Friday, March 16, 2007

Fast Money, Stupid Money

I have noticed an increasing presence of CNBC's Dylan Ratigan's pals, who co-star on his "Fast Money" program, doing short video pieces which are spliced into the daily business news coverage on the network.

Specifically, individuals from Ratigan's program make short videos advising viewers on how to "invest," although "trading" is really the more appropriate word.

The other day, I saw what I think may be the height of idiocy. Ratigan's colleague on his evening CNBC program, the bald guy, Jeff Macke, was featured in a clip about investment ideas.

Macke actually counseled people to consider investing in things with which they are familiar- like their Blackberry or Palm Pilot, cellphone, etc. In short, exhorting all CNBC's viewers to be their own Peter Lynch.

Macke conveniently skipped any notions of: risk, valuation, the rational expectations of other investors, etc. I found this to be truly scary, and rather irresponsible of CNBC.

For that matter, Ratigan's program's entire premise seems to be, 'trade, don't invest.' Yet nearly every one of the network's talking heads who were in attendance for their on-air wake, in honor of Lou Rukeyser's passing last year, solemnly intoned how important Lou's message of investing for long term gains was.

If you had any lingering doubts about CNBC's major role being entertainment, not news, I think the recent promotion of Ratigan's progam, and his panel, are all you need to see to be convinced.

Thursday, March 15, 2007

Viacom v. Google Re: YouTube

Tuesday's announcement of Viacom's $1B suit against Google/YouTube moves the new media challenge to a new plane.

The initial news story in the Wall Street Journal covered the expected terrain. It represented each side's views and legal position. Viacom owns the copyrights, while Google claims fair use doctrine.

Dauman, Redstone's returning lieutenant, has clearly shaken up the sluggish maneuvering between the two giants on this issue.

My consulting friend, S, believes this is simply Viacom's bid to force some sort of fee-based arrangement, and that it will never go to court. Perhaps so.

However, after reading CNBC analyst Paul Kedrosky's excellent editorial this morning in The Wall Street Journal, I am reconsidering my view on that.

Kedrosky feels that this suit is a misguided attempt by Viacom to attempt to stop the onrush of consumer demand to access and buy short clips of the video it wants. He likens it to the original Napster, and eventual legalization of single-song purchases on iTunes.

While S has maintained, and Kedrosky echos, that YouTube's airing of old Viacom material can only be a boon to the latter, the material does belong to Viacom. If they wanted YouTube doing this, they'd have asked.

To me, the reasonable and economic solution is for Viacom to realize two things. First, what most consumers want is an 'honest broker,' independent location on which to view any potential video material. Just as no single record company has ever successfully established a music website, I don't think any video content owner will do so, either.

To realize why, consider what has made Amazon, though profitless, so central to ordering printed media. You can find anything there. I believe the same will hold true for video. Thus, Viacom's best shot is to distribute through YouTube.

Second, all Viacom needs to do is demand a small slice of ad revenues from the pages on which its videos play, plus arrange for an instant, 'push-button purchase' option. Simply locate a "buy this video now" button that takes the viewer to a Viacom or YouTube checkout, and pay YouTube a percentage of the sales price.

Nobody wants to sit in front of a PC viewing endless video clips to approximate a season of any television program. YouTube's clips are for instant gratification, not long-term enjoyment.

Viacom is missing the point here with their lawsuit. As Kedrosky points out, Viacom may well win, if it goes to court, simply on the basis of their undisputed ownership of the material.

But Viacom will lose the war. Google/YouTube will remain a nexus for all sorts of professional and amateur video. But Viacom will have cut off its nose to spite its face, if it boycotts YouTube in the future, after reaping the one-time billion dollar damages.

Wednesday, March 14, 2007

Savvy Investors Lead, Mediocre Investors Panic, Then Follow

In the past, my business partner and I have discussed the implication of periods in which our portfolio's total return trails the S&P500's. We have concluded that it is indicative of situations in which our portfolio selections are 'out in front' of the market, and other investors will eventually come around to our view, and, thus, drive up the value of our selections with their similar, albeit delayed, investment behaviors.

