July 2009 Archives

Management: Straight path to a superior business

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Luke Johnson:

Just as you meet few truly great individuals in the journey through life, so there are a tiny handful of companies that have outstanding management. And the reason so few organisations are really well run is not that it is a complicated matter; it is that managing well takes discipline and effort.

The principles followed by superior businesses are straightforward - but executing them consistently and over extended periods is very hard.

All the best companies have bottom-up management. That means those staff who actually meet customers, or run operations, tell the boss what works, rather than vice versa. It means delegating responsibility in order to empower staff. Imperious, dictatorial leaders who are out of touch with the shop floor do not achieve sustained success.

nother characteristic of winners is that they manage for the long term. Sudden strategic moves to suit quarterly targets or shorter-term bonus measures are damaging. Family stewardship often beats publicly traded or private equity as a form of ownership for this reason. Germany's Mittelstand companies are the backbone of their economy: they are principally family-owned, often world-class operations that adopt prudent financing, and invest in capital expenditure and research and development. Incentives at all levels tend to be long term.

The best leaders possess domain knowledge. This means they understand their industry and are experts in their field. It allows them to command the respect of their colleagues, and means they have genuine insight into the vital economics of their profession or niche.

When I interview managers, I ask them about their customers and competitors. The high achievers will know them intimately, and can talk for hours about the strengths and weaknesses of their rivals. Generic managers, who claim they can turn their skills to any sector and deliver impressive results, are mostly a clever illusion. That is why I tend to respect actual experience in a line of work, or a specific trade qualification, over an MBA.

Title-Insurer Fees Draw Scrutiny

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James Hagerty:

The U.S. title-insurance industry faces increasing pressure from regulators to justify the fees charged to consumers for ensuring they have clear ownership of their homes.

For most people, title insurance is just another mysterious fee they must pay when they buy a home or refinance a mortgage. Unlike some of those fees, though, title charges aren't negligible. They range from several hundred to several thousand dollars--and last year totaled more than $10 billion for the title industry. Lenders insist on the insurance to protect them against the possibility that a taxing authority, another creditor or a disgruntled heir may have a claim to the property, among other risks.

As falling home prices tempt more people back into the housing market in some parts of the country, politicians and regulators are raising questions about whether they may be paying too much for this protection. "There's no transparency," Delores Kelley , a state senator in Maryland, said in an interview. She introduced legislation that created a commission to study the title-insurance industry in Maryland. That panel is due to make recommendations about possible regulatory changes by December.

In Pennsylvania, Attorney General Tom Corbett earlier this year successfully campaigned against a push by the title industry for increases in regulated rates. New Mexico's legislature this year enacted a law that will allow price competition among title insurers, previously required to charge standard prices set by the state insurance regulator. That kind of fixed-price regime continues in Texas.

Money Magazine:

1. Duncanville, TX

Median home price: $99,648
Median family income (per year): $72,243

The "City of Champions" is located a few minutes from downtown Dallas and a quick 20 minute drive from Fort Worth making Duncanville a popular place for commuters looking for easy access to major highways in northern Texas.

With a warm climate, the town is also becoming a popular spot for retirees. A handful of golf courses and a nearby lake with boating and fishing facilities provide an outlet from the heat. The city spends thousands of hours each year maintaining its landscape and parks, and a full time horticulturist is responsible for maintaining flower beds, walkways and fountains. The recreation department plants almost 50,000 annual bulbs each year, adding color to the city. While the main street is showing its age, the town is working to refurbish it.--C.C.

Claire Compton & Martina Cermakova:

The Prague Post: You're running a real estate company in one of the worst markets in recent history. How do you survive, and how have you adapted?

Ivo Gavlas: We want to take advantage of the current situation to strengthen our firm. In the past year, it was almost impossible to find a quality broker, and we believe that we will be able to add more quality brokers to the staff. Our company has already existed on this market for 19 years, and this is not the first crisis that we have experienced and lived through. We successfully survived the crisis in the late '90s, and there is no reason why we shouldn't survive this one. We don't have any loans, and we don't need to take any loans out to do our business. At the very inception of our company, we swore to ourselves that we would never buy real estate from clients who come to us with the belief that we will sell their apartment or house for the highest possible price. We also decided that we won't ever go into our own development projects. As a result of this, we are not in the situation that some other real estate firms find themselves in, that bought apartments from clients and relied on the increase of prices and, instead, are faced with today's drops.

Aline van Duyn:

Looking for a souvenir of the credit crisis?

The Museum of American Finance, located on Wall Street, sells a set of five posters from its credit crisis exhibit.

"Depicts key events from February 2007 through early March 2009 and also features an overview of the crisis, important terms and explanations of key moments." At just $12, it is an affordable gift, too.

