Three misconceptions about USA economy that need to be put to rest

My investment group has a few sages and I was surprised by these three pieces of information given by one of the wisest members and wondered how accurate they were. 

For investment decisions, the biggest problem I see is a tsunami of misinformation. You can't have a rational debate when facts are so easily supplanted by overreaching statements, broad generalizations, and misconceptions. And if you can't have a rational debate, how does anything important get done? As author William Feather once advised, "Beware of the person who can't be bothered by details." There seems to be no shortage of those people lately. 
 Here are the three misconceptions that, according to my wise sage advisor says, need to be put to rest:
Misconception 1) Most of what Americans spend their money on is made in China.
Fact: Just 2.7% of personal consumption expenditures go to Chinese-made goods and services. 88.5% of U.S. consumer spending is on American-made goods and services.
I used that statistic in an article last week, and the response from readers was overwhelming: Hogwash. People just didn't believe it.
The figure comes from a Federal Reserve report. You can read it here (link lost - apologies!)
A common rebuttal I got was, "How can it only be 2.7% when almost everything in Wal-Mart  (NYSE:  WMT   )  is made in China?" Because Wal-Mart's $260 billion in U.S. revenue isn't exactly reflective of America's $14.5 trillion economy. Wal-Mart might sell a broad range of knickknacks, many of which are made in China, but the vast majority of what Americans spend their money on is not knickknacks.
The Bureau of Labor Statistics closely tracks how an average American spends their money in an annual report called the Consumer Expenditure Survey. In 2010, the average American spent 34% of their income on housing, 13% on food, 11% on insurance and pensions, 7% on health care, and 2% on education. Those categories alone make up nearly 70% of total spending, and are comprised almost entirely of American-made goods and services (only 7% of food is imported, according to the USDA).
Even when looking at physical goods alone, Chinese imports still account for just a small fraction of U.S. spending. Just 6.4% of nondurable goods -- things like food, clothing and toys -- purchased in the U.S. are made in China; 76.2% are made in America. For durable goods -- things like cars and furniture -- 12% are made in China; 66.6% are made in America.
Another way to grasp the value of Chinese-made goods is to look at imports. The U.S. is on track to  import $340 billion worth of goods from China this year, which is 2.3% of our $14.5 trillion economy. Is that a lot? Yes. Is it most of what we spend our money on? Not by a long shot.
Part of the misconception is likely driven by the notion that America's manufacturing base has been in steep decline. The truth, surprising to many, is that real manufacturing output today  is near an all-time high. What's dropped precipitously in recent decades is manufacturing employment. Technology and automation has allowed American manufacturers to build more stuff with far fewer workers than in the past. One good example: In 1950, a U.S. Steel  (NYSE:  X   )  plant in Gary, Ind., produced 6 million tons of steel with 30,000 workers. Today, it produces 7.5 million tons with 5,000 workers. Output has gone up; employment has dropped like a rock.
Misconception 2): America owes most of its debt to China.
Fact: China owns 7.8% of U.S. government debt outstanding.
As of August, China  owned $1.14 trillion of Treasuries. Government debt stood at $14.6 trillion that month. That's 7.8%.
Who owns the rest? The largest holder of U.S. debt is the federal government itself. Various government trust funds like the Social Security trust fund own about $4.4 trillion worth of Treasury securities. The Federal Reserve owns another $1.6 trillion. Both are unique owners: Interest paid on debt held by federal trust funds is used to cover a portion of federal spending, and the vast majority of interest earned by the Federal Reserve is  remitted back to the U.S. Treasury.
The rest of our debt is owned by state and local governments ($700 billion), private domestic investors ($3.1 trillion), and other non-Chinese foreign investors ($3.5 trillion).
Does China own a lot of our debt? Yes, but it's a qualified yes. Of all Treasury debt held by foreigners, China is indeed the largest owner ($1.14 trillion), followed by Japan ($937 billion) and the U.K. ($397 billion).
Right there, you can see that Japan and the U.K. combined own more U.S. debt than China. Now, how many times have you heard someone say that we borrow an inordinate amount of money from Japan and the U.K.? I never have. But how often do you hear some version of the "China is our banker" line? Too often, I'd say.
Misconception 3): America gets most of their oil from the Middle East.
Fact: Just 9.2% of oil consumed in the U.S. comes from the Middle East.
According the U.S. Energy Information Administration, the U.S. consumes 19.2 million barrels of petroleum products per day. Of that amount, a net 49%  is produced domestically. The rest is imported.
Where is it imported from? Only a small fraction comes from the Middle East, and that fraction has been declining in recent years. So far this year, imports from the Persian Gulf region -- which includes Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates --  have made up 9.2% of total petroleum supplied to the U.S. In 2001, that number was 14.1%.
The U.S. imports more than twice as much petroleum from Canada and Mexico than it does from the Middle East. Add in the share produced domestically, and the majority of petroleum consumed in the U.S. comes from North America.
This isn't to belittle our energy situation. The nation still relies on imports for about half of its oil. That's bad. But should the Middle East get the attention it does when we talk about oil reliance? In terms of security and geopolitical stability, perhaps. In terms of volume, probably not.