This month, we are seeing this in spades. Witness Goldman Sachs publicly mulling over a plunge into the sub-prime mortgage "meltdown," before the heat has even dissipated. Goldman is no slouch equity investor. It's even in our portfolio right now.

More than usual, I am confident in this view of the market, as described in the title of this post.

I have written before of mediocre investors and the normal curve. Some investors are positioned for future market and company equity returns, despite the views of many other, mediocre investors, to the contrary.

Equity markets are a unique place, in that each buyer or seller of a share has an equal impact, per share, with their action. However, some investors are much smarter, more effective, than others. And as with most normal distributions, there are more inept investors, by number, than there are superior investors. However, we don't know the exact distribution of equity assets among the variously superior, mediocre, or even inferior investors.

Over the long term, we would expect the superior investors to amass equity asset values at a greater rate than the the rest of the distribution of investors.

More to the point, while mediocre and inferior investors might outnumber the superior investors, the key is not just the broad market participation, but the particular equities in which each is invested.

For instance, over the past weeks, some investors have headed to the sidelines. My guess is these would be primarily mediocre and inferior investors. So, in this period, superior investors would perhaps be both different, in remaining invested, and, per Goldman Sach's potential moves, focused on specific sectors from which less-skilled investors are withdrawing.

The bottom line to all of this is that, when an investor is well-positioned to earn superior returns over the next several months, his positions may appear to be losing during periods of volatility over those months. Periods such as the past few weeks can easily contain more noise than signal, penalizing many who attempt to trade through such periods of upheaval.

The bulk of the assets in the equity markets are held by lesser-skilled investors. When they move due to shock, as in the case of the last few weeks, their buying and selling can distort longer-term values. In the moment, who is right? The fleeing crowd, whose selling depress prices, or the patient, unmoving few savvy investors, who are still invested when the market unexpectedly swings back to a positive direction?

Tuesday, March 13, 2007

Halo Effects & US Corporate "Leadership"

This morning, as I write this, one of the more air-headed co-anchors of CNBC, Liz Claman, is breathlessly interviewing Warren Buffett, amidst more breathless and incredulous reports on the statements made by various corporate luminaries at Treasury Secretary Hank Paulsen's Georgetown University offsite conference on securities markets regulation.

The Paulsen conference is a good idea. It is pretty obvious to any intelligent business and markets observer that the ill-considered Sarbanes-Oxley regulation has significantly contributed to recent phenomena such as; increasing percentages of IPOs are listed on overseas exchanges, and the increasing involvement of large-cap senior management in the private-equity-backed buyouts of their companies.

However, it's hard for me to understand what, aside from appearances, Paulsen gains by having such corporate "leaders" as Jeff Immelt, CEO of GE, or Jamie Dimon, CEO of Chase, add their two cents worth. Or, for that matter, even Warren Buffett. John Thain, the NYSE CEO, would seem to be the most relevant contributor of the bunch. Of course, if he only talked with Thain, then Paulsen would be accused of simply running a reconstituted Goldman Sachs cabal in the public sector.

All joking aside, really, what can Immelt or Dimon add? Immelt's been an overpaid, non-performing CEO going on six years now. Dimon is essentially an untested, itinerant cost-cutter who now heads up one of several faceless, nearly-identical, mediocre US financial services utilities. He has yet to demonstrate the ability, at any company, to do more than cut costs.

Why does anyone care what those two executives think about Sarbanes-Oxley, or regulation in general?

And then Buffett. The great "sage of Omaha." Well, here are a few nuggets from the sage's own background to ponder. He bought into Salomon Brothers years ago, then had to go rescue it when the boys on the Treasuries desk engaged in collusive bid-rigging. Ooops!

Then there was the disastrous foray into airline equities.