The problem with such posters is that they suggest the crisis is over.

But it is not, a fact that is starting to dawn on many investors. Until recently the market tone was being set by talk of "green shoots" and economic recovery. Now, there is more talk of weeds - or even manure when the state of the US economy is described.

That the crisis is not over is also clear from comments by policymakers.

Take, for example, the launch this week of the investment funds that will juice up returns with cheap loans from the US government and buy assets such as troubled mortgage-backed securities that banks may want to sell. The programme - the public-private investment programme (PPIP) - has been scaled back considerably, and a plan to use it to buy loans as well as securities backed by loans - called legacy securities or assets - has been iced. "While utilisation of legacy asset programmes will depend on how actual economic and financial market conditions evolve, the programmes are capable of being quickly expanded if these conditions deteriorate," the Treasury said. "Thus, while these programmes will initially be modest in size, we are prepared to expand the amount of resources committed."

So, what could make things worse?

John Dizard:

Whenever the US economic recovery does come, you can take it as read that the recovery and refinancing of the property sector will follow only with a very lengthy delay.

And that's at the macro level. At the level of particular locales and properties, there will be "assets" that never recover. Think of those ghostly outlines of town walls you see when flying low over the European countryside, or abandoned cities in the Andes.

There are Atlanta subdivisions and central California malls that will be mounds of dust and discarded fast food packaging. The difference is that centuries from now there probably won't be any tours of shopping centre excavations.

I would not count too much on any more initiatives from the US Treasury's crack recovery team. The PPIP (public-private investment plan), Talf (term asset-backed securities loan facility), and Tarp (troubled asset relief programme) haven't done the trick. Also, they are at, or past, the public's and the market's limit on aggressive new borrowing to fund work-outs. Two processes have to play out: losses must be incurred and recognised, and debt must be replaced with equity. The loss incurring and recognising part has been a staple of financial analysis. The re-equitisation part is only just beginning to happen.

The rationale for a property owner or developer to borrow was simple: debt has been cheaper than equity, because interest rates for debt secured by property have "always" been lower than earnings on equity, and because interest charges are deductible from operating earnings in computing tax.

Real Time Information Execution Benefits

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Don Sull:

Execution starts with when a team or organization forms a shared understanding of the market situation. A start-up's business plan and an established company's strategy are both examples of what I call mental maps, shared models that represent reality and serve to guide action. Mental maps can range from detailed plans in thick binders to a simple insight sketched on a cocktail napkin. Differences in form should not obscure similarity in role-all mental maps represent the environment, highlight important variables, and suggest a way forward.

Even the best mental map is an imperfect representation. Mental maps can only incorporate current knowledge, and exclude new insights that will only emerge in the future. Maps simplify a complex reality, thereby ignoring potentially important variables and interactions. Competitors will go out of their way to exploit blind spots in any map. We know only one thing about our maps with certainty-they are flawed.

How can leaders update imperfect mental maps as circumstances shift? An important part of the answer lies in collecting the right type of information. Along with my co-author Stefano Turconi, I have been studying the type of data required to map a situation in flux, and identified four critical attributes: The best information is real time, unfiltered, shared, and holistic. My next few posts will discuss each in turn, beginning with real time.

Main Street, a real time internet system for agents, clients and brokers, was designed from day one to be your comprehensive information source. One, real time system is an asset (arguably your most valuable asset) that allows your organization to implement and execute new initiatives faster than brokerages mired in information spaghetti. Related: Both sides now.

Undisclosed Author:

The following post was written by a well known executive at one of the largest sites on the Internet. The author has requested to remain anonymous - not for dramatic effect, but because of the backlash he would receive from the SEO industry and possibly Google itself. He also doesn't want his company associated with the post.

He is starting a discussion on the need for government regulation of the organic and paid search policies of Google, which maintains a commanding lead in search market share today. Or at least transparency in how search results are determined. There is clearly growing frustration on the constantly changing "border policies" that are created and enforced by Google and other search engines. It is a fascinating read.

Imagine, if you will, that the entire Internet is contained within a single continent. That continent is filled with countries, states and cities. Each jurisdiction is autonomous, relying on visitors to cross on to their turf to engage in commerce. Now, imagine if the only way to get into this continent involved just two methods: SEO and SEM. Let's further imagine that the borders to this continent were controlled by a single company. Let's also hold that the rules for search engine optimization listings and search engine marketing were not only defined but were completely controlled at the whim of this single company. Of course, we all realize that word-of-mouth marketing and viral marketing also contribute to traffic to individual websites. That said, the primary methodology for all users to reach any individual website destination is still search, of either paid or organic listings.

