Monthly Archives: August 2010

The Apple Reinvestment Plan

By Lloyd Graff

The Honey Crisp apple season will begin with the Labor Day weekend. Honey Crisp is the apple that has overwhelmed the Golden Delicious, Macintosh, Pippin and Gala varieties in the hearts and palate of the applistas who frequent farmers’ markets in search of the perfect pomme.

Count me as an apple knocker with credentials.

I have traveled to the orchards of Wenatchee, Washington; Logan, Utah; Laporte, Indiana; and Honeoye Falls, New York, searching for apple succulence, but in the mountains of North Carolina I found my best Apple anecdote if not the tastiest fruit.

I stopped at a roadside stand near Asheville where a young woman was selling Winesaps—not my favorite variety but a presentable late season species. I always like to talk to apple sellers for tidbits about their growing approaches. The Winesap lady told me her story gladly. She said her husband was a minister and they knew they never would make a lot of money. When their children were born they planted apple trees under their homestead. They tended to trees with great care, and after five years began to get apples.

Their plan was to let God’s bounty pay for their children’s college education. She said they took a portion of the proceeds of each year’s crop to buy more trees, and the Apple reinvestment plan was working just as she had hoped.

I hope they planted Honey Crisps before they caught fire in the market. If they did they probably could afford Harvard.

Question: What is your favorite variety of Apple?

Stayman Winesap Apple

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After Two Years, Every Day is Gravy

By Lloyd Graff

August 29, is the second anniversary of the day I almost died. I hesitate to revisit it in this blog because I’ve already written about it extensively in the magazine. But I am of the philosophy that you should never let a good crisis (or the memory of one) go to waste, so I’m going to bring it up once more.

IMTS 2008 was coming up, but I was feeling so crappy I didn’t care. I had spent two weeks pretending to vacation with my family in Michigan. I drove home with my daughter Sarah and remember feeling so depressed I barely spoke during the hour and a half drive. A week later, my wife Risa and I sullenly drove 55 miles to St. Francis Hospital in Evanston, Illinois. I walked to the doctors office of my friend, Dr. Chris Costas, and waited while he attended to a child with a cold. How stupidly polite I was. When Chris came out and saw me waiting, he put a stethoscope to my chest and immediately announced that I was in congestive heart failure. He then wheeled me to the emergency room himself. I remember very little except being super scared as they cut my clothes off. Risa told me that the doctors were pessimistic about my survival after looking at my arteries. A cardiologist from Pakistan named Mohammed Akbar was available in the hospital, and he volunteered to try to place a stent in my blocked LAD coronary artery. He succeeded, which bought time to do a quadruple bypass surgery after my body could strengthen for three days.

I remember virtually nothing from those three terrible days, but for Risa they were probably the most moving of her life, and I have relived them vicariously through her stories. My children dropped everything and rushed to her side. Friends and family flew and drove in from everywhere. Camp was set up in the waiting room with air mattresses. It was Friday night, so the Jewish Sabbath blessings were said in the Catholic hospital waiting room over candles and brought in pizza. Everybody held on to one another, praying for good news. Several doctor friends arrived to ask questions and translate medical language to the rest of the group. The ICU nurses at first regarded the amassing family members with reservation, but then embraced them. For three days, I had a breathing tube along with a million monitors and tethers, so I tried to sleep as I hoped for a successful surgery after the Labor Day holiday.

16 days later, I left the hospital with Risa and we drove home. Not a day has gone by when I didn’t think about those tumultuous days. After two years, for me every day is gravy.

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Stocks on Steroids

By Lloyd Graff

The lead story in the Sunday New York Times discussed the “striking” drop in the investment in common stocks. The article went on to talk about the widespread disillusionment with equities since the dot-com crash and the subprime demolition. The Dow Jones average is actually down over 1000 points since 2001.

Personally, I think the widespread disgust with the stock market performance by individual investors derives from the “gaming” of the market by professional computer jockeys for whom long-term investing is holding a stock or an index for a week. The Quants, for whom the stock market is a video game, use huge leverage and a lightning fast computer thumb to play for pennies on a $50 stock.