Finally, back in 2000, I vividly recall sitting in my then-father-in-law's home, reading a Fortune (or Forbes) piece featuring Buffett's predictions for index returns for the coming decade. Now, as a little background, the long-run return to the S&P500 is roughly 11%. A recent 50th anniversary editorial in the Wall Street Journal by Jeremy Siegel noted that the S&P's return since its inception has been..... 11%. So, most people would predict to the mean for any longish term estimate of the index.

Buffett predicted a decade of S&P returns averaging in the 5-8% range. So far this decade, with the market collapse of 2001-02, the actual annual average return through the end of 2006 is 2%. Just a little forecasting error, there, Warren. Of, oh....about 300% of the actual value, and nearly 33% off of his own mean value.

So why does anyone want to hear Buffett's opinions on things other than his two key business strengths- investing cash as an institutional portfolio investor, and buying businesses for Berkshire Hathaway's portfolio of operating units?

And, similarly, why do we care about the opinions of CEOs of the more staid, anemically-performing large-cap companies? What is the source of this halo effect? That, having demonstrated no ability to actually create consistently superior returns for their shareholders, they are the preferred group from which to hear opinions about government regulations?

If they don't object to too much regulation, you should suspect them of simply showing a compliant face to Washington, in order to preserve their image for subsequent political maneuvering. If they do complain, it's going to be suspect as blaming government regulation for their own failings.

It seems to me that the guys Paulsen should be talking with, on the record, are Henry Kravis and his ilk. The guys who run Silverlake Partners, Blackrock, TexasPacific, et. al. It's the heads of the private equity firms who can really shed light for Paulsen on what has driven the volume of deals involving public firms willingly going private. Or the top-performing large-cap companies by total return over the past five years. These CEOs would have no need to use regulation to excuse their own performances. I'd be more interested to hear what those guys have to say about Sarbanes-Oxley than I would a bunch of mediocre CEOs.

Of course, you won't hear this on CNBC. That's because they assign Liz Claman, a mere talking head, to cover Paulsen's conference, rather than invite someone with sharp business mind and a knack for asking the unasked question, like Herb Greenberg, Joe Kernen, or Erin Burnett. And that's a shame.

Another wasted opportunity for excellent business news coverage by CNBC. Let's hope Roger Ailes, of Fox News, is watching this and taking notes.

Monday, March 12, 2007

After The Drop: Market Returns For The past Two Weeks

Since the US equities market dropped by 3.5% two weeks ago, tomorrow, there has been much punditry on the implications of the sudden decline.

One wonders how many investors headed for the sidelines, concerned over the sudden volatility and confusion among various market commentators on its imminent direction.

If you are curious, here are the daily returns for the S&P500 Index for the last two weeks, beginning with that Tuesday's decline.


The total return, excluding the first Tuesday's drop, ending with this past Friday, is +.30%.

For my own portfolio, here is the daily return series for the same period, again, beginning with the Tuesday loss two weeks ago.


Our portfolio's return, following the initial Tuesday loss, is +2.21%.

I believe this reinforces an old adage I learned long ago, when I worked and consulted at Oliver, Wyman & Co. I don't recall the exact statistics, but went something like this: by being out of the market for only the best 10 days over a 10 year period, an investor could miss nearly half of the period's return.

In this case, the market's performance has been net positive for the period after the precipitous decline of that Tuesday. Given the S&P's negative return at this point, the +.30% return is a fairly large component of the year-to-date return.

For our portfolio, the aftermath of the sharp drop has been even better. We regained our year-to-date margin of outperformance over the S&P500, adding 2.2% to our return.

I wonder how many investors, even veteran institutional fund managers, missed out on returns by leaving assets unallocated to equities over the past two weeks? Trying to time the market by dumping shares and running to the sidelines means often missing positive returns in the market that cannot be made up. For most managers, missing only +.30% return in the S&P could well be the margin for underpeforming the index this year.

This recent period reinforces my use of a proprietary market signal for long/short allocation. By avoiding the tendency to bolt out of a market which has experienced a few bad days, my portfolio strategy remained in place and reaped a significant gain.