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October 16th 2006

In This Issue

Plateauing: Redefining Success at Work - Part 2

Warning Sign For Office Market?

Economic Notes:


 

Scorecard

Market Brief: Mild Economic Aftershocks from North Korea's Test

North Korea tested Oct. 9 what it alleges was a nuclear device. Politicians and investors alike are obviously nervous, but the impact will not be nearly as negative as one might think.

First, let us disabuse our readers of the notion that the North Korean economy has anything to do with anyone. The North Korean's guiding ideology is a local version of communism called "Juche" (translated roughly, "self-reliance"), which preaches that the Korean system will be most successful if it is completely economically sequestered from other systems. Since economic separatism has not worked particularly well in any place it has been tried -- Depression-era America and Maoist China come to mind -- it should come as no surprise that North Korea enjoys a gross domestic product (GDP) of only about $25 billion, giving it a per capita GDP of about $1,000.

Foreign investment in North Korea is minimal. The net foreign direct investment (FDI) from China, Pyongyang's ally, in 2005 was only about $15 million in a mix of assorted small projects. Bilateral trade is about $2 billion, but nearly all of that consists of Chinese supplies of energy and food; North Korea's net contribution to bilateral trade is a small amount of coal -- something China could easily replace since it is the world's largest holder of coal reserves. Full sanctions might actually help the Chinese economically, as they would be relieved of the task of subsidizing the North Korean system.

The top investor in North Korea far and away is South Korea, which maintains joint manufacturing facilities at the Kaesong Industrial Complex and Mount Kumgang tourism site. These investments were designed to put into motion South Korea's "sunshine" policy of engagement with the North. A full-sanctions response by the international community to the North's apparent nuclear test would shut down these facilities.

But even if it were cut out of North Korea tomorrow, the impact on South Korea would be middling. Between state and private investment, total South Korean investment in Kaesong and Kumgang is a combined $620 million -- hardly a massive hit for the overall South Korean economy of more than $750 billion. Furthermore, the "chaebol" -- South Korean family-owned conglomerates -- are not exactly happy about the "sunshine" policy. Kaesong and Kumgang are subject to South Korean diplomatic restrictions and North Korean legal restrictions. The net effects are "investments" that are tools of a bilateral policy that would not likely break, even without the generous South Korean tax concessions granted to such "investments." Most chaebol involved would likely be thrilled to be sanctioned out of North Korea, even if they would publicly continue to pay lip service to the ideals that launched the projects in the first place.

Aside from China and South Korea, no state has even a negligible economic presence in North Korea. Thus, any notable economic effects of North Korea's reported nuclear test will fall into the broad category of investor expectations.

The list of players that could possibly feel the effects of shifting investor sentiment are China, South Korea and Japan. China can be crossed off immediately; not only would North Korea's rage be directed at other targets, but China's currency is de facto pegged to the U.S. dollar -- investor sentiment would have very little impact.

The other two states, however, are very different. South Korea, obviously, is on the same landmass as its northern neighbor and would bear the brunt of any military conflict. Because of this, investors are noticeably skittish about the increased likelihood of conflict.

But what most do not realize is that, in general, investors are skittish about South Korea on its own merits. Though Seoul has certainly worked a series of economic miracles over the past half century, transforming South Korea from an impoverished backwater into the world's 10th-largest economy, it has done this with purely indigenous efforts -- not via foreign investment. The Koreans almost pathologically prefer to keep leadership and management firmly in Korean hands. Under these circumstances, foreign investment in South Korea has never been particularly high. It spiked in the aftermath of the 1997-1998 Asian financial crisis as many foreign firms sensed bargains, but after five years of the Koreans -- to put it bluntly -- hoodwinking the foreigners, FDI fell off sharply. In 2005, it edged down to only about $4.3 billion. The current North Korean situation will likely push FDI down further, but even if it evaporates completely, the loss of FDI worth only about 0.6 percent of GDP is not the sort of thing that will inflict meaningful distress on South Korea. Japan's reputation with foreign firms is even worse (for the same reasons). Its $4 trillion economy only sucked up $2.7 billion in FDI in 2005.

