Munis: Does AMBAC’s Plight Boost Risk?
November 16th, 2009 | Posted by stockPosted by: Karyn McCormack on November 16, 2009
Although municipal bond insurers have been on life support for almost two years, Ambac Financial Group’s (ABK) revelation in a Nov. 9 filing to the U.S. Securities and Exchange Commission that it might have to file for bankruptcy protection in mid 2011 should serve to remind muni investors of the need to be especially careful with what they buy.
Until early 2008, cities, towns and states across the U.S. were able to offer muni bonds at a nice premium if they were insured by Ambac, MBIA (MBI) or a handful of other companies. Now that it’s understood how insurance, once limited to munis, has been spread thinly across many riskier assets, the market has no illusions about insurers’ ability to cover losses in the event of another perfect financial storm, says Bill Larkin, a portfolio manager for fixed income at Cabot Money Management in Salem, Mass.
Despite the strong possibility that after June 2011, Ambac may not be able to fulfill its obligations, muni investors don’t have much reason for worry: bond prices have already factored in the increased risk of default, since investors no longer depend on insurance, say some bond fund managers. While it’s bound to be painful, municipal governments have no choice but to bring their spending in line with lower revenues, says Larkin. “States can raise fees, levy fees, auction off properties, lay [city workers] off. They can do some uncomfortable things, but the bond holders get paid.”
Muni prices have also been pushed down by the market’s anticipation of more supply hitting the market as cities and states feel the need to raise funds amid sharp declines in government revenue from falling property valuations, he says.
His one concern is that there could be a loss of confidence among high net worth individual investors, who dominate the muni market. Unlike institutional investors, retail investors tend to get their information from the news and could panic a little on negative headlines such as those regarding Ambac last week.
“If the market got soft because of that, I’d be in there buying [in the secondary market]. I think a lot of other people would be, too,” he says.
Despite Larkin’s optimism, there are real questions about how long it will be before some of the most cash-strapped municipalities succumb to the bad economic conditions and default on their debt.
That’s why Nuveen Asset Management has added research staff in order to be “even more diligent in analyzing the underlying credit on the bonds we buy,” says Tom Spalding, who manages about $9.5 billion in muni assets at the Chicago-based firm.
“What we buy now that used to be insured at a triple A [credit rating] is now providing value for us, with wider spread yields,” says Spalding. He estimates that bonds are 0.4% to 0.5% cheaper than they were when they carried insurance people could believe in.
Larkin at Cabot plays the muni bond market very defensively. “You want to be looking at critical services – interstate highway bonds, schools,” he says. “I avoid hospitals because they have funding problems,” as do some universities and airports that don’t have a monopoly on service.
Larkin scans U.S. Census Bureau data to sniff out communities with lots of children, low divorce rates and high household income. “That correlates to a high [credit] rating.”
Spalding agrees that investors should stick with bonds that finance cities’ essential services, which comprise roughly 90% of what Nuveen buys.
By David Bogoslaw
Singularity University Gives Execs a View of the Future
November 16th, 2009 | Posted by innovIn his various roles as a computer programmer, an emergency-medicine physician, and the director of Microsoft (MSFT) Medical Media Lab, Michael Gillam stays well ahead of the advances that are transforming health care. Yet even he can be caught unawares by the pace of technological change.
Gillam was reminded of this recently during a nine-day boot camp aimed at instructing professionals on how robotics, nanotechnology, biotechnology, and other cutting-edge disciplines are affecting industries. Gillam, one of 20 participants in Singularity University’s inaugural program for executives, was listening to futurist Ray Kurzweil. “We will have plenty of computation as we go through the 21st century,” Kurzweil told attendees in the small dining room featuring Spanish Mission-style decor. “That is not so controversial. The more controversial aspect is really, will we have the software?”
Watching the presentation, Gillam realized that the medical industry is woefully unprepared to handle and analyze the vast amounts of data likely to be unleashed in coming years as health records are digitized and physicians are able to track more information. “[I realized] we have to do this quickly,” Gillam says. “You look at those graphs and you feel a strong sense of urgency.”
That’s the kind of conceptual shift Singularity University’s creators hope to provoke. Kurzweil, author of The Singularity Is Near, and X Prize founder Peter Diamandis began Singularity earlier this year. Singularity offers a nine-week summer program for graduate students and the compressed session Gillam attended.
Singularity’s founders and its executive director Salim Ismail, formerly head of Yahoo’s (YHOO) Brickhouse product incubator, want participants to leave with a sense of where opportunities lie—and the dangers of failing to prepare for them. “We want to help them avoid becoming the next Kodak (EK),” Ismail says in reference to the film company that failed to prepare for the advent of digital photography.
Other examples abound, Diamandis says. “The newspaper industry and the publishing industry are falling as a result of digital communications,” he says. “You have Detroit in serious trouble.…These are century-old billion-dollar industries, and many of these [disruptions] had been foretold.”
