CPI, PPI, Conflicting Data sends the market cautiously downward

Last night, I'm relaxing from a day of arguing with people over how to make admiralty brass tubing, and I flip over to CNBC. They are running a recap show of 2006. Basically, they are lining up one no-name, not important pundit after another who is talking about how great the market is going to be in 2007 and how the PE (price to earnings) ratio of 16 of the combined Dow components is below the 27 PE ratio we saw in 2001 and how the market needs to move higher. They are also playing down the inflationary pressures, energy, and other issues and are calling 2007 another 1995, harkening to an extended boom. They pumped up the idea of continued higher earnings and large corporate profits.

Well, I'm tired of conflicted pundits trying to make a buck by hyping a market that they are already long. There are serious problems in our economy which are coming to bear and such upbeat analyses only confusing people and expections need to be tempered.

First of all, the long term price to earnings ratio for the Standard & Poor's 500, not the Dow Jones Average, is 16 or 17. By saying that the PE Ratio is low, they are implying that the Dow components should trade at a premium to the broader market. This may be the case, although, I would argue that the Dow is not the best predictor of performance, and how much of a premium is a question.

Secondly, the implications that we will see continued high corporate profits is working under several broad and perhaps incorrect assumptions. Most importantly, I believe that there will be wage inflation in a variety of sectors of the economy, reducing corporate profit margins. With unemployment continuing to be low, hitting 4.4% in October, the power, through employee shortgages in certain segments of the economy, will swing back over to labor and corporations will be forced to increase wages and benefits to retain and hire employees.

Third, there is another assumption that these employees and workers in our economy will spend the majority of any potential wage increase which will in turn spell higher revenues and higher profits for the corporation. Unfortunately, this assumption is misguided. The savings rate previously at -0.8%, that's right negative, moved up to -0.2% in October, indicating that people are trying to pay off debts and saving more of their paycheck. Although the holiday season may prove optimistic and consumers will spend, I believe that after the holidays, the pressure to save will return. Due to continued weakness in the housing sector, Americans tolerance for debt will be tempered by their concern over the static value of their main asset.

The United States still has a major debt hangover, funded by overseas banks, a higher dollar due to one of the higher interest rates in the developed world, and a housing and credit boom. The last six months have seen the markets trying to correct and sleep off some of that hangover, but there is still a ways to go and some concerns lurk on the horizon.

If the dollar continues to slide on its own or as a result of a Fed rate cut, the current account defecit doesn't become smaller, and/or commodity prices don't temper in spite of falling US demand, foreign investors will shift their dollars into Euros or other currencies, making it more difficult for Americans to borrow and fund a large current account defecit. Continued high commodity prices may keep inflation high and as a result, keep the Fed from cutting rates which won't alleviate pressures.

After all that doom and gloom, there are couple things that may be in favor of the US economy that may stave off a recession or large correction.

Due to the high corporate profits we may see a pickup in business investment and capital spending. I believe that investments in telecom, energy, commodities and technology are possible, and the continued strength of the commercial real estate market means that corporations in some parts of the country are still investing in or leasing real estate. Several private equity deals focused on Office and Commercial REITs could be an indication of continued strength in that sector. Lastly, the frenzied and continued pace of M&A and private equity buyouts makes the financial sector a good profit source, and potentially means that some of those mergers may produce more value. Further, with profits where they are and cash being so cheap, corporate America may see a drastic restructing. Further, when these Private Equity shops have squeezed the savings out of financial engineering and cost cutting, they will need to invest in order to provide adequate returns that will please their LPs.

We need to proceed into 2007 with caution. We definately don't need to get up on TV about a booming market in 2007 with complete abandon.

Crude Oil Inventories go down, Retail Sales Go up

The Federal Reserve left interest rates unchanged yesterday and the market responded with minimal relief. The Federal Reserve also said that inflation is still higher than they would like and I believe they are concerned about the devaluation of the dollar. Some drop is okay and a gradual slide is fine, if it corrects the trade imbalance a little, but a drastic slide could be problematic.

America is entering a period of confusion in the economy. Although, those individuals in the bottom two quintiles of American net worth, have not felt the good economy of the last two or so years. They haven't had better paying jobs, they haven't been able to cash in on tremendous equity in their homes, and they salaries have not gone up. But they did feel the higher price of oil, the rise in their credit card and other loan payments (maybe even mortgage) and it became more difficult to stretch the dollar.

However, a weaker economy, with less robust growth in housing and autos, may not be so bad for the broad swatch of Americans. Even though the tax cuts and housing boom primarily benefited upper middle and upper classes and has not yet filtered completely through the economy, as corporate profits were distributed to shareholders, and not spent on capital investment or employee raises or hiring. In the past 3-4 months, the labor market has begun to tighten and there has been some wage inflation. This will affect the broader swath of people. Further, although cash rich corporate America has pursued mergers and acquisitions and private equity buyouts, for further return, investment will be required and this will provide a domestic demand stimulus to the economy.

