Friday, September 05, 2008

Boone Pickens' Energy "Non-Plan" & Inflation

Normally, I clearly separate my political sentiments from my business/economic ones. That's why I have my companion political blog.

However, this recent post is post-, trans-, bi-, or maybe non-partisan. Or whatever word is in vogue and applicable.

No matter which party or who champions Pickens-style energy solutions, there's something nobody is telling you about these alternatives and inflation.

But I am.

Rebuilding New Orleans- Again

Nearly three years ago, I wrote these two posts, here and here, regarding the aftermath of hurricanes Katrina and Rita on the US Gulf Coast. Holman Jenkins of the Wall Street Journal shared my sentiments in his editorial on the same subject of how, or whether, to rebuild New Orleans. I wrote in the first post,

"If they want the final say in rebuilding their city, then let them earn it. Ask for help borrowing capital that they will repay with a revitalized port, energy-related commercial zone and tourism areas that are safe and survivable. Rather than issuing demands that the rest of us, through the conduit of the federal government, simply hand over more than $100B to those government entities to spend as they wish. It takes a lot of gall to request/demand $100B to rebuild a city that wasn't safe in the first place, while seeming to stiff-arming the very people from whom they want the money when questioned as to how and why the reconstruction is to take place.

After all we have heard regarding the importance of the area to agricultural transport, energy production and distribution, and other general shipping needs, I don’t understand why the local and state governments can’t borrow against their infrastructure-based revenues to rebuild. I’d prefer to see the funds coming from increased prices paid for goods passing through that region to pay for the new and improved facilities, funded by bonds, than to simply hand over $100B to local and state governmental authorities.

Nobody questions the need and value or rebuilding damaged commercial infrastructure to standards which can better withstand a major hurricane, so long as that cost is economically rational. Either private or public revenue-backed bonds would seem to be feasible. If they can't attract capital, based upon the expected costs and revenues of improved and repaired facilities, then it begs the question of rebuilding commercial facilities there in the first place. What seems to be more in doubt is what kind of residential reconstruction is reasonable. Holman Jenkins wrote an excellent editorial about this in the Wall Street Journal two weeks ago."

And, as I wrote in the second linked post, the mistakes are not confined to the public sector,

"What is it about the Carolinas, Florida and the Gulf Coast? Living in a hurricane belt, you would think that the business owners and residents of the region would have shown more foresight regarding the potential damage from these storms when they build their facilities, homes and cities.

Take oil refineries, for example. I saw an interview with Lee Raymond of ExxonMobil on CNBC this week. He opined how until the past few weeks, he had never known how many experts on oil refineries there were in the US. That’s a pretty funny remark, until you let it sink in a bit.You don’t have to be an expert at building or operating an oil refinery to realize that concentrating so much evidently unprotected, vulnerable capacity in a hurricane zone seems like inept business planning. The oil industry executives bemoan over-zealous environmental regulations, but the net effect of their decisions on refining capacity and locations over the years is to be unable to keep pace with the growth of their customers’ demands for refined petroleum products."

Yesterday's excellent reprise of his three-years-ago editorial by Mr. Jenkins asked the question,

"Does the federal government have to be responsible for everything?"

He noted the difficulty homeowners had getting coverage in New Orleans after Katrina. Jenkins observed that local government officials viewed that as a 'problem,' whereas, in truth, it is the 'solution.'

Jenkins went on to write,

"No Louisiana politician will publicly write off the large submarine sections of the city and its suburbs. Yet the state in December disbanded the Louisiana Insurance Rating Commission, kicking over its portfolio of suppressed rate increases to the state department of insurance....No doubt local voters and politicians would decry it as a crime if New Orleans were forced to become a smaller, higher city because of such "greedy" behavior by insurance companies. The rest of us would see it as a sign of hope for our economic future after all."

He is right.

As I listened to Cindy McCain draw attention to those New Orleans residents who have been forced to flee, then will return, for the second time in three years, the absurdity of her observation hit me.

Back in my youth, the local Illinois river regularly flooded a low-lying area of squalid shacks a few miles upstream from Peoria. The newspaper and most of the town's citizens castigated the residents of those hovels for continually rebuilding in a designated flood zone. Eventually, flood insurance for the area was revoked, and the nonsense stopped.

Why should New Orleans be any different? As I noted in that earlier post, thanks to Holman Jenkins' initial observation, it was known as the Crescent City for a good reason. That crescent was the high ground which, in the days before the extensive levee system, was the only constantly-inhabitable, relatively safe area in which to reside.

