Monday, December 31, 2012

How to Think Like Leonardo Da Vinci (John Authers / Michael Gelb)

 This past April, John Authers' article  "Crack the da Vinci code for money masterpiece" in the Financial Times cited  the seven principles driving Leonardo's thought process as interpreted by Michael Gelb in his 1998 book  “How to Think Like Leonardo Da Vinci”.  

As we approach the New Year, let's consider the following principles:
  • Curiosita (Curiosity): An insatiably curious approach to life and unrelenting quest for learning.
  • Dimonstrazione (Demonstration): A commitment to test knowledge through experience, persistence and willingness to learn from mistakes.
  • Sensazione (Sensation): The continual refinement of senses, especially sight, as the means to enliven experience.
  • Sfumato: A willingness to embrace ambiguity, paradox and uncertainty. (Try to reduce the number of times you see things as an absolute, and reduce words such as totally, always).
  • Arte/Scienza (Arts & Science): The development of the balance between science, art, logic and imagination.
  • Corporalita:  The cultivation of grace, ambidexterity, fitness and poise.
  • Connessione (Connections): A recognition and appreciation for the interconnectedness of all things and phenomena.

Sunday, December 30, 2012

At Center Stage: An Economic High-Wire Act in the U.S.

Last week, as investors attempted to assess the action and inaction of Washington political leaders, risk assets such as equities declined and volatility spiked up in the U.S. 

The following quotes highlight perspectives from selected policy makers:
  • Congressman Tom Cole of Oklahoma (Dec. 27 MSNBC interview): "To paraphrase Ronald Reagan, there's so much manure around here, there's got to be a pony someplace" and "I actually still think there's a chance to get something done and so, you know, these deals usually come together at the last moment. That's what happened on the budget deal, the debt-ceiling deal. I think that's what's going to happen again";
  • Senator Charles Schumer of New York (Dec. 28 NBC interview): “I’m getting a little more optimistic today – sometimes it’s darkest before the dawn”; 
  • Senator Olympia Snowe of Maine (Dec. 27 farewell speech, after 34 years in Congress): "Throughout my tenure, I've borne witness to government's incredible potential as an instrument for that common good," and "I have also experienced its capacity for serial dysfunction. Indeed ... it is regrettable that excessive political polarization in Washington today is preventing us from tackling our problems in this period of monumental consequence for our nation"; 
  • Treasury Secretary Timothy Geithner (Dec. 26 letter to Congressional leaders): “I am writing to inform you that the statutory debt limit will be reached on December 31, 2012, and to notify you that the Treasury Department will shortly begin taking certain extraordinary measures authorized by law to temporarily postpone the date that the United States would otherwise default on its legal obligations.”
As Washington policymakers speak in terms of the “size of a deal” and the “potential for a framework”, investors remain concerned that “viable solutions” are not part of the discussion. Given the persistent “last minute” nature of Congress’s decision-making process, it is likely that investors will continue to confront “high wire” economic dynamics through 2013.

Sunday, December 23, 2012

Boehner, Budgets, Berlusconi and More

During November 2011, after a U.S. Congressional “super committee” missed its deadline to identify $1.4 trillion in U.S. budget cuts, politicians pointed fingers at each other as they “kicked the can”.  Last Thursday evening, Republican Speaker of the House of Representatives John Boehner said his “plan B” effort to address annual automatic spending cuts and tax increases had collapsed among members of his party.  This news reversed a positive tone from earlier in the week and triggered declines in most global markets on Friday.  In a follow-up news conference, U.S. President Barack Obama suggested the potential for a year-end deal and said, “call me a hopeless optimist, but I actually still think we can get it done”.  Note: the Congressional Budget Office has suggested that without a deal the U.S. could move into a recession.

Separately on Friday, Italian Prime Minister Mario Monti resigned from his post after 13 months in office.  It is noteworthy that 1) the previous Prime Minister Silvio Berlusconi, a billionaire associated with many scandals, has recently returned to the country’s political scene and 2) Monti may run for President in February.

  • In the U.S., it is understood that to address the U.S government’s debt crisis requires increasing revenue (more taxes) and decreasing government spending (affecting defense and entitlement budgets). However, finding common ground amid a polarized political landscape remains a challenge. A last minute deal may happen, but it will likely only provide short-term solutions.
  • Regarding Monti's resignation, it remains unclear if he will run for office in February, but it is likely that Silvio Berlusconi’s anti-austerity and anti-Germany views will be well received within Italy and  increase tensions within the Eurozone region.  
  • Bottom line: While the persistent political and economic cross-currents are likely increasing investor fatigue, those that remain focused and patient will likely find opportunities.

Sunday, December 16, 2012

Some Thoughts from Legendary Investor Sam Zell to Consider

During uncertain periods, it is worthwhile to consider perspectives from longer-term investors such as Sam Zell.  He is Chairman of Equity Group Investments, known for its $39 billion sale of Equity Office Properties Trust during 2007 and the controversial purchase of the Tribune Company (including the Chicago Tribune, the Los Angeles Times and the Chicago Cubs).  The following are excerpts from an interview with a Columbia Business School newsletter (Winter 2012), along with Zell’s 13 “fundamental rules”.
  • The Need for Simplicity: “I philosophically believe that if you can‘t delineate your idea in one or two sentences, it‘s not worth doing… My criterion is if [my team} can‘t concisely explain their idea, then I throw them out of my office and tell them to come back when they can. Simplicity is critical.”
  • Making Sensible Investments: “I start by not paying much attention to the market … I don’t make investments predicated on the assumption that there’s a greater fool out there who’s going to buy it from me for more than I paid for it. I look for situations that logically make sense to me.”
  • Focus on Demand Drivers: “My philosophy is to invest in businesses that serve externally created demand – businesses where I don’t have to generate demand. For example, in the mid-80s, I bought the largest dredging company in the world because I knew that every day the rivers and the harbors are silting, creating demand for the product I produced.”
  • Understanding Execution Risk: “one of the greatest risks of any investment is execution risk, and I think it is highly overlooked. I have great respect for execution risk and am always sensitive to people coming up with ideas that don’t have all of the t’s crossed and i’s dotted with respect to how the plan is actually going to be executed.”