One thing that the Fed and we should worry about is continued inflation due to energy costs and a dramatic drop in the dollar. There is a turning point where Asian economies start trading in their greenbacks for Euros and Yen. But a cheaper dollar and a rising and productive economy in Germany and the Euro region will mean cheaper American exports and a better trade balance.

Cheer up folks, maybe the Fed may begin cutting rates even by the end of the first quarter if inflation stays under control and the dollar doesn't drop too much. I think this choppy environment may be just what we need to bring certain overheated sectors back into check.

Newsflash, the FED is not fighting inflation, its fighting a good economy

Today some bad economic data came out from the housing sector and the dollar continued the slide it started three years ago. This is starting to weigh on the minds of economists and as politicians as they seek to explain or pander to their respective audiences. I believe it means that we are looking at a slowing of growth in the economy and continued weakness in the housing market. There may be a potential of a recession given the overhang of credit and debt, the weakness in the housing market, and a vigilant fed that may continue to hold rates for too long, in order to kill inflation.

Here's what Chicago Fed Chairman Michael Moskow thinks.

Here are the facts on the economics news on December 1st.

Today the Commerce Department came out with the weak housing data we've been expecting and receiving for the past couple months. The housing news is not getting better and is factoring itself into the rest of the economy. In that same article from CBS MarketWatch there was a nice quote from Stephen Stanley at RBS:

"We see this as an unambiguously good thing," he wrote. "The faster builders address their bloated inventories and bring the pace of home construction down, the quicker the housing correction will play out and the economy can return to a more normal footing."

The housing sector has been out of whack for about three years or more. However, the correction that has been needed to bring down the air out of the economy, and some of the air out of inflation, did not start until the fourth quarter of this year and will need to continue to properly adjusted the housing market back to normal levels. This correction should push down inflation enough where the Fed will probably need to begin lowering rates in the first quarter and stop trying to drive us into recession.

This brings me to the point that the Fed may be going to far in their Congress mandated fight against inflation. The housing sector and consumer debt is weighing down on the economy and a significant slowdown is going to happen. The question is whether the Fed will go to far or will it begin cutting rates sooner rather than later.

One thing is for sure, we will see flat to falling housing prices in a variety of markets for several years, some wage inflation, and less demand for inflationary driving commodities such as oil and metals. Our heating bills may be lower, but we won't feel the extra pennies in our pockets as mounting credit and high payments will continue to weigh on consumer spending. Look for some tightness in the economy, and slow growth for the following year and even a potential recession in 2008.

LSE won't dance with the NASDAQ

The London Stock Exchange rejected the $5 Billion bid by the NASDAQ to buy it outright and create the across the pond alliance that NASDAQ wanted. CNNmoney.com reports it here.

Why is this important? Two reasons.

1. Twenty years after the "Big Bang" (London's massive financial markets deregulation), the LSE realizes that merging with the NASDAQ could result in Sarbannes-Oxley rearing its ugly head in Britain. This has led to London becoming the true financial capital of the world and New York coming second. Sarbannes-Oxley has made it more difficult, more tedious, and more expensive to list in the United States, and the competition is taking away business.

2. The big exchanges are feeling pressure to become more global and offer better trading opportunities. Unfortunately, banks and other large institutions are annoyed that the exchanges are dragging their feet to create the liquidity that is desperately needed due to undue beauracracy and jostling for position. Recently seven banks decided to come together to create the exchange and trade in the cross border shares. See the information below:

"The move comes as the world's stock markets are rushing to consolidate under pressure from customers to cut fees and offer global services. A group of banks added to the pressure last week by announcing plans to create their own pan-European equity trading platform next year." (CNNMoney.com)

The politicians and even the beauracratic exchanges don't get it. People are not looking for more regulation, they are looking for lower cost, technology driven trading platforms so that they can execute their trades and make more money.

The sooner that the regulators and exchanges understand that the barriers to entry and success are being eliminated, the sooner they will be able to react. The United States needs to follow the example of London's Big Bang twenty years ago and roll back Sarbannes-Oxley and make it easierer to raise money in the US. Unfortunately, with the Dems in office, and protectionism on the docket, this may be a pipe dream and have to wait two more years.

See Reuters article here.

Keep out those high skilled workers...

Let this guy in our country...click to see his website, he's awesome...

Congress is set to begin arguing over increasing the number of H1-B visas. This is a piece of legislation of monumental importance, something that the President and the Dems agree on. We need more skilled engineers and science people in this country. There is a talent war going on around the world and by restricting entry to the most sought after skilled people, we are only shooting ourselves in the foot.

