Category: Predictions

The True Cost of South Limestone

Rob Morris 3 Comments Better Lexington, Business, Community, Lowell's, Neighborhood, Predictions, Streetscapes

The South Limestone streetscape project began with the closure of South Lime two months ago today, and the project is slated to continue for another 10 months.  Meant to better connect downtown with the University of Kentucky campus, the project includes the widening of sidewalks, the installation of bike lanes, and the underground placement of utilities.

When the project started, we wrote about the chaotic process of closing the street and about the need for practical planning and design on South Lime and other urban development projects.  How has the project evolved since then?

Not well.

Severed Artery
The closure dramatically impacted traffic patterns between downtown
Lexington and the south side of our city, resulting in gnarled traffic
on a number of alternative routes to downtown.  At various points in the project, intersections with cross-streets (High, Maxwell, and Euclid) have also closed with little notice, adding to confusion and gridlock for downtown commuters and shoppers.  In effect, the closure of South Limestone has walled off downtown from Lexington's south side.

Several businesses along South Lime have struggled to cope with the substantial loss of customers and the physical disruption of their businesses.  Last week, Joe Graviss, the owner of the McDonald's on South Lime, pleaded with Lexington's Mayor and Urban County Council to add extra shifts or more workers to speed the project.  

City officials responded that extra shifts will not accelerate the project.  The project's manager noted that the city's concrete supplier closed in the evenings and that local utilities were already providing personnel to assist with the location and relocation of utility lines.  At one point, he admitted that he had no ideas for speeding the South Lime project along.

Vice Mayor Jim Gray – the CEO of Gray Construction and the only councilmember to oppose the project – countered the project manager's claims.  "It would be wise of us not to be extravagant in describing the difficulties of this project…  With 2000 projects under my belt, I've never seen a project that couldn't be improved or accelerated."

At this point, most elected leaders and city bureaucrats seem unprepared to take significant action to accelerate the South Limestone streetscape project.

That's because they have been thinking about the impacts of South Lime on the wrong scale.

Estimates on the price of the South Lime project vary, but the early $5.2 million estimate has ballooned to somewhere between $13.1 and $17 million.  The newer, higher price was partly meant to help expedite the project. 

But, as we'll see in a moment, that price far underestimates the true cost of the project to our city, our economy, and to our future. 

South Limestone's closure is not a mere inconvenience – it is a severed
artery that is bleeding the life from downtown.  It demands an urgent response from our leaders.  The cost to the city is too
dear to delay action, especially in this difficult economy.

Disruption: Anecdotes and Hard Data
A number of weeks ago, on the first day that the High Street intersection with South Lime was closed, I worked in my office and overheard two different customers from the south side of Lexington talk about the enormous problem of getting to our downtown shop – the confusion from suddenly closing the High Street intersection had made traffic especially difficult to decipher.

Then, we had an elderly customer from Nicholasville make an appointment for the next day, asking for directions on how to get to the shop with all of the construction.  Concerned about getting lost, she decided to do a dry run the day before.  After experiencing the jams, diversions, and delays, she called back and canceled her appointment.

Last month, I talked with another downtown business who is in our same industry.  They were scratching their heads about why their August business "fell off a cliff".  I talked with them again last week, and their business was still much slower than usual.

Yesterday, a regular customer who owns a shop in Festival Market came into Lowell's and opened the discussion with a flat "Business sucks".

When I started hearing these anecdotes, I began to think that the impacts of the South Limestone closure extended far beyond South Lime.  I wondered about the effects of South Lime as a customer deterrent for our business:

  • How many of our customers come from the south side of Lexington?
  • How many of those south-siders might have chosen to stay away from "the mess" downtown?
  • What could that data tell us about the impacts to all of downtown Lexington?

