Dow’s Flirtation with 14,000 Doesn’t Mean Economy is Better

 

Updated Feb. 28, 2013

While it’s heartening, don’t get exuberant over the Dow Jones Industrial Average passing above 14,000. The lofty height doesn’t mean the U.S. has a healthy business climate, despite what Wall Street analysts hope. 

The nation has huge economic structural issues.

Let’s get real. The Federal Reserve’s practice of printing money only offers false hope. The U.S. Commerce Department just reported the nation’s economy is stagnant – it shrank in the last quarter.

A new study reveals an alarming trend — why startups no longer lead in job creation.

True, workers with 401 (k)s are happy with the market. But my economic view is based on what I see happening at a common-sense, Main Street level.  The flirtation with 13,000 only means investors aren’t currently worried about two developments: 

1. The Euro-zone economic issues.
2. China’s central banks have eased lending requirements. 

Everyone seems to forget that much of Europe is mired in a recession. 

Here in the states are several economic ramifications:  Poor public policy, e.g. Keystone Pipeline and other developments, as well as adverse current events mean crude-oil prices are skyrocketing. The resulting price at the pump will not help the economy. The average American motorist will cut back on other expenditures and necessities with gas at $4 a gallon and climbing. 

Nordstrom is doing well and rightfully so. But the middle class is disappearing and lower-income shoppers favor retailers like Wal-Mart. And Wal-Mart has been a loser on Wall Street. That’s a result of weaker sales, its worst-ever February, and a comparatively dismal outlook. 

Unemployment is still high. Don’t buy into the 7.9 percent unemployment rate. The true figure is at least 15 percent. Employment rolls are fattened because millions of Americans are working as temps without benefits. Far too many people have given up and are trying to freelance. 

At a record rate, millions of Americans aged 62 have filed for early benefits.

Plus, even for those lucky to have a job, wages are flat. But companies are losing much of their intellectual capital as age discrimination is rampant in favor of younger workers. Ironically, savvy employers know that “slow motion gets you there faster.” 

Don’t be misled about the rate of home sales in some areas. However, sales increases were attributed to investors capitalizing on distressed prices as sales prices continue to drop. Not good. Look for another round of foreclosures now that the deal has been signed between lenders and states attorney generals.

Besides, the average victim from the predatory mortgage practices only got a settlement of $2,000. 

Long term, the payroll tax extension will only hurt workers. It means retirees will get less money from Social Security when they leave work. 

What’s needed is economic vision in public policy to benefit this nation. (For Op Ed economic and public policy analysis by noted economist Peter Morici, click here.)

From the Coach’s Corner, consider 12 tips for profits to keep your business dreams alive. 

A blind person asked St. Anthony: ”Can there be anything worse than losing eye sight?”

He replied: “Yes, losing your vision!”

 

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Marketing Principles Needed in Wall Street Protests to Create Culture of Economic Patriotism

 

From New York to Seattle, people are wondering about the impact of the Wall Street protests. No one is asking, but if the protesters want to know how to win, they need to conduct a cohesive major-marketing campaign.

So, if you can humor me, let’s consider this a review of marketing best practices. Along the way, perhaps we’ll see an improvement in corporate ethics. My motivation, you ask? The nation needs a new culture – call it economic patriotism. I’ve been convinced that it’s partly an issue of How CEOs, Taxes and Policymakers Fail the U.S.

The corporate and Wall Street entitlement attitudes – certainly not everyone but a significant number – helped cause and exacerbate the Great Recession. The U.S. will continue to precariously suffer in its fiscal doldrums until economic patriotism becomes the norm, and productive public policies are implemented to improve the pecuniary environment for the creation of jobs.

It wasn’t just the questionable mortgage activities, but many banks and credit card companies behaved in a predatory fashion. Because they’re domiciled in about six states that allow high interest rates on credit cards and related lines of credit, banks were able to charge exorbitant interest rates on small businesses and consumers – as much as 38 percent for dubious reasons. And they abruptly cut off lines of credit for countless companies and micro-businesses.  Consequently, many have poor credit ratings, and can’t qualify for Small Business Administration loans.

Among the hard-hit domestic automobile manufacturers, it’s worth noting Ford has been outstanding in its recovery approach. Consequently, Ford didn’t ask the taxpayers for help.

But the banks and the other auto companies had the temerity to lobby for bailouts, as countless Americans lost their jobs and homes. Foreclosures are still rampant, and the financial institutions are hoarding their cash following the bailouts.

GOP and Democrats

In part, the blame for the Great Recession also falls on Republicans in Congress. Don’t get me wrong. I haven’t changed my stripes. I’m still a strong business and free-enterprise advocate. But the Republicans looked the other way during all the predatory behavior, and continue to do so.

Democrats failed to speak out as it was occurring, and they failed to include small-business protections in passing the Dodd-Frank Wall Street Reform and Consumer Protection.

Further, the Obama Administration has been cozy with Wall Street, ostensibly, to attract political donations. I took originally took note of the administration’s behavior in writing Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner. So it’s an irony to me that Democrats are disingenuously trying to capitalize on the Wall Street protests.

Let’s not forget another entity. I wonder: Does the Federal Reserve Understand Small Business? No.

Fortunately, let’s consider that the Legal War on Wall Street Chicanery Isn’t Finished.

But how can the protests help change the culture of corporate greed for economic patriotism?

Protestors need more articulation – not just inane ramblings about corporate greed and spreading the wealth – and organization. Merely sticking it to the wealthy with taxes, and closely allying with opportunists, such as the Rev. Al Sharpton, won’t help the cause and enable good messaging.

The movement needs to grow roots and needs a credible leadership to espouse American values, just as the Vietnam War protests gained traction. Instead of just a bunch of hippies, pacifists and students, it became a movement for moderate American patriots as they began to question the justification for the war.

The Wall Street protests need to focus on corporate ethics.

Again, a classic marketing line of attack is needed. A rag-tag approach doesn’t lead to successful marketing results.

