Wednesday, October 17, 2012

Citi Gets A New CEO

Readers who are familiar with my sentiments involving Citigroup's just-resigned CEO Vikram Pandit will not be surprised to learn that I feel it was long overdue. But I do not wish to engage simply in negative bashing of the departed Citi CEO. I do not recall which cable television channel I was viewing when news of Pandit's resignation appeared on the screen in the form of horizontally-scrolling text. So I know I was watching neither Bloomberg nor CNBC. However I quickly switched to one of those two business-oriented channels. For which I was rewarded with some very sensible commentary in the person of Wilbur Ross and a few other pundits.

Ross expressed approval that Pandit's exit will likely result in the simplification of the financial utility's business mix. Between the remarks by Ross and other guest commentators. I learned that Citi had failed a recent bank examination by the Fed. It was also the shared opinion of the pundits that Pandit's strategy (such as it was) which never seemed to depart from that of his predecessor, Chuck Prince. Was at odds with the views of Citi's chairman, Michael O'Neill. who is said to favor higher margin businesses than those to which Pandit had continued to allocate capital.

Wilbur Ross expressed a sentiment which  I heard my old boss and mentor Gerald Weiss (one-time chief planning officer of Chase Manhattan Bank NA) express often concerning Chase. Ross bemoaned Citigroup's complexity rather than simply its size per se. Weiss a former senior planning executive at General Electric went further, observing that successfully managing the unusually broad mix of businesses then in Chase's business portfolio would be a difficult challenge even for senior executives from GE or other industrial firms with senior executive ranks possessing experience bases of much greater diversity than that found at Chase or other typical money center banks of the period (the late 1980s).

Is it thus so surprising that Citi's shareholder value declined so precipitously on Pandit's watch? The ballpark figure of a 90% decline was widely cited by pundits yesterday and today.

Ross also pointedly scoffed at the hackneyed notion, as expressed by one of the anchors of the network on which he appeared hat Citigroup has to be in such a broad spectrum of businesses because 'its customers demanded it'. Ross correctly observed that most investment banking businesses had been adequately served by non-commercial banks. And further, he was unaware of such customer requests. 

Perhaps shareholders of Citigroup one of which, I am not, have happier times ahead soon.

Potentially providing additional tangible value from Michael O'Neill's becoming Citigroup's chairman.

Tuesday, October 16, 2012

The Enduring Fundamental Importance of Economics

Watching a recent program concerning the fall of ancient Egypt brought home the enduring importance of economics to understanding the sources of power of nations. For according to the program. The end of annual flooding of the Nile delta brought about the collapse of Egypt's agriculture within one generation and the nation's ability to feed itself. And thus its terminal fall from power. Ironically just this morning I saw a piece I believe on Bloomberg discussing the effects of recent climatic changes i,e, drought, on corn grown in Kansas. The corn belt is moving north.

It reminds us that United States economic power may also wane over time.

Monday, October 15, 2012

Belated reflections

In the months during my recovery from a stroke late last year. I have occasionally contemplated posts which I should have liked to have written. One which comes to mind involves Chase's billions of dollars of losses from trades placed by its London unit. The risk management for which the bank's CEO James Dimon was responsible. As I watched a steady drumbeat of daily coverage of the mess on Bloomberg television. I would rail, unheard. "Have we learned nothing from decades of risk management disasters?"

 Recalling discussions with old colleagues from my days as the first Research Director at then-independent consultancy Oliver Wyman & Co. In large financial entities like Chase the reporting structure of the risk management function is every bit as important as the technical tools and metrics. In this instance all one needs to understand regarding the reporting structure design flaw. Is to ask, with the bank's pugncious CEO as risk manager for the unit which young junior officer was capable of, saying, when necessary, "No," to Dimon regarding the positions which have come to prove so costly and embarrassing?

 It disappoints me that evidently no board member thought to have an objective review and recommendation of the arrangement undertaken by an outside party. Even there, however, which risk management consultant would want to make an enemy of such a powerful rainmaker as the Chase CEO? In truth? Sadly probably few if any.

 Imagine such a senior consulting partner defending such an assignment to his partners. What would be the upside to becoming silently blacklisted from further work at Chase?

Regardless of the financial outcome. If the recommendation was to remove Dimon as the London unit's ultimate risk manager there would be the imagined affront to the CEO. Moreover if the recommended replacement risk manager sustained a loss. The presumption would be that the consultant should have let Dimon remain in place as the London unit's senior risk manager.

Monday, January 30, 2012

Prolonged absence

Thanks for the reader questions regarding my recent prolonged absence. I have been in hospital recovering from surgery. I will be writing posts in the near future.