How to Pitch and Get Investment

Having a business innovation is easy: pitching to investors for funding is much harder.

Entrepreneurs, business owners, sales people and corporate innovators often do remarkable presentations to pitch their concept—only to be rejected by corporate decision makers or private equity managers who do not grasp the long term value. Why does this happen?

Having watched private equity managers who access business pitches, the person on the receiving end—the “catcher”—tends to gauge the pitcher’s competence at carrying through, as well as the deal. An impression of the pitcher’s ability to open up and discuss the business in detail will quickly overshadow the catcher’s assessment of the value of the deal. In other words, if the pitcher can work with others, the deal moves forward. If there is any hint of resistance to team input, the deal is dead.

Having interviewed many private equity managers, there are patterns for those judging business opportunities.

Catchers subconsciously categorize successful pitches as show runners (smooth and professional), experts (quirky and unpolished) and neophytes (inexperienced and naive).

Research also reveals that investors tend to respond well when they believe they are participating in developing the business going forward. As Jacoline Loewen, a private equity expert, recommends, “ CEOs pitching their business should pull back and encourage comments on the business. Then use these comments to build on the Private Equity manager’s comments to make them feel they are adding to the future plans.”

To be successful pitching, whether marketing ideas, sales innovations, a start-up or a mature business, portray yourself as one of the three creative types – show runner, expert or neophyte. Then engage the catcher in a discussion where their views are discussed and integrated into the plan going forward.

By giving catchers a chance to shine, you sell yourself as a likeable collaborator.

You can Google back programs of The Pitch on BNN and watch how the private equity investors either warm to the pitcher or shut them down. See if you can categorize the pitchers who do achieve the thumbs up from the private equity panel. You will see they fall into one of the three categories and that they embrace comments enthusiastically and open up to ideas.

Jacoline Loewen on the three steps to create value

As financial advisors, our focus is on companies in the lower middle market. This typically means companies with annual revenue between $15 million and $75 million. Since the smaller revenues, mean less room to do financial engineering, our strategy for value creation is different.

We, by contrast, base our value-creation strategy on three elements:

1.      leadership development,

2.      enterprise improvement and

3.      growth. 

From our experience, we know that if we accomplish the first two, growth usually results. Even if it doesn’t, such as during the recent recession, significant value can still be created.

Good leaders make good companies. It is not required that our leaders have a long track record of success. We can support them in accomplishing that. What is required is that the leaders possess the personality traits and capabilities that are required to realize the vision of the company. The leadership for the Post Office is different from Apple. For a less extreme example, if the success of a company hinges on continually developing creative, new products, then the leader of that company must possess a personality and leadership style that fosters ideation and creativity. By contrast, such a leader likely would not be effective if they needed to streamline manufacturing processes. Good “fit” of leadership is paramount.

Be sure you have the right team in place. Do a critical and honest analysis of your senior leadership relative to the company’s needs, and adjust accordingly.

If you are the owner and at the center of most activities, this may mean firing yourself.

YIKES!

Owners who realize they are the biggest block to growth and have the ego to hire a CEO will be far more likely to find greater wealth within the next five years.

