Saturday, August 02, 2008

GM Failing At Both Ends Now

Yesterday's Wall Street Journal contained an article regarding GM's latest problems. To add gloom, the inept Chairman of the firm, Rick Wagoner, made a pathetic appearance on CNBC this morning to reinforce his total lack of grasp of his company's near-fatal situation.

Yesterday's headline was "GM to Cut 5,000 White-Collar Jobs by Nov. 1."

From my proprietary research on large-cap equities, I can tell you that a continually-shrinking firm- both in employees and assets- has little chance of earning consistently superior total returns for its shareholders.

So GM is continuing on the road to, at best, mediocrity, if it survives the next few years at all.

To add to its woes, GM is now following Chrysler and Ford in trimming the availability of leases in the US. This will hit vehicles such as trucks and SUVs, whose after-market values are now falling, due to their low gas mileage performances in the face of high oil and gasoline prices.

Thus, GM is taking it on both ends. It's cutting production capacity, while also cutting the availability of resources to facilitate sales in the manner which have propped up its revenues for the past decade or so.
The nearby Yahoo-sourced price chart for the past six months for GM and the S&P500 Index confirms that the company, under Wagoner's bumbling, is in freefall. Chapter 11 is probably a viable, realistic alternative before too long. GM has lost 60% of its market value in just the past 6 months.
And now they are tying one marketing arm behind their back by curtailing financing programs for leasing vehicles, after having spent years teaching their customers not to 'buy' GM products anymore, but lease them.
Smart, Rick. Really smart.
Now you've extended your mismanagement to the sales end of the business, way beyond inept oversight and leadership of design, manufacture and financing.

Friday, August 01, 2008

Starbucks' Latest Move- Posting Losses!

Only just last month, in this post, I wrote with scepticism of Howard Schultz's most recent plan to revive the company of which he is CEO, Starbucks.

Now comes news, in yesterday's Wall Street Journal, that the coffee roasting giant posted a loss.

The retrenching on which I commented in early July has apparently been a signal that, as I predicted, Schumpeterian dynamics are catching up with Starbucks, and there is little, if anything, they can do about it.

The nearby 6 month price chart for Starbucks and the S&P500 Index shows a net 20% loss of value for the coffee giant- twice that of the index.
It was as bad as nearly 30% only a few days after that post I wrote last month.
In the details of the Journal's article about Starbuck's loss is information that the company is closing 600 US locations. And that
"The company blamed the lower-than-expected revenue growth on a mid-single-digit decline in US comparable-store sales. It described US traffic, measured by average number of transactions per store, as "slow." "
Somewhat comically, at least to me, given my prior posts regarding Starbucks, segmentation, pricing, growth, and Schumpeterian dynamics, the article reports,
"In a conference call with analysts, Mr. Schultz said customers remain loyal, but "they're visiting us less frequently as a result of economic pressures." He said Starbucks will promote value for the fall and holiday seasons, though it will stop short of bundling products at discounted prices. "We're not going to go down the fast-food lane," Mr. Schultz said."
By the way, Schultz reversed himself on breakfast offerings, now keeping them, instead of getting rid of them because their aroma masked that of the coffee in the stores.
Schultz's comments seem to demonstrate he just doesn't understand his market or his own strategy. Some years ago, Starbucks went down market to stoke growth. I noted in articles of that time that this would probably come back to haunt them, and now it is.
Then there was this year's big surprise summer drink offering. What happened to that? Sales are down relative to expectations. And customers apparently aren't buying whatever new brew was introduced.
Now Schultz is promising yet another 'just around the corner' tactical move to rescue the ailing firm.
Can't Schultz and his staff simply acknowledge that they saturated this product/market long ago? That with the more focused competition from Dunkin' Donuts and McDonalds, this market is unlikely, by itself, to be capable of delivering sustained consistently superior total returns anymore?
It's over, Howard. Just admit it, retire, and go spend the fortune you justly earned growing Starbucks in your first era as CEO.
Please stop trying to job your own shareholders.

My Prediction On Lucent-Alcatel Comes True

Last October, I commented on then-current Wall Street Journal pieces warning of Lucent-Alcatel's struggles, and CEO Pat Russo's probable departure. Earlier, I had written posts here and here about the folly of Lucent's actions under Russo, including the merger.

