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In Europe, Anxious Market Shifts Focus To Italy

November 7, 2011 by Leave a Comment

Among fresh warning signs, Italy’s cost of borrowing has jumped to the highest rate since the country adopted the euro. Others signs include pressures building in the plumbing of Europe’s banking system. While those pressures are not yet at the levels experienced during the 2008 financial crisis, when some markets in the United States froze altogether, they are high enough to cause worry, analysts say.

Even as Greece reached an agreement on Sunday to form a coalition government meant to avert the collapse of the latest bailout plan for the euro zone, investors are still demanding greater certainty on how Europe would pay for a rescue package aimed at stopping the Greek financial contagion from spreading to Italy or Spain.

“This is a bit of a sideshow,” Mark D. Luschini, chief strategist at Janney Montgomery Scott, said of the shifting political leadership in Greece. “Markets will react favorably to this, but they won’t rally hard on the news. Italy is the bigger issue.”

In the United States, credit markets tightened earlier this year during a political stand-off over the debt ceiling and the ratings downgrade of the country’s long-term debt by Standard Poor’s, but conditions have eased since then.

European banks are likely to remain wary about lending to one another, analysts predict, and investors will continue to require high interest rates on the billions of euros in loans Italy needs each month to keep its economy afloat.

The yield on 10-year Italian notes has surpassed that on Spanish debt, reaching 6.35 percent on Friday after leaders at a meeting of the Group of 20 nations failed to come up with details on how to stop the European crisis from spreading. The rising yield is troubling because once the interest rates on the debt of the bailed out countries Greece and Portugal surpassed 7 percent they shot up far higher, requiring those countries to turn to outside sources of financing. Rates on their debt remain in double digits.

At the end of last month, Italy issued 3 billion euros worth of bonds at an interest rate of more than 6 percent, about 1.5 percentage points higher than it had had to pay as recently as the summer. The extra bond yields are adding as much as 3 billion euros (about $4.1 billion ) annually in additional interest payments, estimates Tobias Blattner, a former economist at the European Central Bank who is an economist at Daiwa Securities in London.

Analysts are concerned that if interest rates on Italian debt keep rising, the country may no longer be able to afford to borrow on the open markets and instead would have to turn to official lenders like the European Union or the International Monetary Fund.

The latest rate “is a warning,” said Mark McCormick, currency strategist at Brown Brothers Harriman. “Seven percent would be a point of no return.”

The European Central Bank is providing another gauge of European stress — the amount of sovereign bonds it is now buying on an almost daily basis. The central bank is trying to provide a market for the debt of countries like Italy and keep interest rates from rising to punishing levels.

This year, the amount of sovereign debt held by the central bank has more than doubled, to over 150 billion euros. Many analysts say they think the bank would have to buy bonds on a much larger scale to stop interest rates from creeping higher, let alone drive yields substantially lower.

 European banks, worried about each others’ exposure to bad debts, have demanded an increasingly higher interest rate to lend euros to one another. The rate, measured by a gauge called Euribor-OIS, was 20 basis points as recently as June, but has since jumped to 90 to 100 basis points. (A basis point is one-hundredth of a percentage point.) The current rate, however, is still far below levels in 2008 and 2009 during the financial crisis, when it reached more than 2 percent.

 Since May, sources of dollars have also been drying up, as United States money market funds have pulled back from buying the short-term debt of European banks.

Article source: http://feeds.nytimes.com/click.phdo?i=da66e82fc3fb58398d79bed085250fad

Filed Under: Business News Tagged With: , ,

New Ways to Exploit Raw Data May Bring Surge of Innovation, a Study Says

May 13, 2011 by Leave a Comment

Math majors, rejoice. Businesses are going to need tens of thousands of you in the coming years as companies grapple with a growing mountain of data.

Data is a vital raw material of the information economy, much as coal and iron ore were in the Industrial Revolution. But the business world is just beginning to learn how to process it all.

The current data surge is coming from sophisticated computer tracking of shipments, sales, suppliers and customers, as well as e-mail, Web traffic and social network comments. The quantity of business data doubles every 1.2 years, by one estimate.

