beyondthemba

Bank Failures Continue - 3 More

While the market is rallying, somewhat irrationally in my opinion, the hints of a lingering economic problem continue. Today we heard of 3 more banks which are being closed at a cost of over $400m dollars to the FDIC.  The FDIC has close to $13Bl in their insurance account and this account topped $40bl before the economic meltdown began.

So, the lesson is this is not over yet. Since the TARP was never really used to buy troubled assets (despite its name), banks are sitting on billions of dollars of assets which need to be written down. As they take losses due to foreclosures and other things, they cannot survive.

This, along with pensions, medicare, and social security, tell me the meltdown has not even come close to finishing.

Third Party Logistics Companies (3PLs) Continue to Hope...

I read in Logistics Magazine today that Armstrong is still holding out for growth in the 3PL business this year. I do not understand how that can be since the size of the pie is continuing to shrink. Their customers are getting smaller. There is no way to avoid that. 

The article is here and my response is:

"I think you will find 3PL revenue has to drop just as a matter of mathematics. The companies they are servicing are seeing a large drop in sales. This translates into far less product being shipped (inbound to manufacturing and outbound to trade). This also translates into a lot less warehouse space needed. I have been looking for warehouses in various cities and I can tell you that many companies are coming to me asking me to take over their warehouse as they no longer need the room. My opinion is this is a "fundamental reset" in the size of the pie. It is getting smaller, will continue to get smaller and the 3PLs need to readjust their model to support this."

Northern Trust is a Bank I Have Trusted

Let's ensure we do not throw the baby out with the bath water. Northern Trust is a good bank and I have followed them for a long time. Now, Barrons writes and reports about it. 

"I Will Never Cut The Dividend"

Dow Chemical CEO says, in October, "This CEO will never cut the dividend". Well, on February 12th, that all changed. 

Lesson: 1) Never say never  2) What happens to a CEO who effectively promised something to investors and then reneged?

Go to about minute 8 on this interview:

The Failure of XM/Sirius Radio

I was looking back on my notes from the summer and saw that I had predicted the demise of XM/Sirius. This was not due to any great financial acumen but due to the fact that I saw the CEO on "Mad Money" with Jim Cramer. The CEO said they were doing, "Everything right". Well I guess not. 

See my original post at "When A CEO Says He is Doing Everything Right, I say Run for the Hills".

The XM/Sirius Chart

And, see the demise of XM/Sirius

Soros Believes This May Be Worse Than The Depression

I think the bank failures and the second down turn leg of the stock market have begun in earnest. So does George Soros. Love him or hate him, he has been right for most of this downturn. 

Another Week and More Bad News

Well, to be clear, there may be a silver lining but I will get there in a moment. Vanguard issues the "Economic week in review" and the summary is this:

1. Market is down for the week and down 8.43% for the year. Who said "it can't go any lower"?
2. The Fed will continue holding rates exceptionally low for some time to come. I think they have essentially decided money has to be free to turn the economy around.  
3. Interest rates on Treasuries continue to rise showing a potential "bubble burst" in treasuries. Where is all this money going if not in Treasuries and the stock market? 
4. The GDP was down dramatically.  

 The silver lining:  First, it appears home prices are starting to establish an equilibrium. While existing home sales prices were down the sales were up. When I see a normal reaction like that it tells me they are close to the equilibrium price (at least for now).

Second, the leading economic indicators actually went up. This one metric foreshadowed this deep recession in December 2007. I will never take my eye off this ball. One movement does not make a trend but let's keep our eye on it. 

State Pensions Are Likely to Be Bankrupt When You Want to Collect

We have all read of, and experienced, the collapse of the markets in 2008. We are focused on credit markets and the stock market along with the housing crisis. However, I submit there is a far bigger issue brewing which is receiving scant attention: State and Federal Pensions.

The pension funds of the states (and the Federal Government for that matter however they can at least "print" money) are essentially broke. This article discusses the outlandish risks Florida has taken to try to juice up their pension fund returns. Of course, as always, this has ended in a catastrophic collapse. 

What will the states do? How will they pay these pensions? Will they have to tax the already poor people to pay for outlandish promises? Will the Feds "nationalize" state pension funds? 

This issue should be watched closely.

When a CEO says, "We are Doing Everything Right", I say, "Run for the Hills"

Recently on Mad Money, Mel Karmazin, the CEO of Sirius radio was discussing the merger / acquisition of XM radio. In this he was quoted as saying, "We are doing everything right". That type of arrogance should cause any and all investors to run for the hills. 

Arrogance leads to complacency and that leads to horrible customer service. Right now, both XM and Sirius are a disaster and they need to get their act together quickly. After having to take on huge debt to finish the merger (due to a precipitous drop in the stock price), Karmazin is now saying it will be after labor day before he provides any direction to the market. Do you think he may need to "adjust the books" and is spending August doing such a thing?