When people flee and return to a weather- or other natural-disaster-prone area several times in a decade, it's time to end the insanity and cut off insurance and relief for those people. Anyone foolish enough to remain there should do so on their own hook. If businesses choose to locate there, then the resulting prices for their products had better cover their disaster losses. Meaning, of course, there'd better be something extremely differentiable and special about those products or services.

It's not a good thing that Jenkins and I are, three years after Katrina, lamenting the same idiocy regarding the rebuilding of troubled, ill-sited New Orleans.

Thursday, September 04, 2008

Business Media's Continuing Focus on Lehman

CNBC and The Wall Street Journal have continued their focus on ailing investment bank Lehman in the past week. This morning's Journal carried an article on the firm's new president and COO, Herbert "Bart" McDade, while CNBC has been running pieces by Charlie Gasparino for weeks. Charlie breathlessly confides his latest inside information on the crippled financial firm.

Honestly, I'm not sure I understand what all the fuss is about.

Yes, I do realize that, in a slow August summer season, Lehman's death-throes create stories, fill airtime and columns. Yes, I understand it's entertaining.

But from a business sense, the coverage has gotten out of hand, hasn't it?

Today's Journal piece opined on "Bart"- you have to love these Wall Street nicknames- McDade's potential to be Lehman's next CEO.

Does anyone else even think there will be another Lehman CEO? Or that, if there is one, it will be either for longer than it takes to sell the wreckage to another firm or firms, or, be hardly worth having, so small and insignificant will the impaired financial firm have become?

Earlier last week, the talk was all about Fuld creating a 'good bank, bad bank' structure to try to spin the bad assets at par value, in a tax free transactions, off of Lehman's balance sheet.

Then there was the article about Lehman's real estate interests, via loans to a large California land warehouser. Maybe they haven't properly written down the value of much of their exposure, an article contended.

The background drumbeat for all of this is Lehman's impending quarterly earnings announcement. All this planned pirouetting on the balance sheet is allegedly Fuld's attempt to delay or minimize further large losses on Lehman's rotten real estate-related assets.

As I last wrote about Lehman here, last week, Lehman is basically a collection of badly-purchased assets, bad management, and one still-reasonably valuable, separate asset management firm.

What's the big mystery about where this is headed?

Neuberger will be spun off, back to management, or sold for cash to another firm. One way or another, further asset value reductions will be realized, shareholder value will be further reduced, thanks to the long term effects of Fuld's ineptitude, and the firm will either shrink or die. Its valuable assets and positions will be taken over by other firms, equity value will take further hits, and the firm will finally leave the competitive field.

You can expect a lot more ink and air time over the precise manner and style of these steps. But you know, as I do, that they are coming- and soon.

I suppose you could arrange a pool with your colleagues to bet on whether or not Lehman will be around to issue a 4Q earnings release. Or the date on, or month during which the firm will finally cease its existence.

But isn't that about the only real mystery left in this story of greed, ego, and bad management on Wall Street?

Wednesday, September 03, 2008

Boone Pickens Fires Back At Holman Jenkins

Boone Pickens wrote an editorial in the Wall Street Journal on August 6th of this year in which he unveiled his plan for American energy development and usage. The next day, Holman Jenkins, writer for the Journal, replied via his weekly editorial, on which I commented in this post. Yesterday, Pickens fired back at Jenkins in a letter to the editor in the Journal.

For me, the crux of Jenkins' remarks, some of which I had already written prior to his editorial, were, as I wrote in that earlier post,

"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."

Pickens attempts to refute Jenkins', and my, criticism that the fact that the US imports oil at $700B/year is not, by itself, a problem. Unfortunately, Boone doesn't have a clear, disciplined approach to economics in this instance.

His retort is essentially a restatement of his original cry of alarm. Nowhere, for example, does he explain why it is okay for the US to import much of its steel, and probably all of its titanium, as well as some other rare, strategic minerals used in defense production.

If Boone could tell us why oil is so special, his position might be more tenable. But he does not refute Jenkins', and my, suspicions that America makes good use of that oil, creating much more than $700B of value-added which is, in turn, bought by others around the globe.

Sure, relying on others for 70% of a key commodity is risky. But that's a different argument, as Jenkins and I both noted, than the economic one. Pickens mixes the two in an intractable tangle of verbal warnings.

The remainder of Pickens' editorial simply restates his by-now familiar wind/natural gas concepts.

I write concepts because, as Jenkins noted, Pickens never provides details of how these alternative energy sources will magically be distributed across the continent.

For what it's worth, in addition to the faults Holman Jenkins noted, I added in my post,
"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."

Pickens ends by claiming he has now represented his plan, writing,

"My father used to tell me that a fool with a plan is better than a genius with no plan. So I ask, what's Mr. Jenkins's plan?"