I wrote, in part,

"Given the sub-par performance of both companies, doesn't it make you wonder why so much air time and/or ink is being spent on this combination? And why nobody seems to be asking how Pat Russo, based upon her dismal track record running Lucent, could possibly take the combined firm somewhere, performance-wise, neither company has ever been before?"

It took two years, but the board of the merged firm finally realized what I, and others, saw much earlier.

As the nearby Yahoo-sourced chart depicts, Russo's Alcatel-Lucent has failed miserably since the 'merger.' It has lost more than 40% of its market value, while the S&P500 has remained flat.

Russo, as quoted in the Journal article, alleged,

"Last year was really tough, but since we put in place the turnaround plan in the fall, we've made concrete, positive progress."

Maybe she should try to tell her shareholders that. The company's share price continued to plummet in the fall of last year, into this spring. It briefly rose, but has cratered once more.

For this abject managerial failure, Ms. Russo will receive parting gifts of "as much as" $9.4MM.


Thursday, July 31, 2008

Merrill's Capital Squeeze

Yesterday, I wrote about Merrill Lynch's recent writedowns/sale of some CDO assets.

Today's (and yesterdays, in the Lone Star article) Wall Street Journal divulged some more details about the transactions. Details so tortured as to give me even less confidence that Merrill can ever return to anything approaching 'normal.'

To begin with, just consider what the firm is really doing. Sure, Thain is asking investors to buy $8.5B in new equity. But Merrill has, according to the Journal, written off $46B in losses since June of last year.

Good money after bad? You bet. "Bet" being the operative word!

We do not know at that price investors will answer Thain's call.

We do, however, know that Merrill sold $30B of mortgage-related securities for $6.7B, to Lone Star. That's 22 cents on the dollar.

But Merrill also financed 75% of the purchase as the recourse holder for losses. Meaning it's not clear of losses yet. And didn't really flush the assets off of its balance sheet, so much as lend the money to Lone Star to take title, at a 78% discount, to $30B of untradeable securities.

Thus, we see that Thain isn't so much raising capital externally, as being forced to raise it internally by selling assets. And even dodgy assets at that, the removal of which trigger horrendous losses. And perhaps even further losses in the future, should 22 cents be too high a value per dollar sold.

But wait...there's more.

Lone Star received financing and a recourse condition for the $6.7B purchase. Doesn't that, in reality, mean the plain vanilla value of the $30B of securities, absent the special financing conditions, is, in truth, even lower than 22% of face value?

Could it be as low as, say, 18%?

Isn't Merrill really already clouding the true losses on this $30B chunk of assets?

What will other investment and commercial banks with similar assets now do to value theirs? Shouldn't Wachovia, Chase, Citi, BofA, Morgan Stanley and Lehman all be observing this 'market pricing' of some 18% of face value of these assets?

Or is this not even a 'market price?' Does its arranged nature make it not a basis on which other financial institutions should price their similar assets?

One thing is sure, though. John Thain's Merrill Lynch is now so crippled that it can't even tap capital markets reliably anymore. It must begin disgorging badly damaged assets just to free up internal capital, in lieu of having confidence that any sane investor would touch a share of Merrill common equity for years to come.

Wednesday, July 30, 2008

"Financials Are Still Reeling".....