Further, he freely admits that deals will be coming which should cause any consumer to stop any purchase of Sirius and/or XM until we find out what the deals will be like. I personally tried to call XM to get a new XM activation (new OEM car installation) and they said they had "no guidance on what to do with long term Sirius customers). 

This, along with the Karmazin arrogance can only spell disaster for this company. My recommendation: Keep your powder dry and wait this one out. Don't buy the stock or buy the product until they figure out just what the heck they are doing. 

Companies Which Go Out of Their Way to Piss Their Customers Off

Bad customer service due to an inept customer service employee or computer glitch is one thing but when a company's policy is to rip their customers off, that is when I get upset. Why do companies do this? They must know they are killing any return customer. 

An example of this is a high priced resort which, after charging you $300 per night to sleep there, charges you another $15 per day for high speed Internet. A service which any Motel 6 charging you $35 per night to sleep there gives you for free. Does the $15 really matter to someone paying $300 for the room? Probably not and yes, I have paid it. However, what it does is really sour my experience at that hotel. The last thing on my mind as I leave is how they ripped me off for something as simple as Internet service. I vow never to return. 

Today, I experienced this with Wells Fargo Bank. I like to pay additional principal on my mortgage periodically and so I went to the site to see if I could do it electronically. Seems like in this day of "Go green" and convenience, this only made sense. Also, it has to reduce their costs as I basically become their data entry clerk for them. Behold! There was a way on their site to do this. However, as I came to the end of the input screen I noticed a nice little "$10 convenience fee" for this service. I figured it must be just for an immediate payment so I looked where I could delay the payment a bit. Alas, no way to do that. So, they want me to pay $10 for the "convenience" of paying additional principal in an electronic, low cost, low environmental impact way. 

Well, what did I do? I did what any rational person would do. I wrote them a check and mailed it. We now have paper flying around, they will have to employ a processor to process the paper and they will then have to enter the check themselves to get payment. 

This is an example where a company, if they were thinking, would realize this is a huge opportunity for a "win-win" relationship. I could get things done efficiently, they could lower cost, and I could be "delighted" with my bank. Instead, they have set up a "Win-Lose" scenario. They are trying to nickel and dime me and the result is additional cost for Wells Fargo, a customer who feels like he is being ripped off and a relationship that will sour over time. 

Was it really worth the potential of scrapping an additional $10 out of me? This is what companies have to ask themselves especially in this era where they are trying to reduce costs dramatically. Will the cost reduction really work or will it just tick your customer off so much you lose the sale all together. One way to reduce costs, I suppose, is to get your customers so mad at you that they leave you and you have no cost since you aren't selling anything. 

Think before you shoot. 

Global Supply Chains: Are They Dead?

I think the answer is, of course not. However, global supply chains are built off of the assumption of low fuel costs and low transportation costs. Neither of these are the case anymore and we have to ask ourselves if we ever will see low enough fuel costs to justify the wild supply chains we have seen in the last quarter century. 

Further, global supply chains assume relative political stability and even that is in question moving forward. Imagine a company finding itself in the position of being cost non-competitive due to a complex global supply chain built up over years of assuming low cost fuel and transportation. Further, while being cost non-competitive, they also find their supply chain disrupted due to some global geo-political event. That is the double whammy creating the perfect storm that could shut down a company. 

Read more at the New York Times: Shipping Costs Start to Crimp Globalization

Note: I am not making, nor do I want to engage in, a political argument about globalization. That is for a different audience and a different blog. This discussion is purely about the business case for globalization in the new world of high fuel costs. 

HR 3221 Housing and Economic Recovery Act of 2008

Well, the Federal Government swoops down again to give out dollars to those who need it and to those who don't. This bill needs to be read and digested in its entirety but a few things:

1. It increases the statutory limit on the Deficit by $800bl!!  This money seems to "poof" come from thin air and now our sons and daughters get to pay for our excesses.
   
2. The CBO estimates this adds $25bl net to the deficit next year alone.
   
3. It provides interesting "give aways" to people who have nothing to do with the mortgage mess. For example, if you have already paid off your mortgage and do not itemize they are going to give you a $1,000 tax credit for "property tax". So, what does this have to do with the ARM adjustments and foreclosures?

I cannot wait for the next few weeks when people pour over this bill and find the pork deep inside of it. If you want to see the CBO (Congressional Budget office) estimates you can go the Congressional Budget Office website and download the bill HR3221 report. You can also see the CBO letter concerning how much the bail out of Freddie May and Fanny Mac will cost you at the Congressional Budget Office Director's blog.

Blogged with the Flock Browser

Tags: CBO, FannyMay, Freddie Mac, HR 3221, housing

Treasury Inflation Protected Securities (TIPS) - A Good Buy Still?

Was wondering if anyone is buying TIPS (Treasury Inflation Protected Securities)?  I have always kept some and some i-bonds (until recently when they went to crap with a 0% inflation payment and limit to $5K purchase).  Turns out with the inflation kicking in these have become "portfolio savers" and have really balanced my portfolio nicely (TIPS Vanguard Fund has returned 15% in the last year). I chose to use the Vanguard Fund due to all the tax consequences and nuances of holding the TIPs as actual bonds.

