July 2011

The Leyendecker View

July 2011

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Welcome to July 2011 issue of The Leyendecker View from Leyendecker & Associates. We hope you find this information insightful and relevant. We welcome your thoughts and feedback.

General Economic Perspectives
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It's starting to feel like the summer of 2010, when there was threat of a double dip recession. That threat was exorcised by Federal Reserve Chairman Ben Bernanke's August announcement of QE2. Equity and debt markets then went on a solid run. Now fragility seems to be setting back in.


The Greece debt problem was supposed to have left intensive care over a year ago, but the patient is now back in critical condition. Should we believe the EU again if they say this time it's fixed? Housing values have reached new lows, with clogged foreclosures likely to negatively affect home values for some time to come. Washington is deadlocked between cutting costs, raising taxes and extending the debt ceiling. Just recently, as QE2 came to an end, the stock market went into a funk. Then Washington created a new economic stimulus by coordinating a release of oil from global strategic petroleum reserves. What a surprise, the stock market went on an immediate tear. 


Where is our organic economy, the one that is supposed to create jobs without government financial or policy stimulus? It seems we are still trying to find it. In a June 25th article in the New York Times, Fed Chairman Bernanke was quoted as saying, "We don't have a precise read on why this slower pace of growth is persisting." Well if the Fed Chairman can't figure it out, then who can?


Some folks have long embraced the sell-in-May-and-go-away stock market strategy. The idea is that when investors and traders go on summer vacation it's hard to maintain a bull market. We'll have to see how things look once everyone is back from summer vacation. But at some point our economy needs to stand on its own two feet, without constant government or policy intervention. What's going to happen when we have the anti-stimulus, austerity?

The Hiring Market
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There have been numerous recent reports about layoffs on Wall Street. So far down here in Houston, we have seen none of that. The energy industry is still robust. And with energy being a huge consumer of capital, banks and securities firms still seem quite busy. Investors also still seem keen on energy, a hard asset that attracts capital during times of economic fragility. Houston may be the most sustainable economic city in the country because nothing, absolutely nothing works without energy. 


The Dodd-Frank bill is a likely culprit behind Wall Street's recent employment contraction. With the "too big to fail" banks only getting bigger, we will likely see even more regulation aimed at squeezing systemic risk from our financial system. They can't pop the bubble too quickly or Humpty Dumpty will come crashing down, but a continuing effort to squeeze risk from the system will likely cause financial services jobs to contract. 


If some version of Glass-Steagall returns, we could also see banks being carved up, reducing the size and operations too big to fail. If this were to take place, job opportunities could grow as the new, independent firms seek to capture and increase market share. The result, though, could be a reduction in average compensation. The bottom line is that if risk is being squeezed out, profits will go down, and if profits go down, so too will compensation.

Managing the Modern Day
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"It's hard to see the forest for the trees" is an old saying that seems to be as relevant today as ever.We're bombarded every day and all day with news. For many of us, it starts first thing in the morning with newspapers, online news, daily newsletters and those talking heads on television, and then we continue to track the news all day through numerous media sources. 


These days, everything about "news" seems meant to confuse. It makes you wonder if the media's real job is to keep you glued to the news waiting for something conclusive. After all, news distributors are paid by the amount of advertising they sell, which is directly linked to the size of the audience they can lure. The more eyeballs they can get, the more they can charge for advertising, and the more those talking heads can make. By keeping us confused with point-counter point and nonstop "urgent" news alerts, we keep watching, making the news business more money.


It seems this constant all day chatter could have a negative influence on our decision-making skills by making us more reactive and short-term oriented. What's everyone thinking right this minute? What's the conventional wisdom right now? Just the term "conventional wisdom" seems odd. How wise is it to think conventionally? And how risky is it to make decisions that are influenced by the daily sound bites of "news"? Can we think straight when we're bombarded all day long?


For some, the Kindle, iPad, and Nook have made it easier to read books. There is great value in having the discipline to read books. In books we can find not just entertainment, but also more comprehensively thought through perspectives on just about everything. Having these perspectives could very well enhance our decision-making skills by making us more thoughtful, reflective and less reactive.