And what I saw in the data was astounding and troubling:

  • About 30% of our customers come from ZIP codes which would use Nicholasville Road (which turns into South Limestone) as the primary corridor to downtown
  • Since July 22nd – the date of the closure – we have lost one third of the business we'd normally expect from those ZIP codes.  By comparison, the rest of Lexington is relatively flat or growing.
  • The net of this was a loss of 10% of our sales (and a much bigger hit to our profitability) directly attributable to the South Lime closure.

I disclose these facts not as a woe-are-we pity party, but as a fact-based assessment of how "the mess downtown" affects one downtown business.  Our business is a relatively healthy, well-respected business with incredibly loyal customers (Last week, we won "Best Honest Mechanic" from Ace Weekly readers).  And, still, the closure of South Limestone accounted for a loss of a full third of south-side customers.

Ripple Effects
Can we extrapolate from just one business to the whole of downtown?  Not with any degree of certainty.  But my conversations with other business owners make me believe that my business' experience with the South Lime closure is not exceptional.  Admittedly, not every downtown business is as impacted by traffic disruptions, but most are impacted in some fashion: lost customers, lost productivity, supply chain delays, etc.

Hard data for downtown Lexington is difficult to come by.

  • Just how much of Lexington's $11 billion economy takes place downtown?
  • Which businesses depend upon the smooth flow of traffic?  To what degree?
  • How many of their customers / employees / suppliers come from the south side?

Depending on the assumptions used, the estimate of impacts to downtown can vary wildly.  Our best "conservative" estimate?  Downtown Lexington loses about $360,000 each business day that South Limestone is closed.  (Depending on our assumptions, the estimates ranged between $275,000 and $600,000 each day.)

That translates to between $7.0 to $7.7 million in lost business every month, or between $84 and $92 million for the year-long duration of the South Limestone project.  That's around 700 to 1000 jobs which could evaporate from downtown Lexington, especially as the closure drags on.

Are these numbers absolute?  Not by any means.  But they do provide a ballpark idea of the true cost of the South Limestone project. 

Much of the focus on the costs of South Lime have focused on either a) the direct taxpayer costs ($17 million) or b) the costs to businesses on South Lime.  And while those South Limestone businesses deserve special attention for the degree this project impacts them, our estimates suggest that our leaders and our community have been thinking about 'cost' on the wrong scale.  There is a much bigger, much more urgent cost which must be addressed.

The irony of South Limestone – as the cycle of lost customers, declining businesses, lower employment, and more lost customers continues – is that the project may well end up strangling the very downtown that the streetscape is meant to connect with.

Our leaders frequently assert the necessity of a vibrant, livable downtown.  It is time for them to live up to their words. 

With the South Limestone closure, they must now choose: Will they continue to choke off downtown from a significant portion of the city, or will they act with urgency and extraordinary effort to accelerate and improve the project?

Their actions now will determine whether the prediction from our Chaos post will come true:

"And the results of the chaos are easy to predict.  Confused commuters
and shoppers stay away from 'the mess' downtown.  Downtown businesses
die.  And, after fits and starts, Lexington ends up with a beautiful
street.  To nowhere."

Time to choose.

LowellsSquare

Chaos: South Limestone Closure Lawsuit Details

Rob Morris 1 Comment Business, Community, Neighborhood, Predictions, Rants

When we initiated LexMobs to help businesses on South Limestone on Wednesday, we noted that the closure of the street seemed hasty and poorly-planned.  Well, now we’ve obtained the Fayette Circuit Court filing from a lawsuit intended to stop the work on South Limestone (first reported by Jake at Page One Kentucky).

And that filing reveals just how chaotic the closure process actually was.

Filed by the owners of several businesses and properties lining the route, the lawsuit seeks an immediate injunction to halt the roadwork and to reopen South Limestone to traffic.  It also seeks damages for the interruptions to business operations along the street.  The suit names the Mayor, LFUCG Urban County Council, and ATS Construction (the firm contracted to renovate SoLime) as defendants. 