Both programs take place at NASA Ames Research Center at Moffett Field in the heart of Silicon Valley. The first of the executive programs ended Nov. 15. Attendees hailed from business, nonprofits, government, and academia in 10 different countries; some sessions lasted from 8 a.m. till past 10 p.m. “If we do our job right, this will affect where companies invest, the types of companies they acquire or don’t acquire, the type of employees they hire, and where they put their research and development dollars,” Diamandis says.
During the first few days, participants heard from thinkers and practitioners in six key areas: artificial intelligence and robotics; nanotechnology; biotechnology and bioinformatics; medicine and human-machine interfaces; networks and computing systems; and energy and environment systems. Instructors included Ralph Merkle, a senior research fellow at the Institute for Molecular Manufacturing who specializes in nanotechnology; Dan Barry, a former NASA astronaut who’s now an entrepreneur, taught robotics.
It takes more than money to prepare for change, said biologist Andrew Hessel, a veteran of biotech companies including Amgen (AMGN). “You can throw a billion dollars at these types of problems and not really go too far,” he said during his session on biotech.
Later in the week came visits to Bay Area companies and organizations that are putting new technologies in motion. NASA researchers discussed using algae to produce new types of fuel, while researchers at Halcyon Molecular talked about breakthroughs that helped them produce ultrafast, low-cost genome sequencing techniques.
Participants were especially wowed by a jaunt to Menlo Park’s TechShop, a kind of Kinko’s for industrial design that gives members access to an array of tools, from drill presses and band saws to laser cutters and metal-bending machines. Initially set up with hobbyists in mind, TechShop has also become an entrepreneur’s workshop that underlined one of the key themes of the week: Thanks to technological advances, even small players on a budget can disrupt long-established companies. “It used to cost almost a million dollars to get prototypes out the door,” Gillam says of TechShop. “Now someone can do it on their own in a couple of weeks.” TechShop charges a $120 monthly membership fee.
For the last part of the program, students worked with facilitators from Palo Alto (Calif.)-based innovation and design consultancy IDEO and used feedback from university faculty to describe how they expect the emerging technologies to impact their industries in the coming decade.
Lunk Jayanata traveled from Jakarta, Indonesia, to glean insights for his three companies, including one that invests in tech startups. “This is the only institution that gathers all these smart people in a forum to discuss what’s coming,” he said.
Singularity University hopes the classes will also pay dividends through an alumni network that helps keep participants on top of the latest developments and helps them recruit future employees and business partners. “There’s no way any one of us can keep up with everything,” says Ross Shott, a student from the summer program who helped run the executive program. “But there’s very little that’s going to slip by all of us.”
Ismail says 18 companies, the governments of six countries, and representatives from four U.S. agencies have expressed interest in the next executive session, scheduled to start in February. Some companies have also approached him about creating an in-house version on their own sites, an option Ismail is considering. “The world is completely changing in every domain at a very fast pace,” Ismail says. The companies that are interested in Singularity University “think we have a finger on the pulse of how it’s going to change and how you can navigate that.”
Are Viacom Investors Too Focused on MTV?
November 13th, 2009 | Posted by stockSure, Lady Gaga, Chris Brown and Jay Z make headlines, but are Viacom (VIA) investors too focused on MTV?
The folks at Ariel Investments think so. MTV accounts for just 13% of Ariel’s estimate of Viacom’s value, according to Ariel’s analysis of Viacom , released on Nov. 13. (Viacom is a holding in the Ariel Appreciation Fund.)
And Viacom’s filmed entertainment business “also receives a disproportionate amount of attention,” Ariel says. That unit, which includes DVDs, generates 40% of the company’s revenues, but it accounts for only 4% of profits because of its low margins. “Investors focus on the near-term headwinds of declining DVD sales and a crowded film production industry, because the output of this segment—glamorous movies—is very visible, even though not highly profitable,” Ariel says.
Ariel says it started buying Viacom in mid-July at $20.83.
Despite the stock’s increase, we believe the stock still has substantial upside opportunity. As of September 30, 2009, shares traded at $28.04, a 22% discount to our private market value of $35.76
Now Viacom is trading around $32. Do you think it still has room to rock and roll?
November 12th, 2009 | Posted by innovWho needs job security? In June 2008, as the recession was moving from bad to worse, Caterina Fake gave up a comfortable, executive-level job at Yahoo! (YHOO) to launch a company. She left California and set up shop in New York City to co-found Hunch, a Web site that uses the experiences of others to help people make decisions. The 40-year-old, who had co-founded the photo-sharing site Flickr before it was acquired by Yahoo, couldn’t resist the idea of creating something new, whatever the economic headwinds. “The entrepreneurial spirit really thrives in situations of adversity,” says Fake. “The world is full of more possibility.”
Fake isn’t alone in betting on that. A crop of potentially groundbreaking companies is emerging from the wreckage of the Great Recession. No question, some will blow up, and others will fail to reach their potential. But the downturn has done little to dampen the entrepreneurial spirit. During the first half of this year, angel investors financed 24,500 new ventures, 6% more than during the same period last year, according to the Center for Venture Research. The overall amount of money going into startups has declined, but the figures suggest that this year will see the birth of roughly 50,000 companies with enough promise that someone is betting money on them. “It may be that this is the best time to start a company,” says Carl Schramm, president of the Kauffman Foundation, an organization that promotes entrepreneurship.