Mining and analyzing these big new data sets can open the door to a new wave of innovation, accelerating productivity and economic growth. Some economists, academics and business executives see an opportunity to move beyond the payoff of the first stage of the Internet, which combined computing and low-cost communications to automate all kinds of commercial transactions.

The next stage, they say, will exploit Internet-scale data sets to discover new businesses and predict consumer behavior and market shifts.

Others are skeptical of the “big data” thesis. They see limited potential beyond a few marquee examples, like Google in Internet search and online advertising.

The McKinsey Global Institute, the research arm of the consulting firm, is coming down on the side of the optimists in a lengthy study to be published on Friday. The report, based on nine months of work is “Big Data: The Next Frontier for Innovation, Competition and Productivity.” It makes estimates of the potential benefits from deploying data-harvesting technologies and skills.

The McKinsey research unit, for example, says the value to the health care system in the United States could be $300 billion a year, and that American retailers could increase their operating profit margins by 60 percent.

But the study also identifies challenges. One hurdle is a talent and skills gap. The United States alone, McKinsey projects, will need 140,000 to 190,000 more people with “deep analytical” skills, typically experts in statistical methods and data-analysis technologies.

McKinsey says the nation will also need 1.5 million more data-literate managers, whether retrained or hired. The report points to the need for a sweeping change in business to adapt a new way of managing and making decisions that relies more on data analysis. Managers, according to the McKinsey researchers, must grasp the principles of data analytics and be able to ask the right questions.

“Every manager will really have to understand something about statistics and experimental design going forward,” said Michael Chui, a senior fellow at the McKinsey Global Institute.

The study estimates that the use of personal location data could save consumers worldwide more than $600 billion annually by 2020. Computers determine users’ whereabouts by tracking their mobile devices, like cellphones. The study cites smartphone location services including Foursquare and Loopt, for locating friends, and ones for finding nearby stores and restaurants.

But the biggest single consumer benefit, the study says, is going to come from time and fuel savings from location-based services — tapping into real-time traffic and weather data — that help drivers avoid congestion and suggest alternative routes. The location tracking, McKinsey says, will work either from drivers’ mobile phones or GPS systems in cars.

Personal location data raises privacy concerns. Both Google and Apple, for example, have faced protests recently for collecting location data without most users’ knowledge. The McKinsey report says such services should require that users have a choice and opt-in to use them, but the report does not deal with privacy issues in detail.

The sizable projected payoff for consumers, some experts say, is not surprising. “Much of the benefit of innovation always flows to consumers,” said Martin Baily, an economist at the Brookings Institution, who was an adviser on the study. “So the large consumer surplus makes sense.”

In health care, the biggest slice of the $300 billion gain is expected to come from more effectively using data to inform treatment decisions. The tools include clinical decision support to assist doctors, and comparative effectiveness research to make more informed decisions on drug therapy.

For example, the Department of Veterans Affairs and Kaiser Permanente save millions of dollars a year in treating many patients with high cholesterol with generic statins instead of branded statins, like Lipitor. But such tailored treatments require electronic health records for tracking results, and most of the nation’s hospitals and physicians still use paper records.

Skeptics say the economic payoff from harnessing big data sets is mostly wishful thinking so far. The nation’s technology-assisted increase in productivity began in 1995 and continued through 2004, having trailed off since, despite investments in data analytics.

“The big dividend mostly hasn’t arrived yet,” said Tyler Cowen, an economist at George Mason University.

The McKinsey authors say that the big-data trend is just getting under way. It will take years, they say, before the gains show up in the economic statistics, just as it did for computers to prove they were engines of productivity.

“But it’s clear that data is an important factor of production now,” said James Manyika, a director of the McKinsey Global Institute.

Article source: http://feeds.nytimes.com/click.phdo?i=5a30d792f94279a1904fb1cd527117d5

Filed Under: Economy News Tagged With: , ,

You’re the Boss: How Small Companies Get in Trouble

March 31, 2011 by Leave a Comment

Transaction

Most of us have an image of the turnaround guy. For some, the term can conjure up images of an unfeeling taskmaster, exemplified by Albert Dunlap, known as Chainsaw Al, who applied his famously ruthless methods to companies like Scott Paper and Sunbeam in the 1980s. Recently, however, I had the good fortune to meet not one but two men who put to rest my stereotype of the turnaround guy as Rambo in pinstripes.