And the filing tells a story of a poorly-communicated, hastily-assembled, highly-inconsistent project with an escalating price tag:

  • Communication.  Initial letters from the LFUCG Public Works Commissioner to the affected businesses invited them to a open house to discuss “a streetscape design” and “utility needs”, but didn’t indicate a complete road closure was immanent. The actual details of the project (and of the changes to the project) were usually disclosed to owners through rumors or media accounts.
  • Timing.  Owners had six days’ notice before the first open house (May 18th), and there was no mention of a road closure.  A second “utility needs” meeting was held on June 3rd, and the full closure of South Limestone was disclosed.  But some owners didn’t learn of the possibility of closing SoLime until the day before; The letter announcing that meeting didn’t mention closing the street.
  • Consistency.  In June 3rd discussions, South Limestone was to be closed from Euclid to High.  After voicing opposition, property owners were told on July 10th that SoLime would initially be closed from Euclid to Maxwell, opening up a full block between Maxwell and High Streets.  On July 21st – the day before the project began – owners learned from media accounts that SoLime was now to be closed all the way to High Street again.  That day, owners met with the Mayor and others from LFUCG to learn that ATS and LFUCG won’t know what they’re dealing with until they dig up the street.
  • Price.  The “Downtown Streetscape Master Plan” proposed improvements to South Limestone costing more than $5.2 million.  The LFUCG council approved the streetscape plan in August 2008.  On July 7th, 2009, the council approved the $13.1 million contract with ATS.  Two weeks later, media accounts put the total at $17 million.

The patterns emerging from this (admittedly one-sided) account of the closure of South Limestone parallels with what we’ve seen recently from LFUCG on urban development projects:

  • Projects languish for years, then are suddenly initiated.
  • Decisionmakers seem to have little sense of the full scope or true impacts of their decisions.
  • The true impacts of the project are only understood, if ever, after it is long underway.
  • Communication with citizens is unclear, intermittent, and/or non-existent.
  • The project changes direction suddenly.
  • It is unclear who is accountable for the success or failure of such projects
  • Because they are so committed to the (frequently noble) idea of the project, decisionmakers accept a series of concessions which cause the project’s price to balloon to multiples of original estimates.

We’ve seen some or all of these elements in numerous recent urban development projects: CentrePointe, Tax Increment Financing (TIF), the Lyric Theatre, the Newtown Pike extension and, now, the South Limestone Streetscape.  

What results is chaos.

Business owners on South Limestone had 2 months to prepare to lose customers for 12 months.  Many owners had one day to figure out how to get customers and suppliers to their door.  The cost of the project is 3 times what was initially approved. 

And the results of the chaos are easy to predict.  Confused commuters and shoppers stay away from “the mess” downtown.  Downtown businesses die.  And, after fits and starts, Lexington ends up with a beautiful street.  To nowhere.

Chaos is no way to run a business.  And chaos is no way to run the business of our city.

LowellsSquare

What to look for in Lexmark’s earnings release

Rob Morris 1 Comment Business, Community, Lexmark, Predictions

Lexmark reports its second-quarter earnings tomorrow.  Since we've written about the decline and fall of Lexmark and the recent rise in its stock price, we thought we'd tell you what to look for tomorrow to determine Lexmark's health.

Under its current management, Lexmark has been very conservative in its earnings guidance (what it hopes to earn in the near future).  This conservatism has historically created two notable dynamics around earnings announcements:

  • The vast majority of Lexmark's earnings announcements have exceeded analysts' expectations, primarily because management guided those expectations lower.  This is the epitome of "under-promise and over-deliver".
  • Because the future guidance has been so low – with management essentially saying "we don't expect to make much money in the future" – the stock market's reaction has been overwhelmingly negative, driving Lexmark's stock price down the day earnings are released.

Update 7/21/2009: Lexmark announced earnings (before restructuring charges) that were 55 cents, while analysts projected 60 cents per share.  Lexmark management also provided lower 3Q guidance.  By both missing 2Q expectations and giving lower 3Q guidance, Lexmark was down over 20% in early trading, approaching 12-year lows.