I recently wrote this post concerning what will need to happen to speed recovery in US fixed income and housing markets. In that post, I discussed the continuing damage that 'mark to market' accounting valuation is doing to investment and commercial banks holding untradeable CDOs and other structured finance instruments.
In its weekend edition, the Wall Street Journal published a piece by, entitled "Financials Are Still Reeling."
No kidding. And why not?
Merrill's recent capital infusion of yet another $8B to cover even more writedowns makes the point quite elegantly. Today's Wall Street Journal attempted to suggest, via its article's title, "Thain's Housekeeping Spiffs Up Merrill," that the ailing brokerage firm is on the mend.
Don't you believe it.
As the nearby Yahoo-sourced one-year price chart for Merrill and the S&P500 Index shows, the financial services giant's price has collapsed by over 60% in just a year. Yes, a little blip of a daily 8% or 12% pop will occur, but on a pitifully-low base price. The bleeding is just not going to stop.
You see, this entire financial services debacle is unique because it involves tradeable instruments. Whole loans could be valued at par so long as they were performing. But once magically transformed via financial engineering into CDOs and their ilk, market price became the dominating valuation metric. And, as I and others have noted for some time now, markets for structured instruments can vanish in an instant. Thus, zero price.
There is no ability for anyone to know how much is a sufficient writedown of an asset with no trading market, except 100%. And who wants to do that?
Thus, over the past five years, as the nearby Yahoo-sourced price chart for Merrill and the S&P500 Index displays, the brokerage is down nearly 50%. Any outperformance managed through 2006 evaporated beginning in mid-2007.
Yes, financials are still reeling. And it won't stop until all the CDOs are basically written off. Totally.
Or, short of that, a vibrant market suddenly erupts all at once as a few hedge funds and private equity groups, like Paulson's ,written about in yesterday's Journal, swoop in and briefly create a market in the instruments for pennies on the dollar.
The holders will get to value the instruments, though probably at lower values than they wished. But above zero.
As I've written elsewhere, these private firms will then enjoy a spectacular rise in value of these structured instruments which are mostly still performing assets.
But for publicly-held companies, there's absolutely no reason for any investor to take a chance on what has become a blind pool of assets which are valued based upon non-existent markets for complex instruments.

Tuesday, July 29, 2008

Why Do We Need Publicly-Listed Commercial & Investment Banks? Part Two

Last Friday I wrote this post about why publicly-listed commercial and investment banks are not, in my opinion, necessary any longer in our advanced, sophisticated economy. In that post, I wrote, in part,

"We don't have a financial/bank crisis in the US. We have an oversupply of mediocre management running too many mediocre, publicly-listed financial service firms.

Now is the time to weed them out and let them die/consolidate.

As I will discuss in part two of this post, the Blackstones, TPGs, KKRs, Blackrocks, SACs, etc. of the financial sector are where the most competent, astute managers are. They have done a better job of risk management. Because, like financial partnerships of old, they own their risk.
Our modern, heavily-overseen and -regulated, publicly-listed financial services sector is a testament to the fact that all the regulatory oversight in the world can't take the place of good risk and business management in financial services.

In fact, it can be argued, and I do argue and contend, that regulatory oversight has taken the place of good management. The result is a crowd of less-talented people mismanaging publicly-listed, privately-owned financial services companies."

Perhaps it's just best to view publicly-owned and -listed banks as distributors of other people's risk-managed lending. A sort of storefront with a shingle bearing one name- Citi, Chase or BofA- while the money being disbursed inside is supplied by another- TPG, KKR, Blackstone.

Who would know the difference? Would you really care if your loan officer is simply executing Blackstone's credit standards and approval process?

The major commercial lenders and underwriters seem to only be capable of safely operating retail financial sites or making connections between lenders/investors and borrowers. Beyond that, every one of them, save Goldman Sachs, proved itself incapable of prudent, proper risk management during a time of temptation.

As I wrote here, in March, there is a sort of 'wheel of financial services,' similar to that in retail merchandising. Only, in financial services, the wheel revolves through private and public ownership of the risk management institutions providing the capital. I wrote,

"It's a sad commentary on the acumen of the CEOs and senior managements running these firms: Citigroup, BofA, Merrill Lynch, Morgan Stanley, and Bear Stearns. The natural, if erratically-timed governmental response, is to save the financial system, and, thereby implicitly restructure the sector.

Risk and capacity are likely to be further concentrated, but, in exchange, more tightly overseen and regulated.A natural consequence to this will probably be even more smart financial services people migrating back to the privately-financed arena. Just like consumer goods merchandising has the 'wheel of retailing,' whereby new entrants compete at the low-cost end of the market, as existing players migrate upwards in terms of quality, service, selection and price, so, too, it seems, will financial services now have its own version of this 'wheel.'

Only in financial services, the 'wheel' is between publicly- and privately-held concentrations of capital and risk management. Again, viewed from afar over decades, the story of commercial and investment banking for the past forty years has been a gradual selling of transactions, asset and risk management businesses at their 'tops,' as formerly-private banks of both stripes went public, followed by managerial ineptitude, decline in risk management, and excesses in pursuit of growth via more risk.

Now that the public is absorbing the brunt of the losses, via equity ownership of these firms, the logical next step is for the better executives to join the early-adopters in forming new, or joining existing private equity and hedge fund shops."

