Storms Gather on Housing Front ... Right?

The New York Times reported new homes sales at their slowest pace in more than seven years, with median prices down 7.5 percent from the previous year. Though, interestingly, when you look at the actual Commerce Department Report, the numbers are hardly written in stone:

Sales of new one-family houses in August 2007 were at a seasonally adjusted annual rate of 795,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.3 percent (±12.4%)* below the revised July rate of 867,000 and is 21.2 percent (±9.0%) below the August 2006 estimate of 1,009,000.

Those margins of error at a 90 percent confidence level are pretty big; in comparison with the revised July rate, the potential error is even larger than the estimated difference.

So, the Times is comparing a reasonably uncertain estimate to more accurate past numbers. And then other questions come up, as well. Is the drop in home sales also due to builders expecting a slow-down and scaling back their work levels? Why not look at the median number of months for sales apparently jumping from roughly 4 in 2005 and 2006 to the current 6? This is an example of the problem with reporting on economic data - it takes knowledge and effort to dig in and understand exactly what it is saying.

For those who'd like some perspective on the numbers, Investors Business Daily has a couple of informative graphs that show trends (at the bottom of the page).

GM and Faltering Leadership

On NPR last night, I was listening to the latest report on the negotiations between GM and the UAW. On the surface, leadership of the two organizations were claiming success, but it was interesting to hear the interviews with UAW members. One said that over and over managers had asked them how to make things work more efficiently in the plants and what they needed to do better - and management never took any of the suggestions. Another member was so very angry at having to give in to the degree they did as upper management continued to be paid millions, even as the company continued to falter. And although it's common to try and lay the blame for GM's problems at the feet of the union members, I don't buy it for a second. Yes, there may be some problems, but labor prices are only that high per car when a company loses as much market share as GM has over the years for not delivering what customers really wanted.

If you've ever had people working for you - or ever had a family or been involved in a volunteer organization - it's hard to ask people to sacrifice. The only way to gain the moral authority to do so is to to make sacrifices yourself. I think GM management has totally blown the chance of being leaders. You can't keep asking for concessions while protecting your own interests. Why not drop all management bonuses until the company can sufficiently turn around? Why don't the CEO and CFO take pay cuts? If you're already worth millions because of compensation in previous years, you don't have as much pressure. (And here's an interesting look Forbes took at Wagoner's compensation in 2005.) If Wagoner at least had done taken a cut, he would have gained enormous credibility among the very people who have to make work any plan he creates. Instead, GM, as has happened in so many other companies and industries, decided to stick with business as usual - as for concessions from employees and not match it to recognize that everyone is in the same boat. And so, I wouldn't expect anything other than business as usual in all other aspects.

Greenspan on the Daily Show

Alan Greenspan has been making the rounds for his new book, and one stop was to see Jon Stewart last week. At one point during the conversation, he made what I thought was a fascinating statement - that in the last 50 years, he hasn't seen a real improvement in the ability to forecast what the market was going to do. The problem is that people either feel euphoric or fearful, and then make decisions based on emotional states, not on reason.

Anyone who has a solid grasp on marketing could have made the same point, but it sounds different when someone who has spent so many years trying to use mathematics to grasp mass behavior comes out and says so.

Another Variation on Outsourcing, and Security/Reliability

I've mentioned the concept of insourcing - when outsourcers outsource back to the country of the client company. But the web of what outsourcing means has become more complicated, according to this story in the New York Times:

In May, Tata Consultancy Service, Infosys’s Indian rival, announced a new back office in Guadalajara, Mexico; Tata already has 5,000 workers in Brazil, Chile and Uruguay. Cognizant Technology Solutions, with most of its operations in India, has now opened back offices in Phoenix and Shanghai.

Wipro, another Indian technology services company, has outsourcing offices in Canada, China, Portugal, Romania and Saudi Arabia, among other locations.

And last month, Wipro said it was opening a software development center in Atlanta that would hire 500 programmers in three years.

