Sunday, August 31, 2008

A "Labor" Day Post - An Economic Allegory And The Process Of Relearning

This is the Labor Day holiday weekend in the U.S. So, what could be more appropriate than a post on labor? And, in the spirit of many themes on this blog, let's make it a contrarian post. A different view than what is generally believed or taught in American society, business and its educational system.

The Detroit News, the best source for North American auto news, has a story that Chrysler would like to spin off its premium Viper car into a separate company. How much is it worth? I'm not being facetious but probably just about zero. It's a single car line that sells between 700-1,000 units annually, it's basically hand built so tangible assets would be minimal, brands defining excess are losing momentum, capital is restricted and it's a Dodge. ie, There is no elite brand appeal like Jaguar or Aston Martin. On that note, Cerberus most likely bought Chrysler because of the high profit pickup truck and brand equity of the Jeep business. What's that worth now? Not a lot given the deflating economy. How many people want to spend $40,000 for a Jeep? Not only that but how many people want to buy a $40,000 Jeep that gets 15 miles per gallon? So, what's left? The car business. And, how much is that worth? Well, they are void of high efficiency or compact cars so I'd say not a lot. Is there anything with any intrinsic value at Chrysler? I dunno. Do you want an empty auto factory in Michigan or Ohio? Well, you'll find companies or cities willing to give you one of those for free. Is Cerberus management worth anything? Not really. That is, unless they can design, market and manufacture automobiles.

The reality is none of the American auto makers have a positive book value. Think of this. We've had this generally accepted economic concept of a growing reliance on a financial economy or capital trumping labor for the last thirty or forty years and what did we get for it? A banking system in ruin and a collapsing Wall Street. As the topic pertains to this post, we got a completely bankrupt automobile industry. Of course, how many times have we said the most important source of capital is human capital. It is indeed labor. I'm not talking about unions or a socialist movement for anyone who becomes emotionally unglued when they find out another worker makes more than they do. An economy that favors capital over labor has created a self-reinforcing resentment on some level. So, now it is an often accepted position that the world is better off if everyone makes $5 a hour. That is, as long as it isn't me. Blaming unions, as has become extremely popular, is a non sequitur. It's a generational belief system that isn't based in truth. But, what I am talking about re labor is the value derived from economic work. Human capital. Not any political association of the term as would be construed by socialism or communism.

I'll tell you the only tangible asset at Chrysler that is worth anything. It's employees. The only value left at Chrysler is the cumulative abilities of its North American work force. Isn't it ironic that after spending three decades of treating employees like a bad habit, ie, doing whatever they can to rid themselves of a million employees, the only value left in the North American auto business is its employees. Because when everything is tallied up, the company is basically worthless. The only substantial value left in Chrysler is that its employees have a proven record of being in this situation before, and if given the money and time to do so, they can once again turn the company around. They can once again create tangible value within the company.

Compare this to Toyota. Toyota has temporarily shut down a fair amount of its manufacturing in the U.S. but they have not fired a single worker. While an extended downturn may result in a different outcome, Toyota is using this time to invest in its local business and to invest in its employees. Part of that very investment is the clear message that Toyota is committed to its work force. And, because Toyota is a conservative company where CEOs don't take $500 million retirement packages or blow untold corporate savings at exactly the wrong time as we highlighted in the PwC CEO post, they can afford to do so. Toyota's operating cash flow has averaged about $27 billion per year over the last three years while GM's has averaged about minus $10 billion. A difference of about $100 billion.

When was the last time your company invested in its most important source of capital -YOU- with significant training or re-training? Toyota is a profoundly different culture in today's disposable world. It is that culture which allows Toyota and Honda to continually beat GM senseless. If GM didn't have loyal employees and suppliers, I'm not sure who would have kept buying their cars. It is that culture which has contributed significantly to Toyota's positive cash flow delta. Why? Because as we discussed in the manufacturing series of posts some time ago, best practices or lean organizational genius is reliant on employees being the linchpin of any such program. The employee is the crown jewel of the Toyota way. And the CEO is carefully chosen to ensure the Toyota culture remains that way. There is a great burden of honor laid in the lap of the Toyota CEO and I can guarantee you he is able to clearly verbalize it. Was your CEO selected with such a rigorous process of ensuring a corporate culture of empowerment and commitment to employees?

So, while the donkeys in Detroit have tried to manage around their employees or down to their employees for ages, Toyota and Honda manage a substantial part of their business from and by employees. Rather than embrace these ideals American car companies even used cheap capital drawn from its labor in an attempt to diversify away from that very labor which provided the ability to diversity in the first place. Auto companies tried making or selling tanks, missiles, IT consulting, cable TV, home financing and half a dozen other schemes. All of these endeavors contributed to a self-fulfilling erosion in the auto industry's core business to the point where its neglect created an environment where companies could no longer pay labor for its capital creation. So labor's value dropped. All the while we are told labor's value dropped because the market demanded it. That it was an issue of paying lower wages for those who did not have the necessary skills. Oh, you mean the skills that led to the erosion of GM or the overall economy? That erosion contributed to an environment where labor had a smaller ability to impact economic growth and a self-reinforcing reliance on more and more capital to impact economic growth in its place. Or, as we have noted repeatedly, capital trumping labor. This is a major contributor to why GM became a company reliant on capital for profits - its GMAC and its financial operations. And, why it effectively defaulted on its benefits obligations. And, why it now is in a position of having a negative book value. All the while auto industry executives made billions. Is it any wonder American car companies haven't been able to beat Toyota and Honda? They just don't get it. (You might consider extending this perspective to a larger picture.)

Remember this quote from one of the industrial economy posts?

"We are justly proud of the high wage rates which prevail throughout our country and jealous of any interference with them by the products of the cheaper labor of other countries. To maintain this condition, to strengthen our control of home markets and, above all, to broaden our opportunities in foreign markets where we must compete with the products of other industrial nations, we should welcome and encourage every influence tending to increase the efficiency of our productive processes"
---Henry Towne, President of the American Society of Mechanical Engineers, 1911

When have you heard this lately? At GM or Chrysler? Do you know the basis for much of the Toyota way? It was the Ford way. Much of Toyota's system was originally learned from Ford. Then they made it better. And, now nearly a century after being a pioneer Ford is introducing the Toyota way into Ford. Effectively, Ford is re-introducing much of the Ford way back into Ford. Isn't life a great irony? Have we learned nothing re business management in one hundred years? In fact, we have come full circle. Ford wandered from what made it successful. And, now Ford is back to embracing ideals of nearly a century ago. It is relearning how to run its business using century old ideals. In between, we had a century littered with attempts to do everything under the sun except refining what it already knew.

What have we, as a society, learned about managing a high performance business? That is, other than much of the current fallacies, schemes and educational misinformation (often called a degree) embraced in the business world? There isn't a Toyota way or a Ford way. There is the only way. The only way is that labor trumps capital because only labor is able to create sustainable capital. Or put bluntly, creating wealth by pushing around paper in the financial economy while de-emphasizing the rest of the economy is complete bullshit - a commonly held economic fallacy reinforced by an educational system creating curriculum supporting these fallacies and by Wall Street elitists having a self-fulfilling impact on the economy as capital plays a larger and larger role in economic growth. And the most important point for this to happen is that "you" believed it. Well, society is about to learn that lesson. Again. The hard way. Just as Ford is relearning that very fact. Again. The hard way. One day all companies will become enlightened to this fact. And, so will our educational system. And so will our society. In the mean time, enjoy the relearning process. Your teacher for this course is the economy.

