Saturday, August 09, 2008

Boone Pickens, The New Man On Horseback

I confess to becoming worried now about Boone Pickens' activities in support of his new energy 'plan.'

Going back to February, when I wrote this post on Pickens' wrongheaded contentions on CNBC, it has worried me that Pickens uses specious logic regarding US spending on one imported commodity- oil.

Holman Jenkins agreed with my assessment in his WSJ column last week, on which I wrote, here.

I wrote this in the earlier linked post,

"Boone went on to cite, as I noted in that prior post, the continuing trend toward nationalization of oil reserves. He pointed out that Exxon pumps only 3% of the world's current 85B bbls pumped per day. He then cited a statistic that the US has 5% of the world's population, but consumes 25% of its oil production. That this "isn't fair."Maybe, maybe not.

What Boone didn't note is that the US produces 25% of world GDP, using 25% of oil, but only 5% of population.

Doesn't that make us a productivity wunderkind?So here's my question: what if Boone, though well-intentioned, is wrong?Could he be overlooking Ricardian economics?How much do we export? Is our oil usage for our 300MM population, or our 25% of global GDP? on the latter basis, it seems actually fair.
Don't we effectively produce for export, as well? Can you actually align US oil consumption purely with domestic consumption, or is it, in a value-added-chain manner, an input into GDP, too?

Don't our exports of intellectual property-based value-added goods and services represent a usage of imported oil? Just like we import aluminum, steel, titanium, diamonds, and a dozen other important, necessary commodities for manufacture of US-sourced goods?"

I'm worried that Pickens, because of his financial resources, including his own wealth, is quickly becoming a 'man on horseback.' That is, a man who begins to hold sway simply by causing a public outcry and and calling others to his 'plan,' no matter how cockeyed it may be.

For example, why doesn't Pickens mention synfuels, as I did in this June post? Because Mike Jackson of AutoNation doesn't agree with Pickens on the production and sale of LNG vehicles.

Doesn't it make much more sense to fill currently-produced vehicles with synfuels made from coal? Then use nuclear and natural gas power sources to produce electricity?

Rather than spend additional resources to design and produce both entirely new vehicles, as well as a new LNG retail distribution system and aftermarket servicing infrastructure?

But it's beginning to seem as if disagreeing with Pickens means you are against 'progress.' He's now appearing on CNBC to report on how many Americans are flocking to his cause, while dismissing critics lightly.

The last thing we need now is another wealthy, prominent American, in addition to Congress, thinking and acting badly concerning the global energy situation.

Friday, August 08, 2008

Auction Rate Securities Hit The Headlines Again

Last April I wrote this post, the third in a short series at the time when auction rate securities were becoming a hot topic in the financial sector.

Only last month, I wrote this one, about UBS's new CEO, mentioning the ARS mess he had to handle.

As reported in the Wall Street Journal this morning, UBS, as well as Merrill and Citigroup have caved in to New York Attorney General Andrew Cuomo and promised to buy back billions of dollars of these improperly marketed securities.

According to the article, Merrill will repurchase some $10B of the ARSs, while Citi pledged to buy back about $7B, and assist its clients with selling another $12B of the toxic instruments.

Breaking stories this afternoon on the internet have UBS agreeing to repurchase some $8.3B of the ARS instruments they bamboozled their clients into stuffing into their portfolios.

Some fines are being levied, too. And well they should be.

When you consider the wider context of the CDO, sub-prime mortgages and ARS debacles, a pretty clear pattern of financial sector malfeasance and general disregard for customer and investor welfare emerges.

As I was contemplating this post earlier today over lunch, I realized that a story from way back in my career at Chase Manhattan Bank, in the late 1980s, is highly relevant. I may have written about it before, but it bears repeating in this instance.

As part of a mortgage banking project, I attended a CMO conference featuring the hot sector speakers/leaders of the day- Lewis Ranieri, Dexter Senft, Larry Fink, and other notables from Salomon Brothers, First Boston and Morgan Stanley.

Most of the audience was composed of S&L and small commercial bank executives eager to offload their mortgage portfolios and reduce interest-rate mismatch risk in the RTC environment.

As I sat with a random group of these financial industry worthies for the rubber-chicken lunch, we began to discuss the morning's presentations.

When I asked the banker to my left if he found the conference useful, he said that he did. Further, that he used these same bankers to package up and sell his mortgages, because it was sure difficult to properly value them for sale.