With that backdrop, BusinessWeek set out to find the world’s most intriguing new companies. After much reporting and research, we’ve assembled a list that’s a barometer of innovation trends in the global economy, with startups that are pioneering new markets in biotechnology, clean technology, health care, and Web computing. Hunch is just one of 25 that made the final cut. Other standouts include Epizyme, a Massachusetts outfit creating cancer-fighting drugs that attack errant proteins; China Water & Energy, a Hong Kong company developing massive wind-power farms in the Chinese countryside; and Driptech, a California startup engineering low-cost irrigation systems for poor farmers around the world. “The markets that we are addressing in India and China are vast and untapped,” says Driptech’s 26-year-old founder, Peter Frykman.
History shows that great companies are often built during bad times. In 1939, at the tail end of the Great Depression, two engineers started Hewlett-Packard (HPQ) in a garage in Northern California. Silicon Valley itself was largely created during the nasty recession of the mid-1970s. During that decade, entrepreneurs laid the groundwork for the boom of the 1980s, building companies that pioneered three new industries: Atari in the video game business, Apple (AAPL) in personal computers, and Genentech in biotechnology. “The only people who venture out in tough times are on a mission, which is what you need,” says Michael Moritz, managing partner of Sequoia Capital, a venture capital firm that invested in Apple back in the ’70s. “The people we are meeting are the genuine article, as opposed to the pretenders.”
Entrepreneurs, financiers, and historians point to several other reasons for this phenomenon. For starters, everything is cheaper during a downturn, including the cost of labor, materials, and office space. There’s less competition both from incumbents preoccupied with putting out their own fires or from other startups unable to raise money. Tighter money means stronger ideas edge out weaker ones. And the tough times force entrepreneurs to work on their business models earlier, so they end up reaching profitability more quickly than when money comes cheap. “[The years] 2010 and 2011 should be extremely good years for innovative small companies,” says Jim Breyer, general partner of Accel Partners, a venture capital firm that has invested in Facebook. “We’ll see dozens of very successful companies emerge.”
Startups are playing an increasingly important role in American business, and they may play a central role in any recovery. As of the end of 2008, companies infused with venture capital were responsible for generating 12 million jobs and 20% of U.S. gross domestic product, according to a recent survey published by the National Venture Capital Assn. A previous NVCA survey found that venture-backed companies accounted for 10 million jobs and nearly 17% of GDP at the end of 2005.
Entrepreneurship is also becoming more global. China and India are leading the way, but Tarun Khanna, a Harvard Business School professor, sees pockets of innovation popping up in less obvious places, such as Brazil, South Korea, and Turkey; 5 of the 25 companies on BusinessWeek‘s list are based outside the U.S. “Now you are seeing traction in a handful of countries,” says Khanna.
Still, recessions certainly present challenges for entrepreneurs. It’s much harder to drum up business, take a company public, or raise money than during good times. In the third quarter of 2009, venture capitalists invested $4.8 billion in 637 companies, down from $7.2 billion and 994 companies in the year-earlier quarter, according to a report from PricewaterhouseCoopers and the NVCA.
Fake has some experience working her way through tough times. When she co-founded Flickr after the tech bust, Internet startups were shunned and the company couldn’t raise capital from professional investors. So Fake hit up friends and family for money and scraped her way along until the company had built a popular photo-sharing site that foreshadowed the rise of Facebook and other social media Web sites.
Today, Fake is back to being careful with her cash. Last September, to stretch her bankroll, the company lowered salaries for all 10 employees. The group hasn’t scaled back its ambitions, though. They believe Hunch can be a leader in a new kind of search technology, going beyond Google to deliver answers based on the wisdom of crowds. Type in “What magazine should I subscribe to?” for example, and Hunch will provide answers by matching responses from users with similar preferences. “The next phase in search is some mating of brute-force algorithms and user-generated content,” says Fake.
So far, Hunch has built up to about 300,000 users and has been gathering information about those people by asking them 5 to 10 questions. Now Fake is preparing to move out of “learning mode” with a home page that doesn’t require people to fill out a questionnaire. “It is actually time to expand and spend and start a new project,” says Fake. “We love recessions.”
November 11th, 2009 | Posted by innovIf you hang around innovators long enough, it’s pretty clear they all have a deep-seated confidence in both their ideas and their ability to turn ideas into reality. The best innovators are able to do this on a regular basis, delivering value along the way. To some, they may seem invincible, impervious to the naysayers, roadblocks, and intransigent systems in their way. But I believe that this confidence, however valuable, is not what distinguishes a great innovator. Instead, innovation requires a level of vulnerability with which most are uncomfortable.
