• Big-business house "flipping" boosts housing prices, hurting new buyers

    image from kentclothier.com

    Big investment banking firms have gotten into the housing market (again) and have taken over what used to be an entrepreneurial endeavor: house "flipping." This process, formerly undertaken by risk-taking small contractors, involved buying a house for cheap with the intention of fixing it up enough to sell it at a quick profit.

    image from gentelmenvip.com

    While the previous boom in the housing market was fueled by over-extending mortgage credit, this boom has been fueled by Wall Street investment houses. According to Kent Clothier, CEO of Real Estate World Wide:

    "Market conditions today have allowed huge investors like Blackstone Group to buy up vast quantities of distressed properties and rehab them for considerable profits as buy and hold investments. That they continue to do so is a good indication of where the market stands, showing that flipping real estate is a profitable practice at the moment."

    The Blackstone Group has bought up 26,000 properties--many of which were in the same areas where houses were foreclosed in the previous housing crash. Another investment firm is Colony Capital. The large firms' ability to make cash deals make them more likely to close the sale--especially when they are competing with first-time home buyers. According to the Campbell Housing Pulse, and quoted in the NYT article:

    "Nationwide, 68 percent of the damaged homes sold in April went to investors, and only 19 percent to first-time home buyers."

    Though some observers feel that the influx of Big Money into the low-end housing market is saving the housing industry, others, like California real estate agent Joe Cusumano, wonder if "faraway investors would properly maintain the homes they buy."  The picture below is an example of such a property.

    image by Emily Berl for the New York Times, per Cusumano's comment

    An additional sign that the big investors might just want to make a quick buck and get out of the business is that Colony Capital and Carrington Holding Company have begun selling off their properties, signalling a belief that the recovery may have peaked.

    Sources:   "Behind the Rise in House Prices, Wall Street Buyers," by Nathaniel Popper, New York Times Dealbook,  June 3, 2013.

    "House Flipping is On the Upswing as Big Investors Stand Ready to Snap Them Up," by Kent Clothier, blog of CEO of Real Estate World Wide, July 29, 2013.

    Follow up:

    • What was the Blackstone Group's role in the previous housing boom?
    • What are the long-range issues that may arise from corporate ownership of houses rather than individual owner-occupied properties?
  • "No strings attached" Cash spurs entrepreneurship

    image from advice-for-good

    The non-profit Give Directly has a new approach to giving to the poor: hand out the cash directly. Give Directly does not set up farming or food distribution or industrialization programs--they just hand out the cash to the poor in Kenya, as described in the above excerpt from an informational brochure. The basic theory behind this approach is that poor people know what they need better than outsiders do.

    "Chris Blattman, who teaches political science at Columbia University and has carried out several studies of programs that give cash to the poor, notes that access to money isn’t a necessary condition for raising people’s incomes in the United States — they can get a job with a company that has that access. But it is crucial in poor countries, since a dearth of formal jobs obliges people to start their own businesses to get ahead."

    In other words, these direct cash grants are like venture capital money to a poor Kenyan--an opportunity to do something entrepreneurial in an environment where a small business is the only way out of poverty.

    Are there any guarantees that the money will be used to start a business? No, but it is likely to be used in some way to directly benefit the recipient and his or her family or village.

    In the United States, many of us resist this approach, because of beliefs that we might hold about the poor--that "they" are different from people who are not poor. But the program is very similar to conditional cash transfers (C.C.T.s) that have been implemented in Mexico and Brazil for several years.  The monthly cash transfers are made on the conditions that the children in the families go to school and get medical check-ups. These C.C.T.s help over 80 million people.

    Another organization, Youth Opportunities Program, in Northern Uganda, gave young people the equivalent of their annual income: $374. The results?:

    "Four years after the Youth Opportunities Program began, recipients were earning 41 percent more than the control group. For women, the difference was a whopping 84 percent."

    Although structural changes to large institutions are also needed to help countries out of poverty, the direct cash approach can clearly make a huge difference in helping the very poor change their lives.