I was thinking about this as I watched both the Little League World Series and Major League baseball games this past weekend. The kids are allowed to use metal and graphite bats but in Pro ball only wood bats are used, because it would be unsafe for the big boys to use metal sticks at the plate. Pitchers would literally get killed by batted balls.

We have speed limits on our highways and hold the maximum speed of showroom cars well below what is possible. But for trading stocks we have allowed the “gamers” to turn the markets for the most important business enterprises in the world into a casino block. This is nuts.

Major League baseball finally shut down the steroid tap, but stock trading is so out of control it is poisoning the public markets. Just because a Ford can theoretically go 200 mph on the interstate does not mean it should be legal.

Until the equities market or government regulators hold back the velocity of trading, long-term investors will take their marbles and go home.

Question: Should there be “speed limits” for professional traders?

Early Quant

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The Eclectic Style of Jeff Begg

By Lloyd Graff

Jeff Begg

When you enter a machining firm which cuts millions of pounds of brass bar each year, you expect to find a line of New Britain screw machines or Davenports – bunches of almost identical automatics methodically turning out fittings.
But at Marshall-Excelsior Corporation in Marshall, Michigan, the machinery assortment reflects the eclectic taste of its owner, Jeff Begg. A little bit of this, a little bit of that. Warner-Swaseys, New Britains, Davenports, Wickmans, National Acmes; 5-spindle; 6-spindle; 8-spindle; a menagerie of screw machines bite at the brass rod, turning out Jeff’s variegated mixture of niche market non-ferrous fittings.

Begg’s mixture of screw machines cannot be easily type-cast. If it’s a good buy and it cuts brass with efficiency, he’s usually interested. Jeff Begg has built a thriving independent fittings business in southern Michigan amidst the wreckage of automotive-land by following his instincts and his own intense personal scrutiny of the fittings marketplace. Marshall Excelsior reflects the particular style and taste of Jeff Begg, who says, “I guess people say I’m eccentric,” not just because of his collection of screw machines, but because he defies the notion of the blueprint-bound engineer, even though he is an engineer by training.

Read full article here

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Frisbee Manufacturing Returns

By Lloyd Graff

Thanks to reader Roger Meyers for sending me an informative article from Forward ONLINE about manufacturing coming back to the United States.

One of the companies prominently mentioned in the piece is Wham-O Corporation, maker of Frisbees and Hula Hoops. Wham-O’s products are not exotic, but they take up a lot of container space per dollar value. With container costs from China up to $4500 from as low as $3000 at the bottom of the recession, Wham-O has rejected offshoring. Their products are not labor-intensive to produce, primarily using injection molding presses. They are cheap, light and bulky. A container of Frisbees may hold only $5000 worth of product, so a 50 percent increase in container costs is a substantial piece of the overall cost, according to Kyle Aguilar, President of Wham-O.

We heard a similar story from Mitch Liss of Edsal Manufacturing of Chicago, a prominent maker of metal shelving for Home Depot, Lowe’s, and Grainger. Shelving is bulky and awkward with low labor costs versus material and freight. Liss says his cost for products sold to the big box retailers is significantly lower in America than importing them from his Chinese plant.

When you figure the cost of inventory on the boat, corruption, intellectual property theft, bad carbon footprint publicity, quality glitches and port headaches, you can see why manufacturing products in North America is beginning to come back like a Frisbee in the wind.

Question: If the Chinese can’t be competitive on Frisbees have they peaked as an exporter?

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Swarf: The Business Warrior

By Lloyd Graff

Today’s Machining World Archives August 2010 Volume 06 Issue 06

Tony Maglica, the owner, founder and embodiment of Maglite®, burns with the same intensity at 80 as he did when I met him at 40.I saw the flashlight king recently at his million square foot plant in Ontario, Cal. I could tell from the moment he greeted me at the reception center and we walked up the 20 stairs to his large but surprisingly austere office, that the factory was Toni’s home.

He immediately showed me a slide show on his Samsung 42” computer screen of his other home—the one he doesn’t live in… yet—his villa on his home island of Zlarin in the Adriatic off Croatia. He grew up poor as dirt there, endured the Nazi occupation and the life altering experience of staring at a German machine gun in the town square as the officer in charge threatened to kill everybody in sight in retaliation for the ambush of a Third Reich soldier.