On a lighter note, it appears the Viper has broken the Nurburgring track record for a production car. (Where automakers go to test their mettle in high performance cars.) MotorTrend caught it all on video. If you are a car fan and have a set of headphones, it's amazing to watch a professional driver guide this monster through the track. Near the end of the video, the car is on a straight and must be clocking close to 200mph. If you wonder what the shake in the car is that develops from time to time, from the comments it appears to be the engine RPM limiter kicking in.
posted by TimingLogic at 6:41 AM links to this post

Thursday, August 28, 2008

Jim Rogers Fans The China Investment Story Again

China’s Economic Advance is All But Unstoppable -- Jim Rogers, April 15, 2008

Anyway I’m still around China. I have never sold any of my Chinese companies. You know, selling China in 2008 is like selling America in 1908. Sure, let’s say the market goes down another 40% - so what! -- Jim Rogers August 19, 2008

I think Jim Rogers provides good examples of where I differ from the generally accepted bearish economic or investment position. Rogers is popular with many bears because those views seem self-evident - the Fed is printing money, the end of the U.S. economic leadership is at hand, the dollar is going to zero, the twenty-plus year commodity supercycle is just ramping up and this is undeniably the Asian century. These are clearly not positions with a basis in fact. Instead arguments surrounding these positions are almost entirely based on emotions and speculation.

I do agree with one point Rogers made. I do believe Chinese equities are going down another 40% - as I wrote in a prior post, I expect a total drop of around 90%. The point is that I do not subscribe to opinions. All of my views are the result of quantitative analysis. That analysis may be right or may be wrong but it has a basis in a reality other than how I feel at the moment. Because if I were using that data point, at times I'd just about convince myself the world is coming to an end.

Near the peak of the Chinese bubble Rogers sold his house in the U.S. and was going to move to China. And, he made it very publicly known by going on the media circuit to announce it. In other words, he was extremely confident. Did he ever move to China or is this more of his ramblings that appear to make less and less sense?

I believe Rogers would generally consider himself a trader but how many trading rules has he broken by holding stocks through a collapse? Just about every one I can think of including every golden rule. Roger's position has seemingly been that it was a sure thing to make money in China. Now that it appears this may not be accurate, he has changed his position to being that he's in it for the long haul. His position changed because he refused to acknowledge his extreme bias might be wrong and has instead decided to hold through a murderous decline in asset prices. How would you like to hold Chinese equities through one of the greatest stock market crashes in history? We aren't talking about anticipating a crash anymore - although we did anticipate the crash. The crash has already happened. Rogers now exposes himself to unquantifiable risks by not enforcing rules in his investment strategy. Instead he has likely let his emotions talk himself into accepting losses. It is textbook. I know because I have done it. And, so has every other person on this earth.

It could be decades or longer before Chinese investments return to these levels, if ever. What economic and political risks might unfold in this period of time? They are unknown. They are not quantifiable. How old is Rogers? He must be close to seventy. I think his grandchildren might be inheriting his Chinese stock certificates. That is, if the communist government doesn't re-nationalize companies or his investments don't go bankrupt while waiting on that economic turnaround.

Rogers could have retired a legend after writing his commodities book around 2000. The reality seems to be that Rogers never understood why his thesis was going to come true other than paper assets were a bubble. But, he knew a commodities boom was coming. Indeed it did. In spades. Now he continues to stray into topics of which he apparently knows very little, if anything, including fundamentals. His calls are becoming suspect because now he talks of bias, politics, opinion and other elements he doesn't understand. So his value is eroding. Prize fighters can never seem to go out on top. Instead they always seem to be carried out on a gurney. Hey Flat Board Jack, looks like we have another pick up for you. This one is a TKO. The Chinese stock market is likely not coming back for a long, long, long time.

posted by TimingLogic at 6:58 AM links to this post

Wednesday, August 27, 2008

Not Only Do You Get To Bail Out Corporations But Most Don't Even Pay Taxes

Oops, the Washington Post moved the article and my link didn't work. Thanks for the email alerting me. Here's the revised link.

Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress. The study by the Government Accountability Office released Tuesday said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period. Collectively, the companies reported trillions of dollars in sales, according to GAO's estimate.

It's not just LLCs or S Corporations either. 25% of large companies didn't pay any taxes. But, you get to bail them out. Even if you personally are losing your house or your car or your job. Read the entire article at the Washington Post by clicking on the text above.
posted by TimingLogic at 9:34 AM links to this post

GM To Offer Best In Class Mileage With Cruze

GM has just announced it will produce a new high volume compact car here in the States. The Cruze, as it will be named, will equal or best the hybrid Prius, 45MPG. And, it will do so with substantially less complication, no costly and environmentally toxic hybrid powertrain, substantially lower end of life disposal costs and theoretically substantially less warranty or repair costs. In other words, if quality standards are achieved, this is a far superior product than the current Prius in the economy segment. GM obviously has the option of hybrid-izing this car as well with its mild or full hybrid technology should the market demand it. I doubt current hybrid technology demand will develop. And, if GM is as close to HCCI as many rumblings now lead us to believe, we could see a relatively large footprint automobile, such as the Cruze, get upwards of 55 MPG within a short period of time. No expensive or complicated hybrid technology required. While the Volt gets all of the attention in the press, this is the key platform to GM's success in the North American high mileage space. The Volt's technology and complexity are too expensive to position it as a high volume vehicle.

The Cruze is a very smart design in a segment where style hasn't been an option from too many manufacturers. Corolla? Prius? Civic? Sentra? Not exactly design award winners. The Cruze looks Audi-ish from the front and side and BMW 3 Series-ish from behind.

GM has never built a world-class high mileage car in the U.S. Ever. A sad reality to the incompetence that has ruled GM for decades. GM has often said it was too expensive to build a world-class compact car here and make money doing it. Anyone who understands Toyota's Production System, the benchmark for lean manufacturing excellence, realizes this is ridiculous gruel of incompetent management.

The Cruze will replace the Cobalt which has an average selling price of about $13,000. The Prius and Civic, by comparison, have average selling prices of $19,000 or higher. GM is leaving at least $6,000 on the table with every Cobalt they sell because of an inferior quality - be it product quality, manufacturing quality, design quality or any other measurement of quality. I would assume the Cruze will be priced near $20,000. If GM can't make money on a high volume compact car selling for $20,000, then monkeys are running the zoo.
posted by TimingLogic at 6:55 AM links to this post

Monday, August 25, 2008

Why I Love To Hate AIG

I hated this stock at $70 so why would I like it today? Some might say because it is making multi-decade lows. It's a bargain. Hardly. Ben Graham wouldn't touch this stock. If it ain't good enough for the Intelligent Investor, I don't want anything to do with it. What we are seeing is AIG is now paying for its misdeeds. For piss poor management decisions. That is not a reason to buy a stock making new lows. That is a reason companies go bankrupt.
posted by TimingLogic at 1:53 PM links to this post

The Street Runs Red With The Blood Of Banks.........Again

Aren't you glad you bought that homemade cooking when everyone was jumping all over themselves to call another bottom in banks? A quick gander on Yahoo shows 86 of 89 financial firms are down today. Again. I'm not sure what that 89 is representative of. Financials in the S&P? But, regardless, it's all good. In the last few days an official or former official of the Chinese government said that if the U.S. defaulted on Freddie or Fannie debt, global finance was over.

