Saturday, April 10, 2010
Last weekend, I visited my daughter in New Hampshire for a few days. While there, I took advantage of the location and season to get a last day of spring skiing in up in the White mountains at Cannon, in Franconia Notch.
The day that I returned home, I found this email in my inbox,
"Just wanted to thank you for staying with us these past three nights. I hope your trip to this area went well.
We appreciate your business and look forward to your next visit.
Director of Sales
Hampton Inn Concord/Bow"
The email wasn't from Hampton/Hilton, though. The address was that of the Paramount Hotel Group that obviously owns the Hampton at which I stayed.
I can't recall any other Hampton owner doing this. It really stood out and got my attention.
In replying to Mr. Martin, I found myself restating my appreciation for his hotel.
What a great example of nearly costless, yet high-impact customer relationship management.
If only most businesses were run so well.
Friday, April 09, 2010
Unfortunately, I missed that session, due to prior commitments that kept me away from a television. But I managed to listen/watch much of Thursday morning's FCIC session.
I'd say the Wall Street Journal article describing those proceedings got it mostly right. Chuck Prince came across as an apologetic buffoon, while Bob Rubin continued to evade and deny any responsibility, whatsoever, for the consequences of his recommendations as non-executive chairman of Citigroup.
Prince, a lawyer and ultimate 'survivor' of a long-running contest at Citibank and, then, Citigroup, to succeed to the CEO's office, basically said he just had Citigroup ape the other large commercial and investment banks. So much for any unique value-added from the multi-million dollar per year CEO of what was once the nation's largest commercial bank.
Reinforcing Prince's image as a highly-paid dunce was his revelation that he held on to all of the Citigroup stock which he had received as compensation over 30 years.
If you need to understand why Prince couldn't identify risk if it hit him in the ass, this fact, alone, tells you all you need to know. The guy was so clueless as to not even diversify his personal finances.
Rubin, as usual, was an entirely different kettle of fish. Aloof and cool, he steadfastly denied any significant role in Citigroup's demise. No apologies, no admissions of involvement. Nothing.
Mind you, he has, on prior occasions, admitted to having advised the board on the relative safety and lack of risk in plunging into exotic fixed income origination and trading. His prior day's revelation about the role that Oliver, Wyman played in his decision to advise the board to enter those businesses would certainly be seen by most observers as an admission of involvement.
Rubin, however, insists this is wrong. He is simply in total denial, and nothing that anyone says will cause him to acknowledge reality.
The Journal's article cites both Prince and Rubin as supporting more and heavier regulation in the financial services sector.
However, after hearing their testimony, why would anyone believe more regulation would have stopped these two executives from wrecking their institution?
They didn't do anything illegal. Prince even contended that he requested federal regulators to rein in other banks in the same risky businesses. It's pretty clear that the two call for more regulation because that seems to shift responsibility elsewhere, and allow them the excuse that they were merely complying with existing rules and regulations.
If they blew up their bank, well, it wasn't really their fault. It was inadequately devised and implemented regulations.
Of course, human beings will, again, be asked to implement any new regulatory regime. Why would you think the outcome will be different next time?
And, according to this piece in the Financial Times, some interesting revelations,
"It emerged on Wednesday in testimony before the Financial Crisis Inquiry Commission in Washington that, partly on the back of a 2005 Oliver Wyman analysis of potential growth in the fixed-income market, Citi decided to ramp up its business in collateralised debt obligations, or CDOs, backed by high-risk or “subprime” mortgage loans.
This ultimately led to a US government bail-out after Citi racked up more than $50bn in losses in the wake of the implosion of the subprime market.
In the heady pre-crisis years, firms such as Oliver Wyman and McKinsey were frequently called in to assess how banks could bolster profits in underperforming divisions, as bank executives looked to stave off shareholder complaints about lagging returns.
Oliver Wyman, for example, marketed a yearly analysis of how banks were faring relative to each other in hard-to-measure areas such as fixed income and commodities, offering previously unavailable competitive intelligence.
