Archive for September, 2007
Filed under: Competitive strategy, Books
Six Sigma Pricing: Improving Pricing Operations to Increase Profits by M. and N. Sodhi should be required reading for everybody in business, whether in finance, sales, or marketing. This is the most accessible, non-jargon-filled explanation of Six Sigma processes I have read. Using case studies, the authors prove that, just as Six Sigma procedures can be used to define, analyze and reduce defects or deviations in manufacturing processes, these same procedures can be applied to the complicated realm of pricing to examine and then reduce “defects” or fluctuations in pricing. Using Six Sigma methodologies company-wide will help everyone involved in setting and abiding by published prices understand that repeated, unnecessary, unauthorized differences between list prices, discount prices, invoice prices, and realized prices have a direct and usually negative impact on a company’s bottom line.
Pricing consistency and control is internal to a company to a large extent. Deviations from list prices do happen primarily because different people in different departments have different goals: greatest profit for people in finance, market share for those in marketing, volumes of sales (and sales bonuses) for salespeople. The authors argue that companies need to build cross-functional pricing teams so that representatives of all groups involved with pricing can have input into how and why pricing is set the way it is for maximum company profitability.
Even readers unfamiliar with basic statistics can benefit from this book. Chapter 7 includes a basic nontechnical overview of the statistical tools involved in Six Sigma analysis. The point of this book is not to teach HOW to implement Six Sigma procedures in pricing processes, though Chapter 6 provides enough basic information to get a team started. Rather, the authors prove WHY companies should implement Six Sigma methodologies to stem “profit leaks.” Numerous graphs, tables, and flow charts provide visual reinforcement of the information in the text. Each chapter contains a brief summary. Chapter 13 provides a useful checklist of steps to take, and in what order, to deploy Six Sigma thinking across nonmanufacturing processes in order to better control the outcome.
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Filed under: Competitive strategy, Books
Six Sigma Pricing: Improving Pricing Operations to Increase Profits by M. and N. Sodhi should be required reading for everybody in business, whether in finance, sales, or marketing. This is the most accessible, non-jargon-filled explanation of Six Sigma processes I have read. Using case studies, the authors prove that, just as Six Sigma procedures can be used to define, analyze and reduce defects or deviations in manufacturing processes, these same procedures can be applied to the complicated realm of pricing to examine and then reduce “defects” or fluctuations in pricing. Using Six Sigma methodologies company-wide will help everyone involved in setting and abiding by published prices understand that repeated, unnecessary, unauthorized differences between list prices, discount prices, invoice prices, and realized prices have a direct and usually negative impact on a company’s bottom line.
Pricing consistency and control is internal to a company to a large extent. Deviations from list prices do happen primarily because different people in different departments have different goals: greatest profit for people in finance, market share for those in marketing, volumes of sales (and sales bonuses) for salespeople. The authors argue that companies need to build cross-functional pricing teams so that representatives of all groups involved with pricing can have input into how and why pricing is set the way it is for maximum company profitability.
Even readers unfamiliar with basic statistics can benefit from this book. Chapter 7 includes a basic nontechnical overview of the statistical tools involved in Six Sigma analysis. The point of this book is not to teach HOW to implement Six Sigma procedures in pricing processes, though Chapter 6 provides enough basic information to get a team started. Rather, the authors prove WHY companies should implement Six Sigma methodologies to stem “profit leaks.” Numerous graphs, tables, and flow charts provide visual reinforcement of the information in the text. Each chapter contains a brief summary. Chapter 13 provides a useful checklist of steps to take, and in what order, to deploy Six Sigma thinking across nonmanufacturing processes in order to better control the outcome.
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Filed under: Products and services, Industry, Consumer experience, Competitive strategy, Personal finance
 NetBank, the online bank with $2.5 billion in assets, has been shut down by the FDIC after investments in risky mortgages defaulted at an alarming rate. Customers with less than $100,000 with the bank will be made whole by FDIC insurance, and those with more will become creditors in the bank’s receivership.
