Saturday, September 17, 2005

When Analysts Become Useless

Have you noticed the incredible split in the way major energy firms are managing themselves recently? ExxonMobil won't bid for new reserves. It's retiring chairman, the veteran Lee Raymond, opines that the price of a barrel of oil will eventually re-settle near $40, and everyone paying an effective takeover premium above that for reserves is making a major strategic error.

Meanwhile, Valero is buying up more refining assets, and now, even Canadian oil sands. At prices that indicate they believe energy prices are heading upward for a sustained time period.

Who is right? Both companies, and several of their competitors, are run by smart, veteran leaders with a lot of common sense and experience. It's really tough, from the outside, to know who is right. And someone clearly has to be right, or wrong, in this kind of situation.

What I do know, though, is that it makes virtually no sense to rely on any "analysts" in the brokerage community to add one iota of value to the analysis of this situation. Who would you rather listen to for your raw information- leaders of the major players in the sector, or outside observers with no industry experience who are paid for generating uncertainty, and, thus, trading income for their brokerage houses?

Not such a tough call, is it, when you put it that way?

Sure, sources like Daniel Yergin or other veteran managers or non-financial-sector observers are worth hearing out. But the uncertainty in this sector right now is not about abstruse technical analysis of financial asset price movements. Nor about customer behavior. It has more to do with assessments of global demand, the price inelasticities of that demand, the geopolitical dimensions of some of that demand, and the very real and gritty business of finding and producing crude oil and natural gas.

So who really believes any of the Street oil and gas analysts can add any value to what the the guys in the drivers' seats of the big players in this sector are already saying, and doing?

One industry veteran put it this way. Those energy producers who believe prices will fall back to pre-summer levels are behaving according to an implicit belief in the late Julian Simon's theory that commodity prices rise and fall to assure a near-constant time period of supply of any important basic commodity. That was the core of his famous bet with Paul Ehrlich over twenty years ago.

Those energy producers who are betting on higher prices implicitly believe that we have finally reached a peak of production of existing carbon-based energy sources. Ironically, deals like Valero's recent purchase of Canadian oil sands could well be the sort of action that will once again prove the other group of producers, and Julian Simon, correct.

For my money, I'm focusing on the actions of the major sector players, and the global economic demands on their products. Who needs biased brokerage analysts to interpret such clear cut information?

Thursday, September 15, 2005

Promises, Promises......

Two major US airlines filed for bankruptcy protection this week- Northwest and Delta. In the former case, their machinists union is already on strike.

What I find ironic is that, while so much of this week’s, and many prior years’ focus, is on union leaders squaring off against company managements, nobody has bothered to ask how it is that the unions got themselves in this mess in the first place?

Why did unions ever begin taking future pension contributions from the companies for which their members worked, instead of cash compensation?

When you think about it, some of those company CEOs of yesteryear were deceptively brilliant. They managed to get unsecured loans, in the form of future pension “obligations,” from the unions representing their workers. No bank would have lent the same sums on the same terms for the same prices. That’s because, ultimately, companies have much more latitude with which to discharge or change their pension obligations in bankruptcy than they have to escape a group of angry, unified, legally-empowered financial creditors in the same situation.

Why is this relevant today? For two reasons. First, it’s the private sector version of the social security mess. What makes sense and works here should inform our solutions for social security. Second, it should inform labor’s current choices and negotiations, so as not to make the same mistakes twice. Especially now, in the airline and automobile manufacturing sectors.

In hindsight, “defined benefit” plans of any type or name, public or private, are a clever way for a public corporation or a government to fund operations with implicit loans. For big steel, autos and airlines, as well as other labor-intensive sectors in the ‘50s, ‘60s and later, this amounted to labor union members lending, via unsecured future compensation and fringe benefit promises from their employers, sums of money for which they had no collateral. Financial engineering which puts modern investment bankers to shame.

Where is the expose on the union leaders who foolishly negotiated, on behalf of their members, to accept unsecured IOUs from companies on terms that the companies’ banks would never have lent them the money?

Why would any of the current unionized employees of Northwestern, Delta, Ford or GM accept any non-cash compensation going forward?

Early Trend & Issue Identifications In This Blog

Topic Date
Link Date

Kraft announces plan to split company along snack/grocery business lines, effectively nullifying the expensive, time-consuming Cadbury acquisition of 2009-2010.
here 24 September 2009

Alcatel Purchase of Lucent To Fail 08 October 2007
here 03 April 2006
"Wal-Mart Era" Declared Over in Wall Street Journal Feature Column 03 October 2007
here 20 September, 2005

Michael Dell Admits Direct Sale Model May Be Outmoded 28 April 2007
here 15 May 2006

Shareholder Participation in Private Equity Buyouts 28 April 2007
here 01 August 2006

GM & Ford Solvency Issues Spring 2006
here 06 October 2005

Split GE Into Its Constituent Parts 28 April 2007 (Citi analyst)
here 03 August 2006

Detroit Big Three Change of Control or Ownership 14 May 2007 (Chrysler sale)
here 06 October 2005

Wal-Mart Retail Strategy/Segmentation Failure Fall 2006
here 20 September 2005

Yahoo's Strategic Drift and Looming Crisis Summer 2006
Terry Semel Resigns June 2007here 28 August 2006

Southwest Airlines Strategic Mistake In Pursuing Growth
here 01 December 2005