Professor Elam

Get Hip Get Capitalist

Lately Bono, Simon Cowell, Bill Gates etc have been decrying the terrible conditions in Africa. And the conditions are terrible-but not for the lack of natural resources or creative people.  John Stossel  makes the point that Gates misses in his address to Harvard.  And as Stossel mentions, perhaps Gates would still not get it if he had stayed to get a degree, after all this is Harvard.  Stossel has been championing the cause of common sense in tv spots, columns, and books.  The problem in Africa is rather corrupt governments that make trade and open markets near impossible. All the productive resources are converted into private bank accounts for those in power, the public be damned.  If you have not seen The Last King of Scotland , it is out on video, and that sorry spectacle continues in places like Uganda today.

Capitalism, it works.

Mad Max, Coming to Gaza this Week

Okay this is not about business or accounting but civilization itself.  Victor Davis Hanson  does his usual great job of framing the issue in classical terms. 

Many futuristic films frame life in  quite a dreadful way. Mad Max , the original apocalyptic starring  Mel Gibson, showed a world dominated by greed for the disappearing resource of oil in which marauding bands of thugs would do anything to obtain the fuel. The same sort of thing is in Waterworld.  Kurt Russel's Escape from LA and NY depict those cities as enclosed prisons, a sort of modern day Devil's Island in which the inmates are left to fend for themselves.  Al of these scenarios depict a total societal breakdown.

Hanson makes the point that even among terrorists who seek to destroy society, they need running water and medical services at the end of the day too.  But this is now the problem in the West Bank and Gaza, there is little left to attract or sustain anyone.  Even the terrorists need a clean class of water he notes.  Indeed, the veneer of society is thin, as one could see post Katrina, or even in the lynch mob psychology for  the Duke Lacrosse Players.  As various sites around the world assume Mad Max proportions, where will the civilization emerge to fill that vacuum?

Arrogance at the Top

Jerry Flint nails it again.  He makes the point that you canot cede a market to your competitor and expect to get it back.  And so the US has exited the luxury car market. Yep, Lincoln is fading with nothing in the pipeline, Cadillac is about it, but compared to BMW, Lexus, Audi, Mercedes, I suspect Caddys have more appeal as 40% discounted used cars with low mileage than as new entry  points.  And once the perception about your company shifts, it is darned hard to get it back in the case of Ford or to change it in the case of Wal Mart. 

So if Americans aren't selling much in the over $50 K category, this speaks to why they aren't selling as well in the under $50 K category, folks don't have the brand loyalty they used to and are as likely to go home in a KIA as a Dodge, well what would that be anyway?   As the US makers continue to lose the car market, one has to wonder if GM and Ford won't end up as light truck makers, farming out cars to overseas low cost makers like Tata and Chery.  You can outsource yourself right out of the business, eh?

Psst Wana Buy a Burger Chain?

The passing of Wendy's founder Dave Thomas in 2002 has left the firm looking for a buyer.   You can check out the
Wendy's website.

What's wrong here?  Well the firm is profitable but gee the fast food field is crowded.  Burger King, MCD, Whataburger, Wendy's, Jack in the Box, and now the rise of Subway, what's a firm to do.  How would you use your study of accounting and finance to analyze the value of Burger King?  Perhaps we should start with the  Cash Flow Statement.    Click on the hyperlink, do you see a problem?  Hmm, cash flow is down significantly.  Now how about comparing that to its rivals?  Then we might see why it is for sale.  Economics textbooks tell us that small business lives and dies with its owner. Dave Thomas started the chain and revived it a couple of times.   Wendy's had a big setback in the 1980s when they left some towns altogether, Same thing happened in the late 1990s, and so here we are again.  Not long ago, MCD had to redo itself. In fact i noticed that MCD now has corporate statements of responsibility in the restaurants. It also is running ads about how a Karen King  rose to the to from an entry level position.  This is an effort to dispel the notion that there is no upward mobility. 

At any rate, this is another example of how quickly fortunes can change for a company.  Focusing on Total Quality Management is paramount.

Swiss Raise Rates

I recnetly suggested that it was whistling past the graveyard to ignore the real import of rising interest rates.  Well, now read how the Swiss have jumped on the bandwagon. One does not build a world wide banking system that stands the test of time unless one is a pretty good banker, the Swiss are. And so it is significant (hey I told you....) when they do. This is all part of the world wide rate hikes adjusting for world wide inflation in the shift from financial assets to hard assets. 

Theft by Design

Here is an example of cost cutting unintended consequences. .   Yep, it's our old friends at WMT back in the news again.  WMT publicly announced that it would throttle back on 'minor' shop lifting  to focus on major shop lifting rings.  KA JING!  And so 'minor' shop lifting has been  lifted, so to speak, the WMT 'shrinkage' rate the the industry average.  Seems folks are simply carting goods right out the front door.  And 47% of this is by employees!