It had to happen. You can't keep piling work up in one corner of the world because of inexpensive labor and expect those costs to remain low. Demand has kicked up, and supply will follow. So the outsourcers try to find cheaper labor, or workers with specific skills not available at home.

However, this should create some additional concerns for the corporations that are outsourcing the functions. Every layer of removal, particularly to a different time zone, complicates management of the process. Every additional stage opens another security front to prevent loss or attack. Additional complication means greater chance that the function will falter or fail.

Of course the outsource vendors will say that there is no difference and that they are in complete control. But that would be like trusting a food ingredient provider that outsourced its own manufacturing to China, in light of the problems that have appeared in that sector. It may be that things are fine, but the company will need to spend the time, money, and attention to be sure that is true - and all that has to get factored into the costs of "saving" the money.

Mattel Admits to Scapegoating China on Product Problems

According to the weekend Financial Times, Mattel had to apologize to "the Chinese People" last Friday. The company had been blaming its series of toy recalls this year on Chinese contractors:

The apology was in stark contrast to recent comments from Robert Eckert, Mattel’s chief executive. In testimony to the US Senate last week, he suggested that the fault for the group’s recent product recalls lay with outside contractors. “We were let down, and so we let you down,” he said.

The story that Mattel had told involved the presence of lead paint, but the vast majority of recalled units - 18 million - suffered from design flaws.

In a later statement, Mattel said that some reports had “mischaracterised” its comments and said it had “apologised to the Chinese today just as it has wherever its toys are sold”. But the statement made clear that it was also apologising to the country and its reputation over the magnet-related recalls.

Oh, what a mess Mattel has made. Just a month or two ago, the company was receiving accolades for its prompt attention to the problems and its handling of the public relations crisis. Guess they can toss the good work out the window - it was nothing but misdirection. I can remember at one point seeing the numbers involved in one recall and wondering why the bulk seemed to be about design problems, but I didn't follow up on that, and shame on me for doing so. But where were the reporters who were actively following the story for their news organizations? There appears to be a numbers phobia in the business press, which is disturbing considering just how much of business is related to and described by numbers.

SAP, Market Expansion, and the Eradication of Value?

The Wall Street Journal had a story on Wednesday about SAP placing strategic bets on "simplified and cheaper business software aimed at small and midsize companies." The story went on to discuss how the company's move into Web-based software was a "product of necessity." That is no surprise to anyone who has watched the high-tech market for longer than three or four years. Actually, I remember writing about this trend some years ago.

SAP's reason is an encapsulation of a problem facing all businesses. No matter how large markets are, they ultimately remain finite in size. Enterprise software companies have come up against this with significant force, because high tech is a sector in which investors get drunk on the prospects of growth.

You can only grow so far, and eventually you have to wonder whether settling for solid profitable operation over the years should be enough. Companies often try to cheat the limits through acquisition, but I've wondered whether this isn't largely a form of business delusion. More and more acquisitions turn into more and more sales, and more earnings, but do the returns per dollar of stock invested really improve? Say that you own shares of companies A and B, both of roughly equal size, and then A buys B. You'll get a bit of a premium on the B shares, but what happens after? A's price goes down some, and eventually recovers. So you've gone from two companies with earnings to one company with earnings, and yet you don't get anything close to the combination of the stock prices. If you've been getting a dividend, it's probably not going to rise precipitously. The acquiring company will claim that the purchase is necessary to stay competitive, but the chances of the results not providing the expected financial returns is, from the research I've seen, upwards of at least 70 percent. Could you reasonably say that the entire M&A game is often a mechanism to remove shareholder value?

Corporations Waste Enormous Money Every Day

I've been dealing with a number of clients who have been slow in payment. Two of them - one a global publisher, and the other a global telecommunications firm - offer experiences that suggest just how entirely warped most businesses are.

Let's start with the telecom company. It took two months to get a PO, which I received after finally finishing the assignment, which I was supposed to bill in pieces over the time I did it. Two or three times they had me go back and change the contents of the document I had sent to establish the purchase order. Now we're going through multiple revisions of the invoice - which the company had failed to process at all when I submitted it back in early September, and then needed one thing and another added.

