Saturday, July 25, 2009

Ford's Big Quarter

I saw in Friday's Wall Street Journal that Ford finally posted a profitable quarter. Granted, much of it was due to various restructuring-related, non-comparable income statement items. But evidently analysts and investors are whooping it up.

Pardon my lack of interest.

Truth is, Ford is unlikely to ever appear on my equity and option strategy's list of investments.

There are several reasons why Ford's quarterly performance is probably not the beginning of a pattern of consistently superior total returns which would truly reward investors.

For some perspective, observe the nearby 6-month, 2-year and 5-year performances of the price of Ford, compared with the S&P500 Index.
Ford is up 200%, meaning it's price quadrupled in the past six months, but is down 20% over the past two years. Over the past five years, Ford is down about 50%, while the S&P is just below flat.
Much of Ford's recent gains are simply the snap-back after the entire sector was in trouble at the end of last year. Like many other companies, values in the first quarter of this year were often far below longer term values, if the company survived. Thus, the six-month Ford stock price performance isn't really due to operating improvements.
It's not at all clear, and, actually, is pretty unlikely that this phenomenon can continue into the future.
Granted, Ford borrowed heavily while it could, during Mulally's early tenure, and generally cleaned up its balance sheet, thus avoiding GM's need to file for bankruptcy. But it still has the UAW with which to contend, and, now, is competing with two government-assisted auto makers, GM and Chrysler.
Finally, auto making just isn't the sort of business in which a has-been, ailing competitor like Ford is likely to suddenly surge forward and become a consistently superior total-return performer.
Barriers to entry are so low that Chinese cities are building cars. Newer vendors of alternative energy cars, such as electric, stand ready to compete Ford back to the point of merely average profits and growth.
Vehicle production just isn't the sort of business that has characteristics of defensible advantages, low union involvement, and high growth that are so often found in the best companies.
Ford reported one good quarter. Maybe it'll have one or two more. But the probabilities that Ford is going to be a long term bet for consistently beating the S&P500 just aren't very high. And that's as much a function of the sector in which the company competes as it is of the company's particulars.

Friday, July 24, 2009

CNBC's Resident Idiot Strikes Again

Earlier this week, CNBC resident idiot and economic-pretender Steve Liesman demonstrated why he loses so many debates, especially with Rick Santelli.

On the morning in question, Squawkbox had Wisconsin Republican House member Paul Ryan as guest-host.

Ryan, in response to a typical charge that conservatives/Republicans in Congress were simply 'against healthcare reform' and had no ideas of their own, quickly rattled off several bills proposed by Senate or House Republicans, but ignored by Democrats. His own proposal, he noted, covers the poor uninsured by providing a (roughly) $5,000 amount as a credit or rebate to use for health insurance.

When Liesman contended that this would cost Treasury, Ryan corrected him, explaining current treatment, taxes typically paid by these filers, i.e., not much, and the alternative of redesigning our entire healthcare finance system just to cover several million people.

Liesman then stared blankly at Ryan, mouth open, eyes dull, uttering something like,

'I'm sorry, I'm just not getting it, Congressman.'

Even I had understood Ryan's explanation, and I'm sure most viewers did, too.

Ryan smiled and patiently replied that he'd take Liesman back through the numbers- again- after the commercial break.

It was a priceless moment. CNBC's clueless economic reporter didn't have a clue about Ryan's rather straightforward manner of providing healthcare insurance for the poor, and the entire program had to stop until the staff dunce 'got it.'

As if it mattered. Or Liesman would be able to retain the explanation for more than a few minutes.

That's Why We Have Anti-Trust Laws

Holman Jenkins, Jr. wrote a curious editorial in Wednesday's Wall Street Journal.

In the piece, he spent considerable ink asking why Google and Microsoft don't figure out how to collude in staying out of each other's way. By comparing Google's relationship with Apple, on whose board Google CEO Eric Schmidt sits, Jenkins noted the animosity present between the other pair of companies.

Going through various detailed examples, such as Microsoft's new Bing search engine and Google's online office applications, Jenkins contended, probably correctly, that each has less prospect of gaining much revenue from encroaching on the other's turf than they have profit to protect by demonstrating their ability to hurt each other.

Somewhere in the piece, Jenkins noted the likely cross-ownership of Google and Microsoft by many shareholders, reasoning that, because of this, it would be a good thing if the two firms could somehow learn to back off and let each other's businesses alone.

But that is exactly why we have anti-trust laws. Microsoft is already moving to cut prices on Office applications and ready its own free internet version because Google entered the business with its own free online applications.

The two also tangle in search applications.

If Google weren't threatening several of Microsoft's businesses simply by its existence, we'd all be paying higher prices for less productive software from the Redmond giant.

Anti-trust law is a good thing. I don't quite understand Jenkins' contention that if only it were legal, gee whiz, these two large companies could save so much money by not building businesses which antagonize and threaten each other.

If that were so, the entire Schumpeterian dynamics process in the businesses in which Google and Microsoft engage would be slowed to a crawl.

The two firms' mutual pressures on each other to continue to innovate, offer more value for price, and worry about the other's encroachment all serve consumers well.

Why change that?

Thursday, July 23, 2009

What Ben Bernanke Didn't Tell You In His Editorial

Fed Chairman Ben Bernanke wrote a long editorial in Tuesday's Wall Street Journal, appearing the morning of his Capitol Hill testimony, entitled "The Fed's Exit Strategy."

You see, many people, including me, doubt that the Fed can effectively avoid rampant inflation caused by its monumental explosion of the US money supply and guarantees.

Ben patiently attempted to reassure readers by listing the many ways he feels the Fed can rein in much of the liquidity it recently created.

Here's the one thing Ben never mentions in his editorial.

