February 10th, 2012
I have been accused of being the eternal optimist. Guilty as charged. Our economy seems to have turned a corner; employment is gaining steam and the stock market is surging. Yet housing seems to be stuck in quicksand.
I am not here to dispense any investment advice, but instead want to pass on some observations on the plight of the U.S. housing market. While much is being made of the insolvency of European banks, we should be equally troubled by the assets held by the largest U.S. banks.
Consider the prospects of Bank of America. The bellwether financial institution required a government bail out, and an infusion by Warren Buffet after its prepackaged acquisition of Countrywide’s toxic assets. The bank holds a staggering $400 Billion+ in U.S. mortgage debt, a third of it in home equity lines of credit – the true villain in the U.S. real estate collapse.
According to B of A, 5% of its mortgage portfolio assets are “non-performing” or are in default. Some have accused the bank of uneven accounting on its balance sheet.[i] Some estimates forecast as much as 39% of its portfolio having a combined loan to value rate below 100% (upside-down). It is expected that about a third of those mortgages could default, and that the banks losses for the average loan are far higher than 50%. Unlike past swings in the market, foreclosed homes have little retained value for the lender, and are boarded up or even torn down. JP Morgan, Citibank and Wells Fargo do not fair much better in terms of performing assets[ii].
Perhaps even more perplexing is weakness in the underlying real estate market. Economist Paul Dales of Capital Economics suggests there is an excess inventory of more than 1 Million residential properties. Housing supply is somewhat stagnant. In Los Angeles for example inventory has gone down 1.65% through September but prices showed 0% change for the year[iii]. As a result, housing starts are projected at a tepid 620,000 for 2012 (according to Federal estimates)[iv]
Even though money is very cheap, many borrowers can’t qualify for a mortgage under the exacting standards being employed by banks. Under tight scrutiny by regulators, we are seeing the familiar rubber band effect as lenders have gone from one extreme to the other – lending to everybody with a pulse to rejecting buyers with cash and good credit scores.
Consumer behavior has also shifted. While lower than 2010, a whopping 17% of defaults are “strategic defaults” where borrowers can afford their monthly payment, but simply walk away.[v]
What is hurtful is not only the affect that the real estate market has on realtors, title companies and mortgage lenders; but the shadow economy it supports. Construction and subprime manufacturers of everything from lighting fixtures to lumber are suffering at the hands of weak U.S. housing demand. The reality is that much of our economy’s GDP growth over the last two decades is a reflection of a false premise, that Americans can just pull money out of their homes on demand.
So as the housing market goes, so goes our economy. Forecasts of 2 and 3% growth rates are a direct result of consumer affluence being minimized by zero wage growth and declining property values.
While economists are cautiously optimistic about America’s future (as am I), we need to be cognizant that a further depression of the housing market could lead to the failure or bail out of U.S. banks which undoubtedly would reverse recent market gains and economic momentum.
[i] Here’s the Bomb that Might Blow a Hole in Bank of America by Henry Blodget – Yahoo Finance
[iv] U.S. Housing starts as published by Forecasts.org/house
[v] Overall strategic defaults on the decline-Housing Wire June 2011
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Posted by Marc Emmer - President - Optimize Inc.
January 9th, 2012
For most entrepreneurs, it has actually been a pretty good year. One wouldn’t know it based on reading the papers.
Housing and construction remain depressed. But an objective view reveals a surging Dow, low interest rates, stable energy prices and inflation that is in check. While GNP growth is modest, most businesses grew last year, and should grow again this year.
Many entrepreneurs I talk to want someone with a silver bullet to tell them which direction the economy is headed. Are we up or are we down? The constant analysis of minuscule shifts in U.S. demand is dizzying. My view is that the directional momentum of the economy is irrelevant for most businesses. It is a variable beyond our control. With no evidence to the contrary, one could assume that 2012 will be much of the same.
Entrepreneurs should be focused on revenue growth and where it will come from. Will revenue gains be with new clients, new products or services, new customers, or new geographies? What are the strategic priorities of your customers? What new service bundles will your competitors present? Every entrepreneur should remember, that the ROI within one’s existing core business typically yields a return of several times that earned in any new market.
Here are some things to look for in 2012:
Capital Investment: Of 781 companies surveyed by the National Federation of Independent Business, 24% planned capital outlays in the next 6 months (the highest proportion in the last 40 months).[i] While still relatively sluggish, expansion of U.S. manufacturing capacity should continue as entire industries (such as automobiles) shift production back to the U.S. as a result of the strengthening of the U.S. dollar.
