Businomics Blog

Housing Bill Will Not Help Housing Market

The Housing Bill going through Congress will not solve the nation's housing problem.  Congress would like to help homeowners who are overextended, as well as prospective home buyers.  By extension, they want to help home-builders and developers and the whole food-chain involved in the residential construction sector.  The housing bill will not help.

The real problem:  too many housing units.  Today the Census Bureau released second quarter data on vacancy rates, and the numbers are still ugly.

Can we solve this oversupply of housing by making mortgages easier to get?  The problem is really too big for mortgage reform to fix.  But if it did, we'd aggravate the excess supply of rental housing:

It's important to keep both markets in mind.  Rentals can be converted into condos, which happened at the height of the home ownership boom (2004).  New condos can be made into apartments, which is happening now as recently-completed condos sit vacant.  Single family homes can be rented out or not.  And if the single family market improved just a bit, homebuilders sitting on lots would try to interest the public in new houses.  The surplus in rental markets makes the surplus of owner-occupied housing that much harder to resolve.

What will solve the underlying housing problem, of too many housing units?  Population growth, which will come with time.  You could also try to increase the number of households relative to the population.  Kick the kids out of the house.  Get divorced.

Mostly, though, this problem will resolve itself slowly as the population grows, but there are no quick fixes.  Certainly the housing bill does not fix the housing problem.

Oil Production Increasing Again

Oil production rose briskly from 2002 through 2004, before appearing to hit a peak in 2005.  That peak fueled more discussion of peak oil theory.  However, rising prices have induced additional supply:

Since last August, however, production has been on the increase again.  (I consider the last observation, April, to be month-to-month noise in the data.)

Why have prices been rising so rapidly with rising production?  Got to be demand growing even faster.  That demand is likely to cool, though, due to slower U.S. economic growth and higher fuel prices in China.  (Their prices are controlled by the government, which recently hiked them.)

Stock Market: Time to Buy?

I blogged on this subject over  at abcInvesting.com.

Middle Class in Emerging Countries: How to Win the Market

Knowledge @ Wharton has an interesting article about the growing middle class in emerging countries.  If you sell overseas, or you could sell overseas, make sure you're up to date on the trend, described in the early part of the article.

There will certainly be challenges in this market.  One point mentioned is price. The new middle class in China and India have less income than the middle class in the Western world.  So they will make discretionary purchases, they will learn to favor certain brands, but their lower incomes will make them more price sensitive than Western consumers are.

Not mentioned in the article, but well deserving of attention, is difficulty in hiring middle managers in these markets.  The geniuses are there, and the masses are there, but they have little tradition of people in the middle who make decisions independently, solving problems without bucking everything up to senior management.  If you are going to have a major presence in emerging countries, start hiring bright young people and training them to take initiative and deal with challenges.

The Future of Securitization: Caveat Emptor

Ethan Penner has an interesting article in today's Wall Street Journal (available for free I think on their Opinion Journal page) on the future of securitization.  I discussed the same topic in part 5 of my series "Why Did the Mortgage Crisis Happen?"

The bond markets ended up selling very risky mortgage-backed securities, but there were two sources of the risk.  The first was explicit risk: the bondos knew they were dealing in subprime mortgages.  The second source was implicit: the loan originators were cutting underwriting corners, lending to even riskier folks than their securitization paperwork implied.  The bond markets were partly at fault there, for they were not auditing the underwriting standards, in an environment where the originator has a large incentive to fudge the numbers.  Sort of reminds you of American companies importing Chinese toys. 

Penner suggests that the securities backed by loan pools only be made of the safest part of the deal, with the originator keeping a good portion of the risk.  That's one way to solve the problem, but it ignores one of the good things about securitization: the party with the strongest appetite for risk may not be the party with the most expertise in originating loans.  Another viable solution is for the bond buyers to insist on underwriting audits.

Where will we end up?  Securitization is vital for the home mortgage market.  It's nice for other instruments, such as credit card balances, car loans, and commercial loans, but it's not absolutely necessary in these sectors because banks can borrow for the same term as these loans.  That's not possible in the world of 30-year mortgages.  But these "unnecessary" securitization sectors are NOT where we've seen the big problems.  They are functioning decently.