In answer to my question, he said something like,

'Yes, I need Salomon to help me, because I wouldn't know what the right value of these securities should be, with all the complex modeling.'

Then I asked him if his bank also bought CMOs from Salomon and their ilk. He replied, "yes."

Which led to my next question of him,

'But, if you need Salomon to tell you what the value of these complex securities for sale, how do you know that the price at which they offer similar CMOs to your bank to buy is appropriate- without such a banker doing the complex math to evaluate the price?'

In answer to my obviously embarrassing question, the banker promptly turned to his right and proceeded to converse with that person for the remainder of lunch.

You see my point?

Buyers of financial service products, especially 'structured' products, should know the intrinsic value and risks of such products on their own. They should not simply trust an institutional salesperson to tell the the truth- the whole truth.

Buyers of ARSs were defrauded- this is clear. They were lied to regarding how liquid the instruments would be, and that the added yield over money market instruments was somehow riskless.

But, really, in the end, should they not have known enough to ask questions? Like,

"But, how can they have a higher yield with no added risk? Surely, there must be something about them that is riskier? What is it?"

When you read about retail customers losing millions of dollars in these ARS investments, don't you wonder how they could be sufficiently intelligent to amass that much money, only to be so easily hoodwinked by some financial schlockmeister spinning tales to separate them from their hard-earned money?

The moral of my story with the mortgage bankers from the 1980s applies to the ARS market as well.

You should never purchase financial assets whose behavioral/valuation characteristics you do not completely comprehend. And if the reason you don't comprehend them is that they are 'too new,' then immediately run- don't walk- the other way.

You are likely to be fleeced.

Today, three large financial institutions agreed to repurchase some $25B of fraudulently marketed ARS investments. That's a lot of damage to retail investors.

And, of course, the next shoe to drop is where the already-capital-strapped banks will find the $25B in capital to pay for this settlement of the ARS issue.

Could this be the last straw for John Thain's Merrill Lynch, or Pandit's Citigroup?

Time will tell. But it looks like yet another ill-considered, rapacious financial services gambit has come home to roost with its purveyors.

Another reason to steer clear of financial service equities for some time to come.

AMD vs. Intel- Again

In May of 2006, I wrote this post on the then-resurgent AMD. Back in April of this year, I followed up with the shocking news that AMD had, in fact, screwed up its big opportunity.

As a backdrop, the nearby Yahoo-sourced price chart for AMD, Intel and the S&P500 Index display the story for the past five years.

AMD had actually peaked just before that 2006 piece, and has been steadily declining ever since.

Intel, true to my prediction, has never really risen to be a consistently superior total return performer again, like it was just over a decade ago. In fact, over the five years, the two both lost money for their shareholders, with AMD faring slightly worse.

Now, in a Wall Street Journal article earlier this week, AMD announced that Dirk Meyer, AMD's president and COO, will take over as CEO, too, from Hector Ruiz.

It's a sad tale of the second-rate firm nearly besting its perennial enemy, only to stumble when given a chance. Ruiz apparently lost focus, got the company over-extended, and missed important product delivery timelines.

Meyer sounds like the ticket to at least halt the bleeding at AMD. He is quoted as saying he will focus on execution and narrowing AMD's efforts to those product/markets in which they hold clear superiority over competition- read Intel.

On the other hand, some say he was a key player in the mistakes that led AMD to this point.

Honestly, either way, I don't think either chip maker would be on my equity/options selection lists anytime soon. The sector just seems too prone to erratic performance and an inability to overcome obstacles to delivering shareholders consistently superior returns.

Thursday, August 07, 2008

Holman Jenkins On Boone Pickens' Energy "Plan"

Yesterday's Wall Street Journal editorial by Holman Jenkins unequivocally voiced nearly-identical sentiments to my own regarding some of Boone Pickens' remarks about US energy and trade policy.

Echoing my own position, as expressed in this post from February of this year, Jenkins calls into question Pickens' outrage that America spends some $700B per year for foreign-produced oil.

He characterizes the purchases as a fair exchange of value for value. Then lampoons Pickens by asking if he would be similarly exorcised to learn that the US also accounted for 23% of worldwide advertising purchases?

Going beyond my economically-based criticism of Pickens' hand-wringing over foreign oil, Jenkins then finds justifiable fault with the description of Pickens' effort as a 'plan.'