While these failures are pretty rare, there are two lessons that investors/savers can take from it:
- FDIC insurance covers $100,000 of your money with each bank. To avoid the potential for stress (being a creditor in receivership is not a lot of fun), avoid putting more than $100,000 with any one bank. With high-yield savings accounts from banks including EmigrantDirect, AmTrust (NASDAQ: AFSI), E*Trade (NASDAQ: ETFC), Capital One (NYSE: COF), and ING (NYSE: ING), you should be able to find enough banks to spread out your savings, unless your last name happens to be Rockefeller.
- Already, a well-meaning friend who works at a bank told me about the NetBank meltdown, and explained that “These high-yield savings accounts are very risky. It’s much better to go with a brick and mortar bank, even if the interest rate is 1% instead of 5%.” Many retail banks will start trying to use that logic to trick customers into saving with them. It’s a bunch of crap! Never trust your bank!
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What a gorgeous day in Southern California. It was a mild day with a touch of fall permeating through the morning marine layer. It is becoming evident that some people believe this wonderful climate is reason enough to ask for bizarre and economically devoid prices. Some sellers still seem to think that Johnny Subprime is around the corner, eager to jump on an overpriced 50 year old home simply to obtain the proverbial Mr. Homeowner label. Alas, this story like all Shakespearean dramas seems to have a tragic ending and the foreshadowing is already darker than a full eclipse. You might have noticed on the right hand column a weekly short-sale and inventory count. An emerging trend is brewing. We are reaching a critical mass of inventory and I am sure housing pundits are going to run with this like a child eager to show his parents their first A in fractions. But there will be two backhanded retorts to this premature excitement in October. First, the percent of short-sales coming on the market is staggering. Next, we are going to have the 3 rd quarter foreclosure numbers sometime in the middle of the month and they will be brutal. How do we know? Just take a look at this article on mortgage resets, price-to-income ratios, and the list of Real Homes of Genius. And speaking of Real Homes of Genius, let us take a look at a short-sale home to highlight the current market. Today we salute you Torrance with our Real Home of Genius award.
In California, we have beach cities and then we surrogate beach cities. Torrance is considered a middle class area here in Southern California. Nothing outrageously glamorous or anything that would cause you to lose bodily functions over. Today we are going to look at what 95 percent of the country would consider a starter home. This home is 1,106 square feet with 3 bedrooms and 2 baths. You would think folks would cut their grass before putting a home up for listing but hey, this is California and vegetation is the next big thing. When you read the ad you realize that this place is fully “landscaped” and has “sprinklers.” Looking at the lawn, we are glad the sprinklers are working. In the midst of the current housing market malaise and the overall reluctance of buyers, what would your guess be as to the current price? How about $575,000. Entering the fall and winter selling season at peak price, I’m not sure how much action this home is going to get.
Now before you rush out to call your agent, let us take a look at the sales history of this home. As an aside, folks even a few years ago did not have quick access to previous sales history as we do now. A rudimentary breakdown of the numbers puts things into perspective quickly without running to your local clerk’s office. This simple caveat as it becomes more mainstream will change the way people value homes. So without further interruptions let us run the numbers:
Sale History
08/14/2006: $575,000
01/11/2006: $450,000
08/15/2003: $255,000
07/21/1994: $110,000
Some of you may be surprised to see such numbers but I have seen this more than I would like to admit and am no longer shocked. I’m realizing after talking to certain sellers that there is psychologically some mental block on realistically evaluating your own property. You can run the numbers hypothetically to a non-owner and they will objectively say “oh yeah, that price doesn’t make sense considering stalling appreciation and the area income base.” But once they become owners a switch goes off in the noggin and we suddenly hear, “well you need to realize that over the long-run, real estate always goes up. And renting is the equivalent to flushing your money down a porcelain toilet.” From 1994 to 2003, a period of 9 years this place had an annual average percent gain of approximately 9.8 percent. Not a bad track record for a decade. But let us take a look at the price gain from 2003 to 2006. In this timeframe, the price went from $255,000 to $450,000, a nominal gain of $195,000. During these 2.5 years the average annual percent gain was get this, approximately 32.9 percent! Bwahaha! Oh wait, it gets better. On the next time frame from 2006 to 2006, we see the price jump from $450,000 to $575,000. This is a nominal gain of $125,000 in 7 months or if you want to look at it another way, the actual total sales price of this same home in 1994. Since we didn’t go one year before trading hands, what does the percent gain work out to? This number should cement in your psyche why we are in a historical bubble; the percent gain over 7 months equates to approximately 28 percent! So for 4 consecutive years this home had annual gains of 30 percent. In four years this home has increased in value by an amazing $320,000.