Moreover, it isn’t likely to happen, but leadership is to needed to avoid the typical 14 reasons for the failure of campaigns.

In marketing failures, there are 14 salient causes:

1. Inadequate analysis of strengths, weaknesses, opportunities and threats
2. Drawing incorrect conclusions from the analysis (leading to ineffective overall strategic planning)
3. Unrealistic budgeting
4. Ineffective testing of ideas and messaging
5. Arrogance – over confidence
6. Poor coordination with centers of influence
7. Not developing effective teamwork and communication among stakeholders
8. Targeting the wrong market
9. Lack of job descriptions – who will do what and when?
10. Wrong people in many key positions
11. Poor positioning in attributes and benefit statements
12. Ineffective allocation of promotional funds – wrong mediums preventing top-of-mind awareness in customers, or voters
13. Unproductive evaluation of the campaign and return on investment
14. Unsuccessful responses to negative surprises and failure to capitalize on opportunities

Thanks for humoring me. Let’s hope for meaningful reform.

From the Coach’s Corner:  here are more thoughts about Wall Street greed.

“Three great forces rule the world: stupidity, fear and greed.”

-Albert Einstein

 

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Author Terry Corbell has written innumerable online business-enhancement articles, and is also a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

 

Legal War on Wall Street Chicanery Isn’t Finished

 

May 23, 2011

Three years after Congress promised answers in the big banks’ roles in the financial scandal, there are none – only questions.

However, New York Attorney General Eric Schneiderman is investigating Wall Street’s role in the mortgage quagmire and housing bubble, according to published reports. Mr. Schneiderman wants documents from Bank of America, Goldman Sachs and Morgan Stanley.

Even as a free-market advocate, I remain troubled by several unanswered questions:

• The banks’ roles in the role that led to the housing bubble?
• Regarding securitization details, the merging of countless bad home loans into securities, which were sold to investors – insurance companies, mutual funds and pension funds?
• Were the banks really that incompetent or was it a case of ethics?
• What will be done to prevent the future devastation of investors?
• What will be done to stop all the illegalities, including the robo-signing in the foreclosures of homeowners?
• What about a moral compass to halt the practice of giving multi-million dollars to employees at firms bailed out by taxpayers?

Ineffective Feds

“These days the Justice Dept. and the Securities and Exchange Commission are investigating Wall Street with tactics, such as wire taps, usually reserved for professional criminals and terrorists,” blogged Dr. Peter Morici, a business professor at the University of Maryland, and a former Chief Economist at the U.S. International Trade Commission.

“Apparently, those agencies recognize what Treasury and the Federal Reserve simply won’t admit – insider trading, robo foreclosures and peddling dodgy securities to unsuspecting investors are good old fashioned fraud,” he wrote. “Like the corruption tolerated by Third World autocrats, those practices handicap American capitalism in global competition and undermine prosperity.”

He cited the subpoenas for executives at Goldman Sachs and SAC Capital advisors.

“Punitive settlements and convictions-resulting from investigations into insider trading at Galleon and SAC, shoddy mortgage foreclosure practices at Bank of America, and shady marketing of mortgage backed securities at Goldman Sachs-ultimately, would curb cynical behavior and ever bigger paydays on Wall Street, and improve returns for stock investors,” he asserted. “As importantly, it would redirect American capital and talent toward more productive, jobs-creating purposes.”

Stocks as investment

Dr. Morici indicated stocks aren’t an optimized investment.

“In February 1998, the S&P 500 first closed above 1000-since corporate profits are up about 210 percent but equities less than 35 percent,” he recalled. “Corporate profits rose 6 percent annually but investing in stocks paid a disappointing 2.3 percent a year.”

Why else?

“Buying stocks doesn’t seem to pay, because too much of the profits created by innovators with ordinary investors capital is captured by hedge funds, Wall Street trading desks, private equity houses, aggressive M&A shops, and then paid to Wall Street executives and traders,” he wrote.

Dr. Morici suggested an eye-opening thesis.

“In the drive for ever bigger compensation packages, Wall Street’s best and brightest violate boundaries of ethical behavior and the law,” he explained. “Not all of our problems can be laid on Wall Street’s steps, but its culture of entitlement and sharp practices impose enormous burdens.

“The carnival culture on Wall Street is attracting too many young people to business schools to study economics and finance, instead of pursuing physics and engineering,” he added. “That’s why the best business schools are overwhelmed with applicants from Connecticut and California, while engineering colleges depend on students from China and Asia, who will then return home to compete with American businesses.

Wall Street paychecks

He believes that the obscene Wall Street paychecks hurt individual shareholders and pension funds, alike.

“The absence of significant appreciation in equities for more than a decade means that many retirees dependent on IRAs and other defined contributions vehicles can no longer live comfortably, and many baby boomers who have been pushed into such pension vehicles can’t retire,” he wrote. “Their money may be working hard, but only for Wall Street titans and not for them.”

He maintains the financial chicanery costs jobs.

“These days, too much money and talent are directed to financial engineering-efforts to design the next complex derivative-and not enough is going into physics and real engineering-designing electric cars, new materials, and products and services that will define U.S. global competitive success and prosperity for the next 25 years,” he maintained.

“Increasingly, venture capital and stock investors look abroad for the best returns, and this deprives small and moderate sized U.S. companies of capital needed to expand and invest in new ideas and create jobs,” he added.

Conclusion

So, what can Mr. Schneiderman, the Justice Department, and the Securities and Exchange Commission accomplish – while the Treasury Dept. and Federal Reserve appear incoherent?

“Prosecuting Wall Street will do a lot to curb abusive practices and excessive compensation, make stocks and IRAs sensible investments, redirect capital and talent into productive purposes, and get the American growth machine back on track for our children and grandchildren,” concluded Dr. Morici.

Agreed. At one time, my free-market philosophy would have differed on this scandal. But not now. The economic liberty of countless people is at stake.