Or suppose the paradigm is the streets of Los Angeles. Let's imagine that in order to enter the city you had to pass through a single gate. And once you entered that gate, the streets you were or were not allowed to go down -- and thus the businesses you were or were not allowed to visit -- could be randomly blocked from your access. Blocked to a point where you might not even know they exist; whatever streets were available for you to traverse were in essence the only streets you knew where business could be transacted.

Sarah Perez:

Matthew Robson, a 15-year-old intern at analyst firm Morgan Stanley recently helped compile a report [76K PDF] about teenage media habits. Overnight, his findings have become a sensation...which goes to show that people are either obsessed with what "the kids" are into or there's a distinctive lack of research being done on this demographics' media use. Robson's report isn't even based on any sort of statistical analysis, just good ol' fashioned teenage honesty. And what was it that he said to cause all this attention? Only that teens aren't into traditional media (think TV, radio, newspapers) and yet they're eschewing some new media, too, including sites like Twitter.

Teens Say "No Thanks" to Newspapers, Radio, and to Some Extent, TV
According to Robson's report (available here courtesy of the Financial Times), today's teens don't really consume any of what you could call "traditional" media. For example, notes Robson, they don't read newspapers because why bother reading "pages and pages of text" when they could instead "watch the news summarized on the internet or TV?"

Andrew Edgecliffe-Johnson has more:
"Teenagers do not use Twitter," he pronounced. Updating the micro-blogging service from mobile phones costs valuable credit, he wrote, and "they realise that no one is viewing their profile, so their tweets are pointless".

His peers find it hard to make time for regular television, and would rather listen to advert-free music on websites such as Last.fm than tune into traditional radio. Even online, teens find advertising "extremely annoying and pointless".

Their time and money is spent instead on cinema, concerts and video game consoles which, he said, now double as a more attractive vehicle for chatting with friends than the phone.

Mr Robson had little comfort for struggling print publishers, saying no teenager he knew regularly reads a newspaper since most "cannot be bothered to read pages and pages of text" rather than see summaries online or on television.

Gillian Tett:

A couple of weeks ago I visited West Virginia, USA, where some friends of mine run a small real estate business. As we sat in their yard on a balmy summer evening, I heard how realtors in this pretty, small town had been devastated by the housing crash.

So far my own friends have dodged the worst with canny financial footwork. And they cheerfully insist that the town can survive the wider damage, as long as prices stabilise or rise. "But if prices fall further, it will be terrible," one realtor declared - before insisting "we really don't think that's likely. Nothing can keep going down for that long."

Is that assumption justified? That is the $6,000bn dollar question, not just for West Virginia, but the wider financial system. After all, it was a turn in the US real estate market that triggered the financial crisis. And while many other financial disasters have since followed, the state of the US real estate market remains crucial to the banking world as a whole.

For not only does the health of the US consumer - and thus economy - remain tied to housing, but western bank balance sheets are tightly tangled up with property too. Most notably, America's largest banks, such as Bank of America, JPMorgan and Citi, continue to hold vast quantities of residential and commercial property loans on their books, in addition to all those loans that they previously repackaged as bonds, and sold on. So do numerous small banks.

The Economist:

Brighter data on house prices may not signal a surge in spending

AFTER a long winter, spring brought a touch of sunshine to American house prices. The latest Case-Shiller indices, released on June 30th, showed that prices continued to fall in April: the ten-city index was 0.7% lower than a month earlier, and the 20-city index went down by 0.6%. But these falls were the smallest since June 2008. So even though house prices in America were still roughly 18% lower than a year earlier, many now suspect that the worst is over.

Such optimism may be premature. On June 30th the Office of the Comptroller of the Currency, a bank regulator, said that the number of foreclosures in process rose by 22% in the first quarter of this year, and that the number of prime mortgages with payments at least 60 days late went up by 20%. The government is stepping up its efforts to get people to take part in its anti-foreclosure programmes.

Banks offered 61% off these foreclosures

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Mathew Padilla:

At a recent foreclosure auction in Santa Ana, investors bought eight properties, or 36% of the 22 offered for sale.

I have looked more closely at those eight properties, after blogging previously on the June 26 trustee's sale. (Read the first post: Frenzied Bidding on Discounted Foreclosures. Property pictured is on Newell Street in Garden Grove; photo courtesy of ForeclosureTrackers.com)

On seven of the properties, the banks or loan servicers offered an average discount of 61% against the debt owed on a first mortgage. (On one of the properties, I could not find the notice of trustee's sale.)

Those seven properties sold for an average discount of 56% against debt. Even though investors bid against each other, they barely nudged up the sale price from the bank's minimum bid.

