Thursday, May 04, 2006

Maria Bartiromo Joins The Fed?

Perhaps there's a divine message in the news this week. Lou Rukeyser, one of America's most respected financial media personages, passed away yesterday from cancer. Only days after Maria Bartiromo, the Barbara Walters of financial news anchors, allegedly moved markets with her dinner anecdote involving Ben Bernanke. She reported, second-hand, Fed Chairman Ben Bernanke's musings on how the markets interpreted his recent remarks. This allegedly caused a major selloff in the market earlier this week.

If any financial media reporter/commentator should have been the one to be accorded such weight, it should have been Rukeyser. Anyone who watched his public television, later, CNBC, weekly program, understood that he had a thorough command of economics and free market mechanics.

In contrast, anyone who has watched Bartiromo would see that she often has to pause interviews when she can't see her teleprompter, leaning across a table and squinting in mid-interview with some Wall Street worthy. It's as if she has no understanding of her own questions- a sort of human fax machine. The story comes out, but the source has no understanding of what it just produced.

What scares me is that, of all the people to whom Bernanke is alleged to have given such a market-moving scoop, why someone who has trouble reading her own interview questions? Someone evidently so bereft of economic and financial knowledge as to actually pause during interviews, because she doesn't understand the questions she's firing off?

What was Bernanke thinking? If he couldn't find an informed media outlet at a dinner full of them, why didn't he just keep his mouth shut? It's not like this was a taped or recorded interview. Does anyone really think Bernanke meant that apparent remark to be processed in the markets as "information?"

What this demonstrates to me, once again, is the utter meaningless of any one day's market moves. They are addled by such oddities as a financial talking head passing along a chance remark by our Fed Chairman to a financial reporter whom we can't even be sure understood his remarks.

Once again, we see that there will always be daily headlines. Yet, they don't necessarily have any lasting impact beyond a few days' trading trends.

Monday, May 01, 2006

AMD & Intel: The "Big MO"

Momentum. Consistent Growth.

Who's got it? Who's lost it? What are the behavioral implications within a firm?

In my prior post, I considered why Intel is in the situation it currently faces. Now, I want to consider that situation, in contrast to its chief competitor, AMD.

For most of my early career, I had a friend at Intel. She became an early Intel millionairess, thanks to their Wall Street-style incentive compensation, at least in the early years. I believe she joined the chip maker in 1980 or thereabouts.

Back then, Jerry Sanders was the flamboyant CEO of AMD. He had a very tough job. The only reason AMD existed was that Intel's customers drew the line at being totally subservient to the chip giant. It was one thing to pay high prices to buy new chips on Intel's schedule. It was quite another to have no other option whatsoever. So device customers kept AMD on life support in order to maintain some slender thread of bargaining power with Intel.

How the worm has turned! But, let's be realistic. Today, as I pointed out in my previous post, Intel is a reasonably diversified chip maker. While its core revenue machine is still pc and laptop chips, it has substantial other applications and, thus, product lines. Which is probably what got it into its recent trouble. AMD is still largely, as I understand it, a conventional PC, server and laptop chip supplier.

So, in discussing this with my partner last night, between squash games, I arrived at an insight lost to me for over 20 years. As it struck me, memories of the years I spent at AT&T suddenly came rushing back. Being on a losing, shrinking team is no fun. Life sucks, and career prospects suddenly look very dim. There is a visceral, human behavioral reaction to momentum in business that goes, I believe unnoticed.

Think of what life at AMD must be like right now. You're in the press, more than ever before, as a charging tiger. You've just grown revenues during a period when your always-imposing, larger competitor shrunk! You're the toast of customers everywhere, for actually listening to their needs and creating product for them. How novel! Growth is abundant. Your share is growing in a stable to declining market. So, for you, it's actually a growth market. It's not the same world Intel sees. At all.

Wouldn't you love to see the electronic flow of communications and resumes from Intel employees to their AMD contacts? I can just envision the sapping of emotional energy among young Intel engineers as they face several months of internal witch-hunting...oops....cost cutting, by Paul Otellini & Co. How paralyzing this is going to be for Intel and its employees.

