Friday, June 11, 2010

Alan Reynolds On A "Double-Dip" Recession

Alan Reynolds wrote an informative piece in yesterday's Wall Street Journal concerning a possible "double dip" recession.

Essentially, Reynolds argued that two political extremes are both arguing for a developing double-dip recession. On the left, Robert Reich is using it to advance the case for yet another stimulus spending bill from Congress. On the right, conservatives are hopeful of a double-dip recession to support further castigation of the administration and a wasteful Congress, whose stimulus spending has been ineffectual.

Reynolds spends considerable effort refuting both, getting into the details of government unemployment statistics in the process. He contends that we have a slow, but not reversing economic expansion. He argues that even the 2001 expansion displayed very lagged employment.

I respect Reynolds and generally find his work to be convincing and sensible. Thus, I'm inclined to take this piece on its face. Reynolds doesn't deny that businesses are experiencing a profitable recovery. He does, however, persuasively argue that the lag in re-employment does not mean there's not still a recovery. And it doesn't mean there will be a return to recession.

I do wonder, however, with Art Laffer's recent Journal piece fresh in my mind, what economic indicators it would take to cause Reynolds to reconsider the possibility that we are headed back into recession.

KKR & Toys "R" Us: Valuations

Dennis Berman recently wrote a piece in the Wall Street Journal on KKR's (and co-owners) imminent floating of an IPO for Toys "R" Us.

The failed toy chain had been sold to a group of private equity firms on the advice of management, which, five years ago, contended that the company's future performance had,

"been adversely impacted by significant developments in the retail toy industry."

The private equity shops hope to sell the retooled toy firm to public investors for something in the range of 1.5 times the $6.6B it cost the group to buy Toys R Us in 2005.

According to the IPO's prospectus, the toy firm's new management, under the private equity group, had performed major surgery on expenses. These are activities that tend to be one-off actions. You can't close the same store twice, multiplying the savings.

Berman frames the interesting question in the last paragraphs of his column,

"The question for future Toys "R" Us investors is whether there are still improvements and opportunities for left for the company which is in a notoriously competitive, low-margin business.

But the bigger challenge will be about setting the narrative. Do investors really want to play in the KKR sandbox? Toys "R" Us will be an important way to find out."


I've never found comfort in corporate performances which are the result of one-time, radical cost-cutting. Rather, my proprietary research provided me with evidence that consistent performance, over time, is worth far more to shareholders.

Given the earlier troubles of Toys "R" Us having been blamed on industry structure and practices, Berman is right on target to wonder why that would have changed. And why new, public investors would be any better off, over time.

In fact, this is the key point. A point with which I struggled for years, before my research confirmed my suspicions.

Buying an equity right after someone else has extracted huge value from restructuring is asking for trouble. If a management has managed for maximum shareholder gain, as the Toys "R" Us management surely has done for is private equity owners, why would you believe there is continuing value creation left?

If there were, why would KKR and its co-owners be selling all of Toys "R" Us?

It's rather like buying the Goldman Sachs IPO. Why would you buy equity when the smartest guys in the room are selling from their private supply of the stuff?

That's essentially what is occurring with Toys "R" Us. Everyone who has been associated with the failed toy firm from its purchase by the private equity group, until now, has likely been compensated on the IPO price.

Not an equity price of the firm five years from now.

Berman is correct to note the immense risk that any new Toys "R" Us shareholders run in buying the IPO. They won't have the leverage which KKR & Co. had when they owned the failed company. Worse, they'll be buying after the largest value extraction at Toys "R" Us in something like a decade.

Thursday, June 10, 2010

Bob Doll Talks BlackRock's Book In The WSJ

Several days ago, BlackRock's chief equity strategist, the renowned Bob Doll, wrote an editorial in the Wall Street Journal entitled The Bullish Case for U.S. Equities.

It would have been more aptly entitled,

'Please Buy U.S. Equities and Help My Book.'

Doll's central point is that, compared to the rest of the globe, US equities look pretty good. So by all means, buy them!

Sounds enticing, doesn't it?

Only one thing- Doll forgot to speak to the continued deleveraging of global economies.

Is it really a good idea to go long, now, in US equities, if, as presaged by the recent Eurozone crisis, it seems that economies the world over are having to accept lower growth, higher taxes and less leverage than in decades past?

I would venture to guess that Doll wrote the piece not for retail investors, but for the lesser lights of institutional money management around the globe.

After all, if the equity CIO of esteemed BlackRock says buy US equities, can you later be blamed for following his advice?

In equity management, like it or not, gains result from being early and, at first, wrong, into equity positions into which more investors later stampede.

If you're Bob Doll, you can help trigger that stampede- in the direction of the equities already in your portfolios.

I think he just did.

Mulally's Misleading Comments On Car-Based WiFi

I happened to catch Alan Mulally's appearance on CNBC last week, just after he also presented or was interviewed at the Wall Street Journal's All Things Digital conference.