Well, I hate to tell you comrade, but even if you don't realize it, global finance is already dead. Frankly, it was dead before it started. The fact that you ate that homemade cooking isn't going to be very appealing when you have to start popping Prilosec. Better take a Prozac with that as well. But, we have to play out the economic consequences of globalized finance until the clowns that created it wake up to reality.
posted by TimingLogic at 12:57 PM links to this post

Sunday, August 24, 2008

Night At The Roxbury

How about some humor to break the monotony of bad economic news. I had a hankering for some old Saturday Night Live before retiring this Saturday night. By the way, have you ever tried to move your head like Jim Carrey in this video? Try it. It's impossible. His head must be mounted on a rubber band. Does he have a spine?

posted by TimingLogic at 12:21 AM links to this post

Thursday, August 21, 2008

Awakening To The Commodities Scheme

"Enlighten the people and tyrannies and oppressions of body and mind will vanish like spirits at the dawn of the day." -- Thomas Jefferson

Truth is a hard commodity to come by these days. Yet, of all commodities, it is the most precious. Greater than gold or platinum. It is the one with the greatest demand. In times like this where there is great untruth, we can always find it within by trusting ourselves. More and more people are indeed liberating themselves by doing exactly that. That very truth will have the greatest impact of any act imaginable.

If anyone still doesn't believe commodities markets are being significantly impacted, if not outright manipulated by financial firms, you have yet to awaken to the truth around you. Some may believe that I was overly dramatic by saying children are going to bed hungry at the expense of Wall Street greed re the commodities bubble but the truth is becoming more apparent. Did you listen to the taped Enron conversations in one of the Greenberger videos I posted on here? Enron executives laughing that impoverished people were suffering under their manipulation of California's energy markets. Manipulation that caused severe shocks. If one firm, Enron, can manipulate major markets, what powers lie beneath the world's largest financial institutions to do the same thing with oil, copper, nickel, wheat, corn, rice and on and on. It is not implausible to conclude the blood of many impoverished suffering around the world might be found on the hands of many involved in this scheme.

While the general public is knowingly fed swill to pump the bubble, the only persons to complain are a handful of informed individuals and ironically major oil companies. Not everyone has the desire or wherewithal to determine the measurable explosion in commodities futures contracts, derivatives and the like but it is imperative those that can, enlighten everyone so that tyranny and oppression vanish. How ironic that major oil companies have complained repeatedly to government officials about speculators manipulating prices. Those complaints went unchecked for years. But, Wall Street knowingly feeds society's misplaced resentment towards Exxon, Chevron, Saudi Arabia and any other oil-related organization by its silent game. To the point that unknowing politicians pile on with talk of taxing excess oil company profits and individuals turn their ire on legitimate energy-related businesses. Most recently a very few morally centered hedge funds and individuals have joined us to make witness to this scheme. But I can't find nary a person from Wall Street who has done so in the last ten years. Not one.

I'm been telling you commodities are a bubble since starting this blog and now the public is finally getting some transparency into the scams as government wheels start to work on behalf of the sovereign once again. The Washington Post today reports much of what we have been talking about for years.

The first major change to this regulatory framework occurred in 1991, when Goldman Sachs, through a subsidiary called J. Aron, argued that it should be granted the same exemption given to commercial traders because its business of buying commodities on behalf of investors was similar to the middlemen who broker commodity transactions for commercial firms.

The CFTC granted this request. More exemptions soon followed, including one to the Houston-based energy trader Enron. (You remember Enron, eh?)

Investment banks had been frustrated with the established exchange because they really were never able to get control of it....................

The most successful of the private platforms was InterContinental Exchange, or ICE, founded by Goldman Sachs, Morgan Stanley and a few other big brokerages in 2000. ICE soon opened a trading platform in London, allowing its founders to trade vast quantities of U.S. oil overseas without being subject to regulation. (Even though ICE is an American company, they are most surely skirting American regulation)

This article is a must read. In a bout of spontaneous enlightenment, the CFTC, who denied speculators were affecting markets for years, now reports that 81% of oil trading is financial speculation. Add in derivatives and it is most assuredly 90+%. We wrote that futures speculation alone had increased nearly ten fold in the futures market while the CFTC was denying any impact. For God's sake, it's about time someone wakes up and does their damn job.

Much of your economic distress has been at the hands of financial schemes and this is no different. You had better be mad as hell about it. How much has your family had to suffer because of high food or energy prices? High home heating costs? Have you lost your home because of it? Your car? Your job? How many layoffs are because of high commodity prices? How many impoverished people have had to have their heating shut off because they cannot afford to pay their bills? Have any elderly or impoverished died in an unheated or uncooled home? How have others less fortunate around the globe been impacted? I want you to remember that money quite likely went from your paycheck into the pockets of greed. As they knew exactly what pain they were causing. Think of that. This greed includes your banking system meant to serve society. Instead they are causing much of your economic distress and the government did nothing to stop it. The same people you are now bailing out for other unsavory schemes. And, as recently as a month or so ago your government threatened to veto legislation that restricted speculation in commodities markets. This is after passing legislation that allowed this to happen in the first place.

It's time to let your government know that the thieving party is over. The best way to do so is to demand change, transparency, regulation and to vote. It's time for a house cleaning.
posted by TimingLogic at 9:28 PM links to this post

Freddie & Fannie Stock Confirms The Inevitable?

If you read the Alan Binder post where he recommended a new HOLC or the post on Larry Summer's comments about Fannie and Freddie, you realize these companies are probably not long for this world. Both company's stocks are pricing in a government takeover. Everyone either knows it is inevitable or there is insider information being passed.

Frankly, I dislike that we have gotten to this point as much as anyone but nationalizing(seizing) these two firms is likely the best of many terrible outcomes. Fannie and Freddie were only able to grow to their current girth because of the implicit backing by government and that never should have been allowed to happen. As I wrote three years ago, we need to start seeing enforcement of monopoly laws. Hopefully, we will learn from this and someone will dust off those antiquated monopoly laws. They were passed for a reason. Ultimately, we'll likely see these firms broken up when the markets stabilize many years later and the government sells off the pieces. Wall Street's financial merger mania and bank oligopolies should be next. But, I have a hunch the market may take care of some of it for them. Citi's CEO Pandit, as an example, keeps telling investors he has no intention of splitting up the company. He'll wake up at some point and I'll tell you why in another post.

Some form of this nationalization was done in the Great Depression HOLC as well as in Japan's great deflation. In both instances the government lost a marginal amount of money or was able to turn a profit for the taxpayers years later. So, yes it is a takeover but no it doesn't mean it has to be a taxpayer funded bailout, something you won't likely hear from people encouraging the "markets" take care of the problem. We already see what the "markets" do when left to their own accord. They created this mess. Following that same paradigm is a repeat of the 1929 mindset. There are obviously no guarantees but this potential outcome is surely more desirable than the economic effects of doing nothing.

We aren't going to nationalize everything. Government hopes by stemming some of this, they won't have to. I do believe that is a relatively naive and incorrect position. We'll get plenty of bankruptcies and defaults. That is a mathematical certainty that can be predicted and proven.

