Wednesday, August 05, 2009

The Misleading US Housing "Recovery"

Last Wednesday's Wall Street Journal carried a prominent lead article trumpeting the recent news concerning increases in housing starts and home prices "across U.S." Home prices were described as having "first gain in three years."

Yet, details in the long article were somewhat contradictory to this headline's implications, if not its limited scope.

No less an authority than Yale housing economist Robert Shiller was cited as saying,

"The change in momentum here is very significant."

Yet, the article also noted of Shiller,

"He said he expects home prices to remain near current levels for the next five years."

Elsewhere in the Journal piece, the ability of housing prices to rise was credited to banks delaying the remarketing of foreclosed homes. This deliberate constriction of supply tends to, of course, firm up prices.

Ivy Zelman, CEO of Zelman & Associates, a housing-research concern, was quoted as saying,

"We think (the sales index) will look like a "W," where prices go up until the foreclosures at the higher end translate into another leg lower."

The article also noted that larger down-payments are being required on buyers trading up to larger, more expensive houses, while jumbo mortgages typically carry higher rates. Both these factors will tend to retard housing sales.

These comments put an entirely different spin on the recent, small and brief upward blip in housing prices and sales.

Seen from 2005, both measures are still very low. And now we learn this positive news might be so only because an undetermined stock of foreclosed homes has yet to reach the market, thus further depressing housing prices, and, probably, new home starts.

Hardly what you'd use to underpin your hopes for a widespread US economic recovery, is it?

Tuesday, August 04, 2009

More Boeing Dreamliner Headaches

Last Thursday's Wall Street Journal reported Boeing's latest troubles with its Dreamliner 787 airplane program.
Now running over two years behind schedule, the plane is running into sagging demand and affordability issues by customers.
In these two posts last year, here and here, I commented on Boeing CEO James McNerney's continuing inability to manage the Dreamliner problem. Essentially, Boeing's board bet that a guy who ran the unit that built engines for airplanes an airplane company.
So far, that's not working out too well. As the nearby 5-year price chart for Boeing and the S&P500 Index shows, the airplane company hasn't outperformed the index over the period.
Figure that you need some extra return from a single issue to adjust for risk, and Boeing's actually behind the index's performance.
What, exactly, has McNerney done for the company? Right now, shareholders would have been no worse off by simply holding the index.
Meanwhile, the gaffes which have become public in Boeing's Dreamliner program would make one ask just how competent the company has been with its vaunted new production and assembly concepts?
Somebody has to take responsibility for Boeing's lackluster total return performance and the Dreamliner's continual launch date. It would seem, after about four years, McNerney would be that person.

Monday, August 03, 2009

Kodak: How The Mighty Have Fallen

Friday's Wall Street Journal reported on Kodak's recent quarterly performance.

It wasn't pretty. The headline for the article proclaims "sales fall 29%." The firm lost $189MM in the quarter.

There were all sorts of the usual verbiage from the company's earnings report explaining expense cuts, revenue declines, etc. Kodak announced that it expects this year's total revenue to fall by 12-18% from the prior year's $9.42B.

As it happened, I saw a Kodak infommercial the next day for one of its printers. All I could think of was,

"Has it really come to this? Kodak is hawking printers with an ex-sitcom co-star on weekend cable television? Complete with the requisite "studio audience" and cutesy comments from the faux-production personnel?"

Yes, it has.

Schumpeterian dynamics have struck, and struck hard, at Kodak. Image capture, distribution, storage and, if you want, printing, in the digital world are finally nearly free, and very easy.

Long gone are the days, when I was a teen-ager, of buying film, taking it to the local drug store for developing, and then hiding the pictures in their bags for decades.

As Schumpeter correctly described, expensive products like film photography spurred radical technological replacements that, first, erode, then just eviscerate revenues and profits of the old-line producers. So low are the new prices that old competitors are crushed and their business models simply disintegrate to mere fractions of the old revenues and profits.

That's basically Kodak today. There really isn't enough of a business left to sustain an entire company with consistently superior profitability. What does still make money at Kodak could be just a copier or printer division at Dell, HP, Ricoh, Canon or Lexmark.

If you had a few billion dollars today, and Kodak's technologies, you probably would not waste the money to found the firm in its current incarnation. What you now see is a snapshot of a firm in the process of dissolving, apparently at an accelerating pace.
As the nearby 5- and 1-year price charts for Kodak and the S&P500 Index display, the company has not experienced prolonged positive returns in five years. It's had roughly -80% price drops over both the 5- and 1- year periods, suggesting it's on a sort of constant rate of decline on an ever-shrinking base, far underperforming the S&P over both periods.
I can't imagine who would still be an owner, besides those unfortunate enough to work at Kodak and have it in their 401Ks. Who wouldn't just dump this company's stock as it plummets toward no value at all, having lost almost any uniquely advantageous business attributes with which to stave off death by digital imaging?