The United States is the most hated country in the world and the country where most people want to live. We have the advantage of being the best place in the world to live right now and we have to leverage that as much as possible. That advantage may not last.

Bill Gates was recently quoted saying that he would rather be a smart middle class kid in China than a poor not intelligent kid in the US. He said that ten years he thought that even the poor kid in the US would be better off. The world is changing and the only types of currency are knowledge, intelligence, hard work and entrepreneurship.

I find the anti immigration arguments in this country incredibly ridiculous.

ARGUMENT #1. Politicians and border nazis bring up the issue of terrorists entering our countries under the guise of these programs, whether H1-visas or other illegal immigrants crossing our border, but I think the more people we get under the scope of law, the more difficult it will be for the few to hide among the many. There is no question that the US should be concerned about letting Iranian and other nuclear seeking countries send the engineers and scientist to MIT to study nuclear physics, but those H1-B visas are already unlimited at Universities and the FBI is already on those guys like crazy...We have to worry about the terrorists that are hiding among the undocumented workers, not the ones that are trying to build software in Silicone Valley.

ARGUMENT #2.
Other politicians and left wing hypocrites say that these people are being brought over to take the jobs of highly qualified American engineers and scientists for a lower price and point to a ridiculous statistic that the salary of tech workers hasn't gone up since 1999. Wait, you mean at the height of the tech bubble...I hope it hasn't gone up since then...those numbers were crazy. Norman Matloff a Prof from the University of California on Marketplace on NPR who made this argument, check out the story here.

As a disclaimer, I have to mention that my parents are Russian Jewish immigrants to this country, and my father is a small business owner who built his business from scratch, so there is some bias here...but come on, I think Americans are out of their mind to keep their borders closed. Not only do immigrants come to America seeking better jobs, better employment, and a better way of life, they are willing to work for it, something that other people don't always do. Granted there is not the same sense of entitlement as in European social democracies, but some of the same arguments are rearing their ugly heads into our lives as well. Let's remember something very important...

"The H-1B visa category is controversial. Advocates say the program (and similar ones operated by other technologically-advanced countries)helps the host country maintain its technological as well as economic superiority by providing a steady flow of highly skilled professionals who may be short in supply domestically. It also provides an incentive for companies not to move their operations abroad.(http://en.wikipedia.org/wiki/H1B_visa)"

Wow that sounds horrible. Please, right your congressman or do whatever, scream from the rooftops, keep these people into our country. Who knows they may help us maintain our techonological or economic superiority and that would be just awful.

The Big Three Go To Washington

So the dems win and the Big 3 finally get the meeting with the White House they've been waiting for. Hank Paulson, Cheney, and Bush sit down and talk about what it means to make a car in America. It means an extra $1000 per car in health care for General Motors. I think they boiled it down to three things:


1. You have got to do some thing about the health care crisis in this country.

2. You have to throw some (aka a lot of) money at ethanol gas stations so that we can use our existing technology to look clean and helpful to the environment.

3. You have to talk tough to Japan, Korea, and China to get them to stop propping up their currencies and closing their borders to American products.

I think there is no chance that the White House will be able to tackle the first issue. Our health care in this country is a mess and business shares an unfair burden. We can't even offer a health care package to our empoyees yet, and the Aflac just didn't cut it. The main issue that I see wrong with the American auto industry is health care, and until something drastically different is done, they will continue to lose potential R&D and design money to prior obligations. This again falls into the argument of this generation being impoverished by the baby boomers...another whole post...sorry.

The second issue is just pork barrel politics that may move the alternative energy engine along, but 80% of the money is just going to go to waste, but the 20% may give the Big Three some time to develop better ethanol engines, eventually better hybrids and maybe even hydrogen, meanwhile, they can use this as a hook to sell cars.

The last issue is another bit of protectionist politics, although there is no question China is doing it, the Dems will probably push this brand of protectionist politics to cater to a disenfranchised unemployed manufacturing base, but that's the nature of the political beast. The Chinese should loosen their control on the currency, and the Japanese and Koreans should open up their markets more as well.

Mainly, I think that if the Japanese can make good cars here in the United States than the Americans can too. The only difference between the Japanese & Koreans and the Americans is health care and legacy costs. One problem can be eventually solved by the US Government, but both problems can be solved by bankruptcy.

For more info on the subject...

http://biz.yahoo.com/ap/061114/bush_automakers.html?.v=14

The Democrats Take Control

People are writing at long length about the recent take over of both houses of congress (even if by a slim margin in the Senate) by the Democrats and what this means for the economy. Consensus has pretty much decided that due to a Republican White House, we are looking at two years of gridlock. There goes reforming social security.