Mulally made a huge deal out of Ford being the leader in placing online applications into vehicles. I can't swear I recall all of the features he mentioned, but the network's program co-anchors were aghast at all of the distracting activities Mulally assured viewers were available in new Ford cars.

When challenged on how dangerous these non-driving activities would be, the Ford CEO kept intoning, like some sort of mantra,

'eyes on the road, hands on the wheel'

He then assured the co-anchors that at least key applications were voice-activated, so everything was perfectly safe.

Then Erin Burnett, one of the CNBC co-anchors, mentioned the research which I, too, have read, concluding that simply talking on a cell phone, rather than with another occupant of a vehicle, while driving, took one's attention off the road and out of the car.

Mulally punted on that one, admitting the research was true, but essentially saying that it was still safe to use Ford's on-board online apps while driving.

This is nonsense. Mulally is clearly skirting a very serious and potentially lethal issue.

First, like the failure of government regulators to catch the budding housing finance bubble in time, the DOT is apparently asleep at the wheel, pun intended, on this issue, as well.

Where is the governmental machinery to make Ford prove it's internet doo-dads placed within reach of a driver won't cause drivers and passengers in other cars to become casualties?

It doesn't take a genius to figure out that young, inexperienced drivers are going to be caught up in these conveniences and take out other vehicles as they busy themselves with texting their friends or Googling God knows what while driving.

We all know someone who has, or nearly has wrecked a car while trying to operate a complicated sound system in a car. Or have watched some youth or adult on a cell phone either hold up traffic while they talk, or cut into traffic and nearly hit another vehicle as they concentrate on their call.

We need less distractions in cars, not more.

Mulally's and Ford's irresponsible attempt to capture the image of a high-technology, forward-looking, internet-vehicle equipped car maker is going to end badly.

I was very disappointed to watch Mulally try to duck, evade and deny the obvious danger that his company's new on-board internet toys will bring to driving.

Wednesday, June 09, 2010

Helicopter Ben: Economic Cheerleader-in-Chief

Yesterday's US equity markets sprint to a higher close has been attributed to Fed Chairman "Helicopter Ben" Bernanke's recent remarks that the US economy is still on an expansionary path. That everything is okay.

Well, what would you expect Ben to be saying?

"Head for the exits?"

"Buy gold and bury some food in the backyard while you're at it?"

One charming thing about now-discredited, prior Fed Chairman Alan Greenspan was that he tended to speak in riddles, leaving analysts and observers to form their own conclusions about the economy. Except, perhaps, for that "irrational exuberance" remark. Which turned out to be wrong.

I'm not surprised by Ben's remarks of the other day. I fully expect him to be waving those pom poms on the Hill this morning as he testifies before some House or joint committee.

What dismays me is how many investors, analysts and pundits still assign any credibility to Ben's remarks. Is it not clear that Ben has become a constant mouthpiece for good news? A virtual Pollyanna?

For me, Bernanke has become a valueless indicator, permanently stuck in the 'optimistic' position.

What good is that for providing honest and accurate economic information to investors?

Electronic Trucks Or Cars? Jobs vs. Ballmer On PCs

The Wall Street Journal's All Things Digital conference played host to an arm's length spat between Steve Jobs and Steve Ballmer concerning the future of personal computers.

Jobs likened PCs to trucks, capable of doing heavy duty tasks, but not as well-suited to single, evolving applications as various newer digital devices, e.g., iPods, iPads, iPhones, etc.

Ballmer, on the other hand, derided Jobs' description and assured everyone that PCs were getting more valuable and individualistic with each passing year. And, for good measure, just in case they weren't, Microsoft was putting Windows on cell phones and tablets, too.

Or, to quote Ballmer directly,

"People are going to be using PCs in greater and greater numbers for many years to come.

Nothing people do on a PC today is going to get less relevant tomorrow. There are usage cases- whether those are done today on PCs or on alternate devices- that are going to grow in popularity."

Maybe so. But let's consider the real core issue- replacement cycles and associated software.

Which do you believe people replace more often- cell phone or laptop/PC? I'm guessing it's their phone.

Ballmer may be correct that people will still use a PC, and those applications done on only a PC, such as finance, spreadsheets, complex word processing, will remain there. But use in greater numbers? Only as youngsters become teens and acquire low-end laptops.

I don't think the number of computers/person is going to rise. And I suspect the average personal laptop age will increase, as well.

Instead, people will focus their energies for new devices and applications on cell phones, tablets and music devices.

As usual, Microsoft's CEO is fighting the last war, desperately clinging to the hope that large-scale software on PCs will continue to maintain Microsoft's value as a company.

I suspect Jobs' perspective on digital device growth rates and usages are more on target.