    Source:   "The Benefits of Cash Without Conditions," by Tina Rosenberg, New York Times Opinionator, August 28, 2013.

    Follow up:

    • Have you ever been given a cash gift without any strings attached to it?  What did you do with the money?
    • Do you think this approach would work with the poor in the United States? Why or why not?
    • How has the term "culture of poverty" been misappropriated in the current political debate from its original meaning, according to the article?
  • Labor statistics worse than they seem

    image from economonitor.com


    The news on the unemployment rate has seemed positive lately. The unemployment rate has gone down. But to be counted as part of the "whole" or denominator of that calculation, a person has to be looking for work.  So people who drop out of the labor force because they have not found a job are no longer part of the statistics. 

    Perhaps a better measure of employment is represented in the chart below:

    image from the Bureau of Labor Statistics via NYT

    This graph represents the "labor force participation" rate...that is the percentage of Americans of working age that are actually employed. The trend since 2008 has been a decline in the percent of Americans working.

    Why is that? Part of the answer is the recession, of course. But what would explain the continuing decline of labor participation, even as the unemployment rate has improved? Some observers postulated that perhaps because of the aging baby boomers there were more retirees. This theory does not hold, because the rate of labor participation among 25-54 year-olds is almost the same as that for baby boomers.

    Some other possible causes include:

    • a slow growth in "educational attainment," also known as a "skills gap"
    • weak economic growth over the last 13 years--since the dot-com downturn in 2000-2001.
    • an increase in the number of workers on disability.

     Regardless of the cause, the trend of fewer Americans working can have implications for long term growth in the economy and the burden of taxation for those who are working.

    Source:   "'The Great Shift': Americans Not Working" by David Leonhart, New York Times Economix,  August 27, 2013.

    Follow up:

    • Why might the labor participation rate be even more important than the unemployment rate?
  • Part Time Nation: good jobs turn permanently bad

    image from www.jobsite.com

    What usually happens during a recession is that people lose their jobs, and the economy slows. As the recession ends and growth recovers, jobs have returned and people can once again find full-time employment.

    Something different has happened in the recent recession and partial recovery. There have been rehires...but not for full time jobs. And those who managed to stay employed had their hours cut. New employee hires as the economy improved kept everyone in a part-time, no-paid-vacation-or-sick-leave, no-benefit status. Barbara Garson writes about the specifics relevant to this recession:

    "21% of the jobs lost ...were low wage, meaning they paid $13.83 an hour or less. But 58% of the jobs regained fall into that category."

    "...employers used the downturn to dump entire departments and reorganize themselves so that the same work, the same jobs, requiring the same skills, would henceforth, in good times and bad, be done by contingent workers."

    During the course of the recent recession "...corporate profits went up by 25%-30% , while wages as a share of national income fell to their lowest point since that number began to be recorded after World War II."

    Part time employment has traditionally been a "stop-gap" measure. But can productivity and quality be maintained over the long term by a part-time labor force? That remains to be seen.

    Source:   "Abracadabra You're a Part Timer," by Barbara Garson, Le Monde Diplomatique, English edition, August 20, 2013.

    Follow up:

    • What was your experience in the job market over the last three years?
    • If you are looking for your first full-time job after college, what kinds of positions have you been offered? Are the pay and benefits what you expected?
  • "Bad" audits of brokerages found by PCAOB


    image from www.jrdeputyaccountant.com

    The Public Company Accounting Oversight Board (PCAOB) found that only 3 of the 60 audits they performed of brokerage firms' reviews in the last year were acceptable and correct. The good news...is that this is an improvement, as NONE of the previous year's audits were deemed correct.

    Primarily, the problems stemmed from conflicts of interest between clients and audits. In addition, in 37 of the 60 audits reviewed, "the auditors failed to do enough work to assess the risk of material misstatement due to fraud." Moreover, in several cases, "auditors made no effort to verify entire revenue streams received by the firms." 

    These findings do show that the auditors of the brokerage firms did not follow Generally Accepted Auditing Standards (GAAS).