From the Coach’s Corner, Dr. Morici’s analyses are regularly published in this portal’s Economic Analysis Op Ed section.

Here are links on the background of the financial scandal:

• Will Goldman’s Scandal Prompt Cultural Changes on Wall Street?
• Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner
• Is it Time to Police Pay at Wall Street Banks?

“There is two things that can disrupt business in this country. One is war and the other is a meeting of the Federal Reserve.”

-Will Rogers

 

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

 

Will Goldman’s Scandal Prompt Cultural Changes on Wall Street?

 

There were reasons for financial reforms.

On the same day  that Congress passed sweeping financial-reform legislation in 2010, Goldman Sachs & Co. agreed to pay $550 million to settle fraud charges. The charges accused Goldman of fraud in mortgage investments. That includes $300 million in fines assessed by the Security and Exchange Commission – the largest in SEC history.

The remaining balance of $250 million went to the victims.

You might recall that Goldman’s mortgage-related investments were designed with participation by a Goldman client, Paulson & Co. Paulson bet those investments would not succeed, and they didn’t.

Goldman was forced to assess its procedures in such financial mortgage deals. The catalyst was the investments that cost investors nearly $1 billion, but the deal netted Paulson huge sums of money. It was also part of the mega mortgage meltdown that helped to exacerbate the nation’s economic downturn.

“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert Khuzami, the SEC’s enforcement director.

A federal judge in New York will rule on the settlement.

The case against Goldman gathered steam when a published report added impetus to fraud allegations against Goldman. The Sacramento Bee alleged Goldman secretly worked to dump “billions of dollars in risky mortgage securities and buy exotic insurance” in anticipation of the housing bubble. But the report said Goldman hid its actions from the Securities and Exchange Commission for nine months in 2007 (“Goldman didn’t disclose its subprime mortgage hedges”).

At issue: Opponents eventually proved that Goldman’s gambling was so relevant – investors would not have bought Goldman’s offerings.

The furor over that controversial 2007 mortgage derivatives deal still underscores the fear of many Americans that the market is rigged against them because Wall Street is a haven for questionable behavior.

The Security and Exchange Commission’s triumph over Goldman’s handling of the collateralized debt obligation (CDO) in subprime mortgages showed the Wall Street sheriff is back and is flexing some muscles.

Furthermore, Goldman’s failure to disclose that a hedge fund manager, John Paulson, helped select the underlying securities and then bet against them to make more than $1 billion is bad enough.

It’s looked even worse after Bloomberg reported Goldman knew it was under investigation for nine months but failed to disclose the investigation in their financial reports to investors.

Such omissions triggered the shareholder legal action.

The resulting headlines are reminiscent of the financial-greed scandals involving the 1980’s shadowy behavior of convicts Mike Milken and Ivan Boesky, as well as the principals at Enron and Worldcom.

Several questions have arisen:

1. Is the SEC action really the tip of the iceberg of upcoming legal challenges?
2. Will it lead to a stock market correction?
3. Will it end the entitlement attitudes seemingly held by many investment bankers?
4. Will it improve the culture in the financial sector?

This case was an ideal situation for New York’s litigious community.

It led to a decline of Goldman shares – 13 percent – as well as the shares of other financial companies trading in CDOs, including Deutsche Bank AG, Morgan Stanley, Bank of America (the parent of Merrill Lynch) and Citigroup.

In addition, a Chicago online publication, ProPublica, reported on questionable bets by Magnetar and allegations of conflicts of interest by the latter three financial firms. Magnetar denied culpability and none of the three banks denied or commented on the allegations.

Indeed, the same day that the SEC acted against Goldman, a Dutch bank leveled similar charges against Merrill Lynch. Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, or Rabobank, cited Merrill Lynch in a $1.5 billion CDO.

Sadly, regarding Wall Street’s entitlement attitudes and culture, the consequences might not be severe enough to prompt an attitude adjustment.

Not to be cynical, here’s the bottom-line question: Are there enough moral compasses on Wall Street to put a stop to the chicanery? Probably not.

From the Coach’s Corner, for more on Sen. Cantwell’s efforts, see “Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner.”

“The saddest thing I can imagine is to get used to luxury”

-Charlie Chaplin

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

 

Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner

 

Updated July 15, 2010 – 3 p.m.

An influential U.S. senator, Sen. Maria Cantwell (D-WA), worked to regulate the perilous use of derivatives by Wall Street bankers, and criticized the Obama Administration in the process. But her derivative strategy worked. The sweeping financial reform legislation will regulate the risky, intangible instruments.

This means derivative trading now faces regulation, and financial institutions will have to set up a fire wall by moving their derivative departments elsewhere.

“This isn’t about poking the White House, it’s about getting capital flowing to small businesses,” Sen. Cantwell said in an interview with Les Blumenthal, a reporter for McClatchy’s Washington state newspapers.

She helped lead the fight against investment bankers, who were bailed out by taxpayers only to shell out big bonuses and who are at it again. Instead of extending credit to business, Wall Street is back to the old tricks of playing risky derivative games that helped lead to Wall Street’s meltdown and the global-financial disaster.

She’s also had a testy exchange with Treasury Secretary Timothy Geithner over the failed efforts to bail out community banks and the associated credit issues faced by her Washington state constituents and other American businesses and consumers.

“We are trying to keep the focus on what needs to be done to get credit flowing and avoid another bubble,” Sen. Cantwell also said. “Do I wish the White House team was more attuned to these issues? Yes.”

 Yes is right. It’s commendable that she’s become outspoken about regulating Wall Street’s behavior.

If she’s successful, we’ll see job creation – the only way out of this mess. I’ve been harping about this and asking for answers to questions for an extended period of time starting with this column, “Is it Time to Police Pay at Wall Street Banks?”

And she was right about voting against the reappointment of Fed Chair Ben Bernanke. Few in Congress seem to understand Main Street issues and his tardy, tepid handling of the Great Recession at the Fed.

