Friday, November 10, 2006

China's Automotive Ambitions

Tuesday's Wall Street Journal featured an article on the rapidly-evolving automotive production sector of the Chinese economy. The details are interesting, and not at all surprising.

Their automotive sector resembles, in many ways, that of the US economy prior to the 1950s. There are many brands, a scramble to gain share, and many component suppliers.

A key difference, however, is the presence of large European, Japanese and American automotive companies with minority stakes in some of the Chinese firms, as well as a coterie of component suppliers from Europe and America.

Thus, the Chinese producers are poised to gain rapidly on American and European manufacturers, in China, by piggy-backing on these existing infrastructures.

With the US elections on Tuesday as a backdrop, the development of the Chinese automotive sector presents the newly-elected Democratic Congress with a vexing predicament.

Do they support US expansion abroad, global trade, and economic health, by acknowledging and accepting this reality of Chinese automotive ascension? Or do they myopically frame the issue as one of US automotive manufacturing and assembly jobs migrating to China, and behave in a protectionist vein?

The article ends with a quote from Bill Ford, describing his firm's substantial investments in China,

"Americans don't get it. They don't understand what's going to happen."

The "it" to which Ford refers is that, soon, China will be the global destination for low-cost, highly productive auto manufacturing. Democratic policies notwithstanding, this is going to occur. The question is, does the US government, in the form of the newly-arriving Democratic Congressional leadership, maneuver to benefit Americans as a result of this reality, and construct positive relationships with the Chinese, or fail to do so, and risk substituting the risk of military confrontation with that of trade confrontation?

For GM and Ford, of course, all of this Chinese development creates even more risk for their turnarounds. With so much value being compressed in the process of producing and marketing cars, and so much of that remaining value moving to China, what's left for a US-based company to extract and on which to make a profit?

Thursday, November 09, 2006

More about Cell Phone Video vs. Television Viewing

Yesterday's Wall Street Journal featured a Marketplace section article focusing on the spread of homegrown video content onto various competing sites. The reason I am returning to this theme again, as I have written about it before here, and here, is twofold. First, it is obviously now becoming significantly more important to the business planning of several large, would-be new media companies, such as Verizon and Comcast. Second, more of the discussion of these ventures and arrangements is beginning to articulate the ways in which users may actually consume these services. As a business person originally trained in marketing, the second always fascinates me. The first is obviously interesting as it relates to my portfolio management activities.

Specifically, the piece spotlighted Verizon's move to support, or feature, YouTube on its cellphones, while Comcast is trying to attract homemade videos to its website.

One line of the article stated,

"It's far from clear, for example, whether short homemade videos will appeal to TV viewers, who are accustomed to watching longer programs with a higher quality picture."

I watch YouTube videos on occasion. Some are video clips of network TV, or live concerts, and some are homemade clips. I also watch cable and, on occasion, network television. I'm one person- but I do both.

So, what sense does the above-cited passage make? Obviously, I adjust my expectations to the medium at hand.

So, back to cellphone videos. Yankee Group is cited as the source for the article stating that an estimated 5.7 million people "will watch video and TV on their cellphones," up from roughly 1.5 million in 2005. I can't, and won't, argue with empirical data. However, it's a big stretch to note that video viewing on cellphone is growing, and then assume that putting YouTube on cellphones is a good move.

My hypothesis would be that most of those cellphone views are of sports and breaking news, both global and business-related.

The overall image I have, reading recurring stories about how many distributors are rushing to license YouTube, or their own privately-originated video content, or pipe video onto every digital device imaginable, simply reinforces my belief that very few of the executives and development teams at these companies have any clear idea whatsowever of why and how consumers might actually pay for and use these services. It seems to be one very large, collective "Hail Mary" video content pass downfield for distributors, in hopes of avoiding the obviously increasing risk of disintermediation by content producers.

Which leaves me sceptical that Comcast or Verizon will enjoy much financial gain for their ill-conceived attempts to force consumer behavior into their distribution models.

For instance, the WSJ piece notes that YouTube has to be significantly altered to be viewable on a cellphone. This is allegedly the reason why device and content providers need to 'work together' to make sure the result is viewable.

I would be much more confident about these various business plans if I read that they were based upon actual research of cellphone users' video usage habits. Is it possible that most of this investment is being predicated on the viewing habits of a lot of 15-20 year olds whose parents won't continue to pay premium add-on monthly fees as these services become more expensive and technically complicated?