John Newman recently retired from turnaround work after 15 successful engagements. His efforts took him across the country, where his clients ranged from closely held businesses to some of the largest agricultural cooperatives in the United States. Lynn Hartrick has been helping midmarket business owners with turnarounds, transitions and liquidity events for 14 years. Both men have many of the same outward qualities, including impeccable listening skills and a genuine desire to fix broken companies. I asked them about the work they do and what advice they have for small-business owners.

Do you see common mistakes or patterns that lead to the need for a turnaround?

“The troubled company pattern looks like this,” Mr. Newman wrote in a prescient 1999 article Good Times Make You Stupid. “When the company is starting out, the owner lives frugally, often taking no salary for the first few years. Then they hit some good times. The owner buys an expensive car, joins

the country club, buys a fancy house … then the luxuries become necessities.” In this scenario, the company’s survival becomes largely dependent on the owner’s personal financial flexibility. According to Mr. Newman, the edge of bankruptcy is often the point at which the owner accepts that change is necessary.

Mr. Hartrick offered a caveat. “It would be unfair to generalize that all turnaround situations are the result of owner mistakes,” he said, citing market shifts and economic factors as other causes. “When it is owner-driven, it is oftentimes due to the business ‘getting away’ from the owner. He has taken his eye off what made the business successful in the first place or failed to keep pace with the change around him.”

Mr. Newman pointed to denial — or what he likes to call “ostrich management” — as another common denominator leading up to many turnaround scenarios. “Turnarounds require painful decisions,” Mr. Newman explained. “It is human nature, although not necessarily good leadership, to try to avoid such actions.”

Both men also included lack of planning and incomplete reporting as hallmarks of a business in a downward spiral — “when owners fail to track and use metrics for performance and prediction, don’t set priorities or lose connections with customers and employees, then trouble is not far off,” Mr. Hartrick said.

(For a detailed account of a business that faced these kinds of issues, see a recent case study and  follow-up post describing the turnaround of First Quality Music.)

You ask people to make difficult decisions. How do you get them to act on your advice?

“While some owners are reluctant, reality usually rules the day,” said Mr. Hartrick, citing pressures like dwindling cash, threats from bankers and vendors shutting off deliveries. “Few businesses get into trouble over night. There is usually a history of no planning, poor management, failure to recognize the need to make tough decisions and a reluctance to communicate and seek collaborative support from employees, creditors and bankers.”

Mr. Newman takes the time to hear that history. “I spend most of my time listening, to learn and develop trust,” he said. “When I talk, I speak the truth about the limited options.” Two likely options, he said, are selling a division or otherwise downsizing the business, and yes, sometimes, letting go of employees — even good ones and especially at the top.

In a 2005 article, Mr. Newman described a particularly turbulent day of meetings between bankers and top executives at a client company. At the end of the day the chief executive stepped down voluntarily, then stayed with the company to train his successor. The turnaround was successful and the incoming chief executive was considered a hero. “But to me,” said Newman, “the departing C.E.O. was equally a hero in the way he conducted himself.”

How does an owner decide whether to sell the business — or to try to turn it around?

“Turnarounds require a burst of energy from top leadership,” Mr. Newman said. “If the owner is already burned out, he would do well do sell it.” Some owners seek an alternative strategy by taking a back seat and hiring a manager, although he added that this method rarely works.

“There is a decision point, and I think it varies in every case,” Mr Hartrick said. “Is the business salvageable? Is there sufficient capital and time to effect a turnaround? Does the owner have the talent and energy to slug through what is required?”

If good times make you stupid, I asked Mr. Newman, what do bad times do? “Folks who go through a turnaround learn lessons that stay with them for a long time,” he said. “I’ve seen companies make major changes specifically because of the depth of the crisis. The crisis became an ally.”

Barbara Taylor is co-owner of a business brokerage, Synergy Business Services, in Bentonville, Ark. Here is her guide to selling a business.

Article source: http://feeds.nytimes.com/click.phdo?i=659460d8b725d2678cd144f0cd717e98

Filed Under: Small Business Tagged With: , ,