So, tomorrow, don't be surprised if Lexmark beats Wall Street's expectations for the second quarter, and yet the stock price falls because of very conservative guidance.

But these regular dynamics around Lexmark's reporting dates tell us little about the true health of the company.  Here's what to really look for tomorrow:

  • Failing to meet expectations.  If Lexmark fails to meet already-conservative expectations, it is a sign that earnings are deteriorating even faster than Lexmark's management anticipated.  It is also a possible sign that Lexmark is entering the death spiral we talked about here.

Update 7/21/2009: As mentioned above, Lexmark missed expectations by 5 cents (nearly 10%).

  • Continued / accelerating declines in supplies, especially in PS&SD.  The majority of Lexmark's revenues (and the vast majority of its profits) come from its supplies business.  In other words, Lexmark makes much more from toner and ink than it does from the printers that use them.

Lexmark's inkjet division (Imaging Solutions Division, or ISD) has seen continuous erosion in its supplies sales, which implies that the installed base of Lexmark inkjet printers is shrinking.  Because of the upside-down economics of the printer business, a decline in supplies business can rob the division of its ability to fund future growth, and signal the impending doom for that business. 

If the Printing Solutions and Services Division (PS&SD – ISD's larger sibling) continues to lose supplies sales – a trend which started within the last year – then Lexmark's decline will be even more pronounced.  Without the supplies-driven profit to 1) maintain its existing business structure and 2) invest in future growth, the company will continue to spiral downward with little prospect for pulling out.

Update 7/21/2009: Overall supplies sales dropped by 18%, and dropped in both PS&SD and ISD (both major divisions).  This is a very troubling sign that Lexmark is entering the death spiral we've written about previously.

  • Additional restructuring.  Over the past few years, Lexmark has announced a series of "restructuring" efforts: Closing plants, reducing headcount, shifting resources, reducing costs.  Unfortunately, those efforts have done little to stem the bleeding at Lexmark.  If they announce similar moves tomorrow, it is a sign that management is still flailing and failing.

Update 7/21/2009: No additional restructuring was announced this morning.

It is tough to gauge the health of a company from a single quarter of earnings, and tomorrow will be no different.  But if some (or all) of these items find their way into Lexmark's earnings report, it will be another nail in Lexmark's coffin, and will be troubling confirmation of the continuing failure of Lexmark's executive team.

Update 7/21/2009: Second quarter earnings indicate that Lexmark is continuing the long, downward slide that we have seen over the past 5 years.  As they have 1) invested in ways that don't promote real growth at the company, and 2) made continual strategic missteps, Lexmark's management has slowly bled economic vitality from the company, and robbed it of its ability to invest in the future.

Why has Lexmark’s stock price jumped?

Rob Morris 0 Comment Business, Community, Lexmark, Predictions

Since we chronicled the implosion of Lexmark on June 25th, Lexmark's stock has seen a remarkable run-up in its stock price.  In less than 4 weeks, the stock has moved up over 22%: from just over $15 a share to $18.61 at Friday's close.

So does the run-up prove we were wrong on our assessment of the failures of Lexmark executives?

No.

While a 20% increase in a single month seems impressive, Lexmark needs to turn in a 1000% increase to overcome the failures of the past 5 years.  And even after the gains of the past month, Lexmark's market value is still down almost 90% from where it was five years ago.

But such an aggressive jump in price still begs the question: Why has Lexmark's stock price jumped?  The question is especially interesting given that there has been no significant news coming from the company.