Wednesday, November 08, 2006

Non-Partisan Post-Election Day Musings

This is the second try at this post, as blogger ate my first one. I suppose that should make this better, tighter, and more focused, so perhaps there was a cosmic method to that.

In my
previous post, I had some thoughts about why yesterday's election results were probably not going to be, and, as it turned out, are, not such a bad thing for the country, or the Republicans.

Today, I want to share some insights I had today while discussing the Congressional election results with a few friends. This is primarily a business blog, and yesterday's post was a rare exception to that. Today, I want to discuss my political insights because I believe they have significant implications for US business and economic activity in the near future.

My basic contention is that, after decades of experimenting with Federal Legislative environments featuring large majorities for one or the other party, the American electorate has now arrived at a point of allowing only narrow margins of control in either House, and that this condition will lead to more stable, effective, productive, and better conditions for Americans in general, and business and the economy in particular, in the decades to come.

Suffice to say, I believe that Nancy Pelosi was right in declaring that 'the people have spoken and want a change,' or some similarly expected blather, but not in the way she would like to believe. You see, I believe that the most important outcome of yesterday's election was not the change in House and (probably) Senate leadership, but the narrow margins by which the Democrats have been handed each House.

With two small exceptions- 1958 and a brief span during the Reagan years for the Senate, the House has had a large Democratic majority from the time I was born, until 1994. The Senate was similar, with its Democratic hegemony ending somewhat sooner, as I recall.

However, we now have a situation in which the electorate has left each party within easy striking distance in each election of gaining/regaining control of either or both Houses. This is something profoundly new on the American political landscape for certainly the 50 years that I have been alive.

To be sure, it makes you wonder just how something like this can occur. That is, we each vote for the Representative in our own district, and probably know little about the one next to us. And we can't vote for half of each candidate. Yet, somehow, as the past decade has resulted in such divisive partisanship, voters have slowly moved toward today's razor-thin House and Senate margins.

In fact, taken from a long perspective, it looks like this (I have Googled this topic, and found nothing helpful, so my details may be off, but I'm confident of my general trend information). From the 1940s, under Roosevelt's New Deal, the Democrats achieved large majorities that lasted for most of 50 years. From the late 1980s, the Republicans recaptured the Senate, and, of course, massively regained the majority in the House in 1994.

The results of these large majorities, especially since the Vietnam War era of the mid-1960s, and the departures of 'statesmen' like J. William Fulbright from the Senate, have been to see partisan rancor rise, and consensus legislation diminish. For some 40 years, Americans have have lived with intense animosity among the branches of government, and especially, between parties in each legislative chamber.

Having begun, in the late 1980s, and by 1994, to give the Republicans a chance to do better with large majorities, it seems that Americans have collectively, through a summation of individual House and Senate districts and seats, to have arrived at the conclusion that this is an unworkable approach.

If you view the last dozen years in terms of GOP power in the House and Senate, you see that it has been gently drifting to ever-slimmer majorities. A few years ago we saw a single liberal Republican, Jim Jeffords of Vermont, switch parties after his election, and hand the Senate back to the Democrats for a brief period. In the House, the GOP majority was only something like 30 seats by 2002, and some 15+ in 2004.

Now, we have what party leaders would call "ungovernable" majorities in both the US House and Senate. As I wrote in yesterday's post, this won't actually affect legislation very much in this next two years, as Bush can wield his veto pen.

I think this is what the voters want. Now, each party has the tantalizing prospect of returning to power in the next election cycle in both chambers. Legistlative obstinance, petulance, or uncooperativeness from either party's Congressional members can still lead to the prospect of further punishment. However, unlike the past, where the majority could easily dispense largesse to fend off change of control for decades, now, it will have to behave, or lose control at the very next election. For the minority, in this case, the Republicans, voters have given them the prospect of a reward for 'better' behavior that was missing in the past.

It now benefits neither party to stonewall the other, or become totally uncompromising. Both parties know that control can now change with each two-year election.

In some ways, I think this will make parties less important. With control of the House or Senate so ephemeral, members may need to serve their electors' interests better, and their party ideology less well, because the party won't be in such a position to easily 'reward' the member with committee chairs, etc.

