Friday, August 21, 2009

Chase Bank Veers Into Government Charity Work Again- At Its Peril

Coincidentally, I saw a Wall Street Journal piece noting Chase Bank's role in providing cash to California to back the state's IOUs on the same day that Glenn Beck revealed Chase CEO's special relationship with Wonderboy.

In both cases, I believe we are witnessing a return to the bad old days of Chase Manhattan, when then-CEO David Rockefeller, along with Citibank CEO Walter Wriston, unwisely became the conduits for recycling petrodollars into sovereign loans to South America, without adequately charging a premium for said sovereign lending.

It was a lesson that came home to roost decades later, during my tenure at Chase Manhattan. In the end, Citibank wrote off, if memory serves, $3B in sovereign loans, while Chase chipped in $1B. It may have been one hundred times those amounts. With the passage of some twenty years, I confess to no longer recalling the exact number of zeros. But it was likely the former numbers.

Now, Jamie Dimon is entering similar waters by lending to deadbeat, broke California. Sovereign lending is always special because your counterparty has the power to simply nullify your loan contract and repudiate the debt. And prevent you from suing to recover in the domicile.

Sure, Chase is getting some underwriting business now. But in time, one has to wonder if an out-of-state bank will continue to receive favorable treatment, when Wells Fargo is headquartered in California.

Then we come to another key link between Chase and a governmental entity.

Glenn Beck revealed that Chase has a special "midwestern director" on its board. None other than Chicago mayor Richard Daley's brother and veteran Democratic political operative, Bill Daley. No chance that Daley is somehow in contact with Wonderboy, is there?

No not much. Hah!

Beck apparently discovered that Dimon has a literal direct phone line to the White House, and noted that Wonderboy has publicly referred to Dimon as a model banker.

Then Beck went further, reaching far back into the bank's past, to describe how, under Rockefeller, Chase bent over backwards for ACORN and/or its forerunners to basically pay financial bribes in order to avoid being victimized by the organization.

Whenever companies stoop to this sort of tactic to ingratiate themselves with government, it usually ends badly. Governments change, and, when in trouble, governments have a nasty habit of turning on any and all businesses whose interests then conflict with their own.

If you thought Dimon's Chase was a safe or smart investment, think again. Dimon is playing with fire by courting various governmental entities and not charging for the risk inherent in that game.

It's likely to come back to haunt him and the bank, just as it did in the 1980s, after Rockefeller's dubious sovereign lending binge of the 1970s.

Thursday, August 20, 2009

When Biased Reporting Goes Too Far And Misinforms

Over the past few weeks, I've noticed something in CNBC's coverage of the health care legislation that constitutes not just sloppy reporting, but genuine misinformation.

Carl Q, the hispanic co-anchor of the network's morning Squawkbox program, now exhibits a rather strange behavior for a news program anchor. Either he is really stupid, and I don't mean that lightly nor euphemistically, or he's been given orders to ignore certain realities.

Here are just two examples, out of several I've seen this month, of what I mean.

A few weeks ago, Carl Q interviewed Virginia Republican Representative Eric Cantor on health care. After Cantor laboriously catalogued several Republican ideas, presented for inclusion in a health care bill, Carlos asked Cantor,

'So, if you defeat this bill, do you declare victory Congressman?'

Anyone watching the interview just saw Cantor say that Republicans know that things must improve in the health care sector, and that he had just ticked off a number of ideas for introducing substantially more competition without government involvement as a provider.

Carl the Q simply ignored these, and, instead, attempted to paint Cantor and his colleagues as purely negative and only wishing to halt any health care reform.

You have to wonder, if Carl were not given instructions to do this, how he can be allowed to remain in his job when he's so obviously mentally impaired. He cannot process statements by his interview subject and respond to them contextually.

Then, just this week, South Carolina Republican Senator Jim DeMint was interviewed by the very same Carl the Q. Once again, the Senator rattled off several ideas which Republicans had offered for health care reform. Once again, Carl the Q responded by totally ignoring DeMint's remarks, saying, to paraphrase,

'So, Senator, is there any possibility Republicans will compromise on cooperatives instead of a single-payer model in the health care bill?'