Well at least some policy could be decided that may have a long term positive effect on the economy. Hopefully, the first of these policies may be the Temporary/guest worker program and an immigration policy that works. Bullheaded okie congressman were playing protectionist politics trying to keep the Latino immigrants out. There maybe a homeland security argument to be made here, but I think that that risk can be mitigated. People aren't dying crossing the Rio Grande to commit terrorist acts, they just want a job and a better life for their family. This illegal immigration will continue. However, by monitoring and tracking these people, i.e. making them legal, we may have a better chance to spot the terrorist that may try to come through. Basically, immigration is almost always a net gain for the country. Our workforce gets beefed up with new workers, keeping labor costs down, performing services that most Americans don't want to do at the current market price, and these people have children that contribute further to our economy.

On the other side of the scale, the H1-B visa system needs to be changed to a point system that mimics the Australians and Canadians. America always needs more engineers and scientists. We need to be bringing them in any way we can, considering that there is a worldwide competition for talent. The more we beef up our talent ranks, universities, and companies with the best quality people, the better we will compete with the rest of the world.

Another thing "The Economist" also mentions as a potential benefit from the democrats taking congress is more work on the environment, improving building codes, green materials, energy efficiency and alternative energy subsidies, and more funding and subsidizing of research and development for the automakers. Maybe in conjuction with raising the CAFE standards which need to be adjusted. The market may need some nudging along to get the auto companies to act, but the high oil price had already pushed them into more cars and less trucks. I see the possibility for nuclear technology flourishing and becoming the preferred electricity source. This may hurt the oil companies as their subsidies will surely be cut, but who should be subsidizing $50 oil anyway? There is definately enough incentive to explore.

In summation, the economy could benefit from some policy changes made by the Democrats and President Bush working together, and hopefully some things will get done, because this President could still do some things that may not absolve him of the Iraq mess in some people's eyes, but will at least dampen their hatred.

Housing...Things are going from bad to worse

So the housing market is finally on its knees. However, I wouldn't say people are really bleeding or jumping out of windows yet. The consumer debt overhang is a fun problem we will have to deal with in 2007 and 2008.


Recently sales of existing homes in September clocked in at 6.16 million, down a bit from Augusts number of 6.3 million, and down a bit more from last September's 7.4 million. Oh and inventory of existing homes is up to 7.2 million from 4.6 million homes same time last year.

Things have finally turned for new housing and the optimistic builders, forcing the median home price down to 217,000 a 9.7% drop from last year and largest drop in over 30 years.

This leads to the other question, well maybe its time to buy...after all...prices should start coming up again...Terry Savage of the Chicago Sun Times throws people's hopes and dreams of higher housing prices back into the toilet.

"A generation of investors was scared out of the stock market by the 2000 crash and subsequent bear market. Many came to view real estate as the alternative for creating wealth. Now the differences in the two types of investments will become apparent. After all, the Dow has made new highs in a short time period. It's unlikely that real estate will make a similarly timely rebound from its eventual low. (Chicago Sun-Times, http://www.suntimes.com/business/savage/116415,cst-fin-savage30.savagearticle)"

"Yet in the coming months, an estimated $1 trillion in adjustable-rate mortgages will be re-set. Even at current low rates, monthly payments will jump for those who entered the market with low teaser rates. And those who have interest-only mortgages could see their monthly payments rise by 50 percent. (Chicago Sun-Times, http://www.suntimes.com/business/savage/116415,cst-fin-savage30.savagearticle)"

Who cares about the housing market you say?

Well, besides its definate impact on the economy through the lowering of people's net worth, reducing their credit worthiness, causing defaults, turning mortgages "upside down" (when your house is worth less than your mortgage), and a general downward shift in consumer spending and demand.

This basically means if personal income or business spending doesn't start going up, we might be in for a smaller GDP growth rate. Lower tax revenue, cuts in programs, medicare, social security all the good stuff...might as well start eating cheese, drinking wine, wearing a beret and protesting labor in the streets...

General Motors posts higher than expected earnings

People don't seem to understand what it takes to turn around the Titanic to keep it from hitting an iceberg...bad analogy. Turning around the Exxon Valdez...wait, wrong again...

GM posted a before special charges, before tax gain of $.93/share in comparison to analyst estimates of $.49/share. That is a serious difference. I've been bullish on General Motors since the stock has been at $16/share. Rick Waggoneer, Fritz Henderson, Bob Lutz, and the other parts of the executive team there are the people best capable to turn around this slumbering giant. What's more, they are doing it.


Recently, the Buick LaCrosse and Buick Lucerne were named in the list of top cars in terms of quality. That's right, quality. Bob Lutz said approximately one year ago that there is a perceived quality gap between General Motors and the Japanese, and the Americans are putting quality cars out there, but it will take a couple of years for the public to take notice. Well, anyone who reads their balance sheet can see the downward trend in warranty costs. Further, GM has provided a 10-year 50,000 mile warranty on the powertrain. This is the way to bolster quality, would they do it if they thought the repairs would cost them a fortune? Absolutely not.