What this may mean for business and the economy is a more centrist, effective, and sensible approach to problem solving in Congress. Because, ultimately, Congress is composed of members who want to be re-elected. Without a party structure to which to look to dispense so much largesse, because neither party can be sure of having control of either chamber, the members will probably need to show progress on key issues, and very little purely negative behavior.

(Added note: Consider this evidence of the preceding paragraph's contention. The Democrats deliberately recruited many centrist House candidates this year, in order to target midwestern and other districts. That is to say, the more liberal party willingly forsook its own extremist wing and deliberately selected, supported and elected House members who will look more like moderate Republicans on many key issues than they resemble the leaders of their own party in Congress. If that does not signal desperation on the part of the Democratic Party, and a resignation to the will of the electorate to find moderate solutions, what does?)

I may be wrong. This may be simply a fleeting moment of small margins of control of each chamber, on the way to another era of overwhelming Democratic majorities. I just don't think that's in the cards, though. The Democrats of the 1970s presided over horrible economic and social conditions for two decades, and managed to retain power. The Republicans barely got half that amount of time before losing control due to ineffectiveness, corruption, and arrogance. IF this is a trend, look for these thin majorities to remain for decades, as the electorate's own check on either party's power in Congress.

One on-air pundit repeated a famous phrase (the source of which I cannot find, even on Bartlett's) which goes something like, "no man's liberty, property or livelihood is safe while the legislature is in session." It seems as if the American electorate agrees, and has finally discovered an effective tool to limit the effects to which the quote refers.

Today's lunch between Pelosi and Bush would seem to indicate that the former realizes she must exhibit the appearance of spirit of compromise, rather than, say, celebrate a coming orgy of liberal legislation at a lunch with Charlie Rangel, David Obey, Henry Waxman, and John Dingell.

Maybe the near-term future for American businesses is brighter after this recent Congressional shakeup.

Tuesday, November 07, 2006

Non-Partisan Election Day Musings

Over the past week, I've had conversations with several friends about today's Congressional and Senatorial elections. Those talks have caused me to reflect on some trends I've noticed, in retrospect, and what some ramifications of various outcomes of these elections may be.

I don't intend this to be a partisan post. If I'm successful, you won't actually even know for which party's candidates I voted this afternoon.

Several things strike me about the prospect of the US House having a majority of Democrats in the Congress which is seated in January, 2007. First, while it took some 40 years for the prior Democratic majority to be whittled down, and, finally, overthrown, in 1994, the Republican-led Congress will have run its course in only 12 years. Both basically became encrusted with too much corruption for even the local voters to tolerate, so that, when added up across 435 districts, the party majorities in Congress changed.

Is it possible that the Republicans needed only 12 years to become as corrupt, on a broad scale, as the Democrats did in 40, because of modern communications and information technology? I believe it is. As my business partner stated it, corruption and bribery have become "more efficient" in the digital age.

If the Democrats win the majority in the House tonight/tomorrow/next month (after unending challenges, recounts, lawsuits, etc.), it may have profoundly unintended consequences for both parties.

For the Democrats, I believe it may well shine a spotlight on them in their "not yet ready for prime time" condition. As several news stories have reported, as many as 40 of the prospective new Democratic Representatives will look a lot like moderate Republicans, based upon their positions on a handful of salient issues- Iraq, abortion, gay marriage, etc. These Representatives, who could almost be called "Reagan Democratic Representatives," to use the old term for the crossover voters who elected that President twice in the 1980s, could well be significantly out of step with their vastly more liberal leadership. And that might lead to some unexpected alliances between the newly-elected, moderate Democrats, and current moderate Republicans, to either block extremely liberal legislation originating in the House, and/or even force more moderate conference versions before bills leave the House.

At the same time, it may be surprising to most Americans to see the much-feared, prospective Democratic House Committee leadership in action- Rangel, Obey, Waxman, Pelosi, Dingell, et. al. The Republicans have railed about the possibilities of these people running House committees for over a decade. Their actual behaviors may result in Americans having two years to rethink leaving the House in Democratic hands, come the 2008 elections.

Meanwhile, being out of leadership may be good for the Republicans. Since Gingrich was forced from office in 1999, the party has lost the ideological high ground that Gingrich led them to with his "Contract with America" in 1994. Now, with the hack-like, rotund Dennis Hastert at the helm, the House Republicans, amidst various sex and bribery scandals, look disturbingly like Jim Wright's Democrats of 1993.

