Friday, January 18, 2008

Citigroup, Merrill & Foreign Investors

It's a lot to ask of one person to make two brilliant, on-air comments in two consecutive days. But in my opinion, that's what Rick Santelli has delivered, yesterday and today.

His rejoinder to Jim Cramer on CNBC yesterday, described here, won my further respect for this straight-talking Chicago-born former futures trader and executive.

This morning, he actually topped yesterday's performance. And, in the process, publicly echoed my own beliefs about the foreign sovereign fund bailouts of Citigroup and Merrill Lynch.

The context was, as usual, CNBC's on-airhead 'senior economic report' Steve Liesman's remarks. He was prattling about the US financial system being saved by foreign capital, asking where were the well-capitalized US investors?

Santelli, without missing a beat, asked how the investments of those foreign sovereign funds in Merrill and Citigroup had fared so far? Liesman admitted they had not done well.

Santelli retorted with a simple, smirking,

"I rest my case."

In this recent post, I argued that, among the reasons for the Abu Dhabi investment in Citigroup, total return wasn't one of them. I was being charitable. I also wrote this, in which I was much less charitable.

A week or so ago, again, on CNBC, when someone asked Treasury Secretary Hank Paulson if sovereign fund investors were dumb to buy American financial services firms' equities, Paulson necessarily, astutely replied with something like,

"I would never say that anyone who invests capital in the US is dumb. We welcome foreign investment in our economy."

Well spoken, Hank. We do welcome investors.

That doesn't mean they are all smart.

Santelli continued this morning's remarks by noting that Warren Buffett seemed preoccupied with other matters, and wasn't rushing into positions in Citigroup or Merrill.

At this, Liesman muttered something about sovereign fund time horizons and different objectives.

However, most investors like to make consistently positive returns. 'Buy, hold, lose for a while, and hope to eventually make it back,' is usually a recipe for an investment manager who wants to get fired.

As I noted in this recent post, investment banking doesn't really seem all that attractive, as a sector. Neither does commercial banking, as I've written numerous times in recent months, such as here and here,

"Personally, I think these foreign investors are making a common mistake- buying damaged firms at the bottom, and hoping they will turn around. Were they to have a basket of such bets, that might be a good, risk-adjusted bet.

Somehow, though, I suspect that they are taking outsized, non-diversified bets that won't do as well, on a risk-adjusted basis, as alternatives such as US index funds or buying shares in Goldman or Lehman. Or, over the next few years, perhaps even Blackstone."

No, the dirtly little secret, to which Rick Santelli gave voice, is that these overseas investors have, in all probability, mistakenly bought into faded marquee names in American finance. Those names haven't been stellar, consistently superior performers very often, if ever, in the recent decade.

It would take the typically clueless Steve Liesman to ask why savvy hedge funds aren't buying into loss-making, crippled financial service has-beens like Citigroup and Merrill Lynch. Buying either one right now is a fairly concentrated turnaround bet. Maybe John Thain will do well with Merrill over time, but right now, an investor could probably do better elsewhere.

As a side note, Liesman also chose to debate veteran asset manager Mike Holland on an investing point this week on CNBC. I don't recall the exact issue, but Holland made a lot of sense, in the calm, thoughtful manner that is his hallmark. He's a long-experienced, successful money manager.

Liesman jumped on Holland's comment and said something like,

'I have to differ with you, Mike.'

It would have been funny, had it not simply been so pathetic. Liesman isn't even an economist, much less one of any note. He's a journeyman journalist cum TV 'economic reporter.'

Thank you, Rick Santelli, for a simple, direct observation on why you don't see American hedge funds rushing into shares of the two crippled US financial service leviathans.

Sears Struggles Under Ed Lampert

Tuesday's Wall Street Journal's Marketplace section featured an article on hedge fund maven and Sears Holdings owner Ed Lampert entitled "Why Sears Must Engineer Its Own Makeover."

It's a very revealing piece, in my opinion, in terms of being evidence in the perennial debate regarding 'corporate governance.' Specifically, it's been my belief that investors should only buy shares of firms whose performance they already find attractive. It makes little sense to buy something whose performance you don't like, betting that you can fix it, or persuade management to fix it.

