Professor Elam

Japan Inc.

Sunday Jan 31 2010

 Sony Toyota and JAL are having problems.   Once Toyota got as big as GM it started making the same kinds of mistakes. As the article points out a one part fits all strategy saves money but raises the possibility of Tipping Point across all model lines if the part fails. Which is what happened. 

There is always someone coming up from behind. Woolco is gone, K Mart ate Sears, what good did that do Sears? and Wal Mart is now enjoying a resurgence in price centered behavior. 

Group think is part of the problem. TQM is not about innovation that's for sure. The downfall is quality is trading the quality idea for larger market share. It seems that the reputation for quality goes hand in hand with smaller markets and defense of price. Apple computer and Macintosh stereos come to mind. Trek and Cannondale bikes are not sold in department stores. Stihl power products are not sold in big box retailers. Defending one's product integrity is another piece of the puzzle. 

TCU has improved its academic status in the last ten years. It made the decision to cap enrollment at 7500, the accolades keep coming.  

Humpty Dumpty Had a Great Fall

Sunday Jan 31 2010

the Express News continues its coverage of the fallen wall, and now, the potential for other 'retaining walls' to fall as well. The Northern reaches of San Antonio extend into the Hill country. Many 'lots' are unsuitable for building given the hilly terrain. And so builders simply terrace them by constructing walls. It turns out that many of these walls never got a permit to be built. 

 I am currently reading The Tipping Point by Malcom Galdwell. Gladwell makes the case that small changes can finally bring a big change, remember the camel and that one last straw? In the photo at left the breach in the wall is evident. Not only does this endanger the houses above the wall, what about those below the wall?  

There are well, no telling how many of such walls all over North San Antonio. Now I suspect that buyers will be shunning houses depending on such a wall. Toyota will fix their accelerator pedal problems. I am not sure how this problem will be resolved. 

Again this forms the basis for a good discussion in ethics class.  Who's responsible?

Negligent city inspectors, permit writers

Builders who are less than forthright and careless in procedures, the wall at left did not have an engineers stamp on it, surprise surprise!

Naive home buyers

GM Offers $1,000 for Toyota Trade In Connecting the dots

Friday Jan 29 2010

GM has offered a $1,000 trade in allowance on Toyotas. Hmm, see our previous post today about the accelerator problem with Toyotas. 

Now let's connect the dots. 

Toyota has a problem with accelerators sticking. 

Toyota recalls vehicles under the DOT regulations, remember the Dept of Transportation is part of the Federal Government. 

Toyota does not operate in union shop states for a majority of its plants. 

The UAW makes large donations to this Administration.  Proof, the Administration left GM bondholders with nothing and made the UAW a big shareholder.

Now the Govt Motors is General Motors. 

Just days after the recall, Govt Motors offers incentives for Toyota Trade Ins.

Okay you connect the dots, is there a conflict of interest here?  Is the US Govt favoring the UAW, ie, GM Chrysler workers and contributors to the election campaign of the Administration over Toyota?

You tell me. 

Oh did I mention that Congress has scheduled hearings on the Toyota recall?  Will that be a show trial, remember when Congress excoriated GM et al for flying to Washington DC to ask for a bailout?

Centex Homes Hits a New Low, Literally

Friday Jan 29 2010

 Centex is a subsidiary of Pulte Homes. Last Sunday a thirty foot retaining wall split. This caused the evacuation of 91 homes with 25 homes declared unsafe to occupy. Interestingly the residents have discovered they signed a compulsory arbitration agreement when they bought the homes. Now, what to do? Centex is monitoring the situation. Well that's reassuring, eh?

While I am no expert on this particular situation one would think this is an ideal case for the Ethics class. Who are the stakeholders?  A short list might include

Homeowners

Mortgage Company

City Building Inspection, Permit Dept

Centex Engineers and Attorneys

Hmm, would greed be an issue here?  OR is this just an error of er ah design?  Who is responsible?  What constitutes justice for the homeowners?  Does the City bear some responsibility?  What should Centex be obligated to do for the homeowners?  Oh, what about the 25 famiilies that cannot move back into their homes?  Do you have a spare couch at your house?

There are numerous articles about this and they continue each day. Let's discuss it on BB in the Ethics class. 

Reading Toyota's Tea Leaves

Friday Jan 29 2010

Click on the chart for a larger view. 

The red and blue lines are exponential moving averages MAs. The red and black bars are the price ranges for stocks in a week long activity. In the summer of 2007 we got a crossover of the MAs to the downside, this is a sell signal. Note we did not get a buy signal until the winter of 2009. Share prices fell as hedge funds and others sold. The panic low went on for several months at the end of 2008. At bottom note the huge volume in the vertical bars. The red bars are net selling, the black are net buying. 