It all comes back to caveat emptor: let the buyer beware.  Any investor purchasing securities backed by a pool of loans should make sure that the loans really did meet the underwriting standards advertised.

Customer Relations Lesson: Meet With the Critics

Relationships between a company and its customers are not always pleasant.  Who hasn't cursed Microsoft, griped about oil companies, are ranted about cell phone customer-no-service?

Customers, however, do need kind attention.  Here's an example of doing it right.  My local minor league soccer team, the Portland Timbers, has had a rocky relationship with its biggest fans, the Timbers Army.  Sometimes the fan cheers are not family-friendly.  Profanity is common, plus there's an attitude toward sportsmanship that we soccer dads don't promote to our kids.  (When an opponent goes down on the field with an injury, the common cheer is "You'll go home in a Portland ambulance."  Which I think is better than than the occassional cheer when the trainers come out to tend to the player:  "Let him die."  Though in Sweden I heard the fans say about an injured play: "Go buy another one.")

The management sees lots of families coming, and the area's youth soccer leagues are a major source of attendees, so family friendliness is important.  In addition, the Timbers Army sees management decisions that don't make sense to them.

What to do?  The Timbers management has had a series of meetings with the fan leadership, described in minutes of the meeting. (Hint for readers:  PTFC is Portland Timbers Football Club, the management.  TA is Timbers Army.  Gavin Wilkinson is the coach.)

Keys to the meeting:  be direct.  You'll see the fans asking about policies and getting clear answers.  The answers don't have to be what the customers want to hear, but they should be honest and direct.  You'll see the management raising issues on their mind.  At the end, they come together to talk about selling more fan apparel.  Isn't that what you'd like your angry customers to turn to?

Sales Force Activity in a Down Market: Interview with Lynn Giuliani

I interviewed Lynn Giuliani for the Businomics Audio Magazine about keeping your sales force energized when business is down and they are getting discouraged.  Lynn's a sales consultant who helps companies develop their people into pro-active sales-oriented staff.  You can check out her website at www.ProgressionsInc.net.  After you listen to the interview for free, look into buying a subscription to the entire audio magazine.

Innovation by Collaborating with Your Customers

Last year the business strategy segment of the Businomics Audio Magazine featured a segment on "Business Uses for Web 2.0: How Companies Can Help Their Customers and Their Employees While Cutting Costs" (Transcript available for free).

Now McKinsey Quarterly features an article describing the same thing, highlighting some of the hurdles and issues involved.

There are some very powerful tools for improving your products and services, based on Web 2.0 tools.  It's no longer just about finding dates for Saturday night; it's about business process improvement.

Investment Returns June 2008: There Is No Present Tense

Jim Picerno over at Capital Spectator has asset class returns for June:

I find that looking at the past helps me to understand . . . the past.  I can also say that my own picking of U.S. stocks isn't that bad, given that my own portfolio is down 8.1 percent in June. (That was a hypothetical statement, unfortunately.)

What does this table tell you about the future?  Not a thing, and that's a pretty subtle insight.  Thousands of people with 401k accounts are bailing out of the stuff that's down and investing in the stuff that's been rising, even though the past does not foretell the future.

Here's a simple way to think of it:  there is no present tense in the stock market.  The market never "is" going up or down.  It "has" gone up or down, and it "will" (maybe) go up or down.  But there is no present.

Oregon Business News

I try to keep this blog focused on national and global discussions, but I know many readers are my friends here in Oregon who will benefit from a new web site: Oregon Biz Report.  They will be republishing some of my blog posts, but they have lots of other good news, too.

Gaming Industry Recession-PRONE, not Recession-Proof

Oops, Wall Street got another industry wrong.  After proclaiming that casinos were recession-proof, they've recently learned just the opposite.  Here's what one mutual fund manager said before the downturn:

“Gaming stocks perform much more like consumer staples than consumer discretionaries. When you look at the long run, people are going to gamble no matter what.” – Dan Ahrens

Here's what happened to gaming industry stock prices:

Just a couple of months before the gaming industry stock prices hit their peak, economists sharply raised their estimates of the risk of recession.  What happened?

