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Profits increase for luxury homebuilder Toll Brothers.

Mon, 2014-11-10 09:18

The luxury home builder Toll Brothers had some good news for shareholders today. Revenues for the quarter ending in October shot up by 29 percent.  Strong demand, especially on the West Coast, boosted the company's sales. 

This past year Toll Brothers has been aggressively expanding on the West Coast.  In southern California alone it’s developing five new communities.

But the strong quarterly showing from Toll may not say much about a wider housing market recovery. Toll focuses on the higher end of the homebuilding market, something that many homebuilders have been doing the past few years.

“Homebuilders have been serving the part of the market that’s been the healthiest, which has been older, move-up buyers that have home equity, that have more wealth,” says Robert Dietz, an economist with the National Association of Homebuilders.  

That trend has been reinforced by lenders chasing wealthy buyers, offering them surprisingly low rates on large “jumbo” mortgages.  The rates, in some cases, are even lower than those for standard loans. Housing economist Brad Hunter at Metrostudy hopes by next year, there will be signs of a broader recovery in the housing market.

“Our take is that rents are getting so high and job formations are getting better,” says Hunter.

What do CEOs do all day?

Mon, 2014-11-10 09:03

Corporate titans, leaders of Fortune 500 companies, wearers of starched white shirts, winners of enormous paychecks and occupiers of corner offices with imposing black desks and gleaming glass views. It's easy to conjure images of CEOs in offices... but what, exactly, is it that they do in there all day?

A CEO's job isn't one that's easy to categorize. It doesn't fit neatly into a one-slot job description like number-cruncher, analyst or ad-man. And when I contacted companies to try to coax out an answer, most said their CEO's time was too tight for a discussion about how they spend it.

Andrea Prat, a professor of economics at Columbia Business School, who studies this exact corporate mystery, says over 80 percent of a CEO's time "is spent in interactions with other people.”

To translate academic-speak into more conversational language: CEOs, says Prat, spend most of their days in meetings. And, he notes, most of the meetings are with employees inside the company. If you find yourself questioning this practice, concerned that meetings have a poor reputation as wasters of time, says Prat: “Surprisingly, that’s actually not what we find.”

Instead, he says, the more time a CEO spends in meetings with his or her employees, the better the company does.

"You can measure firm performance as productivity," he says. "You can measure it as return on capital employed, or you can measure it as growth over time. This strong correlation exists even when we control for everything we observe about the firm – the industry, the location, the size, the capital employed."

When CEOs aren't spending the majority of their time with employees, it can be evidence of a serious problem. It can mean, says Prat, a focus on maintaining outside visibility for the CEO – a hedging of bets. That he or she may be polishing up their resume and keeping an eye on the horizon for other job opportunities. CEOs need to be steering the ship from the inside, mostly, via meetings.

And meetings were what were happening at the two companies that agreed to let their CEOs talk to a reporter. First, at Happy Family, a maker of organic food for babies, tots and kids, 37-year-old CEO Shazi Visram has been so busy all day she's barely had time to – well....

“So I wanted to go to the bathroom like 20 minutes ago, but see, this is, that’s what happens."

Visram is talking about getting sidetracked by trying to check in with her 80 fulltime employees. Something she says she tries to do whenever she’s in her New York headquarters, like today. There's a group meeting to look at sketches of designs for product packaging, a one-on-one check-in about the design of the company website, a meeting to taste test new potential products. And in between, work on a charity project, an orphanage for kids overseas, writing an article, wrangling time zones and dialing codes to place international phone calls with Happy Family's parent company, Danone. And of course, email.

"I probably get close to 500 emails a day on average," says Visram.  "Not every one needs a response, but every one needs to be read."

A stressful prospect for any employee – C-Suite level or not. Luckily, at Sealed Air, a New Jersey-based company, with 25,000 employees, there is a special option available for the relief of nerves. Among the many products the company produces is bubble wrap. Enough, says Ken Chrisman, president of product care at the company, "to reduce the whole level of stress worldwide by at least 1 degree.”

Jerome Peribere, 59, is the company's CEO. After a tour of the Secaucus, N.J., plant he pulled out a printed itinerary of his schedule for the day.

Arriving around 7:15 a.m., Peribere caught up on emails, had a phone meeting, spoke to employees in New Jersey at a town hall meeting - and the schedule for the rest of the day? More meetings.

Sealed Air has over 100 manufacturing sites around the world, and Peribere estimates he spends 60 percent of his time traveling to visit customers, plants and offices.  