    One other aspect of auditing standards that was not met in many cases was that the auditor did not know enough about the brokerage business to be qualified to perform the audit. According the the article:

    "The statistics indicate that many firms auditing brokerage firms may know little about the industry and may not have made the effort to keep up with all the rules pertaining to broker-dealers."

    If brokerage houses are not being audited properly, the public has no assurance that they are following the rules.  Since investment banking and brokerage firms influence the highest levels of international finance, as well as take actions that have long term effects on the global economy, it is probably a good thing that the PCAOB is requiring their operations to be more transparent.

    Source:   "Oversight Board Faults Broker/Dealer Audits," by Floyd Norris, The New York Times Dealbook, August 19, 2013.

    Follow up:

    • Why was the PCAOB formed?  What is its history and purpose?
  • Please, NIKE: Just DON'T do it!

    image of the Nike product described below, from the New Zealand Herald.

    Nike has used a tribal tattoo from the South Pacific as a design pattern in its new Pro Tattoo Tech line.  That wouldn't be so terrible, if the corporation had done its research. The tattoo that Nike has imprinted on women's activewear is a design restricted culturally to Samoan males.


    Nike has made this pattern a part of several garments in its line--leggings, jumpsuits, sports bras and singlets. The design is a "pe'a," and it is only for men.

    from Getty images

    Samoan Facebook pages have denounced the product and marketing, and On-Change.com intends to petition Nike to withdraw its product. Nike did not respond to a request from the New Zealand Herald for an interview, but the NZ Herald quoted this description from Nike's website:

    "These tights feature a distinctive black and white print inspired by tattoos from the southwest Pacific - Fiji, Samoa, New Zealand - with flattering, hand-drawn graphics celebrating the stories culture of Oceana [sic]."

    For those for whom the tattoo is a rite of passage, the meaning is greater.  It remains to be seen what the reaction of consumers will be.

    Source:   "Nike Commits Cultural Faux Pas," by Vaimoana Tapaleao, The New Zealand Herald, August 14, 2013.

    Follow up:

    • What do you think of Nike's appropriation of this cultural symbol in its activewear?
    • What other products have incorporated cultural symbols as part of their designs?  Why haven't they run into the problems that Nike has in this instance?
  • Corn prices fall but Corn Flake prices remain the same

    image from nationalhogfarmer.com

    Corn production is up 30% over last year.  Higher sales prices prompted farmers to plant more corn than ever. Better yet for production--2013 did not have a drought that ruined the crop; 2012 did. However...because the supply is UP...the price is DOWN to $5 a bushel. Last year it was $7 per bushel.

    image from finance.yahoo.com

    But, according to Bob Goldin, Technomic Executive VP, that will NOT translate into reduced food prices, even though corn is found in many places in our food supply.  It just means that there probably won't be a rise in prices.

    It also means that meat prices might not rise, since corn is also a "feed product" for the livestock industry.

    Why won't the falling price of corn cause a reduction in processed foods made from corn? According to Nathan Fields, director of economic analysis at the National Corn Grower's Association, it's because a $3 or $4 box of processed cereal actually only contains about $0.10 worth of corn.

    I wonder what dollar amount of corn can be found in each hog? 

    Source:   "How the Price of Corn Matters," by Sarah McCammon,  Marketplace, American Public Media, August 12, 2013.

    Follow up:

    • Research what has influenced the increasing demand for corn over the last 5-10 years.
  • The "Arab Spring" of Entrepreneurship

    The Middle East has become a fertile ground for entrepreneurs. The risk-taking spirit of protest and revolution that transformed Israel from a desert of poverty at its inception to a strong economy based on thriving and innovative small businesses has caught on in the Arab nations.

    Christopher M. Schroeder, a experienced venture capitalist, investigated the opportunities in several Arab countries recently, and wrote the book, "Startup Rising: The Entrepreneurial Revolution Remaking the Middle East." In it, he explores the creative entrepreneurship he found growing in the Middle East.  He also makes note of the successful technology companies that have also taken an interest and have made significant investments in those countries: Google, Intel, Yahoo, PayPal and others. 

