Lock Your Rates!

Historically, mortgage rates and the 10-year treasury rate have had a high correlation. I compiled the graph below to trace the correlation between a 30-year fixed rate conforming loan compared to the 10-year treasury rate. The difference is rarely less than 2%. Following the Fed’s historic rate cut in November, the 10-year rate dropped from 4% to 2%. Mortgage rates followed. Do not fool yourselves but these levels could be a once in a life-time event.

I have been involved in the mortgage securitization business for 10 years and I can assure you that the yearly seasonality dictates that mortgage rates are lowest in the first quarter and that is usually because lenders adjust to the low demand in winter. This would become a different story in the second and third quarters when many homeowners prefer to move (weather and school schedule).

The point is that we are seeing a double-whammy where the 10-year rate is extremely low and it is taking place during a low-rate quarter. The odds that mortgage rates will go up outweigh the odds that they will go down. So ladies and gentlemen, if you are planning to refinance or purchase a property: Lock your rates!

Source: US Treasury; Freddie Mac.

Disclaimer: Nothing in this blog is designed as, or should be construed as legal or investment advice.

Crabby Times

If you like seafood, what is common between crab legs, oysters and lobster? They are tricky to eat, and the tasty reward is worth every effort you put in. I have always wondered if I were to hire somebody for the sole reason of extracting the crab leg meat allowing me to dedicate my energy on the chewing part, would I still enjoy those crab legs as much?

In a bubble, businesses tend to lose sense of the real value of strategies. They are busy fixing the situation and mostly using their rear view mirror. They are hoping that somebody (e.g., the government, the market) would dictate a big strategy for all businesses, while they focus on the chewing part. At the beginning of the gold rush, gold seemed to be everywhere workers dug and even the lousiest digger was capable of making a good living. When resources started dwindling, only the best strategists and then the most skilled were able to find the gold. A great strategist with good skills always enjoy a downturn when every idiot is no longer able to find gold. Sounds familiar? How many idiots do you know became real estate agents a couple of years ago? How are they doing now compared to more seasoned peers?

A downturn is the perfect timing for sound businesses to plan for prosperous times. This is the time that is most enjoyable to true business strategists. This is the time to sort out the men from the boys and discover who can cope with difficult situations and who cannot. This is the time to setup your business to generate additional added value. Also make sure you equip your business with the right technologies and tools just like you need a dull knife and a nutcracker to help you enjoy those juicy crab legs.
(Dedicated to Mimi and Z)

The Fortune Tellers

So Mr. Bernanke is “hoping” the recession could end later this year, but he cautioned that a full economic recovery will take "more than two or three years". Then he added: “This outlook for economic activity is subject to considerable uncertainty”.

When I was growing up in Lebanon, ladies would gather every morning for a cup of coffee followed by the traditional cup-reading event. That’s when a so-called fortune teller read the shapes left by heavy coffee sediments at the bottom of your cup. As a kid, I was amazed at first and always wondered why that lady couldn’t better her family or financial situation given her obvious gift. Then I started realizing there was a pattern to what the wicked old lady was saying. It was worthless and open-ended leaving a big room for speculations and interpretations. She would say things like: “You will receive good news after 3 signs”, that meant 3 minutes or 3 years! Or “You will receive a big sum of money, but the person delivering it might decide to keep the money and never tell you about it”. Wait, wait, what money? Who is stealing my money? Or she could add “In the future, I see your daughter getting married to someone she is not sure about”. Good luck proving that one!!!

Based on this enlightening experience, I believe the fortune teller from my childhood became so good at it that she grew a beard and called herself Mr. Bernanke. How are his statements different from consulting the horoscope page? I also really believe President Obama when he says that we will recover, but as they say “there is sunshine after the rain”. The real question is "when?" And how will our leaders contribute to the recovery?

The sad truth is that our leaders are speculating, or to use Mr. Bernanke’s word: “hoping”. In the meantime, business leaders need to use this time of chaos to clean up their business model and operations. At least this way, they can be ready for when the market comes back “after 3 signs”.

