Friday, November 07, 2008
Interestingly, nowhere in Wednesday's article was any mention of Boeing's CEO, Jim McNerney. Yet, this latest setback seems to continue the company's woeful failures of management in its most visible, bet-the-company project.
You'd think McNerney would be at least addressing it personally, if not in public. As I noted in the earlier post, McNerney hasn't exactly left a trail of successes in his prior positions. And Alan Mulally, although having his hands full at Ford, is probably feeling that his erstwhile senior management is getting its just desserts for passing him over for a guy who never ran something so complex as an airplane maker.
This latest snafu on the Dreamliner involves the improbable widespread use of the wrong special fasteners on dozens of parts fabricated by the many subcontractors for the plane spread around the globe. According to the Journal's article,
"Boeing's Ms. Leach said engineers traced the latest problem to "specifications that weren't specific enough.""
You cannot make this stuff up, can you?
Wouldn't you have guessed that Boeing would have its own quality control employees in a few pilot subcontractor plants to supervise the entire process? This sounds like an overall failure of program management at Boeing. If this process was allowed to continue in this manner for so long, what does that say about the capabilities and effectiveness of Boeing's middle- and senior-management?
Thanks to this latest delay, and the little matter of Boeing's recent strike, the first Dreamliners aren't expected to be ready for delivery until 2010.
Any guesses as to how many more of these delays Boeing can take before McNerney is asked to take the fall for them?
Thursday, November 06, 2008
From my proprietary research on company performance, Dell has now entered a pattern that will leave it very little chance of outperforming the S&P in the foreseeable future.
Wednesday, November 05, 2008
My first impression of the store was how different is its layout is from most other chains. It reminded me of Trader Joe's, whose aisles are also laid out in odd patterns, and similarly narrow.
These aisle patterns and widths seem to discourage fast, volume-oriented shopping. Supporting this, shopping carts are smaller, too.
In line with the Journal's piece, I noticed some fairly high prices on many items. Not uniformly so, but sufficient to make it clear that spending most of one's grocery dollar at Whole Foods would quickly make a major dent in your budget. Following up on my daughter's questions about some cuts of beef, I noticed that Whole Foods' offerings were literally triple the price of the same items at Costco, from which we had just come.
The mix of customers were more like those I saw in Trader Joe's, too, and less like other, larger local grocery chain stores. For example, there seemed to be fewer parents with young children. Perhaps the largest difference I noted was that lack of pace of other shoppers. Some were obviously married, empty-nesters, taking a lot of time strolling through the store.
On a Sunday afternoon, the store did not seem especially crowded. Then again, maybe it never is. As I noted, this was my first visit.
Turning to the article about Whole Foods in Monday's Wall Street Journal, it seems that perhaps what I observed on Sunday echoes what the chain is experiencing nationwide.
For the past 24 months, Whole Foods' equity price has fallen by some 80%. It's decline really accelerated in the past 12 months.
Looking back further, the 5-year chart shows the company's rising fortunes in 2004 and 2005. Beginning in 2006, however, the peak of the company's equity price had been realized.
Thus, there may be a lot of truth in a quote appearing in the Journal piece by Bob Summers of Pali Research,
"It's kind of the wrong time, wrong concept."
For what it's worth, the local, lower-priced Stop & Shop chain has organized its own product portfolio into a private-label organic brand. Further, it has grouped those items into one section of the store. So the organic-based differentiation of Whole Foods has already been competitively addressed by other chain stores in the area, including BJ's and Costco.
That makes the overall tone of the Journal's article quite believable. It notes the lack of cash on Whole Food's balance sheet, and its Starbucks-like wrangling with landlords in various shopping centers as it attempts to back out of prior lease commitments.
It's not hard to see the company continuing to appeal to a segment of high-income, small-family or empty-nest couples and singles who wish to consume only organic food and can pay the higher prices for it. That's a reasonable strategy, but for a niche player, not a nationwide chain of large grocery stores.
The next 12-18 months should be interesting ones in which to observe Whole Foods adapt to economic changes in the US.
Tuesday, November 04, 2008
My business partner and I have reasoned, since the Fannie and Freddie takeovers, that the government is unlikely to allow the past levels of profitability in mortgage finance to continue in the future. It's the simplest way to avoid a repeat of the excesses of the past few years and recent real estate lending cycle.
