TCInsights

Talking It Down

user.nospam@nospam.example.com (rob) — Mon, 20 Sep 2010 07:47:00 -1300

I've spent the last two years listening to experts and watching the trends, and I'm now convinced that people just get stuck in a talk track. Whether it's the political statements like "small business won't add jobs until they know where their tax rates are headed", or "this economy isn't going to turn around until jobs come back and the consumer starts spending again". Talking down just about everything is just too easy right now.

But consider the contrarian view and I think we might just start looking at things with a little more balance. We are now in a phase when a sustained period of low growth is likely. Slow consistent growth is good and will likely lower the risk of inflation. The move to more conservative and pro-business governments is good and will likely drive the restructuring of entitlements and lower the risk of significantly higher taxes. Once again, good news. The reversal of the fall of real estate and the rise in unemployment has begun. Once again good news.

In addition to the positive aspects of slow and steady, the emerging markets will continue to grow at above average rates for many years. This is good news for global companies and counterbalances the gloom and doom in the US and Europe. Capital is poised to invest as private equity investors have $1 trillion to invest over the next couple of years, and profitable corporations engage in strategic M&A. This flow of capital will drive value creation and the exodus from bond funds will find it's way to the equity markets. You can see it in the eyes of the private equity guys; they are talking down valuations while also racing to put their money to work. Once again...all of this is good news.

Finally, we are just at the beginning of the next wave of technology enabled innovation. With the emphasis on mobility and the shift to cloud computing, technology is once again going to change everything. Today, the gadgets are seen as toys and not productivity levers, and the global computing environment is still built around the old model. As technology tools and applications are delivered like electricity from a utility, productivity will once again go through the roof. As I said eighteen months ago, technology will lead us out. The upside is impossible to measure and the rate of change and investment will accelerate quickly.

While most people today seem to enjoy talking things down, others are charging ahead with confidence. Solid growth based on fundamentals, global markets and innovation is right around the corner. The smart money knows it, and they will benefit the most while the vast majority keep whining about the past.

9/20/2010.

Trust The Flywheel

user.nospam@nospam.example.com (rob) — Thu, 09 Sep 2010 05:06:00 -1300

With all the bad news and worrying these days, it's sometimes hard to look on the bright side. People have the tendency to believe that what's happening today will happen again tomorrow. So, the double dip recession talk and the gloom and doom dominate the news today.

While timing the market and predicting what will happen tomorrow is best left to the gamblers, the truth is that things change and cycles come and go. What goes up must come down and the momentum of large scale change typically shows us where we're going. I was reminded of these simple truths the other day when a private equity investor likened the current change in direction to the power of the flywheel.

Let's face it; the financial market meltdown and the crash in the real estate market created the momentum on the downside. The effects were severe on a global basis and the speed of the collapse surprised nearly everyone...the flywheel was in motion. Today, the flywheel is beginning to spin in the opposite direction, and the speed of the recovery might just surprise us on the upside.

Consider this...the emerging markets of China, India and Brazil are growing at 8-10% in spite of the fact China is trying to slow it down. Interest rates have been held at artificially low levels on a global basis for a very long time, and financial institutions are much stronger. The private equity industry is more active than they have been since late in the last cycle and more than $1 trillion will be put to work over the next couple of years. Productivity is way up and wages have been held down for a sustained period of time.

What does this tell us? I fundamentally believe it tells us that a solid recovery is right around the corner and that inflation is unavoidable. This is clearly not the conventional wisdom these days as most predict a flatline economy for the foreseeable future, but the fear of inflation is overblown. A little inflation will intially be good. The momentum of the flywheel should drive growth and improve the prospects of lowering unemployment and reversing the fall in real estate for the foreseeable future.

The momentum is shifting. Valuations and stock markets will rise, companies will make investments, and senior level executives and investors will do well. The only thing for certain is that things change and I for one am trusting the flywheel.

9/9/10.

Where Have You Been?

user.nospam@nospam.example.com (rob) — Thu, 26 Aug 2010 06:14:00 -1300

During a recent lunch, one of my clients asked, "Why haven't you added any new postings to your blog lately?" Realizing that it had been awhile since I felt the creative need to say something, I checked the blog and couldn't believe it had been five months since my last post. I mentioned it to my partner who immediately said, "We've been busy and I feel like we've barely had time to catch our breath." Given the downturn we all just experienced, we smiled and said "thank goodness".