People must be making a boat load of money in this area right? It is always sobering to look at the area demographics. Let us take a look at some numbers pertinent to this area:
Average Household Income: $63,377
So let us assume the average household was to purchase this home. How would their budget look like?
PITI: $3,968 - with $28,750 (5 percent) down and current jumbo rates
Net Income: $4,188 - filing in California as married with 2 exemptions
So this family has a net disposable income of $220 after paying their mortgage principal, interest, taxes, and insurance. No wonder why folks in California went interest only or with option ARMS since it was the only way they were going to squeeze into these absurd prices without eating mac and cheese and a steady diet of tortillas and cheap beer.
Today we salute you Torrance with our Real Home of Genius Award.
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Filed under: Products and services, Competitive strategy, eBay (EBAY), Boeing Co (BA)
The age of the Concorde may be past, but it’s not too late to grab a little piece of the former jet-setting glamor. Pieces of the defunct Concorde jets went on sale on Friday in southern France. Among the more than 850 lots up for auction are cockpit gauges, landing gear parts, plates and silverware, and even a toilet seat. Not included is the Concorde’s instantly recognizable needle nose.
The auction is intended to raise money for a museum and park in Toulouse, home to Airbus, the world’s largest commercial airplane maker. Airbus profit has fallen of late as Airbus struggles to revive its business by selling plants and laying off employees. It also has had to put up with interference in its efforts to develop the A380 from the French and German governments, which are shareholders in Airbus’s parent, European Aeronautic, Defence, and Space Co. (EADS).
If pieces of the Concorde don’t do it for you, how about a 157-year-old Scotch whisky (went for £294,000), letters from Confederate General Robert E. Lee (went for $61,000), a signed photo of Marilyn Monroe (went for £9,000), or even a part in a Will Ferrell movie (went for $47,000) via eBay (NASDAQ: EBAY)? You never know what you might find at auction.
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Here is this week’s email to our list subscribers sent out yesterday; if you’d like to receive additional Blown Mortgage commentary sign up for our email list here. Please note that if you get our posts via email you are not necessarily signed up for our email list (two different things - technology is not always user-friendly).
Less than a month ago George W. Bush, outlining his position against a government-sponsored bail out of the housing and mortgage markets, proclaimed “It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford.” It was a strong stance that earned plaudits from those who chose not to gamble in the housing market, and economists who were concerned that government intervention would only prolong the well-detailed over-valuation of American real estate. But was it a ruse? It appears so. For a bail out by any other name is surely still a bail out. And what we have seen over the last 3 weeks since Mr. Bush’s aphorism against the greed and irresponsibility that fueled this speculative bubble can only be surmised as a bail out indeed.
There has been little fanfare, and zero talk of a “comprehensive package” which is often the hallmark of a government-scripted rescue; but Congress cannot be accused of being insouciant when it comes to housing, there in bits and pieces can a bail out scheme be seen forming, as clearly as a figure in an artfully-crafted mosaic.
A quick scan of the items that have arisen since Mr. Bush’s proclamation shows this unheralded patchwork assistance program being swiftly and quietly ushered in to law.
The launch of FHASecure - a program of seemingly little consequence that, even by the government’s estimates, may only help a quarter-million of those 14 some-odd million home owners who hold subprime adjustable rate mortgages. FHASecure allows homeowners who have missed a mortgage payment (or many, many more) to refinance their home in to an FHA-insured home loan at a low, fixed rate with no teaser rates or complicated amortization and rate change features.
While 250,000 may benefit from this program, it is hamstrung by the fact that the largest contingent of homeowners staring down the barrel of foreclosure live in states, such as California, Nevada and Florida, where FHA loan limits (which are currently 80% of conforming loan limits - the maximum amount being $362,760) are unable to help a large percentage of those at risk. With FHASecure in place the government has drastically loosened traditional FHA underwriting guidelines (guidelines which dodged the euphoric distortion of the last half-decade) for people who made poor financing decisions in recent years.