Roger Martin, Dean of the Rotman School of Management in Toronto, says the hallmark of an innovator is having a confident point of view combined with the self-awareness that something is always missing. I agree. Neurosis-laced vulnerability is what enables innovators to seek critical input and make the random connections needed to fuel innovation. There is always a better way and innovators open themselves up in order to search for missing puzzle pieces.
Innovators possess the unique capacity to put themselves and their ideas out in traffic, expecting and welcoming an onslaught of direct and hard-hitting feedback. The cliché that innovators have thick skin is true—but it isn’t impenetrable armor. It is a semi-permeable membrane that enables a free flow of ideas and experiences in both directions. The innovator’s vulnerability enables an active osmosis of ideas, allowing for freely flowing input from diverse external networks.
Don’t mistake vulnerability for weakness. Innovators are not weak. They are driven to find a better way and will stop at nothing to find solutions and deliver value. They are not afraid to assert and defend their point of view or present their case for change with confidence and conviction. They don’t hold back—and if you listen closely, it’s always personal.
Innovators don’t give presentations. Instead, they share stories, designed to create an emotional connection with the listener. The stories are often self-deprecating, laying bare the innovator’s vulnerabilities. And innovators are central characters in their own narrative, not removed from the process. They’re sensitive, too. They’re the first ones to read the reviews. They can’t wait for feedback and devour every press mention, blog post, or social media blurb. Critiques can’t come fast enough, and good, bad, and ugly comments are all welcome. Anything with the potential to improve an idea or concept is welcome insight. Critical feedback from respected sources is the best fuel source.
Innovators celebrate their vulnerability by diving into the gray area between disciplines, sectors, and departments. They know you can’t learn anything by being the smartest person in the room or from hanging around with people who all think and act alike. Instead, their goal is to recognize patterns and connect dots horizontally across silos. Connecting unusual suspects by bridging perspectives, language, and approaches is imperative.
Don’t mistake vulnerability for naiveté, either. True innovators are firmly grounded in reality and will not claim victory until value is delivered or a problem is solved. Optimism and belief in a better way provides immunity from the anti-everything crowd. A cacophony of detractors is nothing but white noise to an innovator. Despite being surrounded by skepticism and those supporting the status quo, innovators manage to remain positive and committed to their visionary paths forward.
Being genuinely vulnerable is in short supply these days. Perhaps it’s not a coincidence that innovators are such a rare breed.
Can the Low-Quality Stock Rally Continue?
November 10th, 2009 | Posted by stockPosted by: Ben Steverman on November 10, 2009
Stock strategist these days seem obsessed with the concept of quality.
As I wrote as early as June, the March-to-October rally was driven largely by “junk stocks.” Leading the way were smaller firms with more debt, less cash, low stock prices and falling sales. These stocks were rebounding from terrible 2008’s and their rise reflected investors’ relief that worst-case scenarios had not occurred.
But, now, market prognosticators are watching closely to see if the low-quality rally might be over. Or at least waning.
Three different views on this topic:
1. The rally may have further to run, Robert W. Baird strategist William Delwiche noted Nov. 5. But, he says, trends will moderate and not all stocks will participate. He writes of recent activity:
Small-caps have moved into a lagging position relative to large-caps, failing to match gains on the upside and leading the way lower on pullbacks.
Financial stocks look weaker to Delwiche, while energy, consumer staples and utilities are looking stronger.
2. Commentators at Bank of America Merrill Lynch, led by chief U.S. equity strategist David Bianco, focused on the concept of beta, a measure of volatility, in a Nov. 9 note:
We expect higher beta stocks in general to outperform lower beta stocks as the market grinds higher. We expect higher quality stocks to outperform lower quality stocks of equivalent beta.
But beta and quality aren’t the same things, and disentangling the two concepts can be difficult, they warn.
3. If you think the market rally has run out of steam, it may be time to move into so-called defensive stocks, firms that will hold value even if the market sinks or moves sideways.
Barclays Capital portfolio strategist Barry Knapp believes it may be too early to make any drastic moves. But, he wrote Nov. 6, “we have reached a turning point in the Fed liquidity-driven, highly-correlated rally across all asset classes.” He adds:
While it’s probably too early in the cycle to be playing defense, the valuation opportunities present in the space compel us to take a small step in that direction.
He proposes buying more defensive stocks but still favoring more economically sensitive stocks overall. For example, he believes tech, industrials and energy “should continue to outperform.”
No matter what happens, many high-quality stocks seem to be trading at prices that could be attractive to long-term investors.
In the meantime, much will depend on corporate profits in the last three months of 2009. After a long recession and financial crisis, two of the weakest sectors are consumer discretionary and financials. Both are predicted to report huge boosts in earnings early next year.
If they do so — if retailers have a better-than-expected holiday season and banks repair their balance sheets significantly — the low-quality rally just might continue.
The Hidden Cost of Internal Competition
November 10th, 2009 | Posted by innovThe right place for competition is the marketplace, and the wrong place is the workplace. Put simply, the same behavior that can create value externally can cost a company big-time internally.