The great socialism begins courtesy of those espousing current economic ideology. That includes most everyone. Does it include you? That ideology is going to shift regardless of whether anyone yet realizes it.
posted by TimingLogic at 9:00 AM links to this post

Friday, August 08, 2008

Contrarian Insights Into PriceWaterhouseCoopers Global CEO Survey

This is a long post so it will be the only post for a period of time. I had originally planned to post this many months ago but one thing led to another and I decided to hold it until an opportune moment. That moment is surely upon us given the fevered hysteria that the U.S. is now on the verge of ruin while the rest of the world escapes any media or Wall Street attention. Tonight are the opening ceremonies of the Olympics as well and I anticipate China's communist government is planning a major propaganda show. I would encourage everyone to watch. The meeting of these two inflection points gives me maximum opportunity to take advantage of sentiment with this post - the oft believed new power rising in the east and the seemingly near universal belief of the old power falling in the west. Saving the post has also allowed me to incorporate additional worthwhile analysis and to actually allow witness to many of the consequences of the data in real time.

From a contrarian perspective, I believe this fevered hysteria confirms how little the mainstream prognosticators really do understand about what is going on in the global economy and what has driven us to this point. Not that the U.S. doesn't face very substantial economic problems. Of course, the prognosticators have been generally wrong about everything that has unfolded so far and they will surely continue to be wrong. And, while I am bearish, I do not consider myself in the camp of most bears. Most bears are wrong on many macro factors driving this crisis and, therefore, the most significant risks and probable outcomes are not being factored into their positions. But, then many bears are on a dogmatic war against what they believe are 'end of days' types of problems in the U.S. including the fact that we have a central bank that is supposedly printing money like there is no tomorrow. The problem with these 'end of days' analyses is that many of the problems cited have existed since the beginning of time. They are irrelevant to the long term. In other words, many bears are bearish because they've always been. And, that position is just as invalid as always being bullish.

Personally, I believe this is one of the most interesting posts you will read on here or anywhere else for that matter. Why? We are living through a moment in history where the data presented below will provide a look into a very substantial reality as it unfolds. It provides measurable analysis that invalidates many commonly held beliefs - that is, if you recognize the importance of the analysis. It also supports much of my proprietary work and what I have been stating since I started this blog - emerging markets are a ticking time bomb. That includes the oil producing economies of the Middle East as well. And, while I have not written in detail on this topic for what seems like a few years, that I expect China and many other emerging markets are at great risk of experiencing economic calamities or volatility on a scale that will involve dire and enormous unknowns including the potential for economic depression and social unrest. And, while everyone points to the U.S., the very serious long term economic problems reside outside of the U.S. as I have written extensively. And, although I am not a conspiracy theorist, as I wrote before, I can't help but wonder if the U.S. has pinpointed China with economic warfare in an attempt to destabilize the country. There is a compelling argument the American form of capitalism needs more and more outlets for its capital to continue to grow. And, all of the data fits. The U.S. would gain substantially by an overthrow of the communist system in China and in many ways that aren't well understood. But, that is simply verbalizing a wild notion.

As you read this, remember all of the media reports, best selling books, television shows and intelligentsia who have been telling us of the China miracle for the last decade. There is nary a single financial mind on Wall Street that wasn't consumed by the China or emerging markets story. Not one. Even the bears are bearish on the U.S. but remain generally bullish on anything related to global growth or China. One reason I started this blog was to refute the best-selling book written by author Thomas Friedman that The World is Flat. Something I never explicitly posted but the world wasn't flat, isn't flat and never will be flat. Fairy tales are better left to children and, of course, to writers of fiction. And, as I wrote some time ago in my post about the 41 Untruths Perpetrated by Wall Street, globalization is not a foregone conclusion. Friedman and Wall Street are very likely top-ticking globalization. This cycle will likely end with a substantially muted globalization for a period that could include many decades. Not for any reasons of sentiment or other silly proof points so often perpetuated by Wall Street but because of fundamentals. You remember those? Archaic concepts from ages gone by. Something to think about as it pertains to investments, risks, politics, volatility and just about everything that affects each of us on a daily basis.

The U.S. economy has been deflating on some level for at least thirteen years. What we are witnessing is more and more of the economy joining that deflation. So, when we hear the experts say they don't think this or that will spill into the overall economy, they are completely inaccurate in their assessment. The economy is spilling into housing and banking and will continue to spill into more and more areas as it has been doing. That very fact is missed by every quotable expert. Housing is a symptom. The banking crisis is a symptom. Yet, this deflation has allowed the U.S. to gain a significant head start on rationalizing its economy in varying degrees while the emerging markets continue to ramp up to shove more and more output down our gullet. But, then I wrote this very fact on here three years ago. At the worst time in modern history emerging markets are partying at what they believe is the new golden age. They are partying on the head of a pin and there is little room for them to maneuver. For these reasons and more Wall Street and emerging markets will be caught off guard at what will likely be the end state of this cycle. Part of that end state will include an eventuality that the U.S. will very likely emerge in a more dominant economic position than at any time in my life. Not before significant distress and not because of some perspective of patriotism or hope but because fundamentals support it.

Of course none of this, including what is written below, has come to pass yet. When it does, and unless some miraculous intervention by God occurs, it will, just remember that for all of the trillions of dollars, thousands of people in research and the enormous amount of people working in the machine, they missed the mark entirely before, during and after events unfold(ed). (Tipping points are always excellent opportunities to express contrary opinion.) Use this to your advantage. Use it to develop the confidence in yourself and not in the intelligentsia for the reality is they know less of what is best for you than you do. They know no more about the future than you do. And, as we have talked about repeatedly, they obviously know little about what is best for the economy. If it doesn't feel right to you, it probably isn't good for society and at some point will have a lasting and negative impact on the economy or you. How often are we told that something is economically beneficial to us yet the message seemed completely at odds with your intuition? This very fact and society's general acceptance that self-proclaimed elitists do know what is best for society is the primary contributor to this mess.

Enjoy the post!

"We believe we've become a earnings growth company for the first time in our history. We are breaking the economic cycle associated with our industry. We are very committed to not turning down with the cycle and our strategy speaks to that. We're going to take the word trough out of the lexicon of the company." -- Andrew Liveris, CEO Dow Chemical, January 29, 2008

Dow Chemical starts to shutter plant capacity -- June 24, 2008

Dow Chemical pays $15 billion for Rohm & Haas at a 74% premium. Very possibly near the peak for deep cyclicals. A potentially major gaffe. -- July 10, 2008

Impressive commentary back in January by Mr. Liveris. But extremely improbable statements. As odd as it might sound, I consider this a disappointing statement if I'm a Dow shareholder. Why? You shall read why in this post. Liveris was extremely confident in this interview. In the past year or so Liveris has become a regular on financial television. In fact, he's probably become the most publicly available CEO on the financial media circuit. That to me is an anecdotal sign of trouble. So, Liveris is going to be a proof point for this post. Liveris has been so bold to say Dow is investing $60 billion over the coming years and none of it is in the U.S. Some of the markets Dow is investing in are historically the most economically and socially unstable on earth. We shall see how much of that $60 billion gets deployed, how much gets written off as bad investments and how much has a subpar return on investment.

Here's the point. CEO confidence is good. CEO hubris leading to corporate overinvestment, demand miscalculations and overexpansion obviously isn't good. In other words, it's mismanagement. This dynamic, seldom talked about, contributes to significant economic busts. That is one reason why corporate governance and independent boards acting as a check on behalf of shareholders are so important. Yet, independence and shareholder interests have become nearly nonexistent in many corporations. The term 'I' and 'me' seems to be part of Liveris's speaking style as if he were personally responsible for the success at Dow. "I am investing $60 billion....." By 'I' and 'me' I am assuming he means the company owners are investing. I've spent a career learning to read people and picked up on the potential use of Liveris' hubris as a proof point back in January. So, I jotted down his remarks. Liveris's boldness about future economic success and his overly public presence on the media tour seems to me as potentially significant overconfidence and if that is true then it likely involves significant economic miscalculations on his part.