According to a Wall Street Journal story  (subscription required),  the gaming industry is hurting:

• Four casinos have filed bankruptcy this year
• Several gaming companies have defaulted on their debt
• Moody's has downgraded the debt of 17 gaming companies, with 11 more on watch for possible downgrade.

In addition to these signs of distress, the casino expanded rapidly in recent years, and now see consumers cutting back on discretionary spending.  Boutiques and restaurants are vital to casino profitability these days, so spending is critical.  Travel costs are up, whether for airfares or gasoline.  And the local market in Vegas is hurting because of the collapse of residential home prices, down 12 percent in the last four quarters.

My own calculations for my book, Businomics, indicates that the change in consumer spending on gambling at casinos is -7.8 percent from peak to trough, a little milder than average for consumer spending.  (See details here by scrolling to row 231; definitions at the bottom of the worksheet.)  If you had used this information in combination with the rising risk of recession, you would have sold gaming stocks in the neighborhood of the peak.  If you had bought the industry's self-hype that it was recession-proof, and held your gaming stocks, your would have had a 38 percent loss--so far.

Business strategy lesson: before you believe the industry lore that your business is recession-proof, you should look at the data.

China's Export Machine: The "China Price" is Dead

Four months ago I wrote a post entitled "End of the China Price" which noted that China's inflation rate, plus the depreciation of the yuan, was making it harder for Chinese companies to undercut American manufacturers' prices.  Today the Wall Street Journal is saying the same thing (subscription required).

In addition to rising inflation and the falling yuan, the Journal mentions tighter labor regulations.  I've also heard that middle managers are in short supply.  Entrepreneurs can still find plenty of cheap labor (especially in rural areas), but they have trouble finding folks to delegate management responsibilities to.  Taxes are on the rise as well, more through enforcement than through rising tax rates.  And don't forget new costs (which always should have been spent) to monitor product quality.

China is not going away.  It's not a flash in the pan.  But the great shift of manufacturing from America to China will slow significantly in the coming years.

Business strategy for China:  it's still a major competitive threat, but here's what's new:

1. it's pricing is no longer unbeatable
2. there's more business in the local market--selling to the Chinese--than ever before.

Oil and Recession: The Wall Street Journal survey

Back in August 2004 the Journal asked its economic forecast panel how high oil prices would have to go to trigger a recession.  Here's the results:

Just for the record, here's how long it's been:

$50 or higher:  39 months

$60 or higher: 28 months

$70 or higher: 15 months

$80 or higher: 8 months.

My hat is off to the eight economists who had the high range.  Their identities are not shown in the Journal's online database--so we may have 40 people claiming to be one of the eight.

Consumer Attitudes: How Low Can They Go?

Consumer confidence (the term used by the Conference Board) and consumer sentiment (the label used by the University of Michigan) are not quite at their all-time lows, but they are very close to them.

This seems a little odd because two of the biggest elements of consumer attitudes, unemployment and inflation, are quite benign.
Unemployment, at 5.5 percent, is a hair below its long-run average (5.6 percent).  Inflation (all items) is 4.1 percent, only a little above its long-run average of 3.7 percent.

Why the doom and gloom?

Maybe home prices (see the previous post).

Maybe gasoline, but that's not as obvious as it sounds.  The gas price hikes are incorporated (except for the very last month) in the inflation rate.  But perhaps consumers are giving gas a higher weight than the folks who compile the Consumer Price Index.  Do consumers realize that apparel prices are down from a year ago?  I just bought a new suit, but its hard for me to know if the price was lower because prices of comparable suits are lower, or perhaps I picked a suit that's not quite as nice as the last one I bought.  I know what I pay for gas, but I'm not sure what I pay for underwear.  So I think that maybe consumers are giving a disproportionate weight to gasoline prices.

Maybe its election year rhetoric making people gloomy, or lousy weather, or the President's low approval rating.  All things considered, though, attitudes are worse than the fundamentals dictate.  Look for consumers to decide sometime soon that the sky is not falling after all.