THE ENTERPRISE--Let's think together
THE ENTERPRISE
QUICK HITS
Sears/K-mart is coming apart, just like predicted in THE ENTERPRISE on two prior occasions. (WSJ May 30, 2008 said: "With another dismal quarter in the books, Sears Holdings Crop. is starting to look like it's being pulled toward the abyss.")Sales dropped 5.8%, management is decimated by firings and quits, and Eddie Lampert's heavy hand in decisions. (Although he has no retail experience in any form.) The stock is dropping. Watch for store closings and real estate sales to prop up liquidity and results. As the big 4Q retail period comes, watch for Sears/K-mart to start slow paying. Caution!!
Durable goods orders slipped by less than expected. GDP growth in 1Q was not negative, although it was a small positive number. There is talk that a "recession" is not in the cards, but a long, flat and sluggish period with stagflation will be just as painful.
Alcatel-Lucent merger is not performing--also predicted here. Recent efforts are to talk up its prospects with shareholders, but only results will really convince them. The past quarters have been a series of missed earning predictions and the integration is turning out to be more difficult than expected (by whom--a French company and an American company merging, with a female American CEO?) CEO Patricia Russo says she is staying, but then why did the board approve a resolution linking her departure package to the company's performance?
Southwest proves again that smart airlines can succeed. It has been very successful at hedging oil-related fuel costs, and has 70% of this year's fuel needs hedged to $65/bbl. oil. Other airlines hedged 30% or less, even though a 2004 business case study from Oklahoma State explains Southwest's hedging strategy. One key component: decisions are made by a 3-person team, not a bureaucratic committee. Even the best hedging will eventually run out in time, Southwest proves again that a smart airline that eliminates complexity and takes care of basics, can be successful at making money and offering good customer service.
Dell seems to be gaining traction, after sticking to its business model too long. Thus: PPx@≠FF. If you don't know what that means, read THE COMPLEXITY CRISIS. This is a powerful way to describe a typical business failing in a simple equation.
With that one, I believe it's time to "plan ahead," or as the Boy Scout motto says, "Be Prepared." How? Let's think about things together!
WHAT'S LIKELY TO HAPPEN?
Sometimes, when you don't know what is likely to happen, it is useful to speculate, or to develop hypothetical scenarios. Even if these aren't correct, they expose many of the variables that will influence what might happen, and stimulate thought about how to react to what might happen. Rather than report on current events, let's consider the potential consequences.
IF OIL STAYS AT OVER $100 AND HEADS UP STILL FURTHER IN COST
Gas prices will rise further from current $4/gal. levels, putting still more strain on American consumers, especially the lower and middle classes. Large, gas guzzling vehicles will become less and less popular. The large SUVs and high performance cars will become the province of the wealthy. Gas usage will likely drop off a bit. Costs for freight and all forms of transportation will continue to go up, not the least of which is air travel. Since transportation costs are embedded in virtually every product, those costs will also rise. Prices will be increased to compensate, fueling inflation. (For those who don't recall the definition of inflation: it is when more money must be exchanged for no more, or less value of goods and services)
If oil prices remain elevated for a long time, and no major new sources of supply are added to the current ones, another massive development will necessarily result. Alternative energy sources that were once non-cost competitive, will become attractive. That doesn't mean the stupid corn-based ethanol, whose existence relies on equally foolish subsidies to placate the 20+/- farming state and their Congressmen and Senators. Solar energy, nuclear energy, wind, hydro-electric, geothermal and tidal energy all move closer to economic attractiveness. Not all of them conserve gasoline, but in the total energy equation, any cost effective energy source influences the total mix. Example: what good does it do to develop electric or even hybrid cars, if the means of generating electricity to charge them is as polluting and hydrocarbon fuel intensive as the gasoline driven cars they replace?
IF FOOD INFLATION CONTINUES
Using corn for ethanol has added to an already serious global food problem. It isn't that the earth can't produce enough food. It's a matter of where, how much of what can be produced compared to where, how much of what is being consumed. Corn ethanol is just another flaw in the system—as is global trade policy. Some nations starve, others have plenty, and still others pay farmers to NOT produce food (guess who?). As food prices are driven up by rising energy costs and by supply-demand driven increases in basic foodstuff, consumers get pinched again. Even after trading down to a less costly mix of "groceries" consumers must eat. Thus "inflation" will take another bite out of consumer spending, just like it did with gasoline.