Most of us say, "Oh, I just don't have the time to read books." Well, maybe we could find the time by just turning off the nonstop stream of news telling us the same thing over and over, largely just to hold our attention to sell advertising. By buying and reading books at least we have more control over the information that influences our decision making process.

Chart of the Month: U.S. Based Multinational Companies: Domestic vs. International Hiring
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This chart depicts domestic and international hiring rates of U.S. based multinational companies since 1982. Domestic offices still employ in greater absolute numbers; but hiring rates in foreign offices have been trending up for years, while domestic offices have faced relative dramatic declines, even prior to the 2008 bust. In the last 20 years, hiring rates at foreign affiliates doubled, while hiring in U.S. offices increased only about 10%. And you can see that since 2000, domestic hiring is down about 10% 


Multinational Hiring

Source: Bureau of Economic Analysis 


* The U.S. based multinational companies represented here are only the "MOFAs" - the Majority Owned Foreign Affiliates. These companies are at least 50% owned by the U.S. and the U.S. is calling the shots. This is opposed to Total Multinational Companies, which includes companies with as low as a 10% American ownership stake

Perspectives You Can Use
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From the Fed 

Kansas City Fed: Do SIFIs have a future? 

Thomas M. Hoenig, President and Chief Executive Officer Federal Reserve Bank of Kansas City, discusses SIFIs (systemically important financial institutions) as we approach the one year anniversary of the Dodd-Frank bill, which addressed the potential economic disruption of SIFIs. Hoenig argues the real problem with SIFIs is not their ability to disrupt. Rather, since they are perceived to be so large and powerful as to merit government intervention, they are intrinsically at odds with capitalism and therefore naturally destabilizing. Hoenig analyzes the larger implications and risks of SIFIs in today's less competitive and more volatile economy.


New York Fed: U.S. Economic Policy in a Global Context 

William C. Dudley, President and Chief Executive Officer Federal Reserve Bank of New York, looks at America's economic crisis within the context of a dramatically changing global economy. While both emerging and developed markets were hurt in 2008, emerging markets have rebounded far more quickly, while our economy continues to lag. Consequently, the balance sheets of many emerging markets look far better than our own, upending traditional thinking about sovereign creditworthiness. Dudley looks at policies and strategies that emerging and developed markets can implement to be mutually supportive.


The Economy

Forbes: China wants to buy Facebook 

A sovereign wealth fund in China is angling to buy a stake in Facebook. But just how sovereign can a wealth fund in communist China be, and what are the larger implications in China owning part of the world's largest social networking site?


Business Insider: In today's economy, there are only TWO factors that explain a country's growth 

Is the Emerging Market vs. Developed Market paradigm obsolete? This article suggests that today, an economy can be defined by how linked it is to China, or by how low-leveraged it is.



Jack Welch: Are leaders born or made? 

Jack Welch argues the answer is in fact somewhere in between. Welch outlines what he sees as the five essential traits for every good leader. Two of them, he argues, must be cultivated and improved upon, even for the most innate leaders. What results is a framework for hiring excellent leaders - seek those people who exhibit the three inherent leadership traits, then set out to develop the other 2.


HBR Ideacast: Managing yourself: Extreme productivity 

Within a larger conversation about increasing personal productivity, management professor and author Bob Pozen suggests CEOs shift their focus away from thinking about what functions they want to do, and towards what functions the company needs from them, particularly those that only the CEO can perform. Doing so, he says, will cause CEOs to use their time more productively and with a greater impact.


Management & Hiring

HBR: Making onboarding work 

Deferring to the HR department to orient new hires appears to be obsolete. More managers are assuming the new hire assimilation responsibilities themselves. Doing so allows managers to benefit from an employee that feels more welcomed, included, and informed, and thus motivated and productive.


McKinsey: Chemicals' changing competitive landscape 

New entrants into the chemicals market - from China, India and developing countries -  are shaking up the industry. They are using a strategic approach of resource monetization, which is a deviation from the old industry practice of shareholder value creation. McKinsey outlines how established companies can successfully adapt and remain competitive through industry-wide tectonic shifts.

Thanks for reading The Leyendecker View. We hope you find these perspectives unique, insightful and valuable.

We at Leyendecker & Associates are committed to the highest standards of value creation. 
Doug Leyendecker Jim Ford David Prodoehl Kelly Griego