While there may be occasional stories of investors who've done that, the simpler approach is that of private equity- simply buy the firm and totally refit and restructure it.

Ed Lampert's Sears-KMart play is the most visible example of the hybrid approach. Lampert took control of both firms, but left the combined firm publicly-held.

The results have been disastrous. According to the Journal article,

"With a potential recession on the horizon, retail experts say it is now clear Chairman Edward S. Lampert must engineer a radical makeover of the 121-year-old retailer to prove it can thrive alongside bigger rivals. To halt the sales and profit declines, the company's Sears and Kmart stores must forge new roles for themselves that will distinguish them in customers' eyes from competitors such as Kohl's Corp., J.C. Penney Co., Target Corp. and Wal-Mart Stores Inc.

"Sears and Kmart can't continue in the format they now do," said Love Goel, chairman of Minnesota retail investment group Growth Ventures Group and a former consultant to the retailer. "The time to fix strategy and execution issues has passed; it's an existential issue now," he said. A Sears spokesman said executives weren't available to comment."

Early on, Mr. Lampert stepped into a direct role in operations, overseeing marketing and strategy, and putting finance, until just recently, under his hedge-fund colleague at ESL Investments, William C. Crowley. Mr. Lampert has top Sears executives fly to Connecticut twice a month to brief him and his ESL colleagues. Messrs. Lampert and Crowley's direct involvement left Aylwin B. Lewis, the company's chief executive, to oversee store operations, focusing on revitalizing a store culture that seemed disillusioned and exhausted amid steady sales declines.

Executives have declined to elaborate on what those actions might be, but keeping Sears and Kmart as separate units will no longer work to carry a turnaround at either, says Growth Ventures' Mr. Goel. Kmart has lost too many customers to Target and Wal-Mart and would be better off converted to Sears's brand, he says. Craftsman tools, Kenmore appliances, and Diehard automotive lines have consumer trust and distinct identities that could make for standalone operations in a future revamping, he says.

Mr. Lampert also must make hard decisions to outsource or exit businesses, such as clothing and home goods, that have little hope of regaining customer favor. Kohl's, Penney's, Target and Wal-Mart distinguish themselves with better selection, a better shopping experience, or better prices.

The retailer's Kenmore brand has dominated the home-appliance market for years, but Sears's share of major U.S. appliance sales dropped. Only recently has Sears tried to stop the losses with a new marketing and services push. Sears blamed increased competition and a crashing housing market that has dogged home products sales for its fourth-quarter sales decline."

The portrait that the Journal piece paints is one of a successful trader who came to believe he could simply step into an operational role of a major retailer, too, and repair its shortcomings.

It hasn't turned out that way. In fact, it seems, according to the article, that Lampert's golden touch may be fading,

"Mr. Lampert and his ESL funds own nearly 48% of Sears shares, according to the most recent securities filings. The retailer's losses were a big reason ESL was down more than 20% last year. But Sears isn't his only big setback lately. ESL has almost 22% of its cash in shares of Autozone Inc., the auto-parts retailer that has dropped more than 13% in the past year, according to FactSet Research Systems Inc. He also invested more than 7% of ESL's portfolio in Citigroup Inc., raising the hedge fund's stake for the past year, even as Citigroup has lost 44% of its value."

Maybe Lampert has been distracted by Sears. Originally, wags touted his acquisition of KMart and Sears as a long-term play for the real estate beneath all the stores. But Lampert's actions have belied that.
In any case, as the nearby two-year price chart for Sears Holdings and the S&P500 Index reveal, the latter has been on a downward slide since May of last year, following a see-sawing of the stock's price throughout the earlier part of the year.

Now, however, we see his troubles extend beyond just Sears. His Citigroup investment has to be among the worst decisions a fund manager could have made.

Perhaps what we are witnessing in Lampert's struggles at Sears Holding, and ESL Investments, is simply good, old-fashioned hubris.