In thinking about the conversations I've had over the last few months, I'd say I'm not alone. There has been a general sense of relief expressed by many in surviving the downturn followed by a summer of decompressing from the battle we all just fought. As we all know, the recovery has stalled and taken a bit of a break as well, and leaders are now preparing to reengage in the battle. Come September, the new battles will be waged and I'd predict the hand-wringing will increase.

"Flat is the new up", said one of my clients. However, my sense is that the worry and fear of the downside scenario and double dip recession is overdone. If anyone thought that we'd have a sustained period of growth in 2010, it could only have been someone inside the Obama administration. This is clearly going to be a long and slow process of recovery, but I'd predict we'll start to be surprised on the upside in early to mid-2011.

As for our business, executive turnover is increasing and senior level hiring is picking up. In spite of a choppy economic climate and slow growth, companies, leaders and investors are repositioning themselves. This is good news for us today and a good sign things will pick up soon. Much like our blogging activity, the activity level is bound to pick up after a summer of catching our breath.

8/26/2010

The Bright Side

user.nospam@nospam.example.com (rob) — Tue, 09 Mar 2010 06:50:00 -1300

With all of the doom and gloom the past couple of years, the pessimists prevail these days and everyone is complaining about something. It's hard to believe that Obama came into office just over a year ago with a clear mandate, and today he's viewed by most as a one-term President. Having said this, it's also helpful to look on the bright side.

Just over a year ago, we all had serious doubts about the strength of our financial system. Today, the financial services industry is bracing for further regulation and government intervention, but the financial system has been saved. Just over a year ago, the country was also in a condundrum about Iraq and Afghanistan. Today, we still have significant challenges in the region, but it's clear we have an exit strategy. Just over a year ago, we were in the midst of the Great Recession with little hope of turning the economy around. Today, we have officially exited the recession and signs of hope continue to present themselves.

So, why all of the doom and gloom? Well, people are still unemployed and worried about the future. Their homes are worth far less than they once were and nearly everyone's net worth has been slashed. As business owners, we have limited access to capital, no clear path for growth and an expectation of increased taxes in the future. We also see the ridiculous spectacle that our federal government has become and we're weary of the partisan battling in Congress. And on top of it all, we have a President who seems oblivious to these concerns by pushing a health care plan that would only increase the size of the government we have little confidence in.

But, look on the bright side. The stimulus from the Fed combined with the financial strength of America's companies and financial institutions will allow us to grow. The housing market is in the bottom and now beginning to show some signs of life in many markets around the country. Americans are also fed up with the actions of our government in Washington, and it is highly likely that the forces supporting a constrained federal government will result in throwing out the incumbents. And finally, regardless of the health care bill's outcome, much of it will never become a reality because entitlement reform simply cannot be postponed any further.

Things have been bad and much of the discussion is negative these days, but look on the bright side...the worst is over and good news is coming.

3/9/10

A Tipping Point

user.nospam@nospam.example.com (rob) — Fri, 22 Jan 2010 06:41:00 -1300

Just one week ago, I asked the question, "Will the Recovery Have Legs?" What I absolutely did not expect was the very real possibility that our "recovery" may be so short-lived in 2010 that we don't even notice it. This past week was more than a little scary, and I believe we are entering an important moment.

Who would have seriously predicted just two weeks ago that the Democrats would lose their super majority with a Republican winning Ted Kennedy's Senate seat in Massachusetts? Ironically, along with the surprise, the Democrats can no longer jam through the health care bill which was so emotionally tied to Kennedy's very own crusade. And now, a young and inexperienced President can celebrate his first year in office with the fact he needs to change direction before he's really even begun. Clearly, this is a major challenge for an inexperienced President, but I wonder if he understands this is a tipping point on so many levels.

Not only was his push on health care and alignment with the Democrats in Congress a huge mistake, it was also a major drain of political capital. While he has already softened his position, he has not demonstrated the awareness of how he needs to pivot to avoid rattling the markets. In fact, he seems to believe that changing his focus from health care to punishing the banks is the answer. Perhaps the timing was just coincidence, but can you believe he would sermonize on "never again will the American taxpayer be held hostage by a bank that is too big to fail". Are you kidding me? We're trying to build confidence in the recovery not threaten it with saber-rattling.