There are three plausible explanations for such a run-up in stock price:

  1. Earnings Surprise.  Lexmark announces its earnings on Tuesday.  It is possible that some traders believe that Lexmark will have higher profits and better future prospects than are currently expected by Wall Street analysts.  In the past couple of weeks, there has been a heavy increase in options calls – bets that the stock price will rise.  This could be in anticipation of much-better-than-expected earnings.
  2. Takeover Speculation.  As we mentioned in the Implosion post, Lexmark's ability to generate cash has led to the company being seen as a potential takeover candidate, with Dell, Xerox, and Lenovo frequently cited as potential suitors.  Lexmark takeover rumors pop up occasionally, with the last batch in late 2007.  Traders could be speculating that such a takeover would include a "buyout premium" – a buyout price well above the current trading price to help "seal the deal".  This could also explain the unusually high activity in options calls.   
  3. "Window Dressing".  Over the past five years, Lexmark executives have bought back the company's stock on a massive scale.  The $3.2 billion of stock buybacks have been a catastrophic failure – losing over 70% – which destroyed Lexmark's mountain of cash.  In our last Lexmark post, we talked about how such buybacks could boost stock price while simultaneously insulating the company's failed management from takeovers.  Lexmark's management could be buying back stock as a form of "window dressing" to improve their stock price in advance of Tuesday's earnings announcement.

So which of these explanations is most likely?  A chart of Lexmark's stock price (below, from Google Finance) shows that almost all of the recent increase came in July, with a conspicuous jump in price on July 1st.  July volumes have also been nearly 50% higher than average.  The July 1st pop in price was the first significant move up after drifting downward throughout June.

LXKJune25

Why would the price jump on that date, and continue to increase through July?

July 1st is the first day of the third quarter.  More importantly, it is also the first day after the second quarter, and second quarter financials will be reported on Tuesday morning. 

The timing and volume of the surge in Lexmark's stock price make us suspect that Lexmark's management has been buying back even more of the company's stock – the "window dressing" explanation above.  By buying back stock beginning July 1st, they could improve stock price while not having to report buybacks until September (and not having to include those purchases in Tuesday's report).  If management is buying back a lot of stock, that could also account for the increase in options calls as traders try to feed off of the temporary boost in stock price.

The recent run-up in stock price is probably not due to improved business fundamentals at Lexmark.  All outward signs show that those fundamentals are deteriorating.  Instead, our bet is that Lexmark's stock price has risen because of share buybacks, a traditional crutch for Lexmark's management.

And, historically, buybacks have been a failed long-term strategy for Lexmark.

Update 7/21/2009: After Lexmark's earnings announcement this morning, Lexmark stock has given up all of the gains from the past month.  If Lexmark's management did buy back stock early in July, it would fit the long-term pattern of failed buybacks.

We Were Wrong

Rob Morris 1 Comment Business, Gas, Predictions

Six months ago, the Lowell's Corporate Office of Fearless Predictions forecast that "Gasoline will be well above $3 a gallon by June, if not sooner."  As part of the prediction, we also said oil prices would reach $80 a barrel.

Well, we were wrong.

As of this writing, most stations in Lexington have gasoline at $2.65, and oil has been around $71 a barrel.

At the time of our forecast, gas was about $1.49 a gallon, and oil stood at $39 a barrel.  We predicted that a number of forces (weaker dollar, production cutbacks, greater demand, and speculation) would come together to drive oil prices upward.  We were generally right about the forces driving prices up, but we were wrong about their strength and timing.

In particular, it appears that the economic rebound and infrastructure build-out we foresaw to drive greater demand really didn't kick in as soon or as strongly as we expected.  We're slowly starting to see some signs of the rebound, but it didn't happen when we said it would.

We still expect $3-a-gallon gas by the end of the summer, and wouldn't be surprised to see $3.50 to $4 a gallon by the end of 2009.

That's what we see in our crystal ball.  What do you think?  Where will gas and oil prices go from here?

Why CentrePointe will fail

Rob Morris 3 Comments CentrePointe, Community, Neighborhood, Predictions, UnTower

CentrePit A few months back, I openly wondered about the viability of the CentrePointe project, which thus far has only managed to crater an entire city block of historical buildings.

Since our post (which came long after the controversy started), there has been a continued flurry of discussion around CentrePointe in the community.  But nothing has happened on the construction site. 

In all of this turmoil, one fact has become crystal clear: CentrePointe will fail.