IF PRICE INCREASES FROM CHINA CONTINUE
Costs of a vast array of products sold all over the world, but especially in the US, will climb. These costs are already climbing due to China's decision to no longer rebate the VAT (Value Added Taxes) on exports, and due to China allowing its currency, the Renminbii to float further against the dollar (reducing buying power of US dollars still more). China is reeling from and array of problems: recent natural disasters (earthquake), internal rebellion (Tibet), massive spending on the upcoming Olympics, rampant pollution of air and water, and recently, government mandated closing of low-tech businesses in areas where skilled labor is scarce, so that labor can be diverted to higher value goods. Many factories were told that wages must be increased 17-19%, rendering them non-competitive. This trend can only grow, forcing importers to find new low cost sources elsewhere. (Vietnam, Indonesia, the Caribbean, and even the USA?)
IF THE ECONOMY STAYS SLOW, SLUGGISH
Consumer spending drives about 70% of the US economy. When consumers must pay much higher prices for gas, food, and Chinese manufactured imported goods, there will simply be less spending on other goods. Total spending will still consume nearly the same amount of dollars, but the mix will be dramatically different. That difference will ripple through industry after industry. Those who are unprepared for it will be devastated. Those who are prepared will still suffer, but may be able to find other solutions to the problem. Forewarned is forearmed. The financial crisis is still not over. Credit remains very tight or simply not available. Excess inventory of unsold homes will probably take 3-5 years to work off. Housing is a large employer and a large consumer (direct or indirect) of US manufactured products, so when that industry drops to half its prior level of volume, so does everything else (except perhaps maintenance and low cost improvements on existing homes).
IF NOTHING MUCH HAPPENS DURING BUSH'S LAST 7 MONTHS
The last 1/2 year of the Bush Presidency will be memorable for what it cannot do. Congress and stop or stall most of the Presidential initiatives. The President's stature in the US and abroad are at an all time low. In spite of the apparent progress in Iraq, 2/3 of Americans neither approve of the President or of the direction of the country. The problem is that Congress is no better off. Since taking control 17 mo. ago, the Democratic controlled Congress has proven its inability to fix much. What it has done is prove its ability to spend money, waste money, and make much ado about little accomplished. The recent $307 Billion Farm bill is typical. It is stuffed with patronage project, wasteful spending and totally outdated subsidies.
IF THE DEMOCRATS RETAIN CONTROL OF THE SENATE & WIN THE WHITE HOUSE
Democrats clearly cannot run their own primaries (FL, MI) and have made virtually not progress while in control of both houses of Congress. What they have done is prepare to raise taxes and spend more of taxpayers' money on their pet programs--usually to give money to the underachievers in our society.
Decades ago, Jimmy Carter proved the error of a similar set of policies, which came on the heels of a similar set of acrimonious Democratic party primary battles. In the very early 1980's Carter's legacy was double digit inflation and double digit interest rated, leading to a decade when the stock market went absolutely nowhere.
DEPRESSED YET?
If this sounds like a grim set of circumstances, it might be. A wise man once said, "Those who do not learn from history's mistakes are destined to repeat them." These are a truly daunting set of circumstances we face. But that said, we know that the USA can be a magnificently innovative country, in which immense things can be achieved. This can only happen if the American people pull together and have a leader who can unify them—but in doing the right things. Barack Obama is a truly inspiring speaker unless you listen closely to what he is saying. Then the convenient contradictions, wrong-headed naivete, and the flaws in the most liberal voting record in the Senate betray both his stated intent and his misguided inexperience.
Most of the readers of THE ENTERPRISE are older. To those of you who are in your twenties—try to talk some sense into your peer group. To those who have children who will vote for the first or second time, have a family meeting and explain how a free enterprise system creates wealth, enables the best people to get ahead, and still helps the needy, not with wasteful handouts, but with reasoned assistance. To those who are normally Democrats, think about what you are seeing and hearing, and think hard about the core beliefs of American Democrats you historically admired. (John F. Kennedy, although from MA was far, far from as left leaning as Obama.)
Ironically, the future of the current generation of twenty-somethings depends on them being willing and able to become disenchanted with the muse of Obama's speechifying, and to listen and understand the wisdom of the "old soldier", John McCain's long experience and patriot's zeal. The pictures I see of Obama's rallies call to mind pictures from the past of huge crowds. Study the pictures and think about history.
Who can change the future? You can. It takes one person at a time, making a difference. Will you?
