Friday, July 31, 2009

Carol Bartz Finally Ties Yahoo Up With Microsoft

The big news in the technology sector this week was Yahoo's deal with Microsoft. Ever since the latter launched its semi-hostile takeover bid for the former, some sort of alliance has been talked about.

With Carol Bartz' recent assumption of the CEO position at Yahoo, investors' hopes brightened. Yet, after reading the reports on the actual deal, and various pundits' reactions to it, it seems many of those investors headed out of Yahoo positions, causing a one-day 12% drop in its stock price after the Microsoft deal was announced.

Meanwhile, an article in the Wall Street Journal this week extolled Microsoft's Ballmer for finally getting a few things right, e.g., Windows 7, improved XBox revenues, and the Yahoo deal.

As the nearby two-year stock price chart for Microsoft, Yahoo and the S&P500 Index shows, there wasn't a huge difference between the three. Certainly, after applying some risk premium for the two companies, they would both have underperformed the index.

The second chart, a five-year view, reinforces that conclusion.

I don't think Ballmer is by any means out of the woods yet.Microsoft has not convincingly outperformed the S&P for years, and I don't really think it's about to start now.

As for Bartz and Yahoo, I'm inclined to be a little less critical than most published pundits.

Unless you think she simply lost her mind last week and got snookered by Ballmer, the odds are that, despite her upbeat remarks to the media since she took over the helm at Yahoo, Bartz found things much, much worse than she feared.

To have gone from forecasting a 'boatload of cash' to come Yahoo's way from Microsoft for any tie-up, to getting very little, clearly disappointed a lot of shareholders. Even Ballmer chimed in with helpful comments like, 'people don't understand how good this deal is for Yahoo,' or some similar quote.

I think Bartz got the best deal she could for a firm, the very existence of which, prior to her arrival, was in doubt. She managed to outsource development for search, keep a lot of ad revenue, and get breathing room to pursue her objective of pumping up Yahoo's content.

If you revisit Bartz' remarks about the future she envisions for Yahoo, it's all about content, not search. She has managed to narrow the management focus of the firm and get continued search technology for free.

Not too bad. My guess is Bartz saw things as much worse than outsiders, and just couldn't drive a bargain that would effectively pay Yahoo up front for the Microsoft deal. But she still got what she wanted, and probably the best result among several not so stellar ones available.

While I would be unlikely to own Yahoo anymore, and don't forsee it entering our equity portfolio anytime soon, Bartz seems to have done a lot in a short time to begin reversing the damage done over many years by Terry Semel and Jerry Yang. Investors who want to own Yahoo should at least be thankful for that.

Thursday, July 30, 2009

The Myth of "High Paying Manufacturing Jobs"

Earlier this week, I saw a surrealistic debate on CNBC between an SEIU representative and Wharton's Professor Jeremy Siegel.

Siegel cited economic theory that advanced economies typically lose lower-paying jobs, including simpler manufacturing, to lesser-developed, lower-wage countries. He cited, over the past several decades, the loss of comparatively few US manufacturing jobs, in the tens of thousands, in comparison to the addition of millions of service jobs. Siegel also asked the SEIU rep if he truly wanted his union members to be paid wages on a par with those of lesser-skilled Asians?

Somehow, all of this was lost on the SEIU guy, including the irony of Siegel pointing out how his own sector benefited.

The SEIU rep kept babbling about how we "need to create high-paying manufacturing jobs," as if they are simply devised out of thin air. And, that by saying that phrase, tautologically, such jobs must exist in a long run, profitable US manufacturer.

He then continued by ticking off various guarantees that workers should have- pensions, high pay, health care. Michele Caruso-Cabrera replied that there are no guarantees now, anyway. Unions price their workers out of the market, so continued employment with such lush packages as the SEIU rep listed was often in jeopardy.

Such as at GM and Chrsyler.

The SEIU guy went nuts.

What was evident, though, was his inability to understand Siegel's first, simplest point, i.e., you really don't want US workers being paid Chinese rates for manufacturing.

Missing, too, was an understanding by the union member that advanced manufacture requires education and training. If workers can't cut it, they're destined for lower-paying jobs. Period.