The changes that Lutz has made in the design team are paying off and the cars on the road, including but not limited to the Pontiac G6, Chevy Impala, Pontiac Solstice, Buick Lucerne and Buick Lacrosse have breathed new life into old forgotten brands. The new Saturn designs have compelled people into the showrooms through sheer emotion. This is the makings of a true turnaround.

Further, the number one growing market is China. The General Motors-Shanghai Automotive venture is the market leader. GM is making profits there as the market continues to grow. General Motors is further well positioned in India. It has been investing in India for over ten years and stands to have a strong position as that market begins to boom.

The General is back, and as I have been saying for long time, American carmakers have to combine cost cutting and production scheduling through flexible manufacturing, cut their large pension and health care liabilities by any means necessary, and invest that savings into design, and engine and powertrain research. The world sits on a pivotal technological shift in our uses of energy and natural resources, and the automotive industry is at the beginning of a technological renaissance in the automobile as we know it. Those who think Detroit is not going to be a major part of that renaissance, don't know anything about the people at the top of these carmakers.

Now if only the Chrysler stock could drift far enough that some car guys and some private equity could take that company over...

The General breaks negotiations on the Renault - Nissan 3 way

General Motors breaks off negotiations with Renault-Nissan...

Here's Tom Walsh's take on it from the Detroit Free Press.

The Structural Shift in Labor is Continuing

Labor in this country is continuing to undergo tremendous changes as the new economic environment is weakening the hand of the union. Some say this has been going on since the airlines and steel companies first began their domino fall into backruptcy, but no one predicted that the auto makers would be giving such buyouts...


Now their suppliers are following suit. Nobody wants to be left with a bloated labor structure and cost as the industry restructures. This is just more short term bad news for Detroit economy, but more good news for the long term outlook of the city. Its time to shift priorities.

Crain's Detroit broke the story, that you can read if you click here.

“The unprecedented, yet necessary, structural transformation of the domestic automotive industry is continuing at a rapid pace,” said American Axle Chairman and CEO Richard E. Dauch. “(American Axle’s) special attrition program is necessary at this time to realign our workforce with actual and projected production and market conditions.”

Let's pray that the US automakers stop losing market share and start making money on the cars and trucks they sell, Detroit sure needs it, and they can't blame it completely on labor anymore...

Dow Hits All Time High

News that is a little bit of a big deal...Dow hits all time high!

I don't know how I feel about it...oil prices touch $59/barrel...

Anyway, articles about this are all over the place...I wonder if it even makes sense for me to regurgitate stuff like this...

SEC Rule 10b-5 and Enron

SEC Rule 10b-5

Let me paint a picture for you. You are the CEO and CFO of a major Fortune 500 corporation. You know that one of the things that has made you a darling on wall street is perception. You know that you have had a tremendous amount of success due to the deregulation of parts of the electricity and gas markets and have invented a genius trading platform. You also know that due to market conditions and "behavioral finance" the public markets have become increasingly innefficient.
You know that your company actually may turn around and be successful, assuming that it is allowed to work off its losses slowly and over time. You need to restate earnings and unwind partnerships as profits from other businesses come in. You know you need a restructuring plan.

However, in order for you to succeed, your restructuring to succeed, and your company to turn around, you need to maintain a decent stock price since your special purpose entities are reliant on an elevated price. You can maybe hold off the investors in the special purpose entities while you kill expenditures on broadband and weather trading, power plants in India, and focus on your core energy trading platform, while reigning in the traders.

Do you go to your employee meeting and tell everyone that your company is in the toilet and they should dump their stock? No.

Do you sell your personal shares and positions in the company? No.

What happened at Enron at the time of the implosion was akin to a run on the bank. Anyone who doesn't see that is incorrectly assessing the situation. However, Skilling and other top brass, where the first in line at the bank. That is wrong. But pumping the company in a bad time, well, they had no choice. The only problem is not putting their money where their mouth was.

But Fastow's partnerships, and conflicts of interests, and all these things...he just postponed the crash with brilliant finance. If only they could turn the business around to be profitable, Enron would be an example of brilliant finance rather than an example of an sinking ship that Skilling got off of and then told everyone that the ship would right its course.

I'm not saying there was no wrongdoing here on the part of Skilling and Lay and many of the top brass, or that Fastow may have crossed some lines. However, the ridiculousness of the whole situation is that Enron is the poster child for 90s excess, comparatively speaking, the things Enron did, was doing, and failed because of was no different than other companies being lauded now.