Monday, December 05, 2011

MF Global, Corzine & Gensler

The lead staff editorial in Thursday's Wall Street Journal provides a nice overview of what's wrong with federal regulation of the banking and securities sector.

The piece details how, once Jon Corzine became CEO of MF Global, the Fed reconsidered and reversed its earlier decision to deny the firm its request to become a primary dealer.

The Journal notes that MF Global had posted six losses in the past seven quarters, but drew no extra regulatory scrutiny. It was more than halfway through that period when the Fed granted MF Global its primary dealer status.

What the editorial explains, correctly, I believe, is that it's not quite correct to simply say that Dodd-Frank and the overall federal regulatory scheme worked, because MF Global failed without larger consequences or incidence. But the apparent misuse of customer funds, and outsized position risks taken by the firm, were completely overlooked by regulators.

Isn't that what the system is supposed to prevent? The actual illegal and overly risky types of actions which MF Global is suspected to have taken?

Gensler recused himself from the case, which tells you how much this is all about crony capitalism, which the Journal contends. Either Gensler shouldn't have had to recuse himself, or he should have admitted the cronyism back when Corzine took the helm of MF Global.

It's tempting to write off the MF Global collapse as a one-off, smallish, successful proof of Dodd-Frank. But, in reality, it's proof that our federal financial system regulations don't seem to have clear-cut objectives, or, quite likely, if they do, are not capable of actually implementing them and protecting anyone or anything- not customers, shareholders or the larger US financial system.

Friday, December 02, 2011

Regarding Facebook's Valuation

The Wall Street Journal has published several page one articles recently concerning Facebook's putative $100B market value. I had to go to the Journal's site to confirm Tuesday's edition's lead which contained that number, it seemed so staggering. Facebook is looking to sell just 10% of that value in its IPO scheduled for early next year.

Much is being written regarding the appropriateness of that valuation. I'm not in that business, so I'm not going to argue over billions.

What I am, though, is a strategist who has learned to apply that type of critical thinking to business and equity management.

Among online ventures, I would agree that Facebook should be at the upper end of the valuation scale. Here's why.

Zuckerberg's- and his famous twin collaborators- big idea was initially simply replacing the once-popular college paper 'picbooks' or 'facebooks,' which I first encountered as a graduate business school student at the University of Pennsylvania, with an online version. From there, the rest is history.

Like Google's Brin and Paige, Zuckerberg and his colleagues invented one thing, which just happened to be a popular 'app' for which, in time, advertising was a natural fit. For Google, the search results were just begging for nearby ad placement. And the best part was that, unlike passive television, active searches allowed Google to sell literal terms to advertisers, thus making specific buyers much more valuable.

Facebook has the same characteristic. By developing an application which induces people to spill their guts about their lives onto a webpage, it's tailor made for associating advertising with these pages. And because of its communal nature, it multiplies that value through the various platinum-plated, self-organized, genuine communities of great and frequent interest.

For a marketer, it's a dream come true. Instead of searching for, say, early adopters, you have the ability to link to the close friends of one by virtue of the site's very nature.

How can that not be valuable? Or, as the late Steve Jobs might say, 'insanely' great and valuable?

And because Facebook is simply a generic self-expression tool, it's potentially usable by every living person on the planet, and maybe, in the future, the dead, as well, in absentia. So the accessible market is literally the entire global population that has web access.

Search engines have come and gone. Who even recalls Webcrawler or Lycos anymore? But, like telephony or the mail, social networking technologies become more valuable and monopolistic by their very nature. That's why MySpace became such a money sink and, ultimately, loss for NewsCorp. Second place in social networking is nowhere. Especially when the market share leader is so far ahead as Facebook is.

Thus, while Linked-In is, by comparison, relatively narrow, with its business- and skills-focus, and Groupon is deal-specific, Facebook is perhaps the most common of social networking applications. It probably does belong, if not now, then eventually, in Google's league, which is now about $200B.

Stunningly, that's only twice what Facebook's IPO-imputed valuation. Barring gross mismanagement, I think that sort of valuation range is quite reasonable and appropriate. In the future, who knows by how much that could increase?

From an equity management perspective, of course, that doesn't mean my portfolios would include Facebook in the future. Google never made it into the portfolio. In the early years, its valuation was simply too rich, relative to its growth rate. By the time the valuation had become reasonable, according to my selection criteria, its growth, too, had moderated. Perhaps Facebook will undergo the same dynamics. It will be interesting to see.

About Angela Merkel's Prussian Values

I wrote this post last week, in which I provided a disclaimer relating to my views on how Germany views the profligacy of many of its fellow EU members,

"As a disclaimer, let me mention that my own heritage is Germanic. So the Teutonic insistence on the profligate Europeans paying for their sins is not foreign to me."