I'm not sure that, in the long term, our financial services capital provision businesses are not better off in unlisted hands. Managers of publicly-held and -listed growth-oriented financial services firms, a relatively new creation, have generally demonstrated an inability to provide shareholders consistently superior returns. Rather, they tend to cycle through credit booms and busts, exercising no real risk management, pay themselves well during the booms, and wreck the companies during the busts.

Surely, companies owned by the managers who make the risk decisions can't do worse than this, can they? For both the economy and any of their private investors?

Monday, July 28, 2008

The Evolution of Breakfast in the Lodging Industry

Recently I took one of my daughters on a fishing trip to West Virginia. Along the way, I wrote few observations- here and here- about economic activity levels in various locales along the road.

One of the enduring lessons for me anytime I travel is the evolution of the provision of breakfast at hotels over the past 40 years.

Going back to Revolutionary War days, taverns provided a bed and probably a breakfast with the room. The room, or even the bed, might be shared.

Fast forward to the 1960s, when I was young, and hotels and their kitchens had become big business.

By doing some estimating of inflation, salaries, and room rates as far back as the late 1970s, I would guess that the nightly room rate for a mid-priced, Holiday Inn-style hotel of the mid-late 1960s was about $25.

Breakfast for our family of five in the hotel's dining room would probably have run around $15-20. Almost as much as the room. Maybe more.

As I recall, you might get a hot breakfast- bacon and eggs, etc.- for something like $4, but then there was the tip and tax.

From the hotelier's viewpoint, breakfast must have been a regal pain in the ass. You had to have a kitchen crew to cook, and waitresses showing up at 6:30 or 7AM. Plus the omnipresent 'host' or 'hostess.'

As I recall, an interstate highway-sited Holiday Inn, Ramada, or other comparable chain of the era didn't usually do a land office dinner business. The dining rooms typically served pretty similar, average beef and poultry meals. Nothing to distinguish them from other restaurants, but their prices were, of course, higher, than nearby local or then-expanding national chain dinner houses.

Building and operating that full restaurant kitchen must have been a nightmare for hotel management and owners.

How much more elegant is today's solution. I really marvel at how, with time and technology, the lodging industry solved what must have been a horrific labor management, staffing, cost and operations headache, and even managed to get customers to pay more, implicitly and automatically, for less.

I'm referring to, of course, the now-ubiquitous in-hotel lobby served buffet breakfast. Most modern mid-priced chains- Hampton Inns, Fairfield Inns, and even the lowly MicroTel- provide a 'free hot' breakfast of some sort.

Now, you never explicitly reach into your pocket to pay for breakfast at a mid-priced hotel. And you can enjoy fairly decent spreads of cereal, fruit, a hot protein dish, such as pre-made scrambled eggs and a breakfast meat, or waffles, plus the usual beverages- juices and coffee. In essentially unending supply.

Of course, the cost is built into your room rate. Which also pretty routinely includes wireless internet service, too.

For the hotel management and owners, there's no kitchen to build, operate or maintain. Just a utility room near the lobby with some sinks, freezers, refrigerators and microwave ovens. A normal hotel staffer is assigned the duty of maintaining food stocks in the lobby, and cleaning up debris. Guests serve themselves and clear their own plastic and paper tableware. No chef, waitstaff or hostess to pay every morning.

How much simpler can it get? Few guests will pass up a 'free' breakfast. Yet the hotel actually has recaptured the revenue, if not the stomach, of each and every guest for their share of the cost of this decent, hot, but minimalist breakfast service.

Plus, there's no need to rouse sleeping children all at once. Each family member knows they can meander down to eat within a set time period, with no reservations required.

If you stay long enough to notice, or visit the lobby at various times, you'll see the breakfast crowd change from business people to childless couples, adults eating before their children and, finally, children with one or both parents finally making it to the lobby before the food is removed.

To me, this is just a marvelous solution that hoteliers have developed to actually make more money by providing a somewhat less-extravagant to the problem of feeding guests in the morning. Both capital and operating costs are lower, yet the revenues from the service are assured.

There aren't that many really clever, productive and elegant business solutions to problems like that of the provision of breakfast in far-flung hotels. But this is one I just continually admire.