Jean-Claude Trichet sees the Bottom!

Jean-Claude Trichet, speaking on behalf of the world's central bankers, sees the Eurozone bottoming out and the world economy turning around. Chris Giles, Daniel Pimlott, and Ralph Atkins in the Financial Times report that "The global economy was 'around the inflection point', he said, with some countries 'being beyond the inflection point'." They report further that the OECD declares "there were signs of a 'pause' in the economic slowdown in France, Italy, the UK and China."

The April Employment Report

It is the first Friday and whether or not you do the First Friday devotions, the Bureau of Labor Statistics issued its employment report for April.

The employment report came out better than Wall Street anticipated, but it was still pretty awful. The establishment survey still showed a huge 539,000 job loss. Employment in the household survey was up. Perhaps not statistically significant, perhaps just noise, but I'll take it.

In the establishment data, services took the same hit as goods production (down 269,000 jobs vs 270,000). Private jobs in services fell even more dramatically (down 341,000) with the difference coming from the growth in government jobs.

The aircraft industry looks to have lost 4,700 jobs in April.

In terms of the Postal Service, printing etc. was down almost eight thousand, paper down three and a half thousand, and finance was down twenty five thousand.

Signs of A Recovery?

Australia's employment was up, unexpectedly, in March and the unemployment rate fell from 5.7 percent to 5.4 percent.

Rupert Murdock keeps pace of the world economy by monitoring revenues from his vast media enterprises around the world. These are heavily dependent on advertising which is cyclical like capital expenditures. At a News Corp. earnings call, he said, "I am not an economist…but it is increasingly clear that the worst is over….As you know, I have been uncharacteristically pessimistic in recent calls, though I would argue that it was a well-founded concern. But there are emerging signs in some of our businesses that the days of precipitous decline are done and that revenues are beginning to look healthier.” Peter Kafka's whole posting is worth reading.


Nina Koeppen and Jonathan House report in the Wall Street Journal, "More European indicators are beginning to show some tentative signs of the recession easing in the second quarter, with German business sentiment leading the way.

"German business confidence improved at the start of the second quarter, after hitting a record low in March, indicating that the worst of the economic slump may soon be over, a survey from the German Ifo Institute showed Friday.

"The Ifo business climate index rose to 83.7 from a revised 82.2 in March, which marked the lowest level since records began in 1991."

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Richard Pratt, R.I.P. 1934 – 2009

Australia in 1940-41 had its back to the wall. A country of maybe six million people spread out over an area almost as big as the lower 48 U.S. states, it faced imminent invasion from Japan. Documents released in the last twenty years indicate the government had concluded the defense of the continent was hopeless: it planned to concede 60% of the country and fall back on guerrilla war for the rest.

One lesson learned was that it needed a bigger population if it were to defend itself and preserve its culture. In the decades after the war, it encouraged immigration from Europe. One of these "New Australians" who did very well for himself, thank you very much, was Richard Pratt. The Wall Street Journal tells us, "Mr. Pratt was born Ryszard Precicki in Gdansk in 1934." Mr. Pratt built an enormous empire in the cardboard business (Visy Industries.) As former Primme Minister John Howard eulogized, "He combined all the positive elements that migrants successfully gave so much to our country.

"He became in many ways the example of things regarded as Australian - sport, success, family and commitment. "


Mr. Howard was not the only big wig to attend Pratt's funeral. Whoever was anybody in Victoria seemed to be there. You can read an account of his funeral in the Telegraph.

His fortune was estimated at 2.3 billion Aussie dollars. You can find a gallery of pictures on the Telegraph's site.

The Aussie media, ever ready for a bit of sensationalism, also made a big deal of his lady friend, a Shari-Lea Hitchcock.


On November 30th, 2005, Pratt Industries of Conyers, Georgia announced it had bought the Love Box Company here in Wichita. The Wichita Business Journal reported that Pratt Industries is controlled by Visy.

Kansas Ranks #3 In MaintStreet.com's Financial Happiness Index

Based on our ranking in unemployment (#11), foreclosures (#17) and non-mortgage debt to income (#6), Kansas scored #3 in MainStreet.com's financial happiness index.

Good news for Jayhawks, even if the Cornhuskers came in first. They do have Warren Buffet, after all.

Cessna: The Other Shoe Has Dropped

On April 24th, the Wichita Eagle's Molly McMillin reported a rumor of another possible 2,800 layoffs at Cessna.

Today, she writes, "Cessna Aircraft announced more production cuts and another 2,300 layoffs Wednesday as business jet cancellations continue to pile up during the down economy.