We heard the same exuberance from CEOs in every one of the bubbles we've seen over the last decade. In fact, John Chambers of Cisco was extremely exuberant as recently as the middle of last year when his stock was at the cycle high. Still down 70% or so from its peak but at a cycle high. Since then Cisco's stock has been chopped by over forty percent and Chambers turned cautious. In one quarter his outlook changed significantly. In other words, he seemingly had no insight his business was peaking at the very time he was telling us he had never seen such strong global growth. By the way, John Chambers is a very good CEO. He could be a great CEO if he learned the importance of economic forecasting. That said, few companies have access to strong forecasting mechanisms beyond their own business pipeline. Chamber's mistakes cost Cisco shareholders greatly as the technology bubble was popping as well. Or what about BHP's $150 billion offer to take over a competitor when commodities are at highs never seen in the last one hundred and thirty years? Right before the U.S. economy started seizing. Can one pick a worse time to announce the most expensive acquisition in history? I remember an interview with the BHP CEO where he was so confident of the future of global growth for coming decades that he talked as if it were foregone fact. If he was so able to predict such growth, why didn't he make a bid for Rio in 1999 when he could have paid 90% less for the company and used the anticipated profits to pay for the deal many times over? Why? Because he didn't know. And, today he doesn't know anything more about the future than he knew in 1999. The reality is he is basing his view of future economic activity on what is happening right now. That is a very dangerous practice. My point is the list of CEO gaffes regarding future business prospects are endless. Often they are predictable on some level as you will see below.

So, what is the primary measurement of a CEO's failed strategies and/or overconfidence? Well, overinvestment in capital expenditures, overhiring, mega-mergers, taking on too much debt, layoffs and often bankruptcy. We are going to see alot of that last one around the globe. In my estimation layoffs are an ultimate indicator of failed leadership. Yet they are cheered by Wall Street. The consequences and costs to the corporation associated with layoffs are just now being understood. But that's another topic. Here's something to think about. Is stock price, which can be manipulated for executive gain by weakening shareholder value or distorted by other factors, a good CEO compensation point? Maybe in tandem with other sustainable objectives. CEO compensation should reinforce expected behavior not what a compensation committee, most often with very serious conflicts of interest, believes is appropriate. What might that be? It would be different for each company but what about creating jobs outside of the normal losses associated with productivity enhancements? Or deepening capital investment? Or other measurable investment factors leading to the higher probability of long term shareholder value. I'm not espousing any particular position. I'm just trying to stimulate a thought process. One that has worked in times gone by or even in other cultures. And to remark that the current process is not transparent and often not in the best interest of shareholders. You remember shareholders? The company owners have been thrown under the bus as executives raid the company of wealth.

I don't know Andrew Liveris but I have no reason to believe he isn't a capable CEO. He might be a very good CEO. He's made himself available by being in the press a lot recently so I'm simply using him as an example to make a point. CEO's typically have a certain set of skills. That doesn't usually include self-moderation or self-regulation of the human psyche. In fact, I seriously doubt most CEOs have even thought through the concept of self-awareness. So the quotes above are very likely based more on overconfidence in the PwC survey below. (I'm sure PwC would rather I highlight the report as evidence of future growth or CEO foresight instead of contrary analysis.)

This next statement is a profoundly simple fact that escapes most for whatever reason. In the end much of CEO genius is transient. In other words, their genius is only as good as the fundamentals supporting their company's business. When the climate turns negative for their business so often does their brilliance. The media is unknowingly complicit in this false belief system by assigning values that have no basis in fact. Mostly because the media isn't focused on discovery or journalism but instead is focused on kowtowing to executives in order to maintain access. Each time CNBC has rolled out executives of homebuilders, then mortgage companies, then hedge funds, then private equity, then emerging market executives and then sovereign wealth funds, I have taken an opportunity to write contrarian posts on these areas of the global economy. Each one and more were, or are in bubbles. Their genius is a function of exogenous and unsustainable factors that has little to do with their ability or validation of their strategy. All may be very good executives but we have been in a lengthy period of mania and we now are just starting to see many were far from brilliant. Many more will appear far from brilliant as this cycle winds down. Personally, I believe a focus on the operational aspects of business resiliency and a healthy paranoia are very overlooked CEO competencies. As former Intel CEO Andy Grove taught us, 'Only The Paranoid Survive'. It might also be noted that Intel's executives have generally exhibited positive qualities I talked about in the above paragraph as theirs is a culture built on long term investment and long term capital deepening. In the end, regardless of the fact that investors ran the company stock to bubble levels, Intel is a force in business markets because of its culture of investment. It also doesn't hurt to be a near monopoly.

Now that we've set a backdrop, let's continue to the recent PwC CEO survey. It is a unique insight into behavioral economics and CEO psychology. We are using this as an educational tool in a manner not anticipated by PwC. But, it is a perfect opportunity to witness CEO sentiment data based on very extreme readings. You can view it here. I am providing access for educational purposes only. If you would like a personal copy, I would ask you to respect PwC's intellectual property and download it from

The survey is quite lengthy. You may peruse the entire document for insight but for purposes of this discussion let's focus on the page seven global graphic. (Not page seven of the PDF file but the page number of the document.) This graphic shows CEO confidence on a global map. The survey shows a very bifurcated world. While CEOs in Japan, Canada, the U.S. and Europe are cautious to extremely cautious in their economic outlook, CEOs in Brazil, Russia, India, China and Mexico are near unheard of levels of exuberance. Most specifically Mexico, India, China and Russia. CEO confidence at 90% in India? As I have written repeatedly, emerging markets are at major risk and the hubris of these survey results are most assuredly a sign of doom to come.

There is published behavioral research that concludes quite effectively that CEO confidence is significantly affected by stock price. And, that CEOs are no different than anyone else participating in a bubble. In other words, they start to believe their own invincibility or in irrational expectations. That means there is an argument to be made that CEOs could possibly use stock appreciation and unsustainable fundamentals as a confirmation their strategy is working. And, therefore, continue with overinvestment, taking on too much debt, hiring too many employees or other strategies that creates severe imbalances and risks within a company. A CEO seeing a stock appreciate at 30-50% or more on an annual basis could misinterpret a bubble for confirmation that they should continue to make more and more of what will be seen as imprudent investments in hindsight until finally when the bubble pops the company's future is jeopardized by poor business decisions, poor risk management and overinvestment. Compare this to a culture where calculated prudence is used to achieve a growth rate agreed to in a company's strategic plan or business plan - aka Honda as an example. And, not to overextend corporate resources to achieve greater growth rates in times of significant economic hubris. Or not to take on significant debt for share buybacks as has happened in many U.S. and European companies over this last cycle. That includes many nonfinancial companies that have jeopardized their future business prospects by loading up on debt as we have touched on in past posts.