Instead, any hits to investor confidence will be felt in the South Korean and Japanese currencies as investors rearrange their bets; indeed, both the won and the yen have dipped steadily since the test. But this is not the sort of thing Seoul and Tokyo generally fret about. In fact, the two states are most regularly cited by the U.S. Treasury Department as the world's worst currency manipulators, habitually pushing down their currencies' values to stimulate exports to foreign markets. The South Korean and Japanese governments might be nervous about goings-on in North Korea, but they see any resulting weakness in their currencies as the cloud's silver lining.

Now all of this, of course, assumes the North Korea crisis really is not a crisis at all in a military sense -- that Pyongyang has tested a nuclear device, but that the situation will not spin into a military conflict.

Should war actually break out, the math would obviously be different. North Korea has some 10,000 artillery pieces locked in on Seoul, and removing them from the battlefield with conventional weapons would be a weeks-long affair. Within hours, the North Korean military could thus transform the South Korean capital -- the extended metropolitan area of which is home to more than 20 million people -- literally into a sea of fire. North Korea also likely possesses 100 ballistic missiles capable of hitting spots in Japan. The threat those missiles pose to Japan is not even a shadow of the danger the artillery pieces could create for Seoul, but try telling that to the captains of the container ships and liquefied natural gas tankers that dock in Japanese ports on a daily basis.

But such terror would generate a unique environment as far as global trade is concerned. Certainly a war would have devastating effects on Japan, and in particular South Korea, but bear in mind that northeast Asia is a unique region from an economic point of view. Both Japan and South Korea consume massive amounts of commodities but produce none for export. Global trade routes end and start in northeast Asia -- they do not transit it.

Thus, if northeast Asia were to plunge into war, Japan, and especially South Korea, would obviously suffer terribly, but the rest of the world could easily sequester the problem. The effects on commodity markets would be disastrous, but not in the way most would expect. The two states combined use about 6 million barrels per day of crude oil, as well as more liquefied natural gas than the rest of the planet put together -- about 110 billion cubic meters annually. In case of war, most of that material -- along with the two states' take of global lumber, steel, copper, etc. -- would need to find a new home. Though everyone's gut reaction would be to expect higher prices, northeast Asia's isolated location, combined with the characteristics of Japan and South Korea's trade patterns, would actually lead to global price crashes, not spikes.

Source: Stratfor, 2006


Staples Targets Kinko's

Office supplies giant Staples, Inc. has beaten the competition, topping rivals Office Depot and OfficeMax to become the largest office supplies retailer. So the company management has set its sights on new competition: Kinko's.

During a recent investor conference, president of U.S. stores Demos Paneros announced that Staples is going after the copy and print-center market dominated by FedEx Kinko's and plans to open four small Copy & Print Shops in the Boston area in the next month as a first U.S. test. (Staples tested the concept under the Dossier brand in Montreal.)

The shops will take Staples' existing Copy & Print Center store-within-a-store concept, which offers faxing, photocopying, color printing, engraving, document design and shipping services into its own boxes. The Copy & Print Shops will be standalones containing between 3,500 square feet and 4,000 square feet of space. Staples expects each location to bring in from $600,000 to $2 million in annual sales. The centers have previously delivered about $350,000 a year.