Tony Maglica, a fabulously successful American entrepreneur, dreams of going back to Zlarin as the patron of the island, developing his property, and bringing back his extended family for visits. He wants to plant olive trees and shake the fruit off them with the most modern Italian harvesting machines. He considered buying 75 cement mixers in Florida recently, but decided it was more practical to make a deal with a cement form in Split, Croatia. He’s sunk $5 million into his land and buildings so far, freed his European architects, and hired an American one, but just can’t find the time to get to the island this summer. He’s too involved with a new flashlight rollout and the recent purchase of the German Eubama company out of bankruptcy.

I think the island villa is Toni’s dream of going home triumphant, but his real enduring and consuming passion is still building his business in America. Tony Maglica at 80 is totally committed to making a brilliant and beautifully designed flashlight out of the best materials in America, the country that afforded him the opportunity to shine. He comes to the Mag plant at 6:00 a.m. every morning, stays ‘til 7:00 p.m., and never lets his business fame flicker. The Eubama purchase intrigues him because he gets the chance to refine a machine tool he respects by making the components in the U.S. He’ll make them more efficiently and better by applying his intellect and zeal to the process. Tony says he’ll be making money with Eubama by the end of the year. He’s shopping for a big gantry mill to machine the castings he’s having made here. Eubama is real and practical, and a potential moneymaker. Tony is into it.

Toni’s obsession is making things at his California plant more efficiently and less expensively than in China. He says he’s “a bad businessman” because he doesn’t take the easy way out and buy product from Asia. That would just not be him. His life’s work and daily passion is to continually improve his processes and products so he can successfully make them in California. Mag has a sophisticated new flashlight aimed at the camping and boating market. It is powered by three Triple a batteries housed in an elegantly designed plastic receptacle. Tony says he has a ridiculously inexpensive proposal to make the housing in China, but he won’t do it. He’ll invest heavily in injection molding and assembly equipment, and clean rooms. He’ll do almost anything to make it here.

Tony Maglica is a business warrior and truly loves his America. He hates a government that he believes stupidly makes doing business much harder than it should be. He’s politically incorrect, but doesn’t care because he’s absolutely sure he’s right. Tony is a business anachronism and delights in it. He wants to run his business forever, the way he wants to run it, but his practical side tells him he needs a successor. He asked me if I knew of a manager who he could train to succeed him. I told him I would think about it, but where do you find another brilliant, America-centric, machining entrepreneur like Tony, who would have a small enough ego to learn the job and a big enough ego to stand up to the magnificent Mr. Maglica?

I received an email announcement entitled “AMT and NAM Announce Historic Partnership.” I didn’t know whether to laugh or yawn because of my gut cynicism about Washington based organizations. But then I thought about the financial regulation bill—the current obsession of D.C. politicians. Apparently the massive compromise bill’s regulations are being written by a collaboration of Washington lobbyists and staffers.

Most of the lobbyists are former staffers, and many of the staffers are former lobbyists, so you need a scorecard to know the players.

American manufacturing certainly needs an all-star team to advocate and trade for the interests of metal cutters and benders around the country.

The disconnect between the alphabet lobbying groups on K Street in D.C. and the contract shops of Dayton and Duluth has become a gulf. But behind my cynicism I’m hoping that our Washington advocates actually know the difference between carbide and high-speed steel, and can cut through the red tape and blather in the Capitol. That would be historic.

The post 4th of July period is a good time to celebrate the value of passionate and precise political advocacy. The Declaration of Independence was written by Thomas Jefferson, but his pure prose was edited and rewritten before it made the final scroll.

The reporters and public relations flacks will Red Bull it through windy John Engler’s National Association of Manufacturers (NAM) speech at the International Manufacturing Technology Show (IMTS), but Bonnie Gurney of the Association for Manufacturing Technology (AMT) says they will stream IMTS interviews on the Web with real constituents to members of Congress, which may actually penetrate the Capitol Hill haze.