Relying in part on the Oliver Wyman study, Robert Rubin, then chairman of Citi’s executive committee, and Thomas Maheras, head of capital markets, conducted a review of the fixed-income business. They then sought Mr Prince’s approval for an ambitious investment plan to ensure Citi would keep its edge as the debt markets evolved.
Citi would end up spending more than $300m in 2006 to hire traders, bankers and cutting-edge software systems. CDOs and other structured credit products were a part of that buildout.
“Based in part on a careful study from outside consultants hired by our senior-most management, the company decided to expand certain areas of our fixed income business that we believed at the time offered opportunities for long-term growth,” Mr Maheras told the Financial Inquiry Crisis Commission on Wednesday."
I recall, back when I was the first Director of Research at the then-independent Oliver, Wyman, that we produced and marketed a financial services sector "revenue map" each year. It sounds as if, over the years, the firm added data from its consulting engagements, in which it would get proprietary views of various firms' actual business data, to provide comparative information.
According to Prince's and Rubin's testimony, we see, once again, how a senior management team paid millions of dollars per year can't seem to have its own sense of direction. Instead, they hired Oliver, Wyman to do their thinking for them, with unfortunate consequences.
Rather like the unfortunate experience of Meg Whitman of eBay received from McKinsey some years ago with regard to Google as a competitive threat.
It's understandable, and a good idea, for senior or business managers to use consultants who have some particular informational expertise or knowledge about a product/market. It's rather surprising to me, however, that in the clubby, competitive world of fixed income trading and origination, a firm like Citigroup, composed, in part, of the old bond king, Salomon Brothers, wouldn't already know quite a bit about the market in competitive terms.
Further, there's a point at which management has to do its own thinking, beyond the data.
As I wrote in this post, way back in September of 2008, about the "fallacy of composition" in risk management,
"This is a topic on which I have seen almost no ink, whether physical or electronic, spilled. The tendency of major financial service trading houses to employ similarly-vintaged and -featured risk management systems virtually guarantees the fallacy of composition with respect to sudden windshears in markets.
When one model sees a need to dump a security, due to excessive risk, they all do. And what the models don't account for is other desks, using similar risk metrics, piling on with similar actions, all of which rapidly accentuate the pricing moves that first triggered the sales of risky instruments.
What people outside the financial services industry fail to understand is that, like most industries, vendors supply products and services- data, software, information, risk management methodologies- to as many industry competitors as possible. Further, there is a constant flow of people back and forth between vendors, consultants and financial services firms. For example, a former investment management business partner and one-time colleague at Oliver, Wyman & Co., recently left a senior position at Mercer Management Consulting, which acquired Oliver Wyman a few years ago, to join some of his former OWC colleagues at a risk management consulting firm in California. This will speed the dissemination of his observations on industry risk management practices, and weaknesses, to another major sector consultant."
Apparently, this occurred in the area of simple revenue generation and business expansion, too, for Citigroup. It evidently never occurred to Prince, Rubin and Maheras that if Oliver, Wyman were peddling the idea of jumping into exotic fixed income origination and trading to Citi, they were probably also walking the concept up and down the investment and commercial banking community.
After all, everyone in financial services knew, or should have known, that this has always been the manner in which OWC does its business. One by one, they sold essentially the same risk management technology to every major commercial bank in the 1990s.
Now, though, Oliver, Wyman's role has been brought into the national spotlight in the context of a federal panel investigating the roots of the recent financial crisis. This can't be good for the firm's image or subsequent business.
Perhaps, though, it will serve as a cautionary tale for future financial business executives. Rather than simply seize on a consultant's juicy picture of a market, and plunge in, they'll do some game theory and strategy work to consider the ramifications of multiple competitors entering the same product/markets with similar strategies, technologies, personnel, etc.
Oh, by the way? The other major discipline that OWC prides itself on possessing is....strategy consulting!
Guess they didn't get around to selling that strategy engagement to Citigroup, did they? Maybe Rubin and Maheras ran out of the room after the fixed income market presentation so fast, heading for the board room to recommend jumping into CDO trading and origination, that there wasn't time.....