Zell’s Fundamental Rules
  1. Operate on the condition of no surprises.
  2. Everyday that you’re not selling an asset in your portfolio, you’re choosing to buy it.
  3. Ensure management’s interests are aligned with shareholders.
  4. Look for good companies with bad balance sheets,
  5. Nothing should stand between a company and its fiduciary responsibility to shareholders.
  6. Look for opportunities in markets with pent-up demand,
  7. The definition of a partner is someone who shares your level of risk.
  8. Liquidity = value, 
  9. Sentimentality about an investments leads to lack of discipline,
  10. Take meaningful positions so you can influence your own destiny,
  11. When everyone is going right, look left,
  12. Understand the downside,
  13. It all comes down to Econ 101 – supply and demand.

Sunday, December 9, 2012

Employment Trends and a "Job Creator" Sampler

Last week, the U.S. Department of Labor reported that in November: 1) the unemployment rate dropped to 7.7% - with growth in professional servicesleisure and hospitality, but weakness in construction and manufacturing; 2) the labor force participation dropped to 63.6% (the decline of 350,000 workers likely a result of an aging population and discouraged workers no longer seeking jobs), 3) annual wage growth was 1.7%  and 4) unemployment rate for workers ages 16 to 24 was 14.8%. In addition, as the European Central Bank cut its economic growth forecast for Eurozone, the New York Times (Dec. 2, 2012) reported that European Union youth unemployment (ages 15 to 24) remains high with 22% in France, 51% in Spain and 36% in Italy.

In addition, Inc. Magazine (December 2012) presented its survey results of the  top ten U.S. job creators since 2008.  
  1. Universal Services of America (17,330 jobs): one of the largest providers of security and janitorial services in the U.S.
  2. Air Serv (6,269 jobs): baggage handling, cabin cleaning, and security services to the airline industry; 
  3. RuffaloCODY (1,700 jobs): fundraising and enrollment services and software to nonprofits and universities;
  4. Pacific Dental Services (1,451 jobs): provides administrative and human resource service to about 300 dental practices; 
  5. (1,403 jobs): Internet domain name registration and website hosting services;
  6. Heartland Dental Care(1,150 jobs): staffing, marketing and support services to over 370 dental practices;
  7. Chobani (1,083 jobs) makes yogurt with natural ingredients; 
  8. Talk2Rep (1,043 jobs): U.S.-based call center services and consulting; 
  9. Smashburger (995 jobs): fast food with over 170 locations and
  10. SolarCity  (989 jobs created): installs, monitors, and repairs solar power units
  • With both the U.S. unemployment rate and labor force participation rate declining in November, it is likely that hiring trends remain fragile.
  • Regarding, Inc. Magazine’s survey, while other sources may highlight additional companies and organizations, the concentration of top job creators in the services sector suggests that growth in the high paying manufacturing sector continues to lag.
  • Regarding Europe’s youth unemployment, if the current high rates continue, the potential for social conflict may increase as well.

Monday, December 3, 2012

Some Dynamics of "The Data Driven Classroom" and On-Line Education

With attention increasing on the use of on-line services to address and support educational programs, the links below seem  informative.
  • "The Data Driven Classroom"  highlights 1) the need for repetition of material, 2)  validation of understanding before moving to the next level of class work and 3) data gathering for the teacher to understand where weakness may be within the class.
  •  "A School of Clicks, Not Bricks" addresses themes such as 1) the evolution of teachers becoming mentors and 2) the need to for students to gather and exchange ideas in a physical place.

Sunday, December 2, 2012

Managing Risks to our Food and Commodity Supplies, Global Health Systems and More

Last week, as “fiscal cliff” comments by U.S. political leaders triggered market swings, United Nations representatives met in Doha, Qatar to work on a climate change agreement.  Executive Secretary Christiana Figueres said  'What is very clear is that the science; no matter whether you read through…all these reports that have come out have said that we are running out of time.”
  • In the World Bank report “Turn Down the Heat: Why a 4°C Warmer World Must be Avoided (Nov. 2012) its president, Dr. Jim Yong Kim said, “climate change affects everything. The solutions don’t lie only in climate finance or climate projects. The solutions lie in effective risk management and ensuring all our work, all our thinking, is designed with the threat of a 4°C [warmer] world in mind.”
  • In a NY Daily News article (Nov. 15, 2012)New York State Governor Andrew Cuomo said, “Extreme weather is the new normal. In the past two years, we have had two storms, each with the odds of a 100-year occurrence. Debating why does not lead to solutions — it leads to gridlock. The denial and deliberation from extremists on both sides about the causes of climate change are distracting us from addressing its inarguable effects. Recent events demand that we get serious once and for all.” Note that Superstorm Sandy recovery costs are estimated at $41.9 billion for New York State and $29.4 billion for New Jersey.
  • The report Climate and Social Stress: Implications for Security Analysis (Nov. 2012), sponsored by the U.S. intelligence community and released by the National Academy of Sciences, suggests that within a decade “events will likely include clusters of apparently unrelated climate events occurring closely in time, although perhaps widely separated geographically, which actually do have common causes … in which a climate event precipitates a series of other physical or biological consequences in unexpected ways; and disrupt globally connected systems, such as food markets, supply chains for strategic commodities, or global public health systems.”
Recent events and studies illustrate that climate change triggers events with significant social and economic impact.  Hopefully, global policy makers avoid the “last –minute” tactics applied to challenges such as the fiscal cliff.  In the meantime, investors should add climate change dynamics to their list of investment risk factors. 