Tesla Motors went public at the end of June. The company’s all electric roadster has not been a resounding success financially or mechanically, but has been a publicity magnet. Elon Musk, one of the company’s founders, has an amazing track record as an entrepreneur. He has Toyota money behind him now and the modern Nummi factory in the Bay Area to make the new versions of Tesla cars. Tesla chose not to participate in the X-Prize competition to produce a production-capable 100-mile-per-gallon car, but the company could still be a big big winner over the next 10 years.

Prices for nice CNC machinery at auction show some firmness in the market. On June 29, James Murphy Auctioneers sold a Mori Seiki 2007 NV5000/A1B40, 20” x 40” table for $135,000. The machine had a Lyndex Nikken 5th axis trunnion. A 2005 NV5000/A1A40 Mori 23” x 30” table brought $102,000. The sale at New Concepts in Redmond, Washington, also had a 2005 Mori DuraCenter, which sold for $67,000 and a 2006 Doosan 3016, which fetched $25,000. A 2006 Zeiss CMM Contoura G2 fetched $61,000.

On the same day, Thompson Auction Co. sold Sherman Tool near Dayton. Two Hurco VMX 30 machines, new in 2004, sold for $40,000 each, while a little Okuma ES-6 new in 2007 brought $35,000, and a 1998 Okuma Cadet with a 16” chuck brought $45,000.

In late June at a Winternitz sale near Duluth, Minnesota, a 2008 240-C Doosan 3-axis lathe sold for $49,000.

I would describe these prices as reasonably strong, particularly for the Hurcos. On the other hand, a couple sales in Michigan, MetaVision in Traverse City and a Hilco/Maynards auction in Detroit, were softer for machines that ran mostly automotive related stuff. Dealers bought the bulk of the equipment, and at Metavision a lot of older cam equipment went straight to the scrap yards.

Statistics from the Precision Machined Products Association (PMPA) indicate that business among its member companies has made a full V–shaped recovery over the last 18 months. After business dropped by a third during the worst of the recession in the spring of 2009, it regained the base level of sales in May of 2010. The ascent of automotive business to the still not so lofty level of 11.5 million units and the rebuilding of paltry inventories everywhere have fueled the resurgence. Weak home sales, tepid employment growth and an undulating stock market have eroded confidence, but as the BP mess slips from the news and the stats show the world isn’t coming to an end confidence will come back.

It’s August, the corn is high, and everybody in Machine-toolville is getting stressed out because IMTS is getting close.

If you are showing in Chicago the tension is building. Are you spending too much? Will enough people show to justify the Benjamins?

On the fop side, IMTS holds the promise of giving business a big bump for the end of 2010 going into 2011. It will connect you with the foot soldiers that can make a difference for your product. It can give you leads to drink from for a long winter. It will provide precious emails and cell phone numbers to bang away at.

IMTS is still important for showing off new machines and strutting your stuff. It establishes a pecking order in the key areas of metalworking. It’s part of playing in the Big Leagues, but still, I always agonize about whether IMTS is worth the sacrifice of tripping through the maze of McCormick Place. I have lived with this schizoid view of America’s machining festival for many years. When the holiday lasted 10 days it was an excruciating, foot killing, back cracking opportunity to press the flesh of the oil stained cognoscenti of Machinedom.

When there used to be tigers, contortionists and sexy German and Japanese models in the exhibits, IMTS was live theater. In 2010, the froth will be gone. It will be all “bidness” compressed into six days of hard selling.

God willing, I’ll be there, peddling and schmoozing and wearing a tie. Oh, what fun—I hope.

On June 8, Meg Whitman, former eBay CEO, won the Republican primary for governor in resounding fashion. The same day Rod Blagojevich, former governor of Illinois, watched while his lawyers grilled potential jurors for his corruption trial.

Blago’s father ran a numbers game in Chicago. Young Rod grew up in a world of payoffs and married the daughter of a rough local Democratic politician on his way up the political ladder.

Whitman used $71 million of her own dot-com fortune to pave her primary campaign, while Rod Blagojevich shook down the paving contractors to get his political seed money.

Is Whitman more pure than the driven snow because she was recruited by venture capitalists to run the fledgling eBay after the company’s founder realized he didn’t want to run the business?

