Monthly Archives: March 2011

the Manpower global employment survey: a tale of two (maybe three) worlds

March 14, 2011 By in Current Market Thoughts, emerging markets, employment, Portfolio management, Shaping a portfolio for 2011, Strategy Tags: , , , , , , , , , , , , Leave a comment

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the Manpower survey

Over the past two years, most of my attention, and the attention of the majority of investors in the US, has been on the employment situation domestically.  Reports like the Department of Labor Statistics’ monthly Employment Situation or the equivalent from private payroll company ADP have been scrutinized carefully for signs that a moribund labor market might be showing signs of revival.

The picture that has most recently emerged is of an economy slowly mending, but now generating enough new jobs to not only absorb new entrants into the labor force but also to chip away at the unemployment rate by about 1 one percent per year.

The international employment agency Manpower, in contrast, has for the past half century been producing an increasingly global employment report whose emerging markets content the firm boosted significantly in 2005.  Manpower research focuses on corporate hiring intentions over the coming quarter, rather than chronicling the firms’ actions in the recent past.  As a result of these emphases, the Manpower survey gives an interesting–and different–perspective for assessing the health of the world’s economies.

a diffusion index

One other factor to note before we begin.  Manpower presents its results in the form of what’s called a diffusion index. The company asks all the HR professionals it surveys whether their firms will be hiring, keeping a stable workforce or firing in the coming three months.  It takes the percentage of respondents hiring and subtracts the percentage firing.  This difference is diffusion index.

If, for example, 60% of respondents expect to be hiring and 30% expect to be firing (with 10% remaining stable), the diffusion index is +30.  If 49% are hiring and 50% firing, the diffusion index reading is -1.

the 2Q11 survey results

Here’s what the latest survey has to say:

Asia Pacific

In the Pacific region, Manpower covers eight countries. The lowest reading comes from Japan, at +10.  The highest two are India at +51 and Taiwan at +45.  The median reading is +23.  (Remember, +23 means that companies hiring outnumber those firing by about 3/2.)

The Indian reading is the highest in the six years Manpower has been surveying that country.

China peaked at around +50 in the December quarter and has fallen to +36 now.

EMEA (Europe, Middle East and Africa)

What a contrast!

Of the 21 EMEA countries Manpower follows, only Turkey (+34) and Belgium (+12) score higher than Japan.  Six countries–Austria (-1), Switzerland (-1), Italy (-2), Ireland (-3), Spain (-5) and Greece (-10) are in the minus column.  About the best you can say about these results is that they’re an improvement over the figures this region has been posting over the past two years.

the Americas

Here again, the tale is one of two regions.  The median reading for the ten countries surveyed is about +19.

The stars of the region are Brazil, which appears to be overheating at +40, Panama (+22), Argentina (+22), Peru (+20) and Costa Rica (+17).

Only two nations, Guatemala (+6) and the US (+8), are in single digits.

my thoughts

1.  Among developed countries, patterns in prospective hiring clearly illustrate the difference in the approaches–accommodation vs. austerity
—of the US and EU governments in dealing with fiscal deficits generated by the financial crisis.  The healthiest country in the EU other than Belgium is Germany at +9, which falls one point below the developed world’s multi-decade growth doormat, Japan.  Everyone else, ex Greece, is flirting with one side of zero of the other.

The risk to the US is that the country won’t have the political will to rein in stimulus when the time is right.  The worry about the EU is that the cure will prove worse than the disease.  The near-term growth story, however, appears to favor the US.

2. The contrast the Manpower survey draws between the developed and developing world is very stark.  The developed countries of the globe barely break into double digits on the Manpower hiring index, meaning that almost as many employers are laying off workers as are looking to add to their staffs.  In the developing world, on the other hand, Manpower scores are soaring.  Asia ex Japan is averaging roughly 30.  Latin America is close to the same number.  Both imply that about twice as many employers are looking to hire as are looking to lay off.