There is also published research that shows CEO earnings and business forecasts have no better accuracy rate than coin flipping over an extended period of time. In other words, they use the same trend-following projections as economists typically do. That means they likely conclude next quarter's results will be better than last quarter's....until they aren't. I'm well aware of this fact because I've been part of it for the majority of my career. Better supply chain management and CRM forecasting has alleviated that problem over a single business cycle but not over the longer term. And, these technologies have not changed human behavior. May we therefore conclude that many participating in the PwC survey incorrectly believe their own genius and infallibility? We saw the same thing in the 1990s technology bubble and we are now reliving it in the current emerging markets and finance industry bubbles. We also saw the same situation in early 2007 when professional Wall Street confidence surveys were at the highest levels since 2000 - something we wrote about at that time. And, by the way, those Wall Street confidence levels were substantially less optimistic than the PwC CEO confidence in the countries I have cited above. The extreme measure of CEO confidence in emerging markets is a very ominous development. Is it simply amazing that we have access to these very facts yet executives are generally unable to learn from them? Or come to grips with their own instinctive fallibility that is part of being human?

This brings up an interesting point. On a scale of human self-awareness and development, what stage do you think we are in today? Infant, teenager, early-middle-late adulthood? Most likely we are at the infant or teenager level of awareness and development. Both infants and teenagers may have tremendous abilities to consume knowledge and may be inherently intelligent but how often do we find nuggets of wisdom from children? The goal is to make it out of these stages of development without destroying ourselves in the process. This cycle is going to test that very notion.

Hey Harvard, I have a new class for your executive education program. I'll even teach it. It'll have the largest return on investment of any class you have ever offered. The title of the class is "Don't Believe You Are That Smart. It Can Destroy Your Company.". Of course, I could rename the class to be more socially acceptable. Maybe "Behavioral Psychology and Sustainable Economics". You could offer it every year as part of a CEO's continuing education.

Comparatively, look at the PwC survey results of conservative Japanese CEOs who, similar to emerging markets, are also reliant on the American and European economy for sustainability. I can assure you Japanese CEOs are better prepared for an uncertain future. Why? Because they've lived through an eighteen year economic malaise post the Japanese bubble economy. They have learned the effects of hubris. And, because Japanese culture is much more conservative, corporate decision making is often made by creating consensus through intellectual discourse. Therefore Japanese CEOs may often be more reliant on calculated risk and prudence that has more effectively survived debate. This style isn't limited to one particular country. It's governance that involves checks and balances that are key to effective corporate leadership. Today that system is not working properly in many instances. A key difference to point out here is that effective corporate governance is less of a CEO kingdom and more of a process where leadership hashes out decisions through intellectual debate. Isn't that the decision making process in a democratic society? Is the CEO really any different than the Congress or legislative branch and the board should act as the executive branch or the President as a balance in effective corporate governance? The roles are not exactly the same but the spirit of how effective governance should work is similar.

If CEOs and boards were more aware of their fallibilities or there were more checks in the board rooms, is there a possibility bubbles would be lessened? If housing CEOs would have taken a more conservative growth approach or if boards would have challenged CEO thought processes, would we have this oversupply of homes that is now deflating? If mortgage CEOs were challenged by boards would have taken a more realistic strategy based on sound practices, would we have deflating homes? If commercial real estate developers had been more aware of their own fallibility, would we be seeing their industry teetering on the precipice? If Wall Street executives would have had more checks against their foolishness, would we have all of this toxic trash coursing through the global economy? And watching their own industry literally crumble before their eyes?

As much as everyone wants to blame Greenspan for all of this, he didn't hold a gun to any one's head and make anyone do anything. If Greenspan or anyone had personally offered to loan you one billion dollars, would you have to take it? Would you have to spend it? Would you have to do so by employing risky schemes? Would you have used that loan to buy back your own stock? Wall Street created their own mess. But Wall Street has the media microphone. They always have. Is any one person able to defend themselves from such a frontal assault by the Wall Street media machine? How many times have you read or heard the banking mess is Greenspan's fault? Thousands? More? Greenspan is the lackey Wall Street first used to get an unregulated environment they sought at all cost and is now the lackey they are publicly burying for their mistakes. The system he defended is now burying him. Ironic? Not really. You can't expect Wall Street to take responsibility can you? It's so easy to manipulate the press and throw Greenspan under the bus. It diverts attention from the real problems. That this is a Wall Street created crisis and the system needs overhauled. But, then doing so would involve substantial change and reduced wealth. Does anyone on Wall Street want change? Or do they hope this all goes away so we can continue with more of the same? Divert attention in an effort to buy time hoping the status quo will mend itself? If Bernanke doesn't appease Wall Street, they'll attempt to throw him under the bus as well. We already see this unfolding.

Does anyone find additional irony in these survey results? India, China, Russia and Mexico are four of the biggest economic laggards over the last century. At least three of the four countries have problems with chronic corruption, chronic underemployment, chronic debt, chronic underinvestment and opaque financial markets that have repeatedly shattered. But now they are held up as the inheritors of the future economy. These economies are chronically chronic. The U.S. has had a hand in bailing out financial crises and debt crises in emerging markets over the years. How many emerging markets ever make it out of the "emerging" stage? There is a reason they are emerging.

As I wrote before, we might be bailing out our own messes this time. Should these economies fracture again, they will be left with their own ineffective policies and governance to finally deal with their own problems rather than relying on the U.S. for further bailouts. In other words, what will happen to these economies when the global liquidity pool no longer supports their development? The consequences are potentially dire as these countries show limited or no ability of being able to rebound from self-inflicted crises. On the other hand, the U.S. is always dealing with self-inflicted crises. Dozens of times in the last one hundred years. We are a crisis engine. And, what has always been the long term outcome? We have a proven record of solving our problems. The pertinent question is why? If you understand the answer, you never believed the emerging markets hype.

If global markets are experiencing hubris on a scale never before seen, what are the primary outcomes we will see should a major downturn develop? What are measurable outcomes of CEO miscalculations? What are one of the key messages we have repeatedly talked about? Volatility. How will that manifest itself? Unemployment? Social unrest? Revolts? Famine? Wall Street has convinced everyone to invest in emerging markets as they have. Not just in stocks but in major economic investments across the board. Many that are illiquid. In other words, there is no way to hedge times of volatility or risk. These economies are disproportionately exposed to severe volatility and risk. So are international companies that have made relatively recent large investments in many of these economies. Many of these investments were fueled by debt. Much of that debt will likely become toxic as well.

What can you take away from this? Well, first of all, I have great respect for anyone who starts their own company and creates jobs and wealth, or anyone who dedicates themselves to excellence or achievement including CEOs. I have the utmost respect for those who aspire to excel by accomplishment in any endeavor. But we assign values to people because of association and they are invariably invalid. It is no different than assigning values or skills with people on Wall Street because they work with money as I have often used John Galbraith's quote to point out. So, every time you see a CEO in an interview on television, you should realize their appearance is likely fulfilling their ego or career motives more than it is telling you something about the future of their stock, their company, their industry or the economy. That's not a bad thing. Nor is ego a bad thing. But, it shouldn't be taken as investment advice or legitimate prospects of future economic activity. There are many things CEOs can teach us about leadership, operational ability, managing change and other talents but in times of hubris leave the skills requiring introspection and self-awareness off of the list. This is one such time.

The PwC survey came out some time ago. So, let's do a follow up and look at how dynamics have changed since then to highlight many of the points I've made above. We aren't going to look at China because the majority of their statistics are infused with propaganda. Inflation in China has likely outstripped growth for some time. The average Chinese citizen is therefore very likely swimming against the tide and seeing wealth deteriorate. China is likely sporting negative real growth and starting the process of wealth destruction contrary to what they media is telling us. Any nation that dresses up government officials as monks and parades the international press past them to cover up the murders of 140 of its own citizens is surely not trusted with providing transparency and truth. So, let's focus on India. India is a better example anyway because CEO hubris is the greatest. Here are figures from India's industrial output the quarter after the survey was released. Remember, at this time was when trash talkers such as Jim Rogers were at their maximum bullishness on emerging markets comparative to the U.S.

