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.