This is typical of public opinion reacting to stock market losses and look for someone else but themselves to blame. My favorite is when they interview some pipeline operator who said he had a million dollars worth of Enron stock that imploded. A million dollar portfolio? All in Enron? Well he wasn't complaining when his portfolio got to a million and his friends at Dynegy or General Motors where telling him to diversify...

Cisco Systems has a policy of writing off router inventory from a quarter or two ago as obsolete, then storing that inventory in a separate location at a value of $0.00, when someone comes along and buys an old router from them, oh I dunno, a quarter or two later in the year, THEY BOOK THE ENTIRE SALE AS PROFIT!! But that's not fraud....Enron, those bastards were taking the pensions of little old ladies, clubbing baby seals, and beating up hungry orphans.... give me a break...

It's like my brilliant finance professor said when this thing first went down...in a good market its called financial engineering in a bad market its called fraud.

Delphi, Poor Delphi, Poor Detroit...Lift Up Your Weary Heart...

Hey, Delphi just announced another 1400 people took buyouts...bringing the total to 20,100. Crazy, right?

I feel bad for everyone involved, but this is the restructuring Detroit need 20 years ago. I feel like the heavens are releasing tied down capital. Will some of this money leave Detroit? Yes. Will this be a drain on the economy? Yes. Will Detroit recover? It always does.

Is this question and answer format getting annoying? It always does. Here's the link if you didn't click up there...

http://www.chicagotribune.com/business/
chi-060926delphi-buyouts-story,1,380961.story?coll=chi-business-hed

Fastow got 6 years

"William Sansinger with a six month sentence..."

http://biz.yahoo.com/ap/060926/enron_fastow.html?.v=38

So in the Dylan song, William Sansinger killed poor Hattie Carrol, etc., etc., but really what did Fastow do, besides be the little scapegoat for Enron. Wait, I take that back what did Enron do exactly? Besides do some of the most ingenius financial engineering ever? Wait, let's take the flip side of the coin, what if Enron's stock kept going up, what if these special purpose entities had a net asset gain? (If you remember Enron used their call options on their own stock as an asset to pull debt off their balance sheet into these special purpose vehicles, they got investment banks and other investors to pay cash for these call options...it was basically brilliant structured finance). Did they go to far? Probably. Did Skilling and Lay know about it? Definately. Should Fastow be the villain they are making him out to be? No. People lose money in the market and look for someone to blame. Blame yourself, you big dummy.


Anyway, Fastow is a brilliant CFO. Jeff Skilling was a brilliant CEO. The only problem Skilling lacked was some discipline and moderation. Trading energy was a brilliant idea. Enron Online was a brilliant idea. Screwing up California? Stupid. Rebecca Mark traveling around the world building crappy power plants by ramrodding them through local governments? Stupid? The worst thing about the whole house of cards (I say that without taking anything from Fastow's brilliance) was that they couldn't let the stock go down because it would kill the special purpose entities which they needed to unload debt. So it perpetuated this crazy cycle, where they kept feeding the beast. Meanwhile, broadband and weather trading was just too early... and they kept throwing money at this trading platform idea. If they had put some controls on their traders, thing would have fallen in line, and the money they made there combined with being more disciplined about their new business investment process, would have kept their numbers in line.

Obviously, Enron went overboard and crossed some lines in terms of business. However, the amount of grey area that Enron and the market was operating in at this time was enormous. A more conservative company would have emerged. However, let's be clear, there was no fraud here. They just kept feeding the monster.

Was there incomepetence at Enron? Yes. Was their fraud enough to send a mother to jail for a couple years and her husband to jail for 6? NO.

Fed Leaves Rate at 5.25%

Federal Reserve and Oil and Economic News, Galore... figured I could give you some links on this...

Fed Leaves Key Interest Rate Unchanged - NY Times Article

Crude Oil Falls Again - Bloomberg Article

The economy is slowing down, hopefully the housing market won't send it into a tailspin...

Its not the commodity bloodbath I expected, but nonetheless

Thanks to the illustrious Golden J for clueing me in on this story. I have long bemoaned the run up in commodities since it affected our little business and blamed those nasty hedge fund traders, I thought they would get theirs when the market turned...

However, I thought the bloodbath was going to be in commodities like copper and gold, but natural gas took such a nosedive last week that it really hit these Amarnth guys...

http://money.cnn.com/2006/09/20/news/companies/goldman.reut/
?postversion=2006092012

I think I read somewhere that an Amarnth is a never fading ficitonal flower... now it will be associated with fictional positive returns.

Michigan is #1 in the Journal Again Baby!

At least someone appreciates my alma mater...

http://www.bus.umich.edu/NewsRoom/ArticleDisplay.asp?news_id=8712

What do those morons at US News & World report know about business schools anyway?

Looking more and more like the fed won't cut rates

With recent economic news out last week, all signs point to the fed keeping rates at their current level. Oil has settled in the low sixties and prices are moderating.

