Completing the Continental Divide Trail – a Great Shovel-Ready Project

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With U.S. unemployment currently at 9.6%, here’s an idea for a truly shovel-ready project that would follow in the footsteps of FDR’s successful Civilian Conservation Corps.   The Continental Divide Trail, which was designated by Congress in 1978, and envisioned to be a 3,100 mile long trail from Mexico to Canada up the spine of the Rockies, is still only 70% usable, with many of those miles in desperate need of repair and rerouting for sustainability, according to the Continental Divide Trail Alliance.   Substantial numbers of volunteers are already hard at work on the Continental Divide Trail. President Obama and Congress should consider funding a CCC-style program to push the Continental Divide Trail to completion more quickly, as a way to get more young Americans back to work.

Elephant Hunting with Chambers and Catz

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Last Wednesday’s “Wall Street Journal” had a thought provoking op-ed piece by John Chambers, chairman and CEO of Cisco, and Safra Catz, president of Oracle, entitled: “The Overseas Profits Elephant in the Room.” Mr. Chambers and Catz argued that the Obama administration should lower the 35% tax rate on foreign earnings to 5%, so corporations could more affordably repatriate these earnings and use this offshore cash to create jobs and invest in research, plant and equipment, all of which would help stimulate the U.S. economy.

The problem with their argument is that while it is true that companies could use repatriated earnings to increase hiring and investment, they would only do so if they see a strong return on investment  potential.  And if that profit potential exists, since companies such as Cisco and Oracle currently have access to some extremely low interest rate credit, the 35% tax rate on foreign earnings should not serve as a deterrent, as they can borrow the money they need right here in the U.S.  Consider for instance that John Chambers announced back in June of this year that Cisco would hire 3,000 workers over the balance of 2010.

Further, on October 4th,  Graham Bowley of  the “New York Times” reported that “companies such as Microsoft are raising billions of dollars by issuing bonds at ultra-low interest rates, but few are spending the money on new factories, equipment or jobs. Instead, they are stockpiling the cash.”   According to analyst Richard Lane, Microsoft decided that borrowing new money was more affordable than repatriating earnings from overseas.

And how is Microsoft using some of the money from its recent 0.875% interest rate bond offering?  Microsoft is using the funds to buy back shares of its own stock, and to raise its dividend by $.03/share, all of which is good for Microsoft shareholders, but pretty much a non-event for unemployed Americans.

Gary Hirshberg Stirs Up the Audience at All Things Organic

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I was really pleased to see that Gary Hirshberg, CEO of Stonyfield Yogurt, and author of “Stirring it up: How to Make Money and Save the World” would be the keynote speaker at the Natural Foods Expo East and All Things Organic trade shows, which I attended in Boston last week, because I had heard he was such an effective spokesperson for the organic food movement.  Following a lot of back talk from my Droid about the best early morning driving route to the South Boston convention site, I had scored a front row seat, and was paying rapt attention as Hirshberg stirred up the trade show attendees with a powerful call to action.

After outlining  a number of indicators of environmental damage as symptoms of our “flawed relationship with the planet”, Hirshberg told the audience that “organics has the solutions,” but the industry has to get beyond 4% penetration of the U.S. food industry to raise its influence, which will require “proving the profitability of our paradigm.”    At Stonyfield Yogurt, Hirshberg’s team has mined the profit and loss statement for efficiencies so they can be competitive with conventional food companies.   For example, Stonyfield spends 0.5% of revenue on advertising, while Dannon spends 8%.   “Social media is a gift to this industry,” said Hirshberg, relating how his company invited four prominent bloggers to visit their organic farm, and the subsequent blog posts generated over 3.6 million hits.