Best, John
-----------------------
QUICK HITS
Sears/K-mart is coming apart, just like predicted in THE ENTERPRISE on two prior occasions. (WSJ May 30, 2008 said: "With another dismal quarter in the books, Sears Holdings Crop. is starting to look like it's being pulled toward the abyss.")Sales dropped 5.8%, management is decimated by firings and quits, and Eddie Lampert's heavy hand in decisions. (Although he has no retail experience in any form.) The stock is dropping. Watch for store closings and real estate sales to prop up liquidity and results. As the big 4Q retail period comes, watch for Sears/K-mart to start slow paying. Caution!!
Durable goods orders slipped by less than expected. GDP growth in 1Q was not negative, although it was a small positive number. There is talk that a "recession" is not in the cards, but a long, flat and sluggish period with stagflation will be just as painful.
Alcatel-Lucent merger is not performing--also predicted here. Recent efforts are to talk up its prospects with shareholders, but only results will really convince them. The past quarters have been a series of missed earning predictions and the integration is turning out to be more difficult than expected (by whom--a French company and an American company merging, with a female American CEO?) CEO Patricia Russo says she is staying, but then why did the board approve a resolution linking her departure package to the company's performance?
Southwest proves again that smart airlines can succeed. It has been very successful at hedging oil-related fuel costs, and has 70% of this year's fuel needs hedged to $65/bbl. oil. Other airlines hedged 30% or less, even though a 2004 business case study from Oklahoma State explains Southwest's hedging strategy. One key component: decisions are made by a 3-person team, not a bureaucratic committee. Even the best hedging will eventually run out in time, Southwest proves again that a smart airline that eliminates complexity and takes care of basics, can be successful at making money and offering good customer service.
Dell seems to be gaining traction, after sticking to its business model too long. Thus: PPx@≠FF. If you don't know what that means, read THE COMPLEXITY CRISIS. This is a powerful way to describe a typical business failing in a simple equation.
With that one, I believe it's time to "plan ahead," or as the Boy Scout motto says, "Be Prepared." How? Let's think about things together!
WHAT'S LIKELY TO HAPPEN?
Sometimes, when you don't know what is likely to happen, it is useful to speculate, or to develop hypothetical scenarios. Even if these aren't correct, they expose many of the variables that will influence what might happen, and stimulate thought about how to react to what might happen. Rather than report on current events, let's consider the potential consequences.
IF OIL STAYS AT OVER $100 AND HEADS UP STILL FURTHER IN COST
Gas prices will rise further from current $4/gal. levels, putting still more strain on American consumers, especially the lower and middle classes. Large, gas guzzling vehicles will become less and less popular. The large SUVs and high performance cars will become the province of the wealthy. Gas usage will likely drop off a bit. Costs for freight and all forms of transportation will continue to go up, not the least of which is air travel. Since transportation costs are embedded in virtually every product, those costs will also rise. Prices will be increased to compensate, fueling inflation. (For those who don't recall the definition of inflation: it is when more money must be exchanged for no more, or less value of goods and services)
If oil prices remain elevated for a long time, and no major new sources of supply are added to the current ones, another massive development will necessarily result. Alternative energy sources that were once non-cost competitive, will become attractive. That doesn't mean the stupid corn-based ethanol, whose existence relies on equally foolish subsidies to placate the 20+/- farming state and their Congressmen and Senators. Solar energy, nuclear energy, wind, hydro-electric, geothermal and tidal energy all move closer to economic attractiveness. Not all of them conserve gasoline, but in the total energy equation, any cost effective energy source influences the total mix. Example: what good does it do to develop electric or even hybrid cars, if the means of generating electricity to charge them is as polluting and hydrocarbon fuel intensive as the gasoline driven cars they replace?
IF FOOD INFLATION CONTINUES
Using corn for ethanol has added to an already serious global food problem. It isn't that the earth can't produce enough food. It's a matter of where, how much of what can be produced compared to where, how much of what is being consumed. Corn ethanol is just another flaw in the system—as is global trade policy. Some nations starve, others have plenty, and still others pay farmers to NOT produce food (guess who?). As food prices are driven up by rising energy costs and by supply-demand driven increases in basic foodstuff, consumers get pinched again. Even after trading down to a less costly mix of "groceries" consumers must eat. Thus "inflation" will take another bite out of consumer spending, just like it did with gasoline.
