Is Alan the Culprit?

Who or what caused the Mortgage Crisis? Alan Greenspan claims he should not be blamed! He tells us that "Bubbles can not be safely defused by monetary policy before the speculative fever breaks on its on." Of course Fed's flood of liquidity after 9-11 would have had nothing to do with the bubble's inflating in the first place, now would it have?

Those of us with the more mundane worry of whether the crisis will translate into a recession will be reassured The Wall Street Journal already has the remedy: use fiscal policy not monetary policy. The paper's editors believe the dollar's virtue can not take any more ease. Read its editorial, "False Savior."

The Subprime Mortgage Credit Crisis & the Bursting of the Housing Bubble Drops Mortgage Mail Solicitations By 62%

Mintel Comperemedia research tracks direct mail sent to households. Their data show mortgage solicitations in the mail fell 62 percent in the third quarter from the same period last year. Not surprisingly, ARMs (adjustable-rate mortgages) no longer predominate. The proportion of offers for for adjustable-rate mortgages fell from 56 percent to 22 percent.

Prominent mortgage brokers and mortgage banks have gone bust while major players have with drawn from the market.


DM News reports that the Treasury facilitated plan to selectively freeze the rates on some ARMs is causing direct marketing pros to adjust their offers.

Electronic Payments Now Outnumber Checks by 2-1!

The Fed has done yet another study of how payments are made in the United States. The study, which did not include payments by cash, showed American households and businesses made twice as many payments electronically than they made by check.

Check usage by 6.4 percent a year from 2003 (the last year studied) to 2007.

Economic Terms and Concepts

The Present Value of a future cash flow discounted at X% is the amount of money you would need to invest today earning interest compounded annually at X% to accumulate that future amount. It answers the question "How much do I have to invest now to end up with that future sum if I earn the discount rate?"

A bond's Yield to Maturity is the one discount rate that equates the present value of the cash flows (interest payments and principal) to the price.

A security's Current Yield is its annual income divided by its current price. For a bond it is the coupon interest divided by the price. For a share of common stock, it is the annualized dividend divided by the price.

If the Goliath Has the Distributors In His Pocket, It's Time For David's Sling

Craft brewers are small brewers who brew beer much more like homebrewers do and eschew the tricks of the mass marketed beers such as those of Anheuser-Busch, Miller, and Coors. Craft brewers have about 5% of the U.S. beer market; imported beers have about 11%. Anheuser-Busch, Miller, and Coors have over 80%. Read David Kesmodel’s article, "Small Brews Show They're Not Weak Beer: As Popularity Rises, Specialty Brewers Challenge Distributors" (Wall Street Journal, December 10, 2007; Page B1.) State beer distribution laws sound like one more "consumer protection" law that harms competition, consumer choice and consumer welfare.

The Dreamliner Is Back On Target!

In news of great local importance to Wichita, Ann Keeton reports "Boeing, After Initial Delay, Says 787 Is on Track." Keeton tells us, "Boeing's efforts to deliver the hot-selling 787, which is expected to be more efficient than current aircraft, are being closely watched. Boeing in October said troubles with suppliers would delay delivery of the first aircraft by six months to the end of 2008. But the company said it could still turn out 40 aircraft by the end of next year and produce 109 total aircraft by the end of 2009 once it worked out the kinks in initial production. Boeing has said the delays have so far affected 19 airline." Molly McMillan, in the Wichita Eagle, tells us "Boeing has 762 orders for the new plane valued at more than $120 billion. Spirit AeroSystems in Wichita is a key supplier for the program."

The Subprime Mortgage Crisis, Recession, and Citibank

This morning's Wall Street Journal is full of opinion and commentary on our favorite topics.

Alan Greenspan dissects "The Roots of the Mortgage Crisis." He thinks that if it had not been subprime mortgages, then something else would have precipitated a crisis after risk premia had fallen so low.

Also on the Opinion Page, Alan Reynolds analyzes the dollar in his commentary, "Interest Rates and Dollar Fundamentals" and Martin Feldstein advises on "How to Avert Recession."

Meanwhile, Citicorp, parent of Citibank, has decided that Vikram Pandit and Sir Win Bischoff should stay on as CEO and Chairman, respectively. They were both acting in those jobs. You can read about it in Robin Sidel and David Enrich's article. The big question remains: "Can a universal retail/wholesale bank be created like a hothouse plant through mega mergers and acquisitions?" I have my doubts. That certainly not the way the House of Morgan was created. On October 16th, Ms Sidel and Jeffrey McCracken reported increased skepticism that Citi's universal banking strategy was working.

Jobs Are Up: A Little Bit.

The Wall Street Journal reports: "The Labor Department reported that employment at nonfarm businesses rose by 94,000 jobs in November. That followed revised increases of 170,000 in October and 44,000 in September; those gains were initially estimated at 166,000 and 96,000, respectively. The unemployment rate stayed at 4.7% for the third-consecutive month."

Succession Planing At News Corp?

Has Rupert Murdock decided it is time for James to be next?

Forbes.com: Wichita is #9 for Jobs

Forbes Magazine's web site ranked Wichita's job market as #9 in the country.