He's right. I have, in the past few weeks, heard several people question the viability of a LNG car. No less a car salesman than Mike Jackson, CEO of AutoNation, pointed out that such a car 'has no trunk,' and can't be driven anywhere, anytime. It is pretty much restricted to being a short-distance commuting car.

Further, I've read some reports that the vaunted wind power on which Pickens hangs so much of his 'plan' is not quite as efficient as is claimed. Allegedly, California wind farms generate only about 20% of their rated power.

Finally, as I wrote in this post early in June, why doesn't Pickens mention coal and synfuels?

The US is as rich in coal as it is in wind. And we know that coal can be gassified to become liquid hydrocarbons at no more than $5/gallon. Probably substantially less than $4/gallon if properly incented by Federal pricing and volume guarantees.

Such a fuel would require no new vehicle designs, distribution systems, nor diversion of natural gas from its use to generate electricity in the US.

I'm very pleased to see I am not alone in seeing some gaping holes in Pickens' energy 'plan' for America.

Wednesday, August 06, 2008

More About Incompetent Corporate Boards: GM & Wachovia

A combination of Wall Street Journal articles from yesterday and mid-July gave me the inspiration for this post.

The mid-July piece described Wachovia's new CEO Robert Steel's initial moves to hold that ailing bank together in the wake of the damage done, and still being realized, by Ken Thompson's quest for growth and size.

What caught me by surprise was Wachovia board chairman and CEO search committee leader Lanty Smith's admission, as quoted by the Journal,

"There's been a complete recognition at the board level that Golden West was a mistake, and we have to deal with the consequences of it."

First, as an aside, I cannot let 'Lanty' Smith's remark pass without it reminding me of William "Hootie" Johnson, another colorfully-named southern businessman. Why is it these southerners all sport such silly names?

I can't recall the executive, but I do recall Hootie being the board member who cashiered some CEO of a large-cap firm over a decade ago- well before Hootie became infamous for the gender war at the Augusta National Golf Club, of which he was President. It sparked this recurring image in my mind of a powerful CEO telling his secretary, in earnest,

"And Doris- do NOT take calls from anyone named 'Hootie'."

Anyway, back to Lanty Smith's remark.

Why is Smith, or any of that board, still seated? After making such a blunt confession that, as board chairman, he now acknowledged that Thompson's bid to buy Golden West was a mistake with which, we assume, the entire board concurred, how can he seriously remain as a shareholder representative.

Why didn't Bob Steel call for an entire new slate of directors before taking the CEO job at Wachovia?

God knows he probably had the leverage. And who would want to begin their latest private sector stint by reporting to such a crew of numb skulls.

A group of people so stupid as to have wrecked there bank with just one ill-timed, ill-considered acquisition?

But that's not even the extent of the boardroom idiocy observed in this post.

No, it gets better.

Yesterday's Journal ran an article entitled, "GM's Board Support of CEO Continues."


Until when- Wagoner has lost the last dollar of shareholder equity in the till?

Until he has drained all value from the brands and logos associated with the near-fatally wounded, once-omnipotent US automaker?

According to the Journal piece

"One person close to the directors said the board "is totally behind Rick, realizing nobody could deal with this situation any better than he." This person added, "It's a case of an excellent plan, and delivering on all promises."

Here's a Yahoo-sourced, multi-year view of the prices of GM, Ford and the S&P500 Index.

Since 2000, when Wagoner took over GM, it has been in steady decline. So has Ford. It's hard to determine from this chart which company has lost more value, but the slopes of the declines are similar.

Thus, to say that Wagoner has managed the situation 'better than anyone' is patently absurd.

As the Journal notes,

"But Mr. Wagoner has struggled to show results on the bottom line. GM reported cumulative losses of roughly $50 billion for 2005, 2006 and 2007. GM has lost more than $18 billion so far this year."

How can any board of directors accept such abysmal performance from a CEO?

Here's yet another case where not only should the CEO be jettisoned, but shareholders deserve a new, better board, as well.

Both the Wachovia and the GM situations seem to be examples of the popular cult of denial among board members of ailing firms. They hire the CEO and approve his actions, then behave like somebody else was responsible for the resulting failure.

It's just shameful.

Thank God that real shareholder democracy means selling poorly-performing equities, not waiting until hell freezes over, which is when some of these companies will finally experience their ever-receding 'turnaround.'

GE Begins To Take Itself Apart

I was traveling in mid-July, and only now am getting to the older issues of the Wall Street Journal that are piled on the floor of my living room.