IF PRICE INCREASES FROM CHINA CONTINUE
Costs of a vast array of products sold all over the world, but especially in the US, will climb. These costs are already climbing due to China's decision to no longer rebate the VAT (Value Added Taxes) on exports, and due to China allowing its currency, the Renminbii to float further against the dollar (reducing buying power of US dollars still more). China is reeling from and array of problems: recent natural disasters (earthquake), internal rebellion (Tibet), massive spending on the upcoming Olympics, rampant pollution of air and water, and recently, government mandated closing of low-tech businesses in areas where skilled labor is scarce, so that labor can be diverted to higher value goods. Many factories were told that wages must be increased 17-19%, rendering them non-competitive. This trend can only grow, forcing importers to find new low cost sources elsewhere. (Vietnam, Indonesia, the Caribbean, and even the USA?)
IF THE ECONOMY STAYS SLOW, SLUGGISH
Consumer spending drives about 70% of the US economy. When consumers must pay much higher prices for gas, food, and Chinese manufactured imported goods, there will simply be less spending on other goods. Total spending will still consume nearly the same amount of dollars, but the mix will be dramatically different. That difference will ripple through industry after industry. Those who are unprepared for it will be devastated. Those who are prepared will still suffer, but may be able to find other solutions to the problem. Forewarned is forearmed. The financial crisis is still not over. Credit remains very tight or simply not available. Excess inventory of unsold homes will probably take 3-5 years to work off. Housing is a large employer and a large consumer (direct or indirect) of US manufactured products, so when that industry drops to half its prior level of volume, so does everything else (except perhaps maintenance and low cost improvements on existing homes).
IF NOTHING MUCH HAPPENS DURING BUSH'S LAST 7 MONTHS
The last 1/2 year of the Bush Presidency will be memorable for what it cannot do. Congress and stop or stall most of the Presidential initiatives. The President's stature in the US and abroad are at an all time low. In spite of the apparent progress in Iraq, 2/3 of Americans neither approve of the President or of the direction of the country. The problem is that Congress is no better off. Since taking control 17 mo. ago, the Democratic controlled Congress has proven its inability to fix much. What it has done is prove its ability to spend money, waste money, and make much ado about little accomplished. The recent $307 Billion Farm bill is typical. It is stuffed with patronage project, wasteful spending and totally outdated subsidies.
IF THE DEMOCRATS RETAIN CONTROL OF THE SENATE & WIN THE WHITE HOUSE
Democrats clearly cannot run their own primaries (FL, MI) and have made virtually not progress while in control of both houses of Congress. What they have done is prepare to raise taxes and spend more of taxpayers' money on their pet programs--usually to give money to the underachievers in our society.
Decades ago, Jimmy Carter proved the error of a similar set of policies, which came on the heels of a similar set of acrimonious Democratic party primary battles. In the very early 1980's Carter's legacy was double digit inflation and double digit interest rated, leading to a decade when the stock market went absolutely nowhere.
DEPRESSED YET?
If this sounds like a grim set of circumstances, it might be. A wise man once said, "Those who do not learn from history's mistakes are destined to repeat them." These are a truly daunting set of circumstances we face. But that said, we know that the USA can be a magnificently innovative country, in which immense things can be achieved. This can only happen if the American people pull together and have a leader who can unify them—but in doing the right things. Barack Obama is a truly inspiring speaker unless you listen closely to what he is saying. Then the convenient contradictions, wrong-headed naivete, and the flaws in the most liberal voting record in the Senate betray both his stated intent and his misguided inexperience.
Most of the readers of THE ENTERPRISE are older. To those of you who are in your twenties—try to talk some sense into your peer group. To those who have children who will vote for the first or second time, have a family meeting and explain how a free enterprise system creates wealth, enables the best people to get ahead, and still helps the needy, not with wasteful handouts, but with reasoned assistance. To those who are normally Democrats, think about what you are seeing and hearing, and think hard about the core beliefs of American Democrats you historically admired. (John F. Kennedy, although from MA was far, far from as left leaning as Obama.)
Ironically, the future of the current generation of twenty-somethings depends on them being willing and able to become disenchanted with the muse of Obama's speechifying, and to listen and understand the wisdom of the "old soldier", John McCain's long experience and patriot's zeal. The pictures I see of Obama's rallies call to mind pictures from the past of huge crowds. Study the pictures and think about history.
Who can change the future? You can. It takes one person at a time, making a difference. Will you?
Best, John
-----------------------