Source: Retail Traffic

This Weeks Leads

  • Designs of the Interior
  • Designs of the Interior operates 25 locations nationwide.
  • The stores, selling furniture decorative home accessories, occupy spaces of 3,500 sq.ft. to 5,000 sq.ft. in lifestyle and power centers.
  • Plans call for 20 openings nationwide during the coming 18 months, with representation by Commercial Strategies, Inc.
  • Typical leases run 10 years.
  • Preferred cotenants include Anne Taylor, Bed, Bath & Beyond, Chico, Crate & Barrel and Williams- Sonoma.
  • For more information, contact:
    • Jenny Alvarado
    • Commercial Strategies, Inc.
    • 2377 El Camino Real, Suite 140
    • San Clemente, CA 92672
    • 949-481-6165
    • Fax 949-429-6241
    • Email: jenny@csiusa.biz
    • Website: www.csiusa.biz.
  • Charley’s Grilled Subs
  • Gosh Enterprises, Inc. trades as Charley’s Grilled Subs at 300 locations nationwide and internationally.
  • The sub shops occupy spaces of 600 sq.ft. to 2,000 sq.ft. in malls, urban/downtown areas, freestanding locations and entertainment, lifestyle, power and specialty centers.
  • Growth opportunities are sought nationwide during the coming 18 months. Typical leases run 10 years.
  • A vanilla shell is required. The company is franchising.
  • For more information, contact:
    • Bobby Drouin,
    • Gosh Enterprises, Inc.,
    • 2500 Farmers Drive, Suite 140,
    • Columbus, OH 43235;
    • 614-923-4700, Fax 614-923-4701;
    • Email: bdrouin@charleys.com;
    • Web site: www.charleys.com
  • Schakolad Chocolate Factory
  • Schakolad Chocolate Factory trades as Schakolad Chocolate Factory at 32 locations throughout CT, FL, GA, MA, MI, NJ, NY, OH, TN, TX, VA, Washington, DC, the Bahamas and Israel.
  • The stores, which specialize in European-style hand made chocolates, occupy spaces of 1,100 sq.ft. to 1,600 sq.ft. in urban/downtown areas and specialty, entertainment and tourist centers.
  • Growth opportunities are sought throughout the eastern, midwestern and southern states during the coming 18 months.
  • Preferred cotenants include Starbucks, Cheesecake Factory, Marble Slab Creamery and steakhouses.
  • Typical leases run five years with five-year options. A vanilla shell is required.
  • Preferred demographics include a population of 50,000 within five miles earning $50,000 as the average household income.
  • Competition is cited as Godiva. The company is franchising.
  • For more information, contact:
    • Edgar Schaked,
    • Schakolad Chocolate Factory
    • 5966 Lakehurst Drive, Orlando, FL 32819;
    • 407-248-6400, Fax 407-248-1466;
    • Email: franchise@schakolad.com;
    • Web site: www.schakolad.com.
  • Rocky Mountain Chocolate Factory
  • Rocky Mountain Chocolate Factory, Inc. trades as Rocky Mountain Chocolate Factory at 310 locations nationwide, in Canada, Guam and the United Arab Emirates.
  • The stores, which specialize in chocolate, candy and nuts, occupy spaces of 600 sq.ft. to 1,000 sq.ft. in specialty, outlet, tourist, entertainment and mixed- use centers and malls.
  • Plans call for 40 openings nationwide during the coming 18 months.
  • A vanilla shell and specific improvements are required.
  • The company is franchising. Competition is cited as Godiva. Typical leases run five years.
  • For more information, contact:
    • Kraig Carlson or Dave Richie,
    • Rocky Mountain Chocolate Factory, Inc.,
    • 265 Turner Drive, Durango, CO 81303;
    • 970-259-0554, Fax 970-259-5895;
    • Email: carlson@rmcs.net;
    • Web site: www.sweetfranchise.com.

Greetings!

Market Brief: Mild Economic Aftershocks from North Korea's Test

Managing your organization by the evidence

Plateauing: Redefining Success at Work - Part 2


  • Plateauing: Redefining Success at Work - Part 2
  • Fewer Promotions, Fewer Pensions

    Peter Cappelli, director of Wharton's Center for Human Resources, has done extensive research into the changing nature of the workplace. As he and others have noted, companies no longer promise job security, generous benefits packages or even pensions, and employees no longer feel loyal to their employers or obligated to stay for long periods of time. Employees are responsible for managing their own career track and seeking out the mentors and training they need to move on in their current company or, just as likely, in a new company.

    Cappelli agrees that organizations "don't have quite as much influence over people as they used to in terms of shaping their goals and aspirations, in part because people come to these jobs at an older age and change jobs more frequently than in the past. Does that necessarily mean people are on their own career path? It depends what you mean by that. I'm not sure it means they are eschewing corporate success. But they are looking outside their current employer's definition of success, more so than in the past."

    Cappelli cautions, however, that it's unlikely employees can go on cruise control and still hope to be retained and valued by their employers. "It used to be you could just lie low and wait for the pension. That doesn't happen much any more." And while some employees may not pay as much attention to the goals that their companies want them to pursue, they "continue to work hard because they are afraid of being laid off.... Companies systematically go through and fire people who are not pulling their weight. The ability to punish people into appropriate behavior is one of the great and unpleasant lessons of the 1980s. Employee morale sank and productivity stayed up because people were afraid of being fired," Cappelli notes, adding, however, that this dynamic changes in a tight labor market.