Consider this example. It now appears, from various publicly reported accounts, that Hastert's lieutenants were advised of Mark Foley's sexual activities vis a vis former House pages. Apparently, fellow Illinois Congressman John Shimkus, a Hastert handler, simply swept the issue under the rug, and never mentioned it to Hastert. If this, the kindest interpretation of what probably happened, is true, it shows just how far out of touch with American society the Republican House leadership has become.

Hastert should have been on a televised press conference within hours of the receipt of such information, explaining what he knew, his options, and how he proposed to act in order to investigate the accused, and modify procedures to minimize the prospects of a recurrence. Instead, the issue has come to overwhelm the House Republicans at a time when they are already in danger of losing their majority to the Democrats.

It could well be the right time for a Republican break from leadership, in order to reshuffle its leadership, rethink its positions, and regain ideological supremacy from what already seems to be a largely ideological bankrupt Democratic House leadership.

Thus, a Democratic takeover of the House might be a needed tonic that the Republicans don't want. A little medicine now might result in their return to power, on better foundations, in 2008.

The best news about all of this is that, regardless of who wins the House, or Senate, for that matter, there doesn't have to be that much change in Federal government direction. Since either, or both, Democratic majorities would be slim, President Bush would easily wield a veto pen that could not be overridden. In fact, as I mentioned above, it's possible that some of the new House Democrats could actually dampen their own leadership's legislation before it leaves that chamber for the Senate.

Finally, letting the Democrats run the Senate and House in the two years prior to a Presidential election in which there will be no incumbent, could turn out to be a blessing in disguise for the country. If the Democrats demonstrate that, once returned to power, they can govern positively, productively and effectively, then the change may indeed be beneficial. And the Democrats may indeed have learned to curb their ultra-liberal tendencies, perhaps by changing their leadership. If, however, all the Democrats can do in those two years is to block President Bush's judicial nominations, attempt to raise taxes, withdraw from Iraq via funding cuts, and otherwise roll back 12 years of Republican work, then Americans will see that the party is not yet ready to govern the Legislative houses. Such an outcome might well provide a tailwind for the Republican Presidential candidate in 2008, with fresh evidence of the Democratic party's Congressional ineptitude.

Ironically, the worst thing for the country may be for the Republicans to dodge a bullet in both Houses this election, and carry on as usual. I think that would be a tragedy for everyone, no matter what their political leaning.

More Video Distribution: Verizon and Microsoft XBox

Today's Wall Street Journal carried stories covering the entry of two more companies into online video distribution.

Verizon, in the midst of spending tens of billions of dollars to wire its major markets for high-speed video, is now entering into an agreement to redistribute YouTube content onto its cellphones and television service. Microsoft's Xbox was announced as being capable, imminently, of downloading and playing video content from members of an entertainment consortium, into with which Microsoft has entered agreements.

I hesitate to say that either development is particularly earth-shaking. For Verizon, it's simply securing another third party video content source. Unless I'm mistaken, I can now go to YouTube myself with my cell phone. Searching it, however, would be a challenge. As for TV, I guess, armed with a wireless full typewriter-style keyboard remote, surfing YouTube would be feasible, but I won't be dropping Comcast for that.

Regarding Microsoft, again, it seems like a splinter market- online gaming youth. As my consultant friend S explained, the mostly male youth playing online games with their Xbox 360s won't be 'watching TV,' so now, a crawler can offer them deals on instant movie and other programming downloads. How large a revenue opportunity this will prove to be is beyond me, but it does provide some offset to iTunes.

Either way, I simply don't see these 'also ran' video content deals having significant impact on the total returns of either of these firms. They seem designed more to simply ante up in the race to provide ubiquitous video content access to digital device consumers.

As I sit here writing this, I find it hard to see myself extensively browsing the web with my cell phone. A Blackberry, perhaps. But in the same way that iPods and Xboxes are dedicated-application digital devices, perhaps so, too, will another evolve for wireless multi-media content viewing and communications. Everytime I read Walt Mossberg's Wall Street Journal reviews of such omnibus devices, they seem to be too bulky, clumsy, short on battery life, and missing some key feature in one of the modes- either browsing or communications.

More likely than not, the continued spread of inexpensive, or free, video content among wireless devices will, in a sort of constant iteration of device and content, lead to various new types of devices which stress one application or another, and, thus, appeal to distinct segments.