Lawrence Strauss:

AS A YOUNG INVESTMENT BANKER AT SMITH BARNEY in 1959, Burton Malkiel proposed that the firm ramp up its over-the-counter trading. His idea got shot down by a senior partner, who admonished Malkiel for even thinking about putting the firm's capital at risk.

Malkiel soon left Wall Street for graduate school at Princeton, where he began teaching economics in 1964, and where he has spent much of his academic career since. He's had a lot more impact on Wall Street away from it than when he worked there. His still-popular 1973 classic book, A Random Walk Down Wall Street, has sold more than 1.5 million copies. In it, Malkiel holds that, for the most part, stock prices are unpredictable, and that retail investors are much better off investing in index funds rather than actively managed funds.

"The markets have averaged an annual rate of return of [about] 9 ½% since 1926. But average investors don't make anything like that, because they tend to get in at the top and out at the bottom." --Burton Malkiel

Recently, China has piqued Malkiel's curiosity. He is the chief investment officer at AlphaShares, an asset manager with about $150 million under management. The firm has two indexes used for exchange-traded funds dedicated to international investors who want exposure to China. Barron's caught up with Malkiel recently, to hear his views on China and other topics -- including how the random walk is going these days.

House Prices and the Wealth Effect

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The Economist:

AFTER a long winter, spring brought a touch of sunshine to American house prices. The latest Case-Shiller indices, released on June 30th, showed that prices continued to fall in April: the ten-city index was 0.7% lower than a month earlier, and the 20-city index went down by 0.6%. But these falls were the smallest since June 2008. So even though house prices in America were still roughly 18% lower than a year earlier, many now suspect that the worst is over.

Such optimism may be premature. On June 30th the Office of the Comptroller of the Currency, a bank regulator, said that the number of foreclosures in process rose by 22% in the first quarter of this year, and that the number of prime mortgages with payments at least 60 days late went up by 20%. The government is stepping up its efforts to get people to take part in its anti-foreclosure programmes.


The focus on the housing market is understandable, not least because it has direct links with many other industries. But those who look to housing to lead a broader economic recovery also believe that house prices indirectly affect consumer spending, both by allowing people to borrow against the value of their homes and through something known as the "housing wealth effect".

Investment Outlook: "Bon" or "Non" Appetit?

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Bill Gross:

I was impressed this weekend by an article in the Op-Ed section of The New York Times by staff writer Bob Herbert. "No Recovery in Sight" was the heading and his opening sentence asked, "How do you put together a consumer economy that works when the consumers are out of work?" That is really all one needs to ask when divining our economy's future fortune. Unless an optimist can prescribe how to put Humpty Dumpty back together again and shuffle him/her back to work then there can be no return to an "old normal." As unemployment approaches 10%, what is less well publicized is that the number of "underutilized" workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you'll understand the implications quicker than any economist using an econometric model.

What this all means to you as an investor is near obvious as well. Unsurprisingly, what still can be modeled is the direct correlation of real profit growth to real economic growth, assuming a constant division of the "pie" between profits, labor and government. If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher. But to add to the woes of the investor class, one has only to observe that their share of the pie is shrinking. What does the General Motors example tell us all about the rebalancing of power between the investor class and the proletariat? What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They're headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? The new normal will not be investor-friendly unless your forecasting dial is turned to "Pollyanna" or your intelligence quotient is significantly less than 100.

Clusty Search on Bill Gross. "The Treasury has Bill Gross on Speed Dial".

There is more to city life than convenience

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Michael Skapinker:

In the view of two recent surveys, however, London is no place to live. Nor is New York. Tokyo perhaps passes muster. Shanghai? Forget about it.

The two surveys - one by Monocle magazine, the other by the Economist Intelligence Unit - rank cities for their "liveability". This sounds like a dreadful neologism, but the Oxford Shorter Dictionary is quite happy with it, defining liveable as "conducive to comfortable living".

Zurich is the world's most liveable city, declares Monocle. My colleague Tyler Brûlé, who is editor-in-chief of that excellent publication, writes that Zurich gets the wink for its "high-quality housing, impeccable public transport network, a refreshing lake at its core, a well-connected and user-friendly airport, cosy little cinemas, well-tended bars and diverse population". Copenhagen took second place. Neither London nor New York made the top 25.

Vancouver, 14th in the Monocle survey, won top spot in the Economist Intelligence Unit liveability table, which ranked cities for their stability, healthcare, culture, environment, education and infrastructure. Vienna came second, Melbourne third.

Tokyo came only 19th in the Economist table, well behind the third slot Monocle assigned it. But then, as readers of his Financial Times Weekend column know, Tokyo is a personal favourite of Tyler's. I have visited the city twice, and loved it too. But one FT letter writer declared it "traffic-snarled, polluted and architecturally challenged". That is the fun of these city rankings. They get people worked up

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