Firewall partnership

Sen. Cantwell partnered with Sen. John McCain (R-AZ), the former GOP presidential candidate, to bring back the commercial/investment banking firewall. This will prevent risk-taking by commercial banks that exacerbated two downturns in the 1930s and the most-recent  financial chaos. The two worked together on the Senate Commerce Committee.

Cash flow and credit are critical for operating a business. With too-few funds available in loans, businesses have been failing or, at least, suffering from bad credit as a result of not having access to capital.

Efforts by the Obama Administration and Small Business Administration to provide more loans are to be commended. However, they are way too-little and too late. Most afflicted small businesses now have poor credit because of the cash cutoffs and they won’t qualify for any the funding.

Credit card regulations were too late, too.

Nothing has been done to help repair the credit of the millions of small businesspeople and consumers who were victimized by the credit card companies – domiciled in a handful of states that permit predatory behavior – their rapacious interest rate hikes for bogus reasons and slashed credit lines.

Sen. Cantwell also indicated her disappointment that the Obama Administration twice reneged on promises for action on the proposed firewall between commercial and investment banks.

“Their economic team is not living up to what they said they would,” she explained to Mr. Blumenthal.

Hmm. Broken promises? That’s not what America needs, but we can appreciate Sen. Cantwell’s candor and successful efforts.

From the Coach’s Corner, on another somber note regarding credit: Customers of the hospitality industry are ostensibly the No. 1 target of hackers, here’s the article.

If Mergers & Acquisitions Tempt You, Consult HR Pros

 

If you’re contemplating a merger, be very careful about your human capital – whether you’re in government, a small business or a global company.

Investment bankers will probably salivate over the prospect of new mergers when economic conditions improve, but senior finance executives need to listen to human resources experts to insure success.

From 2005 to 2008, more than 50 percent of the largest mergers should not have been consummated, according to a 2010 Bloomberg report, “M&A Losers in $10 Trillion Takeover Binge Led by McClatchy, Sprint Nextel.”

The 53 largest businesses were considered sub-par just 24 months afterward. They include Boston Scientific Corp, McClatchy, and Sprint Nextel – now, they’re valued less than for what they when the deals were struck.

Yes, any financial decisions about mergers should be based on input regarding human resources. There is another precedent for this precaution.

Actually, when I was contemplating this topic, I was reminded of my 2002 column warning about the unproductive merger of Hewlett-Packard and Compaq when I spotted an online video of her biography by the Carly Fiorina campaign for U.S. Senate in California.  

The spot touts her business experience at HP, but it doesn’t mention her dismal record, especially her merger of HP with Compaq. The merger was highly controversial because she merged two cultures that were not compatible. She was eventually fired.

Later, it was difficult for me to refrain from writing a “I told you so” piece in 2004.

Merger fever peaked in 2007. But the next year mergers plummeted to $1.97 trillion.

Finance pros are naturally concerned about money. Also at-risk are credit ratings and the improbability of profits after a merger.

But that’s not stopping Kraft from acquiring Cadbury or Comcast from trying to acquire NBC Universal.

If you’re contemplating a merger – it doesn’t matter how big or small or whether you’re in the public or private sector – there are several precautions to take.

Yes, crunch the numbers. Perform forecasts. But conduct an HR risk analysis – strengths, weaknesses, opportunities and threats. If you decide to proceed, plan and execute your strategy.

The big five pitfalls

There are at least five questions to consider:

1. Are the cultures compatible?
2. Will senior managers be compatible?
3. Will you lose key talent?
4. How can you be sure about financial sustainability?
5. What about productivity?

Note: 60 percent of these pitfall questions are HR-related.

People-related issues are paramount. Employees are your human capital and should be treated as assets. If you don’t pay early attention to human-capital issues, you’re risking failure. There are many elements to investigate, such as employee morale, benefits and payroll management. Not to mention information technology issues.

Remember, your customers buy from you because of their relationships with your employees. If your employees are uncertain about their future, then your customers will become apprehensive about their relationship with you.

That’s because all customer-buying decisions are made on five value-motivating perceptions. My research shows 53 percent of customer buying decisions depend on what customers think about your organization’s leaders and employees, and their attitudes. (For more on these perceptions, they’re included in this article, “The Seven Steps to Higher Sales.”)

Thwart your competitors who will be savvy predators in recruiting your best workers.

And understand when and what to tell your employees about possible layoffs.

Fiorina case study

HP’s difficulties after merging with Compaq include:

Its stock price dropped significantly despite good revenue and market share. It served one billion customers in 160 countries worldwide. Ranked no.14 among the Fortune 500, it employed 145,000 people and budgeted $4 billion for research and development.

HP was proud of its No. 1 market share in several products: Laser jet printers, disk storage systems, ink jet printers, UNIX servers, Windows servers, storage-area network systems, Linux servers, and notebook computers. Its printer market share was 47.1 percent. It ranked No.2 in handhelds, external RAID storage systems, and desktop computers.

But HP’s share price had dipped about 25 percent and the company did not appear robust.

Prior to the controversial merger, Ms. Fiorina was exposed to red flags. Along with director Walter Hewlett, a son of one of HP’s founders, and 49 percent of HP shareholders, this column raised questions at that time about the merger’s feasibility.

The concerns: Merger opponents were extremely vocal, the HP and Compaq cultures were vastly different, and the latter’s reputation for quality wasn’t strong as HP’s. I had products from both companies and that was my assessment, too. In fact, my firm has had a myriad of printers – black and white, and color – the two 15-year-old HP printers still work well with any computer.

As Forbes’ top-ranked businesswoman, HP CEO Carly Fiorina was a charismatic salesperson. She had her ups and downs, including criticism for purchasing a $30 million corporate jet and her unsuccessful bid to buy the consulting business of PricewaterhouseCoopers for $18 billion a few years previously.

Pundits complained HP had lost its focus in competing with Dell and IBM.

HP’s $586 million profit for the fiscal third quarter ending July 31, 2004, which was announced on Aug. 12, was below Wall Street’s expectations. As Dell began its larger foray in the printing business, HP’s profit in its core strength, printers, dropped.