Monday, November 06, 2006

CBS Hires Quincy Smith To Find The Next YouTube

The "Who's News" section of Today's Wall Street Journal carried a prominent piece about CBS hiring one Quincy Smith, formerly of Allen & Co., the media investment banking firm.

Smith has admittedly great credentials for a 35 year old guy. He's apparently well-entrenched with the Google leadership troika, having been involved in Netscape some years earlier.

Now, a little background on this hire. Les Moonves, CEO of CBS, the spun off dreck of Sumner Redstone's mistakenly integrated Viacom, watched his boss fire Viacom's CEO, Tom Freston for, among other sins, not moving into internet businesses sufficiently quickly. Moonves is even quotes as saying,

"This shows how serious we are about new media.....We're looking to buy the YouTube that nobody has heard of yet. Quincy is the right person to help us place those bets."

Interesting. Here, Freston was being careful about selecting his entry point in a difficult situation, and Moonves, seeing that approach fail, simply ladles out cash to a new media business star, letting Smith take the ax, should things go awry.

And that's why I wanted to write this post. I think they probably will go awry. Not because Smith isn't good- he probably is.

It's that he is at CBS now. Being a highly-paid pawn, knight, or maybe even rook, on the CBS chessboard. And if I recall correctly from a fragment of a Michael Eisner interview with Redstone just last month, the latter decried anyone paying up for YouTube. Meanwhile, as I have written here, I think those who seek the "next" YouTube have the wrong concept of what's now happening in online media. Verizon's desire to be a "destination" on the internet is probably wishful thinking now.

So, we have Les Moonves charging Quincy Smith to find the next YouTube, while Sumner Redstone is already wary of paying up for new media outlets. Sounds like a recipe for frustration and disaster. And if all Smith does is broker some deal with Yahoo or AOL, how much did CBS really need to pay to do that? It would seem Smith's value is in finding precisely the kind of diamond in the rough away from which Redstone shies.

Why didn't Moonves just retain Allen & Co, with some equity sharing arrangement to incent the latter, to do the same thing for CBS, with less risk?

I don't see the Quincy Smith hire as leading to CBS demonstrating consistently superior returns for shareholders over the coming years. So the CBS/Quincy Smith saga should make for some entertaining business news over the next 12-18 months.

The Interesting Case of Dimensional Fund Advisors

Today's Wall Street Journal contains the October month-end mutual fund section. The lead story concerns a mutual fund group named Dimensional Fund Advisors.

Without restating the entire article, what interested me is how some elements of their style resembles that of my equity strategy. Their funds strategies are based upon Fama's and French's original "efficient markets" work. In fact, the two academics are involved with the company.

Dimensional could be described as having a passive management philosophy, but not using third-party indices, such as the Dow-Jones or the S&P500. Rather, befitting the academic work on which it is based, they identify smaller-capitalization companies which they tend to, apparently, hold for very long time periods. There's a quote by Fama about waiting some 25-30 years for the payoff in value stocks, which is what they characterize their portfolios as containing.

While the article does not fully disclose their approach, it does highlight their use of price/book measures to sort stocks as 'growth' or 'value,' which is a fairly conventional approach. They allegedly part company with the investment crowd on three dimensions. One, they ostensibly buy and hold for eons. Two, they end up with a passive, sort of custom-built 'index,' or fairly static portfolio. Three, they use quantitative methods, so that they can't really comment on why stocks are in their portfolio- they do none of the conventional 'kick the tires' sort of research that more qualitative shops employ.

There are some nice quotes in the piece, including one by John Bogle, the legendary founder of Vanguard. He opines that, while Dimensional's approach is very good, it's not perfect, because the market will arbitrage the excess returns to smaller-cap 'value' portfolios more quickly than French and Fama believe.

As I read the piece, I saw how, in some respects, Dimensional's approach shares some aspects of my own equity strategy's. Like Dimensional, I hold portfolio positions for longer than many other managers. And, I also employ a quantitative approach that eschews in-depth qualitative research, in favor of quantitative discipline, rigor and consistency. Like Dimensional, my holding time horizon is not for everyone. Also like Dimensional, however, the historic returns to my strategy have been much better than the S&P500.

I was, overall, very pleasantly surprised to see such a positive review of an investment approach that shares some salient characteristics with my own, in such a widely-read publication as the WSJ.