By the way, I'm not just of German extraction, but Prussian. Both sides- one from the permanently-German states, the other side from borderlands between Poland and Germany.
Thus, I was amused to read this in Wednesday's lead Wall Street Journal staff editorial,
"In opposing that option, the Germans are said to be imposing their Prussian morality on everyone else. But without reforms, the countries of southern Europe will never pull out of their downward debt spiral. The Germans are at least telling the truth."
I highlighted the two words in the passage which I found so amusing. It's not just me who sees this long-evolving crisis as a morality tale now relying on Prussian values and discipline to resolve it.

Thursday, December 01, 2011

Monetary Cocaine From Six Central Banks

What can you say about yesterday's equity index responses to the announcement that six large-country central banks, and the ECB, provided coordinated dollar funding support to European financial concerns? This news, along with a optimistic ADP payroll forecast, drove the S&P500 Index up 4.3%.

But if you listened to various pundits on CNBC and Bloomberg television, the news wasn't actually so good. It gradually dribbled out that un unnamed European bank was set to go bankrupt over this coming weekend from insolvency due to an inability to replace lost dollar funding. The credible pundits, people like El Erian of PIMCO and Alan Meltzer, for example, were relieved with the immediate move, but remain concerned that the longer-term problems in the Euro zone remain unresolved. Meltzer advocated a two-track Euro, effectively saying he believes the currency, as we now know it, is finished.

But let's be blunt, if seemingly cynical.

What you heard from the asset management community was a gigantic sigh of relief that these six central banks have put their taxpayers' incomes behind promises to dollar-fund failing European banks, thus providing a free floor under the values of those managers' portfolios.

This is the sort of hyper-global crony capitalism against which Occupy Wall Street rails, only most of them aren't actually sufficiently knowledgeable to understand that.

Does anyone who is informed about the history of markets actually believe that a handful of central banks, several of which, I believe, aren't exactly all that significant (Canada, Switzerland), can outgun the world's hedge funds? Recall how George Soros gained a huge leg up in his net worth by betting against the British pound, allegedly on an inside tip, and won?

What about the Baker Plaza Accords of the 1980s? When central banks go to war in the markets with fund managers, the managers typically bring more assets to bear. Yes, the banks can 'create' money, but, in doing so, depreciate the value of the currency they are printing. There's a relevant range of effective expansionary monetary policy, i.e., printing or borrowing money, with respect to time, quantity and fiscal context. Right now, the Euro nations don't have much range, the US a bit more, but, in total, global economies are phenomenally over-leveraged already.

So how is it that a Euro-zone crisis caused by over-borrowing will be solved by central banks....borrowing or printing more money to magically produce dollar funding for near-insolvent European banks?

That said, I hope you enjoyed yesterday's landmark US equities rally. I'm sure the hedge fund managers whose asset values have been saved, provided they weren't naked short Euros, or can wait out the short-term pop in the currency's value, are very pleased. Everybody who was in the market got a nice 4% or so boost in value before selling the top in the coming months.

But as Rick Santelli said on CNBC this morning, the Fed is now 'all in' backing the Euro-zone and ECB. Helicopter Ben has linked the US economy and dollar to a bunch of entitlement-loving Euro nations and their failed fiscal policies.

Wednesday, November 30, 2011

Tom Keene's Housing-Related Program Yesterday On Bloomberg

Bloomberg's Tom Keene continues to slip in my estimation with almost every program of his that I view. His guests are of uneven quality, and Keene tends to project this naivete that makes you wonder if he's really up to cross-examining his guests. I'm guessing not.

Yesterday he had two women guests discussing the US housing situation. First was, I believe, Laurie Goodman, a principal with an asset manager.

Goodman declined to attribute responsibility for how we came to have 20% of all mortgages in existence five years ago now delinquent, and 23% of all US mortgages underwater.

Keene was totally in love with a trend chart purporting to illustrate that job growth was dependent upon housing, so without housing growth, the US economy is dead. He never questioned whether perhaps this had been a short-term (only a decade or so, I believe) and artificial correlation that is, in fact, unhealthy for the US economy.

Goodman sensibly said that thing will get better as new construction stops, thus forcing the huge foreclosure overhang to be worked off. And that two other events need to occur.

One, which Lew Ranieri explained over six months ago on CNBC, is the appearance of a government program allowing local investors to buy foreclosed properties and rent them. The second is to process as many foreclosures as possible in order to eliminate the old, high costs bases and allow new owners to buy at market prices.

She added that lending for these new mortgages is stalled, presenting a stumbling block.

The second guest, Stephanie Meyer, now with BofA Merrill Lynch, echoed Goodman's sentiments. She was clear about the need for foreclosures to move along and allow repricing of housing stock.