Keeping resentment over waiting for income at bay for a moment, let's pretend, for argument's sake, that I was to receive $5,000 for the word. Now let's presume that the company wanted to stretch its payables, effectively making money off the float (the interest it sees on cash in hand). Let's even say that they get a total of 60 extra days of use. At roughly 5% annually, that is roughly 0.4% monthly. On $5,000, that would be $40 in their pocket. But how much does this cost to get? Each go around has involved three people on their staff. Being extremely conservative and saying that each touch of the issue meant an employee spend $25 of company money in time invested, that would be at least 3 rounds total times 3 people times $25, or $225. So, even with the most manipulative of intent, they would be losing $185, or 3.7% of the total of the invoice. The company could have sent a form stating how invoices needed to be formatted, paid on time, and gotten the equivalent of several percent discount.

Another example on the payment front. The publisher has offices in New York. They sign off on an invoice and send it to Midwest office. One or more people sign off on it there and send it back to New York, when then sends it to New Jersey to process a check. The accounting department mails the check ... back to New York, which then forwards it to me. Now, using a more realistic corporate cost of time of $50 per handling, that's $200 to send one check. How hard would it be to use automatic routing? Could it save at least half that cost? I would think so. On the same $5,000 payment, that would be a loss of 4 percent.

Corporations complain loud and long about documenting their controls for Sarbanes-Oxley. And yet few, if any, have used what they have learned to make things simpler and cheaper. So what is the average company losing in potential annual profit? Four percent? Five percent? More? Whatever the number, I'm betting it would translate into big earnings.

Google Experiments with Primary Election Coverage

According to Newsosaur, Google is running an online publishing project in Australia. Using maps, videos, web gadgets, and more, the Australia Votes site will let people get election news with a perspective that neither newspapers nor broadcast media offer. :

Australia Votes signals a significant strategic shift on the part of Google to become a primary web destination, as opposed to restricting itself to its historic role as a supplemental, though highly valuable, research tool. As such, it eventually could compete head to head with not only the likes of CNN, the Washington Post and all the other media biggies but also with the tiniest of tiny weeklies.

As I've been saying for a while, Google has all the characteristics of a publisher, not of a simple advertising medium, and is willing to be inventive in ways that traditional media don't appear to be, or possibly are too fossilized to approach:

The Google election project, an elegant mashup of Google’s arsenal of search, mapping, video, widget and other technologies, is a preview of how all but the most technologically recalcitrant consumers will expect to get political – and many other types of – news in the future. In addition to delivering a wealth of well-packaged election information and interactive tools, Google has created four content-pushing widgets and a number of ways for users to express their opinions via forums and home-brewed video.

News organizations have to be sweating at this point - but then again, so does Google. It can profit mightily from pasting links to content, and it is starting to license wire content. But the company could easily become a commodity purveyor, just as many newspapers are today. This may be one of several initial steps, but don't be surprised if Google starts hiring people to provide its own coverage.

As I've heard through the grapevine, it's already considering doing so in specialized areas. After all, if you know so much about your users and you want to keep them interested, then you have to be sure they get the content they want in the areas that attract them. But what if you aren't finding the depth of coverage necessary, particularly in niche topics, and you've got gazillions of dollars? It's cheap enough to hire experienced journalists who could provide coverage, and would probably relish the chance to dig into something more than "regular" media often allow. I wouldn't be surprised to see the beginning of "Google Coverage" - whether feature articles, video, or commissioned blogs - within the next 18 to 24 months.

Greenspan and Trusting the Market

In a 60 Minutes interview, Leslie Stahl asked former Fed chairman Alan Greenspan whether he knew what was going on in the sub-prime lending market. His answer?

While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn't really get it until very late in 2005 and 2006.