The project will fail in one of two ways:

  1. The project will fail to be constructed, or
  2. The project will be constructed, and then fail financially

I say this not out of emotion or disgust aimed at the project, the developers, the mayor, or their conduct (although all may be worthy of disgust) – but because the justifications for the project fail to stand up to basic business logic.

Instead of acknowledging the flaws in their business plans, CentrePointe's developers have continually invoked wishful thinking to rationalize their actions. 

I've seen this kind of fatal optimism in business many times before.  Business executives often think they can make a project succeed by just wanting it badly enough.  (Unfortunately, optimism isn't a viable business strategy.)  In their blind pursuit of their goal, they disregard the facts. 

So, lets explore the facts around CentrePointe ('CP' from now on), which really can't be ignored any longer.  (Read more from the Herald-Leader here, here, and here.)

  • CP has had an unnamed international financier who committed $250 million to the project.  This week, we learned that the mystery investor died.  Without a will.  The project certainly won't commence until a) the financier's estate goes through probate court, and b) the heirs agree to continue support for CP.  Odds the financier ever existed: Iffy.  Odds heirs will support CP: Doubtful.
  • CP is supposed to house a J.W. Marriott luxury hotel.  Meanwhile, Marriott's CFO (who is their soon-to-be CEO President and COO [correction]) has repeatedly announced that even the best projects – a group that CP cannot possibly belong to (see more below) – are stopped in their tracks.  Odds Marriott will end up in CP: Doubtful.
  • The Marriott would have 250 rooms going at $190 per night.  The price is 50% higher than competing hotels, yet the developers' analysts estimate occupancy rates at startup which are better than those (less expensive, more established) hotels.  Odds of getting higher occupancy at a much higher price: Very slim.
  • There are 91 luxury condos at the top of CP, which would sell for $1.2 million each and which would generate over $100 million for the project.  The analysts estimated that 45 of those would sell before construction starts.  And all 91 condos would be sold in 3 years.  In all of Lexington, there were 31 million-dollar properties on the market at the end of 2008, and only 10 such properties sold during the entire year.  So… CP's developers would flood the market with luxury properties — essentially quadrupling the number that are on the market — and expect to sell them faster than historical rates.  Odds that Lexington could absorb a 300% increase in ultra-luxury properties in only 3 years: Zero.
  • CP's developers have to sell 4.5 years (45 condos at 10 condos per year) worth of luxury property inventory before construction starts.  And that assumes that every million-dollar prospect would prefer to live in a 2700-foot high-rise condo instead of a country estate. Odds that CP's developers can sell 45 million-dollar condos before construction starts: Zero.  (Note: This week, CP's developer claimed that 61 of the 91 condos were 'spoken for'.  This is patently false, and reveals a worrisome desperation from the developers.  Unless 'spoken for' means that someone said "I wish that I could live in a place like that…"  Which is also worrisome.)
  • CP's analysts assumed that the $1.2 million condo buyers would have an average income of $220,000.  That's an incredibly aggressive price-to-income ratio of nearly 6, which ranks with inflated San Francisco, New York, San Diego, and Los Angeles averages – before the real estate bubble burst.  Snakebitten banks are much more critical of an applicant's ability to pay in this economic environment.  Lexington's average price-to-income ratio: 2.35 – indicating an income of over $500,000 to afford the condos and drastically limiting the pool of eligible buyers.  Odds of finding enough eligible prospects in Lexington: Very slim.

So what are we to conclude about CentrePointe from these facts?

  1. The developers' tendency toward secrecy and intrigue are unacceptable in light of the public investments in and public impacts from this project.  We deserve transparency.
  2. The project is not financially viable.
  3. The primary financing (if it even exists) is shaky at best.
  4. The analysts' projections are unrealistic and misleading.
  5. The project cannot generate the promised tax revenues.
  6. The developers are prone to either fantasy and/or outright deception; either case bodes poorly for the feasibility of the project.
  7. CentrePointe will fail.  Miserably.