Competition is kind of like ozone. Ozone benefits us by reducing the sun’s harmful ultraviolet rays outside the Earth’s atmosphere. But inside the atmosphere, ozone wreaks havoc by creating air pollution and damaging our lungs. Similarly, competition damages our businesses when it manifests internally and with business partners. So when it comes to competition, the trick is to avoid confusing outside with inside. This means leaders must understand when and how to morph from competitors to collaborators.
Bringing to market better, faster, thinner, greener products involves competition. But the second we begin competing with team members and business partners, we lose value. Consider this scenario. Your company’s flagship product is suddenly under siege, because a venture-backed startup with disruptive technology has just signed deals with two of your largest customers. Sales, marketing, and engineering come together for a white board strategy session. The immediate objective is to stop the customer defections. Should there be competition in this situation? Absolutely. The company’s survival is at stake! But competition must be externally focused.
The Blame Game
It’s exactly this sort of crisis that breeds internal competition. Many team members focus on which function, team, or person deserves blame. Some “star” players struggle to appear that they’ve saved the day. Jostling for position, finger-pointing at another function or department, developing solutions without engaging key stakeholders are manifestations of internal competition. They distract our companies from the business at hand, compromise agility, and reduce value. The more effective response is to collaboratively develop solutions.
Despite the hit to the balance sheet, many companies foster and encourage internal competition in the mistaken belief that all competition is good competition and that the cream rises to the top. For these companies, competing with colleagues is ingrained in organizational culture. Worse yet, competition is often institutionalized in company procedures.
Some companies embrace a star culture in which individuals are recognized and rewarded for achieving more than their colleagues. Some companies compensate and promote managers only for their own accomplishments rather than for developing the abilities of team members. Still, some companies “rank and yank” team members and regularly eliminate the bottom-performing 5% of the workforce. These practices pit employees against one another and force team members to spend more time, energy, and focus competing with colleagues. What’s lost is the motivation to work collaboratively in innovating processes, retaining and acquiring customers, and developing products and services.
Reducing Internal Competition
Internal competition is a double-whammy. No. 1, internal competition compromises value by distracting the workforce and forcing people to focus on the wrong things. To compound that loss of value, internal competition also prevents companies from creating value through collaboration. Perhaps the most significant way that internal competition derails collaboration involves trust. How can we trust one another if we’re competing in a dog-eat-dog culture? Instead of trust, fear prevails. Another way that internal competition short-circuits collaboration involves information hoarding. Achieving within an internally-competitive culture requires an “it’s my stuff” attitude about data and information. This attitude complicates collaboration, because collaboration requires sharing.
Companies in industries ranging from transportation to consumer products chalk up substantial results by curbing internal competition. That value includes eliminating redundancy, reducing product development time and enhancing customer satisfaction.
Rather than compete for job retention in a challenging economy, mechanics at American Airlines have collaborated to maintain full employment and make their function a profit center. Facing competition from foreign maintenance companies, American has cut the time and number of mechanics needed for major overhauls. This has freed the mechanics to take on additional work from other airlines and air freight companies. Essentially, the mechanics have collaborated across functions and have reduced internal competition to retain jobs and create new business opportunities.
So how can you as a leader reduce internal competition? Here are 5 ways:
• Reward People for Sharing Data and Information
Sharing data and information internally creates value by harnessing resources across the organization. Sales and marketing teams can avoid redundant client contacts, and product development teams can avoid duplication of efforts. Therefore, annual salary reviews should include an evaluation of how team members share data and information to create organizational value.
• Avoid Pitting People Against Each Other
Some companies create internal competition by giving two or more team members the same assignment and rewarding the person who does the best work. Instead, harness complementary skills by encouraging cross-functional teams to meet challenges.
• Recognize People for Gaining Broad Input
Successful collaborative organizations create value by recognizing leaders for gaining broad input into decisions. When leaders make decisions in a vacuum, the organization suffers. Worse yet, some managers make shoot-from-the-hip decisions without analyzing adequate data and information and without input from others. The organization benefits when people participate in decisions regardless of level, role or region.
• Change the Conversation
Language is a powerful component of organizational culture. Too often, shop talk includes sports metaphors and internally-competitive language. As a leader, encourage your team to change the conversation and embrace collaborative language. In a collaborative organization, you should hear language like: “Let’s get input from sales” or “We can make a better decision if we engage finance to run the numbers” or “Let’s connect now with corporate communications to see how different approaches to solving this problem will affect our reputation.”
• Clarify Role of Competition
Team members need to know when to compete and when to collaborate. Educate your workforce that competition belongs in the marketplace rather than in the workplace.
Inside Ski Maker K2′s Design Process
November 9th, 2009 | Posted by innovTo understand the design process at K2, the largest seller of skis in the U.S., consider its relationship with Shane McConkey. One of the world’s most talented and colorful extreme skiers before his death in a ski accident last March, McConkey changed the way K2, and ultimately most of its rivals, makes skis.