Do we prefer the Rockefellers, Heinzes and Whitmans, or maybe celebrities like Arnold and Ronald Reagan to run our country because the earthy Rod Blagojeviches are too untrustworthy? Do we want only the elite who go to Harvard and Yale Law on the Supreme Court, which we now will have when Elena Kagan is confirmed?

Maybe we want a House of Lords because the raunchy Rods and the slick Willies get too dirtied up climbing to the top.

When I wrote the blog about Meg Whitman using her eBay wealth to win the Governorship of California while Rod Blagojevich defended his mastery of payoff culture in a Chicago courtroom, I was unconsciously touching a bigger theme—the rise of women in American life.

Hanna Rosin’s cover story in the July/August Atlantic—“The End of Men: How American Women are Taking Control of Everything”—tells the story of the decline of men in 2010. Economically, this trend is related to the decline of manufacturing and construction. Current unemployment is heavily weighted toward males but the long range trends are even stronger than recession related layoffs.

Testosterone, physical strength and a gambling spirit, the traits that tamed the Old West, are not as highly valued in today’s world. Women are earning 60 percent of the college degrees now. Statistically men struggle more in school, and school is the gateway to advancement.

I think that the shift towards female dominance is less apparent in the machining world we inhabit, but I find women taking more of the purchasing agent roles. Men may still be making most of the stuff, but women are often signing the checks.

When Pierre Omidyar, founder of eBay, realized his business was getting too complicated for him to manage, his venture capital investors found Meg Whitman in Boston biding time as a consultant and brought her to San Jose to grow the business by harnessing the entrepreneurial fervor of mom and pop companies everywhere.

Meanwhile, Rod Blagojevich, who still can’t use a computer, was wheeling and dealing in the backrooms of Chicago politics. His first big move was marrying a powerbroker’s daughter. He then joined the law form of Eddie Vrdolyak, a famous fixer and Chicago dealmaker. He used his smile and big hair to charm the voters all the way to the top of the State. Very competitive, very male, very Chicago, very corrupt, our Rod.

Meg goes to Sacramento if she beats the old liberal poll Jerry Brown, former governor of California from 1975-1983. Rod goes to prison if the wiretaps stick.

It’s getting tough to be a good ole boy.

I love the “Second Act” column which appears on Tuesdays in the Wall Street Journal. It recounts the stories of people who forsake their original career for one that promises more excitement, opportunity, fun or satisfaction than the career path they originally pursued.

On June 8, Journal writer Dennis Nishi told John Putnam’s story. Putnam was a successful bankruptcy lawyer in Boston with a form representing failed airlines and steel mills. While taking a deposition he had an epiphany. “Everyone there was very senior and making serious bucks. That’s when I looked around and [realized] I didn’t want to spend the best part of my life getting to where they are,” the Journal quoted him.

The rest of the story is about Putnam buying a farm in Vermont, taking a job with a Vermont law firm while developing the farm, and then chucking the law to make specialty cheese for a living.

He studied cheese making for four years and bought a custom made copper cheese vat to give his Alpine cheeses a unique favor. A French college student taught him some tricks of the trade in a work-study exchange while he wrote his graduate thesis.

Putnam started making cheese in 2002 and his business was profitable in 2003. Today his Thistle Hill Farm sells eight tons of cheese a year and is making decent if not great money. Doing Today’s Machining World is the second act for this used screw machine dealer.

I would like to hear from you about second acts you are now involved in, would like to be involved in, or have tried and given up

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Are we in a period of deflation in America?

By Lloyd Graff

PIMCO co-chief Mohamed El-Erian

Are we in a period of deflation in America? Will prices for goods and services, real estate and machinery trend downward for the foreseeable future? Will wages also move down? Will the value of cash be greater and illiquid assets like homes and machinery get harder and harder to sell?

This is a question of enormous importance to not only economists and statisticians, but to everyone who doesn’t live in a cave.

The bond market is alerting us to the possibility of deflation, with the 2-year U.S. Treasury paying a .5 percent return and the 10-year yielding 2.9 percent. And this is in a period of trillion dollar federal deficits with foreigners supposedly skittish about U.S. debt.