Lexington must now accept the failure of CentrePointe and begin to move beyond the CentrePointe fallacy.  We must hold accountable those who recklessly ramrodded the flimsy development through our city council.  We must prevent future irresponsible allocations of our common wealth.  And our community and our public officials must begin carefully contemplating what's next for the block that CentrePointe obliterated.

Update 4/13: Crossposted to Ace Weekly as "Optimism is Not a Business Strategy"

Update 4/14: Tom Eblen did an excellent parody of the CentrePointe situation here.  Very cool.

Update 4/17: OK.  Let's just get the whole story out on the table.  The UnTower Manifesto: What went wrong, what to do about it, and what to do about the scar it left on our city.

[where: E Main St & N Limestone St, Lexington, KY 40507]

Dealership troubles

Rob Morris 0 Comment Auto Industry, Business, Dealerships, Predictions

In January, the Wall Street Journal ran a page one story about the troubles facing two dealerships in southeastern Kentucky.  One of them, Johnny Watkins, had filed for bankruptcy.

At the time, we predicted that there would be a lot more dealership closures in 2009, especially in smaller towns. 

MaysvilleFordAuctionThen, a couple of weeks ago, we received an auction notice to liquidate the assets of Maysville Ford.
 
Why is this happening to dealers in small towns?  There are a few key reasons:

  • There really isn't enough critical mass of car sales to support a dealership in a small town.  So dealers have to draw customers from nearby cities, usually with discounts that squeeze their profitability.
  • The most profitable part of the dealerships come from service to vehicles after the sale.  When out-of-town customers purchase from a small-town dealer, they tend to have their cars serviced somewhere else, as the dealer is too inconvenient for frequent maintenance.  So small-town dealers lack the service customers that larger dealers have.
  • The heavy reliance on car sales (and the lack of substantial service sales) means that small-town dealers are much more sensitive to economic downturns.  As car sales plummet, the service business is what has sustained many big-city dealers.  The smaller dealers just don't have that cushion.

The economic realities of being a dealer in a small town mean that a lot of them won't survive over the next couple of years.

[where: 41056]

Toyota is #1. And will stay there.

Rob Morris 0 Comment Auto Industry, Business, Lowell's, Predictions, Toyota

In 2008, Toyota became the largest carmaker in the world, producing nearly 9 million vehicles.  Toyota surpassed General Motors, who had held that title for 77 years, by over 600,000 vehicles.

As Toyota specialists, we're pleased.  As lifelong fans of GM, we're also a little sad.

Both manufacturers downplayed the significance of Toyota's ascension to the top of the sales charts, which is the culmination of a decades-long steady climb by Toyota and a precipitous drops by GM, especially in the past year.

While GM executives are optimistic about a return to the top spot, the Lowell's Corporate Office of Fearless Predictions says that won't happen.  Toyota will remain #1 for the next 20 years or more.

As we've noted before, GM and the other Detroit automakers have structural disadvantages in their business design relative to Japanese automakers which their executives have been either unwilling or unable to decisively address.

Meanwhile, Toyota has historically invested in new technologies and new capabilities long before the market demanded them, and stood ready to take advantage of sudden shifts in market demand.

Toyota isn't always right — they released their huge 2008 Tundra and Sequoia models right into the teeth of $4 gas — but they almost always put themselves in position to be right.  With gas prices lower, their big models may get some traction, especially against similar GM, Ford, and Dodge models.  When gas prices shoot back up, they can rely on the Prius and their other hybrid models to continue their market gains.

Toyota consistently makes collections of bets which advantage the company relative to its competitors.  When those bets don't work out (witness the Tundra), the Detroit 3 suffers more than Toyota (witness the sudden implosion of Detroit's truck-heavy business).  And the other bets Toyota makes (like hybrid, solar, and electric vehicle techologies) more than compensate for the ones that don't succeed.

That's why Toyota will stay in the top spot.