Retail: The convergence of mobile devices and real time data has completely changed the face of retailing. Retailers will be moving towards solutions that morph the in-store and online retail experience. Consumer spending this Christmas season was high (up 6% through Q3 and with similar strength in Q4) even though joblessness remains relatively high (9.1%) and there is virtually no rise in household incomes.[ii]
Hiring: U.S. companies who have cut staff for 3 years are starting to hire again. Economist Carl Riccadonna said “We’re getting to the stage where employers can’t squeeze more water from the stone”. Remarkably, the talent war persists as many employers can not find skilled workers.
The worst is over with bankruptcies: Over one million consumers filed for personal bankruptcy in 2011, down sharply from 2010.
Credit Markets: If there is a cog in the wheel we should be worried about it is the state of major U.S. banks. Those with significant mortgage holdings (especially in home equity line of credits) of troubled assets on their books (some have even suggested at least one major U.S. bank is insolvent). 29% of homes in the U.S. are currently under water. The difference between 2012 and past cycles is that foreclosed property has virtually no value in depressed communities such as Buffalo and Cleveland. A major U.S. bank failure could reverse a year of positive projection in our confidence.
Construction: If there is an industry that has been beaten down it is construction (especially general contractors). Every project is won or lost by RFQ (request for quote). The few who are still profitable are niche players or those with a unique selling proposition or penetration in unique markets (such as those that do environmental work or projects for municipalities and state governments). While housing starts are seeing a very modest turn around, pricing will remain brutal for the foreseeable future.
Government: Presidential politics will dominate the debate, with entitlement spending and Obama care in the balance. In 2012, 30% of Medicare’s burden will shift to states[iii]. “Draconian” cuts in government spending at the Federal, State and Local level (with more than 200,000 expected lay offs in local government) will impact businesses reliant on government spending. It’s time to diversify if that is you. Outsourcing for government is an opportunity.
By now, every company should have revisited their strategic plan, set 3-5 year goals and set their budget for calendar 2012. Here is a useful New Years Proposition for you: invest your energy on building the infrastructure to support future growth, and focus on only those markets where you can dominate and remain profitable. For most businesses, this is a time to expect steady modest growth, and not to be making wild bets.
[i] A Brighter Future – Maybe by Angus Loten WSJ December 29, 2011
[ii] Oliver Wyman Market Intelligence Report by Experian
[iii] The Kiplinger Letter December 9th, 2011
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Posted by Marc Emmer - President - Optimize Inc.
December 14th, 2011
About 4 years ago, our firm began to implement an enterprise system. Several months into the project, I had to hit the abort key. The software did not gel with my team’s habits, processes, preferences and collaboration techniques. We just weren’t ready.
I, like many entrepreneurs, fell into a trap. I was romanced by a technology. Those of us committed to improvement often see tools that are sexy, and interesting and we feel like we have to have them. Technology and gadgets can be like crack.
This is why many information technology professionals are cynical about new tools, especially trendy ones that don’t fit within narrowly defined parameters. They see the potential flaws, and often act to mitigate the risks. We should listen to them, and avoid the tendency to chase shiny objects.
What I see in entrepreneurial firms is that having the right solutions is very important, and implementing them at the right time is equally important. I have seen clients wait too long to implement enterprise tools and that has hurt them (creating a competitive disadvantage). But the opposite is also true-attempting to execute technology projects based on arbitrary target dates is a slippery slope.
Successful technology implementations require a complete organizational commitment, from top to bottom. In order to affect successful projects, companies must vet a software’s capabilities, and carefully plan its implementation. The cost of failure is very high. Rushing to judgment, skipping steps and trying to cut out expenses such as scoping and training can cause dire consequences.
In most implementations, there is a single point of failure; users and contributors rely solely on IT to manage the project. A very consistent problem is that nearing completion, users realize their new toy doesn’t fulfill the company’s needs, or offer features of the software it is to replace. If users are not required to be accountable for scoping a project from the onset, they are almost always disappointed.
I once read that over 90% of ERP implementations are late, not to mention over budget. In such instances, people are quick to blame IT or their vendors, when it is often organizational inertia that blows up the project in the first place. Unfortunately, there are very few technologists that are savvy enough to write business requirements that capture everything software must do to satisfy its users. That is why the users themselves have to take a more active role in understanding how their systems will work.
As you consider upgrades to your system, whether they are minor or significant, select your system carefully, plan the steps rigorously, and implement at a point in time when your team has the bandwidth to manage the project effectively.
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Posted by Marc Emmer - President - Optimize Inc.
November 14th, 2011
Businesses constantly struggle with capacity issues. Manufacturers seek access to the ideal manufacturing capacity, and service providers look to employ the optimum number of employees. Both understand their labor spend is a key component of a company’s profit formula. So how is the entrepreneur to scale in an uncertain economy?