Why Businesses Go Bankrupt: Corus Bankshares

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Corus Bankshares filed for Chapter 11 protection with the Chicago bankruptcy court in June of 2010, declaring assets of $314 million and liabilities of $533 million in its bankruptcy petition.  US banking regulators had taken control of Corus on Sept. 11, 2009 and transferred $7 billion of Corus deposits to MB Financial Inc., at a cost of $1.7 billion to the Federal Deposit Insurance Corp.  According to Reuters, Corus was the 7th largest bank to fail in 2009.  Corus stock,  had been selling at a peak price of $31.61/share as recently as 2006, when the company also enjoyed an $845 million book value.

Lesson Learned:  Corus was very transparent in its shareholder reports about the “unorthodox” strategy it pursued, with a loan portfolio invested almost exclusively in loans to condominium developers.   Corus management believed that this approach let it concentrate on the market it knew best, and that they also had sufficient equity cushion to cover themselves in the event of a downturn.  Further, Corus had diversified nationwide, with 36% of their loan portfolio in Florida, 16% in California (primarily San Diego), 11% in Las Vegas, 11% in Washington DC, and no other metropolitan area representing more than 10% of their loan portfolio as of 12/31/06.

But according to the Comptroller’s Handbook: : Loan Portfolio Management: “Risk diversification is a basic tenet of portfolio management.  Concentrations of credit risk occur within a portfolio when otherwise unrelated loans are linked by a common characteristic.  If this common characteristic becomes a source of weakness for the loans in concentration, the loans could pose considerable risk to earnings and capital.”

Despite their specialization in the condominium market,  Corus management was not quick enough to realize that the condominium market had become speculatively overheated in many, if not all of the key markets where they had concentrated their portfolio,  and as the market softened, their geographic diversification would be insufficient to avert an eventual financial collapse.   As reported by CNBC in April of 2007, “The poster children for excess construction generally reside on the coasts in markets where home price appreciation have boomed,” according to Suzanne Mulvee, senior real estate economist with Property & Portfolio Research, a Boston-based real estate research firm.   “That includes Florida – especially Tampa, Miami and Orlando – Chicago, Las Vegas, Palm Beach and San Diego.”

Blockbuster Declares Bankruptcy – A day late and a Business Model Short

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Blockbuster filed a Chapter 11 petition in NY City bankruptcy court on September 23rd, listing assets of $1.02 billion vs. debt of $1.46 billion.  The filing “provides the optimal path for recapitalizing our balance sheet and positioning Blockbuster for the future, as we continue to transform our business model to meet the evolving preferences of our customers,” CEO Jim Keyes said in a statement.  Blockbuster has arranged for sufficient “debtor-in-possession” financing to allow it to continue to operate its 3,300 U.S. stores, although analysts expect hundreds of additional closures soon, the “Huffington Post” reported.

Lessons Learned:  Competitor NetFlix’s stock hit an all-time high of $163.72/share the day Blockbuster declared bankruptcy, in testament to the power of ideas over assets.   When home ownership of DVD players hit a critical mass in the late 90’s, Reed Hastings sensed the time was right to launch NetFlix.   Without a bricks and mortar retail system to build and maintain, Netflix was able to carry many more titles than Blockbuster (e.g., 14,500 in 2002), and then created a proprietary recommendation system to encourage its subscribers to explore and choose from this “long tail” of DVD options.

By comparison, for much of its history, Blockbuster has seen increasing the number of its retail locations as the key to its growth,  either by building new stores or acquiring competitors.  This is just the strategy as one might expect from a company that was run in its early years by two former  executives of Waste Management, a trash management roll-up: John Melk and Wayne Huizenga.  And in the first ten years of Blockbuster’s life it worked beautifully: the pair made a fortune selling Blockbuster to Viacom for $8 billion in 1994.  But in the decade coming to a close in 2010,  it became apparent that NetFlix had built a better mousetrap, and Blockbuster shed unprofitable stores, adopted a “no late fees” policy, and tried to shore up its own website, but too late, from both a competitive and a financial standpoint. Acquisition of assets was so much a part of Blockbuster’s corporate DNA, that even as late in the game as February 2008, the company considered trying to acquire the struggling electronic-goods retailer Circuit City.