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Archive for December, 2008

Will the age of Obama become the age of austerity? As the president elect enjoys a family vacation in Hawaii we are drawing ever closer to the end of a year that may portend the beginning of the end of an economy dominated by rampant consumerism.

In less than a month,  the world will witness the transfer of power in America from a Republican administration and a President that for most of the American electorate , can not go quickly enough into that good night of post presidency speaking engagements at friendly venues hosted by various industry trade associations,  to the recently anointed messiah on the global political stage Barack Obama.

President elect Obama will be front and center in the global economic crisis that has a choke hold on consumers around the world. Expectations for this nation’s GDP growth in the fourth quarter are dismal and approaching a negative 6%. Many economic prognosticators are suggesting that the worst is ahead of us, as the fall out of rising unemployment, the continued crisis in housing and asset valuations and a decrease in consumer demand will lead to further declines in economic performance through 2009.

The President Elect will work with Congress to inject a massive stimulus into the economy to provide a jolt to an economic engine that is on life support while at the same time professing the benefits of personal sacrifice and calling forth the memory of Camelot.

The underpinnings of an economy that has relied on consumerism that began, following the robust economic growth of the post war period in the 1940’s and accelerated into warp speed during the  1980’s and continued into this decade,  has been fueled by the belief that the American dream is about bigger, better, and bolder. It has been the dream that has been emulated by economies around the world.

In the Age of Austerity,  the Obama administration will attempt to realign the American dream so that sacrifice and stewardship are at the forefront of American values. The accumulation of wealth will be tolerated, providing the wealth is properly distributed among the broader population through aggressive taxation. Public programs and policy will provide economic stimulus as opposed to traditional capital formation by the markets.

Lofty ideals are virtuous provided they are in balance and tempered by the reality of present. The American economy is the greatest economic vehicle the world has ever known. It may be time to realign the tires but, with fuel costs declining we should pull up to the pump fill up the tank and push our way to a bigger , better and bolder economy.

The new administration must remember that the American economic model is the envy of the world. American entrepreneurship must be encouraged and provided with appropriate incentives to continue to build on a platform on which the foundation was laid by Thomas Edison, Henry Ford, J.P. Morgan and John D. Rockefeller and in later years further enhanced by Walt Disney, Ray Kroc, Sam Walton,  Bill Gates and Steve Jobs to name but a few.

President Elect Obama comes to power at another of America’s pivotal points in history. We are at a crossroads in which we can rise up and lead the world to a new economic prosperity or we can continue to lick our wounds and recede into what might have been.

 The President Elect should set a tone for the American electorate by heralding the virtue of American entrepreneurship to instill confidence in consumers and  promote economic innovation  as opposed to supporting an agenda that promotes the malaise of the left.

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Expect retailers to continue deep discounts into the New Year as they attempt to unload inventory on consumers, that have exhibited significant restraint during this holiday season, holding  onto their dollars with a tighter grip than seen in recent years.  

This is the time of year, where historically, retailers have unloaded inventory that has collected dust on shelves and accumulated in backrooms and warehouses. This year these clearances take on a greater sense of urgency given the impact of the current economic recession on the retail industry.

As I wandered through a fashionable mall in Phoenix to browse at the offerings of various retailers, I viewed numerous promotion vehicles promoting discounts on merchandise of as much as 70% off. The stores were filled with shoppers however, there were few bags in hand as shoppers picked through racks and shelves searching for bargains.

Much of the merchandise available was clearly marked down from previous mark downs in an effort to push it out the door however, I noticed that particularly in apparel that the selection of popular colors and styles seemed to be very limited. Many of the racks, shelves and display tables featured odd sizes, colors and fashions which at any price seemed overpriced to the more discerning consumers of 2008.

The reluctance to purhase by many shoppers may be a result of retail buyers failure to create a compelling reason for shoppers to buy beyond deeply discounted prices. The Age of Austerity, that  began with the steep rise in fuel prices over the summer and accelerated through the financial crisis, market crash and auto bail outs has by necessity given birth to a more disciplined and cautious consumer.

Retailers, will need to refresh their brand and differentiate the merchandise and services they offer if they are going to succeed, with a disciplined consumer, that after decades of consumption, may find saving more appealing in the new year than spending.

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I have just completed viewing Paramount Pictures, The Curious Case Of Benjamin Button. A tale of fantasy based on a Fitzgerald short story in which the premise of the story evolves around a character who is afflicted with a reverse aging process.