The increase of federal loan limits. FHASecure is limited because loan sizes in high foreclosure states are many times the current allowable maximum loan size for FHA-insured loans. Further, loans that can be bought by Fannie Mae and Freddie Mac (the government sponsored entities, GSEs) are also capped at $417,000 (for most states). In a move that is clearly designed to help improve the effectiveness and reach of FHASecure (and yet to be announced related programs) politicians at every level are calling for loan limit increases. No less than the “Terminator” himself sent an appeal to increase conforming loan limits to Congressional leaders articulating his views on the “irrelevance” of government loan limits to the California housing market.
The Govenator is not the only one pushing; Senator Schumer is not only pushing to allow Fannie and Freddie to buy more mortgages, but to also increase their loan limit caps (and FHA as well). His legislation hit the floor a scant 11 days after President Bush’s missive.
The forgiveness of debt relief incurred in short sale home transactions. Currently, homeowners who sell their homes at a loss that cannot be covered by cash out of their assets is covered by the lender in the process of a short sale. This debt forgiveness is no favor from the lender however; as homeowners receive a 1099 reporting the forgiven amount lost in the short sale to report as income on their year-end taxes. Talk about a double-whammy; not only do homeowners lose their house (if it was ever theirs to begin with via 100% interest only financing) but also are rewarded for trying to extract themselves from potential foreclosure with a nice, healthy hit to their yearly income. This may be about to change as the House Ways and Means Committee just passed H.R. 3648 Mortgage Forgiveness Debt Relief Act of 2007 - unanimously. This act keeps the debt forgiven for mortgage-related losses from appearing as income at tax time. A welcome development for those people currently decorating their front yard with ‘For Sale’ signs in a desperate attempt to extricate themselves from a less-than-desirable situation.
More on the way. We have legislation in the works to allow bankruptcy courts to rework mortgage debt for personal bankruptcy cases, $1 billion in subprime mortgage assistance pledged by presidential-hopeful Hillary Clinton, dollars allocated for debt and financing counseling, and many more polemical and effervescent ideas - some will surely stick and fall under the unspoken rubric of a federal bail out of home owners.
Mr. Bush, your posturing was a nice, if thinly veiled try. It seems to be a running theme of this administration to use a strong aphorism to gloss over the actual facts of the matter. Your strong words offered a glimmer of hope to the responsible and reasonable amongst you and your colleagues constituencies, but the actions of Congress clearly show that politicians are racing ahead to bail out homeowners and speculators alike. The goal is clear: come to the aid of gamblers who left all their money on the come line and crapped out.
Whether you ever utter the words bail out or not, the government is in full rescue mode; under the sleepy watch of American press and the public eye. When the new legislation is assembled piece by quiet piece, a large safety-net will have been crafted by. Crafted in total disregard of the near 70% of voters who favor no subprime mortgage bail out, the government is piecing together another ill-begotten subsidy.
We should not be surprised though. The American government has always come to the rescue of those who fall out of the market’s favor. Farmers of cotton receive subsidies north of 80% for each bale of cotton sold; no less than the automotive, savings & loan and airline industries have been completely bailed out in the last three decades; dictators and suppressors of freedom receive billions in US government hand outs to help further American interests. If the proletarian homeowner can’t get in line for a hand out with those regulars, what good is their government to them? The US government continues to play with state-sponsored socialism in situations where it benefits them the most; and this year its all about looking good for elections. Joe America is going to be looking at the world (and ballot) through the lens of the bay-window of their McMansion ; and whomever helped keep him there the longest is going to get his vote. It’s time that we call a horse a horse; the government has stepped in and the dole-line is beginning to wind down the block. Whether 70% disagree or not,
the gears of this bail out are grinding quickly and roughly. A common theme in America gets a new-century refrain: those that gamble win. Why not take one more roll of the die when you’ve got the greatest enabler of all time in your back pocket - Uncle Sam?
What do you think?