It started shortly after K2 began endorsing McConkey in 2004. The company brought him to Whistler, B.C., on a junket to ski with its retail partners. But rather than merely glad hand and promote K2′s latest product line, McConkey wanted to sell an entirely new idea in ski design. He believed skis that curved up at the tips and tails— a design that would come to be known as “rocker”— made powder skiing much easier. So before he took to the slopes that day, he grabbed a piece of wire, ran it around the rivets in the tips of his K2 skis, and cinched it tight around the toe piece of his binding. The rigging pulled the tip skyward. On his makeshift skis, McConkey floated down the mountain. “Point was made,” says K2′s global brand manager Jeff Mechura. “He was a believer in these things.”
What defines K2, though, is that it became a believer too. Other companies might have dismissed the stunt as the wacky gimmickry of a skier who’s jumped off one too many cliffs. But K2 was willing to listen, willing to rethink the conventional wisdom of ski design.
And McConkey gave them an earful. He didn’t just want the rocker; he wanted the skis to be wide, much wider at the tips and underfoot than anything on the market at the time. Within weeks, McConkey was shooting Mechura page after page of ski designs. They included detailed drawings of skis with width and length measurements that would make engineers proud. Alongside those drawings were notes describing his vision. “I think it’s important that the tail is the narrowest part of the ski,” McConkey wrote in one memo, concluding, “I could keep writing for pages more.”
Within a year, the K2 Pontoon hit the market. K2 won’t break out specifics, but in a business where ski models change as frequently as weather patterns, the Pontoon has remained in the stable of K2 skis for five seasons. This year the company is selling a limited edition version of the ski, with all proceeds going to McConkey’s family.
For K2, this is how innovation gets done. The company listens to its athletes and pushes them to push the company. It challenges its staff, many of whom are expert skiers and snowboarders, to challenge convention. “We’ll try anything once,” Mechura says.
It’s not unusual, of course, for ski and snowboard companies to sponsor athletes and even solicit their ideas. Snowboard maker Burton has Winter X Games icon Shaun White in its stable. Olympic gold medalist Ted Ligety skis for Rossignol. The lists goes on and on. And each company, to varying degrees, gets design insights from its athletes. It’s a strategy they all promote.
But McConkey’s pushing K2 to challenge convention is in keeping with the Seattle-based company’s heritage. K2 started in the 1960s as one of the first firms to use fiberglass to make skis. In 1995 it was the first company to sell shaped skis, the hourglass-looking designs that made carving turns a snap.
The K2 Four skis became the best-selling ski of the era and led the industry to embrace side-cut designs. The same year K2 Snowboards was the first company to use a step-in binding system called “The Clicker.” And “rocker”, unheard of in ski design just a few years ago, is now part of the marketing lexicon of the industry, with similar designs showing up from rival ski makers.
K2 is part of the Jarden (JAH) conglomerate that includes such household name as Mr. Coffee appliances, Bicycle playing cards, and Rawlings sporting goods. K2, with some 450 employees worldwide, amounts to just a piece of Jarden, which rang up $3.8 billion in sales in the first nine months of 2009. But Charlie Strauzer, senior managing director of CJS Securities in White Plains, N.Y., who follows Jarden, says that K2′s breakthroughs have allowed the company to outpace rivals, even in a down economy. “While their sales are down year-over-year, they’re taking share from competitors,” Strauzer says.
Two winters ago, Peter Pontano, a binding engineer for Ride, the snowboard company owned by K2, was testing some new designs at Mt. Hood in Oregon. While on a lift up the mountain, the top strap to his board binding fell off, leaving him to snowboard down without it. Much to his surprise, the run was fine, except for the heel-side turns when his toes swung out. It got him thinking about reducing the binding weight by holding the toe in place with the least material possible.
That was the genesis of the Ride ContraBand, a binding that uses two plastic straps to hold the toe in place and is roughly 20% lighter than its predecessor. “We encourage our staff to get out as often as possible,” says Scott Mavis, Ride’s brand director. “A lot of our ideas come from that.” No need for focus groups when the athletes who work for the company are free to innovate.
U.S. Economy: The Big Questions for 2010
November 9th, 2009 | Posted by innovAre U.S. consumers growing confident over growth prospects, or just more terrified over federal fiscal imprudence? Are businesses coiled for a cyclical spending surge, or just “recoiled” in the face of an ongoing commercial real estate collapse and one-sided risk for tax, regulatory, and health-care changes? Will movement in net exports and energy costs help or hinder U.S. growth? Will a rapidly changing political dynamic translate to a voter tsunami in 2010? And will the Fed get caught in the undertow?
It’s likely that all these questions will be answered in 2010.
A major problem for the stimulus legislation of 2009, which was intended to provide a feel-good boost to household spending, is that the effort may have instead exacerbated household fear. It emphasized just how soft economic conditions were and it raised expectations that savings needed to be accumulated in the face of likely sizable future tax-rate hikes and other residual damage from an increasingly insolvent federal government. Although various consumer confidence measures have already risen above their deep recession lows, they remain at extremely depressed levels relative to the rebound that is underway in gross domestic product growth.