Click on the title link to get the story and commentary by the mammon master himself. You need windows Media Player to actually watch the video.

Can Housing Go into a Recession Without the Economy Falling Too?

New home sales plunged 8.3 percent in August while the average price fell 7.5 percent. New home sales are 21.2 percent below last year. With home building down 19.1 percent from last year, this will only make a bad situation worse.

Will Housing Cause a Recession?

We can have a recession without housing starts plummeting: the recession of 2001 proved that. But can we have a large decline in housing starts without going into a recession?

The chart above is courtesy of the Federal Reserve Bank of St. Louis. Every time we have had a comparable decline in housing starts, the economy has gone into a recession. The lone apparent exception is 1966. And that exception is more apparent than real. The NBER's failure to call the cyclical episode in 1966 a "recession" was extraordinarily controversial and in my opinion a bad call. In 1966, industrial production fell sharply for five months, private domestic spending fell two consecutive quarters, the stock and bond markets took a bloodbath. Housing starts fell by a half.

In the current cyclical environment, housing starts are 41.9 percent below their cyclical peak. That puts the housing sector's current misery right up there with the typical postwar recession.

The odds against our avoiding a recession have shortened dramatically!

Strong Business Jet Growth On Into the Future Brightens the Wichita Business Outlook

Molly McMillin reports in today's Wichita Eagle that "Buoyed by strong international sales and new models, the business jet industry is expected to continue to soar...

"Business jetmakers are expected to ship more than 1,300 jets next year and 14,000 new planes in the 11-year period from 2007 to 2017, according to Honeywell Aerospace's forecast. A record delivery pace is expected to continue into 2009, it said."

Wichita manufactures thirty six (36%) of the world's general aviation aircraft. The aerospace sector accounts for one in six of Wichita's jobs directly and many more indirectly.

What's a Minsky Moment?

The Wall Street Journal's Justin Lahart reports that the "Minsky moment has become a fashionable catch phrase on Wall Street. It refers to the time when over-indebted investors are forced to sell even their solid investments to make good on their loans, sparking sharp declines in financial markets and demand for cash that can force central bankers to lend a hand."

Personally, I find John R. Hicks' explanation in A Market Theory of Money far more comprehensive and plausible for what we are now undergoing.

Entering China and India

Professor Anil K. Gupta, Professor of Strategy at the Smith School (The University of Maryland), explains to the Wall Street Journal how to enter the markets of China and India:

Which Way Do the Indicators Blow?

Federal Reserve Bank of San Francisco President Janet Yellen, speaks during the National Association for Business Economics (NABE) Washington Economic Policy Conference in Arlington, Virginia, March 13, 2006. Photographer: Stephen Voss/Bloomberg News


Members of the Federal Open Market Committee which sets U.S. monetary policy are singing from different hymnals. Their discordant tunes indicate that the future course of policy is uncertain.

Bloomberg's By Scott Lanman and Vivien Lou Chen report that: "Janet Yellen, head of the San Francisco Fed, today cited 'significant downward pressure' on growth because of housing and financial-market turmoil. Dallas Fed President Richard Fisher said he's `'generally encouraged' about the economy, while Atlanta's Dennis Lockhart backed off remarks he made four days ago that the housing slump was having a limited impact.

The scope of remarks may reflect a debate inside the central bank over whether to lower the benchmark rate on Sept. 18 by a quarter-percentage point, or a half-point as some investors expect, Fed watchers said.

The R-Word?

Meanwhile, Eoin Callan in the Financial Times reports that there is more use of the word "recession" as economic observers digest last Friday's payroll employment shock. Read his "The R-word surfaces on Wall Street."

True Blue Growth: The Australia's Economy is Up 4.3% Over a Year Ago

Bloomberg reports that Australia's GDP is grew .9 percent over the first quarter and is up 4.3% from a year ago. The Aussies do not annualize the quarterly growth rates as does the U.S. Commerce Department. I suspect they have it right down under: the gyrations in the seasonally adjusted annual rates we report on GDP growth confuses more than it enlightens.

Australia's expansion is in its sixteenth year. They have been doing well ever since I first arrived in 1991 and continued after I left. (Post hoc, ergo propter hoc?)

Investment spending and exports are leading the parade. The commodity boom and particularly China's insatiable appetite for raw materials is driving growth. The U.S. is no longer the lone leader of the world economy:

Bloomberg reports "The Australian dollar climbed to 82.45 U.S. cents at 1:36 p.m. in Sydney from 82.07 cents immediately before the report."

Use Pricing to Get the Traffic Moving in Manhattan!

Ken Livingstone argues in "Clear Up the Congestion-Pricing Gridlock" (New York Times , July 2, 2007) that New York City could learn from London. Pricing entry into the city would reduce congestion sufficiently to more than make up for the burden of the tax.

He tells us that four years ago, "London’s business district was undergoing rapid growth, but it was at capacity in terms of traffic. Efforts to channel more cars into the city center simply led to ever lower traffic speeds, which in turn led to business losses and a decrease in quality of life. Simultaneously, carbon emissions were mounting because of the inefficiency of engine use.