Did Ed Lampert just become too wealthy to remember his own personal limits? Did he think that his own substantial personal wealth would buy him the time for any investment to eventually pay off? And, then, with a little help from the other shareowners, he could sit and bide his time while the turkeys he bought gradually became swans?

It's certainly turning out much differently.

Instead, Lampert's experience with Sears validates one of my long-held beliefs. Mono-line firms in today's world tend to outperform their diversified competitors. The former have only one shot at success, so the successful ones focus intently on winning in their product/market segments. The latter have other business challenges which sap their focus, time, energy and capital. They seem to behave as if they can sustain some setbacks, due to their diverse sources of income. Ultimately, it tends to spell doom for the diversified competitors.

The best examples of this which come to mind were the standalone credit card companies of the 1990s. The best of them handily outperformed their competing divisions of large banks. Eventually, BofA even bought MBNA.

Sadly, one can easily envision the end of Sears and, probably KMart, too, as retail brands, when the agonizing Lampert saga ends. Both chains have now languished under Lampert's hand for nearly three years. That may be too much time for the once-proud Sears to overcome in its quest to reacquire customers to its brands and stores.

Thursday, January 17, 2008

Jim Cramer, Donald Trump & CNBC

This morning brought another grandstanding, self-involved performance by Jim Cramer on CNBC's morning program, Squawkbox. If you needed to see more evidence of why CNBC is in the "business entertainment," rather than the "business news" business, this would have been it.

Cramer's appearance was directly connected with a purely entertainment topic- his inclusion in one of Donald Trump's "Apprentice" episodes. From a trailer I saw a few days ago, Kodak was involved, and I'll probably write about that later. Suffice to say, both Trump and Cramer extolled the firm's 'successful' move into digital photography.

I think that would be news to Kodak shareholders.

As a sort of benchmark on Cramer's, and Trump's, judgments, let's look at Kodak's trailing two-year price chart, compared with the S&P500.

It looks to me as if both "The Donald," and his new acolyte, Cramer, reside on another planet. Kodak has managed to lose some 20% of its value over the past two years, while the S&P rose just under 10%.

In fact, if you look even longer term, as this chart does, you see that Kodak has never really regained its footing, in terms of shareholder returns, from the decades of the 1960s and 1970s.

After a mediocre tracking of the S&P throughout the 1990s, Kodak's share price has sunk as digital photography eviscerated the firm's business model. At best, from a long term perspective, you might charitably say that the worst bleeding has ended by 2001. But, since then, it's still drifted downward in a rising equity market.

So much for Cramer's- and Trump's- business judgments.

Now, back to this morning's performance by the Mad Money Maniac. For however long it lasts, here's the link to CNBC's video clip of this morning's rant. After viewing it myself, I see it begins after Cramer's comments about Bush and Bernanke.

Cramer took questions from the CNBC co-anchors and guest host, Greg Ip of the Wall Street Journal. Prominent among Cramer's jabs were, as expected, that Fed Chairman Ben Bernanke has performed abysmally, and that President Bush is equivalent to President Herbert Hoover. The latter comparison was obviously Cramer's way of announcing that he believes we are in economic straits similar to, and fully the equal of, the 1930s Great Depression. His cute way of doing this was to say,

"...President Hoover...uh....I mean Bush....."

Cramer catalogued the recent decimation of capital at Merrill Lynch and Citigroup, declaring that we were now turning to,

'communist countries and countries that fund terrorists'

to recapitalize our banks. He then announced that, but for these funding sources, the two large 'banks' would be, in fact, bankrupt. Along the way, he savaged, appropriately, Stan O'Neal, Sandy Weill and Chuck Prince. This would lead you to believe that Cramer blamed them for nearly wrecking Merrill and Citigroup.

He then decried the Fed's actions in 2007, implying that Merrill's and Citigroup's near-failures were the fault of Bernanke & Co.

Quite a flip-flop, n'est pas? It seems Cramer couldn't keep his views straight from minute to minute this morning.