One gauge of consumer caution is the sustained pullback in both new vehicle purchases and vehicle usage, as measured by gasoline consumption. The share of consumption dedicated to auto purchases plummeted through the end of the last cycle as gasoline prices soared. But since last year’s commodity price drop, consumers have seemingly restrained both auto purchases and vehicle usage as they attempt to preserve cash flow.
We continue to see last year’s spectacular spending dropoff from September to December, and the associated savings rate surge, as a response to last year’s TARP legislation and associated fears of a collapsing financial system that would translate to an eventual collapse in government finance. Will the consumer’s sustained caution of 2009 reverse course in 2010, or will the consumer pull back further? This will determine whether the consumer sector—which accounts for two-thirds of U.S. spending—will boost or restrain the emerging cyclical rebound. For now, we assume a flat savings rate trend that will leave the consumer contribution in “neutral,” with spending simply rising to keep pace with the recovery in GDP growth.
As we frequently note, it is the sustained pullback in risk-taking by U.S. businesses that is proving the most unusual part of this year’s emerging expansion, as businesses have yet to shift from a “cash preservation” strategy to a growth strategy in line with the economy’s change in course. Indeed, accelerating growth in corporate profits has yet to translate to a comparable bounce in business investment spending.
Meanwhile, borrowing from the banking sector has exhibited a powerful retrenchment as the economy has bounced. Either improved cash flow is leading companies to accelerate loan pay-downs, or banks are reining in growth in loans via restrictive terms and conditions. In either case, credit data does not display the customary sign of a sharp rebound in the trajectory for business investment.
A rebound in lending activity early in an expansion is often associated with a shift toward inventory restocking, as companies often use commercial and industrial (C&I) loans to fund inventory positions. We and most other economists expect the record-pace of inventory liquidation through the middle of this year to give way to inventory accumulation by the second quarter of next year and a rebuild into the end of 2010. Will this occur? At question is to what degree the powerful collapse in inventory holdings in 2009 was intended or unintended, and to what extent businesses will continue to use diminishing inventory levels to preserve cash flow, with restrained “bets” on impending economic success.
Corporate pessimism might be fueled in some sectors by the collapsing commercial real estate market, which shows little indication of any reversal over the near term. We continue to expect hefty declines in nonresidential construction through 2010 as companies race to reduce exposure to the commercial market. This should leave a net contraction in 2010 construction overall, despite a recovering housing market.
We did see some signs of life in equipment and software spending figures through the third quarter, with a return to positive real growth for the first time since the recession began. But we see the bounce as reflecting some reversal of excessive declines in the first half of the year as GM and Chrysler entered bankruptcy court. Unfortunately, we expect the resumption of negative real growth rates for this component into 2010.
One segment of the economy that is likely to fuel U.S. growth in 2010 is the trade sector, given a faster recovery abroad for many of the major trading partners of the U.S., plus a falling dollar, which makes U.S. exports more competitive in world markets. Yet we expect the rate of trade improvement to slow in 2010 as imports fuel the assumed 2010 inventory rebuilding.
We are assuming an optimistic path for U.S. export growth. Yet the hefty third-quarter export surge almost entirely reflected the emergence of the U.S. auto sector from bankruptcy court and we have yet to see just how strong the U.S. export rebound beyond the auto sector will be into the fourth quarter and 2010.
World GDP is clearly recovering and this is particularly true of the other industrialized countries, where we generally saw a much bigger GDP contraction through the 2008 fourth quarter and 2009 first quarter than we saw in the U.S. The Chinese and Indian economies revealed less of a contraction than widely feared through the turn of last year and hence face less room for a rebound.
For U.S. trade, we see greater uncertainty in imports, which will depend on the trajectory for both U.S. GDP growth and its inventory component, which is often fueled by imported goods on the margin. Beyond the third-quarter bounce led by the auto sector, we expect sustained gains in U.S. imports.
Unfortunately for the U.S., the trajectory for nominal (unadjusted for inflation) imports is heavily dependent on the price of oil, and the recovery in world growth that will fuel U.S. exports will also likely to firm up global oil prices. Oil prices tend to move in tandem with world growth and the trajectory for energy prices into 2010 is upward.
The one big, bright spot for the U.S. economy in 2010 was its Achilles heel over the last three years: the housing market. The sharp rebound in pending and existing home sales in 2009 has placed a floor under U.S. housing starts and other early indicators of U.S. home building activity and has allowed some recovery in new home sales. We assume that this improved trajectory will continue into 2010, though we have yet to see to what degree the existing home sales recovery was fueled by a one-off boost from the tax credit for first-time home buyers.
Year-over-year declines in home prices by virtually every measure are now moving back toward “zero,” and we expect most measures of home pricing to move back into positive territory, in comparison with prior-year prices, in next Spring’s home buying season, which could fuel renewed speculative interest in this beleaguered market.
We have yet to see to what degree homebuilders will be fast or slow to join in any emerging optimism, however. Our assumption is that 10% to 20% growth will reemerge for real residential construction expenditures through 2010. It is interesting to note that prospects for this usually volatile and fickle sector are probably less uncertain than for most of the remainder of the economy.