"Cessna issued 60-day layoff notices to 1,600 workers at every level of the company on Wednesday, including 1,300 in Wichita.

"Cessna also will issue layoff notices to 700 salaried employees by mid-June, the majority of them in Wichita."

The great general aviation bubble of 2007 has burst with a nasty splash. Earlier McMillin had written that business jet usage is down dramatically quoting UBS Securities analyst David Strauss, "Domestic and international business jet usage was down 30 percent in March and 30 percent for the first quarter of 2009."

Thus the accelerator's vengeance is visiting the industry. Moreover, cancellations are eating into the general aviation industry's backlog as the corporate jet has become the leprosy bell of gray flannel America.

Why is Textron so keen on cutting jobs at Cessna?

First, as I have written previously, 2007 is looking like it was a bubble year for the aircraft industry and specifically for the general aviation industry. The industry seems to have over expanded in 2008. Boeing, Spirit's biggest customer, in contrast, expanded production more cautiously in 2008. Spirit has used various strategies to preserve its talented workforce with considerable success.

Textron, Cessna's owner, says it has no plans to sell Cessna. McMillin quotes CEO Lewis Campbell: "Given the success we have had with the Textron Financial liquidation so far, and given the recent sale of two high-value assets and other cash-production opportunities, I feel now that it's highly, highly improbable and unlikely that we'll ever have to divest of any more assets."

Yet Textron itself is in play. Cutting jobs and costs is one way to try and boost profits in a lousy market and try to get the stock price high enough to keep the wolves at bay. I suspect Textron management may more worried about keeping their jobs than the state of their shareholders' wealth.

If the parent is sold, Cessna will be cut off from the defense end of Textron's portfolio.

On April 9 2009, the Financial Times' Justin Baer and Julie MacIntosh reported that, "Shares of Textron soared by 49 per cent amid speculation the industrial conglomerate could be broken up and sold to a consortium of Middle East and US investors.

"Al-Watan, a Kuwaiti newspaper, reported on Thursday that a United Arab Emirates group was close to a deal to acquire Textron, whose businesses range from Cessna aircraft and Bell helicopters to E-Z-Go golf carts, for $21 a share, or more than $5bn. The buyers would then find a US company to take over Textron’s defence division."

Before the price jump, the market was valuing Textron's shares at $2 billion. After the price rise, they were worth $3 billion. Textron has about $10 billion in debt.

Baer and Julie MacIntosh reported, "Industrial bankers have long held the view that there is no single buyer for Textron because of its incongruous mix of aerospace and defence assets, the struggling financial division and an industrial business that builds products including golf carts and tools."

Bob Tita in the Wall Street Journal notes, "Industry observers predicted that any purchase of Textron's civilian aircraft business by a foreign consortium would have to be accompanied by the acquisition of Textron's military business by a U.S. company at the same time."

Might Boeing wind up owning the military piece of Textron? Tata wrote, "Loren Thompson, a defense analyst for the Virginia-based Lexington Institute, said Boeing Co. would likely be the frontrunner for the military business. The aerospace giant is already a partner in the production of the Osprey. 'The military operations would be a good fit with Boeing.'"

And what about the Wichita economy?

Wichita State's forecast of higher employment in 2009 than 2008 looks wildly optimistic. WSU's Center for Economic Development and Business Research (CEDBR) in its Barton School wrote "Employment in 2009 is expected to remain relatively flat with a gain of 0.3 percent, adding 3,829 jobs."

Cessna is no longer our number one employer: Spirit now is.

And yes, management makes a difference.

GDP Dropped at a 6.1% Annual Rate; Final Sales Down c.3.3%

The GDP numbers are out for the first quarter. The Commerce Department's Bureau of Economic Analysis announced GDP declined at a 6.1 percent seasonally annual rate. The acceleration of the decline in inventories knocked 2.8 percentage points off of that annualized growth rate. Final Sales declined at a 3.3 percent seasonally annual rate.

Declines in investment spending accounted for more than the total decline in GDP.

Prices, as measured by the GDP price deflator, rose 2.9 percent (2.0 percent without food and energy.) Inflation is not dead.

On the bright side, such a massive inventory fall should be self correcting to some degree. Import declines more than offset the small fall in exports. Net exports on net contributed back almost two percentage points to the negative growth rate in GDP.

The decline in GDP was worse than the 5.0 percent consensus expectation.

Yes, I am sticking with my prediction thet the U.S. economy hit its trough in March. The magnitude of the inventory correction is in line with my scenario.

How Business Schools Have Failed Business

Why not more education on the responsibility of boards?