In 2003, London put in place a £5 (about $9) a day congestion charge for all cars that entered the center city (the charge is now £8). This led to an immediate drop of 70,000 cars a day in the affected zone. Traffic congestion fell by almost 20 percent. Emissions of the greenhouse gas carbon dioxide were cut by more than 15 percent.

The negative side effects predicted by opponents never materialized. The retail sector in the zone has seen increases in sales that have significantly exceeded the national average. London’s theater district, which largely falls within the zone, has been enjoying record audiences. People are still flocking to London — they’re simply doing so in more efficient and less polluting ways."

Attack of the worms

In the developing world simple things have enormous impact. Worms (the kind you get inside you) reduce productivitiy whether we are talking about manufacturing or learning in school. Nicholas D. Kristof writes in the International Herald Tribune that "Here in Congo, one study found that 82 percent of children have worms, and partly as a consequence 70 percent are anemic."

The whole editorial is well worth reading.

Bloomberg: Dollar Falls on Reduced Concern Housing Will Slow Global Growth by Bo Nielsen

Dollar Falls on Reduced Concern Housing Will Slow Global Growth
By Bo Nielsen

Aug. 25 (Bloomberg) -- The dollar fell the most against the euro since March on diminished concern that U.S. housing weakness will slow global growth.

The yen posted its biggest weekly decline versus the euro since 2003 as investors returned to carry trades in which they borrow in Japan to invest in higher-yielding assets elsewhere. Global stocks rose and volatility fell as traders increased bets the Federal Reserve will cut rates in September.

``Things are calming down sufficiently enough for the market to go back to the trades that dominated prior to the shake-out: buying other currencies against the yen and selling the dollar,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, with about $250 million in funds under management.

The dollar dropped 1.5 percent this week to $1.3675 per euro, for the biggest weekly decline since mid-March. The dollar rose 1.8 percent to 116.44 yen. The yen plummeted 3.4 percent to 159.26 per euro, for the biggest loss since September 2003.

The Fed Uses a Less Used Weapon in its Arsenol

Friday, the Federal Reserve cut the discount rate and the stock market soared. The Dow was up 233 points. Today (Monday) it appears that Asian stock markets are following suit. The market in Sydney is up 2.33%. Tokyo closed 3% higher and Hong Kong almost 6%.

The Fed reduce the rate it charges its member banks to borrow from it. Its more usual tool is open market operations: buying and selling government securities.

Shiller comments on the Housing Bubble

Is this the August Before anoter Black Monday Tuesday?

In August, 1987, the Economist magazine ran a cover that looked like the poster of a horror movie entitled "The Return of Inflation." The U.S. stock market started falling culminating in the crash of October 20th ("Black Monday".) From August to Black Monday the Dow Jones fell a thousand points (when a thousand points was a lot.) Five hundred of those points were lost on October 20th.

Are we on the same path?

The U.S. housing bubble has ended with a large amount of mortgage backed securities backed by subprime mortgages that are turning sour. Hedge funds and other investment funds are holding large amounts of these. As they try and sell these securities, they are finding there is no market. This global run from risk is causing treasury securities to rise in price and the world's central bankers rush in shoring up the liquidity of their banking systems.


Listen to Phil Resler, Chief Economist of Nomura Securities, discusses the current liquidity scare with the Wall Street Journal's Phil Izzo and David Wessel.

The S&P 500 may seem cheap at 17 times earnings, but it spent most of my life below 15x.

John Rogers' Ariel Capital Management Increases its Stake in McClatchy, the Wichita Eagle's Owner

John Rodgers is an old and savvy investor. Media Daily News reports that his investment company has raised its ownership stake in the McClatchy Company to 15.5 percent. The Chicago Tribune reports, "'Our firm is based on contrarianism. We often find that's where opportunity is,' said Ariel founder John Rogers."

The McClatchy family owns about 30% of the outstanding shares and has super shares to allow it control. Hedge fund Citadel Investment Group also has accumulated 3.2 million McClatchy Class A shares.

Newspapers have always been great cash generators. John Rodgers, Citadel, Rupert Murdoch, and Sam Zell all seem to think they are worth investing in. Everyone else is avoiding them like the plague. At least in Murdoch’s case we know that his strategic insight is that he who controls the content commands the audiences.

Ft.com has an interview with Zell that provides a view of the business that he back up with a very large bet.

The Decline in Newspaper Ad Revenue is Accelerating.

The Wall Street Journal reports today that "The downturn in the newspaper industry is getting worse.

"Last fall, newspaper executives and analysts were caught by surprise by the severity of a slump that took hold last summer. Since the beginning of this year, the rate of decline in advertising revenue has accelerated. Total print and online ad revenue was down 4.8% to $10.6 billion in the first quarter from a year earlier, according to the Newspaper Association of America, compared with its full-year decline in 2006 of 0.3%." You can see the acceleration in the chart from the Journal on the right.

Newspapers continue to increase their internet revenues: their 2006 online ad revenue was up 31.5 per cent. However, at only 5 percent of the total, the internet revenues are no where ner enough to offset the losses.