I've written a few posts on the nationalization of US banks, both recent, and, ideally, in the future.
Part of those futuristic musings of mine came a step closer to reality with Bernanke's comments. I actually saw part of his address live on Friday, but didn't know the context of what I was viewing.
In his remarks, Bernanke sketched out a continued role for the Federal government in housing finance in at least one of three ways: heavily regulated covered bonds to back mortgages; a 'public utility' model which featured a cooperative between private mortgage originators and GSEs, or; Federal mortgage bond insurance.
Taken in conjunction with Bernanke's comments concerning the difficulty in making the current GSE model function, it's not clear how the 'public utility' model is really any different than the current one.
But his description of government-issued mortgage bond insurance sounds like the sort of step that will further cement a nationalized banking system into place.
Can you imagine trying to sell mortgage-backed bonds in a market without such Federal insurance, when all the competing, similar bonds carry the Federal insurance? It would seem foolish.
About the only way you could do so would be to market the mortgage equivalent of high yield, or junk bonds. And we just saw what has happened to those in the past year. Much like the original junk bonds, such a mortgage-backed variant, even without the CDO overlay, would only be attractive during periods of risking markets.
But, back to Bernanke's comments. Introducing government-sourced mortgage bond insurance would encroach upon the conventional, private-sector bond insurers, such as MBIA and AMBAC. However, observing their disastrous plunge into insuring CDOs, it's unclear whether they could credibly re-enter the non-municipal bond insurance market again and offer simple mortgage-bond insurance.
With government provision of mortgage bond insurance, there would likely be a permanent foreclosure of the market to private enterprise, much like the effective elimination of private mortgage conduits when Fannie and Freddie were allowed to dominate that market.
We are probably seeing, therefore, the next concrete step along the road to heavy governmental regulation and de facto nationalization of core banking and lending functions in the US.
"In it, Taleb's approach is described in more detail than prior articles I have read. It reinforced my feeling that his is a very inconsistent strategy. That is, he is constantly buying puts, losing a little money routinely, in hopes of profiting from the really big market meltdowns. This is what I more or less sensed from my prior reading about Taleb's hedge funds.
In the Journal piece on Friday, however, Taleb's performance is discussed. His last fund earned a 60% return in 2000, then lost money in 2001 and 2002, with only low single-digit gains for the next two years. He closed the fund on the heels of such mediocre performance, during years when conventional hedge funds rack up much higher gains.
Thus, Taleb's approach, and, probably, that of the new fund using his ideas, tends to be erratic, and depend upon high volatility to earn large returns."
Of course, the events of September and October, with their double-digit negative monthly returns, provided the once-in-several-decades windfall that is the payoff of Taleb's deep out-of-the-money put strategy.
The question now, of course, is how the Taleb-inspired fund will do in the coming months. Yesterday's Journal piece noted,
"He also helped start a hedge fund, Universa Investments L.P., which bases many of its strategies on themes in the book, including how to reap big rewards in a sharp market downturn. Like October's.
Assets under management at Universa have neared $2 billion since the fund launched early last year with $300 million under management. While Mr. Taleb frequently consults with Universa's traders, the Santa Monica, Calif., fund is owned and managed by Mark Spitznagel, who worked for several years in the 1990s as a pit trader on the Chicago Board of Trade.
The strategy, which keeps more than 90% of assets in cash or cash equivalents such as Treasury bonds, either breaks even or loses small amounts in most months while waiting for periodic, infrequent spikes in volatility.
While the black-swan strategy has paid off handsomely this year, it hasn't always. Mr. Taleb's previous fund, Empirica Capital, which used similar tactics, shut down in 2004 after several years of lackluster returns amid a period of low volatility. The strategy may face another test after the current bout of market turmoil."
The piece goes on to question whether investors will remain with the fund, once the prospect of more deep market downdrafts has lessened.
My partner and I have considered this question, of course. It's a variant the one which was resolved for me years ago by a wealthy private investor during a brief stint doing research with him. A former economics professor who ventured out on his own and made a tidy fortune, he was interested in developing the equity strategy engine for a potential hedge fund group, and wanted to assess my strategy for that purpose.