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Filed under: Management, Competitive strategy, Mutual funds, Goldman Sachs Group (GS)
 In this week’s Barron’s [a paid service], the main feature is on the “50 Best Hedge Funds.” Despite the turmoil over the past couple months — which even Goldman Sachs (NYSE: GS) has not been immune — there are some standout performers.
However, it’s not easy to get information on hedge funds, even though it represents nearly $1.7 trillion in assets worldwide. So, Barron’s wants to provide some much-needed transparency.
To weed things out, Barron’s has based its criteria on a three-year performance span, as well as a minimum of $250 million in assets.
The winner? It’s RAB Special Situations. In fact, it has posted a stunning 47.69% average annual return for the past three years.
Basically, the fund targets commodities, as well as deep value stock investing. What’s more, the fund has been willing to invest in privately-held operations, which can certainly generate huge returns if there is an IPO or acquisition.
Who said hedge funds are bad thing?
Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements . He also operates DealProfiles.com.
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Filed under: Products and services, Consumer experience, Apple Inc (AAPL), Wal-Mart (WMT), Amazon.com (AMZN), Best Buy (BBY), Media World
It seems that whenever you talk to someone about the music industry, the discussion eventually comes to the steep decline that has occurred in the past few years as the growth of digital downloads has affected the sales of CDs. Whenever I think about that decline, it’s hard to see it simply because I still purchase a large quantity of CDs and only a handful of downloads per month. Still though, when I do download an album it always (and I mean always) comes from Apple Inc.’s (NASDAQ: AAPL) iTunes Store, primarily because I own an iPod.
While that may sound like a complaint, it really isn’t because I have always found the iTunes Store very usable and the iPod very convenient, but the reality is that not everyone shares that opinion. For some users, the question of accessibility has become a major issue, and iTunes dominance in the market affects how accessible they view the market. This is not without warrant of course — no matter the success of Apple with the iPod and iTunes; it is still a dominating product in a shrinking field. This view does not even take in the account of CD users.
With the beta launch this week of Amazon.com’s (NASDAQ: AMZN) MP3 store, Apple finally has a competitor that will be able to challenge iTunes with sales and prices, not to mention that the DRM-free (Digital Rights Technology) downloads will be playable on the iPod, among other portable devices. Amazon’s DRM-free tracks are not limited to music from EMI Group PLC and numerous independent labels, either. Certainly both of these differences will aid the new Amazon “iTunes” store, but the very fact that it remains an online store adding an MP3 section means that it should fare well against a store dedicated strictly to media digital downloads.
Continue reading Accessibility in the music industry: Apple (AAPL) vs. Amazon (AMZN)
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Filed under: Consumer experience, Employees, Countrywide Financial (CFC)
If Countrywide Financial Corp. (NYSE: CFC) can’t borrow everything it needs to get back on its feet, perhaps people opening savings accounts at the mortgage bank will do the trick. According to The Wall Street Journal, Countrywide is pulling in deposits of $50 million a day. The paper writes the “company is counting on deposit growth to provide funding for its mortgage lending.”
Because of the success of getting deposits from individuals, Countrywide will increase the number of branches where people can open savings accounts.
There is no doubting the troubles that the company has been through. It is in the process of cutting 12,000 jobs.
And, that’s what does not make sense about the pace of new deposits. One would think that people would avoid putting money will a bank that has been in so much trouble and whose woes have been on the front page of every newspaper.
Either there is a sucker born every minute, or Countrywide is giving away very nice toasters for every new deposit.
Douglas A. McIntyre is a partner at 24/7 Wall St.
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Filed under: Options
 Agrium (NYSE: AGU) volatility is flat as AGU at record high on strong fertilizer demand. AGU, an agricultural retailer and fertilizer producer, closed at $54.38. AGU over all option implied volatility of 39 is near its 26-week average of 38 according to Track Data, suggesting nondirectional risk.
Terra Industries (NYSE: TRA) volatility is flat; TRA is near record on demand for nitrogen. TRA, an international producer of nitrogen products for industry and agriculture, closed at $31.26. TRA is expected to report EPS on 10/25. TRA over all option implied volatility of 52 is near its 26-week average of 50 according to Track Data, suggesting nondirectional risk.
Option update provided by Stock Specialist Paul Foster of theflyonthewall.com.
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