It has been said that locks on doors are there to keep honest people honest. One needs only look at this kind of statistics or a newsreel from post Katrina or LA in 1969 to see what happens when we signal the all clear to theives. Which reminds me, the DISD has decided it is just too difficult to prosecute the 600+ credit card 'theives' in its system. What message does this send to all their employees? 

We wil  continue to discuss ethics in class and what happens when good folks are allowed to go bad....

Critically Thinking about Reading

I urge students to read different sources about the news.  Then of course, one has to conclude who knows and who does not.  Here is an example of what I term an Alfred E. Neuman What Me Worry  column.  Alfred you will recall is the fictional character of Mad Magazine.  This particular article assures the reader that higher bond rates are nothing to be concerned about, after all they have been much higher in the past.  And if rates are up, it must mean that there is more demand for money, ie, the economy is stronger.

Okay here is the very big picture, and this is where technical analysis comes in.  At times we have MAJOR turning points in market. The last one, and I mean MAJOR, was in 1981-82.  That was a MAJOR shift from the domination of hard assets, commodities, to financial assets. For years inflation had run wild causing the prices of hard assets, real estate, gold, silver, oil. to rise in US Dollar Terms.  Once Paul Volcker broke the back of that trend with really high rates, money started to flow into financial assets, stocks.  In short, if you can make 14% in bonds for doing nothing, which you could then, why invest in stocks.  Mind you no one had heard of Warren Buffet at the time. The DOW Jones Industrials were a mere 800, which considering they peaked at 390 in  1929 was not much of a recommendation for stock market investing.  But finally the DOW broker 1,000 adn then 2,000, note it broker 1,000 for the first time in 1966.  This is historically important, from 1966 to 1983 you would have made zilch nothing nada had the Dow Diamonds existed for you to invest in. 

Now the DOW is 13,500 or so.  Oil bottomed at $12 in 1998 and gold at around $300 in 2001.  Now oil is $65 and gold has been over $700.  My point is that commodity investing is coming on big time.  Stocks are on borrowed time, as now interest rates are surging.  Why?  Well several things including
A weak dollar due to too many US overseas commitments and rampant borrowing
Come to think of it that IS the reason, coupled with the perception that the US Govt is not going to do anything about it, and so the prices of commodities rise in relation to the ever weakening US dollar to maintain their purchasing parity.

I will continue to post some graphs and discuss this over the next few days.  But basically it means it is time to lighten up on stocks, move to short term bonds, and keep an eye on commodities.

To learn more click here for Chart School.   This is a great tutorial on technical analysis.  More later, stay tuned.

Most Mergers and Buyouts End Badly

I will likely be at the British and European Car Day  at White Rock Lake this Sunday. but then I have learned my lesson, look don't buy!  Sadly Ford is coming to grips with its lesson.  Now Ford want so  sell its Premier Auto Group , which has only been premier in losing money.  This is an interesting article as it notes that the remaining three brands will likely split Land Rover/Jag and Volvo since Volvo shares little with the other two.  The article also notes that Toyota has never made such a mistake. Instead of buying others, launched Lexus and Scion both of which are big money makers.  Gee Ford wishes they could say that as does GM about buying Saab.  And then there was BMW's disaster with the Rover Group, not the Land Rover, in which they lost $3B.

So Okay Professor now relate this to the class.  Well you will recall that Dr. Deming says it is important to be focused on the long term results of the company's operation, which ,means you don't wander the landscape buying someone else that does it all a different way.  Jag was not only different, it lacked quality, was a living antique, and lost money, oh did I mention the British union? Toyota on the other hand did it right.  The one exception lately was the takeover of Nissan by Renault, who would have guessed. 

Meanwhile it appears that Rupert Murdoch may well take over the Wall Street Journal.   Years back this would have been impossible, and indeed Murdoch is really paying above market. Can he make it work, along with his planned competitor to CNBC?  Again the point is that everyone can be for sale if the buying hedge fund has enough money. 

Attention Stock Market Shoppers, Economy Getting Weaker

Here are a couple of articles to check out. First is The Real Cost of Offshoring in B/W.  Seems that the nubmers for GDP are not being counted right.  Next is a story I cannot relocate on finance.yahoo but the upshot is, M-1 the ready supply of money is declining.  The theory of M-1 and how ready money drives the economy got Milton Friedman the Nobel Prize back in  the 1970s and put the Univeristy of Chicago on the map so to speak.  The idea is that if money supply is exapnding, everyone has more of it, gee.  And if money supply is contracting, gee, things are not going well. 

The rise in interest rates is real.  Yes rates backed off today but I suspect that this rise is for real and will eventually draw money away from the stock market.

More on Design

Well here I go again, stressing the importance of DESIGN. Check out this article on the design of the new malibu. GM does not have as much money to spend but needs to compete in this market, will their design win folks over-check this one out.  And by the way, have you noticed that great tv ad for the new I Phone?  Analysts have Apple stock going even higher, no wonder, it is a great design, the thing that has propelled AAPL stock ever upward.