Those who had not experienced rapid market erosion previous to the liquidity crisis learned an important lesson; high fixed costs can be truly catastrophic when demand contracts quickly. Employers must marry labor costs with demand. There are several steps one can take to mitigate labor capacity risk:
Optimize Labor Efficiently- Most entrepreneurs intuitively understand that they should push low value activities down through (or out) of the organization. Senior managers should aim for “zero administration”, where virtually all of their time is spent improving service or profitability, and not loading paper in the copier. A good administrative assistant is worth their weight in gold. Similar thinking should apply to all; all work should be allocated to the appropriate staff based on their skill level, experience and cost.
Outsource Low Value Activities Based on Demand- The zeal for outsourcing is far from over. Organizations are not only seeking lower costs, they are looking to move resources outside their organization so that they can scale their bandwidth quickly. Look for outsourcing partners who have infrastructure that can move, (in real time) with your business. Such organizations typically have an existing core competency in the services provided, including technology and human capital geared towards executing such work.
Increase Weighting of Incentives to Total Cash Compensation-Those who only provide subjective bonuses are actually doing themselves a disservice. Practically the entire Fortune 500 have moved to some type of performance based pay. Part of the rationale is to only pay out incentives when an organization reaches certain performance thresholds. Failure to have a significant portion of cash compensation in incentives (20% or more) creates fixed costs and puts stress on a business and on employees. Fluctuations in demand require drastic action such as lay offs or furloughs.
Measure Labor Meticulously- Labor KPI’s are amongst the easiest predictive indicators to measure, and directly affect the bottom line. Examples include overtime, labor dollars per unit, direct labor, indirect labor and labor as a percentage of revenue.
Beware of External Demand Indicators- Within virtually every business segment there are external measures that provide context on future demand. Add external indicators to your scorecard/dashboarding system so that you can stay in tune to the market place. Government websites, trade associations, and private research organizations offer a litany of statistics. Plot such data against company revenue to find which numbers correlate with business growth.
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Posted by Marc Emmer - President - Optimize Inc.
October 28th, 2011
As evidenced during the Arab Spring, and earthquake in Japan, we are often unable to recognize the magnitude of events as they unfold. Such could be true of the Occupy Wall Street Movement. Are world-wide protests an indicator of momentum into a global revolution of the people, or will it fizzle into a clash between local police and a group of poorly organized discontents? What effect will all of this have on the business climate?
Many remain skeptical. One analyst said that a friend of hers had mused that she could, “smell them through the TV.”
Yet this is no ordinary protest, and to dismiss “the movement” on its face would seem shallow and naive. Regardless of ones political leanings, we must all be conscious that the movement on Wall Street has struck a nerve on Main Street. It is clear there is a faction within America who believes that significant reforms are required, and they believe they represent 99% of Americans. It is hard to know if Wall Street CEO’s are paying much attention, but one must assume that legislators are watching the 6 o’clock news with some discomfort.
The most direct effect will be the influence all of this has on the Presidential election, not only in terms of the selection for President, but of the agenda, which will define his term. Seemingly, the protestors will embolden those who seek higher taxes on the rich and broader controls and regulations. The inability for the Republican Party to provide a clear front-runner, with a populace message could only further the left’s ambitions to reallocate American wealth.
Regardless of the winner, it would appear that laissez-faire capitalism is the institution under greatest attack. There seems to be a belief that the corporation itself is an instrument for evil. A tentacle of the movement seems to be that government should legislate or guarantee employment, a concept with deep implications for labor law, unions, and taxation.
In the year ahead, the executive branch will continue to drive on tighter regulation. While there are streams of regulations under review, some of the most noted include[i]:
- Stricter interpretation by the IRS on expenses related to meals and entertainment, and a new tax on self insured health plans.
- A revamp of the SEC, including greater oversight of “broker/dealers”.
- Labor Dept. enforcement on the use of “contractors” and more restrictions on the use of minors on farms.
- Environmental controls on “fracking” and similar activities.
- The revamp of Medicare by the “deficit panel, including the potential of extending the Medicare eligibility age.
- New rules by the Equal Employment Opportunity Commission that crack down on discrimination against disabled workers.
- The Occupational Safety and Health Administration focus on violence in the work place and protections required in “high risk” work settings.
- A push by the Consumer Financial Protection Bureau for new rules on banks offering high-interest direct deposit loans.
The spread of protests in Europe is of particular concern, as the degradation of fragile economies there could provide fuel to the fire. Those feisty Europeans are not new to protest, and their governments are not immune to violence. One thing that is hard to reconcile is that governments (such as Greece) are completely broke, yet their residents seem to expect a preservation of services, a zero sum game for all. The failure of banks in Europe poses a much greater threat than in the U.S. It is a situation ripening quickly.
The fact that tax rates will escalate for the wealthy is somewhat inevitable. The President is calling for an unfathomable increase in corporate tax rates to boot. Let us hope that such impetus does not create much in the way of immediate stress on the U.S. economy in the short term.
Batten down the hatches; it could be a long winter.
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Posted by Marc Emmer - President - Optimize Inc.