Read the AP article:

http://biz.yahoo.com/ap/060920/fed_interest_rates.html?.v=5

It's like my man McManus from the Usual Suspects said...

"Falling energy prices, further weakening of the housing sector and a few tame inflation reports have put a lid on inflationary expectations for the time being," said Thomas McManus, an economist at Banc of America Securities.

New Yorker Article on Neuroeconomics

In last week's issue of the new yorker, a fascinating article came out in regards to a new field of study called neuroeconomics. The field of neuroeconomics questions one of the most basic and traditional principals of economics. That the market participant is rational in his decision making. The article claims that certain situations and decisions cause overactivity in the frontal region of the brain, which tend to limit risk. It focuses on some simple situations where a person makes decisions about risk that it seeks to explain more as emotional rather than rational. It further, shows that people who have had brain damage to the front of their brain actual made riskier decisions, but had higher payoffs.

The article can be found here:

http://www.newyorker.com/printables/fact/060918fa_fact

Your comments are welcome as I found it a worthwhile read.

Housing Construction Down Again

Housing construction down, more bad news for the housing sector, but more good news for those looking for a deflation of the housing market...

http://biz.yahoo.com/ap/060919/economy.html?.v=7

Inflation is Moderating...yipee!

Some economic news out today...

Housing Starts Drop 6%, more than economists expected
http://biz.yahoo.com/ap/060919/housing_starts.html?.v=2

Inflation pressures moderate as wholesale prices edge up only 0.1%
http://biz.yahoo.com/ap/060919/economy.html?.v=6

Its now beginning to look like we may see a interest rate cut before we see another rate increase. The remaining concern is the lack of equity in people's homes, upside down mortgages, and the big debts they racked up. Hopefully, the hope that incomes will rise to help people pay the interest and they will tighten their belt accordingly, look for discretionary retail spending to take a hit. People will buy the things they absolutely need, not just the things they want. Either way, a wave of defaults is still on the horizon.

"Lift Up Your Weary Heart Detroit!"

It's a Sufjan Stevens lyric....

Given the fact that I am a Detroit lover and former long time resident of the great city of Detroit, I wanted to talk about the implications of the recent layoffs of white collar workers at Ford and the general mass buyouts in the auto industry.

The auto industry always offers us incredible lessons in globalization, labor costs, unions, and manufacturing in general in the United States. As the whole country bemoans the loss of manufacturing jobs in the United States, foreign automakers are fighting each other for new sites to build cars in the South and all over this country. What do they know that the American politicians crying foul don't?

One remarkable principal that continues to manifest itself in our economy is the concept of Creative Destruction, introduced to the field of economics by Joseph Schumpeter(sp.). We have see this in the telecom industry which shed 600,000 jobs in three years only to reemerge and begin hiring again. Of course, the industry is faced with multiple challenges, however, we know that parts of the sector are back, investment is up, and the industry was able to reposition itself in as little as three years to combat a different competitive environment. In order to do this they had to "destroy" parts of their old business model. Labor flexibility allowed them to do so.

Let's get back to our situation in Detroit. Robert Stempel and the United Auto Workers signed a contract in the early 90s giving unprecedented salaries and benefits to the UAW employees and creating the now infamous job bank. This concept guaranteed salary and benefits to UAW employees even if the company did not sell enough vehicles to keep these employees busy. Therefore, even if a plant would be closed, the workers would still keep their full salaries and benefits.

Fast forward ten to thirteen years and the US auto industry is struggling again due to labor disadvantages as compared to their Japanese and Korean counterparts. Are the cars from made in the US by the Japanese that much better. Some can argue that they are, but General Motors in particular closed the many quality gaps, redesigned vehicles and have made some headway on product. However, General Motors maintained a capacity to make enough vehicles to take 35-40% market share, when their actual market share was around 27%. Why couldn't the company adjust to a changing competitive environment with 6 large auto companies competing for the world's largest and most competitive market? They lacked labor flexibility and their labor costs are much higher than the rest of the industry.

The Wall Street Journal several months ago did a comparison of two plants in Texas. One plant owned by General Motors that produced highly profitable SUVs such as the GMC Yukon and Chevy Trailblazer had a average hourly cost per worker including retirement benefits and health care of $81 per hour or $1800 per vehicle. 300 miles down the road a new state of the art plant built by Toyota to produce the Toyota Tundra to take away the truck dominance of the domestic auto manufacturers has a labor cost of $30-$40 per hour including benefits and a $800 cost per vehicle.

Back to our faithful motor city, what does this all mean? It means that although Ford and General Motors have had quality, design, and operations problems over the years. However, GM and Ford's management, quality, design and operations are not far enough behind to be the sole problem for the success of the Japanese firms and the Americans failure. The issue comes back to labor flexibility. In order to restruture the social welfare city-state, I mean Metro Detroit, GM and Ford have to make the painful cuts the way the telecom industry did in three years. However, this restructuring has been coming since the early 80s.

