Analytical Wealth

It's no secret to anyone who has read this blog on a regular basis that I've been pushing for GM to declare bankruptcy for months now. The reason being that I felt that the bailout and restructuring efforts were just prolonging the inevitable, and because I believed that it was the fastest way to separate the good parts of GM from the bad. While some may see this as a dark chapter in GM's history, I personally feel that it's really just the first step towards the company's rebirth.

However now that the bankruptcy is moving forward the question offered is: will GM be used to service the interests of the various stakeholders in the company, or will they instead work together and focus on what needs to be done to make the company profitable again?

Just think about it: GM's problem as a company was never it's ability to sell cars, as for nearly all of its history prior to the bankruptcy it always sold more cars than anyone else in the U.S. if not the world. Instead their problem was that their overall operating and capital structures prevented them from being able to sell cars efficiently, due to having service a myriad number of liabilities, labor costs, excess dealer capacity, costs related to unneeded manufacturing capacity, etc. The problem was never cars that people didn't want, fuel efficiency, reliability, styling, etc, instead it was always efficiency. This is not to say that fixing those problems wouldn't help, but to say that the company would've been profitable in spite of them if it had been structured properly.

Money can hide a multitude of sins and the problems that destroyed GM were problems that always existed, but were simply being hidden/subsidized by the company's hey day when it had a multiple of its current market share, SUV sales were higher, the economy was stronger, etc.

In other words the Obama Administration and the UAW have to make profitability their ONLY objective, not green cars, saving jobs or any other socio-political goals. Because only when the company is profitable will it have the muscle to focus it's efforts on green cars, higher fuel efficiency and job creation. Otherwise GM will turn into a de facto GSE that is used to service a myriad number of social-political interests, and the end result will not be pretty.

After all just look at what happened with the mortgage GSEs.

When tackling the problem of fixing GM the Obama Administration and the UAW need to ask themselves the following: companies like Honda, VW, Subaru and others have run profitable automaker operations in the U.S. despite selling a fraction of the number of cars as GM, so how do we structure GM in such a way that it doesn't need to have 40% market share to be profitable, and could instead be profitable with say 7-10%?

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted to: Auto Industry on June 2, 2009 at 11:59 AM | Permalink | Comments (0) | TrackBacks (0)

Much has been made over the sweeping changes being forced on the credit card industry by the Obama administration, with the overriding feeling that the changes will make things easier on consumers. While I don't dispute the fact that the new laws will have some positive effects, I contend that the real problem is that consumers simply don't understand how credit cards (or any of kind of consumer debt for that matter) truly work.

The problem isn't really how the credit card companies treat their customers, it's the lack of education on the part of consumers. No bank can take advantage of an educated consumer, and the consumers who "fell victim" under the old laws will continue to face issues under the new ones.

A classic example of this is an article that came out a few years ago where a Harvard Law Professor discussed how none of her students could find the APR on numerous credit card offers, with the implication being that if her Harvard Law students couldn’t find the APR then how could the average person? Here is the rub: credit card offers don't often provide the actual rate, instead they provide you with information on how to calculate the rate. They often give you a "margin amount" that you add to the prime rate to figure out the actual APR, ditto for situations where you miss a payment or commit other infractions that would cause your APR to go up. E.g. if the prime rate is 6.0% and the margin is 8.2%, the APR is 14.2%.

The same article claimed that credit card companies trick their customers by moving around the date that the payment is due, when the real truth is that the payment is usually just due after a fixed interval of a certain number of dates, and the date changes due to the fact that not all months have the same number of days. Either way the customer wouldn't have to worry about the date "moving" if they simply read their credit card statement every month, the real problem is that they assumed the payment was always due on the same date.

In other words while you can legislate changes that will make things easier on the customers, the fact remains that without education you're not truly solving the problem. Credit card agreements are always going to contain quite a few gotchas, and if people don't read and/or

understand the agreements they have with the card issuers they're going to run into problems

It's analogous to trying to fix the problem of fatal car accidents with an increased number of safety devices, when the real problem is bad drivers who don't wear their seat belts.

So while the efforts of the Obama administration will help things a bit, they won't solve the core problem.

Posted to: Personal Finance on May 26, 2009 at 10:11 AM | Permalink | Comments (0) | TrackBacks (0)

Some quick thoughts on Toyota and their recent profitability issues:

Toyota's profitability issues seem to be a classic case of "money hiding a multitude of sins", as their success caused them to abandon some of the company's key values with respect to efficiency, keeping things simple, etc. A WSJ article I blogged about a few months ago covered some of these issues, especially with regards to various aspects of the manufacturing process that  were really instances of "engineers at play", more so than adding value and efficiency. All of this leads me to believe that the economic downturn will actually benefit Toyota in the long-run, as it's forcing them to confront various internal issues before they become even bigger problems down the road.