Direct mail spending continue to grow, but faces a strategic problem. While newspapers are rich in content, they are increasingly poor in ad revenues. Direct mail revenues grow, but the medium is increasingly poor in content.

Coen’s Midyear Forecast for Direct Mail: Up 5%

Robert J. Coen’s midyear forecast for Direct Mail is for a five percent growth in spending to $61.6 billion during the current year. That compares with a growth of only 3.1 percent for total advertising spending. If these figures hold up through the end of the eyear, Direct Mail will have a 21.2 percent market share of the ad market.

Robert J. Coen of Universal McCann is the world's leading authority on advertizing expenditures.

Boeing projects $2.8 trillion new airplane market

Boeing is forcasting demand for 28,600 new commercial airplanes over the next twenty years. According to the Wichita Business Journal, "The forecast is based on a projected 5 percent annual growth in passenger traffic and a 6.1 percent annual increase in air cargo traffic. "

Manufacturing and Housing: Which Way is the Economy Going?

The monthly reports on April's Housing starts and industrial production give us some insight into which way the economy is headed. The April employment report had demonstrated weakness in each.

Construction: Housing Starts 19% Below Last Year

The Wall Street Journal reported, "Home construction unexpectedly rose during April, making a surprise increase despite bloated inventories and tighter credit for subprime borrowers, but building permits took their sharpest fall in 17 years." Bloomberg's consensus forecast for housing starts were 1.475 million new units. The actual (a 1.528 million annual rate) was better, but that level is 19 percent below the year before.

Manufacturing, especially Aerospace, Is Up

The Federal Reserve Board published its April Index of Industrial Production. America' mines and factories produced 1.9% more than a year ago and their capacity usage (80.2% ) was 2.3% higher. Motor vehicles were a little stronger, a good sign.

Aerospace production was up 9.7 percent over last year.

Jobs Grew Modestly in April

Low expectations. Even lower job growth.

Wall Street expected a weak employment report for April and it got it. According to Bloomberg, the consensus estimate was for a growth of 100,000 jobs. According to the Wall Street Journal, the expectation was for 110,000. The Bureau of Labor Statistics announced April's job growth was 88,000.

April's payroll's were 1.4% higher than a year ago. The economy has produced slower year over year job growth in first four months of 2007 than we saw last year. Yet 1.4 percent growth is fast enough to keep up with labor force growth and slowly pull down the unemployment rate. These comparisons need to be weighed against the very rapid growth experienced the same time last year.

The unemployment rate increased from 4.4 percent to 4.5 percent. This reflects the month to month sampling fluctuation more than it does a fundamental reversal of trend.

Aircraft manufacturing booming

The Bureau did not report separate jobs data for aircraft manufacturing. However it did report that total jobs in the transportation equipment sector fell by 200,000 and that motor vehicles and parts fell by 4.8 million. This implies the rest of the sector grew by 4.6 million jobs which would be principally in the aerospace industry.

Wichita Job Growth is Strong and Accelerating

Jobs grow 4.1 percent.

Employment grew a rapid 4.1 percent in the Wichita labor market since March of last year according to the federal Bureau of Labor Statistics. Not only was Wichita's job growth strong, but it is accelerating compared to the 3.9 percent year over year growth recorded in February. By way of comparison payrolls nationwide grew only 1.4 percent. Wichita’s economy produced twelve thousand new jobs over the last twelve months.

The unemployment rate is down and well below the national rate.

The Wichita unemployment rate was 4.1 percent well below the national average of 4.5 percent. Things have changed dramatically over the last twelve months. A year ago, both the national and the local unemployment rates stood at 4.8 percent. One major reason is the booming aircraft industry. Commercial aircraft order backlogs are up 40 percent over a year ago. The financial recovery of the domestic airline industry, its aging fleet of planes, and a huge demand abroad are all contributing to this sanquine cycle in a very boom and bust business. The Eagle reports that passangers on Air Tran grew 12.9 percent in April.

Murdoch Bids $5 Billion for Dow Jones

Want a Journal Mate?

The rule of media empires is he who owns the content rules. Whether content pays is another matter! Wall Street seems convinced that top shelf journalism and having a business model in the black are two diferent things after all. (And I do not mean Conrad Black!)

Rupert Murdoch's News Corp has bid $ 5 billion for Dow Jones, publisher of the Wall Street Journal, Barrons, and the Dow Jones Newwires among other media properties.

Is Murdoch paying too much? he does not think so: "[W]e feel it's worth this. This is the greatest newspaper in America, one of the greatest in the world. It has great journalists which deserve, I think, a much wider audience. We feel that with coming both online and offline, there's a great deal to be done here. It's got great journalists, it's got great management, but it's got a rather confined capital. It's got to be part of a bigger organization to be taken further."

The Bancrofts say "No."

Although the bid is a 67% premium over the stock price that does not mean it is a deal.

Like many traded newspaper companies, Dow Jones has more than one class of shares. In this instance, the Bancroft family, which has a minority of the shares has a voting majority. The Financial Times quotes Michael Elefante, a Dow Jones director and lawyer representing the Bancroft family, as saying “Members of the family and the trustees of trust for their benefit have advised him that they will vote shares constituting slightly more than 50 per cent of the outstanding voting power of Dow Jones against the proposal.”