So, it was and is good to have in the overall portfolio. Business Week called it in 2005 , and MSNBC called it back in 2002 when inflation was but a whisper (I like what he says, "The best time to buy flood insurance is during a drought) but my question now is, do you buy more? I guess you do if you believe we are on the front end of the inflationary spiral (as I do) or do you think, with oil prices recently receding, we are on the back end of the inflationary spiral?

Blogged with the Flock Browser

Tags: TIPS, TreasuryInflation Protected Bonds, Investing, IBond

Economic Roundup For The Week of July 21

I like to read the Vanguard Economic Round up news every Saturday morning and this one was especially interesting. While all "current" indicators are down (i.e., unemployment is worse, housing down etc. etc.) one bit of good news did pop out. Durable goods orders were actually up (see table below; read link above).

I watch things like durable goods, capital investments, trucking volumes etc. to identify when we are starting to come out of the recession. My guess is we are far closer to the bottom than we may think. Companies have to be very careful right now as they cut capacity. If they cut too much, they may be far less able to take advantage of the uptick when it happens.

Another interesting factoid: They say we have a 10 month inventory of houses and I had thought it was a lot more.

With all the bad news coming our way on the newscasts, it is tough to identify the uptick but it is possible we are seeing signs of life.

Blogged with the Flock Browser

Tags: economy, business, finance, vanguard

What is Innovation at Your Company?

I am listening to a podcast from the Harvard Business Review with A.G. Lafley. He is the CEO of of P&G and recently wrote a book about innovation. He is discussing innovation at P&G and how it permeates all the way through the business. It is far beyond just innovating product and extends to shopping experience, cost and supply chain. Of course, for anyone who has worked with P&G, this is very believable. I have dealt with their transportation people before and it showed clearly they were trying to innovate even in a "back office" function.

In talking about how to review innovation, he discusses the following:

1. Develop with the consumer. Develop products with people who most likely will buy the product.
2. Use posters not briefing books. He discusses how their innovation process is actually fairly low tech and simplified. Think of the "high school science fair" where you walk around the poster and talk / discuss and not brief.
3. Use of an "innovation team leader".
4. Are we dealing with the "killer issues". Don't go to the easy solution first. Go to the one or two issues which will either make the project win or kill it.

The leader's involvement is critical. The leader needs to attend all meetings and needs to be actively involved. Not involved like most where the leader is getting "briefed" and is there to act like a king but actively involved from the perspective of helping, coaching and mentoring. The CEO became the CEO presumably because they know a lot. They need to impart that wisdom.

I have always been amazed by the P&G culture and how they continue to be a great company. This is one way they have shown their strengths.

Blogged with the Flock Browser

Tags: Proctorand Gamble, Lafely, innovation

Investors' anxiety builds as retirement nest eggs show cracks - The Boston Globe

An interesting article showing the strain on the "do it on your own" retirement system we have in the United States. The key question now is do you "take advantage" of this huge dip and continue buying or do you pull back? It appears, in the aggregate, the US Investor is pulling back in a big way (Net flows were actually negative in April and far less in May than January / February).

Of course this flies in the face of the "buy low / sell high" basic Mantra of investing. In my mind, unless you think you need the money right now, this is precisely the time to be investing in a big way; of course, only through good Total Stock Index funds.

Read: Investors' anxiety builds as retirement nest eggs show cracks - The Boston Globe.

Oil's biggest day yet drags down stocks

The impact of oil prices will be stunning and swift. I believe companies will finally (many already have) that either they have to get price in the marketplace or they will scale back operations.

As we see the issues develop in the airline industry where they are effectively shutting down capacity saying it is cheaper to park the planes than fly them, so will you see this with trucking. Soon, I predict, moving your products at any price will be next to impossible. Trucking companies will raise prices, take out capacity and refuse to drive "unpaid" out of route miles.

All this means an incredible strain on the economy overall. 

Oil's biggest day yet drags down stocks

Blogged with the Flock Browser

Tags: oil, inflation, economy, transportation

The Invisible Hand at Work - Americans Driving Dramatically Less Miles

Isn't this how capitalism is supposed to work? Price of oil goes through the roof and Americans are driving a lot less. What will be interesting is as Americans drive less governments will be taking in far less gas taxes.

Adam Smith was on to something many years ago!

Inflation Spiking in latin America

Price of Oil Tied to U.S. Dollar

Interested in people's thoughts on the above topic. I saw a study last week saying that in $ value adjusted terms, oil is hovering around $70 to $80 per barrel right now.

While we say our policy is a strong dollar, have we done anything to strengthen it? What can we do? With an economy either sliding into recession or in one now, the Fed has to keep interest rates low which, in turn, weakens the dollar.