Over the past several months, emerging markets have been underperforming those of the developed world.   The idea has been that governments of the former have begun to temper economic growth while those in the latter, especially the US, are still applying extraordinary stimulus.  Therefore, on a relative basis stock, markets in the developed world should be emphasized over those in developing ones.

To me the Manpower numbers argue that the preference for the US over emerging markets is a counter-trend movement that can’t last for long.

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LVMH’s acquisition of Bulgari

March 13, 2011 By in Current Market Thoughts, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , Leave a comment

The LVMH bid

About a week ago, LVMH announced a successful bid for control of the publicly traded Italian jewelry manufacturer and retailer, Bulgari.  Bulgari’s offerings, many of which reflect the founding family’s Greek heritage, mostly range in price from $2,000-$10,000.

The terms:

LVMH will issue shares of its stock in exchange for the 51% of Bulgari controlled by the Bulgari family.  It is offering €12.25 in cash for the 49% held by third parties.

what’s in this for Bulgari?

1.  A significant part of Bulgari’s business is high-end watches, the most extremely cyclical category in the fine jewelry business.  Watch sales are especially difficult to monitor, since wholesalers play such a large role in their distribution.  As a result, economic downturns have tended to be white-knuckle events for the company–and its stock.  Being part of a larger, more stable conglomerate will mean less wear and tear on management’s stomach linings.

2.  The Bulgari family gets two seats on the LVMH board, so it retains a management presence in luxury goods.

3.  Younger-generation family members who don’t want to be involved in the business and would rather have their inheritance right now and in cash will be able to sell without endangering the Bulgari family’s control position.

4.  Francesco Trapani, a Bulgari nephew and the current Bulgari CEO, will become head of the LVMH watches and jewelry business, an organization twice the size of Bulgari.

…and for LVMH?

1.  The larger fine jewelry business means LVMH will be in a stronger competitive position versus other luxury goods conglomerates like Richemont.

2.  The willingness of an entrepreneurial luxury goods family like Bulgari to join the LVMH fold contrasts sharply with the frosty reception of the Hermès management when it learned LVMH had acquired a large ownership position.  The Bulgaris, fellow entrepreneurs, may be able to smooth ruffled feathers in a way that Bernard Arnault has been unable to.

3.  The Bulgaris will likely also be instrumental in convincing other European luxury goods families to follow their lead.

What’s next?

Wall Street rumors have TIF (I own it) as the next target of LVMH and Mr. Trapani.

I don’t agree.  The main attraction of TIF would be the fit between its business and Bulgari’s.  TIF is a dominant factor in “statement” jewelry costing $25,000-$50,000 or more.  The company is unique in its ability to–at the same time–be a leader in the market for jewelry and other gifts that retail for $500 and below, without diluting its brand image (i.e., alienating the very big spenders).   I don’t know why, but TIF has never been very good in the middle; Bulgari would fill the doughnut hole in Tiffany’s offerings.  That’s the positive side.

On the other hand,  Europeans don’t regard TIF as a legitimate luxury brand.  That’s partly because it’s an American company, partly because of its lower-end business.

What is Mr. Arnault’s game plan?  I think it’s to collect up as many small, inefficiently run European family luxury goods businesses as he can over the next few years.  He’ll doubtless be able to use the brand names he acquirers more effectively than their current owners.  And he’ll enjoy manufacturing, distribution and marketing synergies.

His main selling points will be two:  the positive experience of the Bulgari family, and the ego appeal of joining a very exclusive club.  Were he do anything so déclassé as acquiring an American “quasi-luxury” company like TIF, a lot of the positive effect of the Bulgari merger on potential European luxury acquisition candidates would be lost.  Yes, TIF is doing a land office business in Europe currently.  But that’s because the affluent there are trading down.

TIF may eventually be on the Arnault to-do list, but I think he’s gunning for smaller, local game first.