Stay tuned, the fun has just begun.

Federal Prosecutors will retry Former Westar Energy Executives David Wittig and Douglas Lake

According to the Kansas Star via Kansas.com "The government will retry former Westar Energy executives David Wittig and Douglas Lake on charges of defrauding the company."

According to the Kansas City Business Journal, the two former executives had been convicted on 39 and 30 counts of defrauding the utility. An appeals court threw out the convictions due to insufficient evidence on one of the isues in the case. Although prosecutors will not be able to pursue all of the original convictions, "Wittig will face 14 counts of circumventing internal controls and one count of conspiracy, [a federal spokeperson] said Monday. Lake will face 13 circumvention counts and one count of conspiracy ."

This will be their third trial.

New Orders

The Commerce Department's durable goods orders data release showed significant strength in manufacturing.

New orders for durable goods were up 3.4 percent compared with a 2.2 percent consensus estimate according to Bloomberg and 2.7 percent polled by the Wall Street Journal. Particularly relevant to Wichita, new orders for commercial aircraft were up by 37.6 percent more than offsetting a 48.8 percent decline in military arircraft orders. In a significant reverse of form, motor vehicles and parts were up 3.3 percent. Boeing announced 27 percent higher profits based on its revenues which are being driven by its strong order book.

Will the delating housing bubble pull us down?

The national housing market remains a worry for the economic outlook. Yesterday we learned existing home sales were down by 8.4 percent in March, the largest drop in eighteen years. Weather has caused these numbers to bounce like a yo-yo. Indeed they spiked in February setting up a snap back. Thomas Lawler, the Vienna, Virginia housing economist, predicted a 7 percent drop in house prices this year (fourth quarter, 2007 over fourth quarter, 2006.) Lawler's prediction was quoted in today's Wall Street Journal. More encouraging was a 1.6 percent drop in the inventory of unsold homes and higher than expected new home sales in March of 1.213 million.

NLRB Levels Unfair Labor Practice Complaints Against FedEx Home Delivery

FedEx has always tried to avoid unions. Management, from Fred Smith on down, sees unions as a barrier to the flexibility and entrepreneurial drive that it views as essential to FedEx's culture and profitability. Doubtlessly, there is a sprinkle of ideology as well.

Not surprisingly, the Teamsters see things differently. If you click on the title link for this posting, you will find their press release proclaiming a victory of sorts in their skirmishing with FedEx.

A key element in FedEx's business model for their package delivery operation and in particular for FedEx Home Delivery is its use of nonunion contractors.

This might develop into an interesting story to follow.

The Wichita economy is Steaming ahead

Wichita's unemployment rate falls further below the national average

The Bureau of Labor Statistics reported this morning that Wichita's job market was stronger than the national job market. Our unemployment rate dropped to 4.4 percent in February compared to 4.6 percent in January and 4.9 percent in the America as a whole.

Strong job growth

Employment, as measured by the Bureau's survey of Wichita's payrolls, grew 3.9 percent over February last year an increase of thirty nine hundred jobs. Strong orders in the aerospace industry have fueled this growth. Recent new orders data confirm that this sector is booming even while other key parts of manufacturing weaken. The news in the automotive industry, for example, continues to be weak.

Aerospace leads the way

Aerospace seems to be on the boom part of traditional boom and bust cycle. Although the domestic economic growth appears to be cooling off, foreign demand continues strong and a strong replacement demand exists in the U.S. as it battered airlines nurture their balance sheets back into health. Moreover, a new IMF study argues that the rest of the world is less vulnerable to a U.S. economic slowdown.

The Department of Commerce reported that the unfilled order backlog for the aerospace indutry was up 31.3 percent in February. The growth was almost entirely in the non defense book was up almost 40 percent.

Mortgage Meltdown

Andy Laperriere argues that we see in the subprime mortgage market debacle the bursting of the housing bubble. But it is just the begginning. He asks "[w]hat role did the Fed's loose monetary policy from 2002-2004 play in fueling the housing bubble? Should the Federal Reserve reexamine its policy of ignoring asset bubbles?"

Mr. Laperriere, a managing director in the Washington office of ISI Group, comments in today's Wall Street Journal.

He goes on to say, "Stock markets world-wide have sold off the past few weeks over concerns the collapse of the subprime mortgage industry could prolong and deepen the housing slump and threaten the health of the U.S. economy. Federal Reserve officials and most economists believe the problems in the subprime mortgage market will remain relatively contained, but there is compelling evidence that the failure of subprime loans may be the start of a painful unwinding of a housing bubble that was fueled by easy money and loose lending practices."

The "wealth effect" has been a the tail wind boosting consumption growth and GDP. If house prices do fall 10 percent this year, it will feel like a Kansas gale in our faces. How far will it push us back?

China Threatens to Start Manufacturing Big Jets

The Financial Times had some dramatic news for the aircraft industry over the weekend.