One of the elements we look for in an investment is the ability to evolve the enterprise. If accomplished, this also will create value without the need for growth. However, when coupled with growth, the value creation is multiplied. Enterprise evolution, typically, is accomplished by harvesting one or more of the following:

Strategic planning. For us, the strategic plan is the cornerstone of enterprise improvement. It is not a just a budget. It sets the management team’s vision.

Sales and marketing. This is an area that often can be improved. In our experience, a majority of lower middle-market companies have not invested sufficiently in this area.

Systems. Often there is an opportunity to evolve an enterprise by improving or replacing systems, including accounting, ERP, oversight, reporting and accountability.

Asset utilization and balance sheet. In lower middle-market companies, there almost always is the ability to improve and create value through better asset utilization and balance sheet focus. This may include using a return on investment framework for capital budgeting, as well as basic items such as improving accounts receivable, accounts payable and inventory turns through focus and technology.

If you are able to accomplish some or all of the leadership development and enterprise improvement initiatives described in this article, you will create value irrespective of business cycles. Even better, you are likely to also create growth.

Jacoline Loewen is a Director of Loewen & Partners Inc., an Exempt Market Dealer, specializing in finance for owner operators and family businesses, specifically acquisitions, restructurings, sales, successions, strategy and private equity financing.

Jacoline began her career with Granduc Mines, Northern BC, and then Deloitte in their strategy unit. She developed a strategic planning model and published it in a book called "The Power of Strategy”. She also wrote "Business e-Volution" and “Money Magnet: How to Attract Investors to Your Business” (Wiley), which has been used by Ivey as a text book.

She is a Director on the Board of the Exempt Market Dealers Association (EMDA) responsible for brand and communications. She is on the advisory board of DCL International, Bilingo China and Flint Business Acceleration. She has been a Director for other Boards such as the Strategic Leadership Forum.

She is a regular panellist on BNN: The Pitch, a contributor to the Globe & Mail and National Post, serves as a judge for the UBC and the Richard Ivey School of Business’ Business Plan Competitions and is a guest lecturer at Ivey and Rotman Universities. Jacoline holds an arts degree in Industrial Relations from McGill University and a MBA from the University of the Witwatersrand.  Her MBA thesis was selected by Cambridge University and published by Cambridge’s Engineering faculty. 

Joe Oliver speaks up for the environment

There is no hope of reasoning with so called environmental groups protesting the pipeline from Alberta to Kitimat.  Joe Oliver is exposing these groups and their malevolent corruption as reported in the Financial Post.
I worked in northern BC for ESSO and Granduc Mines and was grateful that the generous salary that paid for my university and my trips to Acapulco at spring break. These mining companies built good homes, rec centers, schools and  a hospital; they even funded a museum. (My town looked just like Deadwood's set, minus the Gem Salon, but with a more sedate hotel.)
The nature in Northern BC is immense, stretching forever with few humans living there. The mine road, town and mine itself took up little space and now, if you look at Google Earth for Stewart, you will see nature has taken back much of this development. That reversal back to overgrown forest took my lifetime.
So it was crazy to me when people in Toronto would tell me they were against ESSO and Granduc as they were exploiting the land and the people. I could not understand why they would belittle my father's living, mining for the very minerals in their phones and computers. Their words about pollution and strip mining just did not match my reality where I did not see that story line beloved by Greens.
Maybe they were watching too much TV, I do not know.
I do know that at a speech by Enbridge's CEO, a smart man stood up and voiced concern about the wilderness of BC. He had been fishing there and was concerned an oil spill would affect the people's only livelihood. I shook my head because just a few decades ago, the area had employment opportunities for aboriginal people in Granduc. Then the BC government listened to the environmental movements and shut down any mining development, leaving many men of my father's generation to rot away late in their careers.
We need to speak up for politicians like Joe Oliver who have the guts to point out these activists, their sourcing of money (US), the hypocrisy of these Hollywood stars like Cameron who has massive homes and uses energy like a gushing water pipe to make his movies and let us not even add in the energy used by audiences to watch these films. If Darryl Hannah does not like development, go live in Zambia or Zimbabwe. 
In the Financial Post article, there were many comments that agreed with Joe |Oliver and I liked this one:

You can not convince these environmentalist, city dwellers that the Gateway Pipeline is a benefit to Canadians. They are not interested in where we sell our oil, if we create jobs or grow the economy. They do not care if we become a less competitive country with a lower standard of living. They do not care about the significant advances in technology that monitors and prevents spills and other problems with pipeline transportation, the safest mode of oil delivery today. But they fear environmental damage from a pipeline based on partial or unsubstantiated information they have been fed by various sources. 