When CNBC co-anchor Becky Quick asked Cramer about the moral hazard of bailing out the institutional investors, and their firms, who made unwise bets on CDOs and other, mortgage-related structured financial instruments, Cramer's faced showed a silly little grin and he said something like,

'I think you just have to do it.'

This, of course, is vintage Cramer. Going back to my post here, he has consistently railed against the Fed for not bailing out his friends who made injudicious financial bets on bad paper. There's a reason why people like Cramer aren't on the Federal Reserve system Board. They'd ladle out liquidity anytime their neighbor lost money on a business venture. It's essentially a modern version of William Jennings Bryant's "Cross of Gold" free silver coinage position.

Cramer then goes on to savage MBIA, AMBAC, and the whole idea of their insuring structured finance instruments. Most of Cramer's comments center on his own hallowed status as the 'only' person to be honest about this.

In fact, the seizing up of credit markets demonstrated that their backing didn't really matter. I won't claim to have predicted the failure of either insurance firm here, but I pointed out here that they had strayed very far from their original, sound business model. The fact that the equity values of the two firms have plummeted so far, so quickly, tells you that the market already knew, and knows, what Cramer claims to be alone, martyr-like, in stating this morning.

Next, Cramer does another rather stunning piece of waffling. He goes ballistic so fast that it's hard to keep his remarks straight, but I believe he begins his rant about the sales of structured finance instruments in response to Rick Santelli's reasonable retorts to Cramer's overall hand-wringing. More on that a little later in this post.

Cramer then begins by saying that, while at Goldman, he and his colleagues packaged junk paper and 'jammed' it on customers. He tells brief, clipped anecdotes of himself and his fellow Goldman workers laughing at how they dumped junk investments on Australian or German banks and other Goldman customers. It's actually quite reminiscent of Michael Lewis' similar stories in his excellent first book, Liar's Poker. As well as the now-infamous, long-ago 'jamming' of overpriced, needless derivatives by Bankers Trust salesmen onto companies such as Gibson Greeting Cards and P&G, which led to the bank's demise, Charlie Sanford's ouster, and its eventual sale to Deutsche Bank.

Cramer then does an about face and claims that he never 'jammed' anyone at Goldman, and that's why he didn't make more money there. That he 'had a conscience.' And that Goldman taught him and others not to 'jam' customers, because everyone else did, so the one firm that did not would win their loyalty.

This from a guy who admitted, years later, to manipulating information flows, while a hedge fund manager, including the Wall Street Journal and CNBC, in order to pump equity positions he had already taken, then dump them into the resulting follow-on buy orders.

Frankly, this little episode left me reeling in confusion. I think Cramer cut loose on the real stories, then realized what he'd admitted, and, in unfazed, continued manic fashion, attempted to retract the truth and claim that he and Goldman never actually did what he'd just said they did.

Rick Santelli brought sanity back in the final moments of Cramer's appearance by reminding him that adult institutional investors willingly bought structured financial instruments, thinking they were conning the sellers, as I noted here, and in prior related pieces on what I call the "double con."

In fact, going back a few days ago, Santelli noted that the futures traders in the Chicago pits were already indicating that more Fed action was moot. They were pricing in their expectations of a weakened, but still growing economy, through which companies would simply have to work, and no further rate cuts would really affect this. Santelli said as much again this morning, adding that all Cramer was asking was for bad investments by institutional professionals to be bailed out by the Fed.

I'm sure that having Cramer appear on CNBC's morning program increases its viewership, and probably stampedes many of them into a worried exit from the exit markets. But, viewed from a more dispassionate, broader perspective, Cramer, in my opinion, lacks credibility in his basic business judgments, and typically makes himself, and his own imagined ethics, the center of his manic performances. It's entertainment, pure and simple.

Thirty seconds of Rick Santelli in the same video space as Cramer, and you see the difference between business entertainment, and business news, information and analysis.

Wednesday, January 16, 2008

The Evolving Structure of Capital Markets: Hedge Funds As Newly-Public Investment Banks

There was a story in Monday's Wall Street Journal from the "" column concerning hedge fund managers going public via existing investment bank hookups, rather than via IPOs.

