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April 30, 2005
Burgeoning Activity at the Palestine Stock Exchange
Catching up on some reading I had saved for when I got back from China: here's an article on the Palestine Securities Exchange, where prices doubled in the first quarter on improved prospects for peace and stability.
The exchange has a market capitalization of just over $2 billion; by comparison, about the same market cap as Saks Incorporated. Recent gains have been driven by the Palestine Telecommunications Co. P.L.C. and Palestine Development & Investment Ltd., a real estate and business development company.
One securities firm there has done more business in the past three months than in the previous three years!
Capitalism is truly a dynamic organism, springing with life at the slightest nudging.
Posted by John at 10:06 AM | Comments (0) | TrackBackApril 29, 2005
Developing Into IT Leaders
In interesting article originally published in The Business Times, Patricia Yim, managing director of IBM Singapore, details a number of reasons why future leaders in IT may come predominately from developing countries. Innovation in IT in Asia, Eastern Europe, and Latin America is being driven in part by lower cost open source software, which spurs local software development.
IBM couldn't be happier, as that's exactly where they are placing their bets.
Posted by John at 1:25 PM | Comments (0) | TrackBackSeveral Other Thoughts on Bank Stock Prices
The waning of the m&a frenzy of the past few years in the banking industry is not the only serious headwind facing bank stocks, in our view:
--The beginning of the end in the cycle of any stock market sector is when the momentum investors start crowding in. Over the past year or two bank stocks have attracted not only the usual value-oriented institutional investors, but momentum and growth funds seeking “what’s working now.”
With the lousy relative performance of this group in recent months, those same momentum and growth investors are heading for the exits, it seems, and using those proceeds to build their exposure in better performing groups like energy and natural resource-oriented sectors. This phenomenon is one explanation for why rallies in the financials in 2005 seem to be short-lived.
--Moreover, as we implied in earlier comments, the sell-side on the whole is still too bullish on this group. We see too much “relative valuation” analysis on banks right now (“this stock’s at 10x earnings, while its peers are at 12x earnings, so buy it”). Such justification for buy recommendations, most experienced investors will tell you, is forced optimism which often leads to capital losses.
--Investment banking rears its ugly head in this equation as well. Merger & acquisition fees originating from the banking industry have been significant in recent years. Coming as no shock to anyone, investment bankers continue to exercise (at the least) subtle pressure on analysts regarding their comments on favored clients.
Wall Street has seemingly learned from the email droppings of past scandals, so the pressure exerted is direct and face to face. It exists, nonetheless.
Eventually, the sell side will largely throw in the towel and lose their bullish bent on the group, and a healthy proportion of them are fired by their short-sighted geniuses in senior management. At that point, the “all clear” sign should be flashing for investors.
Posted by John at 1:22 PM | Comments (0) | TrackBackPoliticians Wanted Their Ads Subsidized
The U.S. Senate is wrangling over campaign finance, centered largely on Section 527 groups. You won’t read about it in the Washington Post or other accounts of the development, but there’s bi-partisan agreement on one point: getting political ads subsidized by broadcasters (and ultimately, other advertisers).
According to the Television Business Report, a last minute amendment was attached to Senate Resolution 271 by Illinois Democrat Dick Durbin. Durbin’s amendment requires broadcasters to charge the lowest unit rate to political candidates during the year leading up to Election Day. Moreover, such ads would be non-preemptible.
If this proposal becomes law, broadcasters will inevitably make up for this discounted airtime by charging higher rates to their other advertisers. As the TVBR notes, it would be encouraging to broadcasters (and to voters at large) if this proposal were about increasing debates or town hall meetings.
Forget about that, says Washington: we want unobstructed, discounted airtime to paste the country with as many ads (invariably negative) as possible.
Posted by John at 8:04 AM | Comments (0) | TrackBackQuote of the Day for Friday, April 29, 2005
Today's quote is from the great Duke Ellington, born on this date in 1899:
"Fate is being kind to me. Fate doesn't want me to be too famous too young."
Posted by John at 4:08 AM | Comments (0) | TrackBackApril 28, 2005
Coughing Up Blood: The Dying Market for Bank and Thrift M&A
Most sell-side research firms are petrified to say it, but Sterne Agee isn’t: the m&a environment for banks and thrifts has died and may not be resurrected anytime soon. Measured by the number of announced transactions, acquisition activity is at a three year low, notes Sterne Agee’s Jim Schutz in a recent report (pdf). Moreover, about 75% of the total deal value in the first quarter was accounted for by one deal: Capital One’s acquisition of Hibernia.