In the very same week, Warren Buffet comes out and says "the tax on banks just doesn't make sense", and two additional Democrats on the Senate Banking Committee announce they plan to vote no on Bernanke's confirmation. Really? Is Congress so oblivious to the fact that a "no confidence vote" on Bernanke is completely irresponsible right now? So, in spite of very solid earnings announcements from a host of companies, the equity markets sell off and will probably end the week with the Dow off by nearly 5%. Sure the markets have gotten out ahead of themselves and were bound to experience some correction, but you'd at least expect that to happen based on some economic news. The data looks good, but our leaders look terrible and that's the problem.

Obama had best figure out that punishing the banks and tongue lashing them in public is even more stupid than trying to push through a massive health care plan when we just went through the Great Recession. Forget the political consequences for Obama and the Democrats, we can't afford more destabilization. Somebody in Obama's camp better help him pivot and change direction or we're not going to like what's on the other side of this tipping point.

Let me know what you think.

Will the Recovery Have Legs?

user.nospam@nospam.example.com (rob) — Thu, 14 Jan 2010 02:45:00 -1300

As we all know, the recession is technically over and we're expecting a much better year in 2010. While unemployment is expected to continue to rise for the next few months, most of the experts predict the unemployment rate to peak and for the recovery to begin this year. We're certainly hoping for a solid recovery, but you have to ask yourself, "Will the recovery have legs?"

Needless to say, the past two years have been a roller coaster with most of the ride plunging downward. In 2008, we began to see the effects of the real estate bubble bursting, but it was clearly the tale of two stories. During the first half of the year, the stock market tried to hold on in spite of the write-downs in financial services. In addition, investors and consumers remained in a state of denial as the presidential election approached and the talk of a soft landing prevented the economy from tanking. But we all know what happened in the second half of the year as we held on during what felt like financial armageddon.

Similarly in 2009, the first half of the year was devastating as the Great Recession took hold and unemployment raced towards 10%. Somewhat surprisingly, the financial and stock markets rebounded quickly, and companies began to see the bottom as businesses across the board stabilized, albeit at levels down on average 30%. The tremendous amount of stimulus and support from the Fed helped as well and companies came up off the carpet to exceed expectations in the second half of the year. As a result, 2009 was much like 2008 in that the first and second halves of both years produced very different results.

So, here we are in 2010 with talk of a recovery and unemployment peaking and hopefully beginning to come down. The financial services sector is clearly in much better shape as large bank CEOs are defending plans to pay out large bonuses once again. The consumer was surprisingly resilient over the holidays, and the year over year comparisons should allow the stock market to hold onto it's gains and continue to rise - at least for awhile. Companies are also getting back to work and investing again as productivity improvement positions them to perform very well when revenue growth comes back. As a result, the first half of 2010 is set up for success, but I think the real test will be the second half of the year and the first half of 2011.

My belief is the recovery will run out of steam and the second half could be scary. As the Fed executes it's exit strategy, companies will be conservative and unemployment is unlikely to change much. Sure companies will stop laying people off, but jobs will not come back in any noticeable way this year. As a result, sustainable growth is likely to be difficult to achieve and the emphasis on these risk factors will probably shake the confidence of investors leading to a correction in the stock market. While my crystal ball may not be 100% accurate, I'd be very surprised if the second half of the year is as strong as the first half in 2010.

The Recession is Over - Now What?

user.nospam@nospam.example.com (rob) — Tue, 13 Oct 2009 02:01:00 -1300

After four straight quarters of negative economic growth, the great recession is now over. While we've certainly made it through one of the most difficult economic periods in our history, it doesn't seem like anyone is celebrating; at least not yet. So what lies ahead and how should we chart the future?

Growth is good and things will surely get better, but the speed or lack thereof of the recovery makes a big difference. When the Dow was at 6,600 and Goldman predicted it would reach 10,000 by the end of 2009, few believed it. For those who sold and stayed on the sidelines for fear of losing even more, they're kicking themselves but justifying they really had no choice as they worried about their jobs and the value of their homes. We all know the story, but it is important to remember that for the vast majority of people the recession really isn't over.