In my opinion, Pickens still doesn't get it. Anyone can stand up and say we should use domestic natural gas and wind power. Fine. We should drill for oil offshore and in ANWR, too.

But that's not a plan. It's more of an overall approach to substituting domestic energy sources for imported oil, despite potential economic penalties, in order to provide more security for our energy sources.

Although Pickens is fond of citing how few of the world's natural gas-powered vehicles are in the US, he avoids telling you what Mike Jackson does- that those cars can't replace all the capabilities of the current, modern, average US car.

If yesterday's editorial was Boone Pickens' best reply to Holman Jenkins' criticism of his energy 'plan,' then I think Boone has a lot of work to do before anyone should follow his prescriptions.

He may be correct in warning that we are sending $700B to potential or real enemies, in exchange for their oil. But that does not mean you should necessarily accept his concept for a solution.

As I stated in my original post on Pickens' energy plan, and Jenkins echoed, it is unclear to me that, merely on economic bases, importing $700B of oil is a bad thing for the US economy. We import plenty of other commodities, goods and services, on the bases of David Ricardo's 'law of comparative advantage.'

If, however, we now believe that it is vital to keep US dollars out of the hands of those who own oil around the globe, then we can and should expect to pay an economic price for producing domestically the substitutes for imported oil.

Isn't that going to result in a lowering of American standards of living, and perhaps some inflation, as well?

How do you answer those questions, Mr. Pickens?

Tuesday, September 02, 2008

More On Ed Lampert's Failure At Sears

Last Friday's Wall Street Journal carried a article reinforcing yet another of my contentions. This time, they entitled their piece, "Mr. Lampert, Fire Thyself."

My last explicit post on Sears and Lampert, here, I noted that his foray into the retailer as its CEO had failed.
The recent picture of the firm's 2-year stock price performance, when compared to the S&P500 Index, tells the same story.
Since that post in January, the price of Sears shares has fallen precipitously, then recently bounced, to end lower than it was early in the year.
For what it's worth as empirical evidence, my daughter and I visited a KMart in West Virginia this summer. In contrast to the well-stocked and -staffed Wal-Mart down the road, the KMart was disorganized, ghostly, and very unappealing as a place to shop. Things hadn't changed much in the store's ambience since the days of my very first job working at a KMart, circa 1973.
Having lost some 60% of the firm's value since mid-2007, Lampert's ill-considered attempt to operate the retailer has cost shareholders plenty.
In this case, I think the breakingviews folks are correct. Lampert should fire himself, once he has attracted a veteran liquidator to come in and extract what value remains in the combined Sears-KMart operation.
Perhaps some of the old Sears brands, such as DieHard batteries, Kenmore and Coldspot appliances, and Craftsman tools can be sold off to other retailers in those businesses. After that, perhaps some of the real estate still has latent value, despite what I read about much of it being tied up with clauses involving being an anchor tenant in various malls.
Like many other once-great American businesses which have essentially seen their business model evaporate, Sears should simply be dismantled, before all the value shareholders might receive is needlessly spent on the turnaround that will never come.

Monday, September 01, 2008

A Detroit Bailout?

The Wall Street Journal's weekend edition carried an article by contending that the US automakers headquartered in Detroit are seeking government aid during this Presidential election as a way of avoiding bankruptcies.

For what it's worth, the column agreed with my overall diagnosis of the auto sector in its entirety, even down to the detail of noting that the Carter-era bailout of Chrsyler was not a success. Instead, the company faltered again in the mid-1990s, selling itself to Daimler.

It amazes me that Ford and GM would have the gall to ask for government assistance when they caused their own troubles. Further, to use an election year as an opportunity to effectively hold Michigan votes hostage to the candidate who promises the most financial aid to the companies is unseemly and wrong.

Hopefully, either or both major party Presidential candidates, if forced to consider paying some form of electoral extortion, will focus on aiding the displaced workers of the companies, not the companies themselves.

Whether it's airlines, steel, auto making or even banking, our government needs to stop even entertaining the idea of assisting failing companies.

Our economic system works through rewarding successful business models and using the resources of failed companies- people, physical plant, intellectual property- as material for new growth. We must let capital and consumer markets judge the management of companies via sales and equity prices.

There are growing, successful auto makers in the US. They have names like Toyota, Daimler, and Nissan. We need to allow them equal special treatment with mismanaged auto makers, which is to say, none.

If Washington will stay out of the way, the valuable parts of Ford and GM will find their way to ownership by other global auto makers, and the workers who can add value will also remain employed.

The rest will and should be liquidated to provide resources for fresh growth in the US economy.