Interestingly, and another incident of Keene's failure to adequately question his guests, neither woman, nor Keene touched on the political issue of dumping so many existing delinquent homeowners out of their homes. That the current administration is trying to prevent this by threatening 'cramdowns' and such forcible taking of investor value to reward delinquent homeowners.

Disappointing, too, was Keene's failure to challenge whether the housing sector should ever have become so central to the US economy, and whether its removal of mobility for homeowners was a mistake in our modern economy?

Still, the raw information from these two guests concerning what would move the housing sector forward was refreshing.

Tuesday, November 29, 2011

Black Friday & Yesterday's Equity Market Pop

Positive news about Black Friday's sales numbers propelled equity indices up sharply yesterday. The S&P500 Index rose 2.92% on the strength of the information.

However, as a Wall Street Journal article explained, there's actually little correlation between Black Friday sales and sales for the entire holiday season. It mentioned the 2008 holiday season, when Black Friday sales were up 3%, leading estimates for the entire season to be increased to 7.2%, only to see the actual data come in at -4.9% for holiday season spending.

Moreover, as I watched CNBC's coverage of the unfolding Friday shopping, guest hosted by well-regarded retail analyst Dana Telsey, it was clear that people were out shopping because of the large discounts being offered. Telsey admitted that this season's sales would be low-margin in nature but that, due to falling commodity prices, hopefully 2012 would be 'the year of the margin.'

Meaning that Black Friday's sales were robust because many people were out taking advantage of sales. And this is good news? This is going to fuel a long-lived US economic expansion?

I doubt it.

Another reason for yesterday's equity index performance was reported to be, as one analyst coined the term, 'hope-ium' that Euro governments discussing coordinated, tougher and enforceable fiscal policies would eventually resolve that trading bloc's sovereign debt woes.

If that isn't a pipe dream, what is? Looking at the reactions of the populace in Greece and Italy to austerity measures, what do you think will occur if/when the same is applied to Spain and France?

As I write this, the S&P futures are up to 1194, presumably on the news that Cyber Monday sales were 15% higher than last year.

Again, fine for a passing S&P500 rise, but suspect as the source of lasting US economic expansion. As a friend of mine opined last night regarding the holiday sales reports, and his own experience at a crowded restaurant over the weekend,

'It seems like if you have a job, you're spending. But if you don't, it's a different story.'

Just so. And with broadly-defined, actual US unemployment between 15 and 16%, and real median income for the past decade flat, that doesn't seem to be an improving underpinning for the US economy going forward.

US equity indices reflect global economic activity, so they may outpace US economic growth. But Europe's slide into recession should concern investors looking at the global GDP outlook.

Monday, November 28, 2011

The Economist's Denial Concerning The Euro & Europe's Entitlements Crisis

The current issue of The Economist entitled it's lead staff editorial "Is This Really The End?" Of the Euro, of course.

The piece then goes on to examine various ways Euros may be printed or borrowed, or back yet another instrument in hopes of fooling investors into overlooking the EU's real problem.

While usually on target, the Economist is hopelessly in denial on this issue. They concentrate mostly on the topic of Germany and Merkel simply bailing out Europe, about which I wrote recently. But that's almost a sideshow.

What the editorial never mentions is that this isn't simply a financial or sovereign debt crisis, per se.

It's a European entitlements crisis.

The Economist can blather on all it wants about the ECB, the EFSF, the Euro, and various means to move the same old monetary pieces around the same board, sometimes with new labels on them. But none of that will solve the problem.

The United States and Europe's nations all share a common, heretofore not experienced problem. Their lush government defined-benefit obligations have finally outstripped their abilities to fund said obligations. They are all gigantic Ponzi schemes, in which 1.5-2 generations have legislated extravagant benefits for themselves, to be paid by borrowing now and taxing later generations, or simply taxing later generations. Thus, there's no possibility of resolving the loss of confidence by global investors, because the money to solve the problems doesn't exist yet.

And with the suffocating tax and regulatory burdens besetting all these nations, it's looking like economic growth won't be helping anytime soon.

Face it, the developed nations are in for a rough economic ride for probably at least one decade- maybe more. Since WWII, governments have voted their older citizens benefits never before enjoyed in the history of civilization. And clearly won't be again, either. It's been a massive acceleration of spending fueled by wealth borrowed from future generations. Thus, GDPs since the war have also probably been artificially pumped up on this monetary equivalent of steroids.

Only a return by all large economies and nations to defined-contribution social welfare and corporate pensions and health care schemes will bring this unsustainable financial joy ride to an end.

And forget what you hear about any of these oldsters having "earned" their promised benefits. That's a lie. Those benefits were legislated without a clear explanation of their funding, while economists stood by and remained silent on the senselessness of promising such large-scale fixed and escalating benefits to be funded by dynamic, competing, uncertain economies throughout the world.