While not putting it into quite these words, this investor was unequivocal in noting that, in some market conditions, one simply has to be out or short. Long-only strategies get so badly mangled in a downturn like the one of the last two months that they struggle to repair the resulting damage. Especially since most equity strategies which outperform in up markets tend to lose a lot more in serious down markets.
This brings me to Taleb's work, because he has a viable approach for the rare, but spectacularly damaging sudden bear equity market of short duration.
Few investors correctly saw the sudden wind shear-like drop coming, thinking, instead, that the evolving financial markets troubles and looming recession would temporarily dampen equity returns.
Truly, these past two months were the sort of 'black swan' event for which Taleb is so well-known.
The trick to being able to maintain a long-running equity or derivatives strategy is to have functioning approaches for both healthy, upwardly-trending market periods, and the few, dramatically falling periods. Effective transition between these two different types of market conditions is key.
It seems that Taleb's huge gains in short periods of tremendous market declines are not matched by his provision of any type of reasonably competitive long-oriented equity or derivative strategy. But investors will look for either a strategy capable of switching gears to match market conditions, or will simply switch allocations out of such single-market condition funds.
Monday, November 03, 2008
After a few days, this clip surfaced on YouTube. I think it is the one for which those readers have been searching.
Since splitting from Viacom at the end of 2005, CBS has generated more than $4 billion in free cash flow. Prudently managed, and together with well-timed asset sales, CBS should by now have accumulated a decent cash hoard to tide it comfortably through a downturn.
But CBS Chief Executive Leslie Moonves never made any secret of his impatience with CBS's slow-growth image. So while he raised more than $2.3 billion selling small radio and TV stations as well as theme parks, he has spent about as much buying digital businesses, including CSTV, Last.fm and the $1.8 billion all-cash acquisition of CNET last summer.
Moreover, he squandered $3.4 billion on ill-timed stock buybacks last year, paying an average of $32, which was only a little below the stock's high point of $35 since the split and more than three times the approximately $9.40 where the stock is now trading.
By aiming for two goals at once, he is likely to fall short on both."
Sunday, November 02, 2008
Last week, or perhaps the week prior, there was an interesting discussion on CNBC concerning the timeline and actions, or inactions, of various players surrounding the Lehman bankruptcy.
For example, there are stories of several in-person meetings between Fuld and Treasury Secretary Paulson. Some say that Paulson pointedly told Fuld to raise more capital or suffer the consequences. Others say this was not the case.
Fuld is clearly under the microscope for potentially having told his staff and executives one thing about Lehman's capital adequacy and plans to raise more, while telling investors and analysts something different. If this is proven to be true, with bad intent, Fuld could be facing jail time.
Stepping back, the larger question would seem to be this:
Can and/or should the US Federal government, either through cabinet officers or regulators, intercede with financial sector firms and either take possession of them, or direct them to take various actions, prior to a bankruptcy?
Is a concern that a firm's reckless or ill-advised courses of actions will 'cause some problem' or 'cause something bad to happen to the financial system,' of an undefined nature or magnitude, sufficient to justify the taking of personal property in the form of a publicly-held financial services firm?
Several people, including John Gutfreund, former Salomon Brothers CEO, have opined that Fuld should have known sometime late last year that he wasn't going to be able to maintain Lehman's independence for very long into 2008, as a solvent company.
Even if this were true, does that mean the Federal government should have interceded just based on fears, rather than facts?
Was Fuld's continued running of Lehman as an independent firm criminal?
These are not trivial questions.
For example, Treasury, the Fed and the FDIC have all taken actions in the third quarter of this year which would have been totally unacceptable, had they taken place one year earlier. Yet, had they taken place in 2007, the serious meltdown of fixed income and equity markets might not have occurred to the extent they have in recent months.
Was AIG necessary, or an overstepping of legal boundaries? WaMu? Fannie and Freddie?
In the case of the latter two GSE's, given that Congress and at least two Presidents encouraged these firms to securitize problematic home loans, is it fair for citizens to have lost equity value due to government's incompetence?
What is the desirable path in our mixed-economy? What are the appropriate uses of, and curbs on Federal power in maintaining the health of our financial system, while also respecting private property rights?