Sunday, November 25, 2012

Border Wars, Disputes and Other Global Considerations

Amid better than expected improvements in German business confidence (reported by the Ifo economic institute) and  Greek debt restructuring efforts moving forward, budget talks among 27 Eurozone leaders broke down on Friday.  European Central Bank President Mario Draghi said Eurozone leaders need "to follow up with determination on their commitment to make the institutional reforms needed to complete economic and monetary union", German Chancellor Angela Merkel said "we have reached a good basis to continue our work" and U.K. Prime Minister David Cameron said “the budget deal wasn't good enough for Britain, but it also wouldn't be good enough for a number of countries”.

Additionally, as many governments pursue financial restructuring, others confront geographic and political restructuring challenges. China recently issued passports presents maps of its boundaries extending into parts of India, Taiwan and areas of the South China Sea considered territories of the Philippines, Brunei, Malaysia and Vietnam. Today, in Catalonia, a region accounting for 20% of Spain’s economy, its citizens are considering political leaders that may lead the region toward a separation from Spain. In the Middle East, with a cease-fire in place between Hamas and Israel, Egyptian President Mohamed Morsi’s increased control over the country has triggered significant internal conflicts.  In the U.S., there is increased attention on petitions for secession by various states  - the largest effort from Texas with over 112,000 signatures (the White House will provide an “official response”  to petitions with over 25,000 names by mid-December).


  • Regarding the Eurozone – with diverse economic and political interests among its 27 member countries, internal tensions will likely continue for months, if not years.
  • Regarding “border war and disputesChina’s remapping efforts present a challenge to several players in the region because of its significant position as an economic trading partner; in Catalonia, any successful actions toward separation from Spain may provide a roadmap for other Eurozone players to follow; in Egypt, President Morsi’s actions reinforce the view that political conflict is the norm within the region; in the U.S, the varied petitions highlight the divergent attitudes across the country and the challenges facing decision makers as they seek common ground to address the “fiscal cliff” and other economic challenges.

Sunday, November 18, 2012

A Cliff, a Storm, the Gates of Hell and a Wounded Brand

Last week, Middle East tensions increased as Israeli and Hamas leaders launched air strikes against each other. Hamas military leaders said Israel opened "the gates of hell on themselves" after a military leader was killed. Israeli Foreign Minister Avigdor Lieberman said, "Every time that Hamas fires there will be a more and more severe response.” Egyptian President Mohamed Morsi added, “I’m warning the aggressors against Gaza – they can’t have any power over the [Gaza] strip”. Today various players in the region are trying to arrange cease-fire talks.

In the U.S., the Federal Reserve reported that October industrial output unexpectedly declined 0.4% (a 0.2% increase was expected) and suggested that the impact of Superstorm Sandy contributed to the weak results. At a financial summit in Atlanta, Federal Reserve Chairman Ben Bernanke said, “that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery”. In addition, President Barack Obama and Congressional leaders met to discuss potential solutions to the “fiscal cliff” debt issues.

Finally, Hostess Brands (the maker of Twinkies and Wonder Bread) filed for bankruptcy and CEO Gregory Rayburn said the firm “will move promptly to lay off most of its 18,500 member workforce” along with closing 33 bakeries, more than 560 distribution centers and 570 bakery outlet stores.


  • Regarding Middle East conflicts, while actions of political and military leaders may not align with the views of its citizens, last week’s actions reinforce concerns that persistent historical tensions may expand into broader regional conflicts.
  • Regarding the U.S., 1) Superstorm Sandy will drive a long-term rebuild and replacement cycle, but short term business disruption will have a negative economic impact, 2) improving bank lending dynamics will require more stable economic growth and 3) global market volatility may continue until Congress and the President reach an agreement for managing the “fiscal cliff”.  
  • Regarding Hostess, against a nostalgic backdrop, this is another bankruptcy resulting from 1) poor decisions by private equity firms, company management and unions and 2) changing consumer demand for its products. There is an obvious negative impact to the firm’s employees, as well as its production and distribution network partners, but some of its brands will likely attract new investors.

Sunday, November 11, 2012

Eurozone Issues and the Fiscal Cliff, Once Again the Focus

Many global markets responded positively when the U.S. Presidential election results were announced last week. However, a few hours later, markets swiftly turned negative when European Central Bank President Mario Draghi said, “Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are now starting to affect the German economy”. In addition, when discussing issues in Greece and the Eurozone, German Finance Minister Wolfgang Schaeuble said "We are on the way to solving the problems step-by-step," but "on the other hand we have weaker growth in the global economy as a whole and that weighs on our ability to grapple with the euro crisis."