Indian Industrial Production Growth Rates
Textiles down 62%
Textile Products down 58%
Paper & Paper Products down 76%
Rubber, Plastics, Petroleum & Coal Products down 26%
Non-Metallic Minerals down 51%
Basic Metals & Alloys down 39%
Metal Products & Parts growth turned negative
Machinery & Equipment down 30%
Transport Equipment & Parts down 81%

If this trend continues across Asia, may I ask what effect this will have on energy and commodity demand? Isn't the enthusiasm for commodities really nothing more than another way to look at the PwC CEO survey and the hubris in emerging markets? Emerging market economies are major bubbles. But then we've talked about that for years. The bubbles just keep getting larger and larger. That means the misappropriation of capital continues to grow larger and larger. And, that means the end of this cycle and the ultimate mess just keeps getting larger and larger.

Where are those again positing this is the Asian century? That the U.S. is kaput? Where do the greatest risks lie? Who is unprepared for a significant and potentially extended global economic slowdown? Who likely has the most excesses and imbalances built into their economies? Being a creditor nation aka China or others does not mean anything. The U.S. was a creditor nation in 1929 while many European nations were debtor nations. European nations generally came through the Great Depression much faster than the U.S.

As I have said, the world economy is more reliant on the U.S. than at any time in my life. Those saying the U.S. is a less significant player in the global economy have no idea what is going on in the global economy. Most likely the U.S. will come out of this cycle with an even greater comparative economic advantage than it had before it went into it. There may be hell to pay in the interim but there is no Asian century. There could be but there won't be. For the same reasons the last one hundred years weren't the Asian century. Another of the myths perpetrated by book sellers, prognosticators, Wall Street and media.

What did actually happen is that emerging markets have received the equivalent of an economic Marshall Plan by American and European economies. Except it has been substantially larger. The Middle East, China, India and other emerging markets haven't created wealth. What we've seen is simply shifting of wealth from the U.S. and Europe. The current world economy that is written of as being the biggest boom in history is really nothing more than a reshuffling of the economic deck. That cannot and will not continue for many reasons. Now we shall see how these miracle economies respond when it is left to their own accord. The real miracle is how many people believe it.
posted by TimingLogic at 8:00 AM links to this post

Thursday, August 07, 2008

Retail Industry Update Re Store Closings

I wanted to add a few quick contrarian comments here. I just took a spin around the blogs and it appears over the past week quite a few blogs are pointing to retail store closures as significant.

The list of retail chains closing is the who's who of poorly managed retailers. I've worked as a partner with the retail industry for the better part of two decades and all of these dogs have been on life support for a decade or longer. Starbucks, the lone healthy retailer closing a significant number of stores, has a company-specific problem. The coffee culture is pervasive now leading to substantial competition, the brand has been diluted with oversaturation and the company has lost focus on its core identity & strategy.

Let's keep something in focus. The economy produces economic winners and losers all of the time. More commonly called creative destruction. New category killers have come in to replace these dogs of retail over the last decade and longer. All leading retailers are reporting profits. They are muted profits but they are all profitable. The fact that the worst managed retailers are finally going out of business is a good thing. It frees up capital for economic leaders and/or it destroys capital with no productive value. (By the way, this last point is a major reason why the current incarnation of Wall Street is imploding.)

All of this is completely normal and should be expected. That it is happening where ten or fifteen majors chains are completely closing down is simply a sign that the economy is weak and the marginal players are going to suffer. Remember, to count the top Nasdaq companies today would be void of many of the top companies ten years ago. None of the hot Nasdaq companies of the early 1970s are even around today. The impact of thousands of store closings of the dogs of retail has literally no effect on the economy. That said, what does have an effect is when new store openings falls below store closings. Yes, that is happening and that is a more important data point. The economic impact of weak retailers closing is no more significant than one quarter's loss at AIG.
posted by TimingLogic at 10:27 AM links to this post

Aspirational Consumer Stocks Are Imploding. Whole Foods Suspends Dividend As Shares Crater Again.

Back in 2006 when we highlighted numerous consumer stocks that were cratering, one we highlighted was Whole Foods. And, as we wrote then, Whole Foods is a proxy for upper income Americans. Indeed food stuffs are a staple but paying a substantial premium does not make Whole Foods a core consumer staples spend. Whole Foods is an aspirational consumer spend to many.

Something else we have also highlighted as aspirational in the retail segment are luxury auto brands. A large portion of the premium car market in the U.S. is comprised of aspirational consumers. And, as we wrote last year, the premium auto market is likely top-ticking for many years to come. Since that post shares of independent luxury auto brands Audi, Porsche, Daimler and BMW have imploded on the European exchanges. Most are now down about 50%.

posted by TimingLogic at 5:58 AM links to this post

Wednesday, August 06, 2008

Paris Hilton Runs For President

This video has been floating around the television newsrooms and is a response to a political ad placed by one of the candidates. That ad showed two blonde women in what was obviously meant to deliver the message of the "dumb blonde" stereotype. I personally found that ad to be very offensive. I'm actually surprised no one has come out and pointed to that ad as misogynistic.

Anyway, Paris got the last laugh with this video. Frankly, she's the only candidate who earns her own salary and I suspect we would get a lot more common sense policies were she to be elected. That includes her energy plan. Therefore, I'm officially using this video to endorse her as a candidate for President.

See more Paris Hilton videos at Funny or Die
posted by TimingLogic at 10:15 AM links to this post

Tuesday, August 05, 2008

More Crony Capitalism For GM, Ford & Chrysler While American Citizens Are Booted Out Of Their Homes

Richard Parry-Jones could arguably be the top automotive engineer on earth. He is a subject matter expert and the former chief technology officer at Ford Motor Company, one of the leading technology and industrial companies on earth. When people of this ability talk, we might want to listen.

Parry-Jones tells us in an interview that current hybrid technology isn't cutting it and that the industry will figure out how to make 180 mpg automobiles by 2050 if the government will simply leave them alone. Government should not be picking technology winners and losers in the market place. To believe a politician or for that matter even Parry-Jones knows exactly what will be developed over the next forty years is preposterous. So, to allocate capital based on what a politician or government believes is appropriate is exactly what has put us in this economic situation in the first place.

But politician John Dingell wants to allocate $25 billion in taxpayers money for a boondoggle to benefit three companies out of hundreds of thousands of companies in the U.S. May I ask why they get a $25 billion loan and I don't? More corporate bailouts. And Dingell wants to piss away this money on technology that a leading expert tells us isn't even sustainable. You want the money? Fine. Then show the American people the technology roadmap and business plan submitted by the auto companies that shows why they need taxpayer assistance. He can't because they don't exist. More government waste.

Dingell needs to back off and let the world's venture capitalists, engineers, scientists, inventors and business people define future solutions rather than wasting taxpayer dollars to support crony projects for three companies headquartered in his state. More appropriately maybe John Dingell should have been worrying about the depression that has existed in the state of Michigan for the last nine years and doing so well before he was asking all of us for more government bailouts of corporations while the American people are booted into the streets in record numbers.
posted by TimingLogic at 12:38 PM links to this post

Short Selling, Bear-Raids & Naked Short Selling Explained

I'm a major proponent of the ability to short stocks when done within the constructs of regulatory oversight. There is most certainly unsavory actions of many sorts taking place in financial markets today. When trillions of dollars of capital are under little, if any, regulation, there is no doubt seamy activities will take place.