At Happy Family, Visram says she does a little bit of everything – sales, marketing, management. Being a CEO, says Visram, requires a certain personality type – someone with a strong vision for the future.

Yeah, I’m a little bossy – but in a good way. If a corporate culture is all about collaboration, and there’s no one person who can say, 'you know what, this is great, but we’re going to do this and this is why,' you’re asking for chaos.”

Andrea Prat says CEOs put in just over 11 hours at work every day. But he says it's probable they work even more. His study is limited to the hours a CEO was observed working, or had been scheduled for work activities, by her or by her personal assistant.

"So if, for instance, after dinner they make phone calls or they do emails, we don’t observe that," he says.

Being CEO, says Peribere, is more than a full time job, and isn't limited to five days a week.  "The good thing about the weekend is that you can spend quality time working," he says.

 

Visram is not only CEO of Happy Family, but also the company's founder. She recalls putting in epic hours during its start-up phase. She was also pregnant.

"And I would literally think, 'I’m not going to drink too much water right now, because I’m going to be on the phone for an hour and a half, and I don’t have the time to go and literally walk all the way down the hall,' because the restroom was really far away."

Visram would get so busy, she says, she used to sleep on the floor of her officewith a little blue blanket and a yoga mat, until an employee felt sorry for her and splurged on a $100 fold-out bed. She still keeps the yoga mat in a corner of her office. So when people bring up the touchy subject of high CEO pay, Visram says that while she's not familiar with the workings of banking institutions, "the CEO pay scales that really get critiqued"– she is quick to voice her opinion about the pay scale of other corporate leaders:

“I believe that for the folks who are in that position, many of them have really earned it, and they’ve paid their dues,” she says. "I was the CEO for four years of this business, and I was making $36,000 a year, living in New York City, and I had an MBA from Columbia. So, I think it all balances out."

Peribere, who is originally from France, says he applauds the American practice of publishing the salaries of top executives of public companies.

"I like very much this transparency with the concept of being paid for the value you create," he says. "You have CEOs who have created zero value during their tenure. I think it is unfair to have very high salaries for people who have created zero value."

He takes out his phone and pulls up a chart of Sealed Air's stock performance dating back to before he started with the company.

"It was at $13 the day before my nomination has been announced," he says. "And it is today at $35."

Peribere says the company has done well, so the executive team should be rewarded – reasonably. And, he notes, not everyone is cut out to be CEO. A company's leader has to be able to see the light at the end of the tunnel, he says, as well as to lead their team there. Like when employees use overly complex language in presentations, and he asks them "what do you mean?"

"And then the person tells you oh, what I meant is, 'this is where we are, this is where we’re going and these are the five things we need to do to get there.' And my answer systematically is – just say so. Business is simple; people make it difficult.”

PODCAST: Natural gas, naturally

Mon, 2014-11-10 07:40

What does it mean when buying stocks in China gets quite a bit easier?  Andrew Batson, China Research Director at Gavekal Dragonomics, joined us from Beijing. Plus: Wholesale natural gas prices spiked last week, and they're back up this morning on news of a new polar vortex. Finally: natural gas production, however, shows no sign of abating - the question now is what to do with all of it.

Wall Street bonuses as economic indicator

Mon, 2014-11-10 05:45

It’s that time of year again: Wall Street bonus season. 

A survey Monday from Johnson Associates suggests this year will bring good news and bad news to different sectors of the financial industry, providing a mixed indicator of the health of the American financial industry, as well as the economy as a whole. 

The survey has bad news for some of finance's risk takers: Hedge funds and traders of stocks and bonds are predicted to see bonuses drop by as much as 10 percent from last year.

 "The first question is: 'Why are the trading bonuses lower?'" says Wallace Turbeville, senior fellow at Demos and former Goldman Sachs investment banker. "That could be a lot of reasons."

Turbeville thinks it could be due to lower stock market volatility or an increase in automation. "But the real question is whether the traders are changing their behavior and putting less risk on the books at the banks and hedge funds," he says. "That kind of risk can blow up, of course, that's what happened in 2008."

The Johnson Associates survey projects other sectors of the financial industry to see bonus increases. Investment bankers and private equity employees working on mergers and acquisitions are predicted to see increases of up to 15 percent.

"The picture is really quite bright, or it is getting brighter, for investment banking," says S.P. Kothari, deputy dean at MIT's Sloan School of Management. 