How do you reason with people who won't listen or learn?

Jacoline Loewen on the defense of Private Equity

At a recent advisory board meeting, one of the Directors made the comment about how the company owner did not want private equity as it would strip the business assets and destroy the employees. I was shocked at this short sighted view, particularly as this very same Director was doing a JV with a German company with a 50% partnership and was familiar with the benefits of working with financial partners.
How did Private Equity get to this position? What happened?

In 1980, approximately $4 billion was invested in private equity in the USA. Today, that number is estimated to be over $600 billion. Canada has followed a similar, but smaller, trajectory.

Many of our great companies and iconic brands were founded with private equity investment and partnering including: RIM, Opentext, IMAX, Skidoo, Four Seasons, Mastermind, Flickr, Apple, Sleep Country, Harveys, Rogers, Cirque duSoleil and Lululemon. Many private equity individuals and firms have generated very large and highly publicized returns on their investments. They have made it the Billionaire's Lists.

The visible, monetary success of private equity was met with some general concern, skepticism and, perhaps, envy from the business community and seeded the pervasive negativity of today. These attitudes were then heightened by the sometimes-questionable and widely publicized practices of mostly American well-known private equity professionals like Michael Milken of Drexel Burnham Lambert, who drove tremendous merger and acquisition activity with junk bonds, T. Boone Pickens generating fortunes with greenmail, and Carl Icahn’s ruthless corporate slashing. 

In Canada, Vengrowth’s Labour Fund rise and fall was not helped by the perception that management had taken a huge fee for themselves, and lived the high life in mansions, while not giving the promised returns. I heard a top journalist lumping all of labour funds and private equity with Vengrowth. 

It is very unfortunate that the journalist put the term “private equity” into a negative business view which flows through to the public’s dialogue. It is hardly surprising then that the bad apples of PE spoil the reputation for private equity that has done very well. Bermingham Construction, Hamilton, was only able to get private equity, not bank finance, and then able to grow to a significant size. This growth would have not happened with bank debt.. 

The public’s concern about private equity was cemented during what Carlyle’s founder, David Rubenstein, called the golden age of private equity, from 2003 to 2007. These years saw unprecedented levels of investment activity, investor commitments, debt deployment and the formation and growth of thousands of private firms and companies that support their investing. During that period, 13 of the 15 largest buyouts in history occurred, and three of the largest private equity firms went public, creating tremendous wealth for their general partners. 

During the golden age, many owners of small- and middle-market companies, and much of the public, started considering private equity investors to be greedy abusers of debt, willing to do whatever is necessary to generate a quick return, even to a company’s detriment. Unfortunately, that perception was not unfounded. Fortunately, there are many great private equity firms that do not operate that way.

Private equity is like many industries (and political parties) where a highly visible portion sets the public’s perception of the whole. There are, in fact, many private equity firms that don’t fit the stereotype, and they can be great partners to business owners and management teams.

Reputable private equity firms focus on creating returns though growth and improvement of the companies they invest in. They develop transaction structures that align their needs with those of the selling parties, as well as the company and its employees. They use appropriate leverage. They develop well thought out incentive plans for company leadership and employees. They support management in developing and executing a strategic plan that will satisfy stakeholder expectations and realize the company’s full potential. They bring resources to bear that the ownership and management wouldn’t otherwise have access to. Finally, they are valuable sounding boards and guides. 

They add value.

Don’t assume all private equity firms — or corporate finance advisers for that matter — are the same. If you are considering a transaction, talk to an exempt market dealer, like Loewen and Partners to point you towards those private equity partners with the track record and who make great partners. They definitely exist.