So almost a month after the announcement, I just read that GE is planning to spin off its Consumer & Industrial businesses to shareholders.

These are the original core businesses of GE- electrical-related products such as motors, light bulbs, and appliances.

On one hand, I will take credit for noting the need for this about two years ago. On the other hand, it's not really sufficient to affect GE tremendously.

The Wall Street Journal reproduced a GE chart showing that these businesses account for only 8% of the conglomerate's sales. And quoted data showing a 30% decline in the company's share price under Immelt's nearly-seven year reign of shame, incompetence and arrogance.

The entertainment, jet engine, financial services and infrastructure businesses still remain, unrelated though they are to each other.

By trying to sell the credit card portfolio business, selling or spinning off appliances, and spinning off the other electrical businesses, Immelt gives the impression that he is answering calls to split the company apart.

But he's really just nibbling around the edges.

I don't think Immelt will go after the big stuff- jet engines and entertainment- because spinning those off will cause even the dimmest analysts and shareholders to see that the corporate overhead attendant to Immelt's job will then be unnecessary. And the last remnants of GE will finally dissemble into separate businesses.

But I do think this is going to begin a trend, if only a subtle one, that results in Immelt being the last CEO of the diversified GE that we know today.

For shareholders' sakes, let's hope so.

Tuesday, August 05, 2008

A Mistaken View of Carl Icahn

Friday's Wall Street Journal carried an editorial of uncommon stupidity and bad logic. Written by a woman named Lynn Stout, a law professor at UCLA, and entitled "Why Carl Icahn Is Bad for Investors," the piece contains numerous errors of logic and perspective.

If there is any merit in the headline's contention, Ms. Stout's editorial isn't the reason you would know it.

Ms. Stout begins by bald-facedly declaring, referring to Mr. Icahn and his "fellow activist hedge fund managers,"

"they will be robbing average investors of better returns."

Ms. Stout alleges that shareholders of companies targeted by the likes of Icahn suffer because the activist investors drive up the stock's price quickly. Then, she contends, these activist investors quickly dump their shares, driving the company's price down, and harming, it is presumed, long-term shareholders.

She cites Icahn as preying on Time-Warner, Motorola, Blockbuster and Yahoo.

But here is the first of Stout's errors. As the nearby Yahoo-sourced 2-year price chart for Motorola, Yahoo, Time-Warner and Blockbuster, and the S&P500 Index, clearly shows, all of these firms have been in significant decline and unable to deliver even the passive market average total return to their investors for several years. If you examined the 5-year chart for the same entities, the story is roughly the same.

Why anyone would have been 'holding for the long term' in these issues is beyond me. Maybe Ms. Stout just likes to do charity work. For the feeble-minded and inept investors.

Hilariously, Stout accuses Icahn and his kind,

"They push for strategies that raise the stock price of the few companies they own but may lower the stocks of other companies, or that raise prices in the short term while harming companies' long-term prospects."

Suddenly, Ms. Stout has shifted her perspective, claiming that, when you own stock A, you have a moral imperative and duty to protect and bring no harm to stock B. Does this not make Ms. Stout a socialist? Hardly logic and sentiment which belongs in a discussion of activist investing, is it? Capitalism, in case you've forgotten, Ms. Stout, requires and depends upon self-interest.

Further in her editorial, Stout repeats this mistake by claiming that, because Icahn and others like him often demand the sale of the company to another firm, usually at a premium, the shareholders of the acquirer experience declines in their returns ex post.

Again, apparently selling an asset to another firm, which unwisely overpays for it, is wrong. And immoral. At least, according to Ms. Stout. Next, I guess she'd be calling for some kind of governmental intervention to protect the management and boards of all acquirers from their own mistakes.

If I'm not mistaken, most acquisitions, not just those of companies pushed to sell themselves by Carl Icahn and other hedge fund investors, fail to return appropriate or expected superior returns to shareholders of the acquiring companies.

For example see my prior post today on the subject of one company buying another's failed businesses.

As to her contention that long-term prospects are harmed by short-term stock price increases, Stout badly misunderstands the nature of "shareholder democracy."

Any shareholder can sell when Icahn sells. There's no rule or law barring other shareholders from piggy-backing on Icahn's unlocking of more value in mismanaged, has-been companies with entrenched, self-enriching, slumbering management.