It's apparently a reflexive response that Carl can't hear his Republican Congressional interview subjects' answers about solutions to health care costs, etc.

A wide range of Republicans now routinely offer a coherent, sensible set of solutions, including:

-medical tort law reform
-interstate insurance competition, ending state-bound regulation and marketing, to increase competition
-relaxing/removing mandates so that consumers may purchase exactly what they choose
-tax-based credits or other treatment to place all consumers on a level field in terms of before- or after-tax basis for health insurance expenses
-a government-funded credit for pre-existing conditions insurance, distinct from that offered by for-profit entities

Why CNBC can't manage to acknowledge these truths is beyond me. Unless, of course, you assume the network, as a matter of policy, simple chooses to tilt the news this dramatically.

Otherwise, one is left to conclude Carl Q is totally unable to do his job, and should be fired for incompetence.

After all, if a news anchor can't reliably and correctly report news and interview newsmakers, of what use is he?

Wednesday, August 19, 2009

The Coming Bernanke Inflation

A little less than a month ago, Fed Chairman Ben Bernanke took the unusual step of penning an editorial in the Wall Street Journal, on which I wrote this post, entitled, "The Fed's Exit Strategy."

I observed, in my piece,

"Here's the one thing Ben never mentions in his editorial. All of the methods he described involve raising interest rates.

You know what rising interest rates tend to do? Yes, that's right. Choke off recoveries and slow economic growth."

Back about a week before Bernanke's piece, occasional Journal editorialist Andy Kessler wrote a column in which he observed,

"At the end of the day, only one thing has worked- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear."

I don't usually find Kessler's financial sector insights very good, but this time was an exception. I think he's right on the money, as it were. Pun intended.

Then Journal staffer and editorialist Kim Strassel chimed in last week, noting that Bernanke has a big job on his hands trying to get renominated and reconfirmed for his job. She observed Congress' rough handling of the Fed Chairman at hearings, wherein he was vaguely accused of perjury for 'forgetting' key conversations with Ken Lewis and then-Treasury Secretary Hank Paulson.

Strassel shrewdly concluded,

"The once hard line between the "independent" Fed and the rest of official Washington has been blurred. Mr. Bernanke's problems are now the Obama team's."

Personally, I am betting on Larry Summers' getting Ben's job. But that won't keep Ben from trying.

And that, unfortunately, means the Fed Chairman won't tighten until after he is sure he is either renominated, or not. And if not, then why bother?

Either way, here's the thing. We are in for easy money for the rest of the year. And when the US economy gets addicted to cheap, or, in this case, nearly no-cost money, watch out.

There is no safe exit to this monetary policy mess that will leave the US economy in healthy shape.

The monetary-based equity rally of the past few months isn't about a recovery. It's about hope for a recovery with low interest rates.

Whether it's tightening or inflation, there's no obvious safe, easy path out of this mess which includes a healthy, growing US economy in the next year.

Tuesday, August 18, 2009

Dinner With The Colonel: A Lesson In Inept Management & Marketing

I had the occasion to visit a KFC outlet last night. My interest was to try the chain's new

grilled chicken menu item. It had been praised by a friend earlier this summer. Since the only local store was only slightly out of my way home from my fitness club, I decided to try it last night.

I've been to that store in the past, and always find the gaudy, crowded menu difficult to understand. I don't think it's just me. When I visit a Burger King or McDonalds, the choices are pretty obvious and clear.

Not so at KFC.

The menu board is busy and confusing. There must be upwards of 30 ways of getting chicken, and none are really very clear. They have fried, extra crispy, now grilled, with or without sides, in varying quantities. But pricing isn't clear, nor is exactly what combinations are on offer.

By the way, is it Colonel Sander's Fried Chicken? Kentucky Fried Chicken? KFC? Or Colonel Sander's Kentucky Grilled Chicken?

References to the Colonel still appear, but the chain went from its longer name to KFC years ago. Of course, fried food went out of style for a time, thus the name change. But using the Colonel evokes the chain's roots and one signature product- fried chicken.


The service was just horrendous. I stood looking at the menu for over a minute while the counter attendant busily cleaned in front of me on the customer side of the counter. She didn't even acknowledge my presence until she returned to her side to wait for my order.