Huh? An economist with his experience didn't understand that lenders will be happy to take outrageous risks if they think they can sell off the loans and not have to deal with the defaults? It's not as though no one brought it up. According to the CBS story, former Fed governor Ed Gramlich said that he had proposed examining the lending practices, but that Greenspan rejected the idea. Apparently that is the case:

"I thought that…we would not be capable of doing what he was suggesting," Greenspan says.

"But if sitting on them, taking some regula-what…" Stahl asks.

"Well, I think not," Greenspan replies.

"Even looking into it?" Stahl asks.

"It's nothing to look in to particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," Greenspan says.

So, he knew they were going on. I cannot - simply cannot - believe that Greenspan couldn't see the writing on the Wall Street, not after warning about irrational exuberance. No way to check on this? Not even with all the intellectual power and computing systems that the Fed has? Couldn't find a way to do some random checking on credit scores that were probably part of the lending record versus the size of loan and verified income? No way to see how many of the loans depended on lenders not verifying income, maybe? I don't believe it. This wouldn't be rocket science. and then there was this interchange:

"Just remember we raised interest rates at every meeting from June of 2004 till I got out of office," he says.

"You raised rates in 2004. But only after you held interest rates at historically low level for three years, while the bubble, the housing bubble was forming," Stahl points out. "And that you had 13 rate cuts in that period of time."

"It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low," Greenspan explains.

Unfreeze the banking system? This sounds dubious. American companies had clearly over-invested in the 1990s and it would take them years to digest all that spending. Low interest rates weren't needed for investment - they were needed to get consumers to spend.

Perhaps Greenspan truly believed in the market the way I see many treat it, almost as a form of religion. Free everything up and it will all work out. I somehow don't think he's try to rig the system to let certain people take advantage. When asked about the major American car companies, he replied, "I would suggest they focus on selling, creating better cars for their customers," rather than depend on lowered interest rates. Perfectly sound advice. They aren't selling because they aren't producing products that consumers want most.

But there's a problem with the market-cures-all vision of unfettered capitalism. Depending on a market isn't relying on some invisible, rational, impartial mechanism that evens out the bumps. It means trusting to human greed, fear, and emotional goads that cause people to do the most unbelievably stupid things. Lending large sums at high interest rates, which will only go up, to people who will be unlikely to maintain payments is stupid business. It's hoping that enough of the money will come in to cover the losses. This isn't business; it's gambling.

As happens with most such decisions, what people do is rationalize why what they want to do really makes sense. Maybe that's what Greenspan was doing - hoping that things would work out as they were "supposed to."

SEC Slaps Wrists Over SOX Violation

According to the Associated Press, the Securities and Exchange Commission "charged 69 accounting firms and partners on Thursday with violating a landmark 2002 antifraud law by auditing public companies without registering with the board that supervises the accounting industry."

According to Sarbanes-Oxley, accounting firms and accountants that audit public companies must register with the Public Company Accounting Oversight Board (PCAOB), part of the SEC that provides oversight to the accounting industry:

Without being registered and subject to inspections by the board, the 69 accounting firms and partners around the country together issued audit reports for 53 public companies from November 2003 to October 2005, the S.E.C. said.

Of these, 28 firms and 22 partners were censured by the SEC but didn't have to pay any fines. There are still cases pending.

My question is why have such regulations when you're not going to strictly enforce them when it comes to the very businesses that are supposed to provide the reviews that help investors know if things are on the up and up? Are they claiming that they can provide adequate audits if they can't even get things together enough to register as the law says they should? If slapping wrists is all that happens, then my bet is on yet more problems with public companies going forward. Why not, when there don't seem to be serious consequencies?

Falling Dollar and Credit Crunch

I've mentioned the credit crisis a number of times in this blog, and now we have another consideration: the state of the dollar. According to the New York Times (and other outlets as well, I'm sure), the dollar fell to a new low point against the euro:

Currencies are influenced by many factors, chief among them expectations for interest rates and inflation. If rates were to fall in the United States and remain unchanged in Europe, as many investors are expecting, traders will probably bid up the exchange value of euros.

