Archive for June, 2012
Many of you know I spent my younger days in the auto industry. I spent much time performing operational audits for the captive finance arm of the company I worked for.
One of the units we had to review was the division that financed semi tractor trailers. With a dealership network in places like Texarkana, Hattiesburg, Dothan, and Abilene, the office was populated with many a colorful character.
To these folks, Corporate HQ was a far off mythical place and policies & procedures were respected, but always vigorously questioned like a slightly off color dollar bill.
Needless to say my colleagues never liked to go there but …..you guessed it ….I loved going and interacting with that group. As a young internal auditor, I was completely drawn to the “get ‘er done” style of the place.
One of the senior executives was my favorite guy in the office. Middle-aged, tall, broad-shouldered and with a booming voice, he hailed from a place called Nevada, MO. He would never let you get away with mispronouncing the name either. Unlike Las Vegas, Nevada, his hometown was pronounced NA-VAY-DA.
While there I would often audit the collections process and one of the things we looked at was how many payment commitments the collectors were able to secure in a given time period. It wasn’t the collection calls that mattered, it was the commitments.
My closing meetings would go something like this:
My Favorite Executive: How many commitments y’all find?
My Favorite Executive: 25! What in the heck are you guys doin’ down there, goin’ for sandwiches every 10 minutes?
Collections Manager: Our number of calls are up 34%!
My Favorite Executive: You can keep coating that pig with lipstick but I still aint gonna kiss it!
Priceless advice. Too bad the economic mandarins that operate the dials and valves of economic policy are falling into the same trap as our hapless Collections Manager above.
As the world’s weary eyes linger on Europe’s slow train wreck, the economic policy makers have suddenly realized that the latest batch of makeup (LTRO, QE, Operation Twist, etc.) slathered onto the pallid face of the long suffering global economy has not only worn off, but underlying conditions they were trying to mask have gotten worse!
Incredibly, instead of calling for a bankruptcy cleanse followed by a balanced diet of savings, risk evaluation and judicious capital investment, some of the “super geniuses” of the economic world are calling for “More lipstick!”
There are two things at play here. First, world stock market indices have become a proxy for global economic health, and second, because the underlying economy is still soft we apparently have resorted to the economic equivalent of cosmetics (stimulus) in order to raise the stock markets in particular, and risk assets in general.
The colloquial term for this of course is “Putting lipstick on a pig.”
Gone are the days of economic fundamentals driving market sentiment. These days the only thing driving markets is the “hot money” (Operation Twist, QE1, QE2, QEx) emitted by central banks. To support this point, consider these recent headlines:
Stocks: Central banks give markets a lift
Stocks rally on hopes for central bank boost
Stocks likely to struggle – U.S. stocks could struggle Friday on investor disappointment that Federal Reserve Chairman Ben Bernanke did not signal more stimulus is on the horizon.
One might say, “So what! We can keep the loose money flowing and the stock market will rise making some of us richer.”
Well, like our metaphorical patient that continues to deteriorate, more and more cosmetics must be used to cover up the underlying disease ….and each application of makeup has less effect than the one before! None other than Bank of America points this out in the chart below:
As the chart implies, each successive monetary intervention has a lesser effect on the markets. Indeed some market commentators are guessing that the market may have already “front run” the much anticipated QE3.
In other words, traders may have already priced in QE3 and the market might go down when QE3 is enacted as traders, following the old Wall St. adage, have “Bought the rumor and sold the news!”
Lipstick on a pig…the phrase rings in my memory and still makes me chuckle. I have long since moved on from those days at the truck office. I often wonder where my favorite executive ended up after all these years…
My guess is that he is probably back on his farm in his hometown of NA-VAY-DA. Probably planting some sorghum and maybe even tending to some pigs.
Perhaps our intrepid economic policy makers should give him a call and ask him what he thinks of their latest makeover?
Have a great week,
Michael Bechara, CPA
Granite Consulting Group, Inc.
For those that remember, he was the host of the one of the most popular game shows of the 70’s and 80’s, “The Family Feud.” The show consisted of two competing families answering various trivia questions. The families would have to guess the most popular answers to the questions, based on surveys conducted by the show’s producers.
Dawson would ask each family member the question and after some friendly banter, he would receive the answer. Turning to the answer board, he would shout his famous line, “And the survey says?!”
The show was pretty popular with my family and I can remember watching the show as a kid. My brothers and I would stretch out on the floor in front of the massive TV, encased in dark cherry wood about the size of one of today’s china cabinets.
The other thing Dawson was famous for was kissing nearly each and every female contestant. Dawson later would say that it was to remove any nervousness the contestant may have been experiencing. My father would sit on the couch behind us and watch the show as well. “Heh..you believe this guy,” he would
mumble and shake his head with a mixture of jealousy and annoyance after Dawson planted a kiss on each female contestant.
The curious thing about the show was that the contestants did not actually have to answer the questions based on their own thoughts. They just had to answer with what they thought most people in the survey had answered.
For example, if the question was, “Name something an employee might ask a boss for?” the contestants would have to guess what the most popular answers were in the survey rather than saying what they really believed.
Many times in our risk work, we are treated to a version of “The Corporate Feud.”
The basic risk assessment approach used by most companies is to identify some risks, send out a survey and have everyone vote for their favorite risks. Of course everyone in the company believes the most serious risks facing the company are the ones in their area. Accounting people vote for accounting
risks, marketing people vote for marketing risks, and so forth.
Executive management gets the survey results back and what do they do? …….Survey says?!….They take action on the most “popular” risks.
There are a couple of problems here. First, the risks are being evaluated in a vacuum. The risk assessment process does not take into account the company objectives or what the company is trying to achieve.
Second the risks are being looked at individually and not together or in risk patterns. Most negative risk events, say a legal sanction against the company, occur because a few risk factors are working together. What a luxury it would be for an executive team to be able to deal with risks one at a time…..
Finally, voting on risks individually and without regard to objectives creates the “beauty pageant” effect noted above. Whichever risk has the most “Likes” will be one deemed most serious to the company and will receive the highest mitigation budget. But what if the risk doesn’t threaten any company objectives?
The best way to remove the “Corporate Feud” effect is to analyze company risks by linking them to objectives and combine risks into risk patterns.
Dawson was a great game show host for sure. It’s strange that his legacy seems to be continuing in the corporate risk environment. But hey, who are we to argue? Perhaps running popularity surveys is the way to go!
On the other hand, linking risks to objectives and forming risk patterns is a more “real world” way to identify and mitigate risk ……although no one seems to want to kiss us for saying so…
Have a great week,