I would hazard to guess that there is now an intangible energy, an initiative, dare I say, advantage, with AMD. They have, as George Bush used to say early in his failed 1976 race for the Republican presidential nomination, the "big mo." I suspect that, coupled with competent management and Intel's self-inflicted wounds, it should make for continued success for the near term at AMD.

It is, once again, a Schumpterian force. It's consistent growth. For AMD, in a positive direction. For Intel, now, in a downward one. My investment style, and my research focus, have always involved consistent business performance. I have found, contrary to what others seem to believe, that it is its own reward. With this recent competitive story developing between Intel and AMD, I think I have also rediscovered an intangible reason why consistency matters. It is its effect upon humans engaged in business endeavors.

Intel's Insides

Friday's Wall Street Journal carried a piece concerning Intel's restructuring, amidst revenue declines. A good friend in the consulting sector had alerted me to it on Thursday night, when she read the story elsewhere. She assailed me, in a collegial manner, about the Intel situation and "corporate governance," knowing my stance on the general topic.

I am, frankly, of two minds about it. On one hand, I agree with my friend. Which is to say, 'how could the guys at Intel have messed up so totally?' They surely must track PC and laptop shipments and share. So they must have had earlier warnings of the weaknesses in those markets than just the past few months. My friend's overall attitude was, 'what are these guys being paid for, if not to manage around this type of knowable challenge?' I do agree, in part.

It's sort of inconceivable that as well-run a company as Intel has historically been could stumble so badly on demand assessment as to actually have to freeze hiring and terminate some employees. And I mean, with all the flourish and publicity of a "restructuring," to paraphrase Intel CEO Paul Otellini.

On the other hand, Intel is now long in the tooth. Its big break came from the space program. That's 40 years ago now, friends. They stomped all over the competition at the dawn of the PC era. That's roughly 25 years ago now.

At this point, I am having a serious Proustian moment. I actually recall gazing at a Business Week headline in the late '80s, featuring then-CEO John Opal, or perhaps his successor, John Akers, struggling with appalling losses. And wondering why IBM was so quickly and totally disparaged by the business press. This was very close to the time Bob Stempel got booted out for losing billions of dollars at GM. Recall, if you will, that Lou Gerstner and ex-P&G CEO John Smale stepped in at IBM and GM, respectively, to stem the losses.

What I thought then, as I do now, is that Americans simply have no sense of perspective with regard to business history. The two cases I mentioned, GM under Stempel, and IBM under Akers, literally launched the work that has resulted in this blog, a forthcoming book, and my portfolio strategy. I was shocked at how little understanding the business community, especially the media, had for prior performance. And I asked myself, "what is the mean time, in years, that a US company can sustain consistently superior total returns?" And, allied with that, what is the distribution of experiences surrounding that mean?

Suffice to say, what I subsequently learned is that it is a very, very rare firm that can sustain consistently superior performance, both in terms of total return, and the fundamental operating performances that drive the former. It's easy to sit and carp while a once-great firm, technological or not, dies. Or becomes seriously ill, aged, and never to rise again to its former dominance.

I think it's time to give Intel its due. It reigned supreme in its burgeoning sector for decades. It even managed, while doing that, to attain a time and measure of consistently superior returns for its shareholders. I have even held Intel stock in my portfolio, as a consistently superior firm.

So, while I think the current management is perhaps over-matched by circumstances, it's not, strictly speaking, their fault. If you've read much of the body of writing on this blog since the fall of last year, you may see a number of themes coming together in Intel's current travails. It is so very Schumpterian in nature, that I'm not sure even Bob Noyce could pull Intel out of the ditch this time. It very much matters whether a CEO follows a long line of consistent successes, or not.

Here, I think we have a rather traditional case of technological innovation and progress rendering Intel unable to extend its dominance anymore. Pressures of internal growth, slowing and declining internal competence and passion, coupled with commoditization pressures, and changes in their end-user market, have all combined to bring Intel to this impasse.

Within the next few days, some thoughts about AMD. Facing the same markets, why is it different, and what does that imply for both AMD and Intel?