Tapping the Well of Opportunity – Start Now

The stock market rallied yesterday on a combination of good indicators. One of which is the increase in Consumer Confidence. After a 6 month decline it is up to 51.9 from 51.0 last month. What is interesting is that this is still as low as it was in 1992. A coworker of mine Chuck Lomax mentioned to me on Monday that he witnessed an increase in people at the beach this past weekend. It is worth noting and speculating that perhaps the consumer is ready, ready to go to the beach, ready to eat steak, ready to buy a car. But more importantly, maybe it is the recognition of hitting bottom and the optimism of only being able to go up that is spurring this new excitement. I also think the patriotism of the Olympics is creeping into many people and we are reminded of makes America so different. Between now and the middle of 2009 there is a lot of opportunity for small businesses and investors to get in cheap, weather the slow, and be primed for a take off.

Fail Spectacularly

I didn’t know much about Randy Pausch prior to his death. I missed much of what happened last September. I wasn’t interested in a guy who was talking about death, my first child was less than a month old. But now that I learn more I’m fascinated. But to follow up with my post from yesterday –

Randy Pausch –     “I don’t know how to not have fun”
                             -Fail spectacularly rather than try to just to get by-

A Place of Risk and Renewal

America. A place where risk and renewal is a way of life. What happened to that? I wonder because I see on CNN.com a story called Report: Repairing U.S. bridges would cost $140 billion. How is it that our bridges are in such condition? I’ve cited before that I agree with an EPI plan that provides a Stimulus package to the states that pays for infrastructure projects. I agree with this because it puts people to work and it repairs the foundation that is required for commerce. Plus it needs to be done anyway.

But really, why hasn’t someone come along with a better way to do bridges? Why are bridges so expensive? Where are the people that take a look at these problems with a different eye and come up with some that is innovation? There is a lot of money to be made.

But what I think is causing the slow demise of the US is the management tool – Cost/Benefit analysis. Sound silly? Hear me out. The Cost/Benefit analysis reviews the case for the project. For example, if someone buys a house but wants to make big changes to it they can either bull doze it and start completely over or they can build on the existing frame. If you do a cost/benefit analysis you almost always come up with using the frame. But using the frame puts in constraints. I know the constraints are part of the analysis but what isn’t is the motif, the creative side, and the freedom. A generation before saw opportunity differently than many investors do now. The idea was to hit home runs you have to swing big. But the idea now seems to be to just get on base. But that doesn’t get you much. There is a lot of collateral benefits to big risks. There is the new approach which brings with it new trial and error learning. There is the amassing of resources. And there is the prestige. The pride. The identification.

 Risk and renewal is now hedge and duct tape.

Pay Down on Wall St in 2008

Last year was a terrible year for Wall St. The Credit collapse was fully recognizable by the early summer and no one  wanted to believe the real depth of it. So as the packaged mortgage investments went kaput in value I assumed the bonus packages for the Wall Streeters would too, but they didn’t. Pay on Wall St. last year held up. Perhaps compensation managers thought this was a short term issue. However, a year later the story has changed. Maybe it was Bear Sterns being forced on JP Morgan Chase that turned the tide. Either way, the NY Times is running an article by Patrick McGeehan called Wall St. Bonuses Could Fall by $10 Billion, Affecting City and State that documents the anticipated impact on bonuses for Wall St. firms. Some of the stats:

  • $18 billion less in pay and benefits compared to 2007
  • If true, this would easily surpass 2001 when the drop was by $6.5 billion
  • The city would lose about $10 billion in potential incomes to tax
  • Compensation for six of the largest firms show a decline of %9.5 billion in the first half of 2008 when compared against 2007

Other stats:

  • Year end bonuses for investment bankers usually comprises at least three-fourths of their income
  • Wall St. employs about 178,000 workers in NY city
  • Normally, these payments contribute to about 10% of NY city’s tax revenue and 20% for the state.
  • The projected decline in state tax revenue is by $700 million

These losses in potential income have a ripple impact because of the accompanying spending on items like clothes, watches and so on. These items and corresponding jobs aren’t needed without affluent investment bankers.

