Saturday, January 16, 2010

An Old Idea Gets A Fresh Start with Technology

Thursday's Wall Street Journal had an article which really brought back some fond memories. It was on the back page of the Marketplace Section, concerning a pick-up grocery business in France.

A colleague and I also conceived this business back in 1987. Of course, 23 years ago, one was restricted to fax and phone. The problems still remain, but the nature of the business is otherwise better.

It's always struck me as the optimum mix of Peapod's delivery service and shopping in a store. I think many people have time to pick up a pre-selected and packaged order, but don't want to waste time with the mostly low-value-added task of the actual, physical stock-picking.

Now, with cheaper and more practical, effective communications, via cell and internet, ording grocercies is much easier than it was over 20 years ago. The business also features easier billing and fulfillment. For example, consider this passage,

"The warehouse model means Chronodrive doesn't need more than a dozen employees per location, so costs are low. But customers shop according to a list- there are no impulse buys at the checkout."
The drive-through model allows for less expensive site selections. The Journal article describes how French Chronodrive stores are located near highways and neighborhoods with lots of middle class families. They expect a terminal penetration of some 4-5% of the French market.

I've always believed that one could get people to buy the toughest non-sight items, produce and meat, by simply having a 'no questions asked' return policy for the first month. Once people felt comfortable with the product quality, and their ability to return bad 'fresh' food, I think they'd learn the habit of ordering those, as well.

Ironically, for me, at least, this harks back to my high school days. I worked at Matarelli's, a literal corner grocery store in my modest-sized downstate Illinois town. We were one of only two grocery stores that delivered. Our prices were SRP (suggested retail price) to cover the cost of our "free" delivery, and the store was known for its excellent meat quality.

However, many customers would telephone their orders to the two Italian sisters who ran the store, driving by a few hours later to pick up their boxed orders.

I hope this French business works out well, and makes an appearance on our shores soon.

Friday, January 15, 2010

Two Interesting WSJ Pieces On Financial Sector Regulation

Wednesday's Wall Street Journal editorial page featured the regular matched editorials by Holman Jenkins, Jr., and uber-liberal Frank Thomas.

While Jenkins wrote a thoughtful, insightful piece, as usual, what was surprising was Thomas' unexpectedly reasonable call for a return of Glass-Steagall.

I found Jenkins' editorial refreshingly candid on why it's Congress that "doesn't get it" about some bankers' compensation, and not the other way around.

He bluntly observed that taxpayers made money, via the Fed, on the assets whose depressed values got so many investment and commercial banks into trouble. That the Fed had record profits of $52B in 2009. A fact about which the administration and the Fed are being rather, well, quiet.

As Jenkins points out, like it or not, traders and investment bankers are highly mobile, so when they add value, they will either be paid commensurately, or leave for another outfit. And let's also be candid about who would do a better job devising admittedly imperfect compensation schemes- government or management? It's going to be management, because they have a vested interest in keeping their talent.

Meanwhile, the usually-ludicrous Thomas actually argued for something sensible. Something my friend B and I have been discussing for over a year. Call it a return of Glass-Steagall, or simply prohibiting any financial institution which enjoys the benefit any government support or insurance scheme, e.g., FDIC, Fed window access, etc., from engaging in: proprietary trading, securities underwriting or any other non-plain-vanilla lending.

Thomas is right to note that Bill Clinton's solemn intonation in 1999 about Glass-Steagall was completely wrong,

"worked pretty well for the industrial economy....But the world is very different."
Granted, as usual, Thomas wrongly blames a general rush to deregulation.

In this case, it was actually the concerted efforts of some stupid commercial banking CEOs who largely failed to understand, or deliberately ignored, that allowing more, and less-capable capacity into proprietary trading and general securities underwriting would cause disastrous systemic consequences for both businesses.

There are ways in which you could allow wholly-owned, separate subsidiaries of commercial banks to do these businesses, but the key would always be two-fold: no leverage, and no government backstops, insurance or aid of any kind, should the riskier units go down. Their failure would have to be fully absorbed by the units' equity, with no debt left unpaid.

It's simpler, of course, to simply forbid insured, government-assisted financial entities from those businesses. But it really is time to restore a functional equivalent of Glass-Steagall.

More than any current regulatory so-called reform afoot in Congress, this one act would do more to minimize the consequences of the inevitable future systemic financial disasters than any other suggestion in circulation today.