Given the events of the past several months in the financial markets as well as the broader global economy and more recently the revelation of self confessed ponzi scheme extraordinaire architect Bernard Madoff,  I am moved to ponder what might be if Madoff suffered from a similar affliction as Benjamin Button portrayed by Brad Pitt in the film.

Following the chronology of the film, its’ unlikely that Madoff would have been able to effect the fraud that has led to the dissolution of wealth for so many and has elevated the angst level in a global investor community already shell shocked by the implosion of the markets in 2008 and battered by the continual media feed of an economy deep in recession.

Madoff would have been unable to make off with any funds as he would have been devolving through his  teen years and into toddler hood during the alleged period that  his scam impacted investors in his fund. Investors which included the rich and famous, as well as a number of Jewish charities and separated many others  from their life savings would have been spared the gut wrenching realization that for many their lives are now forever changed.

Bernard Madoff is not Benjamin Button. Lives are changed, charities are shutting down and blood has been spent. In the coming months,  as we learn more about the Madoff fraud and his victims we will continue to be both sickened and amazed at the magnitude of this scheme perpetrated by Madoff and we may from time to time ponder the fantasy of Benjamin Button.

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A year in which many investors have had frigid returns well below zero is not warming up as we approach the finish line in a historical year in the markets, in which volatility was one of the few constants. The long awaited Santa Claus rally in the stock market appears to be in a deep freeze in the North Pole. The markets fell for the fifth straight day today as the onslaught of negative economic data continued.

Investors have been traumatized this year by economic events which have included bail outs for financial institutions and the auto industry, a market crash that saw market caps of many companies drop by half and some as much as 80% or more  and a global recession that shows no immediate signs of recovery. Despite the aforementioned investors should take comfort in the unprecedented actions by the Fed and the support of both Congress and the White House to provide an economic stimulus to this ailing economy.

Unless Santa elects to steer his sleigh to Wall Street on an abbreviated trading day tomorrow, it looks like it is time to turn our focus toward a year end rally in the few days remaining in 2008. Does anyone hear bells?

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I am going to begin writing about a journey, that I am beginning, as I attempt  to acquire a platform company in partnership with a private equity firm.  A  journey that is likely to be more difficult given the current performance of the global economy. However, economic trials can provide numerous opportunities if you are prepared to put the effort forth to identify and execute. In the Age of Austerity we have to create opportunities.

I will be targeting middle market companies with revenues from $100 to $500 million and will not expect any TARP funds or bail outs from Congress or the White House to finance the acquisition. The intent will be to identify a platform that will provide organic growth as well as serve as a vehicle for a potential roll up within a category.

 I  will provide some background on my experience to establish my credentials for this particular pursuit. I will not use actual names as the confidentiality of the process is critical and I will at times in this journey be targeting a company or companies that may be publicly traded.

I have enjoyed a  successful career in an industry that continues to provide challenges,  opportunities for innovation and provides essential products to the public. I have worked with fortune 50 corporations as well as a smaller family business. I have experience in both domestic and international markets  and I was a CEO of a middle market company for nearly 10 years. During my stint as the CEO,  the company was divested by its’ parent company and I was able to partner with a private equity firm to acquire the company and remain as CEO until the company was divested from their portfolio in 2004. 

 In 2005,  I joined another private equity firm to become CEO for a group of five companies that the firm had acquired over a period of about three years,  prior to my joining the firm.  After nearly three years at the helm of this group of companies I am now in a position to seek new opportunities and have selected another private equity firm to partner with.

What I will be writing about in the coming weeks is the process from creating a  target wish list, to acquisition should we be fortunate enough to complete a transaction. The journey ahead will be  filled with numerous roadblocks as we identify a target, create true believers in our partners, secure meetings with target management, engage in due diligence, arrive at an acceptable valuation, present an offer to shareholders and secure financing to close the transaction in a timely manner.

The first step for me in this process was identifying a firm that I could partner with. As an operating executive I bring a set of skills and experience that private equity firms are in need of.  That experience includes knowledge of an industry or  a category that the firm may desire to invest in, along with the ” in the trenches ” experience garnered from years as a CEO charged with enhancing stakeholder value.