Also, with renewed focus on the U.S. Fiscal Cliff, President Barack Obama suggested that spending cuts and additional taxes from high-income Americans (including himself) were needed and said "that’s how we did it in the 1990s, when Bill Clinton was president …that’s how we can reduce the deficit while still making the investments we need to build a strong middle class and a strong economy. That’s the only way we can still afford to train our workers, or help our kids pay for college, or make sure that good jobs in clean energy or high-tech manufacturing don’t end up in countries like China....” In addition, House Speaker John Boehner said, "I'm proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us."


  • Regarding Eurozone issues - with persistent economic stress and continuing tensions among member countries, it is likely that the Eurozone of today will not be the Eurozone of tomorrow.
  • Regarding the U.S. Fiscal Cliff - with policy makers pursuing a mix of 1) “kicking the can down the road” tactics, 2) hardball decision-making and 3) general gamesmanship as the end-of year deadline approaches, global markets will be driven by the degree of confidence in their efforts. We should expect more volatility, and hopefully we do not encounter any unintended consequences

Sunday, November 4, 2012

In The Post "Sandy" Era, the Climate Change Debate Continues

Last week, the high winds, rains and tidal surges of super-storm Sandy affected millions of people living in the northeast coast of the U.S., as well as parts of Cuba, Haiti and Jamaica. As President Obama declared New Jersey and New York “major disaster” areas, climate change, a rarely discussed issue during this year’s political campaigns, became a high profile concern. Supporting commentary included: 
  • New York Governor Andrew Cuomo - “We have a new reality when it comes to these weather patterns; we have an old infrastructure, we have old systems. That is not a good combination and that is one of the lessons I will take from this, personally”, 
  • U.S. Senator Charles Schumer - "There are a group of people in Washington right now who just deny the truth …about what's going on in the atmosphere” and 
  • New York City Mayor Michael Bloomberg - “The floods and fires that swept through our city left a path of destruction that will require years of recovery and rebuilding work….In just 14 months, two hurricanes have forced us to evacuate neighborhoods -- something our city government had never done before. If this is a trend, it is simply not sustainable. Our climate is changing. And while the increase in extreme weather we have experienced in New York City and around the world may or may not be the result of it, the risk that it might be -- given this week’s devastation -- should compel all elected leaders to take immediate action.”
On Friday, the “Climate Security Report" published by the American Security Project (a nonpartisan think tank) said "The effects of climate change on infrastructure will not only be costly to our nation’s economy, they will also make us less secure as a nation," and Christine Todd Whitman, a board member, former New Jersey Governor and EPA Administrator said “Sandy is the second 100-year storm we've had in 14 months in this part of the country. … It tells you that something is changing.” Also note: last year the authors of the United Nations’ 2007 Intergovernmental Panel on Climate Change said that global sea levels could increase by least six feet by 2100, causing problems for many coastal cities (Mumbai, New York City, etc.).

  • The economic impact of this disaster will take months or longer to assess, but the "Post Sandy" era will require replacements and upgrades to a broad set of infrastructures (transportation, power grids, etc.). 
  • The rebuilding process has the potential to 1) drive economic growth, 2) reduce the polarized nature of political discourse and 3) increase the focus on the effectiveness of government rather than the size of government.  

Sunday, October 28, 2012

Mobile Devices, Corruption in China, U.S. Growth and the Baseball World Series; Let's Go Giants!

Last week, dynamics in the high profile mobile technology market included: 1) Apple (AAPL -0.9% for the week) – its earnings report disappointed some investors, and the pricing for its iPad Mini tablet was higher than expected, 2) Samsung Electronics (005930:KS -1.1% for the week) – its strong earnings results were driven by sales of smartphones (including the Galaxy S3) and flat panel displays, but smartphone market growth may slow in 2013, 3) Microsoft (MSFT -1.5% for the week) - released its Windows 8 operating system and a version of its Surface tablet offering, 4) Facebook (FB +21.9% for the week) – its earnings surprised investors with better than expected traction in mobile advertising and 5) as a sign of increasing competition, Apple, Google (via its recently acquired Motorola division), Microsoft and Samsung are major advertisers during this year’s Major League Baseball World Series.

In the U.S., the Commerce Department reported that third quarter GDP grew at a stronger than expected rate of 2% driven by consumer, defense and homebuilder spending. In China, the New York Times reported in “Billions in Hidden Riches for Family of Chinese Leaders” (October 25, 2012) that members of Prime Minister Wen Jiabao’s family had accumulated assets of over $2.7 billion since 2002, and the report “Illicit Financial Flows from China and the Role of Trade Mis-invoicing” (Oct 2012) by Global Financial Integrity said “the Chinese economy hemorrhaged $3.79 trillion in illicit financial outflows from 2000 through 2011. (Note: Last week, China blocked access to The New York Times website.)

  • Regarding U.S. GDP growth, September’s results are positive, but questions to consideration include: 1) when will business-spending trends improve, and 2) are investor expectations for higher GDP growth levels unrealistic? 
  • Regarding China, corruption in that country is not new news, but the scale cited in reports likely exceeds most expectations – investors should proceed with caution. 
  • Regarding mobile devices, competition may provide consumers with increased product choices and lower prices, but investors should be aware of the potential impact of lower profit margins and market share shifts. In addition, the expanding use of Google’s Android operating system is worth tracking – it drives many Samsung and Motorola mobile devices, as well as cameras by Nikon - another World Series advertiser.
  • Finally, with San Francisco leading in the World Series, let’s GO GIANTS!