Thursday, January 14, 2010

On Technology & The H-P Microsoft Closer Tie-Up

I skimmed through the Wall Street Journal piece this morning announcing H-P's closer ties with Microsoft. From what I gleaned, it's largely aimed at corporate cloud computing and similar product/markets.

Well, I'm here to tell you- after 4 hours wasted on a Microsoft-generated PC problem this morning- that the H-P-Microsoft relationship isn't the one to improve.

It's the Norton-Microsoft or McAfee-Microsoft interfaces.

If you are like me, your laptop periodically greets you in the morning with a sign-in screen and the notification that Microsoft's Windows operating system security updates thoughtfully invaded your machine during the night and rebooted it for you.

Hopefully, you think, the damn thing will still work.

Not this morning.

I won't go into exhaustive detail. Suffice to say, I spent a full hour on the phone with Comcast, rewired two laptops directly to the cable modem, and opened countless system management windows for the Comcast technicians in their quest to get my connection operating.

Only late in the process did I realize, as a backup laptop connected directly to the modem and the internet, but this machine did not, that there was a reason Norton Anti-Virus no longer appeared in the icon tray. Nor responded when I clicked on the icon.

The Windows security update had obviously corrupted the Norton program, causing it to simply die in place. But not become uninstalled.

Thus, every other internet access program was still waiting for the crippled Norton security program to allow it to connect. Which it couldn't do. Only when another machine was hardwired directly to the modem was it able to bypass the crippled security program's iron grip on my internet access.

Once I uninstalled Norton, everything worked.

Silly me. Why didn't it occur to me right away that Microsoft would so carelessly reach into my machine, disable my anti-virus and firewall while leaving it in place, then silently leave me to figure out the damage. And how to overcome it.

Instead, I wasted an hour with Comcast, 10 minutes with my computer technician, subsequent troubleshooting of my wireless router and time spent re-installing Norton.

I'm sure I'm not alone. The Comcast technician, who was both pleasant and very skilled, remarked that they have waves of this type of malfunction during periodic Windows security updates. And that Zone Alarm was notorious for causing these sorts of issues, too.

You would think, by now, that Microsoft would have figured this out. That, at least, its updates would alert you to the fact that it had corrupted your firewall and anti-viral software. Or, heaven forbid, actually detect that program first, then download updates designed not to corrupt your resident security program.

But that would require some actual sensitivity to customer needs and concerns. Something of which Microsoft has never shown itself capable.

Wednesday, January 13, 2010

Kyle Bass In Washington Today

I saw an interview on CNBC this morning with Kyle Bass.

Bass achieved fame by appearing in the networks special program on the 2007-08 financial crisis, House of Cards. He's a Texas-based fund manager who had approached Bear Stearns with his concerns before their two risky mutual funds blew up in the summer of 2007.

From Bass' remarks on camera, the special Congressional commission allegedly investigating the sources for the crisis- as if it was so hard to do- is going to get quite the earful about Fannie's and Freddie's responsibility for the mess.

And that, of course, will hopefully lead to identifying publicly and for more Americans to see, Congressional members Barney Frank, Chris Dodd and Kent Conrad as chief among their government representatives directly responsible for directing the two GSEs to engage in the behavior that triggered the crisis.

Yet More Ideas For Corporate Board Reform

There's not much new under the sun.

Earlier this week, the Wall Street Journal published a review of a book purporting to offer solutions for what is ailing today's American corporations' boards of directors. The review mentioned several ideas, but there was only one which gained any positive attention. It involved making directors take a substantial stake in a firm on the board of which they sit.

It's not a bad idea. It's also an old idea. I wrote, in this post nearly three years ago,

"Here's another insight. If, as I wrote last summer as a solution to America's corporate governance problems, board members were required to "run" for the post, and invest significant assets of their own in the company, thus clearly aligning their financial interests with those of shareholders, it might improve corporate board oversight and involvement in the operation of companies.

Suppose private equity firm partners offered their services to a publicly-held company. Would they not, in effect, take board positions, in exchange for options to own much of the firm, or be paid a percentage of the value they created over, say, a function of the firm's prior total returns, relative to the S&P500? In effect, like my idea, they'd commit their financial fortunes to, and align them with those of the firm's. But what mechanism exists for shareholders to do this? None.