This drop in acquisition activity has negative implications for bank stock valuations beyond what we’ve already seen in 2005, argues Schutz, and I agree with him. Perceived takeover value for a number of small and medium sized institutions has dropped in recent months as the price of acquisition currency used to buy those banks—the share prices of larger acquirers—has dropped significantly.
At the same time, unfortunately, the industry is "awash in 'pitch books,'" notes Schutz. ("Pitch books" are the documents prepared by investment bankers detailing the virtues, actual or projected, of their client institutions seeking to sell out.) My anecdotal observation matches Jim’s. Moreover, I see absolutely no evidence that seller expectations have gone down. Virtually every bank I talk to assume three times book is an accomplished fact if they want to sell; the only doubt is how much over three time book they can wrangle out of the buyer.
Sellers have gotten used to buyers easily (and in some cases indiscriminately) using ridiculously absurd assumptions to justify three times book value or more. If you’re an acquirer and your acquisition currency (share price) has been shaved by 15%-20%, it’s harder to justify those assumptions even if the Kool-Aid you’re drinking is 140 proof.
The combination of reduced values in acquisition currency and a bumper crop of potential sellers is a deadly combination for the m&a environment. Further, we haven’t even mentioned the fact that earnings for a number of acquirers in the first quarter were either short of expectations or of very low quality (to be charitable), causing reduced expectations for 2005 results. A tough earnings year will likely to cause many acquirers to have an inward focus for the time being.
The “time value of money” calculation for many bank stock holders looking for a takeout had gotten more adverse in recent months. Bank stock prices are beginning to reflect this fact. Wall Street is loath to freely admit it, however, and is unlikely to do so until the fact is so obvious it cannot be ignored.
Posted by John at 2:49 PM | Comments (0) | TrackBackQuote of the Day for Thursday, April 28, 2005
Today’s quote is from Harper Lee, author of To Kill a Mockingbird, born on this date in 1926 in Monroeville, Alabama:
"Before I can live with other folks I've got to live with myself. The one thing that doesn't abide by majority rule is a person's conscience."
April 27, 2005
China Tastes Great for Yum! Brands
Starting in 2005, Yum! Brands, owner of fast food brands such as KFC, Taco Bell, and Pizza Hut, begins reporting information from its international business in two separate operating segments. Because of its importance in this company’s overall results, the China Division (which includes Thailand and KFC Taiwan in addition to mainland China) will be reported separately from the rest of the International Division. (A recently released detailed presentation on Yum’s China Division be found by following this link.)
The information which has been released so far is revealing. Yum’s operating profit in their China Division has expanded by 39% compounded since 1999, growing from $39 million to $206 million in fiscal 2004.
In the just reported first quarter of 2005, the company reported China Division sales of $235 million with operating profit of $53 million. By contrast, in the Untied States, Yum’s roughly 18,400 stores generated only $1.3 billion in revenue and operating profit of $162 million.
In other words, although the China Division has 90% fewer stores than Yum’s U.S. operations, it is already one-third the size of the U.S. operation, measured by operating profit, and gaining rapidly.
It’s little wonder that Yum plans to open about a store a day in China (over 350) during 2005.
Posted by John at 6:01 AM | Comments (0) | TrackBackQuote of the Day for Wednesday, April 27, 2005
Today's quote is from Ralph Waldo Emerson, who died on this date in 1882:
"Whatever course you decide upon, there is always someone to tell you you are wrong. There are always difficulties arising which tempt you to believe that your critics are right. To map out a course of action and follow it to the end, requires some of the same courage which a soldier needs."
April 26, 2005
A Better Educated, Higher Earning U.S. Hispanic Population
I've been reading a excellent piece of newly released research entitled The U.S. Hispanic Economy in Transition: Facts, Figures, and Trends. Many of its findings confirm many data points we’ve passed along in "Tidbits" in recent months (and run counter to many pat assumptions about the Hispanic demographic:
1. The aggregate net worth of the U.S. Hispanic population reached $534 billion in 2000, up over 30% in two years. This growth was 5% faster (albeit off a smaller base) than that of non-Hispanic whites over the same time period. Net worth, of course, is a much better measure of wealth than income.
While the biggest increase in net worth came increased home ownership, other traditional savings vehicles showed increases as well. Interest earning accounts rose 20%, 401K and thrift savings plans were up 50%.