Wall Street Journal: April 24, 2009


By Michael Jacobs
As we try to understand why our economy is so troubled, fingers are increasingly being pointed at the academic institutions that educated those who got us into this mess. What have business schools failed to teach our business leaders and policy makers? There are three profound failures of sound business practices at the root of the economic crisis, and none of them have been adequately addressed by our business schools.

Just about everyone agrees that misaligned incentive programs are at the core of what brought our financial system to its knees. Countless individuals became multimillionaires by gambling away shareholders' money. Incentive systems that rewarded short-term gain took precedence over those designed for long-term value creation.

We could chalk this all up to greed, as many pundits have. But first we should ask how many of the business schools attended by America's CEOs and directors educate their students about the best way to design management compensation systems. Amazingly, this subject is not systematically addressed at most business schools, and not even discussed at others.

Secondly, as Washington scrambles to restructure the financial regulatory system, those who still believe in the private sector are asking why corporate boards were AWOL as institution after institution crumbled. Why did it take rumors of nationalization and a drop in Citicorp stock to below $2 a share to inspire Citigroup to nominate directors with experience in financial markets?

American icon General Electric was stripped of its coveted AAA-rating because of problems emanating from its financial services unit. Yet its board has only one director with experience in a financial institution. If it is the board's job to oversee a corporation, it seems logical that there would be a segment in the core curriculum of every business school devoted to board structure, composition and processes. But most programs don't cover the topic.

The third breakdown came in the investment community. Nearly 20 years ago I wrote a book titled "Short-Term America" that warned about the growing chasm between those who provide capital and the companies who use it. The concept is simple: When money provided to homeowners or businesses comes from an anonymous source, possibly half way around the world, there are serious challenges to operating a functioning system of accountability.

Nationally, finance departments at business schools offer hundreds of courses in asset securitization and portfolio diversification. They have taught a generation of financial leaders that risk can be diversified away. But in their B-school days, few investment bankers examined the notion of "agency costs." That concept explains that as the gulf between the provider and the user of capital widens, the risks involved with selecting and monitoring the participants in the portfolio increase. It should come as no surprise that financial institutions amassed securities that consist of a diversified portfolio of deadbeats.

About 70% of the shares of American corporations are held by institutional investors such as pension and mutual funds. These organizations are brimming with MBAs. But how many of these MBAs took a class devoted to how shareholders should exercise their rights and obligations as the owners of America's corporations? Few, if any. When shareholders are uneducated about their obligations, how can a corporate accountability system function properly?

Recently, when I delivered a guest lecture at another school, a distraught-looking student pulled me aside after class. She explained that my talk was very disturbing to her. After investing two years and $100,000, she was only weeks away from receiving her MBA. But prior to our class, she had never heard a discussion about board responsibilities or the rights of shareholders. She said she felt cheated.

By failing to teach the principles of corporate governance, our business schools have failed our students. And by not internalizing sound principles of governance and accountability, B-school graduates have matured into executives and investment bankers who have failed American workers and retirees who have witnessed their jobs and savings vanish.

Most B-schools paper over the topic by requiring first-year students to take a compulsory ethics class, which is necessary, but not sufficient. Would Bernie Madoff have acted differently if he had aced his ethics final?

Could we have avoided most of the economic problems we now face if we had a generation of business leaders who were trained in designing compensation systems that promote long-term value? And who were educated in the proper make-up and responsibilities of boards? And who were enlightened as to how shareholders can use their proxies to affect accountability? I think we could have.

America's business schools need to rethink what we are teaching -- and not teaching -- the next generation of leaders.

Mr. Jacobs, a professor at the University of North Carolina's Kenan-Flagler Business School, was director of corporate finance policy at the U.S. Treasury from 1989 to 1991.

PPI and Retail Sales Down

The Bureau of Labor Statistics reported that the Producer Price Index (PPI) for finished goods fell 1.2 percent in March (0.0 excluding energy and food): that is 3.5 percent below a year ago. PPI for intermediate goods fell 1.3 percent and for crude goods .3 percent.

The Commerce Department announced Retail and Food Sales fell 1.1 percent in nominal terms. Autos and auto parts lead the decline with a 2.3 percent decline. Note this is in nominal terms. If consumer prices also fell this would reduce the decline in real terms.

Since the number of cars sold in March rose, there must have been a substantial fall in some combination of the prices or the richness of the mix of cars to produce the decline in dollars spent on cars and parts. Retail Sales of automobiles and light trucks and automotive parts were down 2.3 percent based on an 8.5 percent increase in vehicle sales offset by a 9.7 percent fall in dollars spent per vehicle sold.

This could provide a nice bottom for the recession trough.