Thursday, April 08, 2010
First, there was government spending. Then, there was the natural snap-back from a too-steep sell-off in 2008.
But, to us, the lack of employment gains, and continued job losses, coupled with rising productivity, suggested a 'jobless business recovery' which was missing US consumer demand.
However, two credible opinion pieces in the last few days have modified my perspectives, and I shared them with my partner at our weekly lunch meeting yesterday.
The first was a short presentation by Larry Kudlow on his CNBC program Tuesday evening. He noted the broad, recent strength in the ISM numbers, and continued low Fed funds rates. Coupled with clearly-rising commodity prices, Kudlow made a convincing case as to why inventories are growing. It's to beat price increases in inputs.
The next morning, Zachary Karabell wrote an excellent editorial explaining why he is optimistic for US equity prices in the year to come.
Essentially, Karabell notes something which I've contended for years, yet missed applying in the current situation. It's the fact that, by owning the S&P500, or larger members thereof, an investor is buying global exposure and growth.
Right now, that means exposure to faster growth and recovery in other product/markets. It also means that S&P500 profits can rise in ways which are unrelated to US economic conditions, and irrespective of US employment levels.
Mr. Karabell then adds some fairly conventional, but reasonable, logic, i.e., corporate cash levels are very high, investor cash levels are high, and bond yields are not compelling relative to equities.
Taken together, Karabell paints a picture of large, healthy, productive US companies growing globally, hiring overseas and booking profits while the US employment and economic picture remains clouded by government takeovers of private sectors, expensive, debt-fueled pump-priming, and anemic employment numbers. Plus, just yesterday, falling levels of consumer debt, implying a continued restraint in spending.
Karabell's outlook also dovetails with Kudlow. The latter didn't say, necessarily, that the GDP growth would all benefit US workers. If the S&P500 constituents make and sell more products, but those sales are exports, it still registers as US growth, but employment can remain stuck in neutral, as can US consumer spending and sentiments.
In short, it's a US investor's recovery, but not necessarily a US employee's recovery.
Thus, I told my partner, based on Kudlow's and Karabell's analyses, we can expect several months of call option portfolios with fairly decent returns.
Wednesday, April 07, 2010
Treasuries finally broke the 4% yield mark earlier this week. Could this finally be evidence of the beginning of inflation?
Let's not quibble about commodity prices and such. I mean Friedman's view of inflation-
"everywhere and always a monetary phenomenon."
The gap between the Fed's rate setting and the market's is now looking pretty significant. And, in the long run, markets tend to win that fight.
In hindsight, it will be easy to see the massive federal borrowing and dollar creation of the past two years as inflationary.
There are, to be sure, various arguments concerning relative safety of currencies. In that view, dollars are still more trustworthy than any other currency. So, at the end of the day, investors will still hold dollars.
But so many new dollar-based obligations have been created recently that it fairly screams 'depreciating dollar!'
What investor wants to explicitly buy an asset that can so easily be depreciated by its creator? And that's so clearly what is going to happen to the dollar in the years ahead.
When has the Fed ever managed this sort of withdrawal from a position of such over-creation of dollars?
Volcker wasn't correcting an over-supply of dollars, so much as breaking an already-existing psychology of inflation. And rates were much, much higher.
Now, we have a still-sluggish economy and a Fed seemingly hooked on dollar creation, at whatever cost, to prop up an increasingly-statist economy.
How is that something that is desirable or able to be easily ended?
Tuesday, April 06, 2010
For example, over on CNBC, David Pogue gave a very positive review of the new ereader. Complaints included no camera and a virtual keyboard. Pogue pronounced it great for getting information, but poor for sending/creating it.
I wrote about the product in these two prior posts, here and here.
In retrospect, the earlier piece has conclusions with which I remain comfortable. Seriously, how much better a compliment can the iPad be given than to be compared to a netbook more than Amazon's Kindle.
My business partner told me last week that, just in pre-orders, the iPad already had 33% of the volume of Amazon's Kindle, though the latter has been in the market for at least two years.