In America, beneficiaries of Ponzi schemes are forced to return their payouts by virtue of the scheme being a fraud and, thus, no real gains being available for anyone to realize. As an example, witness the ongoing recoveries of the Madoff fraud's payouts.

Why should the payouts of similar government-run Ponzi schemes for retirement and medical care be any different? Nobody 'earned' those benefits. They were never really affordable in the first place.

It may take years, but eventually, voters will have to accept that they elected governments which promised benefits many voters knew weren't really affordable. And they'll all have to take haircuts on those benefits.

Which brings me back to my starting point.

Germany can't fix the Euro problems because they aren't, strictly speaking, just about sovereign debt, the Euro and defaults. They are about totally unsustainable government benefit programs which can't be financially finessed back into solvency.

It's not a liquidity or currency issue. It's a social welfare state issue around the globe.

The Economist should know better than to go into denial about this truth.

Saturday, November 26, 2011

Great Expectations

If you want to understand how America has corrupted itself while amassing $15T in debt, with even more in still-unborrowed, unearned entitlement liabilities, consider this thought experiment.

It is 1925. WWI is behind us, and the Roaring '20s are in full swing. GDP growth is torrid, new products and innovations abound. Incomes are rising, as are standards of living. Electricity, telephones and the car have revolutionized American life.

Income tax must be paid in one lump sum, while medical expenses and retirement are self-funded. People are still self-reliant.

Ten years later, global economic conditions, bad, constrictive monetary policy and too-liberal borrowing to buy equities have resulted in a market crash and simultaneous global recession which becomes the Great Depression in the United States. FDR's response is to print money to fund various government giveaway programs, while pushing Congress to pass the act that creates the greatest social welfare mistake, Social Security, which will inexorably change peoples' savings behaviors and the social structure of families.

Over the next few decades, young and old alike begin to rely on government promises of defined, ever-increasing benefits, and spend more, instead of saving for old age. Three decades later, Medicare and Medicaid are similarly mistakenly designed on the same lines as the original error, Social Security. Dependence on government for near-total pension and medical care funding are complete.

Now the experiment.

Imagine an America that never created Social Security, Medicare or Medicaid. Imagine that, like in 1925, future decades saw an America without government promises of retirement income and medical expense funding.

Instead, Americans remained self-reliant on themselves or their employers for retirement and medical care funding.

Since, ultimately, Americans were going to pay for these expenses themselves in some way, whether privately-funded, through taxes, or government borrowing financed by taxes on later generations, the real question is: how would their interim spending and savings behaviors have been affected?

What did Americans do before the government-promised benefit schemes of the 1930s and 1960s? I believe they spent more prudently, saved more, and expected to work longer. So if we'd never had the badly-designed Social Security, Medicare and Medicaid programs, it's likely people would have continued to do the same- spend less and save more for their own retirement and medical needs.

See, whether government provides it, or individuals save for it, the money for post-work living expenses and medical care come from the same place- wages earned while people work.

You can call it taxes, government borrowing or you can call it forced individual savings, but, either way, money for people's old age living and health care can only come from wages they, and/or future generations, don't spend.

If government had begun to mandate savings for both needs, kept in individual accounts, the effect would have been the same as if everyone behaved prudently and saved enough of their incomes to fund those needs.

However, the major difference would have been that there would have been no looming unfunded government-suppled defined-benefit pension liability or medical care funding, including generational shifts in the liabilities for them, because no such benefits would have been promised. Instead, savings would have gone to accounts meant to fund individuals' old age and medical care.

Of course, one other major difference is how these schemes affect the financial behaviors of individuals. When told government is supplying benefits, people spend more. Even though the money for the 'guaranteed' benefits has to come from taxes now and borrowing which is repaid with taxes on future generations. And it's a safe bet that cycling money through taxes, Washington and and back again adds to the cost of the benefits which are being funded by taxes on individuals' wages anyway.

There's one more difference. When benefits, instead of contributions, are promised, then timing can become mismatched. And one generation can enjoy benefits which leave debts for the next generation to pay.

Which is where we are now. But reasonable people realize that the defined-benefit schemes of the 1930s and 1960s have over-promised and won't be affordable for another generation. So, in reality, one generation promised itself lush benefits and left the bill to following generations.

That's why defined contribution schemes are inherently more fair and moral. They leave the cost of old age and medical care with the generation incurring them.

I find it fascinating to consider how families in the 1920s considered funding for the retirement of the adults in, say, the 1960s. Or their medical care. Without government programs promising those benefits, or company-supplied medical insurance, didn't they just save more and spend less, budgeting those costs into their existing lifestyles?