    Investment and sustained capital growth might become a vehicle for sustainable changes in the region. 

    Source:   "Start-up Rising," listed on Amazon.com, August 13, 2013.

    Follow up:

    • Read about the United Nations conference on entrepreneurship held in Israel. What factors, cited in a UN resolution, contributed to entrepreneurial growth in that country?
    • How is the entrepreneurial climate in other Middle Eastern countries similar and different?
  • How to motivate people

    image from contentforcoachesandconsultants.com

    Understanding the human brain and human psychology is a key to motivating others, which is the essence of good business management. Tim Berry, a consultant, recently condensed some of his best client advice and posted it on his blog. Here are his suggestions about rewarding and motivating employees:

    • "Do it fast. Delay kills the reward buzz."  Anyone who has trained a dog with a clicker knows that the instant reward is the only one that really works.  Waiting confuses people and makes them less sure of what they are being rewarded for.
    • "Do it publicly.  Recognition matters more than money." Berry thinks that people that are good want to have recognition from their peers, so a good place to reward people is in a meeting, or a group email. 
    • "Good people want more responsibility." Berry suggests that a great employee really wants to do more work, and have more responsibility.  A less-interested--and less valuable--employee might think, "No good deed goes unpunished," if given more work as a reward for success.

    . Source:   "3 Best Ways To Reward People On Your Team," by Tim Berry, Up and Running Blog, August 7, 2013 via "Today in Small Business," by Gene Marks, NYT, August 9, 2013.

    Follow up:

    • What motivates you in a work situation? Is Tim Berry off-base, or would his suggestions work to motivate you?
    • What other motivators might work?
  • Crooks a role model for business ethics

    Image of note left by burglars who returned stolen goods

    The San Bernardino County Sexual Assault Services offices were burglarized on July 31. A laptop and several computers and monitors were taken.

    The next day, in the wee hours of the morning, police found even more "suspicious" behavior--the thieves had returned, and left all of the stolen property in a shopping cart outside the door. The above note was attached.

    What a great role model for the while collar criminals in the news today!--Swift, unambiguous restitution of stolen goods and a sincere apology for good measure.This behavior belies the adage, "There is no honor among thieves."  Quite the opposite.

    Source:   "NBC, Southern California: Burglars Return Stolen Computers to Non Profit--Along With Apology Note," by NBC, Southern California News, August 9, 2013.

    Follow up:

    • Research some cases currently in the news involving crimes by banks, oil companies, and other corporations.  Pick one. What would be the comparable restitution they might provide? Write their letter of apology, including details of all their actions.
    • Have you ever immediately admitted a transgression--before being found out?  Did you make direct amends for your actions and apologize in a way that was comparable to the apology of these thieves? Describe the situation.
  • Safety net: what is yours?

    image from affordablehousinginstitute.org


    We all hope that things will work out for the best, but sometimes life events put us in a situation where we are facing homelessness, hunger, or financial ruin. Marketplace has as website called, "Show Us Your Safety Net." Here are some of the posts:

    "I was in a terrible car accident last December getting ready to start back at university after a 13-year gap. I lost both my jobs related to the accident, couldn't work due to a broken shoulder (still can't). I applied for every program I could as soon as I could. Was able to get free medical from the county. Qualified for food stamps and short-term disability, but went with no income for two months. Had some help from friends, relatives, and church. Not sure what's next, hopefully the disability extension is approved.”

    "In 1989 I was let go from my from my $45K per year civilian job. The loss of employment was as much a psychological shock as a financial one. I still had my $9K per year Navy Reserve 'weekend warrior' job. By volunteering for additional assignments, the Navy Reserve job provided sufficient cushion for me to try other things.

    "I live and have lived for over a decade with a huge loss of income. I use SSDI to subsist.”

    "When my parents were alive, they always gave me quiet support. Seldom praise, but at least, food and shelter. It's been a lot rougher since they passed. There is no one to help me out if I get in a financial bind. Most of my bills are paid automatically through my bank, so I have to be very careful with what little I have left.