Now we have another panic. Toyota is embroiled an a hung accelerator controversy. They have recalled millions of vehicles and ceased production for the time being. Note the tall red vertical bar at the far right, bottom panel. Funds are selling Toyota shares at any price. IF this keeps up into next week, no doubt it will generate a sell signal with a crossover of the MAs to the downside. 

Now the question, is this the end of Toyota?  I doubt that.  However this may be a preview of what we will see this fall if another market wide panic ensues. We have a huge mood shift from positive to negative. Toyota is a large capitalization stock listed on many exchanges. And so this panic will help bring market averages down around the world. 

Elizabeth Warren on Daily

Elizabeth Warren explains the TARP fiasco on the Daily Show. 

Congress Eyes Toyota

You will recall that our political heroes, the Federal Government, now own Chrysler and GM. In a classic, hit em while they are down strategy, Congress now plans hearings on the hung accelerator story at Toyota.   

Apparently the problem is actually a misaligned floor mat. 

 The same sort of unintended acceleration story nearly sunk Audi a couple of decades back. Owners reported that cars would suddenly for no reason, accelerate without notice, often through garage walls. Nothing was ever proved but Audi suffered lost sales and declining car values for years. 

What is really going on here is the downturn in socionomic mood. Bear markets bring out the worst in everyone. The mood is exclusionary, not inclusionary. We see this in dictators like Chavez blaming the failure of his own socialist policies on the US. Ditto, Putin blames the west for the lack of modernization in Russia. The truth is that Toyota has played by the rules but with no union plants, you can bet the UAW is looking for blood in the Water as Michigan continues its downward spiral, courtesy of GM and the UAW. 

As we have noted there is a new Civil War. The new Civil War falls along the  same lines as the 1861 version. But this time, it is the Solid South that is doing better industrially. And it is doing so in Right to Work states without compulsory union membership. 

Toyota has followed the rules. I have a 2009 RAV 4 and the accelerator has not stuck, but the attitudes in Washington certainly have. 

In Front of the Curve - Weekly Column

Cupertino, CA Apple Computer announced the highest profit and gross revenue in its history. It is now a $50 billion sales company.

Steve Jobs at the much anticipated  Apple iPad Announcement

Conventional wisdom has it that earnings drive stock prices, so Apple stock went up on these announcements, right?  As a matter of fact Apple fell 4% then next day. AAPL is already down $15 from its all time high. What, how can that be? The answer is easy, buy the rumor, sell the news. Markets are all about anticipating what is going to happen. Apple stock helped the NASD recover from the lows of last March 2009. But the recovery ended just as Apple trotted out its announcement.

We use Apple as an example of how once all and I mean all, the good news is in, the only thing a market can do is fall. All the buyers have crowded the stage anticipating ‘the event.’  Sellers let the buyers have whatever is in question, Apple stock, barrels of oil, ounces of gold, and then once the market runs out of buyers, the price can only fall.

Our political heroes in the Senate, the ones that engineered front room deals to pay Louisiana $300 M for Mary Landrieu’s vote and exempt Nebraska from paying the same taxes other states would pay, essentially re appointed  Ben Bernake as FED chief yesterday.

The result will be more of the same. Ben has flooded the markets with money, read your and my debt. That money has gone to ‘banks’ a euphemism for everyone that wanted  a Federal lifeline in the wake of the Fall 2008 meltdown. But all that TARP (politically named the Troubled Asset Relief Plan) money did not result in a  Jimmy Stewart Donna Reed Wonderful Life scenario. With no particular strings attached, the ‘to big to fail banks’ namely Goldman Sachs, invested the TARP money in the stock market at the lows of last March. The reverse psychology happens to the downside. Once all the sellers were flushed out, the torrent of one trillion dollars did not meet any selling resistance, bingo. Stocks marched from Dow 6600 to Dow 10,600 or so. Note, the Dow Industrials never exceeded its halfway point of 10,750. That divides the crash from 2007 to 2009 half way. Thus there appears to still be more folks that want to sell than buy.

Meanwhile the US Dollar Index has finally stirred from its sub 75 low to about 79. And that is very important for the price of oil.   West Texas Intermediate fell from $84 to $74. But wait, conventional wisdom CW says that the US buck has to decline.  CW expects hyper inflation as the Government is printing so much money, what happened.?