It would, in fact, be a sort of return to the days of the original form of shareholder capitalism. A few wealthy, skilled owners running the boards of large companies. Since, instead, many boards are infested with lesser lights, faded failures of other boards (look at Microsoft for a great example of this tendency), or "politically correct" members with absolutely no business skills, corporate performances are often appallingly bad, while CEOs and board members are still handsomely compensated."

I do honestly mean it when I write that I can't recall any other idea these two authors had.

For me, they join a long list of politicians, union leaders and so-called shareholders' rights champions who fail, in my opinion, to understand the fundamental structure and bargain struck by those selling common equity shares in an enterprise to the public.

Those owners want the public's money, nothing more. Buying a share entitles the public owner to a vote on the board and a share of dividends, plus the ability to sell a share whose value has risen.

That's it.

In an ideal world, board members would, in fact, be so because they had the opportunity to help a company make much more money, and, thus, would invest their own capital. A board like this would not be pawns of the CEO. They'd be actively involved and, if necessary, firing the CEO much sooner than is now the custom.

It's not an entirely new idea. But it actually would require moving backward in time to when public corporations were more often run by genuinely gifted businessmen and their competent colleagues, rather than boards stuffed with politically correct members, often with no business acumen whatsoever.

Tuesday, January 12, 2010

Jim Chanos' Bearish Bets On China

A friend sent me a recent NY Times article, the topic of which was short-selling hedge fund manager Jim Chanos' current focus on China.

It seems there is a clear difference of opinion building between some respected financial veterans.

Chanos suspects that the Chinese have been misrepresenting their economics statistics, among other things. He also, according to the NYT piece, believes that China will soon be stuck with warehouses full of goods they manufactured or assembled, but can't sell to the West, notably America.

One-time hedge fund manager Jim Rogers emphatically disagrees. Rogers became such a proponent of Asian growth that he moved his family to Singapore a few years ago. From this perspective, Rogers has criticized Chanos, derisively observing,

“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”

We both inherently distrust Rogers' objectivity. Additionally, Rogers seems to believe that Chanos is bearish on China forever. But that's not what Chanos is actually saying.

Rather, according to the Times article, I've seen Rogers hold forth enthusiastically on commodities and Asia for the past few years in various interviews on CNBC. That may well be true in the long term.

But I believe Chanos is, instead, contending that there is a short term valuation disconnect in China. Speaking from personal experience watching equity market downdrafts for over twenty years, the sudden awareness of overvaluation brings about a quick, severe drop in values. But it doesn't necessarily derail long term growth prospects, nor reverse advantageous terms of economic competition.

It's a reasonable bet, though, that any Chinese economic slowdown and valuation collapse would have ripple effects on the US equity markets, if only as a sentiment reflecting more serious, sustained global economic weakness than had been hoped.

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point.
I asked the colleague who sent me the article what he thought, and he, as do I, leaned toward Chanos' view.

Monday, January 11, 2010

Business Week's "New" Work Force

A colleague described the recent BusinessWeek cover to me over coffee this weekend.

The details portray the average employee as a contract worker with no health care, pension nor vacation.

You know what? This is what 75 years of government intervention has wrought.

Think about it.

Unionism fought for recognition in the '20s and '30s, culminating in FDR's liberal Democrat administration and the then-Democrat controlled Congress passing legislation to enshrine unions in our nation's workforce.

Neither the corporate behavior toward employees at the time, nor permanent legislation favoring unions, were effective solutions.

But since the 1930s, government and the unions it has, thanks to a long run of Democrat-controlled Congresses, supported, have cemented into the US economy the notion that employees are entitled to health care, pensions, and vacations, all provided by the companies for whom the employees work.

Within the cocoon of that system, it all seems to make sense, doesn't it? Fair, compassionate minimum standards and lifestyle provisions which, otherwise, workers would never receive?

Here's an alternative view.

For every non-cash benefit, workers receive less cash compensation. Mandatory vacation days means that companies implicitly adjust cash wages and their increase to the number of actual hours worked by employees. More vacation days means less in terms of wage increases.

It's the same thing with employer-paid insurance and pensions.

As my colleague put it so well, they are all simply another variant of the old-style 'defined benefit' compensation system. And every non-cash mandate or demand by unions or government decreases cash compensation to workers.