I don't think there's any question that the iPad will be significant in its category. Some claim that, at least initially, it will also increase volume of ebook sales at Amazon. Perhaps so. But I continue to believe it will marginalize the Kindle, relative to its prior market position.
As to Holman Jenkins' points, I'm not quite as sure of them now as I was then. Yes, Apple doing cloud computing and advertising seems a stretch. But, when you consider the iPod, iPhone and iTouch, the iPad represents simply the latest in Apple's second-generation application-specific digital devices.
That strategy seems to set Apple apart, make it unique, and capitalize on it, and/or Steve Jobs' genius for the design, production and marketing of such devices.
Look how easily and thoroughly Apple has moved into and changed the music and phone businesses. Perceiving Apple's niche as application-specific digital devices has allowed Jobs to cleverly and profitably combine software and hardware solutions to specific consumer needs, outflanking phone and computer makers. Plus creating whole new devices for music and video.
On Friday, I was left musing over David Pogue's comparison of Jobs to Edison, and simple identification of Apple's success with Jobs. According to Pogue, no more Jobs, no more Apple. He explained and described Jobs' incredible control over details of Apple product designs. Unlike Gates, Jobs has a clear magic touch with consumer products and systems.
Plus, he is very decisive, according to Pogue. That's why Apple can product devices so quickly, from concept to market, with such beauty and functionality. Jobs is focused, moves quickly and eliminates delays.
I suppose it's both good and bad news, in the conventional vein regarding Jobs' health and energy where Apple is concerned.
But there seems to be no denying that the iPad is another milestone product.
Monday, April 05, 2010
First, seen from a slightly more objective perspective, 110,000 jobs for the past month is anemic.
With some 6 million lost jobs in the past 2+ years, plus the natural growth of employable Americans, and underemployed numbering almost twice that 6 million, 110,000 is so small a number as to be nearly invisible.
Yes, I know. the importance is allegedly in the trend. The cessation of months of lost jobs. A month in which jobs were added.
But here's something to ponder.
Old jobs don't, typically, come back. Due to process change, outsourcing, business failures, etc., it's not like the same jobs lost two years ago are now 'back.'
Sure, there may be a few auto jobs involving calling back production employees. Like those, ah, already on full pay at job banks.
There may be a few manufacturing firms calling back the marginal employee for slightly increased production volumes.
But big numbers of new jobs, large-scale job growth, typically comes from....new business.
However, given the spread available to financial institutions in Treasuries, they aren't lending excess liquidity. They are investing them. And, with the recent mortgage market bubble bursting after too much low-rate lending, bankers are wary of doing that all over again.
Thus, despite idiot CNBC economic no-nothing Steve Liesman's protestations (see linked post), ultra-low rates are a curse right now. David Malpass was and is correct in contending that investors should determine appropriate market rates and corresponding funding available to projects.
Thus, there's not much in the way of new business formation at present.
In fact, between federal government actions giving unions sweetheart deals on auto maker bankruptcies, excessive witch hunts among bankers, and the nationalization of the medical and health insurance sectors last week, an investor or businessman with a new idea is very wary of risking capital right now.
Government is simply too capricious to trust for anyone to make large-scale investments just now.
Without new business creation, you can forget about much in the way of strong 'new' job growth.
A "double-dip" recession? No, probably not.
More like just a flat, slow non-expansive, sluggish economy that won't shrink again until all those hundreds of billions of borrowed and printed dollars have been spread around.
But it won't grow robustly, either. Because the 'stimulus' was borrowed federal money, not genuine, private sector-sourced investing or spending.
Keep that in mind in the coming months, as each new successive jobs report is released.
The US economy is much smaller now than it was only two years ago. Deleveraging has accomplished that. Federal leveraging isn't providing large numbers of quality private sector jobs to replace those that were lost.
At even 300,000 new jobs per month, it's going to take over two years to soak up the unemployed. Even longer to use the underemployed.
A few months of 100,000 jobs increases won't materially affect our economy at all, nor signal the dynamic new private investment which will really lead to healthy, large-scale private sector job growth in months and years to come.