2. Hispanic-owned businesses, one of the fastest growing segments measured, rose to 2 million in 2004, up 82% from 1997. Total annual sales of Hispanic-owned firms are expected to rise 70% by 2010 to $465 billion.
3. While immigration has been the biggest factor in the growth of the U.S. Hispanic population over the past 30 years, trends are changing. Second generation Hispanics—the U.S.-born children of immigrants—are emerging as the largest component of the population. By 2010, about 11% of the total U.S. population ages 5 to 19 will be second generation Hispanics.
4. Native born Hispanics are increasingly likely to be high school graduates. In 1980, only 44.5% of U.S. Hispanics were high school graduates. by 2000, the percentage had risen to 57%. As the number of native born Hispanics rises proportionately to foreign-born, education attainment will increase as well; in 2003, over 80% of native-born Hispanics had a high school degree or higher, compared to just over half for foreign-born Hispanics.
5. Increased education means higher disposable income. In 1979, about 60% of Hispanic households with incomes between $40,000 and $140,000 had educational attainment at the high school graduate level or higher; twenty years later, that number had risen to 76%.
The U.S. Hispanic population, still young, will continue to experience above-average gains in disposable income and net worth for the foreseeable future. Consequently, the business opportunities in this demographic should continue to expand significantly.
Posted by John at 11:44 AM | Comments (0) | TrackBackQuote of the Day for Tuesday, April 26, 2005
Today's quote is from novelist Bernard Malamud, born on this date in 1914:
"Without heroes, we are all plain people and don't know how far we can go."
April 25, 2005
"Cheap Labor" and "China" Becoming Less Synonymous
The terms “cheap labor” and “China” have become synonymous in the minds of many Americans. With 1.3 billion (probably undercounted) people, China’s low cost labor advantage is seemingly infinite, or so the perception goes.
The actual truth is more complex. As we’ve covered in "Tidbits" previously, China’s low cost labor advantage is actually more transient than permanent, as with many advantages that global competitive forces can attack. Because of factors such as the one child policy and greater urbanization (which is a natural birth rate inhibitor), the number of 15 year olds (a reliable proxy for the new supply of cheap labor) will steadily decline in coming years. Such demographic trends are largely unalterable, as they have already been set into motion many years previously.
This recent Economist article examines the problems some companies are having with turnover. A Hewitt Associates study pegs China’s turnover rate at 12.6%, and all of the Chinese companies surveyed by Hewitt expect wages to increase in 2005.
Because of both rising labor costs and labor shortages, some companies are actually considering outsourcing from China, according to the Economist. (Did you ever think you’d be reading that phrase?) Vietnam and Cambodia are likely venues.
In a global economy, labor costs can invariably be undercut, particularly as a labor forces in a particular region or country becomes more skilled and more costly. China is not exempt from this inevitability.
Posted by John at 5:32 AM | Comments (0) | TrackBackQuote of the Day for Monday, April 25, 2005
Today's quote is from one of the greatest jazz singers of all time, Ella Fitzgerald, born on this date in 1917:
"It isn't where you came from, its where you're going that counts."
Posted by John at 4:34 AM | Comments (0) | TrackBackApril 21, 2005
"Publix Sabor" Makes Its Debut
Today in Kissimmee, Florida, Publix Super Markets is debuting "Publix Sabor," a new store format oriented to the Hispanic demographic. (We had reported this development to you last month.) The store will feature a greatly expanded selection of food products important to Latino families which are not commonly found in many mainstream department stores.
This remodel is not a retrofit of an aging small store. This 40,000 foot location is only about six years old. The company is remodeling another store in Hialeah into the "Publix Sabor" format, and you can bet that many more will ultimately be opened across the Publix footprint.
Publix, if they're smart (and they are), will market these stores beyond the targeted Hispanic demographic. Such an effort, I predict, will be successful, given America’s always expanding tastes for different foods.
Posted by John at 6:26 AM | Comments (0) | TrackBackIn Case You Missed It: China is Driving World Steel Demand
Assuming this particular fact wasn’t already drilled into your head, the International Iron and Steel Institute (IISI) forecasts that China’s demand for steel will drive the worldwide market. The total use of finished steel products will exceed 1 billion metric tons for the first time in history, says the IISI, and China will account for 80% of this year’s growth.
The IISI also forecasts that apparent steel use will fall in the United States this year. Our anecdotal observations confirm such a forecast. Aggressive inventory build-up in late 2004 has left users with an overhang so far in 2005, and recent price decline make the pain of such an overhang more vicious.