Why couldn't the same behaviors return for Americans, once we abolish unsustainable group defined-benefit programs? The money comes from the same place.

The real difference, in the end, affecting behaviors, is the expectations set by either self-funding or government promises of defined benefits. And the past 80 years have demonstrated that inappropriately-raised expectations by government's unaffordable and unsustainable promises have raised expectations to unaffordable levels for our entire society.

Friday, November 25, 2011

Germany, Merkel, EuroBonds, The ECB & The Euro-Crisis

It's almost funny now to hear pundits and reporters on CNBC and Bloomberg gush over how the only solution left that will placate investors is for German PM Angela Merkel to agree to either ECB issuance of bonds/printing of Euros, or EuroBond issuances.

Anything else, one European correspondent solemnly intoned, and the world will plunge into financial chaos and ruin. Did the Germans really want this?

Or will they step up to the plate and save the global financial system all by themselves? C'mon, he implied, why can't Germany just open its checkbook to bail out everyone else?

As a disclaimer, let me mention that my own heritage is Germanic. So the Teutonic insistence on the profligate Europeans paying for their sins is not foreign to me.

But I do, honestly, see the Germans' viewpoint. Why should they mortgage their economy to bail out those of France, Greece, Italy, Spain, etc.? Where will it all end?

The foreign correspondent who tut-tutted Germany for playing chicken with global ruin also confessed that, sure, in such a scenario, Germany comes out best among the ruined financial world.

It has become borderline-hilarious to me how media pundits and analysts desperately hope that Germany will ruin itself financially in an insufficient attempt to rescue the entire rest of Europe and, by implication, the world financial system. And why? Because it's the last apparently large, solvent European nation, and a fairly comparatively conservatively-managed one, as well.

As I wrote in a prior piece, echoed in a humorous piece by a Harvard economic historian in last weekend's edition of the Wall Street Journal, what the Germans couldn't accomplish with their 88mm guns in WWII, they may well achieve simply by being patient as the rest of Europe offers more and more financial and political control to the Germans, in exchange for a gigantic bailout.

In the meantime, regardless of the global consequences, I can't but respect and agree with the German reticence to be sucked into financially rescuing the rest of Europe.

S&P500 Index Performance vs. US Economy- Now You Know Why They've Diverged

Finally, a really good, solid datapoint!

Tuesday's Wall Street Journal featured an article on the front place, top, of its Marketplace section with the headline,

"U.S. Firms Eager to Add Foreign Jobs"

The first paragraph said it all,

"U.S.-based multinational corporations added 1.5 million workers to their payrolls in Asia and the Pacific region during the 2000s, and 477,500 workers in Latin America, while cutting payrolls at home by 864,000, the Commerce Department reported."

Further, regarding the other important business input, capital, the article stated,

"The multinational companies, for instance, reduced capital-investment spending in the U.S. at an annual rate of 0.2% in the 2000s and increased it at a 4.0% annual rate abroad. Still, they allocated $2.40 in capital spending in the U.S. for every $1 spent abroad."

In summary, US-based multinational companies cut 864,000 workers in the US and added 2.9 million workers overseas from 1999 to 2009.

If this doesn't explain why the US economy and GDP growth are slowing, with stubborn unemployment, while S&P500 company profits continue to rise, what else do you need?

It also explains why business investment spending, while remaining robust, isn't helping US employment. It's reasonable to expect that much of that new investment spending is being serviced by overseas units and, thus, workers, of US-based companies.

No surprise to me. This is pretty much what I would have expected to see. This is simply the first solid piece of data on the phenomenon which I've seen.

If you heard interviews with the author of Steve Jobs' authorized biography, you may have heard him recount Jobs' frustration with US immigration policy. The story involved Jobs and Google chairman Eric Schmidt, at a White House dinner with its current occupant, explaining that a lack of US engineering talent forced Apple to build a facility in Southeast Asia, where the engineers were available. In addition to the hundreds of engineers, Jobs told the president, Apple also hired thousands of local workers for the production facility.

That, writ large, is what these recent Commerce numbers capture.

Shareholders of these companies should rejoice that the firms are doing what is economically best for them. That includes...ahem.....union members whose pension funds own shares of the S&P500 Index or companies therein.

I wouldn't go pillorying the executives or boards of these companies. They are simply reacting to global demand, costs, tax rates and regulatory environments.

The US Congress and administration should take note. This report illustrates Ricardian comparative advantage economics in action. And that clearly portrays a US labor market that has become overly-regulated, too expensive and difficult to accommodate in exchange for the presumed benefits. Thus, these multinationals find it more cost-effective to service overseas demand with overseas labor, capital equipment and facilities.