To gauge the health of the recovery, it would seem to me that you only need to look at four things; unemployment, housing, US equities, and consumer spending. Clearly the equity markets have improved and it is expected they will continue to do so in 2010. Remember, we're still down more that 20% from the highs and the markets are essentially flat over the last ten years. As a result, the near term downside is minimized. Having said this, the consumer still has no real value in their homes and the piggybank of home equity loans may not come back for years. This combined with unemployment that is expected to rise even further in 2010 means that a noticeable recovery in consumer spending may not occur for 2-3 years. I'm not an economist, but it seems unlikely that we'll return to high rates of spending while the consumer continues to deleverage.

As a result, we're likely to see a rebound over the next few quarters followed by an extended period of flat to no growth. The markets may spike and fall and uncertainty and risk aversion will likely dominate the corporate psyche for sometime. As a result, leaders are likely to strategically reposition their companies while simultaneously focusing on improving productivity and profitability of core operations. Non-core operations will be sold and discontinued, and M&A and CEO turnover will rise. While all of this activity will be good for dealmakers and senior leaders as they reposition themselves, the positive effects of these structural changes may not be felt for several years. As a result, the labor market at the middle management level will likely lag behind the most senior levels in the market.

So, what does all this mean? My belief is that the recovery will stall in late 2010 and early 2011. While this may cause some turbulence, I also believe that most managers and investors are aware of this risk and unlikely to get out in front of themselves. As a result, we may experience a flat period in 2011 and into 2012, but I also believe that a sustained period of growth will follow. If we see solid growth in spending, rising home prices, and much lower rates of unemployment at that time, we could be in for several years of upside. As a result, it would appear wise to manage your expectations over the next couple of years but get positioned for sustained growth beginning in 2012.

Gleeful Disappointment

user.nospam@nospam.example.com (rob) — Mon, 24 Aug 2009 05:12:00 -1300

We're entering some very strange territory in this country as it becomes more apparent every day that the extremists on the right and on the left are gearing up for a major fight. While Obama won by running to the middle, the debate over the last few weeks on healthcare is fanning the fires on both ends of the extremes.

As a fiscal conservative, I, like many in this country, have difficulty relating to the extremists on the right and the left. I'm not as socially liberal as the base of the Democratic Party and I'm not as radically "conservative" as the base in the Republican Party. Importantly, I'm not alone as the vast middle in our country share these same views. Having said this, the views expressed in the media, and increasingly the banter amongst my friends and colleagues, reflect the extreme view of the moment. Just as the Democrats believed they could do no wrong after the election, the Republicans are now "doing the happy dance" as healthcare reform looks like it could in fact be Obama's Waterloo. While disappointed in the current situation, far too many people are almost gleeful to see Barack fall in the polls.

Clearly people are angry that they've lost money in the market and their homes are not worth nearly as much. The middle class in the country see nothing but rising costs and reduced benefits in the future and they blame the financial irresponsibility of our government. These concerns are most clearly seen in the light of healthcare reform. Nevermind the countless elements of any healthcare package that will have positive effects, it is clear to most people in this country that we'll get less, it'll cost us more, and the government will have a bigger say in our lives. That means healthcare reform is a big loser for the Democrats and a big winner for the Republicans.

At the end of the day, the debate over healthcare will prove to be cathartic. We'll move past the debate and the economy will eventually improve. We'll likely swing back to the right and eventually find the middle again, and the big issues won't change. Namely, that America isn't the center of the universe anymore. This is the "Asian Century" and we'll look more like Europe as the century progresses. The day or century of reckoning is here, and the sooner we face it the better off we'll be.

Instead of engaging in the daily "one upsmanship" that fuels our debates these days, I hope we'll find a more moderate middle ground. If the politicians in Washington would be a little more humble in victory and gracious in defeat, perhaps the vast middle in our country could find a voice.

When will Americans take back this country from the politicians and the media? Let me know your thoughts.