Being, as I noted above, confused by the poorly-designed menu, I just asked what quantities of grilled chicken were available, and for what prices. After some thrust and parries to get the information I desired, I settled on buying just a half of a grilled chicken and a drink.

It was, thus, somewhat insulting to have a plastic plate with two legs and two thighs shoved my way by the indolent counter attendant.

I asked if their usual half chicken came all dark, and she replied it did not. She then made a point of slowly searching high and low for a breast and wing.

When I went to fill my standard-chain-store-issue drink cup, there was no ice. I remarked on this, and the manager- no less- had to manually pour a fresh bucket of ice into the dispenser.

Then I had to ask for cutlery, as none is in view. Again, a sigh and a slow, laborious movement by the attendant brought the requested dining tools.

When I finally got to taste the new grilled chicken, it was superb. A little pricey, in my opinion, at $10 for rather smallish pieces of grilled chicken. But the flavor was really very good.

My mixed experience brought forth this post.

The KFC branding is schizophrenic. The "Colonel" is still mentioned, but he's really a relic of a bygone era.

It's KFC, but the hot new non-fried menu offering is great. Trying to order it is a challenge.

Then I looked at the nearby five-year price chart of YUM Brands and the S&P500 Index. To my great surprise, YUM has handsomely outperformed the index for nearly three years. It did a bit better consistently from 2005, and really held its own beginning with the recession late in 2007, while the S&P cratered.

Of course, YUM is the combination of KFC, Pizza Hut, Taco Bell, Long John Silver's, and A&W All-American Food Restaurants brands, so you can't deduce that KFC is actually driving YUM's good performance. Personally, I have had more and better experiences at the firm's A&W and Pizza Hut units.

I included McDonalds and BurgerKing in that chart above for comparison. As I expected, YUM looks a lot like BKC, while both trail McDonalds. It once again goes to show what product and brand leadership do for you in tough times. McDonalds just eased ahead of both of its competitors, although, as I may write in an upcoming post, they have their own occasional store issues, too.

I guess my overall takeaway- no pun intended- from my KFC visit is how my experience of a really good, fresh, well-prepared fast food item can be ruined by inept, slow and uninspired service.

Did I mention, by the way, that as I sat eating, at 8:45PM, over an hour before the store's 10PM close, the same counter attendant found it important to sweep the floor and rearrange chairs and tables near me in an otherwise nearly-empty restaurant. Yeah, that'll have me running back there, too.

So much of running a really consistently superior business is execution. In this case, I've always found KFC's menu items to deliver well on their promises. The fried chicken is good, as is the new grilled version.

But the service and setting always bring me down. There's a lesson there.

Monday, August 17, 2009

More Reflections On The Economy, Growth & The Fed

Today's US equity market sell-off seems to be following my expectations, as expressed in these recent posts here, here and here.

Allegedly following foreign equity markets' reactions to Friday's dismal consumer confidence survey report, the S&P has fallen 2.3% as I write this just before the market close.

Suddenly, the fall swoon of which I had written could be nigh.

Or not. As one pundit on the floor of the NYSE put it today, it depends on volume. And I agree with that. But Lowe's tepid earnings report, coming after various analyses explaining why it should have been good, will probably go a long way to dampen investor expectations now.

Never mind last year's comparable quarter results. I think investors are smart enough to not dwell on that metric.

The real key seems to be the trajectory of the US economy. It's not enough to sustain a recovery rally that Bernanke thinks the economy is 'leveling.'

Printing money, borrowing it and having government spending it will do a lot in the short term, or could do so. But for long term equity gains, the private sector has to resume growth. And there's currently nothing presaging that.

I keep returning to the inventory situation. So many pundits simply assume inventories will be rebuilt, resulting in manufacturing activity, chain reactions among suppliers, higher payrolls, and, voila, growth and recovery!

So if that doesn't happen, what then?

Rely on some 'shovel ready' road projects? Not enough.

It's not clear that today's sell-off is the beginning of the next 'big one.' But it's having some observable, significant effects on our equity options signals already. Certainly altering their prior trends.

I wouldn't be betting on a much higher S&P very soon. The CNBC pundits who predicted such a market gain by later this year seem to be naively optimistic, in my opinion.