    Wharton management professor Sara Kaplan "could imagine a scenario where people have discovered that there is not too much point being loyal to their employers, and then go on to say, 'Okay, I have gotten where I am going to get, and I am going to focus on the other part of my life. I will keep working but won't invest all my energy in my job.'"

    But Kaplan also thinks "everyone needs something to be passionate about, so it would be hard for me to imagine that people would simply ramp down on their job without having a crisis or without having found something else" to interest them. Indeed, in today's economy, she adds, "you can't keep your job unless you are engaged, to a certain extent. Corporations don't want people who don't want to go higher. They don't want people who won't strive. You can't plateau; there are always people biting at your heels."

    Directly related to the issue of job satisfaction is the question of job design. "Management scholars have been studying this for a long time," says Wharton management professor Sigal Barsade. "Whenever a company designs a job, it must take into account how employees view that job, whether their goal is to get ahead, whether work is central to their lives, and so forth. A company can make a real error trying to redesign a job to be more enriched if the employee doesn't want that," especially if the new job definition requires them to work harder.

    What is crucial, Barsade says, "is good job fit. Is the person doing what the company needs done? If the answer is 'yes' and the person also is good at what they do but simply doesn't want to do more, then that could actually be a good situation, especially for jobs that don't include room for promotion." This is applicable in particular to customer service positions where people need to be engaged while they are providing the service, but are not expected to be thinking of ways to redesign the whole customer service system. "So the fit needs to be between what the organization needs and what the employee wants and values. If that fit isn't there, that's when you are going to have a problem."

    When should employees who have no interest in advancing or taking on higher challenges worry about losing their job? "I think as long as these employees are working diligently and competently and are willing to change -- whether that means learning a new technology or adapting to a new work process -- they should be safe," says Barsade.

    Continued Next Week!

    Source: McKinsey& Co.


  • Warning Sign For Office Market?
  • It’s tough to argue that the health of the nation’s 7 billion sq. ft. office market is anything but robust. Demand is strong and vacancy rates have fallen. Lofty construction costs have tamped down new supply and asking rents shot up at their fastest rate in six years during the third quarter.

    But a host of economic risks, ranging from weak job growth to ripple effects from a housing slowdown, could impact the office market in coming months. The shift may already be upon us: Take third-quarter job growth, which many economists viewed as mediocre -- non-farm payrolls increased by just 51,000 in September after rising by 188,000 in August. The consensus prediction among 23 economists polled by Dow Jones Newswires was that payrolls would jump by 125,000 in September.

    While recessions are notoriously difficult to predict, some troubling signs have emerged in recent months. One quirky example is the Federal Reserve’s “beige book” report from September.

    This closely watched survey, essentially a roundup of regional economic reports, used the word “weak” 50 times. The July report only featured 40 references to “weak.” What’s telling is that the January 2001 report used the word 53 times and that was two months before the last recession officially began. One real estate economist believes that the office market is slowly feeling the effects of weaker job growth.

    Leasing demand answers to job growth. So will this be a gradual slowdown or a flat-out recession? The Conference Board, a global research and business membership organization, reported on Tuesday that several economic indicators suggest slower growth --but not a recession -- on the horizon.

    Within the past three months, the Conference Board’s index of leading economic indicators has turned down relative to its level six months ago. That’s significant because it marks the first time that the index has fallen since the current economic expansion began in 2003.

    “While this signal is not particularly alarming, since the downturn is still rather modest, it does suggest that the economic cycle is more mature than is generally presumed,” says Gail Fosler, executive vice president and chief economist at the Conference Board.

    “Everybody is watching the job numbers and the housing market very carefully,” says Bob Bach, national director of market research at Oak Brook, Ill.- based Grubb & Ellis. “It’s also getting harder to deny that growth has pulled back a bit given the recent job numbers.”

    Sam Chandan, chief economist of research firm Reis, points to a more troubling sign of a slowdown: Net absorption fell from 16 million sq. ft. nationally in the second quarter to 10.7 million sq. ft. during the third quarter. That means tenants are taking on less space and demand is cooling.

    “The fourth quarter could be a real turning point for the office market,” says Chandan. “And the consensus is that 2007 will bring slower growth than 2006, which may go down as a banner year for the office market.”