Overall Toyota's problems seem to be more of a case of needing to remove some bad apples from the system, as opposed to widespread systemic problems that require a re-visioning of how they company does business. In short: I view Toyota's problems as nothing more than short-term hiccups, which will probably benefit the company by forcing them to adopt a more disciplined decision making process moving forward. As a result I think that they should be able to return to profitability relatively quickly.

Toyota may very well be a classic case of a company's short-term problems allowing investors to pick-up their stock on the cheap.

Disclosure: while the author didn't own a position in any of the companies mentioned in this article at the time of publishing, he is considering investing in the companies or sectors mentioned in this article. In keeping with the typical rules around investment timing and disclosure, any potential investments would occur 10 trading days after the original publishing date and the position would be disclosed in future articles discussing the relevant companies. The ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted to: Auto Industry on May 21, 2009 at 07:20 AM | Permalink | Comments (0) | TrackBacks (0)

This is an old WSJ graphic but it's still interesting and worth discussing, as it depicts the historical savings rate going back to the early 80s:

Graphic courtesy of the WSJ

So one of the constant refrain during this downturn has been that "we need to get people spending again", in spite of the fact that a lot of consumers are overleveraged and aren't saving enough. The basic idea being that in order for the economy to grow people need to "spend like it's "2006 ". It goes back to the theory of "the paradox of thrift", which puts forth the idea that while saving may be good for individuals it's not good for the economy overall.

However when we look at the historical savings rate we see that people can save a lot more than they do now and the economy can still be strong. This suggests that what we really need is to reduce unemployment and get more people spending, as opposed to getting people to spend more at an individual level. The solution is increasing the number of participants in the economy, as opposed to the majority of individuals spending all of their disposable income.

Unfortunately becoming a nation of savers is easier said then done because our economy is (for all intents and purposes) structured in a way that it depends on us being a nation of wild spenders as opposed to rational savers. Several industries ranging from automotive, real estate, retail, etc, have been generating their growth over the last 20+ years from people overspending, as opposed to spending within their means.

The adjustment won't be easy, but it's a necessary part of creating a sustainable economy, as an economy based on being a nation of spenders isn't sustainable.

IF the Obama administration really wants to stimulate the economy in a sustainable fashion, they really need to put some thought around how to incent savings and other smart financial decisions. As opposed to the usual pattern of trying to incent people to spend money.

The graphic comes from a WSJ article that discusses the potential for the beginning of a trend where the savings rate continues to increase even after the economy recovers, which you can read in full here.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted to: U.S. Economy on May 21, 2009 at 07:08 AM | Permalink | Comments (0) | TrackBacks (0)

…..AKA the punch most of the country wishes they could throw

All that being said: while the bankers and MBAs deserve a lot of the anger that is being directed at them, let's not forget that this crisis is truly a perfect storm of bad decision making on the part of corporations, bankers, politicians AND consumers. One of the things that continues to concern me is that so many people view this crisis as something that the bankers "did to the country", and are ignoring the role that other actors played in the crisis.

I say this because we're not going to prevent future crises if we only focus on one aspect of it.

Posted to: Randomization | U.S. Economy on May 21, 2009 at 06:56 AM | Permalink | Comments (0) | TrackBacks (0)

I took a brief hiatus from blogging to recharge and focus on some other things for a bit,  and I'm now "back on the scene" as the saying goes. I'm going to post a few things today, and return to the usual posting frequency after the holiday.

Posted to: Housekeeping on May 21, 2009 at 06:46 AM | Permalink | Comments (0) | TrackBacks (0)

William K. Black was one of the chief banking regulators during the S & L crisis, and in a recent interview with Bill Moyers on PBS he makes a very strong case that our financial system has become a de facto Ponzi scheme. A Ponzi scheme that was enabled by deregulation, and that is currently being propped up by the rescue efforts of the Bush and Obama administrations.

Needless to say he pulls no punches when it comes to his opinion on how the government is handling things.

While the interview is both disturbing and arguably inflammatory it's hard to argue with the man's logic, my suggestion is to either read the transcript and/or watch the video and decide for yourself.

You can also read more about Mr. Black here.

As for my opinion? A long time ago I had a independent mortgage lender as a client, a company in the vein of companies like New Century or Accredited Home Lenders. About two weeks after starting with the client the CFO was walking me through how their business worked, in terms of originating mortgages, securitizing them to raise cash for more loans, etc. About five minutes into his presentation I realized that the company was running cash negative and was only profitable on paper, but those paper profits were largely hypothetical and may never be realized in a tangible sense. About ten minutes I remarked: "So wait, your business works like a Ponzi scheme?". *Note: this was when I was very young and had a habit of saying exactly what I was thinking in business situations. It's really not a good idea to accuse your clients of running Ponzi schemes.

The CFO's response? "Um, well, I wouldn't exactly characterize it like that, we're running a legitimate business here that provides real value to its customers."

Do I need to say anything more than that? 