Ms. Fiorina made another misstep: She was openly critical of Dell’s approach in not investing in research. Ms. Fiorina touted HP’s niche as being between Dell’s so-called low-cost products and IBM’s emphasis on costly consulting and information technology services. However, Dell’s profit jumped 29 percent and IBM was also growing and announced plans to hire 18,800 workers in 2004.

HP was vulnerable because of its broad strategy in taking on such venerable foes, especially when corporate and consumer spending on technology, in general, wasn’t robust. Plus, Dell had hired away Alex Gruzen, a HP senior vice president, responsible for HP’s notebook, tablet personal computers, and personal digital assistant division.

Merger Solutions

Here are the three A’s for merger success:

Awareness. Properly assess the risks. As in the merger of HP and Compaq, it’s important to note it isn’t feasible to achieve success after launching such endeavors for five reasons:

1. Strategy and focus – public agencies and companies lose focus when the merging cultures aren’t compatible.

2. Synergy – firms at the opposite ends of the spectrum culture-wise, don’t function well as a unit, no matter how much overtime the CEO works. This also means employees don’t respond well to new leadership, which leads to a breakdown in communication and infrastructure.

3. Apathy – such internal challenges lead to ennui in company initiatives; nothing great has ever been achieved by a lack of enthusiasm or passion.

4. Decrease in competitiveness – marketplace forces seemingly weaken a company, such as HP, as it learned in facing its opponents, Dell and IBM.

5. Effects from macroeconomic events – terrorism and recessions, for example, hover as challenges. As a result, consumers and businesses will spend less on technology. Ask any government agency or business about 9/11 and the impact on their revenues.

Acceptance. Just as analysts were adamantly opposing HP’s focus and its inability to discern challenges accurately and to adapt accordingly, customers will likewise become indifferent about a merged company’s products and services.

The concept behind the principle of acceptance also requires resourcefulness in creating solutions to deal with reality, hidden or not.

Action. To sustain performance, implementation of an action plan requires a checklist of six key elements:

• Analysis by an astute analyst to ascertain strengths, weaknesses, opportunities, and threats
• Close monitoring and participation by top executives, especially during periods of change or unrest by stakeholders
• Prudent assessments of strategy and tactics combined with implementation by an outside participant – an assertive, objective traffic cop – to monitor and insure success in sustaining performance
• Due-diligence and patience so that not even small details are overlooked
• Accurate anticipation of the needs of customers
• Performance-based compensation

The three A’s for merger success will insure any company adapts extraordinarily well in a climate of change and uncertainty.

Oh, if you’re contemplating the possibility of joining such employers, do your due diligence.

From the Coach’s Corner, related links:

• Leadership, HR, Marketing Lessons from HP’s Executive Turmoil
• Did Carol Bartz Use the Right Leadership Approach?

 “Sometimes the poorest woman leaves her children the richest inheritance.”

-Ruth E. Renkel

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

 

Forex Trading: Prevent Tragedy with Due Diligence

 

Forex trading is a daily marketplace in the trillions of dollars. But scandals serve as a reminder about due diligence.

In Canada, the B.C. Securities Commission accused Horizon FX Investments of illegally soliciting $34 million from 1,000 investors, according to The Vancouver Sun on Nov. 10, 2009.

Ten days later, The Wall Street Journal reported a new managing director was appointed to lead Chinese conglomerate Citi Pacific Ltd. to replace a predecessor in the wake of huge losses in a Forex scandal.

That’s not all. Enter the key words, “investor scandal,” on any search engine and you will find numerous references.

Reader’s question

So, I decided to focus on due diligence after receiving and answering the following question:

“Hey Coach, I’m a business owner and fairly new to investing in the stock market. I keep hearing about Forex trading, but I don’t understand what the buzz is about. Can you help?”

My response:

Especially since the Digital Age began to really take root, we’ve been seeing a whole of innovations, changes and advances – all thanks to globalization and technology. My earliest recollection is when I was a journalist in the 1970s long before the Internet.

Many have been great developments. Ask George Soros, a remarkable story, who has made mega bucks as a speculator.

But the scandals show the downside from not practicing due diligence.

Forex trading is exciting and fast-growing, and it can really get your juices flowing. I think it’s a rather sexy subject because Forex success necessitates staying abreast on a broad range of current topics including economic trends and political developments.

One of my business-professor buddies has taught it as a college-level class, which means it is a complex subject and I’ll only attempt giving you a basic primer.

Not to oversimplify, Forex trading mainly refers to the foreign exchange market for international trade and investment in currencies and cash via what’s called the interbank market. Forex trading is highly specialized and it isn’t available at every bank and financial center. It’s important to only deal with reputable people and use competent Forex software.

Traders include speculators, central banks, private-sector banks, and companies. Investment strategies can include algorithmic trading using software for price, quantity or timing.

For you as a business owner, this means you have the opportunity to make money throughout the world while simply sitting in your home or office. Of course, that includes Forex trading of any currency.

If, for example, you want to start trading with a country in the European Union, a foreign exchange deal will help you buy or sell Euros.

Perhaps a bit complex for you as a novice, essentially, it’s all about convenience and flexibility to make money across the globe in trading currencies.

That includes the variety of factors influencing exchange rates, market liquidity, 24-hour trading during the week, trading volumes, geography across all borders, and the use of debt or leverage to supplement investments.

Due Diligence

Before you get excited, please note: Don’t make any rookie mistakes.

Forex trading is transacted on margins, which means high-profit potential but nonetheless it is risky. Funds in an account are less than the amounts that are controlled. It’s worth noting that currency exchange rates on an average day are not large but can be small. However, trading on margin is risky.

So do your due diligence by studying in Forex exchange courses or reading blogs. Know your broker and check authoritative sources like Forbes.

A great source of Forex tutorials and information are blogs, which are easily updated with current information, which you can arrange for RSS feeds to your computer.