La Cigale et la Fourmi

You might be familiar with this fable, “The Cricket and the Ant” written 350 years ago by French poet Jean de la Fontaine. La Cigale (the Cricket) spent all summer singing while la Fourmi (the Ant) was collecting food for the winter. When winter arrived, la Cigale came knocking at la Fourmi's door asking for food and shelter. La Fourmi’s answer was “You sang, you say? How nice, my dear! Now go and dance your life away!”

Sadly, the fable stops here. I will not delve into politics and discuss why the government is tapping la Fourmi’s savings and sharing it with la Cigale, or that la Cigale deserves death because it did not plan well. Human nature tricks us into believing that the world we live in is static. Throughout history, we once believed Earth was fixed in space, and then we thought that the Universe was in a Steady State, but the Big Bang theory shattered that belief. So why do many businesses tend to believe that the current economic downturn is here to stay?

I just wish la Fontaine completed the fable by telling us how la Fourmi also spent winter using its savings to rejuvenate and planned strategies for next summer. Imagine if la Fourmi kept saving more food during winter thinking that summer will never come. Two things could have taken place: Either la Fourmi would have become malnourished, caught some disease and died, or by summer it would have been exhausted trying to manage its resources that it did not prepare and now other ants are already collecting the good stuff.

Three Wise Monkeys

...aka "see no evil, hear no evil, speak no evil". Great metaphor to describe the lifecycle of a business.

See no evil: Entrepreneurship. This is when a fresh college graduate (or dropout) decides to take the leap and start their own business. It is also when an employee moves (voluntarily or otherwise) to the self-employment arena. Surveys suggest that most entrepreneurs would not have done it if they knew or saw what was coming their way. Once they were able to see, that helped them become successful self employed tradesmen/tradeswomen. They took their skill and sold it independently.

Hear no evil: Incorporating. Not to be mistaken with the legal process, this milestone requires individuals to move from being good at one trade to managing a middle-market business. Too many small business owners fail at this transition because they refuse to hear other opinions and they stick to their trade not wanting to relegate control and delegate functions. Once they start listening, they become managers of managers and their business grows.

Speak no evil: Big Box. The business could start franchising and even go public. This is when communication becomes crucial internally and externally. Marketing takes a major role and the brand is definitely recognizable. Until a middle-market business can learn how to speak the correct language, it cannot cross this milestone. Most often, it will need experienced business advisors to help it move past this milestone.

Now how many businesses do you know that are stuck in milestone 1, milestone 2 or milestone 3. The above metaphor could be used as a guideline to quickly understand their pain points.

Where's the money?

The news media is saying it is really bad out there... but 93% still have steady incomes and Americans are saving at a faster rate. Oh and by the way, mortgage refinancing has been booming. So what are Americans doing will the extra money?

Here are some facts to chew on:
Source: US Treasury; Freddie Mac; Mortgage Banking Association

Collective Amnesia

Do you feel like Alice in Wonderland (no need for guys to imagine yourselves in a cute pink dress… unless you really want to)? If so, the good news is that you did not catch the virus of collective amnesia; at least not yet. This condition has not been proven scientifically although it seems to be spreading quickly. Its symptoms are very similar to the collective hallucination condition where a non-existing event is induced by the power of suggestion to a group of people… usually high on drugs.

If you did not catch the virus, you should by now feel like having one of those nightmares where all common sense suddenly disappeared and you became an outcast surrounded by people behaving outside the norms? Do you remember the deep burning sensation of being misunderstood and overwhelmed by the ignorance around you? That is how it feels today when seeing the market panicking and businesses downsizing with no strategic objectives.

Make no mistake, a single instance of amnesia is understandable and could be a medical condition, but when this condition is collective, the panic feeds on itself because people “collectively” tend to forget the same things. Can you relate to situations where you communicated a plan on numerous occasions and everybody agreed on the next steps, but somehow when confronted with deadlines, collective amnesia took over?

The market today is reeling from collective amnesia and people forgot that a downturn is an opportunity to reinvent and reinvest. People seem to forget basic economics and facts. But the truth is that facts are facts, and sooner or later, the drug effect will wear out and reality will settle in. That is when businesses will realize that they missed an opportunity to set themselves up for better days.