Kudos to my friend "Jest" for bringing this one to my attention.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Posted to: Financials on April 23, 2009 at 09:37 AM | Permalink | Comments (0) | TrackBacks (0)

Courtesy of Economist.com here is a graphical look at unemployment rates around the globe:

Graphic courtesy of the Economist.com

(From Economist.com): "U NEMPLOYMENT is accelerating in many countries as companies shed jobs in an attempt to survive the global recession. On Tuesday April 14th, Russia's president Dmitry Medvedev said he was “deeply alarmed” that unemployment levels were rising more rapidly than forecast, to reach 8.5% in February. This week Greece announced that unemployment had risen from 8.9% in December to 9.4% in January. Spain's economy has crashed since its housing and construction boom ended. In four months unemployment rose nearly three percentage points to stand at 15.5% in February. Countries in severe financial trouble, such as Latvia, Iceland and Estonia have also seen rates rise rapidly."

One the things that concerns me most about rising unemployment in the U.S is that many of the people who've lost their jobs are going to find themselves underemployed in the future. Many high-paying manufacturing jobs are gone for good, white collar workers may find themselves dealing with a lower pay scale on an on-going basis, and many employers aren't going to "give back" the mandatory pay cuts imposed on many workers. As a result I anticipate lower consumer spending, consumer confidence, etc, even after the official unemployment rate returns to pre-crisis levels.

To be sure we saw some of this after the last recession and it was one of the factors that led to the increased use of consumer credit, as more and more consumers used credit as an income supplement. In a post credit bubble world credit will be harder to come by even after the financial sector recovers, which should only serve to exasperate the declines in consumer spending the pain felt by the retail sector.

Either way the true pain caused by rising employment will continue to be felt even after the economy recovers.

Sources:

Economist.com: "How the recession hurts" -- April 15, 2009

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.  

Posted to: Global Economy | U.S. Economy on April 21, 2009 at 11:45 AM | Permalink | Comments (0) | TrackBacks (0)

I figured that this comic was apropos to some of the recent discussion topics around business failure:

Tying it in more directly to the current economic crisis: I think that one of our biggest problems is that few people at the "controls" (politicians, executives, policy wonks, etc) are willing to accept that the world has changed, and that many of their usual assumptions are wrong. What else can be said when many of the "rescue" efforts seem more aimed at rolling back the clock to '06, than they are at forging (or helping people adjust to) a new economic reality?

Posted to: U.S. Economy on April 21, 2009 at 11:22 AM | Permalink | Comments (0) | TrackBacks (0)

In yesterday's blog post around business failures I discussed how failing companies often get into patterns where they become more interested in "defending the religion of their business model", instead of making the changes they need to make in order to survive. One of the consequences of this is that the company begins to punish those who try to innovate and change the company, while rewarding those who celebrate the status quo. This dubious business practice creates a double edged sword that destroys the company by encouraging the very business practices that are destroying the company, while simultaneously chasing away the agents of change who can save it.

So as one of my readers asked this morning: "How do you reward innovation and punish stagnation?"

One of the answers to this question resides in a situation that practically anyone who has worked in an organization has been exposed to: you're trying to accomplish a particular goal/objective/etc, and are unable to because of some sort of impedance that is intrinsic to the way the organization operates. Maybe it's the way your distribution network is set-up, the way the sales force operates, etc. Everyone in the room knows what the real problem is, but you also know that speaking up about is a bad idea from a political perspective, or that perhaps management won't support you in removing the impedance, etc.

I.e. the organization's top level leadership s too busy defending the religion of their business model to do their real job, removing the barriers to success standing in the way of the people below them.

So what does everyone do? They think of ways to mitigate or work around the part of your organization that is holding them back, because removing the impedance is a non-starter. I've had first hand experience with this, because I once worked in a marketing organization whose sole mission it was to mitigate the aspects of the company that led to sub par products, an ill-prepared sales force, the wrong approach to selling particular products, etc. 

So how do you combat this problem within an organization?

The easy answer is that you have to send the message that nothing is sacred, and that the goal of the organization is to perform at the highest level possible, not to defend, perpetuate or preserve the current way of doing business. Continuous improvement should be one of the organization's key missions, and all managers should be incented for regularly thinking of ways to refine, tweak and evolve the company's business model forward.

Finally management has to send the message that one of their key missions is to enable the people below them to be successful. In other words: if there is something about the way the company is currently doing business that is making it hard for people to successful, they should have no fear about speaking up about it, and they should feel that if they will be taken seriously if they present valid alternatives to the current way of doing business.

Of course it goes without saying that all of these things are easier said than done.

I could easily write a book about this topic as I have many ideas on it and well, thinking about these sorts of issues is basically what I do all day. SO, I plan to write an on-going series of blog posts on this topic. Once a week I'll either post a real world example of something I've done to encourage innovation, or some general ideas on same.

Next time I'm going to discuss the issue of trust and how to get your managers on your side when you're trying to incent innovation, the idea is simple: the mere offering of carrots doesn't necessarily mean that will people will eat them.

Posted to: Organizational Management on April 21, 2009 at 11:12 AM | Permalink | Comments (0) | TrackBacks (0)