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.
August 25th, 2011
Everybody likes to think of themselves as a strategic thinker. From advisory board members, to CPA’s and marketing consultants, lots of people list “strategic planning” within their list of competencies. Yet, there is a big difference between thinking broadly about strategy and creating a functional, tangible, strategic plan.
Strategy is somewhat esoteric, and theoretical. It deals with broad decisions that must be made about a business such as what products to offer; in which markets, using which core capabilities. The carefully crafted strategic plan has tactics woven into it, in the form of goals, objectives, initiatives, and action plans.
Unfortunately, some companies have a strategy and no strategic plan (and vice versa). If the strategy is stored solely within the confines of the thinking of the entrepreneur, there is no strategic plan.
There are books written about preparing a strategic plan in an hour and writing a marketing plan out on the back of a napkin. The napkin’s evil cousin is the one page business plan, which may tout simplicity as grand, but lacks depth, scope and detail. As the thinking goes, anything as important as the future of a business (and the implications for its employees and investors) should be explained in a few paragraphs. Using the same mindset, an airline pilot’s flight plan could be drawn on a napkin. A cancer researcher’s thesis should be able to fit on an index card. Perhaps we can cut a few corners and keep the design of that skyscraper to a minimum. Who has the time?
The other problem with the napkin analogy is that it suggests two guys sitting in a pub dreaming up the grand strategy over a Guinness. Some of history’s most ingenious strategies may have been dreamed up that way. Yet the grand strategies do not always translate into a functional strategic plan based on research, thought, prodding, challenge and development of core capabilities such as supporting human capital and technology.
Most importantly, the people who will be responsible for buying into the grand scheme need to be included in the process of developing it. If a board of advisors or two guys in a bar craft and develop the strategy void of management’s input, they are likely to sabotage it or at least slow down its momentum.
Thus, the distinction between being a closet strategist and creating a thorough strategic plan is an important one. The finer things in life, like a great cabernet or scotch, take time. Building a strategic plan requires patience and a level of expertise that you would expect out of a CPA or intellectual capital attorney.
Take the time to convert your strategy into a tangible strategic plan that you can share with your investors, employees, vendors and even customers (when appropriate). Isn’t the future of your company worth it?
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Posted by Marc Emmer - President - Optimize Inc.