Sunday, October 21, 2012

Another Week of Global Cross Currents to Consider

Observations from corporate earnings reports last week included: General Electric CEO Jeff Immelt “the overall environment remains challenging “ (GE -2.0% for the week), Microsoft – weakness in PC sales and Europe present challenges (MSFT –1.9% for the week), Google – moving into mobile is less lucrative for the company (GOOG -8.4% for the week), McDonalds CEO Don Thompson "It's been very rare that we've ever seen all of our major markets experiencing the impact of these (shifts in) global economies at the same time" (MCD -4.1% for the week), Honeywell CEO Dave Cote “we are planning for a continued challenging macro environment” (HON +3.8% for the week), IBM - Americas region was soft, Europe and Asia steady and Japan improved (IBM -6.8% for the week).

In China, the National Bureau of Statistics said gross domestic product (GDP) grew 7.4% during the third quarter, down from 7.6% in the second quarter- the slowest rate since early 2009. In the U.S., the Commerce Department said new home building activity increased 15% in August, up 34.8% from a year ago, significantly exceeding expectations.”

Additionally, economists Carmen Reinhart and Kenneth Rogoff, in a Bloomberg article said, “Five years after the onset of the 2007 subprime financial crisis, U.S. gross domestic product per capita remains below its initial level. Unemployment, though down from its peak, is still about 8 %. Rather than the V- shaped recovery that is typical of most postwar recessions, this one has exhibited slow and halting growth. This disappointing performance shouldn’t be surprising. We have presented evidence that recessions associated with systemic banking crises tend to be deep and protracted and that this pattern is evident across both history and countries.”


  • Since publishing “This Time Is Different: Eight Centuries of Financial Folly” in 2009, Reinhart/Rogoff have consistently stated that the current economic recovery is different from typical recessions and will require an extended time period to resolve. 
  • Regarding corporate earnings results, 1) economic weakness, 2) the U.S. fiscal cliff and 3) unresolved global policy issues are among the concerns facing business managers. 
  • Regarding results from Microsoft and Google, information technology demand continues to de-emphasize desktop computers, but the shift toward tablets and smartphones presents business challenges as well.
  • Regarding weak China GDP results and the strength in U.S. home building, positive and negative economic crosscurrents will continue to challenge investors.

Sunday, October 14, 2012

A Debate, A Summit and Hundreds of Earnings Reports to Consider

Dynamics in Europe last week included: 1) the Nobel Peace Prize award to the European Union, 2) Germany Chancellor Angela Merkel’s visit to Greece where she said “These problems cannot be solved with one wave of a magic wand or one measure” while confronting 30,000 protesters in Athens and 3) Standard & Poor’s cutting Spain’s debt rating to one level above junk

In addition, 3rd quarter corporate earnings reporting started with 1) aluminum producer Alcoa cutting its growth forecast by 1% based on concerns about Chinese demand (AA down 4.4% for the week), 2) YUM Brands (parent of Taco Bell, KFC and Pizza Hut) also it concerns about weakness in China, but reported solid results (YUM up 5.2% for the week), 3) Wells Fargo surprised investors with weak results (WFC down 4.5% for the week) and 4) JP Morgan Chase CEO Jamie Dimon said the U.S. housing market had “turned the corner” (JPM down 0.11% for the week).

Also, it was notable that shares of Apple dropped 3.5% for the week as research firms IDC and Gartner Group reported that 3rd quarter personal computer sales declined 8%.

This week, a much broader set of companies sharing their results and forward outlook will include: Abbott Labs, American Express, ASML Holding, Baker Hughes, Bank of America, BlackRock, Citigroup, Coca-Cola, CSX, Danaher, eBay, General Electric, Goldman Sachs, Google, Halliburton, Honeywell, Intel, IBM, Johnson & Johnson, McDonald's, Microsoft, Morgan Stanley, PepsiCo, Philip Morris, Schlumberger, Tata Consultancy Services and Verizon.

  • Regarding global policymakers, as they navigate their countries through once in a lifetime economic and political challenges, it is likely that “kick the can” policies will confront the forces of the financial markets.
  • Regarding earnings season, some investors expect companies to reduce forecasts and believe this information is “factored into the market”. However, a weakening trend is likely not as “factored in” as these investors may think.
  • Regarding Apple, the IDC/ Gartner Group data supports the market shifts to tablets, smartphones and cloud based computing – but how will Apple’s business model address an environment of increasing competition?
  • Finally, remember that 1) earnings season is a time to listen and learn and 2) many complex dynamics drive the direction of financial markets!

Sunday, October 7, 2012

On U.S Jobs, Growth and Jack Welch's Twitter Rant

On Friday, the U.S. Department of Labor provided its September employment report that included: 1) payrolls increased 114,000 - slightly better than expected, 2) unemployment dropped to 7.8%, and 3) the labor force participation rate had not improved, remaining at 63.5% - the lowest since Sept. 1981. 