More on due diligence later.

OK, I feel better. Now that I’ve cautioned you, Forex trading is fun because there are continuous opportunities because of the high liquidity and other factors.

Countless enthusiasts invest in managed Forex accounts. Because of the Forex-market dynamics, a managed Forex account is usually ideal for someone who doesn’t have the expertise and time to stay current.

Investors choose among such spot transactions (the spot market is the largest) or forwards, which are basically deals to buy or sell in the future for an agreed-upon price now.

Most nations allow Forex derivative trading although it is not acceptable in third-world countries. There are tier-levels of participation, which depends on the amount of money being traded. It is unlike when you trade in the stock market.

Institutional investors from pension funds to insurance companies have been a pivotal part of the growth.

Forex is highly speculative and focuses on what is anticipated in terms of movement of currency. So again, I advise caution.

ETFs

You’ve probably heard the acronym, ETF. That stands for exchange-traded funds. Many will follow or track the trends of currencies vis-a-vis the dollar.

For example, when comparing the dollar to the Euro, an ETF can increase its value when the dollar drops vs. the Euro.

For pricing, in essence, individual investors rely on Internet market makers.

To get credit with banks in the interbank market, such Forex brokers use their own money in participating in foreign exchanges. They land the most competitive pricing – if they have good credit relationships with banks because they are then-better capitalized than their competitors.

Again, there have been many unsettling events. Scandals have resulted when predators have taken advantage of unsuspecting souls.

As in all business issues, relationships are important. This is especially true during challenging economic periods. In other words, if the marketplace is volatile, respected brokers continue to get the best deals. So, deal with a respected Forex broker.

In conclusion, that’s your Biz Coach primer. Have fun. But did I mention due diligence?

From the Coach’s Corner, suggested reading:

• Forex brokers list
• Small Business Tips to Protect Your Bank Accounts
• Tips on Understanding the Mindset of IRS Auditors 

“Diligence is the mother of good fortune.”

-Benjamin Disraeli

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

 

Is it Time to Police Pay at Wall Street Banks?

 Sept. 20, 2009

As a longtime free-market advocate, I never thought I would be writing this – but the time has come to regulate the Wall Street compensation of senior banking executives. So, I’m endorsing the proposal from the Federal Reserve – with two provisos.

The Fed ostensibly wants to discourage excessive risk-taking by many banks, including their permissive lending by regulating bank executives’ pay. Nearly 6,000 banks would be covered.

Such practices helped lead to the deepest financial crisis in decades. The behavior has been so bad, it also helped exacerbate problems with the agency that insures consumer accounts to $250,000. Federal Deposit Insurance Corp. may have to borrow money from the U.S. Treasury. FDIC’s bank insurance fund will be paying out $70 billion through 2013 after 123banks collapsed by Thanksgiving in 2009.

Businesses have suffered because their accounts are not insured.

“Wall Street greed and irresponsibility have nearly destroyed the U.S. economy,” said Dr. Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the US International Trade Commission. “Big bonuses for bankers encourage reckless risk taking and were a principal cause of the credit crisis and Great Recession.”

Here are some examples:

“Banks wrote mortgages and sold those to Wall Street financial institutions, who bundled loans into bonds and sold those to investors, such as insurance companies and foreign governments,” said Dr. Morici. “From loan officers to the Wall Street bond salesmen, opportunities to exaggerate the quality of loans emerged. If local banks or Wall Street financial houses could pawn off high-risk, high-fee loans as reasonably safe, they enjoyed big paydays.”

He bluntly criticized the behavior on SWAPS, a financial instrument called a derivative. Simply put, it pays face value to the buyer if a company does not meet its debt obligations.

“Wall Street bankers wrote bogus insurance policies called SWAPS that were supposed to limit losses for investors when mortgages defaulted,” added Dr. Morici. “AIG wrote many SWAPS without capital to back them up, and banks even wrote SWAPS on each other’s mortgages – like two homeowners on a North Carolina beach promising to pay one another in the event of a hurricane.”

SWAPs and bad bonds victimized investors and the bankers garnered mega paychecks. But when the homeowners failed to pay mortgages, banks faltered and the huge losses rippled throughout the economy. But only the banks were bailed out by the government (taxpayers).

To add insult to injury, banks have been allowed to borrow at extremely low interest rates. But they failed to make funds available to consumers and business, and once again enjoy enormous profits. And they have been paying huge paychecks to management.

“Consequently, widows relying on Certificates of Deposit for income, now receive much reduced interest rates” said Dr. Morici. “That’s right – Ben Bernanke is taxing grandma to bail out Goldman Sachs.”

Receiving comparatively little attention has been the continuing predatory behavior on credit card customers – banks and credit card companies are still geting away with bogus reasons for jacking up credit card rates and fees.

But a year after the collapse of Lehman Brothers, another SWAPS practitioner, SWAPS have lost their stigma, according to published reports.

Dr. Morici agrees:

“Flush with profits, the banks are up to their old tricks – again creating highly engineered financial products, selling swaps, setting aside massive profits for bonuses, and manufacturing conditions for another crisis,” said the business professor. “If Wall Street banks are too big fail, then they are too big to let go on with this irresponsible behavior.”

But he points out the Fed would be over-matched in its proposal to regulate bankers’ pay.

“The latter is too complex to be realistic – the banks would run circles around such rules, much like lawyers creating tax shelters,” he said. “Better to limit bonuses and salaries of bankers to a fixed percentage of net income that aligns financial sector salaries with those of other industries.”

Agreed.  In addition, I would add two caveats:

1. Strictly reduce the amount of risk that banks undertake.
2. Require high reserves – much higher.

And on a related topic while we are cleaning up Wall Street practices, let us correct the predatory behavior of banks and credit card companies that dramatically increase rates and fees for bogus reasons. The companies are domiciled in a handful of states that permit such behavior.

In other words, here is what is really needed: Police the behavior of these people.

But are the Obama Administration, Congress, certain state lawmakers, and regulators conscientious and determined enough to do the right thing and stop the madness?