Ms. Stout alleges that the shortage of well-performing public companies is due to the likes of Icahn buying the best-performing companies and taking them private

Now, that's odd, because you would think that private equity and hedge funds would have to be buying those companies at expensive prices. But Ms. Stout spent most of her editorial alleging that those activist investors by temporarily-distressed firms which, in reality, have excellent prospects.

It can't be both. Which is it, Ms. Stout?

Finally, Stout alleges that by sometimes draining targets of their excess cash, Icahn and company are damaging the companies' prospects for future profitable growth, which, she contends, is

"a serious problem for long-term average investors tyring to save for retirement."

But why is an 'average investor's' desire for retirement in any way linked to their holding period for equities? In today's fast-moving, dynamic world of American business, the old concepts of 40 years ago, to 'buy and hold' for decades, is laughable irrelevant.

Not to mention, of course, that the reason Icahn and his cohorts do this is because, as the chart above illustrates, their targets are busily wasting that cash, as if it were free. By returning it to shareholders, Icahn forces a company to account for the true cost of cash it must raise for growth-oriented initiatives. Using 'free' cash on the balance sheet cheats investors when the company is, in fact, destroying value year after year. By forcing the management to pay the market rate for its use of new cash, Icahn and his ilk actually benefit shareholders. Otherwise, management might simply assign a zero value for capital costs on internally-funded projects.

This is one situation in which past experience is a strong argument for future expectations. A management that has destroyed market value for shareholders really cannot be trusted with excess cash on its balance sheet.

Further, why would anyone necessarily have their retirement harmed because Carl Icahn temporarily drove up the stock price and returns of a mismanaged company, allowing all shareholders who wished to sell at a larger profit? Then invest the profits in better companies.

Apparently, Ms. Stout and her own investing concepts are laughably irrelevant, and wrong, as my comments have demonstrated.

Unilever Surrenders US Laundry Products Market to P&G

Unilever seems to have shown uncharacteristic candor and courage in assessing its market position in the US in laundry products, and ceding the market to Proctor & Gamble.

What puzzles me is why Vestar Capital Partners bought the businesses at any price.

The Wall Street Journal article in yesterday's edition was silent on what the acquirer intends to do with the brands. Other than forming 'Sun Products Corporation,' there was no information about Vestar or its plans.

If an experienced, global competitor to P&G couldn't make these businesses go, how would a smaller private equity shop do so? Was management at Unilever's American operations so bad that it couldn't make decent brands prosper? Or were the overhead charges and associated red tape of being part of the global giant too much burden for some decent businesses to offset?

Reading the brands involved- All, Snuggle, and Surf, to name a few- I have to say that I haven't seen advertising for any of them in years. They seem to be truly aged brands.

I guess I would have expected Unilever to just fold up those businesses. Finding a buyer for them, at about $1.4B, no less, seems an incredible stroke of good fortune for the European consumer products giant.

I'm really quite curious as to what will become of the brands involved, who Vestar is, and why they saw so much value in the moribund Unilever operations being shuttered/divested.

Monday, August 04, 2008

Congress' Lack of Comprehension of Derivatives

Friday's Wall Street Journal featured an article entitled "The New Chemistry of Speculation" in its Money & Investing section.

For everyone's good, the Journal chose to focus on how mobile and unstoppable global commodities speculation is.

Responding to investor demand, investment and commercial banks are ramping up derivative instruments to cover one of the last un-hedgeable commodities: iron ore. Like other commodity derivatives before it, this provides a more efficient way for producers and/or consumers of iron ore to directly lock in forward prices without clumsily buying, or selling equity positions in iron ore producers.

True, as the article reports, hedge funds have increased their assets allocated to commodities from $13B five years ago to roughly $260B now. But is this not simply investors taking advantage of rising, and volatile prices of 'an' asset? Nobody complains when investors pile into, say, internet stocks. Or tech issues.

Why are commodities special?

And, as the Journal's interviewed source for the article, Kamal Naqvi, points out, these contracts are really for taking positions regarding prices of commodities. They don't allow market squeezes, because no physical delivery is ever taken.

Much like agricultural commodity derivatives allow farmers and food processors to take positions which lock in prices they will receive or pay for the commodities in question, so, too, do these new instruments. They have no effect on the supply.

If only we had legislators who actually understood economics, we might get a decent policy on financial sector and overall economic issues in the US.

Until that happens, we'll have to continue to watch Washington look foolish on the global economic stage while investors move to the exchanges and markets that fulfill their demands for investments.