In this particular instance,  I am working with a firm in which there are two team members at the firm  that I have partnered with in a past transaction within the same industry and category. Since we  had a successful experience in our prior business relationship it shortened the courting process and we were able to agree to work together after a phone call and a meeting. Selecting the right partners or firm to work with may be the most critical decision that I make in the entire process.

The benefits to be gained from this relationship are numerous.  For me,  they include working with a well respected and well funded firm that understands the category that I want them to invest in and they are familiar with me and respect my counsel and experience.

 For the firm,  I provide insight into a category they are interested in participating in and at no cost to them,  they now have access to a knowledgeable participant in the industry that can potentially generate new opportunities for the firm.

In my next Blog I will write about creating the target acquisition wish list.

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The price of a barrel of crude oil fell below $37 today. Despite the OPEC decision on Wednesday to further reduce oil output by 2.2 million barrels per day, oil has tumbled to a level not seen in nearly 5 years. It was only a few short months ago, that speculators triggered a run on the oil market, that drove the price of a barrel to nearly $150 and generated gasoline prices well in excess, of $4 per gallon, in most areas of the country.

The ripple effect of these extraordinary fuel costs were resounding and ripped through the economy, shredding transportation budgets at corporations and swallowing big gulps of discretionary income from consumers. SUV’s and other gas guzzlers were garaged, sold at significantly reduced prices or were parked in dealers lots collecting dust. Politicians promised numerous solutions via alternative energies, while smart cars and hybrids became more visible on our roads and highways. 

The effect on the auto industry has been devastating. The spike in a barrel of crude oil and a gallon of gas gave way to continued erosion in the housing market and pending implosions in the financial markets, as well as a crash in the stock market. Most Americans that own assets have seen a significant decline in asset valuations during the economic realignment of 2008.

The bright light for consumers and corporations is the rapid decline experienced in fuel costs over the past several weeks. The irony of course is that as fuel costs have declined an inverse relationship has existed in the auto industry which has General Motors and Chrysler Corporation teetering on the brink of a possible government organized bankruptcy. Now we can fill up our tanks at less than half of what it cost over the summer. It is likely however, that in the future,  the tank we are filling may not be in a vehicle manufactured by one of the Big 3 auto makers.

Last week, when the Senate failed to support a bill to provide bridge financing to the auto makers the White House indicated that they would step in and save the day. The presumption being that TARP funds would be made available to assist the auto industry with some short term cash needs, until the new administration, along with the aid of  Congress,  would provide longer term support for this ailing industry.

Now we are hearing the word bankruptcy from the President in reference to the auto industry dilemma. Even an orderly bankruptcy has the potential to generate an ugly chaotic effect on the economy. At this time, the White House needs to drive a decision to either support an auto bail out with TARP funds or crawl to the curb while these former bastions of American enterprise reorganize under bankruptcy and the American economy is dealt another blow.

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Strolling through the aisles at my local Wal-Mart today, I was surprised to see an abundance of board games on display. Games such as Parker Brothers Monopoly and Life, were well merchandised in a center aisle. As we read and hear more about entering the age of austerity, could this portend a return to more traditional lower cost forms of entertainment.

Will people again be inclined toward sitting across from one another and delighting when they pass go. With the contemporary version of  Monopoly, players can now compete to  own such iconic properties as New York’s Times Square, Wrigley Field and even the White House. It appears a walk along the Boardwalk isn’t what it used to be.

With the success of Wii, X-Box and Play Station, I had assumed that traditional board games had been relegated to a shelf in dark closet to be pulled out only in the event of a power outage. However, given the exposure these games are being given this holiday season at Wal-Mart, we may be in for a wave of exciting board action where strategy may again reign supreme over reflex. 

On a snow filled winter day like today huddling with a few friends around the fire and a game of Life seems like a pleasant way to pass some time.

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A tip of the hat to the Fed for their dramatic response today to the continued economic plight that we find ourselves in as we count down toward 2009. I can’t imagine that  many Americans ever envisioned the Fed establishing a Fed funds target rate of between zero and one quarter of a percent but,  that is exactly the target that the Fed’s Board of Governors announced today.

Bernanke’s Fed continues to make the right moves to provide stimulus to a beleaguered economy. The stock market  responded with a strong embrace of the Fed’s action today as  the Dow was up nearly 360 points and the move today could signal a year end rally in the market.