It is also noteworthy that prospects for any boost to growth from the government sector are notably limited, despite the spectacular increases in government spending that have been put in place over the past year and that may be legislated over the quarters ahead. As we frequently note, there was remarkably little “stimulus” in the stimulus legislation, which was dominated by transfer payments. Heightened federal government outlays are occurring alongside massive cutbacks in state and local government spending, largely nullifying any net positive effect from the government sector. We appear on track for growth in government spending in 2010 that will merely keep pace with GDP.
Despite this limited-growth contribution from government, we have federal deficits as a percent of GDP that are locked in the 7% to 10% range for the foreseeable future, which will increasingly challenge the Treasury’s ability to finance government deficits at attractive rates. This powerful drain on credit will crowd out private borrowing and will weigh on growth. The trajectory for yields in 2010 may help to gauge just how long this juggling act can continue without a restructuring of the federal government budget to incorporate some combination of massive tax hikes and spending reductions.
This process may prove dicey as we approach 2010 mid-term elections that could prove unusually cantankerous. Polls have documented a sizable shift in voter preferences toward fiscal prudence just as many incumbents have hitched their reelection prospects on the follow-through benefits of government largess. Interestingly, and unfortunately for the markets, this conflict may have more impact on monetary than fiscal policy, as there is considerably more room for change in Congress’s relationship with the Fed than in the federal budget balance sheet.
The Fed will enter 2010 at what may prove to be the crescendo in its quantitative easing strategy as the central bank’s balance sheet hits what we expect will be its maximum size around the start of the year. The Fed’s provision of borrowed reserves is continuing to decline, although it will take the start of the Fed’s program of large-scale reverse repo operations to “take back” any meaningful amount of the slack now evident in excess reserves.
These operations will likely not prove popular with next year’s Congress, and Bernanke may face a 2010 fight that will dwarf his 2008 struggles with the financial market crisis. At issue is whether the “exit strategy” will prompt challenges to Fed independence that will boost rather than diminish market fears over long-term inflation prospects as the Fed tightens, possibly leaving the central bank with no “good” options for the withdrawal of reserve credit.
As the Fed faces these political risks in 2010, it enters the year with remarkably low interest rate levels relative to what is evident in the other advanced economies, alongside a falling currency. Without a substantial corrective hike in rates over the coming years, the Fed will face the obvious risk of fueling a new financial crisis just as political pressures potentially delay action.
In total, the 2010 economic data will likely resolve many diverging views on developments in 2009. We have yet to see whether consumers will be a positive or negative force for GDP growth in 2010 on net, as gauged by the trajectory for the savings rate, which we currently assume will move sideways. Business investment should post a cyclical rebound. Yet available data show little evidence that an investment renaissance is unfolding and the collapsing commercial real estate market may dominate the trajectory. The path for net exports and oil prices remains uncertain and here, most economists assume a sideways path as well.
Ultimately, the question of whether the stimulus package boosted confidence, or just raised tax-hike fears, will be gauged to some degree by how incumbent members of Congress position themselves for the 2010 mid-term elections, and how those elections turn out. Perhaps the greatest question of all for the year to come is whether this political debate will leave the Fed as an unfortunate victim—or will, at the least, delay the deployment of the Fed’s exit strategy.
Tradition, a Feeling of Accomplishment
November 6th, 2009 | Posted by stockThis was my ninth New York Yankees World Series parade and my sons first. There are no more $5 hats ($35 for the ‘official’ ones and $10 for the ‘others’), most of the windows don’t open, Broadway was closed-off by 11AM (start time), and there is no more tape, just purchased shredded paper. But I’ve waited nine years to pass on the tradition that my mother first taught to me in 1961 (my father had taken me to the last game of the regular season that year, in which Maris hit 61, breaking Ruth’s record). My mother was a Yankee fan, she lived a few blocks from the stadium, and dated her games back to the early 30s. Her parents were both immigrants and there was no better way back then to show your new pride than being a baseball fan, especially if you lived in the Bronx. Her big item was being at the stadium on July 4, 1939, when Lou Gehrig made his final speech; her father brought her a souvenir ball that day with Gehrig’s name on it. Many years ago I stole that ball from my mother, and joked that it would pay for my kids’ first years’ tuition. Two years ago, my son, who attended his first NYY parade today, as well as the first game at the new Yankee Stadium, stole that ball from me. It sits in a case, in his room, on a mantel. However, unknown to him, behind the case there are two notes. The first is from my mother, saying that the ball is now his. The second, I wrote, and is dated July 4, 2039, and addressed to “David’s child”. It says that I stole the ball from my mother, that their father stole it from me, and that today, July 4, 2039, on the 100 year anniversary of Gehrig’s speech, they need to steal it from their farther, my son. I don’t know, or care, if my grandchildren will be Yankee fans, but I sure hope they will understand tradition; it took me a lot of years to get there, thanks mom.
Recent Blog Posts:
Popular Blog Posts:
Subscribe to our RSS