In response to the news, former General Electric chairman/CEO of Jack Welch went viral with the following tweet "Unbelievable jobs numbers..these Chicago guys will do anything..can't debate so change numbers" (Chicago is President Obama’s hometown). Defenders of the report’s integrity included Bureau of Labor Statistics economist Steve Haugen who said, “The data are not manipulated for political reasons. I've been involved in the process myself for almost three decades. There's never been any political manipulation of the data, period.” Contributing to a confusing U.S. economic picture are improvements in consumer confidence and home loan applications, but a decline in factory orders during August – the 5.2% drop is the largest in three years.
Separately, in “Is U.S. Economic Growth Over? (September 2012), a provocative report by economist Robert Gordon of Northwestern University, he suggests that the U.S. standard of living will continue to benefit from innovation but more slowly than in the past, with headwinds including 1) the dynamics of globalization and the Internet; 2) cost inflation in higher education and poor secondary student performance; 3) environmental regulations and taxes; and 4) consumer and government debt. He also highlights that “Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living.”
  • Regarding U.S. jobs, debates will continue on this topic during the presidential campaign, but the labor participation rate remains very problematic for the economy.
  • Regarding Jack Welch, his tweet is entertaining and cranky, so let’s move on.
  • Regarding Gordon’s report, it makes several good points, and we should remember that productivity improvements and population growth are fundamental economic drivers. Investors should continue to seek opportunities that benefit from these dynamics, as well as other characteristics such as price/valuation dislocation.

Sunday, September 30, 2012

Sometimes the Stock Market and the Global Economy Diverge

From CNBC anchor Maria Bartiromo: “My observation on the disconnect between what is happening in the economy versus what is happening in the stock market…today (Thursday) the latest GDP report was anemic lowered from a growth rate of some 1.7% growth to 1.3% on top of weak data on durable goods and pending home sales also not so hot… you would not know it from the stock market. They’re all up in the double digits today - greatly aided by the massive stimulus. The worry, of course, is that at some point fundamentals matter. Should you join stocks and not fight the Fed, rather than investing on the fundamentals like earnings growth, jobs, and economic growth? Make sure your eyes are wide open as we enter the third quarter (corporate) reporting.”

In Spain: Facing continued economic weakness, a majority of citizens in Catalonia (which accounts for about 20% of Spain’s economy) want to separate from Spain, and a review of Spain’s largest banks found that 7 out of 14 failed a stress test – along with a large but expected €60 billion ($76 billion) funding shortfall. Now the question is – will Spain ask for a bailout from the European Central Bank?
In China: The high profile and politically distracting Bo Xilai scandal (which included taking bribes, sexual misconduct and his wife murdering a British businessman) resulted in his removal from the Communist party leadership. Also, a dispute with Japan over islands in the East China Sea and concerns about economic slowdown add to market uncertainty. Notably, China’s Xinhua news agency announced that a major political transition process would start November 8 at the 18th National Congress of the Communist Party of China (this gathering of more than 2,200 delegates was last held in October 2007).

With market sensitivity increasing, news items can trigger strong and abrupt market moves (such as Philadelphia Federal Reserve President Charles Plosser’s concerns about QE3 that pushed markets sharply lower on Wednesday). Also, market dynamics may become more dependent on corporate profit growth trends, consumer confidence and the actions of political leaders as stimulus efforts likely enter a stage of diminishing returns. Hopefully, the U.S. elections on November 6 and China’s transition process (starting November 8) will help reduce economic uncertainty and political paralysis.

Sunday, September 23, 2012

Where Does the Economy Go From Here?

After massive stimulus efforts by global central bankers in recent years, many asset prices have increased and credit markets are calmer, but economic growth and employment trends remain muted. The commentaries below are worth considering as we assess – “where do we go from here?”

Howard Marks – Chairman of Oaktree Capital Management – a $78 billion fund (Memo to clients - Sept. 11, 2012)
“The world seems more uncertain today than at any other time in my life.” and “Economic growth doesn’t just happen. Its vigor depends on a combination of population gains, a conducive infrastructure, positive aspiration and profit motive, advances in technology and productivity, and benign exogenous developments. In many ways and to varying degrees, I think the future for these things in the U.S. is less good than it was in the past. The birthrate is down; our infrastructure is out of date; it’s uncertain whether technology can add as much to productivity in the future as it has in the recent past (but perhaps it always is); and mobility up the income curve has stagnated.”
Richard Fisher - President Federal Reserve Bank of Dallas (NYC Harvard Club Speech, Sept. 19, 2012)
"Nobody (at the Fed) really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course.” and “ Nobody—in fact, no central bank anywhere on the planet—has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank—not, at least, the Federal Reserve—has ever been on this cruise before” and “One of the most important lessons learned during the economic recovery is that there is a limit to what monetary policy alone can achieve. The responsibility for stimulating economic growth must be shared with fiscal policy. Ironically, and sadly, Congress is doing nothing to incent job creators to use the copious liquidity the Federal Reserve has provided”
Full text at

After significant positive moves from the market bottom in 2009, uncertainty continues and economic headwinds persist. While there are suggestions that the recent rally can drive the markets into “escape velocity”, prudent expectations for economic growth and investment returns are likely warranted.

Sunday, September 16, 2012

After Another Plan from the U.S. Federal Reserve...

On Thursday, the U.S. Federal Reserve Chairman announced plans to provide more stimulus because: 1) it was concerned that the economic recovery may be at risk and 2) U.S. employment trends need to improve. This third round of quantitative easing (QE3) promises to 1) keep interest rates low until at least the middle of 2015 and 2) take the unprecedented step of pursuing open-ended stimulus efforts (often interpreted as “printing money”) until the employment situation “substantially” improves. 

On Friday, investors confronted both positive and negative news as:August industrial production unexpectedly declined by 1.7%, with weakness in automotive production and other manufactured goods and 2) consumer sentiment improved during August with the Thomson Reuters/University of Michigan index unexpectedly increasing to 79.2 from 74.3. Against this backdrop, risk assets such as equities and commodities had strong positive moves, while stress in many credit markets continued to decline. 