Wednesday, November 23, 2011

Larry Fink On Warren Buffett

I had the opportunity yesterday to watch the hour-long Bloomberg program I had recorded on Monday evening which featured an interview at UCLA's Anderson School of Business with graduates Bill Gross of PIMCO and Larry Fink of BlackRock. It's well worth some 40 minutes of your time- sans commercials- to view. Two of the smartest asset allocators in the world answer some pretty direct, potentially embarrassing questions. I learned a lot, if only, in many cases, that my own views are pretty close to those of these two asset management titans.

Of particular interest to me, after both veteran asset managers' generalized asset allocations for the near term future, were Larry Fink's remarks about Warren Buffett. They illustrate, for me, the continuing perception of Buffett that is so at odds with reality.

Fink told a story of meeting with Buffett on a day on which equity markets were plunging. He spoke admiringly of Buffett getting up several times during their meeting- apparently in his office- to 'buy more stocks.'

Then Fink reinforced his point by saying that 'everyone should behave more like Buffett,' lauding the Omahan's tactics of 'ignoring quarterly results and investing for the long cycle.'

Fink went on to say more glowing words concerning Buffett's track record.

Only here's the point. We don't know what Buffett's actual equity selection performance record is. We only know what Berkshire Hathaway's total returns have been. And those haven't been exactly consistently stellar in recent years. Moreover, Fink was stressing buying dividend-paying classic industrial or consumer goods stocks, while Buffett has been crowing about technology and banks. The latter, by the way, I believe both Gross and Fink said they wouldn't go near.

It seemed to me that Larry Fink was more repeating what he'd read in the fawning press regarding Buffett's long-ago equity selection results, rather than commenting on what's observable recently.

He also skipped over the part about Warren not needing to worry about short term performance. In that recent linked post, I wrote,

"I contend that if Berkshire's price charts were labeled Fund X and compared to other funds, Buffett's company would be judged inadequate, inconsistent and, at best, mediocre."

What Gross and Fink, termed by the Bloomberg host as the two men with more assets under management than anyone else in the world, both glossed over is how different management of institutional money by very large, now-reputable firms is than what individuals can accommodate.

It's simply not possible for the average retail investor of a few tens of thousands, perhaps hundreds of thousands of dollars, to emulate Buffett. Nor should they. They don't have the risk profile that Berkshire/Buffett does, nor access to the same risk management analyses, nor tools to manage risk. Buffett's corporate billions can withstand losses that individuals cannot. Individuals facing retirement and worried about market downdrafts don't have Buffett's luxury of riding out Fink's "long cycles."

Further, they can't get an inside track to lend BofA money at preferred rates, plus warrants. Or get an otherwise-illegal inside track to make a tender offer for Burlington Northern while excluding any competing bids.

I have tremendous respect for Larry Fink. He's built one of the two largest money management businesses in the world, from scratch. He clearly does good work for his clients.

But I don't think that makes him either objective or an expert about Warren Buffett's equity management style or its utility and applicability for average retail investors. And his comments illustrated how widely-accepted, without evidence, Buffett's reputation remains.

Tuesday, November 22, 2011

Examining The Context of Market Timing

Yesterday I wrote this post, in which I noted how the S&P has been around the 1180-1190 level several times in the past few months and, in fact, a year ago this week. Thus suggesting that overly-active management has pitfalls. Because in some market conditions, if you wait long enough, you'll see the market return to a level.

However, while discussing the post with a friend, I articulated a key facet of overly-active management, or timing, that makes it so dangerous and prone to overestimation of success.

Consider the following datapoints pairing dates and closing values of the S&P500 Index.

6/24/2011 1268.45

6/27/2011 1280.1
6/28/2011 1296.67
6/29/2011 1307.41
6/30/2011 1320.64
7/1/2011   1339.67
7/5/2011   1337.88
7/6/2011   1339.22
7/7/2011   1353.22

10/19/2011 1209.88

10/20/2011 1215.39
10/21/2011 1238.25
10/24/2011 1254.19
10/25/2011 1229.05
10/26/2011 1242
10/27/2011 1284.59
10/28/2011 1285.09

11/1/2011 1218.28

11/2/2011 1237.9
11/3/2011 1261.15
11/4/2011 1253.23
11/7/2011 1261.12
11/8/2011 1275.92

In each case, the last datapoint is the local maximum, from which the S&P fell. Yesterday's close was 1192.98.

When index gains seem to be part of a monotonic upward series, there's nothing magical about the peak closing value. A priori, amidst the justifications of many pundits who suddenly appear on cable networks, an investor is prone to be concerned that if he sells now, he'll miss a big move in an obviously upward-trending market.