According to the column,

"Shares in Fortress Investment Group and Bear Stearns have fallen more than 50% since the days after Fortress's initial public offering last February. The two recently discussed whether they had more than that in common, according to the Financial Times. Although no deal transpired, the implication is that Fortress was looking to become more than just a hedge fund and private-equity manager. Like some other fund groups, it has intentions eventually to compete on Wall Street's turf.

Ambitious rival managers such as Citadel Investment Group might take note. Citadel is just one of several fund firms that were rumored to be on the brink of going public until the markets turned against them. Such firms might find inspiration in the abortive Fortress-Bear talks.

For alternative-asset managers that lack a stock-market currency, it is tougher to expand quickly. Yet Citadel, for one, has the ambition to take on Wall Street. It already has turned trading know-how into separate businesses, and its executives clearly relish creating an institution with a Goldman Sachs-like reputation. For Citadel or another privately held rival, a bigger deal with a publicly traded investment bank, perhaps modeled on the Fortress-Bear idea, could simultaneously help achieve strategic diversification and provide a traded stock."

My question is, why are these firms planning to take on existing publicly-held investment banking firms?

What's so special about the business of underwriting? Is the market for underwriting enjoying better margins, or substantial new growth? Last time I looked, it hasn't been a source of extraordinary profits for quite some time.

Trading doesn't require being publicly held, unless the firm wants to make a huge jump in assets committed to that business line. Judging by last year's results, most investment banks didn't do all that well for themselves. Two apparently superior risk management, Goldman Sachs and Lehman, come to mind.

But Paulson Capital, the alleged big winner in shorting the mortgage securities market, is a privately-held hedge fund. So successful asset management doesn't require going public, either.

Why would Fortress or Citadel want to become full-fledged, publicly-held companies in what seems to be a cutthroat business in which several existing players- Bear, Morgan Stanley and Merrill- are actually shrinking, due to sizable losses in 2007?

If anything, capital markets have become much more efficient in the last decade, leading the sector's competitors to risk more of their own capital in proprietary trading. It was the lack of growth and margins that caused Stan O'Neal, late of Merrill, to take so much risk in buying a mortgage originator and holding so much structured finance paper.

Why would a successful, profitable, privately-held hedge fund or private equity group want to expose themselves to public scrutiny?

I wrote a series about some of these issues when Blackstone went public, the last of which may be found here. My guess is that Citadel and Fortress are hoping that the current market turmoil will obscure investors from properly assessing the future value of the core of these firms' businesses.

Going public now, via marriage with an existing outfit, will let them, similarly to Blackstone's owners, collect cash for the presumed value of their business up front, and let new shareholders bear the brunt of any downward valuation corrections.

Between current competitiveness in the sector, recent losses by experienced players, and a lack of significant bases of differentiation and advantage as I wrote here recently, it's difficult for me to see how a newly-public hedge fund or private equity group will perform substantially better than the current crop of investment banks on Wall Street.

Is it simply a case of these firms' managements wanting a higher cash-out value from a publicly-traded stock for the same business? I think it is.

That, or simply a common case of good old-fashioned hubris. An attitude on the part of the senior partners of these private financial services firms that they can swagger into the publicly-held sector and take business from Goldman and Lehman, or make more money competing with them.

Either way, if this occurs, it's going to be a very interesting show to watch.