One of my very first blog posts concerned the culpability of union chiefs in recommending to their workers to take promises of future pension and health care benefits, rather than cash upfront.

That has turned out to be a huge mistake.

Companies don't live forever. Business dynamics change. Promises made 40 years ago may become unaffordable, and simply unpayable.

Imagine if unions had stopped at demanding safe working conditions and a maximum number of hours in a 'regular' workweek?

Then better workers would make more money. In cash. Those who wanted a pension would save for it. Those who desired health care could buy it. Those who did not, would enjoy greater disposable incomes.

Those who wished to work longer hours for more money could negotiate that, too.

Typifying the modern worker as BusinessWeek does actually tells us something very important.

Seventy-five or so years after New Deal-backed initiatives to force companies to obey a truckload of mandates regarding employees, company managements have finally come full circle to simply defining workers as not belonging to their companies.

If they don't have permanent employees, then they don't have to comply with an overgrown thicket of employee regulations.

In truth, the business world is always in flux. There are no free lunches. There is no static business world in which a promise today has a guarantee of fulfillment 30 years from now.

That would be fantasyland.

The trend to portable IRAs is a good one. So, too, would a simple tax-treatment change to allow everyone to purchase health insurance on the same tax-preferenced basis, but as individuals.

In the long run, it's actually better for workers to control the way they spend, or save, higher cash wages, than to have mediocre managements and union leaders promise to look after their medical insurance and pensions, while paying employees less in cash today.

I'm sure that's not what the BusinessWeek cover and article intends to contend. But that's the perspective I have on it.

It may have taken three generations of business management and radical transformation of the US economy, but it ought to be clear to everyone now that relying on promises of future payments by any company, or the government, is foolish.

Better to function like a private contractor of your own talents, demand more cash with no strings attach, and make your own lifestyle choices for health care and future income from invested savings.

Sunday, January 10, 2010

The Fed's Behavior Re: AIG Disclosures

The Wall Street Journal published two very damning articles concerning the federal government's handling of AIG in 2008.

The first, on Friday, concerned emails from Fed personnel addressing the filing of detailed information regarding AIG's payments to counterparties. The Fed directed AIG to conceal details which AIG personnel indicated the SEC would prefer reported.

Aside from the obvious issue of one hand not knowing what the other is doing, or there being conflicts between federal entities on what they demand/require of companies, there's the issue of transparency.

The Fed's position smacks of concern that the actions it directed AIG to take were ones it would be unable, or unwilling, to explain and defend in public.

This sort of clandestine action by government, with a major once-private, then questionably "taken" by government, ought to be very worrisome to the business community.

A day later, in the weekend edition, the Journal published, as its customary single, long interview with a prominent business person, a piece by Holman Jenkins regarding his recent conversation with former AIG CEO Hank Greenberg.

I won't reprint major portions of Jenkins' piece. Suffice to say, Greenberg made his major theme that the business press needs to ferret out why Goldman Sachs, Morgan Stanley, Citigroup, et. al., were saved by federal cash, while AIG was, instead, marked for takeover and eradication.

Greenberg mentions something about which I was unaware, and I'm sure I'm not alone. He explained a 2005 change in the operation of credit default swaps by ISDA, the International Swaps and Derivatives Association. The change essentially changed such swaps from having value changes settled once, at maturity, to being ongoing 'mark to market' payments. He doesn't allege, but asks, whether or not Goldman Sachs, which bought large amounts of such swaps from AIG, was behind this change?

He also bluntly challenges the press to discover why AIG was treated so differently by Paulson and Bernanke than were the commercial and investment banks?

One passage really does deserve to be quoted,

"Most of all, he cannot fathom why Treasury and the Federal Reserve let billions of dollars fly out the backdoor to Goldman and other firms. Washington could have simply ordained that AIG's debts were the government's debts and so no collateral was due given Uncle Sam's bulletproof credit rating."
It's a more than fair point. And Greenberg, never a fool, is clever to call for objective press investigations into this mess.

If you see unholy alliances between Goldman and the Treasury and/or Fed, made in the shadows, then you find yourself agreeing with Greenberg's demand that somebody force explanations.

Even if you don't see such alliances, it still makes sense that, over a year later, the major players explain exactly why such differential treatment was demanded for AIG, than the commercial and investment banks which the government elected to save.