Toyota developing a solar car?

Rob Morris 0 Comment Auto Industry, Lowell's, Predictions, Toyota

In another example of Toyota's consistent ability to anticipate the future and develop for it, the Nikkei is reporting that Toyota has a completely solar-powered car in the works. 

This follows similar reports in July showing spy photos of a next-generation 2010 Prius which would help power its hybrid engine with solar panels.

Toyota already exemplifies how a relentlessly innovative company can come to dominate its industry.  It appears poised to continue that domination for a while.

Why gas prices will go back up

Rob Morris 0 Comment Business, Gas, Predictions

From the Lowell's Corporate Office of Fearless Predictions:

Gasoline will be well above $3 a gallon by June, if not sooner.

The recent and dramatic decline in gas and oil prices has been great news for our wallets and our troubled economy, and the extra cash has provided some much needed relief from the barrage of recent bad news.  Oil is trading under $39 a barrel as I write this (It had topped $140 a barrel this summer).

But it won't last. 

How can I so sure?  I think part of the answer lies in how oil prices collapsed.  So we'll start there.

The Collapse

Three events converged — and then fed one another — to drive oil and gasoline to multi-year lows.  

Supply / Demand.  First, the economic slowdown combined with gas pump sticker shock to cause people to really pull back from using as much oil — fewer and shorter trips.  Meanwhile, petro-regimes were ramping up production, greedily grabbing for historically high petroleum prices.  More oil + Less consumption = Lower prices.

Stronger Dollar.  This summer, really low interest rates had made the dollar incredibly weak in the world market.  Essentially, each dollar bought less of everything from other countries (including oil).  As the US slowdown began to hit other countries in early autumn, and their banks lowered interest rates too, the dollar was suddenly much stronger.  As a result, each dollar now bought much more oil.

Financial Meltdown.  Finally, much of the run-up in oil prices was driven by speculators in oil-based securities in the financial markets.  The speculators drank their own outrageous Kool-Aid as firms like Goldman Sachs predicted $250-a-barrel oil by the end of the year.  As so many financial firms imploded (think Bear Stearns, Lehman Brothers, Washington Mutual, Merrill Lynch, etc.), they unloaded their more-profitable oil holdings in a panic to generate additional cash. 

Any one of these trends would have driven down prices somewhat, but combined, they caused prices to fall to almost one-fourth of their summer highs.

The Coming Spike

There are signs that a couple of these trends are reversing, and that there will be a near-term spike in the price of oil.

Weaker Dollar.  The recent moves by the Federal Reserve to take their funds rate to 0% have not been followed by similar moves by bankers in Europe and Asia.  This has served to significantly weaken the dollar in the global markets.  Each dollar will buy less oil and gas.

Less Oil.  OPEC members, watching their rivers of cash dwindle, have recently indicated that they will curtail production in order to restore higher prices.

Greater Demand.  At the same time, the US and other countries are stoking the economic engines with incredible amounts of 'rocket fuel': The government's huge economic stimulus packages and dramatic financial moves — from 0% interest rates to "infrastructure" projects to direct cash injections into failing firms — will (eventually) ignite, and will help the economy rebound, probably very aggressively.  As the economy takes off, much more oil will be needed to move products and rebuild infrastructure.

Speculation.  I would expect some moderation in the financial speculation — many
speculators just aren't around anymore — so I'd be surprised if the
prices reach the levels of this past summer.  There's also the Kool-Aid factor: Merrill-Lynch recently speculated
that oil prices would drop all the way to $25 a barrel.  They'll likely
be as outrageously wrong as Goldman's $250 prediction…

I'd look for these counter-trends to get traction in early January, and for the economic rebound to begin gaining steam in the April – May timeframe.  By June, these counter-trends will work together to drive oil and gas prices up again.  Netting it all out: I would expect gas prices over $3 per gallon and oil prices over $80 per barrel.

But that's just my crystal ball…  What do you think?  Where will prices be in 6 months?

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