It makes sense. As interest rates drop in the US, you get less bang for your literal buck, and you want to hold currency that has greater strength, because there's greater demand.

But forget about interest rates going forward, for a moment, and consider what happens to existing debt. As the value of the dollar falls, people and institutions in other countries find that the notes they hold keep dropping in effective value in their home currencies. Instead of paying the equivalent of X euros or Y yen, suddenly you're getting some percentage less. US investors don't see that particular effect as much because they are still paying for things in dollars.

Unfortunately, much of what we consume in this country is imported. As the dollar drops, the imports become more expensive. Consumers need more money to do the same purchasing, and they're not getting it from credit, so they buy less. That slows the economy and, I'm guessing, weakens the dollar even more, because people internationally are less interested in being tied to our currency. That acts as a positive feedback loop, helping to increase the effect.

All in all, I have a funny feeling that the business climate over the next couple of years is going to be much rockier and difficult than I hear most people in business admitting. Maybe I'm wrong, or maybe they don't want to come out and say what is actually happening.

RFID Implants and Cancer

In a rush to prove their concepts and make money, companies often overlook information that is bound to return and blacken their eyes. The Associated Press reported this weekend that animal studies from the 1990s raised questions of whether RFID chips, implanted under the skin, could cause cancer:

"The transponders were the cause of the tumors," said Keith Johnson, a retired toxicologic pathologist, explaining in a phone interview the findings of a 1996 study he led at the Dow Chemical Co. in Midland, Mich.

Leading cancer specialists reviewed the research for The Associated Press and, while cautioning that animal test results do not necessarily apply to humans, said the findings troubled them. Some said they would not allow family members to receive implants, and all urged further research before the glass-encased transponders are widely implanted in people.

Share prices in VeriChip, which is in the business of creating microchips for identifying people, fell more than 11 percent yesterday, according to a New York Times article. What is amazing, to me, is the following section:

VeriChip said that it had not been aware of the studies cited in the report, according to the article, but both the company and federal regulators said yesterday that animal data had been considered in the review of the application to implant the chips in humans. They said that there were no controlled scientific studies linking the chips to cancer in dogs or cats and that lab rodents were more prone than humans or other animals to developing tumors from all types of injections.

Let's set aside, for the moment, the question of whether the RFID chips are actually dangerous or not. (I'd think that a cell phone would generate similar radio signals at significantly higher power levels.) Either VeriChip is lying about not having seen these studies, or it was grossly incompetent in not researching thoroughly enough to find them and consider how they might affect the company's strategy. In either case, this is a major business screw-up at the highest levels, and the ones paying for it are currently the investors.

Even if management decides to can a few people for not having turned up the information, did it commission an external review to find every potentially problematic study? If not, why not? If it did, will the company make that report public? The only way out of such problems is to come clean, and quickly. It will be interesting to see how VeriChip's management handles this. So far, it hasn't looked promising.

AMD NDA DOA

I understand why businesses want to control information, both from a competitive information view as well as marketing. But there are times that a company squeezes so tightly that it bursts a blood vessel. That has happened with chip maker AMD. Apparently AMD was holding some event in Singapore and had a non-disclosure agreement so draconian that a journalist walked out of the event and spilled the beans. According to Techarp, the agreement required the journalist to "send any stories to the vendor before his newspaper can publish it."

AMD categorically denied it, and now Techarp has spoken with the journalist who noted that the terms technically required him to send in any article in advance to AMD for approval:

The PR person even had the temerity to say that it was "just paperwork and that everyone, be it a president or prime minister, had to sign this document". That was when Don walked out.

If AMD PR people think they have done themselves any good, they are fools. They've antagonized the press in a way to make it hostile, the story has hit Slashdot.org (meaning tech people all over the world are reading it), and they haven't gotten any better control over their "story" (the PR jargon for what is going on).