Tuesday, January 15, 2008

Wither Citigroup Now? Pandit's Pronouncement

It's just after noon on Tuesday, January 15th, 2008. Citigroup CEO Vikram Pandit has concluded his first earnings announcement a little while ago, and the markets are not pleased.
The write-offs are huge. Losses are near $10B. The dividend has finally been cut nearly in half. Apparently, it wasn't enough.
Seen on the left, my first Yahoo-sourced chart indicates that the company's stock price has gapped significantly lower today, back down to or below 27, from its recent 5-day high of 29.
According to some of the pundits talking on CNBC this afternoon, including one fairly prominent fund manager, Vince Farrell, Pandit blew his chance to make a good first impression. There was no talk of significant, immediate job cuts.
Let's take a longer look at Citi's stock. Here's a chart of the S&P and Citi's stock price for the last three months. The latter has been pretty much in free-fall for that entire time. It had a few local minima, where the price moved up by 5 or 10 percentage points over a few weeks. But the trend has been steadily downward.
Over the past year, the picture is similar. The price of Citi's stock has declined over 40%. Even before the summer credit market debacle, Citigroup's stock had been fading, relative to the S&P.
Finally, we have a Yahoo-sourced chart of the S&P and Citigroup for the past five years.
In this view, we see that for largely the entire period, except for a brief few months in mid-2003, the bank's stock has performed, at best, like a market-tracking stock, and, since January of 2005, three years ago, significantly worse.
Taking a look at all of these views- multi-day, multi-month, 1 & 5 years- it's hard to argue that Citigroup has been a desirable investment, or well-managed, for the past half-decade.
So, does Pandit's poor opening performance as CEO today matter?
As I jokingly wrote in this spoofish post last month, Pandit's already won. He's made at least tens of millions by selling his mediocre hedge fund to Citi last summer.
So, in all honesty, I think the answer is, "no," it doesn't matter. Nothing has changed at Citigroup.
And, according to some pundits speaking about the situation today on CNBC, it could be years before the nation's largest bank regains any semblance of traction in terms of operating performance and total return performance.
What really shocks me, though, is Punk Ziegel bank analyst Dick Bove's continuing 'buy' position on Citigroup for the past two years. At least I think his eternal optimism on the bank extends that far back. I know he was touting it heavily last spring, claiming that its best days were just around the corner.
Even this morning, he was shilling for the crippled bank on CNBC, issuing yet more strongly-worded statements of hope and support for Pandit's financial Pig.
You have to wonder what in the world would possess a veteran analyst like Bove to hew to a single view of such a mediocre, troubled bank for so long.
To me, reviewing the performance of Citigroup's stock over such a long timeframe, and comparing that to its erratic and troubled operational performance during the same period, I would have to agree with those who advise steering clear of this financial utility for the forseeable future. Aside from continuing to enrich Vik Pandit, and impoverish the poor shareholders whose original positions are being so rapidly diluted by new capital-raising efforts, I can't imagine anyone who would even consider owning this company's shares.

Monday, January 14, 2008

Returning CEOs: Buying Opportunity, or More Trouble?

Herb Greenberg wrote a fascinating piece in the weekend Wall Street Journal entitled "Why Investors Should Applaud A CEO's Encore Performance."

Drawing on the work of an Ohio State University assistant professor of finance named Rudi Fahlenbrach, Greenberg wrote

"Here is some good news for Howard Schultz and Michael Dell, both of whom have boomeranged back to become chief executives of their respective companies, Starbucks and Dell: History is on their side. It is for their investors, too.

This doesn't guarantee a happy ending, but a study of encore performances led by Rudi Fahlenbrach, an assistant finance professor at Ohio State University, shows that, on average, the stocks of companies run by CEOs on a second tour of duty outperform the market by 6% annually during their comebacks."

I like Herb Greenberg's work and am typically interested in his opinions. So when I read these opening paragraphs to his article, I took notice. My own proprietary research, while not confined to turnarounds involving returning CEOs, found them to be rarely profitable for shareholders. So I was, and am, very interested in Greenberg's and Fahlenbrach's views on this. Greenberg further wrote,

"According to Mr. Fahlenbrach, from 1995 through 2004 at least 75 CEOs at the country's 1,500 largest companies were called back to active duty from either retirement (especially if they still have a large financial stake in the company) or having been relegated to the chairman's outpost.

"One of the most significant predictors of someone coming back is poor stock-market performance of the current CEO," he said.

On average, before the ex-CEO gets the call, the stock has fallen 40% over two years. Starbucks -- a broken stock, not yet a broken brand -- had skidded by a greater amount in a shorter amount of time. Ditto for Dell. When that happens, Mr. Fahlenbrach said, "They're in need of a quick turnaround."