Has Wells Fargo Learned from its Lessons?

 

Updated – Nov. 6, 2012

Wells Fargo is seemingly in constant problems. The nation’s biggest home lender is in a federal cout court denying culpability in that massive legal case brought by the U.S. government.

Even if innocent, the shining halo over Wells Fargo – successful despite the economy – has dimmed as the result of its behavior. Wells Fargo is a negative case study for banks and businesses in all sectors.

Considering the bank’s stellar reputation and expertise, its apparent lack of sensitivity was rather perplexing during the Great Recession.

First, it was an appalling sense of corporate entitlement and disregard of investor angst over Wells Fargo’s reluctance to be transparent. Then, came the Los Angeles Times report that one of the bank’s senior vice presidents partied lavishly at a beachfront home the bank took back from a borrower in swank Malibu, CA.

If Wells Fargo does not reverse its course on these fronts, the bank will suffer from unintended consequences. The bank’s behavior is not what we anticipate from such a high-quality institution.

First, let us consider the bank’s shortcomings on transparency:

On Sept. 3, 2009, The Wall Street Journal reported the bank’s shares were on a roller coaster ride because of a lack of transparency with investors. The report said Wells Fargo’s 2009 share price was down 11 percent while others in the financial sector were up – shares at Bank of America and J.P. Morgan rose 17 percent and 31 percent, respectively.

Here are the three Wall Street transparency issues:

1. The published report asserted Wells Fargo – unlike other large banks – would not disclose its earnings in a quarterly conference call.
2. Nor would the bank publicize its tangible book value per share (TBVPS). Basically, TBVPS is what common shareholders will get if the bank should go into bankruptcy. That is considered a fair question for investors to pose in the wake of the recent financial disasters.
3. Nor would Wells Fargo disclose the status of the distressed loans from its purchase of Wachovia.

Beachfront Partying

On Friday, Sept. 12, 2009, the Los Angeles Times reported Cheronda Guyton – who is the bank’s senior vice president in charge of foreclosed commercial properties – staged extravagant parties at a beachfront Malibu house owned by the bank. At one party, the report indicated the guests arrived on a yacht.

The report lit another fuse: The explosive issue stemming from the unrestrained behavior by financial firms that received those massive government bailouts.

In February 2010, after collecting $25 billion from taxpayers in TARP bailout money, it came to light that Wells Fargo scheduled an over-the-top employee recognition event in Las Vegas – complete with all the lavish trimmings – lodging and all expenses paid for multiple nights at expensive hotels. Only after negative publicity did Wells Fargo cancel the junket.

Plus, in August, the bank announced its four top executives would receive mega increases in pay. CEO John Stumpf’s paycheck skyrocketed from $900,000 to more than $5 million.

The Malibu partying ignited another firestorm: A bank employee was throwing lavish parties in a home surrendered by the owners while millions of Americans face foreclosure and their mortgage problems are destroying their credit ratings.

Ostensibly, Malibu residents blew the whistle. Their former neighbors were the owners who lost their home because their finances were devastated by the Bernard Madoff massive Ponzi scheme. It was also revealed that after Wells Fargo retook the elegant home, it did not list it for sale and refused to show it to prospective buyers. That is an unfortunate precedent from the perspective of shareholders and customers.

It is also a public relations eyesore that published reports indicate Wells Fargo has been too slow – one of the slowest banks – in modifying the troubled mortgages in President Obama’s $75 billion foreclosure prevention plan.

Turning it Around

Here is my sense of what Wells Fargo must do to reclaim its once-prestigious legacy:

In addition to the foreclosure dilemma, first, the bank needs to be sensitive to what is taking place in America, and behave accordingly.

The real unemployment rate is about 18 percent. That includes 23 million Americans who are receiving unemployment benefits, those who cannot find a job and their unemployment checks have ended, and those forced to work part time or freelance because of a lack of jobs.

An incident involving Wal-Mart reminded me of when I have recommended to clients to schedule their advertising every two weeks – just before the first and fifteenth of each month. That’s when most consumers have extra money to spend.

Wal-Mart CEO Mike Duke was quoted as telling the Goldman Sachs 16^th Annual Global Retail Conference that most shoppers – not just low-income – are financially stressed. He said Wal-Mart sales are increasingly bigger during paycheck cycles, especially just after midnight on the first of each month.

Wal-Mart and other retailers have instituted layaway programs to attract cash-strapped consumers in the holiday-shopping season.

Next, Wells Fargo needs to be sensitive to shareholders and customers. The bank should develop a culture where it demonstrates a concern and sensitivity about mortgagees. The management’s attitude of corporate entitlement in their appearances and excesses should cease and desist. Stop planning junkets to Las Vegas.

The bank needs to understand the let-it-begin-with-me concept.

Here is how:

If they want a higher share price, they need to communicate with investors as though they care about transparency, as if to reassure investors that Wells Fargo is a good investment.

If they want to attract the best customers, they need to demonstrate customer empathy and a caring attitude about deposits and loans.

Regarding the Malibu parties, the bank needs to set an example with its senior vice president. But if the bank’s executive had permission to occupy the house and throw lavish parties, everyone should remember the privilege is a taxable benefit or she should pay the market’s rental rate for a luxurious beachfront home.

Certainly, Wells Fargo is not the only firm with senior executives demonstrating an entitlement mentality and behavior. But the bank has an opportunity to wipe the slate clean and reclaim its stellar reputation. Just as the bank undoubtedly penalizes late borrowers, senior management should start demonstrating their awareness that dubious behavior has consequences.

Short of these steps, Wells Fargo will continue to hear from the government and will someday suffer the same fate as General Motors. And we’ll all be sorry.

From the Coach’s Corner, Wells Fargo is not alone with a history of issues:

• Banks Have Credibility Issue with Affluent Women, Study
• Why Bank Woes Provide Lessons for All Companies Seeking Growth

“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.”