What Are They Waiting For?

user.nospam@nospam.example.com (rob) — Thu, 20 Aug 2009 06:35:00 -1300

After meeting with a variety of private company owners and private equity investors this summer, I've been surprised by the tentativeness in both camps. While I'm a firm believer that M&A activity is poised to pick up and is a leading indicator of a recovery, I have to ask, "What are they waiting for?"

We have all heard the same comments from small and medium sized business owners who say they've weathered the storm and feel the worst is behind them. They reflect on the anxiety they experienced during the crash, and the vast majority of those still standing feel they were fortunate to have saved the business. While clearly relieved, they also express cautious optimism for the future with a lack of conviction of how quickly things will noticeably improve. I then ask if they've considered selling the business, and almost to a man I hear, "the private equity guys have disappeared, but that's OK because I sure wouldn't want to sell anything right now if I didn't have to".

As for private equity firms, they've been busy fixing the companies in their portfolio they can save and calming investors. They've also taken a look at potential deals, but they're extremely skeptical of the future potential of any company that is on the block right now. As the private company owner says, "Why would anyone want to sell anything right now unless they have to?" There we have it. It really isn't about a lack of capital or leverage, it's really about a lack of confidence and unrealistic expectations. Sellers still haven't adjusted their expectations on valuations to address the risk private investors still see in the market.

For the buyers, they continue to wait for that magical day when valuations appear more reasonable. For sellers, they're keeping their fingers crossed that their businesses continue to improve and that private equity buyers will come back. While it seems like a standoff, I believe the buyers will come rushing in when they feel they may miss the window. Buying good companies at a bit of premium is going to look a whole lot easier than buying marginal companies at a discount and trying to turn them around. You get what you pay for.

So, where are the private equity guys? What are they waiting for?

Let me know your thoughts.

Breaking Out in 2010

user.nospam@nospam.example.com (rob) — Wed, 19 Aug 2009 02:39:00 -1300

As I've been traveling the country this summer and talking with leaders from many different walks of life, the conversation has inevitably drifted to our assessments of when things will noticeably improve. Back in March, I wrote a short piece on when things will start turning around so I thought I'd revisit the question.

Aside from the slowing rise of new unemployment claims, the 40% rally in the equity markets, and Q2 earnings reports which generally met or exceeded analyst expectations, the mood in this country is cautiously optimistic at best. Interestingly, when the market corrected a bit this week (which is healthy and to be expected) it was somewhat surprising to hear some predict that the sky is falling and that we may retest the bottom. It's clear that the fear and pain is just below the surface, and people will get scared quickly if a major correction occurs. Having said this, almost everyone feels that things will get better in 2010.

But what are the triggers to get us moving? In March, I pointed out that we watch two trends to predict improvement in the executive search business; namely CEO turnover and M&A activity. Interestingly, CEO turnover has been reported to have increased 20% this past month, and while a month does not make a trend, it is the first sign that CEOs and Boards are ready to move on. In addition, the private equity firms and investment banks are preparing for a healthy resurgence in the IPO market. Lazard just hired a senior banker to lead their activities and private equity firms are preparing for IPOs to show returns for their investors. Without exits and leverage, the deal market has been dead, but the signs are there for a significant increase in transactions over the next 12-18 months.

While these trends drive management turnover which is good for my business, they are also the signs that value creation opportunities are in greater abundance and that visibility is improving. These leading indicators of a turnaround are improving, but two additional things need to happen to really clear the decks for growth. First, the US Government needs to move past healthcare and demonstrate a unified focus on jobs and economic recovery. Obama has tested our patience and more government spending will only postpone a recovery at this point. Secondly, the government's role in the financial markets needs to be curtailed. As one real estate investor told me, "There are great deals out there, but investors will not invest if they think there is another government subsidy or regulation coming out."

With Obama's poll numbers slipping and the timing for a vote in Congress quickly approaching, my bet is on a grand compromise to move past healthcare in the Fall. Obama will work to improve his approval rating, and consumer confidence should improve; perhaps not in time for the holiday season but probably in time for the spring. As a result, we should see solid growth in 2010 as long as these trends continue. Whether the growth can be sustained to avoid a "W-shaped" recovery is a debate for another day, but I'm cautiously optimistic we'll be "breaking out in 2010".

What are your thoughts? Do you see other key trends to watch?