This is in part because of a number of big mergers and acquisitions this year, like Comcast's acquisition of Time Warner and AT&T's acquisition of DirecTV. This year's M&A activity is on track to be one of the biggest, in dollar value, of all time.

"The merger activity is a harbinger of good prospects for the economy," says Kothari.

 For the financial industry, the good and bad prospects more or less average out: With bonuses factored in, take-home pay at commercial and investment banks is expected to be about the same as last year.

Electricity as utility. A model for the internet?

Mon, 2014-11-10 04:00

 

Update 11/10/2014: President Obama made a statement this morning calling for "free and open Internet," citing the 4 million comments sent to the FCC regarding net neutrality.  

For context, read on.

As Federal Communications Commission chair Tom Wheeler moves closer to releasing new rules on net neutrality and internet "fast lanes," many open internet advocates have been calling for the FCC to reclassify internet service providers as "common carriers."

Doing so would effectively turn them into public utilities like power, gas and water services, and thereby subject them to more strict regulation.

But some of those utilities themselves started out as products sold on the open market, just like internet service. So how did they get regulated as public utilities? For the best comparison with the internet's current situation, look at how another "new" technology went from market good to public good: electricity.

In the case of electricity, it starts with Edison.

With a patent for the first practical light bulb in 1879, Thomas Edison needed an actual market of people who could use his invention, meaning a way to get power to his customers. In 1882 his Edison Illuminating Company constructed the first central power plant in the United States, the Pearl Street Station in New York.

The catch with early direct current power plants, however, was that they couldn't generate power at very high voltages. The power couldn't travel that far along the copper wires without weakening the further it went. But as electricity gained popularity and more appliances were created to use it, numerous companies began building power plants to supply electricity to individual neighborhoods, each station selling power to customers within a small radius.

This is where goverment regulation entered the picture, in the form of municipal franchise agreements. Those agreements allowed the companies to dig up streets and build infrastructure. In exchange, they had to meet certain price caps and service standards. These controls, usually administered by city governments, were in fact very weak.

The large investment costs usually prohibited one company from owning all the power stations in a single city at first, but the different firms would often compete over customers in areas where their services overlapped. As companies were able to expand their reach, customers in large cities like New York and Chicago actually experienced a sort of golden age of price wars with many local companies competing against each other.

The competition was short lived, however, as single companies gained monopolies over large cities and increasingly advancing technology made for high barriers of investment in infrastructure needed for a new competitor to enter a market. The market for internet service providers is kind of at the same point right now in terms of barriers to entry, as telecom and cable companies have consolidated to a certain extent, buying up smaller regional ISPs. This has made it pretty much unfeasable for new competitors to get in the the game without considerable resources.

The old municipal franchises that governed electric companies also became prone to corruption from city politicians. In the early 1900s, an entrepreneur named Samuel Insull who had exploited the economies of scale to dominate the Chicago market argued along with other electric utilites that they were "natural monopolies," that resulted from the inherent barriers to competition in large markets.

State governments attempted to regulate these monopolies with legislation, but power barons like Insull were able to outmaneuver the efforts by restructuring their businesses with holding companies that were not covered by the reforms. By the late 1920s, the Federal Trade Commission was investigating the holding companies for market manipulations.

It wasn't until the onset of the Great Depression, and the strong reforms of the New Deal that power over electric utilites was taken away from the holding companies in the form of the Public Utility Holding Company Act and the Federal Power Act of 1935, transferring much of the regulatory power over eletricity over to the federal goverment.

This was significant not because power utility monopolies were split up, but that the "natural monopolies" were in fact legitimated; they could exist, but they had to be under government control. The federal legislation, along with other New Deal legislation, actually provided for the creation of a number of government monopolies over public goods.

As it stands now, internet service providers are sort of stuck in between being a wholly private good or a heavily-regulated public utility. Until recently, the FCC has successfully imposed on ISPs to treat all content the same in terms of speed of access, but they haven't set caps on how much they can charge or set standards for quality of service as are required of utilites like water and power.

The federal government has also subsidized ISPs to the tune of $200 billion to build a fiber broadband infrastructure for schools and low-income regions, which many activists contend they never completed. Following the model of electic utilites, further government investment could hypothetically result in internet infrastructure owned by the government itself.

It's unclear whether the internet will go along the same route to regulation as a utility, but with nearly a third of Americans having no choice for their internet service provider, the circumstances are starting to look very similar.

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