 

frozen by the screen: a portfolio manager’s ailment

March 11, 2011 By in buying and selling, corrections, counter-trend movements, Current Market Thoughts, frozen by the screen, Trading Tags: , , , , , , Leave a comment

frozen by the screen

Every seasoned professional investor I’ve sat down and compared notes about the profession with has experienced this phenomenon.  Usually it happens when the market is declining and you’re underperforming–sometimes badly.  You turn on your computer or your trading machine to see what prices are doing.  Your stocks are doing poorly again.  But instead of either turning to another page or going back to work, you sit and watch the flow of trading in your stocks and worry.  You may be mesmerized or horrified.  You’re using up a lot of emotional energy.  You know this isn’t helpful, but you just sit and watch–and maybe perspire heavily.  You can’t tear your eyes away from the screen.

This isn’t good.  For one thing, you’re not doing anything productive.  You’re not thinking about how you can tweak your holdings to achieve even higher levels of outperformance.  In a deeper sense, though, this behavior is a sign that you’re either about to lose your confidence or have lost it already.  You’re focusing on failure, not success.

for professionals

This happens to every professional now and again.  It’s the equivalent of a hitter going up to the plate worrying about being hit by a hundred mile an hour fastball and breaking his ribs, rather than visualizing how he’s going to hit a double off an accomplished pitcher.  You’re setting yourself up for failure.And the cold reality is that if you can’t get into a positive frame of mind, then you may not be cut out for this line of work.

For a portfolio manager, there are several obvious steps to take to restore a positive mood:

1.  Turn off the price screen and don’t turn it back on.

2.  Take out your analysis of the stocks you hold that are performing the worst, rethink and rework your assumptions, and come to some conclusion.  The result will probably be that you believe the stock is as cheap as you thought.  Even if you spot some fatal flaw, you’ll have some reason other than fear for making a change.

3.  Rethink your portfolio structure and whether it’s still appropriate.

4.  Look for depressed stocks that you always wanted to own but thought they were too expensive.  Consider whether a market downdraft has made them more attractive.

5.  Look for long-term weak performers in your present portfolio (you know they must be there, because everyone has them).   They’re probably not going down much (because they never went up).  Think about using them as a source of funds for any new additions.

6.  You can always take some risk out of the portfolio by making it look more like the index.  In my case, however, every time I’d done this it’s been a mistake.

7.  If you’re going to do something stupid, like selling a perfectly good stock while its price is down, do it in a very small amount.

8.  If nothing else works, go to the gym  …or read a book.  Just don’t turn the screen back on.

Of course, there’s an underlying assumption I’m making–that what’s going on is a moment of mental weakness, a temporary loss of focus.  It’s also at least possible that your unconscious is telling you that you have deep fundamental flaws in your portfolio that you need to fix as fast as possible.  But if you know yourself well enough psychologically, you should be able to tell the difference.

for regular people investing their own money

Funnily enough, these are much harder cases to diagnose.  Good professional investors are highly trained in what is an often counter-intuitive way of thinking about the world.  So the pitfalls they encounter are usually well understood, because they’re the ones every other manager has encountered as he tries to master his craft.

For regular investors experiencing angst at declines in their holdings, I’d have three basic questions:

1.  Do you know how the companies whose stocks you hold earn their money?  Have you read quarterly/annual reports and 10Q/10K filings?  Have you formed an expectation about potential returns for each holding?  If you haven’t, you’re not investing, you’re buying lottery tickets.

2. Do you have an overall financial planning strategy?  Is the risk in the stocks you hold appropriate for your economic circumstances?

3.  Are you willing to devote the time needed to develop investing skills, or would you be better off finding a financial planner to help?  (Finding a competent adviser is a whole other can of worms, however.)

why am I writing this today?

My personal stock portfolio had been holding up relatively well during the correction–until yesterday.  I did end the day with two green lights on the screen, DKS (who knows why) and 1128:hk, where the market was closed while New York was falling sharply.  But my other stocks really got clunked.  That’s just life.   But I noticed that I was starting to stare at my screen in an unhealthy fashion.  So I ran for about a half-hour and read a couple of chapters in a book about web design. 