I've talked about the concept of stock pools and many unsavory activities that took place in the 1920s and correlations to today. This video by two Wharton professors also talks of this concept in today's environment, talks of historical manipulation using short strategies before the SEC was created, naked shorting and the SEC's recent announcement as it regards to primary dealers. The first few minutes are a little slow but the discussion picks up steam as the interview progresses.

posted by TimingLogic at 10:04 AM links to this post

Sunday, August 03, 2008

Banks Spend Our Money (Deposits/Investments) To Lobby For More Bailouts Using Our Money (Taxes). Is There Such A Thing As Double Usury?

Yes there is. It's called Wall Street.

But, then society has allowed this behavior to continue without challenge seemingly forever. Financial institutions have undoubtedly spent over a billion dollars lobbying the Federal government over the past few decades. I'm aware of half a billion dollars in two cases alone. Now we find out Bank of America spent $1.2 million to lobby Washington in the second quarter alone. Might we guess what this money was spent on? Could it be an attempt to find favor in policy that might help impact the the incredibly foolish acquisition of Countrywide? If that's not enough the Wall Street Journal reports over the weekend that lobbyists have already pumped $140 million into Washington campaigns in the first half of this year. That would be for both parties for those who somehow believe Republicans are the embodiment of bad government. That's just to buy favor in the political campaigns. The swine are lining up to feed from the trough of gluttony - most assuredly at your expense.

Might now be an appropriate time to ask yourself a question? Who has spent that much money lobbying on your behalf? Who has ever lobbied for your job? Who has ever lobbied for relief from the economic struggles you've dealt with? For a bad economic decision you might have been exposed to or made? Or your family and friends have dealt with? Lobbyists, Wall Street and politicians, maybe more appropriately known as Cerberus the three headed hound from hell, are involved in a sordid dance at your expense. This is another prime example of capital trumping the sovereign - of what is in the best interests of capital being valued more highly than what is in the best interests of this country's citizens.

It's quite telling that these firms believe they can pay their way out of this environment. Government still refuses to enact discipline and reform on the scale needed. Why? Might you guess that $140 million reported by the Journal has something to do with it?
posted by TimingLogic at 10:45 AM links to this post

Friday, August 01, 2008

Larry Summers On Freddie & Fannie

One last post this week. I have linked to Larry Summers before and I believe he is an extraordinarily insightful thinker. And, someone who speaks with honesty of thought. Sometimes that gets him in trouble or people construe other meanings to his statements but such is life.

Our society finds answers to problems via public discourse. Constructive criticism and the exchange of ideas hones the method. Summers' FT article highlights a plan that I believe is somewhat inevitable as we move forward. A very good read.
posted by TimingLogic at 1:24 PM links to this post

Toyota Truck Sales Decline 34%. Total Sales Drop 19%.

posted by TimingLogic at 12:58 PM links to this post

Merrill Pumping Individual Investors While It Was Dumping?

I've been particularly hard on Merrill this year. That's because there is ample evidence they have been one of the most egregious violators of investor's trust. If nothing else, the stock being down almost 80% should be an easy barometer. I don't know what will happen to Merrill but I do know they are in serious trouble. That said, if I spent all of my time posting every investigation into Wall Street's practices, this blog would be littered with thousands of posts on nothing more than a continual indictment of Wall Street. I have no intent to get involved in that minutia and you shouldn't either. It is irrelevant in the big picture of what is transpiring. I do find this Bloomberg article on auction-rate securities particularly vile - although this is simply par for the course in an industry rife with abhorrent behavior. It's time to throw the baby out with the bath water and that is exactly what is going to happen. Mark my word.
posted by TimingLogic at 11:18 AM links to this post

Chinese Government Attempts To Help Bag Holders By Controlling Markets

posted by TimingLogic at 7:44 AM links to this post

Here Comes The Inevitable Tsunami Of Corporate Defaults & Bankruptcies

We have obviously talked of record corporate debt issuance and stock market valuations being in bubble territory. That compares to the general consensus on Wall Street that has been perpetrated over the last four years. That being corporate balance sheets are in great shape, profits are high and valuations are cheap. We see the first outcome of this fallacy with bank stocks falling more than at any time since the Great Depression. It's important for people to understand bank stocks are not reacting to economics of today but they are discounting economics over a period of the past decade or longer. The implications for this are very serious. But, of course we are told the "rest of the economy" or "non US markets" are safe(r). Anyone espousing these views clearly are deluded at best.

I wrote at the peak of the private equity buyout & merger mania that boom was based on extremely unsound business practices and nonexistent bank risk management practices. And that it really shouldn't be called private equity because those deals were done with massive amounts of debt. And, with deflation that debt was high risk. But, what do I know? Evidently more than the CEOs of banks or any of these private equity firms. Of course, all this really involves is balancing our check books and saving for a rainy day. Nearly all of us are capable of this if we have the capital to do so, something banks and corporations surely had the luxury of yet something they seem incapable of doing. But they get to run off with our cash and we get to pay the bill for their stupidity. So, in the end I guess they are smarter than all of us. They have gamed society and many probably knew exactly what they were doing.

There were days I would turn on the television and see prognosticators pumping stocks based on the buyout or private equity rumor of the week or the Goldman private equity takeover list. Total insanity. No surprise since one of the prognosticators used to work for Goldman and was just helping out his buddies while giving us great tips from the geniuses on Wall Street. Now, you get to eat that takeover list without any French fries. And, it's doused in cyanide. Many of these private equity deals are going to crumble.

Corporate debt is far from the domain of banks and mergers. Insurance companies, pensions, hedge funds, mutual funds and retirement funds choked down a lot of this garbage. Then, alot of insurance companies have strayed significantly with their own investments. Of course, these firms didn't choke down all of that debt with French fries. They did so with champagne and caviar that Wall Street fed them at sales meetings while convincing them to put your retirement at risk. Actually, that is based on factual accounts rather than my standard sarcasm.

Then we have corporation debt outside of the finance industry. We even had many companies that were "underleveraged" (a term used by a particular Fortune 500 clown, er, I mean CFO) and took out loans to buy back shares. This particular Fortune 500 company is still a darling of the investment community and has borrowed about $20 billion to buy back shares. Maybe it's more by now. Wall Street cheered with glee as this company and others followed them down the rabbit hole. Me? I sold all of my positions in this company for obvious reasons - a deteriorating balance sheet, a massive hit to shareholder equity, weakening fundamentals, silly management decisions and a rising stock price. But, hey the PE is only 15. I'll see this stock 50-70% lower at some point.

Do you think Warren Buffett buys into companies where CFOs load up the balance sheet with debt for a stock buyback? I simply can't believe some of the things companies give me to write about. I can assure you systemic incompetence in the board room plays a substantial role in this crisis.

On this topic, just as many on Wall Street run for the safety of the fixed income markets, here comes the inevitable tsunami of record amounts of distressed corporate debt soon to be followed by a tsunami of corporate defaults and bankruptcies. Ah, but this is a consumer-led recession. Not. More grist for the mill. As I've said before, cash is king. I'll have an order of fries with my cyanide.
posted by TimingLogic at 7:03 AM links to this post