All of the methods he described involve raising interest rates.

Whether it's by paying higher interest rates on bank reserve deposits, selling Treasuries, or any of the other approaches he outlined, they all necessarily involve boosting interest rates.

It's fundamental economics. Money supply down, rates up. Pushing securities into investors' hands via sales pushes those prices down, thus raising effective interest rates.

You know what rising interest rates tend to do?

Yes, that's right. Choke off recoveries and slow economic growth.

Granted, rates are basically at zero for now. But they are at zero with much, much more US obligations outstanding than ever before. To move the needle on these massive obligations, interest rates will have to rise.

Oh, yes. That's right, the rate the US pays on its debt will...have to...rise.....too.

Oh, my. Doesn't that raise our cost of government and the deficit?

You betcha!

Thanks for the tutorial, Ben. Next time, maybe be more honest about the effects trying to shrink the money supply will have on the economy's effective interest rates?

Wednesday, July 22, 2009

The Coming Financial Sector Troubles: Commercial Real Estate

Last week, in this post, I cautioned against becoming too optimistic over Goldman Sachs' recent blowout quarterly earnings.

Sure enough, yesterday's Wall Street Journal warned that Morgan Stanley is likely to report a loss this quarter, due in large part to bad commercial real estate performances.

This is precisely the sort of thing I had in mind when I wrote about Goldman. Goldman's earnings were trading-related, something at which the firm has always excelled. And it has been rather aggressive at writing down its commercial real estate holdings.

Morgan Stanley, however, seems to be reminding investors that it is an also-ran in investment banking, and, now, commercial banking, too. It plunged into real estate late and ineptly, being burned badly enough to have to plead for a commercial banking license, and actually consider behaving like one.

But, like most investment banks, Morgan Stanley doesn't really have a great deal of successful experience with holding physical assets like real estate for long term gains. This is now becoming clearer.

In fact, the drumbeat of commercial real estate troubles, which began some months ago, are growing louder and touching more companies, including GE.

I think it's way too early to declare soundness in the banking sector, or a healthy, recovering economy.

So long as joblessness continues to grow and federal spending fuels GDP, real estate lending of both types, residential and commercial, seems destined to limp along until prices finally fall to market-clearing levels.

Morgan Stanley's imminent disclosure of more real estate losses is probably just the tip of another expensive iceberg for the financial sector.

Tuesday, July 21, 2009

GE's Continuing Pathetic Performance

The Wall Street Journal's headline on GE's performance results this past weekend said it all, "GE Net Falls 49% as All Units Hit."


Perhaps the most glaring insult to shareholders was inept CEO Jeff Immelt's quote,

"Despite a difficult overall economy, we are pleased with our results."

That sure took a lot of gall for Immelt to say, didn't it? Look at the nearby stock price charts for GE compared with the S&P500 over the past 3, 6 and 12 months.

The financial unit saw profits plunge 80%! Once again, Immelt's mismanagement and continuation of the firm's senseless, grab-bag diversification, has injured shareholders more than was necessary.

With virtually no relationship between the major components of the firm, those shareholders wishing to hold only industrial or media properties could have avoided the enormous losses of the financial unit's toxic holdings.

The same day, a Journal analytical piece in its 'Heard On The Street' column spanked GE for two weaknesses.
First, the piece noted how GE, contrary to many commercial banks, has continued to issue debt with government guarantees. Without conventional bank deposits for funding, the company has issued $68B of obligations under various federal programs, and there's no clear end in sight of the company's dependence upon, basically, all taxpayers.
The article also draws attention to GE's lower reserves for commercial and residential mortgage losses than its commercial bank competitors. This is an area on which the firm has been castigated in prior months, and there doesn't appear to be any sign that its management has seriously considered more realistic treatment of asset values in its real estate portfolios.
Take these two items together, and you conceivably have GE raising taxpayer-guaranteed debt while inaccurately leaving questionable real estate asset values inflated.

All in all, hardly a picture of competent, prudent management of the diversified conglomerate of which so much glowing press has been written in past decades. Instead, it's become a bloated, over-valued collection of unrelated, struggling businesses dependent upon government aid to fund itself.
This is a business model of which Immelt is proud, and the performance with which he is pleased?
Jack Welch must be spinning in his grave. Oh, wait, Neutron Jack's still alive!

Monday, July 20, 2009

More Signs of Schumpeterian Weakness At Microsoft

In a rather innocuous article in last Tuesday's Wall Street Journal, the paper reported that Microsoft is set to offer a free, online version of its Office software in the first half of next year.

It doesn't get much more Schumpeterian than that, does it? Google's intense pressure on Microsoft, including helping starve the former of search revenues, then offering its own free online suite of applications software, has finally caused the software titan to buckle on maintaining Office's conventional product strategies and policies.

Despite the company's insists that it will continue to grow Office revenues at a healthy rate, I'm rather more suspect about this.

My own children have learned to subsist nicely with web-based spreadsheet and text programs. Most people don't even use 80% of what Office products contain anyway. I have never bothered to upgrade from Office 2003, which has precious little advantage over my prior copy of Office2000, and contains copy limitations, too.

It's unclear to me that I'd shell out over $600 again for a private copy of the professional version of Office. There just doesn't seem to be that much comparative advantage anymore. As it is, so long as Office2003 is compatible with a next Microsoft operating system, I would have absolutely no need to upgrade.

I'm sure I'm not alone. Microsoft didn't come to be so reviled by good product management. Like many companies and other individuals, I'm always open to ways to avoid paying the Redmond giant another buck. Especially when no new significant value has been added to its products.

With their imminent admission that the web is a required distribution channel for Office, and on a free basis, at that, I think the end of Office as a main revenue growth engine at Microsoft is in sight.