Unfortunately, in the short term Detroit and Michigan suffers. Everything from Doctors to Plumbers to Housing will suffer. But when a similar thing happened in the early 80s, Detroit recovered and will recover again. Most people understand that capital has been trapped in the Auto industry. That capital in a different city would be redistributed into other industries. However, again the process of creative destruction is hurt by the lack of labor flexibility.

I want to make the point that unions have built this country in partnership with corporations since they first gained prominence. Their sacrifices and successes cannot be trivialized and the rights they fought for created a better life for the American worker. But in the auto industry and in certain places they pushed too far and lacked the foresight to make changes that would guarantee their potential jobs in the future and help the future of Detroit.

Hopefully, Detroit will reemerge as a new city, with capital redistributed, a stronger and more educated labor force, and more industries with flexible labor forces.

Its the Economy Stupid...Doesn't Economic Data Make You Feel Safe

What a day of economic news!

Consumer Price Index - up 0.2%
Core Consumer Price Index - up 0.2%
Industrial Capacity Utilization - 85.4%
Oil - under $63.00 a barrel
Natural Gas - under $5 per btu

What does it all mean, well, it means the consumer in America will be getting a break from high energy prices, but overall it means the consumer has slowed down and hidden his pocketbook. Finally the interest rates, oil prices, gas prices, and other high prices have put the breaks on the drunken spending of the consumer. The economy is slowing down, and this may mean an end to interest rate hikes, but it may mean that the housing sector which has been slowing may seem some very deep cuts in certain over valued markets.

However, there is optimism in the market that could push the Dow above 12,000. A slowing economy was desperately needed to calm the housing market, inflation, and rising commodity prices. The basic materials, industrial, and energy boom is being tempered, and hopefully the market will fall back into moderate growth and go into recession. We have a good head central banker who has tempered our economy and paused at the right time. Did he do too much, the verdict is still out.

Mainly, my personal opinion is the bloodbath for the consumer is just beginning. Business spending may go up, M&A will continue to grow, and the economy may progress, but the consumer is in for some problems in the housing market. My contention is that we haven't seen the hangover from Option ARM mortgages and the housing problem is still lurking. People are working, unemployment is down, business have money to spend (because they have been conservative), but anytime a mortgage jumps $500 per month in a span of four months is too much of a rise for most families to handle. Look for more foreclosures, and stay from consumer brands.

For some headlines on this economic news:

Inflation Pressures Moderate in August - AP

U.S. August Consumer Prices Rise at Half July's Pace - Bloomberg

Small businesses should be looking to secure sales to business customers. Those who sell to the consumer should hope that those consumers don't categorize those small business's products under discretionary spending. I feel that the word discretionary spending is tied to the equity in everyone's home and the home equity boom is drying up.

Introduction - Or an outlet for my frustration according to Jess W.

Hello, My name is Joseph J. Ravitsky. I am 26 years old and have been working at a family startup for about four years. I have created this blog to discuss several topics:

1. Economics
2. Small business, startups, and the young entrepreneur
3. Work-life balance and goals of the "Young Professional" in today's economy

By the overuse of the word "Young," you can probably guess that these topics will be approached through the perspective of the recently graduated and 20 something professional out in the work world for two to ten years. Naturally, being that I am 26 and recently graduated 4 years ago, I believe I fall into my target audience and hope that they are interested in the same information I am.

Of course, in order to retain the interest of my audience, I would have to be some kind of expert in these topics or at least lie about having this expertise. Although I am not an expert in economics, small business, or work life balance, I believe that my experiences attending a top undergraduate business program, living the life of an entrepreneur and vice president of a startup, and pretty much struggling with a work life balance. I will be posting more information about my biography in the side bar or something, as I don't believe that it is my expertise or lack thereof or background that is important, but the contribution and participation of people intersted in these topics.

I hope to use this as a forum to involve past classmates from Michigan, professors from Michigan and other schools, and other "real experts" on economics, work life balance to write and publish stuff here. Further, like any forum, I hope to bring in relevant information from other sources online and articles that fall under the topics that I have listed above.

I believe that there is not enough accessible information out there for the young professional struggling with career choices, work/life balance, and our place in the economy. Further, I think the young professional in this economy, grew up more accustomed to change and interested in entrepreneurship than generations before him, and I hope to provide insight into my experiences taking a less sought after route after graduating from college. I hope that I can serve that perceived void here both with my experiences and the contributions of friends, colleagues, outside articlesand information, and relevant experts.

I look forward to trying to make this a forum that can be a place for friends that care about these topics and are struggling to understand them as well.