China announced it will set up a state-owned company to build large commercial jet aircraft. The state council, roughly the cabinet, had made what it called an “important strategic decision” to begin research and development to enter the market dominated by Boeing and Airbus.

China is one of the biggest markets with an estimated demand for almost $350 billion in planes over the next two decades. Serving a big domestic market is a key success factor in industries with large scale production.

China's entry into this market over the next fifteen years could have significant impact on Boeing and its suppliers like Spirit Aerospace.

Boeing is on Schedule with the 787 And Will Increase Production

Ann Keeton in the Wall Street Journal reports "Boeing Co.'s new 787 aircraft is 'targeting' a first flight in late August, followed by the first delivery, as previously scheduled, in May 2008...

"During the first update this year, Mike Bair, head of the 787 program, said Boeing likely will increase production of the aircraft to meet strong customer demand, which now stands at close to 500 aircraft."

Spirit Areospace makes the composite fuselages.

Judging a Manager By His Subordinates' Success

Ron Turcotte aboard Secretariat

By their fruits ye shall know them

Breeders judge a horse by the races, particularly the stakes, won by the stud's or mare's offspring. Secretariat was the greatest horse that ever circled the oval, but his offspring have had nothing like their father's success.

Darren Everson in this weekend's Wall Street Journal looks at the big name college basketball coaches and asks whose assistants became successful head coaches. He develops a scorecard similar to that kept by horse breeders. He looks at the suces rates of assistants of big name coaches. Why do some coaches like Rick Pitino produce subordinates who go on to be great head coachs, while others do not? This is an issue not only for baketball fans, but for students of management everywhere.

Whom do companies reward?

Corporations invest heavily in training and succession planning. How often do they identify, encourage, and reward managers who are successful mentors? The managers who produce great managers are a powerful and underappreciated asset.

One last note in Secretariat's defense: he may not have been horse racing's greatest sire, but he is arguably the greatest broodmare sire God ever created!

2006 Newspapers' print advertising revenues down; internet jumps to $2.7 billion

The Newspaper Association of America, in data reported in the Wall Street Journal, reports that advertisers spent $46.6 billion (down 1.7 percent) on their print ads and $2.7 billion on their internet ads. The newspapers' internet advertising was up 31.5 percent. Although that was in line with the 34 percent increase in all internet advertising spending, it was not enough to offset their losses on the print side. The internet side of the business provides only 5.4 percent of the industry's advertising revenue.


The Journal got its overall internet ad spending data from the Interactive Advertising Bureau.

Mary Berner is Making Changes

Ad Age tells us that she has been dipping into Conte Nast for key executives to lead the changes at the Reader's Digest Association. Having people you know, have confidence in, and can trust can be crucial to an outsider's success in an organization in need of change.

Read more in Ad Age.

Delinquencies on Home Morgages are Up to 4.95 Percent and Those on Subprime Mortgages Are Soaring

Trouble in the mortgage market

Delinquencies

Damian Paletta reports in the Wall Street Journal today that "[d]elinquency rates for subprime adjustable rate mortgages reached 14.44% in the fourth quarter of last year, jumping 122 basis points in three months...."

This is based on data from the Mortgage Bankers Association's National Delinquency Survey. "[D]elinquencies on one-to-four family homes jumped 28-basis points in the fourth quarter to 4.95%." These data are reported quarterly.

The Stock Market fell 242 points. The mortgage market's woes help pull equity prices down.

The role of fraud and brokers

Mortgage brokers had a money machine when interest rates were low, house prices rising, and mortgage refinancing was a boom business. When that boom faded, apparently some less scrupulous brokers wrote mortgages that have turned sour. How much of the problems in the subprime market result from fraud and how much from changing economics is not clear. Imprudent lending and borrowing are certainly a big part of the problem.

What is the effect on the economy and mail volumes?

Securitizing the pain

The last time that we had wide spread mortgage credit delinquencies and foreclosures was in the run up to the 1990-91 recession. At that time a much larger proportion of mortgages were on bank balance sheets. As banks wrote off assets reducing their capital, they cut back on business loans contributing to that recession. The conventional wisdom is that securitiztion reduces the economy's vulnerability to a wave of mortgage defaults. I am less sanguine.

Mail volumes

The real estate sector has been an important source of mail volumes in recent years. We should expect a cutback in solicitations from mortgage brokers. When the problems in mortgage markets overflow into credit card issuers, expect a cutback in credit card solicitations to the subprime market.

Readers' Digest Association Goes Private

The Readers' Digest Goes Private

March 2nd, 2007, Readers' Digest Association went private. Ripplwood Holdings, LLC led a group of private equity investors who acquied the Association.



Mary Berner takes over as CEO. She has a big job ahead of her. Since the Cold War ended, the flagship magazine, an American cultural icon, drifted away from its original editorial embodiment of solid American values in a desperate search for new demographics. Circulation fell. The magazine, which was the vine that gave substance to the direct marketing branches, withered.

Mary Berner is highly qualified for the job. She left Conte Nash in January, 2006. Apparently she lost out in the bureaucratic politics, and did not want to play second fiddle. She brought an appealing management style to Fairfax publications and achieved great success.