There just are no guarantees with global competition.

Along the way, GE CEO Jeff Immelt's dopey speech calling for more US manufacturing was cited, and Siegel sort of laughed and implied Immelt is an idiot. That's when he began to describe the low-paying type of work that manufacturing now typically is which has been sent overseas. That we are a service and IP giant, not really destined to grow manufacturing in a world with cheaper labor overseas.

It's understandable, sadly, that the SEIU representative continues to believe in the myth of "high paying manufacturing jobs" in the US, with no thought of how they would possibly be globally competitive.

It's totally baffling, at first, why GE's Immelt would be similarly ill-informed. But, then, as readers of this blog know, I have never believed that Immelt has been a worthy successor to Welch, or, for that matter, that the former has shown any ability to merit his current position and compensation.

Wednesday, July 29, 2009

Housing Starts From A Fresh Perspective

Tuesday's Wall Street Journal had a great little article by staff writer Mark Gongloff, entitled "Pyrrhic Victory in June Housing Data," about the June housing starts. It was tucked away on the back page of the Money & Investing section.

It's fairly short, so I've pasted it below:

Many investors celebrated Monday after June's "surge" in U.S. new-home sales. Alas, it was largely wishful thinking.

True, the Census Bureau reported sales up 11% from May. That is a big number, at first glance justifying Monday's 4.5% leap in the Dow Jones U.S. Home Construction Total Stock Market Index. But it fails a close inspection.

First, home sales quite often jump in June, the height of the spring selling season. When trying to gauge the strength of home sales, then, it makes more sense to compare them with the same month a year ago. That comparison is less kind -- sales were down 21.3% from June of 2008.

Seasonally unadjusted data show a total of 36,000 new homes were sold last month, the lowest June total since 1982, notes Richard Moody, chief economist at Forward Capital.

And the Census Bureau warns against assuming too much precision in these numbers, which are based on a sample survey. Accounting for a 13.2% margin of error -- at a 90% confidence level, suggesting the actual error could be higher -- new-home sales enjoyed somewhere between a 24.2% gain or a 2.2% decline from May.

New-home inventories are falling, an encouraging development. But inventories are still higher than their historical norm, and there remains an avalanche of distressed sales.

Little wonder, then, that June's "surging" sales were driven by heavy discounting. The median new-home price -- not seasonally adjusted -- fell 12% in June from a year ago, to $206,200, the lowest June sales price since 2003. And it was down 5.8% month on month.

To paraphrase Pyrrhus, if sales keep soaring like this, then home builders will be utterly undone.

That sounds more like it. Sales are down, year-over-year. And prices were discounted to get that.

Hardly a housing boom, is it? Or even a 'recovery.'

Yes, inventories of unsold houses are being sold off, but at lower prices. Which is a good thing.

But don't kid yourself that this is going to turn around next quarter....or the one after that.

Tuesday, July 28, 2009

The Economy: Recovering, Or Ready To Plunge Again?

Alan Blinder's recent editorial in the Wall Street Journal extolled the imminent blast-off for the US economy of Samuelson's accelerator-multiplier effect.

Blinder didn't credit the retired MIT Nobel Economist in his editorial, but he provided the math to explain how housing and autos, having plunged so low, will kick-start the US economy in the next quarter just by being non-negative.

Dick Hoey, whom I knew briefly at EF Hutton many years ago, was saying the same things on CNBC yesterday afternoon.

Then we have a very detailed, persuasive editorial in last Tuesday's Journal, written by Mort Zuckerman. In his piece, the chairman of US News & World Report, and head of Boston Properties, dwells almost exclusively on the under-representative current unemployment rate of 9.5%.

Zuckerman lists 10 separate, but related points, all of which provide evidence that the demand side of the economy, via consumer spending, will almost certainly be much lower in the next few years than most pundits, analysts and economists realize.

Among his points, Zuckerman cites: underemployed, those no longer even looking for work, workers 'employed' but on unpaid leave, part-time workers who were once full-time, shorter work weeks among the employed, a 65% capacity utilization at US factories, and, finally, the longest average length of official unemployment- 24.5 weeks- since this data item has been tracked back in 1948.