    I don't know what I would post on that site. In my late teens and early twenties, I lived on a food budget of $100 per month--mainly beans, rice, clearance canned goods, whatever vegetables were in season, and fruit from public fruit trees. I found co-operative, shared housing situations and lived in downtown Detroit during my first years out of college--in a medium-safe neighborhood between Tiger Stadium and the Wonder Bread factory.  In the many months that I was down to my last dollar, I was always lucky enough for things to work out. So when I see a homeless person, I know that, many years ago, that could have been me.

    A business education was my life-long safety net, and it has really worked out.

    Source:   "Show Us Your Safety Net," by Marketplace.com, American Public Media, August 6, 2013.

    Follow up:

    • What is YOUR safety net? What stands between you and homelessness or financial ruin? What if you are sick, or become disabled and are unable to work?
  • Amazon's Bezos to Buy Washington Post

    Jeff Bezos of Amazon
    by Patrick Fallon/Andrew Harrer of Bloomberg Businessweek and Getty Images


    Today there was an announcement from Katherine Weymouth, publisher of the Washington Post, that Jeffrey P. Bezos, acting as an individual (not as CEO of Amazon), would buy the Post for $250 million. The deal included most related newspaper publications owned by the Post, but did not include Slate magazine, The Root.com and Foreign Affairs. Ms. Weymouth will continue to work at the company for the time being.

    Donald E. Graham, CEO of The Washington Post Company, said in a written announcement that the Board of Directors had decided to sell after dealing with years of challenges, and made the decision in the interest of the stockholders. Graham's family, of which publisher Katherine Weymouth is a member, has been in charge of the Post for generations.

    Recently, other "new media" purchases of "old media" have soured. It is ironic that this morning's print edition of the New York Times ran a major story in its Business section about what Barry Diller had considered a mistake: the online Daily Beast's purchase of Newsweek magazine.

    What will be the outcome of this purchase by Bezos?  Is it just a "trophy" purchase for media power? Or will it be a good  investment?

    Source:   "Amazon.com founder to buy The Washington Post," by Christine Haughney, New York Times, August 5, 2013.

    Follow up:

    • What are the ideological issues about a small number of corporations controlling all news outlets?
    • Do you read a print newspaper? An online newspaper? What is your primary source of news? What are the habits of your friends and others in your place of business?  What inferences for the future of news journalism might you draw from the behavior of those you know, if any?
  • The entrepreneur who's "not a numbers person"

    Many entrepreneurs are good at certain business skills, but avoid dealing with the numbers that describe their business performance.  Since accounting is basically arithmetic, this avoidance often stems from old fears of math class.

    Accounting reports can sometimes produce additional anxiety for entrepreneurs, because the numbers that result in "net income" or profit, are NOT the same numbers that produce "cash flow." Net income does NOT equal the cash you have in the bank.  This seems counter-intuitive to many small business owners.  "Cash flow" is often more closely aligned with what entreprenuers experience on a "gut feel" level regarding their business performance.

    image from entreprenuercrunch.com

    Jay Goltz recently interviewed Michelle VanAllsberg, owner of The Hair Company--a salon in Michigan. Although she claimed to "have no money," the salon was earning a profit of $32,000. She had not poured the cash into increasing inventory, but it turned out she had used some of the money to pay down her debt. Significantly, however, Michelle had no idea if she was making tax payments--which she owed because she was turning a profit.

    As Jay points out, "Entrepreneurship, first and foremost, is about accepting responsibility." One of those responsibilities is learning about accounting, "the language of business."

    Source:   "Help! I'm not a numbers person! (Part 2)," by Jay Goltz, New York Times Small Business, August 1, 2013.

    Follow up:

    • Are you a "numbers person"? What does that mean? If you are NOT a numbers person, what efforts have you taken to overcome this obstacle to being a good businessperson?
    • If numbers are your thing, what advice can you offer your colleagues in terms of ways to manage personal finance and business accounting tasks?
    • What, specifically, creates the numeric differences between net income and cash flow?