Not that all former bosses are better than their successors. Notable failures the second time around include Gateway's Ted Waitt, Lucent's Henry Schacht and Xerox's Paul Allaire. And don't forget the late Ken Lay, whose return as CEO of Enron coincided with the final stages of the company's downfall."

Greenberg quotes Jeff Sonnenfeld of Yale, who speaks highly of Houghton, thusly,

"Mr. Sonnenfeld says those who succeed in coming back have three qualities. The first is they came back with great reluctance; they weren't trying to undermine their successor. Second is they aren't coming back for some unmet ego need. Many had better things to do with their time, and came back "because they were being drafted by all of their key constituencies -- because of relationships, knowledge and a cultural aura they can do things nobody else can do to fix the problem." Third, and perhaps most important, he said, is "they recognize what they had built isn't a religion. At Corning, Mr. Houghton had to revisit all kinds of decisions he may have been part of making." "

Stepping back, Greenberg lists Jamie Houghton of Corning, Michael Dell of Dell, Howard Schultz of Starbucks, William Stavropoulos of Dow Chemical, and Chuck Schwab of Schwab among those who either have been successful at returning to turn their old company around, or are expected to do so.

Let's have a closer look at these, dispensing with those even Greenberg cited as ineffective- Schacht of Lucent, Waitt of Gateway, and Allaire of Xerox.

Nearby is a long term price chart for Dell, Starbucks, Corning (GLW), and Dow Chemical. Have any of them returned to a consistent path of outperformance of the S&P? Because the 6% per annum mentioned by Fahlenbrach wouldn't be all that spectacular if it only lasts one or two, perhaps even three years.

It's easy to see Dell's slide and Starbucks slowly running out of gas before failing in 2006. Of course, Schultz didn't actually leave the company, just the CEO position. I think Michael Dell was further removed and out of Dell when it finally began to actually decline.

According to Greenberg's piece, Houghton and Stavropoulos returned to their respective firms in 2002, the former for three years, the latter for two.

I can't honestly see a difference in Dow from 2000 until now. Corning fell after Houghton returned, and seems to have only clawed back to even by the time he left. Since then, it's climbed a bit, but has only matched the S&P for the past two years.

This next chart displays recent price activity more clearly. Corning is definitely still wandering aimlessly since early 2006. That's a two-year stint of inferior performance. So much for Sonnenfeld's admiration for Houghton. In fact, if he left in 2005, it seems that things actually took off, briefly, for a year after his departure, before running out of steam again.

Dow, too, clearly has not been giving shareholders consistently superior returns, either, since 2004.

How about Chuck Schwab? He returned in mid-2004, making him CEO for the past 3 1/2 years. The nearby chart seems to show he's done better than the other examples in Greenberg's article.

Even so, he has yet to get Schwab back to consistent outperformance. But he may be close. If he can continue the firm's total return performance path in 2008, he'll have done it. And it looks as if he is the only one of those mentioned by Greenberg and Fahlenbrach who actually has done so.

Why do you suppose that Fahlenbrach, and Greenberg, are so enamored of a few short-run CEO return successes, and a few who didn't even manage that?

Personally, I think it demonstrates how low most analysts and observers set the bar for 'excellent' performance. To paraphrase Fahlenbrach and, by inference, Greenberg, a two or three years of besting the S&P by only 6 percentage points draws notice.

My own research shows this is actually well within the range of pretty average performance. Many companies can do that, and don't need to be turning around while they do it.

Why do you suppose that these CEOs, as a group, mostly failed to move their firms to consistently superior total return performance?
In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance.
Dow and Corning represent, I think, business models which have been uneven at best for a long time. They don't tend to have even been consistently superior growth firms to begin with. Given their stock price paths, it's clear that holding the S&P instead of ever holding the those companies' shares would have been a safer and more profitable choice for over twenty-five years.
In the final analysis, while I enjoyed reading Herb Greenberg's piece on Fahlenbrach's work, I found the conclusions to be largely unsustained. I guess my expectations of outstanding CEO and investment performance are higher than those of either of those two guys.