At the same time, broad debates about the Fed’s unprecedented actions are focusing on topics such as: 1) does the Federal Reserve have special insights into increasing economic weakness, 2) are its actions politically motivated to assist in President Obama’s re-election and reduce Chairman Bernanke’s chances of losing his job and 3) does the Fed have the capacity to improve employment trends?


While the Federal Reserve hopes to reduce the risk adverse behavior of consumers, business leaders and lenders, the open-ended and unprecedented nature of its actions may also introduce more uncertainty into the markets. Regarding the potential to improve employment trends, with many businesses continuing to spend on new equipment and software to improve operational efficiencies, rather than hiring new employees, it seems that fiscal policy (by Congress), rather than monetary policy (by the Federal Reserve) may be a more constructive approach (assuming Congress can get its act together). Regarding political motivations, this is a presidential election year – everything is political. Regarding the tone of the markets, this week’s actions by the Fed may continue to improve the mood among investors, but let us not assume that “open-ended stimulus” also means “no risk investing”.

Sunday, September 9, 2012

After Another Disappointing U.S. Employment Report .....

On Friday, the U.S. Department of Labor reported August data that included:
  • Payrolls increased by a lower than expected 96,000,
  • Unemployment dropped to 8.1%,
  • Labor force participation rate (people either working or looking for work - 16 years and older) dropped to 63.5% - the lowest since Sept. 1981,
  • 368,000 people left the workforce and
  • Percentage of adult males in the labor force dropped to its lowest level since 1948.  
With the national political conventions over, job growth is now the number one topic confronting President Obama and Mitt Romney as they move toward the November 6 presidential election. For investors, the focus this week is - will the U.S. Federal Reserve announce additional stimulus in response to the weak employment data? 
  • Regarding the presidential campaign, an already close contest just became closer. With voters increasingly skeptical about Washington politicians, each candidate must now motivate “swing voters” to: 1) swing in their favor and 2) show up and vote on Election Day. 
  • Regarding the markets, while investors are hoping for additional stimulus actions by the Fed, there is increasing concern about the effectiveness of its efforts to improve the overall economy. 
  • Bottom line: markets may trend higher, but they may do so with significantly less investor conviction.

Europe's "Super Mario" Draghi Will Do "Whatever It Takes" to save the Euro

Earlier this summer, European Central Bank President Mario Draghi said he would do “whatever it takes” to save the Euro. This past Thursday, he said the ECB would buy the sovereign bonds of troubled Eurozone nations to address “short-term distortions in financial markets”. However, countries seeking assistance must agree to economic policies developed by the International Monetary Fund and other European authorities.

The actions of Mr. Draghi and the ECB are only one-step toward fixing the Eurozone’s problems, but it is a positive step. Concerns remain about: 1) Greece’s viability as a Eurozone member, 2) whether countries such as Spain and Italy are comfortable with the terms of ECB’s approach and 3) how supportive is Germany toward these efforts. For the moment, the Eurozone is not on the verge of a meltdown and most global markets had strong positive moves on the news. Time (and significant ECB funding) will determine if this effort is sustainable.

Sunday, September 2, 2012

Fed Chairman Bernanke Shares His Concerns about the U.S. Economy

Last Friday, U.S. Federal Reserve Chairman Ben Bernanke spoke at the Jackson Hole Economic Policy Symposium, an annual gathering of policy experts and academics. Below are selected excerpts - the complete text is at

  • On U.S. economic growth:  “Key sectors such as manufacturing, housing, and international trade have strengthened, firms’ investment in equipment and software has rebounded, and conditions in financial and credit markets have improved” but “the economic situation is obviously far from satisfactory and labor force utilization remains at very low levels.”
  • On the housing market: "Although the housing sector has shown signs of improvement, housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle.
  • On challenges facing Federal, state and local  governments:  “State and local governments still face tight budget situations and continue to cut real spending and employment” and at the Federal level “resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity.”
  • On Europe:  “A major source of financial strains has been uncertainty about developments in Europe. These strains are most problematic for the Europeans, of course, but through global trade and financial linkages, the effects of the European situation on the U.S. economy are significant as well.”
The problems in the U.S., Europe and Asia are well documented, but the road ahead remains unclear. With persistent concerns about global growth, short term areas of focus include U.S. employment trends (August data will be released Friday), and Eurozone dynamics (such as - Will German central bank chief Jens Weidmann resign from his post?). September will likely be a period of heightened market volatility.

Sunday, August 26, 2012

As the Apple v. Samsung Litigation Continues, Consider a View from 1994

As these firms litigate tablet and mobile phone design related issues in countries around the world, two decisions came last week: 1) a court in Seoul, South Korea  provided a spit decision and 2) in San Jose, CA  jurors were favorable to Apple, with a verdict that included $1.05 billion in damages (Apple wanted $2.5 billion).  In addition, while Samsung is the named defendant in these cases, it is Google’s Android software platform, used by Samsung and other device manufacturers, that is at the heart of these disputes. (Note: The litigation has not focused on Samsung’s recent offerings such as its Galaxy S3.)

  • In the short term, Apple’s stock may move higher, while Samsung's and Google’s may be lower; but lawsuits and appeals will continue.  As technology companies expand their patent portfolios, debates will continue about whether patent or copyright law should cover software (Europe and other regions favor copyright) and if user interface design and business processes should fall within the scope of patent law at all. 
  • The history of technology innovation is mostly a process of refinement and/or better execution of pre-existing ideas.  For example: 1) several innovations popularized by Microsoft’s Windows and Apple’s Macintosh are based on the Xerox Star - introduced in 1981 and 2) many tablet design concepts were introduced in by Roger Fidler  in 1994  (see  video below), then Director of New Media for Knight-Ridder Inc.  Let’s hope patent wars do not stifle innovation and consumer choice.