JPMorgan's Dimon: Favoring the "True" vs. the "Tried"
As profiled in the same BusinessWeek issue as Jeff Immelt and GE, JPMorgan’s Jamie Dimon has a much harder task of reinvention. For several years, what is now JPMorgan largely thrived off two unsustainable trends.
One was a terrifically strong capital markets business, which peaked in 2000 during the zenith of the stock market bubble. At the same time the company delivered short-term results through a series of cost-cutting mergers which kicked off a decade and a half ago by the merger of Chemical Bank and Manufacturers Hanover.
In realizing the benefits of the JPMorgan acquisition of Bank One, Dimon could easily pursue the company’s old cost cutting formula. Such a strategy is easier for analysts to get their arms around such a strategy (and therefore applaud it). Moreover, it fits Dimon’s image as the no-nonsense hard-nosed manager; BusinessWeek calls him the “Hatchet Man.”
Dimon is pursuing a different tack, because he’s smart, first of all, and as a 49 year old CEO successor in waiting, he knows he has a lot of time ahead of time.
Dimon recognizes the need to delay realization of the cost cutting benefits of the Bank One acquisition by making substantial investments across the company. The long neglected retail bank is in the early stages of receiving a substantial overhaul and expansion, and eight global private banking offices will be opened. Investments will be made in technology which helps expand the credit card and consumer finance business. The investment bank is getting a new commodities and currency trading platform. The 401-K administration business will be significantly expanded.
JPMorgan’s near term earnings are weighted down from such expenditures, giving many analysts heartburn. The company’s trade about 20% below the high JPMorgan shares touched in the afterglow of the Bank One merger announcement. One analyst is quoted in the story to the effect that a one to two year turnaround story is now a three to five year story.
Dimon’s moves are not just appropriate; they are in fact essential for this company to have any hope of sustained vitality over the long term. While optically pleasing to earnings in the short run, the old formula this company employed for years has played out. The law of large numbers combined with the effects of underinvestment in the business have insured as much.
Dimon is a very unusual large bank CEO. He doesn’t deal in grand visions induced by the latest “synergistic” deals. Based on the anecdotes I’ve heard about his time as Bank One’s CEO, he spends a lot more time with in the trenches with actual customers, God forbid. He understands, as he is quoted in the article, that banking is "1,000 small steps."
I wasn’t swept up in the giddiness of the Bank One acquisition when it was originally announced. The spin on the deal’s “benefits,” spouted by CEO William Harrison and even Dimon himself, sounded too pat, too assured.
The reality, though, is that Dimon is forcing JPMorgan into tackling a much more difficult yet lucrative task: reinvigorating the company, business line by business line, so that sustainable organic revenue growth can be achieved. Such a strategy makes JPMorgan shares, particularly now that it has drawn more skeptics, much more inviting.
Quote of the Day for Thursday, April 21, 2005
Today's quote is from psychologist Rollo May, born on this date in 1909:
"The acorn becomes an oak by means of automatic growth; no commitment is necessary. The kitten similarly becomes a cat on the basis of instinct. Nature and being are identical in creatures like them. But a man or woman becomes fully human only by his or her choices and his or her commitment to them. People attain worth and dignity by the multitude of decisions they make from day by day. These decisions require courage."
Posted by John at 4:12 AM | Comments (0) | TrackBackBack From China
I’m back home from China after an exhausting, packed two week trip which encompassed twelve different cities. I thought I might have time to post while I was there but my schedule and need of sleep prevented it.
I’m glad to be home, and I’ll be posting some observations gleaned from my travels over the next several days.
April 4, 2005
Quote of the Day for Monday, April 4, 2005
Today's quote is from Dorothea Dix, born on this date in 1802:
"In a world where there is so much to be done, I felt strongly impressed that there must be something for me to do."
Posted by John at 5:15 AM | Comments (0) | TrackBackApril 3, 2005
Boldly Remaking GE to Insure Future Success
In case you need any further proof that in the dance hall of the elephants, GE may be the most nimble of them all, read "The Immelt Revolution" in the March 28, 2005 issue of BusinessWeek. CEO Jeff Immelt, instead making incremental moves, has plunged the company into a complete regenerative program.
His moves include:
--Encouraging the recruitment of outsiders, inside of relying exclusively on home grown talent, to give the company fresh blood. One example is Vice-Chairman Sir William Castell, CEO of recently acquired Amersham, now President and CEO of GE Healthcare.