-Robert Frost

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

 

How to Attract an Angel Investor

 

Now that a University of New Hampshire study indicates early stage financing by angel investors is more advantageous than venture capital money, what now? How do you get the angel funds?

Noted angel investor John B. Dimmer offers seven tips.

The 2009 study – “Initial Public Offerings and Pre-IPO Shareholders: Angels Versus Venture Capitalists” – shows evidence of under-pricing by venture-supported IPO groups in initial public offerings vis-à-vis angel investors. The study was conducted by Professors William C. Johnson and Jeffrey E. Sohl. 

So what does it take to land an angel investment? Noted angel investor John B. Dimmer offers seven tips.

Acknowledging the difficulties of entrepreneurship, the successful angel investor in Tacoma, WA, who likes technology, says he looks for tenacity: “I want people with the moral integrity and intestinal fortitude to make the difficult journey through the Valley of the Shadow of Death and come out the other side,” says Mr. Dimmer. “It’s fun to greet them on the other side, hand them a margarita, and toast the success of their achievements.”

In the third installment of my profile of Mr. Dimmer’s insights, he graciously explains his comprehensive approach in how he selects investments:

Q: What mistakes do new companies make in applying for funding?

A: As I indicated, people are the single most important element in making an investment. As such, I generally don’t see business plans unless I know the people who are involved, or I know someone who knows the people involved. I think that to a large extent, most venture investors share this philosophy.

The business plan always comes first. I want to see a compelling market opportunity, and I want to know how the company intends to capture a meaningful share of that market. Mistakes I often see in this segment of the presentation almost always center around unrealistic sales assumptions. Overly aggressive projections relative to the percentage of market share the company will capture is one common mistake. Another mistake is a fundamental lack of understanding of the sales cycle, and the organizational structure required to produce the target revenues.

Q: Preference on projections?

A: Three years worth of financial projections is adequate, but five years is preferred. I would like to see the first year broken down into some detail, but future years can be prepared on a condensed basis. Having been involved with a myriad of start-up companies, I know that the financial projections will not be accurate; however, the forecasts provide valuable insight into the thought process of the people involved.

The most common mistake companies make in this area is a failure to understand and exhibit the financial metrics of their particular business. For example, software companies should normally generate 90 percent gross margins. If you are coming to me with a software investment, and your forecasts show a 55 percent gross margin, unless you have a very good answer as to why you deviate from the norm and how you are going to make money, I will assume that your business will fail because you don’t understand the financial metrics. Likewise, if you present me with an opportunity in the professional services space, which normally generates 50 percent gross margins, and you tell me that you are going to generate an 85 percent gross margin, I will assume you don’t know your financial metrics and pass on the opportunity.

Q: Structuring the deal?

A: Angel investing is risky business, with many of the portfolio companies ultimately failing. Accordingly, angel investors need to see an opportunity for substantial returns in order to offset the losses on bad deals and generate a reasonable return on the entire portfolio. What kind of a return is required? Well, a lot of that depends upon the timeline between the initial investment and exit, but traditional metrics suggest angels are targeting five to ten times their money back from a successful deal. It should be a given that any company approaching me for funding will have established the asking price for my initial investment.

Q: Exit strategy in proposals?

A: This should include the type of exit transaction, which may be a merger, an IPO, or something else, the timing associated with the exit, and the valuation metrics at exit. The mistakes I see here fall into one of two categories, those being an initial valuation that is set too high, or an unrealistic assumption about the exit timing and valuations. As the exit strategy is simply a forecast of a future event, my solution to either of these problems would be to try and negotiate a lower initial valuation.

As an example, I recently looked at a company that had their financing pulled out from under them. They had a big business opportunity ready to go, and needed capital to execute. While I liked their business plan, I felt their valuation was exceptionally high. I compared their valuation metrics with those of similar publicly-traded companies, and found that I could own these public companies for about 20 percent of the price they were asking. I ultimately went back to them with a proposal, but slashed their valuations. They weren’t too happy and so went looking for money elsewhere, presumably under different deal terms.

Q: Legal controls?

A: I believe that items such as voting rights or preference provisions should be allocated and enjoyed equally between all the parties involved with a company. Periodically I see instances where the founders have preferential rights to voting or liquidation. I’d like to think that we are all on the same team, which means if one person wins, we all win. Preferences then make it possible for one party to win, and another to lose, cause the creation of multiple agendas and ultimately lead to failure.

Q: What are the components of a successful presentation?

A: It’s pretty simple: brevity, clarity, honesty. A quality opportunity should be somewhat self-evident. I might need a little help starting down the path, but if I don’t pick up on it pretty quickly, I’m never going to buy into the deal. So, don’t be too long, don’t get overly complicated, and don’t try to pull a fast one on me.

The other thing I am going to look for in a presentation is the ability of the entrepreneur to think on their feet. If you really know your stuff, this shouldn’t be too hard. I periodically like to ask questions where I already know the answer just to see if the entrepreneur knows what they are talking about. Likewise, I sometimes like to ask questions that are outside the box just to see how the entrepreneur handles obtuse ideas. If you know your stuff, you can digest the inquiry and quickly formulate a meaningful response. If you stumble, you don’t know your stuff, and if you don’t know your stuff, I don’t want to give you any of my money.

Q: What trends would you care to predict?

A: I do not consider myself a visionary, but I’ve certainly worked with visionaries. My strengths come in the form of listening and then determining if there is a realistic opportunity for the vision to be commercially implemented within a reasonable time period. The only prediction I will make is that as our world advances, each advancement creates more opportunities…More opportunities for services, products, and technologies to be developed and delivered to consumers. The world of the entrepreneur is expanding at an ever-increasing rate, and I don’t see this changing any time soon.

From the Coach’s Corner, the other articles featuring Mr. Dimmer:

• Investor: Tips for Increasing Cash Flow, Profits
• How Investor Has Fun in Business and Technology

“If a business does well, the stock eventually follows.”

-Warren Buffett

 

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

 

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