April 26th, 2011
There is an old saying in poker; if you can’t see the sucker in the room…it is probably you. The same can be said of advancements in technology. Forrester’s recently forecasted increases in IT spending of 8% in 2011 and 2012[i]. Recent M&A activity suggests the sector is heating up.
In many industries, market leaders create proprietary technologies and information systems that improve the customer experience directly or indirectly through information flow, efficiency, cycle time, etc. At the current rate of change, a company either realizes a technological advantage, or is likely at a competitive disadvantage.
We have numerous clients who are either in the midst of ERP implementations, or considering similar upgrades to their systems. At some point the business owner must ask the strategic question; are our technology improvements truly game changers, or only an enhancement to existing ways of doing business?
More than 90% of ERP type systems are delivered late, and their implementations can be taxing to small and mid-market businesses. It is not difficult to spend $1 million+ (in hard and soft costs) in such systems, which is a drop in the bucket compared to the cost of disappointing customers due to errors or missed timelines. If entrepreneurs are going to expend valuable resources (time and money) on technologies, they had better select the right ones, and prime their organization to implement them seamlessly.
I find there are often two extremes during such implementations. In some companies, functional department heads (such as sales, engineering, design) lack experience in software integrations and do not become invested in the deliverables until it is too late. Other times, companies become so fascinated with perfection, they lose sight of the objective, and become paralyzed in analysis. If a company’s enterprise system becomes dated because of their inability to act, competitors can seize the upper hand.
If you are considering such upgrades to your technology, it is often sensible to take the aggressive but measured approach. In other words, the strategist is always looking to leverage technology that reshapes the customer experience, improves efficiency or reduces costs in some material way while simplifying or automating processes. Such decisions should not be left to the technologists, but shared by the leadership team who must be equally responsible for selection, scoping and integration. Failure is not an option as an unsuccessful project can put a company years behind.
Don’t be the sucker.
[i] Source: Wall Street Beat: Underlying Confidence Marks Tech Sector IDG News
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Posted by Marc Emmer - President - Optimize Inc.
June 5th, 2010
I lost my idol on Friday night.
John Wooden was perhaps the only person I have ever met for which I was in complete awe. His teachings left an indelible mark on my life. John Wooden was one of those rare people who instantly made you want to be a better human being. He made us more humble, more gracious, more caring and more willing to serve others.
Coach was larger than life, and the business and leadership lessons survived by his legacy are many. His Pyramid of Success is as likely to be found in a corporate board room as a high school gym. The man had an undeniable, unwavering commitment to quality. When new players showed up for freshman camp, they were taken aback by his extraordinary level of detail; starting with how to put on their socks and lace up their shoes as not to get blisters.
Coach Wooden’s innovations were legendary and his words insipring. “Failure is not fatal, but failure to change might be.” Every off season, Coach Wooden would seek out the best coaches in the country in a particular discipline (such as zone full court press) and would spend that year learning everything there was to know about it. The man did not accept mediocrity. “If you don’t have time to do it right, when you will have time to do it over?”
The most important thing I learned from studying Coach Wooden is that we all need to be more thoughtful about the affect we have on others. We can choose to lead, to inspire, to demand more of others; or we can be wrapped up in what is best for us. We must be committed to teaching (as he was) and creating leaders who are lifelong learners. “It’s what you learn after you know it all that counts.”
In announcing the passing of the greatest coach of all time, Vin Scully quoted Shakespeare on air Friday night “His life was gentle and the elements so mixed in him that nature might stand up and say to all of the world; this was a man.”
John Wooden 1910-2010
“The main ingredient of stardom is the rest of the team.”
“Winning takes talent, to repeat takes character.”
“Never mistake activity for achievement.”
“Be quick, but don’t be in a hurry.”
“The worst thing about new books is that they keep us from reading the old ones.”
“Don’t give up on your dreams, or your dreams will give up on you.”
“Success comes from knowing that you did your best to become the best that you are capable of becoming.”
“Winning takes talent, to repeat takes character.”
“Don’t let what you can’t do stop you from what you can do.”
“Talent is God given. Be humble. Fame is man-given. Be grateful. Conceit is self-given. Be careful.”
“It’s not so important who starts the game but who finishes it.”
“You can’t let praise or criticism get to you. It’s a weakness to get caught up in either one.”
“A coach is someone who can give correction without causing resentment.”
“The team that makes the most mistakes usually wins, because doers make mistakes.”
“Success is never final, failure is never fatal. It’s courage that counts. ”
“What you are as a person is far more important that what you are as a basketball player. ”
“There are many things that are essential to arriving at true peace of mind, and one of the most important is faith, which cannot be acquired without prayer. ”
“It’s the little details that are vital. Little things make big things happen.”
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Posted by Marc Emmer - President - Optimize Inc.