--Inside of the practice of moving the best managers around to different spots, encouraging managers to become experts in their business.
--A $100 million renovation of the company's research center in Niskayuna, New York; expansion of research centers in Bangalore, Shanghai, and Munich.
--Getting out of slow-growing, low margin “cash generators” like appliances in favor of more promising growth industries such as bioscience and wind power.
--Inside of tying executive compensation exclusively to better bottom line results, linking bonuses to the ability to generate new ideas, cash growth, revenue growth, and increased customer satisfaction.
For a leader like Jeff Immelt and a company with the size and the track record of GE’s, the only way to insure continued success is to undertake such an overhaul. The strategy of small, incremental moves around the edges is actually the most risky alternative for large companies like GE.
The Organizational Metaphor in the Search for a Successor to John Paul II
The selection of a successor to John Paul II could be as momentous as his own selection in 1978, given the changing composition of the Catholic Church.
The Church’s most rapid growth has been in Africa and Latin America over the past two decades. Meanwhile, the leadership of the Church remains significantly European; of the cardinals eligible to vote on a new pontiff, 58 are European, while only 11 are from Africa and 21 are from Latin America. Many Catholics in Third World have high expectations that the new pontiff will come from their region.
This decision and its consequences serves as an interesting metaphor for the self examination and realignment many of the world’s institutions, whether religious or secular, must undergo in order to maintain vibrancy and relevancy.
April 1, 2005
Whose 21st Century Will It Be?
Online magazine The Globalist features an interesting analysis by Daniel Lian, Morgan Stanley Chief Economist for Southeast Asia, of whether the 21st century will actually belong to China, a label many have already conceded, or whether the title will actually be taken by India.
One of his key points, a good one, is that China’s edge in low wage rates is not a permanently sustainable condition (for any needed confirmation, ask Mexico):
China’s present edge on manufacturing — low wages, an inexhaustible supply of quality cheap labor and an already large and rapidly growing manufacturing capacity — presents no significant obstacles to India’s quest for manufacturing growth.
In fact, China’s low-wage, low-value-add, low-returns model is quite vulnerable — as India’s ability to better protect intellectual property rights may allow India to offer similar low wages, but be quicker at climbing the value chains, thus representing a better bargain for the West and global investors. . .
Lian’s theory could prove true if China doesn’t come to embrace the importance of design, but anecdotal evidence suggests otherwise.
Posted by John at 11:47 AM | Comments (0) | TrackBackToo Big to Work?
The Economist asks a wonderfully salient question about larger financial institutions, such as AIG, Morgan Stanley, Citigroup, and Fannie Mae, which have run into recent troubles: “Too big to fail, or too big to work?”
“What in the past appeared to be a beneficial synergy of operations now looks like a series of unmanageable conflicts,” says the Economist. Conflicts and the resultant regulatory problems miss the larger point, which exists regardless of any consideration of current troubles.
As finanical instituitions get to be a certain size, the law of large numbers takes over and revenue growth becomes increasingly difficult. Cross-selling and the attempt to gain the elusive “beneficial synergy of operations” becomes more frantic. Clients begin to suspect, and rightly so, that the advice they receive is tainted, regardless of whether it actually is or not.
Moreover, technology has helped preserve and even enhance the “cottage industry” aspect of the financial services business. While scale is very important in some sub-sectors of the industry (like credit cards), cheaper, more powerful technology has allowed smaller institutions to serve larger, more sophisticated clients than every before. Such is the case not just in traditionally less capital intensive sectors like corporate m&a advisory or investment management, but even in banking and insurance as well.
Posted by John at 11:26 AM | Comments (0) | TrackBack
"Design" Rising in Importance in the Chinese Economy
’s Ministry of Labour and Social Security announced the recognition of several emerging professions which reflect the growth and development of the country’s economy, particularly its service sector.
Newly recognized occupations include web editor, toy designer, real estate designer, textile designer, intelligent building manager, credit manager, and corporate culture designer.
Additional professions under consideration include health instructor, sports agent, and video game art designer.
Note the frequency of design-related professions. Japan developed its industry into something more than a low-cost manufacturing hot house; “made in Japan,” in the 1960s, had much different quality connotation than the term did by the 1980s and afterward.
China is ultimately headed toward the same goal.
Posted by John at 9:36 AM | Comments (0) | TrackBackQuote of the Day for Friday, April 1, 2005
Today's quote is from Anatole France:
"The fool doth think he is wise, but the wise man knows himself a fool."