For what it’s worth, my take on the sharp reversal in my portfolio’s relative fortune signals that the correction has entered a new phase.  The tendency in downdrafts in the market is for investors to begin by selling stocks they don’t care much about.  As the correction progresses, the selling reaches closer and closer to what people consider their crown jewels.  If the decline ends in a mini-panic, even parts of core holdings get shown to the door.  I’m not saying this last happened yesterday, but I do think the correction took another step closer to completion.

why are the Saudis raising oil output?

March 10, 2011 By in emerging markets, Energy, Industry Analysis, Refining Tags: , , , , Leave a comment

Saudi Arabia to the rescue

Saudi Arabia announced recently that it is upping the amount of oil it produces.  It’s doing so to replace the portion of Libya’s normal output of 1.6 million barrels a day being lost during the current political struggle there.  The Saudis will doubtless be joined by other OPEC nations who will increase their production as well, although these other countries may not choose to identify themselves.

Even assuming the total number of barrels reaching the market is unchanged, the world faces a short-term logistics issue.  The Saudi crude needs more processing than Libyan oil.  It has extra sulfur (corrosive and a pollutant) that needs to be removed, for one thing.  And it contains more large molecules that need to be “cracked,” or broken down chemically to yield higher value-added products like gasoline or jet fuel.  The quality difference is a particular problem for Italy, the traditional buyer much of Libya’s oil.  (Italy seized Libya from Turkey in a war about a century ago and held it as a colony until after World War II.)  The country’s refineries haven’t seen the need to spend money on the expensive equipment required to process lower-quality Saudi crude into stuff customers can use. Nevertheless, they’re under severe political and market pressure to deliver refined products.  The resulting scramble for easy-to-refine crude is one reason the price of high-quality North Sea oil has risen so much.

Provided governments don’t decide to “help” the process along with new regulations, oil companies should readjust the world’s refining and distribution networks to restore the flow of gasoline, naphtha and jet fuel to something akin to the pre-Libyan-revolution normal within a few months.  I think there’s a very good chance of this happening.

why add production?

That doesn’t mean I don’t see a secular upward trend in the price of oil, because I do.  In this post, however, I only want to address the narrow question of why Saudi Arabia is acting to hold down oil prices, even though a $1 a barrel rise in the cost of crude puts an extra $3 billion a year into the royal treasury.

the iron law of macroeconomics: substitutes determine pricing

The answer is pure microeconomics.  Saudi Arabia, like many OPEC countries, has enough oil underground to last for well over fifty years at its current production rate.  It could easily have a hundred years’ worth.

Most of those barrels will only have value if petroleum remains the world’s fuel of choice in 2060…and in 2100.  So Saudi Arabia certainly doesn’t want world governments worrying about the dependability of oil supply and starting programs of serious research on possible replacement fuels.  Nor does it want dramatic real (that is, inflation plus) increases in the price of oil that might cause consumers to start to conserve.  Saudi Arabia doesn’t want to make waves.  It just wants to keep taking its $800 million + check to the bank every day.

conservation potential

Conservation could be a serious threat to OPEC revenues.  Look to the United States, which is the low-hanging fruit in the conservation department.  We have 4% of the world’s population but use about a quarter of the world’s oil (we consume about 3.7 tons of the stuff yearly for each man, woman and child in the country).  We’re the only developed country without a coherent national energy policy.  We’re practically alone in not taxing oil heavily to discourage use.  True, we no longer artificially depress the price of oil as we did in the Seventies.  Nor do we have quotas that limit imports of fuel-efficient cars, as we did in the Eighties.  But that’s not much.  The Saudis have a strong economic interest in us not waking up.

history shows what sharp price increases do

We’ve seen during the oil shocks of the 1970s what happens when oil price skyrocket.  Crude oil prices, which were under $2 a barrel in the 1960s, quadrupled in the early 1970s, declined somewhat and then more than doubled during 1978-80 in the wake of the Iranian revolution.