Two quotes I like:

“One of the things that highly compensated people do is they spend money,” Mr. Bleiwas said. “So when Wall Street suffers, the pain ripples through the rest of the economy.”

“The top market is fine. Upper-end people can still afford their Rolexes,” Mr. Kopel said. The marked drop-off has come in sales of items priced between $500 and $2,500, which he described as midrange.

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Big Day on Capital Hill – Economy

Today the Joint Economic Committee of the US Senate held a hearing on the economy. There is a summary called Middle Class: “On the Edge” by Tami Luhby on money.cnn.com. There are many fascinating tidbits related to this and the writing is very straight forward and brief. Check the government website – http://www.house.gov/jec/index.htm

But the two economists that provided testimony did so in an commendable fashion.

Jared Bernstein of the Economic Policy Institute (EPI) provides a 21 page effort (several charts so it is an easy read). Here is an excerpt of his testimony titled How Much More Can Consumers Be Squeezed by Stagnant Income, Skyrocketing Household Costs, and Falling Home Prices?

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As members of this committee are well aware, many of America’s working families have far too little to show for an economic period characterized by impressive productivity growth. The 2000s may well be the first business cycle on record where real median family income is lower at the end of the cycle than it was at the beginning. Now, as the 2000s cycle appears to be over, weakness in key markets—housing, labor, financial—is taking a further toll on these already stressed families. Prices of key items, such as energy and food, are rising much more quickly than average inflation, and more to the point, much faster than their earnings. These weaknesses are also leading to the net loss of jobs, and payrolls are down by over 400,000 so far this year.

David Kreutzer of The Heritage Foundation is the other economist to provide testimony to the Joint Economic Committee. His writing is called The Impact of Higher Gasoline Prices on Household Costs and Income. It is a three page opinion on the economic situation caused by higher costs of gasoline. Here is my favorite excerpt:

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Higher gasoline
prices squeeze the production side of the economy from both the demand and
costs directions. Consumers’ demand for output drops as they divert
expenditures from other items to gasoline. In addition, gasoline is a factor of
production in the distribution of goods and services. Faced with higher costs,
producers raise their prices. But the lower demand prevents the prices from
rising enough to completely offset cost increases. This leads to production
cuts and, therefore, to lower employment. In turn, these conditions put
downward pressure on wages and salaries.

Don’t Sell a Product, Sell an Association

On July 13th Charles Duhigg wrote a piece for the NY Times called Warning: Habits May Be Good for You. The title is playing off of the negative connotation associate with that term – “Habit.” However, as the article says, about 45% of the average day is conducted by habit. It isn’t just smoking, but rather where you left the keys and what you eat.

As the article goes on to illustrate, the manipulative power of Corporate America isn’t just about selling specific products. It is about selling memory associations and feelings. After that is established the actual product just rides the coat tails. But the genius is how the behavior continues beyond the product i.e Febreze.

So I’m advising any new entrepreneur to consider the power of habit formation and somehow align to that for your product or service. Once it starts its hard to stop.

The Liability of the Labor Department

The Government Accountability Office or G.A.O has found that the Labor Department has mishandled cases more than the accepted amount. In a report titled Case Studies from Ongoing Work Shows Examples in Which Wage and Hour Division Did Not Adequately Pursue Labor Violations the nonpartisan GAO illustrates several examples of general lethargy at the Labor Department. The NY Times ran a pointed editorial called No Friend of the Workers which directly blames the republican leadership and President Bush in particular. The line that fascinates me the most is:

President Bush has filled top posts across his administration with
people who do not agree with the missions of their organizations. His
Environmental Protection Agency has failed to protect the environment;
his Justice Department has promoted injustice.