There was a time when people in PR generally first spent extended periods of time as journalists. This let them understand the mindset, including how to craft stories to be of interest to the press, and avoid the major pitfalls. Perhaps corporations should stop recruiting people right out of college and look, instead, for those who have spent time in the trenches and have something more to offer than vague corporate-speak and a lot of hand-waving.

Apple Bails on iPhone Pricing

There are signs that Apple's long-held premium pricing approach may have gone over the top with the iPhone. The company is dropping a low-end model, cutting the price of the 8GB one by as $200 - and for those who bought early, missed the price break, and got angry with all the documented problems (non-replaceable batteries and others), there's a $100 store credit.

But you've got to wonder what's going on - at least, I do. Apple would never have cut the price if it thought it could continue to get the premium, particularly through the holiday buying. Particularly in high tech, you drop prices to clear out an old version and make way on store shelves for a new one, or because, somehow or other, you've really screwed up. I think it's clearly the latter, in this case. The move will tick off the early buyers - who might not mind if some significant period of time had passed and they had a chance to upgrade (and if a $100 Apple store credit could actually buy much of anything) - and it starts messing with Apple's positioning as worth the extra money.

This isn't going to batter Apple, but it does reveal that maybe someone took the old magic a step too far. Cool is fine, but you'd better also providing people with something of value. How do you think the sense of cool came about in the first place?

Grocery Chain Tests Marketing Concept

The New York Times today has an article on how Hannaford Brothers Company, owner of the grocery store chain, used a one-year experiment with a food "healthy" rating system:

The chain, the Hannaford Brothers Company, said that the program had a major impact on steering purchases in the expansive packaged-food section of the store, including cereals, soups and breads.

Not only is this of general interest to any food company, but it's interesting to see a company actually test a marketing concept. In this case, foods got a zero to three star rating. It worked best with packaged foods, less well with meats, and didn't have a lot of impact with produce, most of which got starred ratings.

Google to Host Wire Service Stories

I've mentioned before how I think Google wants to become a publisher. Now here's a story from IDG News Service saying that Google will directly display wire service stories on their own on the company's own news page, and not via a link to a site of a publisher or broadcaster. In trying to appease the wire services and reduce the law suits, Google has direct relationships with AP, AFP, the UK Press Association, and Canadian Press. (Can Reuters be far behind?)

Now, I've often run into wire stories via links to newspaper sites. Yahoo has not only been doing that for some time, but also directly presenting articles from Reuters and AFP with a combined branding. (I do wonder how long it will be until Yahoo also directly hosts some of the of the other wire services, particularly amid another round of rumors that it is up for sale.)

What I'm sure publishers are quaking about is how this will often cut them out of the loop. Why go to a newspaper's page to find it's running a wire story that you can get elsewhere - and in its entirety, not a cut-down version that the paper might decide to run? Every day Google looks more like a publisher of news, maps, photos, video, audio, books, published patents, blogs, and academic material.

More Debt Madness Upcoming?

I'm on a number of specialty email lists, including one from a major international risk management firm. It ran an opinion piece from a reader who noted something that I hadn't realized: companies have created the same types of security derivatives based on debt for the credit card market as they have for mortgages. This should shake everyone's shoes.

People have been living on credit, at least in the US, as many have noted. Fueling much of their buying has been low mortgage rates. People refinanced, pulled out cash, and made purchases, thinking that higher housing prices would cover their rears. Now that it's ending, and many mortgages are suddenly rising in price, they will start turning to credit cards.

According to this opinion piece, the US has a total of $904 billion in revolving credit debt - mostly credit cards. The UK has $100 billion on plastic. Bank of England data says that British banks have written off $18 billion in bad debt over the last 12 months. Moody's suggests that American credit card companies have seen bad debt jumping by almost a third in one year.

Credit cards are the last refuge of those not making more money who are trying to manage higher costs of living, and that's piling a lot of weight on what appears to be a flimsy structure. If you thought the sub-prime mortgage situation was a fiasco, what do you call what will happen with credit cards? Unmitigated disaster? Or depression?