Stockholders, who had gotten little to cheer (see the stock price chart courtesey of Stocktrak.com) about during the long years of public ownership, gladly voted for the acquisition offer in February.

Koch on Success

Wichita's Charles G. Koch (pronounced to rhyme with "Coke" ) has just published his manual in real investing, the Science of Success. You can read Mark Skousen's review in the Wall Street Journal and Cecil Johnson gives us his insights in the Eagle.)

Koch is the architypical active investor who grew a family business into the largest privately owned business in America. He has strong ideas on management (embodied in his Market-Based Management philosophy.) In contrast to the conflicts too evident in many publicly traded companies, Koch explains that "[a]t Koch, we use incentives to attempt to align the interests of each employee with the interests of both the company and society. This means we strive to pay employees a portion of the value they create for the company. We believe this approach tends to attract and retain the right people, and motivates them to be principled entrepreneurs."

For a fuller exposition of his ideas, read his interview with the Eagle last Sunday or just read the book.

Turbulence

This was to be a busy week of U.S. economic news, but markets themselves grabbed the headlines.

Chinese stocks fell almost 9% in Shanghai overnight Tuesday. The Dow responded by dropping over 500 points as part of a world wide rout in share prices.

Among the economic news, there was plenty to make investors revise their expectations.

Alan Greenspan suggested there might be a recession in our future. (See below.)

GDP growth

The estimated growth of the U.S. economy was revised downward. The Commerce Department said GDP grew only 2.2 percent (that is a seasonally adjusted annual rate) far short of the 3.5 percent initially reported. That is one of the largest downward revisions in a long time. The main culprit was the estimate of inventory investment, although downward revisions of fixed business investment spending and consumer spending on durable goods and nondurable goods all contributed.

The fourth quarter saw a big inventory sell off. Although this pulled down estimated GDP growth by 1.35 percentage points (final sales grew 3.6 percent), a drop in inventories can be a good omen for future production. We must take a careful look at its composition.

New home sales dropped 16.6 percent in January.

The housing sector is continuing to worry investors. They are right to worry. The lenders who financed the run-up in house prices are now finding their capital strained. See Justin Lahart: "After Subprime: Lax Lending Lurks Elsewhere" and Robin Sidel And David Reilly, "No Worries: Banks Keeping Less Money in Reserve."


The fallout

Viewed from the vantage point of Thursday afternoon, investors seem to have taken Professor Greenspan’s advice. They are now a bit more risk adverse. Consequently stocks are a bit cheaper, government bonds a bit dearer, and high yield bonds’ yields are higher. And analysts are now a bit gun shy about saying the economy has nowhere to go but up.

"We have extraordinarily low risk premiums now."

The Wall Street Journal quotes Alan Greenspan that we may have a recession later this year. To some extent the Journal is trying to make a headline. Alan Greenspan would always say that the next phase of our current cycle is a recession: that's what follows an expansion. The question is when. He warned his audience that the cycle is mature: profit margins are no longer expanding.

He found "disturbing" how low risk premia have fallen. Professor Greenspan was teaching us that when we discount risk too much we set ourselves up for a fall. When shocks occur, investors and institutions become more risk averse in reaction. This sets up the pull back in lending, investing, and spending that drives the economy down.

Is the News That the Employment Report Was Weak or that BLS Found another Million Jobs?

BLS's January Employment Report

The Labor Department's January employment report came out today. Economists' reactions were all over the map. And well they should be.

When the Bureau of Labor (BLS) asked firms how many people were on their payrolls, the results indicated that jobs grew by a fairly modest 111,000 in January. When its surveyors phoned households, they found that 4.6 percent of the workforce said they were unemployed, up from December's 4.5 percent.

Conclusion: based on those bare facts, the economy is growing but somewhat weakly. Hence the Wall Street Journal's headline: "Heading for a Soft Landing."


But you need to read the fine print to get the real shock! The statisticians on Massachusetts Avenue rebenchmarked their samples to an actual count of firms who are registered with the state employment offices.

Guess what?

There were 981,000 more jobs in December than BLS had estimated in its previous report. The monthly data were revised back almost two years. (The revision is "only" 933,000 on a seasonally adjusted basis.)

This means that the year over year employment growth in December was 1.66 percent. A month ago, we thought employment had grown only 1.37 percent. Apparently the economy was stronger than the 2006 data initially led us to believe. On Wednesday we got a surprise. The Commerce Department reported the Gross Domestic Product grew a strong 3.5 percent at a seasonally adjusted annual rate in the last quarter. In light of these revisions, it should not have been such a surprise.

Fed watchers should note that the economists who work for Dr. Bernake also read footnotes!

What is a Forecaster to Do?

This episode gives you a little insight into the real difficulties of business forecasting.

Consider the Postal Service which not only has one of the most sophisticated business forecasting systems in the world, but also shares it with the public through its rate filings. When you read the testimony of Thomas E. Thress one of the Postal Service's experts with RCF Consulting, you will find that a similar measure of employment in the forecasting equation for First-Class single piece mail. One of the attractions of this variable in forecasting and econometric work is its robustness against revision and statistical reporting quirks by the reporting agency (BLS.)