For good measure, Zuckerman adds that low consumer confidence and high debt levels have increased the savings rate which will, of course, dampen any subsequent recovery, as the consumer's 'marginal propensity to consume' will be much lower than in recent years. He laments that now, when a truly job-creating, infrastructure-building federal spending bill would help, it's too late. That's because $787B was allocated for what has been, to date, largely increases in Medicare and other state-based transfer payment programs.

In effect, Zuckerman would conclude that people like Bank of New York's Hoey mistakenly believe that there will be sufficient consumer demand to justify rebuilding inventories, building new cars and houses.

Who's right?

Personally, I'd put my money on Zuckerman. Leaving aside that Dick Hoey was a fixed income manager back in the day, and his BONY/Mellon/Dreyfus bio doesn't exactly laud him as an economic Nobel Laureate, I don't think Hoey is sufficiently observant of the real differences in the effects of the recent recession on the US labor force from those of recessions prior to 1992.

That so-called 'jobless recovery' may well have marked a turning point for the US economy which has not yet been captured in various models and adequately observed by pundits-cum-economists like Hoey. Or even Alan Blinder.

Prior to the 1991-92 recession and recovery, you are looking back to 1982-83, the early Reagan years, now very nearly thirty years ago. For perspective, was the 1960 economy different from that of 1930? Very much so. And the 1980 economy was so radically different from that of 1950, thanks to electronics and technological advances in communications as to make forecasting the former with models of the latter seem laughable.

I suspect that's what is happening now. Those analysts and economists harking back to the early 1980s and using conventional models with estimates of consumer spending and labor growth have missed some important transformations in the US economy of 2009.

I don't think Zuckerman is one of them.

Monday, July 27, 2009

Barnes & Noble Enters The Electronic Reader Business

Last Tuesday's Wall Street Journal reported on Barnes & Noble's entry into the electronic book market. In a direct challenge to Amazon and its Kindle e-reader, the bookstore chain is seeking to extend its business into providing e-books across a range of readers. And, the Journal report states, probably enter the e-reader market, as well, with its own proprietary device, to be developed by Plastic Logic.

I find this very exciting.

Up to now, Amazon has had a lock on this market, although nobody knows just how lucrative it has been. Whatever that profitability level has been, watch it shrink.

Credit Barnes & Noble, too, with not waiting around to be cannibalized by a potentially growing market in electronic readers and content.
The nearby, Yahoo-sourced price chart of Barnes & Noble and the S&P500 Index shows that the bookseller has held its own with the market over the past five years, but dipped lower during the turmoil of the past 18 months.
If you think about it, there's little about Amazon's book and e-reader business that B&N can't duplicate. It has a well-known brand, and its website ought to be able to hold its own, as well.
If this boils down to a battle of pricing and features of e-readers, Amazon could be in a lot of trouble. In fact, per classic marketing theory, Amazon could actually end up paying a price for being the 'first mover' in this new publishing area.
Often, early entrants into a new field eventually suffer by becoming the target of later, better-focused and technologically-superior competing products.
Given that neither Amazon, nor B&N are doing in-house development of e-readers, it could well come down to the delivery of content. On that basis, too, B&N should be able to remain competitive.
I wonder if Jeff Bezos is worried. My guess is he should be. Not because B&N could become the market share leader in e-readers and e-books, but because it could slow Amazon's own growth, dragging the online merchant back to parity among other competitors in this new publishing area.

The Myth of Consumer Over-Spending

Last week, I caught a few minutes of CNBC's morning program, Squawkbox, when a market strategist for, I believe, Citibank, Tobias Levkovich, made a clear and succinct statement regarding US consumer debt and spending.

Levkovich unequivocally stated that he had studied data over some longish period, perhaps the past 7-8 years, and concluded that the wealth created among consumers over that time vastly outweighed what had been borrowed against housing equity and on credit cards.

David Malpas, once the chief economist of Bear Stearns, is the only other prominent analyst to have noticed this.

Levkovich then addressed the many who consistently claim that US consumers simply 'used their houses as piggybanks,' and said they are wrong. That this is a myth and it's simply, clearly, wrong.