The Certainty of Global Uncertainty

Notable commentary last week included:
  • Caterpillar, Inc. CEO Doug Oberhelman  -  “There’s never been a more unpredictable set of tea leaves than right now.  Even in 2008 and 2009, U.S. housing was already dying and had been for two years. We saw that”  and “I don’t think the situation is as grave as it was in 2008, but the uncertainty, the storm clouds are around things that none of us know about – like what will happen with the political situation in Europe”,
  • the U.S. Congressional Budget Office’s updated Economic Outlook suggests if the Fiscal Cliff is not addressed, “fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5% between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9% in the second half of calendar year 2013”  and
  • German Chancellor Angela Merkel - “I want Greece to stay in the Eurozone and that’s what I’m working for."
With mixed economic data and comments by central bankers and policy makers driving market moves, this week’s focus is on an annual gathering  in Jackson Hole, WY - Federal Reserve Chairman Ben Bernanke and European Central Bank President Mario Draghi will speak, as well as the Republican convention in Tampa, FL. Expect more debates on the effectiveness of economic stimulus, austerity and debt reduction efforts.

Sunday, August 19, 2012

As the LIBOR Scandal Expands; Is New York State the New Sheriff in town?

Last week, Benjamin Lawsky, the head of New York State’s Department of Financial Services, announced a $340 million settlement with U.K based Standard Chartered Plc related to improper financial transactions with the government of Iran.  Additionally, New York’s Attorney General Eric Schneiderman issued subpoenas to Deutsche Bank, Citigroup, JPMorgan Chase, Royal Bank of Scotland, Barclays, HSBC and UBS for documents and other communications related to the global investigation into the London Interbank Offered Rate (LIBOR) manipulation scandal.

While the U.S. Federal Reserve, the Treasury Department and the Justice Department often take the lead in these types of investigations, there may be a growing  sense of impatience and timidity with their recent oversight efforts of the  “too big to fail” banking crowd.  Given the broad use of the LIBOR index in setting rates for over $300 trillion of home mortgages, student loans, commercial loans and derivative contracts, any help in cleaning up the LIBOR mess is welcome.  Note: New York State passed the Martin Act in 1921 to expand the attorney general’s powers in financial fraud investigation, which are generally broader than other states and federal oversight entities.  Expect more activity by New York State in this area.

Sunday, July 29, 2012

Can "Super Mario" Draghi and Friends Save the World?

After declining performance by global markets early in the week, on Thursday, European Central Bank Chief Mario Draghi said “the ECB is ready to do whatever it takes to preserve the euro. . . . Believe me, it will be enough” and markets swiftly reversed the downward trend.  On Friday, German Chancellor Angela Merkel and French President Francois Hollande said they are ready to “do everything to protect” the Euro.  Additionally, the U.S. Commerce Department reported that second quarter GDP grew at a weak, but expected, rate of 1.5%.


With most economic data and commentary from business leaders pointing toward a global economic slowdown, any action to reverse the trend is welcome news.  However, prior comments from Eurozone leaders have led to mixed results.  The strong positive market moves last week suggest that expectations are high for how Eurozone leaders will proceed.  Hopefully, their actions will support their words and meet expectations.  Anything less will be unfortunate.

Sunday, July 22, 2012

Flaws, Frauds and the $300 Trillion LIBOR Crisis

As the probe expand globally, after senior executives at Barclays Bank resign and the firm pays multi-million dollar settlement fees for LIBOR manipulation, consider the following commentaries: The Economist – it is “the rotten heart of finance”, Barney Frank – “this is fundamental dishonesty” and “this notion of self-regulation is a mistake”,   Eliot Spitzer  - “this is about as big as it gets in the financial world and goes to the heart of every piece of debt that’s issued to consumers”,  MIT finance professor Andrew Lo - "this dwarfs by orders of magnitude any financial scams in the history of markets",  Elizabeth Warren - "the Libor fraud exposes rot at the core of the financial system", the U.S. Treasury’s Office of Financial Research - “this type of manipulation -- poses significant risks to market integrity and investor trust, and will require continuing regulatory focus”,  Federal Reserve Chairman Ben Bernanke - “the Libor system is structurally flawed,” and “it is a major problem for our financial system and for the confidence in the financial system, and we need to address it.”

A brief primer on LIBOR (London Interbank Offered Rate)
  • LIBOR is an index used to set pricing of between $300 and $500 trillion worth of mortgages, student loans, commercial loans and derivative contracts
  • small changes in the index can impact financial markets and borrowers -  a 0.01% change can have a $30 to $50 billion impact,
  • over 75% of U.S .commercial and mortgage loan valuations are dependent on the index,
  • the rate is not set by market demand, but an “honor system” by bankers and traders at 16  major financial firms – many of the usual suspects,
  • manipulating LIBOR can  help traders make more money and improve their firm’s  financial appearance and
  • emails by bankers and traders related to potential LIBOR rigging are emerging such as  “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.

While the scale of the LIBOR manipulation problem is amazing (the abuses extent back to at least 2007), the discovery of continuing problems in the global financial system and complacency and lack of oversight by regulators and policy makers is no longer shocking.   Perhaps a factor contributing to the long recovery process from a major financial crisis is that it takes time to remove a generation of “bad actors” from the stage.