Unfortunately, the gnomes in the bowels of BLS are not cooperating.

Durable Goods Were Up in December; New Home Sales Were Down 17.3% in 2006

In two separate releases, the Commerce Department showed some strength in manufacturing. House sales did a bit better in December, but were way below a year ago. Particularly relevant to Wichita, new orders for aircraft and aircraft parts excluding defense orders were up by $3.8 billion.
To quote the Wall Street Journal, "A surge in aircraft orders accounted for a large part of the gain, but orders for "core" capital goods excluding defense and aircraft were also up at a good clip."

NBC is wroth about a breach of its rules: What about the shareholders' money?

Victor Jung used to be the treasurer at NBC Universal. According to this morning's Wall Street Journal. He has been charged with stealing some $800,000 over a six month period. Mr. Jung set up a corporation "NBCU Media Productions LLC and wired transferred funds from a GE account" to bank accounts in its name. These accounts financed some fancy flings and a place in the Hamptons.

He was arrested 6:00 A.M. yesterday.

I wonder what he was thinking? "They won't notice $800,000: it's rounding error."

Of course, maybe he is innocent. Perhaps in the wacky world of the media, he was simply facilitating the extravagence of his superiors.

The unsung hero of the piece is the internal auditor who caught him. Internal auditing has been booming after the wakiness of the internet boom went out of fashion. What was ordinary business practice was seen to be just plain silly when that bubble burst. Sarbanes Oxley has super charged the boom. The most recent figures I saw had internal auditors' salaries growing in double digits. The demand outstrips the applicants off into the future.

Most interesting in this news story is NBC Universal's reaction:

Consider its public statement: "NBC Universal is committed to and vigilant about the enforcement of its compliance policies. When we discovered the potential integrity breach, we promptly brought it to the appropriate authorities and are cooperating fully with the investigation. We will continue to monitor the situation to its resolution."

That is a far cry from "That blankety blank stole the shareholders' money and we want every red cent back!" Perhaps the flack under the NBC peacock is singing a song for his grey flannel superiors at GE where the corporate culture is probably a lot less flamboyant.

In general, the return to corporate sanity after the internet bubble burst is salutary. But I also wonder whether in the post Sarbanes-Oxley world, companies are worrying more about following the rules, than growing the value of their businesses?

Click Here to See the Oil Price's Ups and Downs

Crude oil prices dropped two dollars today after reports that inventories are up. The Wall Street Journal has provided this graph of its history in real terms and in nominal terms. The real price is the price adjusted to the U.S. price level in January, 2007.

Is My Understanding of the English Language Becoming Obsolete?

In today's Wall Street Journal, Joe Dickerson, an analyst at Atlantic Equities LLP, is quoted saying that J.P. Morgan "is making tangible progress on leveraging its diverse business model to the bottom line." Atlantic Equities is a London independent research firm.

What does he mean? By "diverse business model," does he mean that J.P. Morgan has multiple business models? Or does he mean that the bank's business model is based on a diversity of business (each with its own business model)?

I have a personal preference for the more straightforward verb "lever" over the rethreaded noun, "leverage." Whatever my preference, I know I am spitting into the wind on this one. That said, how does one lever a diverse business model to a bottom line? That is not a matter of levering or amplifying.

So what does he mean? My hunch is that J.P. Morgan has made progress integrating banks it has bought and achieving some economies of scope between such diverse businesses as securities trading, investment banking, retail banking, and credit cards. And perhaps he is right.

If I were an investor in J.P. Morgan, my worry would be this: The bank is gaining an earnings boost from over levered consumers who are falling back on their credit cards lines. Will that interest income disappear in the future when some of those balances evaporate into loan loss reserves?

National Employment

The national unemployment rate was 4.5 percent and national payrolls grew by 167,000 jobs in December. In November, Wichita's unemployment rate fell to three tenths percent below the national employment rate.

Although the transportation sector (which includes the aircraft industry) lost five thousand jobs nationwide, the losses were overwhelmingly were among firms producing motor vehicles and parts. The American automotive industry is suffering from both a declining vehicle market and stiff foreign competition. Employment in motor vehicles and parts has declined 4.9 percent over the last twelve months while jobs in the rest of the transportation equipment sector increased by two percent.

Overall, employment is doing well. Jobs were 1.4 percent higher in December, 2006 than in December, 2005. This steady growth seems to be holding up despite the economy's slower second half growth (see the chart.)

The Wichita Job Market

Wichita's unemployment rate dropped to 4.2 percent from 4.4 percent from October to November. This reflected strong growth in payrolls in the metropolitan area. In the Bureau of Labor Statistics' November Metropolitan Employment Report, businesses reported 294.4 thousand workers on their payrolls. This was a full thousand more than in October. Jobs grew 1.8 percent over November last year.

The job growth reflects the continuing strength of the local economy, particularly the aircraft industry. That industry's unfilled orders have grown. The job growth is the more impressive given that Raytheon Aircraft has been operating under a job freeze while its pending sale was being resolved.