    And what about a severe slowdown in the housing market? History offers some guidance: If the housing market were to reprise its last major downturn in 1991, Bach projects that roughly 716,000 payroll jobs would be lost. That total represents 42% of all net additions to non-farm payrolls by all sectors between August 2005 and August 2006.

    More than 90,000 of these jobs would be in housing-related service sectors that tend to occupy office space. The upshot is that such a severe slowdown could generate negative net absorption approaching 16 million sq. ft. over the next four quarters. But, Bach adds, that is a “worst-case scenario.”

    It’s important to note that most of the bearish economic forecasts in recent weeks have all touched upon a housing slump. Last week, for example, International Strategy & Investment economist Nancy Lazar said this in the Wall Street Journal: “I'm very worried about housing and the potential negative impact on overall economic activity...the big question for me is how will that impact consumer spending?"

    Source: The National Real Estate Investor


  • Economic Notes:
    • Global Business Confidence
    • Global business confidence held steady again in early October at the level that has prevailed since late August. The recent stability in sentiment is welcome after the sharp decline this summer. Sentiment is currently as low as it has been since the fall of 2003 and is consistent with a global economy that is growing measurably below its potential. Confidence is strongest in South America, followed by North America, Asia, and finally Europe. The recent stability in sentiment is due to a modest firming in sales, but this is being offset by weaker hiring and inventory investment. Pricing pressures remain elevated, but have abated substantially since peaking in the summer.
    • Wholesale Trade (MWTR)

    • Wholesale inventories were well above consensus expectations, coming in up 1.1% for August. Wholesale sales were also up 1.1%, and the I/S ratio remained at 1.15.
    • Treasury Budget

      The unified surplus for September was $56.0 billion, slightly larger than the CBO’s preliminary estimate of $54 billion. For the complete fiscal year 2006, which ended on September 30, the U.S. ran a unified deficit of $247.7 billion, 23% smaller than the deficit in FY2005. This was the smallest deficit since FY2002.

    • Chain Store Sales

    • Chain store sales ended a four-week slide, rising 0.5% in the week ending October 7, according to the ICSC. Year-over-year growth accelerated to 3.7%.
    • MBA Mortgage Applications Survey

    • Mortgage demand decreased 5.5% in the week ending October 6. Purchase applications decreased 5.3% and refinance applications decreased 5.8%.
    • Oil and Gas Inventories

    • Crude oil inventories rose by 2.4 million barrels for the week ending October 6, according to the Energy Information Administration, which is better than expectations. Gasoline inventories inched up 0.3 million barrels for the week, and distillates posted a 1.6 million barrel drop, slightly more than expected. This report is broadly bearish, although the drop in distillates could spook markets.
    • Natural Gas Storage

    • Underground storage of natural gas increased by 62 billion cubic feet during the week ending October 6. This was a smaller build than the market consensus of a 66 Bcf increase in inventories. With the gain, inventories are now 11.8% above the five-year average, down slightly from the 12.1% increase in the week prior. This report is likely to moderate bearish pressure on prices.
    • Manufacturers Alliance/MAPI Survey

    • The Manufacturers Alliance/MAPI composite index fell to 64 in September from a reading of 71 in June. The index points to slowing but continuing expansion of manufacturing activity in the coming quarter.
    • International Trade (FT900)

    • The nominal U.S. trade deficit in goods and services widened in August to a new record high. The U.S. trade deficit came in at $69.9 billion, $1.9 billion more than July's revised $68.0 billion, according to the Bureau of Economic Analysis. In August, both exports and imports increased, while imports increased more than exports. The goods deficit with China, however, widened $2.4 billion to $22.0 billion. Crude oil prices increased in August, which in return increased the nation's total import bill for energy- related petroleum products to $30.5 billion.
    • Job Openings and Labor Turnover Survey
    • Gross job flow data are consistent with other indicators of a slowing economy. The rate of hiring declined in August to 3.5%, from 3.7% in July but because separations declined as well, net job creation remained fairly strong. The economy created 4.7 million jobs in August while 4.3 million workers left their jobs either voluntarily or involuntarily.

    Source: Economy.com

  • BONNEVILLE RESEARCH
  • "Problem-solving" is not planning, and "Planning" is not the same as "problem- solving"

    Effective planning can not be done without addressing the problems that are critical.

    Not all problems deserve attention.

    Some just go away.


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