What followed was a period of global economic stagnation and then–crucially from an oil producer’s point of view–a twenty-year period of oil price decline.  At its nadir, crude had given back in real terms virtually all its gains from the 1970s.  So OPEC had a few years of riches, followed by two decades of budget deficits.

Conditions could actually have been worse for oil producers, had it not been for Saudi Arabia.  Had the Saudis acted unilaterally to temper price increases by adding to output, prices might have otherwise stayed high enough for long enough during the late Seventies-early Eighties to force permanent changes in consumption. Those billions of barrels of oil still in the ground might have become worthless.

As it turned out, however, and especially in the US, governments quickly lost interest in substitute fuels and in conservation measures as oil prices began to slide.

Today, Saudi Arabia is just doing what it has been doing for the past thirty years +, taking the role of the “swing producer” to keep real increases in prices under control.  This behavior may have its altruistic aspects, but, given its vast amounts of untapped oil, Saudi Arabia is clearly acting in its own economic interest.

iPad 2 is likely to be a big success: Boston Consulting Group survey

March 9, 2011 By in Current Market Thoughts, e-readers, Industry Analysis, Publishing, Recent Market Action, Surveying, Technology Tags: , , , , , , , , Leave a comment

the Boston Consulting Group survey

The iPad 2 goes on sale this Friday.  It’s faster than the original iPad–as well as sleeker and lighter.  It comes equipped cameras and is available in two colors.  A recently-released internet survey of over 14,000 respondents done by the Boston Consulting Group last December suggests that iPad 2 will be a much bigger success than its predecessor.  This survey follows up on a previous one done in March 2010, just before the launch of the first iPad.

its conclusions

The main conclusions of the December 2010 survey, with is actually about both tablets and e-readers, are:

1.  Awareness of this category of devices is growing.  In the US, for example, 67% of respondents to the survey knew about tablets and e-readers.  That’s up from 54% in the December poll (I wonder where the other 33% live).

2.  Lots more people intend to buy one. Globally, 69% of respondents who are familiar with tablets and e-readers intend to buy one in the next three years.  That’s slightly smaller percentage than the 73% of people from the March survey.  Given that awareness has increased so much, though, the pool of potential buyers is still much deeper than it was a year ago.  Applying the figures to the US, for example, suggests that 17% more Americans want to buy a device now than a year ago.  Half plan to pull the trigger in the next 12 months.

3.  Consumers want tablets, not e-readers.  The margin is 3.5/1 in favor of tablets.

4.  The market understands what these devices do. Respondents said they wanted to use the devices to browse online (85%), read email (84%) and view videos (69%).

5.  People are willing to pay for content…

(Note:  my experience is that people aren’t crazy.  They flat-out lie to surveyors about the prices they’d be willing to pay for stuff.  They regard money questions as part of a price negotiation and give low-ball numbers.  Wouldn’t you?  So I regard the content responses as very encouraging.)

US respondents said they’d pay $5-$10 for a digital book, $3-$6 per month for a digital magazine subscription and $5-$10 a month for a daily newspaper.  These are roughly the same numbers people gave last March.  The figure that jumps out to me as especially high is the magazine one.

6. …but not for the device itself. Respondents from the US say they’d pay $130 for an e-reader (which they don’t particularly want), but  only about $200 for a tablet (which they do).  See my note to point 5.

All in all, the picture looks very good for AAPL.

methodology

BCG had 14,314 respondents from 16 countries:  Australia, Austria, China, Finland, France, Germany, Hong Kong, Italy, Japan, Norway, South Korea, Spain, Switzerland, Taiwan, the UK and the US.  Each provided at least 700 respondents, split equally between male and female.  All were internet users (duh!), and read print books or periodicals.  In Australia, South Korea and China, respondents tended to be clustered around cities; elsewhere they were distributed proportionally in urban and rural areas.

The big advantages of internet surveys is that they’re fast, cheap and can reach lots of people.  The main worry is that the techniques used in traditional surveying to figure out whether respondents really mirror the population you want to find out about don’t work.  See my post on internet surveying for more details.