Perfectionism and Business

What an odd combination! It is the feeling when a project is not “perfectly” complete but there is a need to launch. Businesses always struggle with finding the optimal threshold between spending and results. Many surveys conclude that 50% to 65% of IT projects fail to deliver on scope. Management consulting projects with intangible results could have a higher failure rate. So how do you decide when it is good enough?

An up-to-80% solution leads to high return on spending. In this case, work performed is necessary and sufficient to get the expected results. On the other hand, an over-80% solution leads to diminishing returns on spending. This is when the work performed often creates complexity and reduces flexibility.

80% solutions are specially adapted to fast changing markets, as they provide flexibility and help optimize the balance between labor and systems. By addressing the remaining 20% through skilled and flexible employees, a business can adapt quickly to any change in market requirements. Selective use of automation reduces technology costs, eliminates over-design, and provides a motivating work environment.

Why Do Business Strategies Fail?

How many times did you hear a business manager "whine" about how his/her greatest idea never got implemented? The reasons they provide abound: "The implementation guys messed up", "senior management did not back me up", or "people kept changing their minds".

Most businesses underperform not because of a lack of good strategies but due to poor execution:
―Lack of knowledge and expertise: This leads to poor implementation of a usually well designed strategy. Management went through SWOT analysis, vision and mission setting, business planning and they communicated very well. They just underestimated the fact that their subordinates are subject matter experts which does not necessarily mean they know how to implement change.
―Culture: This is usually exacerbated through a latent resistance by the organization’s employees and partners. It is extremely hard to break habits unless compensation is aligned with strategic objectives.
―Lack of resources: This results from incorrect diagnosis of strategic requirements. Senior management underestimates the time and financial requirements leading to incomplete execution and sunk costs.

A somewhat good idea that is well implemented is much better than a great one that never materializes.

Overshooting Pendulum

We all agree that the news media is not doing their job and instead is just feeding on bad news. Which means: Is it as bad as we are told to believe?

Well for a start, let us look at these facts: the national average employment rate is at 93%; it costs today more to build a house than to buy one; the upward saving trend is indicative of people sandbagging. Sooner or later, postponing spending will come to an end and more than 9 out of 10 people will realize that they still have a steady income. You know, that new car they did not purchase and that vacation they did not take is suddenly overdue.

So what do you think will happen to the market? You guessed it! But rapid growth is more challenging than a slowdown. You can always shed inefficient resources and keep your best ones, but it is much harder to hire new resources fast enough to handle an uptick. It is ALREADY a lost game for businesses that are not using this downturn to understand their core competencies, build a strategy plan, and quickly executing on that plan.

I did predict the internet, the real estate and the oil bubbles (sadly, I never wrote about it but my close friends heard me talk about it). Along those same lines, I am predicting the pendulum is overshooting the other way this time, so make sure you clean up your business model and set yourself up for the next round.

The White Swan

"It seems that the current economic downturn has no end in sight", "jobs will continue to shrink", "the sky is falling"... these statements are being repeated all over the world.

Beware of the White Swan! What is happening today is an inverted situation of the Black Swan (stealing the concept from my compatriot Nassim Taleb). Today, everybody seems to believe that "all swans are black". In this case, what will happen is that somehow, somewhere, somebody will discover a white swan and suddenly things will start changing and quickly. In other words, things might get better faster than we think.

As the doom and gloom bus keeps loading herds after herds of depressed employees, some businesses will discover the situation is not as bad as people think and that the sky is not falling. When this happens, it would be too late to step out of the doom and gloom bus to join the party. So the major question businesses need to be asking is not when and how things will get better, but are we doing everything we can to get ready for when the situation starts turning around? If you are downsizing and cutting costs just because everybody else is doing it or because your finance team is forecasting a decrease in volume, then you are behaving just like in a bubble situation and following the herd until the bubble pops and leaves you in ruins.

Businesses need to learn from the bubble era and apply those same learnings to the current downturn. Many businesses today wish they set themselves up for this perfect storm. So why aren't they setting themselves up for better times?