What happened is the inevitable collapse of the economies of the poorer European countries of Portugal, Italy, Greece, and Spain. Oh, and Bill Gross at PIMCO suggests we add Britian, yes Hail Britiania to the list. All are spending more than they take in to make the long story short, and bond interest is rising. The Dollar and the Yen become safe havens as the European Community will have to decide whether to move the goal post to save the weaker countries. 

It appears this is a larger correction than the July 2009 pullback. Is it THE top?  We don’t know yet, many are calling for The Top now. But that seems a bit too pat and simple to me. It could be that the Dollar rallies to 81 and then pulls back again. That would allow one last rally for commodities and stocks. And it would allow the Government and pundits to say, see, it is working, the worst is past. And that would be a top.

Please be aware that the stock market has now duplicated, percent wise, its post crash 1929 recovery. Back then it was Dow 390 in 1929 to 190 to 290 by the spring of 1930, roughly speaking. That recovery assured everyone the worst was indeed over. It was not. In the nest two years the Dow slumped to 41, one tenth of its all time high. It would take until 1954 for the Dow to exceed 390 again. Do not dismiss this possibility. Citi bank trades at $3.25, less than one tenth of its $50 high just three years back. And that is after all the King’s TARP money rode to the rescue.

We should see a rally into February and then a re test of the $60s for oil. And then, we will update you on the Dollar and Oil. 

Tom Friedman

Thursday January 28 2010

While Mr. Friedman and I do not come to all  the same conclusions he draws in this column, his comments about Goldman and situational ethics are spot on. Yesterday in Ethics class we discussed the idea that an ethical person does not change his or her position based on the situation. I have given you several articles to read about the financial meltdown.  Friedman makes the point that Goldman acts in through egoism, never using a utilitarian approach about what would be good for all. 

I do not agree about Bernake. Bernake has given all our increased debt to the banks which have gambled the money raising the stock market, and then paying themselves bonuses. There is nothing in the so called stimulus package that will raise employment in the private sector. Today's idea of a high speed rail in Florida excluded Texas, that did not vote for Barack, and will do little or nothing to employ anyone this month. The much better idea would be an immediate rollback in income tax and witholding thereby increasing the take home pay this month for all wage earners. 

And I would eliminate capital gains taxes, inheiritance taxes (the death tax), adopt a portable IRA type health care plan that allowed you to buy only what you want, no mandates. 

The best idea of course is to cap all Federal Spending at 10% of Gross Domestic Product, a Tom Sowell idea. Of course congress will never vote for that. Oh repeal the minimum wage for a year while you are at it. 

Getting in Tune with the Bond Market

Thursday Jan 28 2010

 

TLT is a closed end fund of bonds averaging 25 years in maturity. The market has been descending in price and increasing in yield since the top last October. It should now be falling in a fifth wave for this formation. The action after that daily fifth wave bottom will perhaps provide some clues as to just how high interest rates are liable to go. Note that RSI is failing at the 50% level at top and MACD is working its way down at bottom. 

DUring the 1930s long term T Bond rates fell to 1.7%. If that happens this time, bonds are the way to go at over 4%, that would offer a potential double in capital gain while earning a nice 4% dividend. The argument FOR bonds is that in a deflationary environment, prices will continue to fall, money will exit virtually all other investments, real estate, stocks, etc, and find a home in safety. Corporate and municipal debt will be in doubt as to whether it will be paid, expect interest rates to go up but principal to be in danger, witness the recent action in Greece for example. In addition one can argue that if a currency is going to crash it is more likely to be the Euro what with Portugal Italy Spain Greece not to mention the Eastern European problems. 

On the other hand, in the 1930s the US was a net creditor, the world owed the US. Now however the US is the world's biggest debtor. As I write the Congress wants the debt ceiling raised to over $14 Trillion. This strikes us as the drunk asking for another round. In the 1970s Britain had to pay higher and higher interest rates as its entire economy became more mired in socialist programs that could not support themselves.  Finally Margaret Thatcher put the brakes on endless borrowing, privatized entire industries, and brought Britain back. Today Britain is in much the same shape as it was in 1979. Indeed various writers are suggesting that Britain will be the model for what is about to happen in the US.  Is there some point at which the Chinese and PIMCO say  enough, no more debt, we want more interest. Can Bernake permanently keep rates at zero short term while running a printing press to make all the money he wants. Can the US borrow its way to prosperity, Bernake seems to think so. 

At the moment or at least for the next two weeks, the bond market is demanding a higher rate of interest. Bottom line the action after a daily fifth wave bottom in TLT will likely tell us a great deal about the appetite for US debt.