If people are scared about repayment of principal or debasement of the currency, they will not accept three percent for 10 years.

The “sky is falling” inflation vigilantes who play the bond market were near apoplexy a few months ago about the pandemic of government deficits. Now many of the Henny Pennys, like Mohamed El-Erian of Pimco, are warning of deflation ala Japan in the 1990s.

I don’t think anybody really knows if we are entering a prolonged period of deflation, but I think that developing a contingency plan for deflation is wise. And the first commandment would be “Thou shall not own real estate.”

The worst thing to own during deflation is land and buildings. Better to rent with short-term leases and options to renew in case prices start to go way up. Small business people have traditionally built wealth by owning their buildings and renting to themselves, but this is absolutely wrong during deflation. Tokyo real estate has been a terrible investment for the last 20 years.

Leasing machinery and cars would be the way to go if prices slide. If a new Haas VF2 machining center dropped $10,000 in price over three years, the used value would depreciate accordingly.

An additional kicker is the likely appreciation of the U.S. dollar against foreign currency, which we have seen happen with the yen. This would make imports cheaper.

Deflation would bring wage deterioration and givebacks. We are already seeing a lot of this. We may be asking the counter intuitive question, “Is my pay decrease in line with deflation?”

For the investor, big multi-national companies with well protected dividends would be the ticket. A company like Altria that pays 6 percent by selling to tobacco addicts might be a good bet, if you can stomach owning the stock.

If one figures in the recent drop in home prices, we are in a deflationary period now. It’s a depressing prospect, but if you adapt to it, perhaps you can make it work for you.

Question: Do you think we will be in inflation or deflation for the next three years? How will you adjust?

Bananas for sale at discount grocer Save-A-Lot in St. Louis (Wall Street Journal)

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What’s Religion Got to Do With It?

By Lloyd Graff

Chelsea Clinton married Marc Mezvinsky Saturday night. Why should I care?

I care because Chelsea is American royalty. She just married a Jew, and not a plain clothes Jew or a hidden heritage Jew like John Kerry, but a practicing one. For better or worse, I grew up seeing everything through a Semitic lens.

Bernie Madoff was a colossal thief, but worst of all, he was a Jewish thief. I cared that Scott Feldman won 17 games for the Texas Rangers last season because he was Jewish. I voted for Al Gore in 2004 because Jewish Joe Lieberman was the vice presidential candidate.

For my generation of post World War II Jews, life is about proving Hitler did not win in his effort to exterminate us. The phenomenal success of Jews in America during the last 50 years in business, politics, science, the arts, academia etc. and the amazing ascendance of Israel despite being surrounded by militant enemies affords me great pride.

When Elena Kagan is confirmed for the Supreme Court she will be the third Jew on the Court. To most of America, she’s another New York liberal woman, if they care at all, but to me she is an MOT—a Member Of the Tribe, which makes her important. I keep score and I always will.

My acute sense of Jewish success in the U.S. scares me. I wonder when the next wave of jealousy and resentment will pop up like a mushroom. Personally, I am ashamed of my Jewish brethren at Goldman Sachs, whose cynicism and greed helped bring on the economic collapse of 2008. I am surprised that the resentment against Wall Street has not morphed into overt anti-Semitism and that the Tea Party movement has stayed away from “blaming the Jews,” which was common during the Great Depression.

When I heard the title of the new Steve Carell movie was “Dinner for Schmucks” I feared it was Hollywood turning on the Jews, but now I think I’m just ultra sensitive about the topic.

I have taken a chance to write about my Judaism and my Jewishness in this blog. It may be risky for business reasons, but to my surprise I have felt very little pushback for it.

This country has changed in my lifetime—for the better. Chelsea Clinton was married under a chuppah, the canopy traditionally used in Jewish weddings, by a rabbi and a reverend, and the traditional Jewish Seven Blessings were read. It wasn’t that big a deal in the press. The father of the groom was a congressman. He has been in jail and married a congresswoman. But who keeps score anymore?

Question: Do you pay attention to the religions of famous people?

Chelsea Clinton with Husband Marc Mezvinsky

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