With the Fed funds rate at historic lows and the various actions the government has taken to both provide stimulus and prevent further  implosion of our financial markets and institutions  it would appear that we may begin to take heart that these actions will prove fruitful.

Granted,  unemployment, continued erosion in the housing market, an auto industry seeking a lifeline and an extraordinary fraud by a prince of wall street,  all bring pressure to bear on the fragile psyche of the consumer and threaten further economic decline.

However, if the markets can indeed rally from this point through the year end and December 401k and other investment portfolio statements begin to show an improvement,  investors may enter the new year with the feeling that perhaps we are emerging from the devastation of 2008 to a more promising 2009.

The aggressive action by the Fed and the promise of further stimulus by the new administration and a democratic Congress bent on additional stimulus in the new year should bode well providing, certain of our lending institutions remember why they were prevented from failing in 2008 and begin loosening their stranglehold on the credit markets and initiate prudent lending during the year ahead.

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The emotional roller coaster investors are riding around the globe caused by the volatility in the stock markets as measured by the .VIX are equally matched by the volatility of the .PBI, the Political Bailout Index. While the public can be caught up in the  high drama associated with these political solutions as evidenced currently by the attempt to salvage the auto industry, it can be a nightmare for investors as they attempt to discern,  from both the political rhetoric and the never ending voice of the financial media and their talking heads, which direction our nation through our elected leaders is moving.

A market today which saw the Dow  futures plunge well below 200 points on news of the Senate’s failure to pass a bill submitted by the House closed up nearly 65 points on the news and belief that the White House will come to the rescue of  General Motors and the Chrysler Corporation to prevent these former industry icons from collapsing into bankruptcy and subsequent liquidation.

I wrote previously on this blog about my concern that the failure by Republicans in the Senate to support an auto industry bailout by standing on principle would precipitate  further erosion in the markets. Clearly if the White House, through the Treasury Department fails to act that will be the case when the markets open on Monday.

Investors dodged a bullet today thanks to the regognition by the President that allowing the auto industry to collapse would have a calamitous effect on the already battered and bruised economy. It is fascinating to observe the Republican leadership in the Senate break once again with the agenda of the President. The President has demonstrated a willingness for bipartisanship to seek solutions during this period of economic turmoil while it becomes increasingly clear that those unwilling to support much needed legislation do so to preserve their own political livelihood at the cost of the American public.

This is certainly standard and acceptable behavior within the political realm. However, we are facing extraordinay threats to our economy which call for extraordinary political behavior. The willingness to sacrifice three million jobs to protect one’s own political skin is unacceptable behavior.

At this time our nation needs leaders that are willing to look beyond the politics of self and enact legislation that stimulates our economy as opposed to decimating it. The markets need to know that our government is prepared where appropriate to provide support as needed until the economy can once again generate the employment growth and the asset appreciation necessary to sustain a viable economy and allow investors a smoother ride.

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With General Motors on the brink of Bankruptcy and Chrysler queuing up behind them Republican leaders in the Senate are opting to stand again on principle as opposed to acquiescing to an imperfect and temporary solution to the immediate ills of the US auto industry.

One need only to look back a few weeks and recall the waffling that took place during the TARP legislation and the dramatic erosion of the markets as the House failed to pass the bill in a timely manner. Subsequently,  a week later after further erosion in the markets and the economy, Congress elected to do the right thing and prevent this economy from imploding and turn from a recession to a depression by passing the bill.

The economy and the market are again facing a similar hurdle. Confidence in the stock  market will be enhanced should Congress choose to move swift and enact legislation to support the auto industry. Amidst an ever evolving litany of negative economic news, failure to pass this legislation could result in another crippling blow to the American economy and as evidenced by trading today, further erosion in the equities markets.

The Republican and Democrat members of the Senate that choose to ignore the economic reality and effect of rising unemployment and decreasing asset valuations are either suffering from economic ignorance or are simply out of touch with reality.

 The convenience of standing on principle provides a political solution for their constituencies, many of  whom are still seething from financial institutions bail out. Congress needs to enact good faith legislation with respect to the auto industry support bill and step up to the American public with that support instead of cowering behind principles that are politically based to provide cover for the flack which will come with the passage of this controversial bill.

Senate Republicans need to be part of the solution by working with the majority in the Senate now to provide  an interim solution to the auto industry crisis while maintaing an eye toward enacting legislation for a permanent solution to the crisis with the advent of the Obama Presidency.

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