This is where discipline makes a difference. Investing discipline is particular in its meaning to the style of the investor. It may involve adhering to signals and rules, rather than letting contemporaneous market conditions affect sentiment which overrides those signals or rules. Or it may involve some target rate of return, after the attainment of which positions are closed to cash or some fixed income instruments.

On one extreme, one might be a dollar-averaging, long term buy-and-hold index investor. In which case trends are moot. Or one might engage in some hyper-active style which buys upon a certain percentage downward index movement and sells upon a corresponding move upward. These are, of course, simplistic examples meant to mark the poles of market timing.

But rest assured, local equity index maxima don't come with identification tags or warnings. Attempting active timing without some well-founded, researched approach invites disaster.

Google Speeds Cable Disintermediation Via YouTube Celebrity Channels

After reading a piece in the Wall Street Journal yesterday concerning Google's $100MM bet on celebrity channels on YouTube. It reminded me of my old mentor, Gerry Weiss' insights into competition and colliding arenas.

Gerry and his colleagues developed the concept as strategic planners at GE under Jack McKittrick. Essentially, a technology that is at the core of one entity in one 'arena,' or business area, uses said technology to expand into a new business. The entity's technological and/or other business model attributes strike at a vulnerability of existing occupants of the new business, causing a radical upheaval.

That's what seems to be about to occur at Google/YouTube.

I've been writing about the disintermediation of cable television for a few years. Now I realize that Google's recent staking of various media celebrities to $100MM worth of channels for their own creative usage will only speed that disintermediation. The Journal article cites several actors having broken into work on cable television programs via viral YouTube videos.

I've contended for several years that a writer/producer like Larry David would be foolish to bother putting his next series on cable. He could easily go right to streaming video from a website.

Then Glenn Beck departed Fox News for his own website-based media empire.

The Journal piece ended on a cautionary tone, noting that Google isn't likely to be earning revenues from any of this YouTube effort anytime soon. But offered a silver lining that in just three years, its Android cell phone alternative has grown to take half of the smart phone market.

My own sense of Google and YouTube is that, in the simplest case, they get eyeballs on which to earn advertising revenues. Then, over time, as viewers are trained to watch streaming web videos as their natural way of viewing heretofore broadcast- and cable-only frequently-aired (i.e., weekly programs) content, the step to paying for new content from a bankable talent like David or some other writer will be simple.

At that point, it wouldn't be a stretch for Google to be straying into signing and backing new talent, would it?

Even if not, just by migrating more and more viewers to their streaming video, they'll drain the last drops of life from broadcast network television, while accelerating the problems at cable providers.

That's one of the hallmarks of arena competition. Whether it's smart or not, the new entrant can afford to subsidize its intrusion into the new business with profits from its existing businesses. In Google's case, they aren't unconnected. But its targets don't really have multiple revenue sources on which to rely in the coming video content sourcing battle.

Monday, November 21, 2011

What Did I Miss? Evidently Nothing.

As I write this post at 11:15AM today, the S&P500 Index is at 1187. My proprietary vvolatility measure, which more or less tracks the VIX, has been above a critical threshold since early August.

Interestingly, you could have been gone for the past two months and missed nothing in terms of S&P level. Or three months, since mid-August, for that matter, if you're a buy-and-hold kind of guy.

Or a year, for that matter! The S&P was at today's levels a year ago this week.

Of course, if you were invested for the past year, but rebalanced gains or were incredibly lucky with your market-timing, perhaps you sold above 1300, realizing a 10%+ gain.

But the point is, volatility has been above my threshold more than not since early 2008, or three and a half years! The interval between the US equity market turnaround in March of 2009, and the initial Greek debt crisis was only about 13 months. The highs of 1400+ on the S&P of early 2008 have never been revisited.

At present, November's S&P monthly return is below -5%.

Which is why market-timing on relatively small gains and losses in the indices is such a dangerous practice. Especially now.

This Morning's Stupid Remark on CNBC

Howard Ward, a growth portfolio manager at GAMCO, made a rather naive and stupid pair of remarks this morning, and it's not even 8AM.

First he asserted that there have been 'five or six weeks of good economic news' in the US, so "we're doing okay."

Really? 9% unemployment and 2%+ GDP growth is okay Howard? Wow, I'd hate to see bad.

Ward then proceeded to declare that even as Europe slips into a recession,

'The rest of the world can keep on growing and Europe can have its recession separately.'

Where has Ward been for the past two decades? Global interconnection of supply chains and US companies' dependencies, especially recently, for growth overseas has resulted in a much more correlated global economic picture than ever before.

Europe is a huge economic trading bloc. Growth in one of its larger member countries, Italy, is projected to be negative next year.

I guess CNBC is desperate for guests if they're getting this caliber of pundit on their morning program.