CNBC's Latest Try At Showcasing David Faber

CNBC has been heavily promoting a new hour-long program, entitled Strategy Session, featuring its very capable and intelligent reporter, David Faber.

Gary Kaminsky, who is, I believe, the retired CIO of Neuberger Berman, is the co-host.

I happened to be around to view the inaugural episode yesterday afternoon. I can't recommend that it is unusually worthy of viewing.

For example, John Mack, former CEO of Morgan Stanley, was the first episode's marquee guest. Others promised this week are also heavy hitters, calculated to pique interest.

Of course, Mack was lauded as the chief of a major....well, commercial bank, now...but once an investment bank. Faber and Kaminsky dutifully hung on Mack's every word and quizzed him on various business topics about which I would venture to say Mack doesn't really have expertise.

What they didn't bother to do was ask Mack how he managed to nearly ruin Morgan Stanley? How his choice of risk and fixed income managers nearly sank the firm? How they took so much mortgage banking risk at precisely the wrong time?

Or even how he managed to get outmaneuvered by Phil Purcell years ago in the ill-advised Morgan Stanley-Dean Witter hookup?

I like David Faber. I think he has a razor sharp mind, good analytical skills, and a desirable penchant for speaking candidly about company behaviors and strategies in solo appearances.

However, as with nearly all CNBC on-air anchors, he clams up and tosses softball questions to real-time, present guests. Like Mack.

The program didn't seem, at least to me, to live up to its hype about giving viewers some inside track on M&A activity, deal strategies, or any other particular financial topic. It seemed to be just another allegedly-specialized, hour-long segment purporting to add value that it didn't.

CNBC has tried, several times, to package Faber on his own in an hour-long format. I regret to say, raw intelligence and candor doesn't seem to have the legs for a daily hour of content of that type. Adding Gary Kaminsky and guests just makes Faber seem like yet another run-of-the-mill CNBC anchor.

Tuesday, June 08, 2010

Steve Jobs Misses The Boat On Newspapers

The Wall Street Journal's All Things Digital conference gave rise to a special section in the paper on Monday. Of course, a half-page was given to excerpts from Steve Jobs' comments, some of which I also saw on video on CNBC last week.

Of particular interest to me were Jobs' remarks concerning the iPad and newspapers.

The Journal quotes Jobs as saying,

"One of my beliefs very strongly is that any democracy depends on free, healthy press, and so when I think of the most important journalistic endeavors in this country, I think of things like the Washington Post, the New York Times, the Wall Street Journal and publications like that, and we all know what's happened to the economics of those businesses. I don't want to see us descend into a nation of bloggers. Anything that we can do to help the news-gathering organizations find new ways of expression so that they can afford to keep their news-gathering and editorial operations intact, I'm all for."

Is this the same brilliant, societally-aware Steve Jobs who marketed the early Apple computer, built the company, built Next and Pixar, then returned and reinvented Apple?

Is so, how could he possibly miss the dynamics of modern media and the naturally-shrinking place of published printed text as news?

Let's take his quote apart and expose Jobs' logical and factual errors and biases piece by piece.

First, "a free, healthy press" in today's world means video content, and, most importantly, cable news.

For Christ's sake, Steve, have you been living under a rock for the past 20 years? CNN's coverage of the first Gulf War catapulted 24-hour cable news to the forefront of media, didn't it?

Nobody with a brain thinks text-only "press" is where it's at anymore.

The "economics of those businesses" are in trouble because, as Schumpeter would probably observe, they have been eclipsed by better business models.

One only need mention Rupert Murdoch's successful acquisition of Dow Jones from its family owners to understand how the model has changed. Murdoch saved the Journal's news-gathering operation by pouring it into a much wider, real-time, accessible distribution system.

Steve, were you even aware that Murdoch bought the Journal? It sure doesn't seem so, from your remarks.

Then there's Jobs' constant penchant for ultimate, tight-fisted control, evidenced by his disdain that the US could "descend into a nation of bloggers."

Doesn't this contradict Jobs' opening contention that "any democracy depends on a free, healthy press?"

"Free press" doesn't mean only newspapers. Isn't blogging the ultimate "healthy, free press?" The ultimate individuation of free speech broadcast to all who would read and listen to it?

What's unhealthy about a nation of individuals using free blogging tools to express their opinions? And perhaps even report news?

However, I think we see, in this element of Jobs' remarks, his ongoing distrust of anything he can't control. The need for closed systems which can be bought or muzzled. Jobs is notorious for designing closed-ended devices. And often, they are sufficiently superior in performance and design to take large market shares at premium prices. Good for him.

But that's business, not democracy.

The last line of Jobs' quote, involving "anything that we can do to help the news-gathering organizations find new ways of expression...." was demonstrated by Murdoch when he bought Dow Jones.

Again, Jobs appears to be a simpleton with his ignorance of this phenomenon.

Pinning his hopes on a print edition of the New York Times shows how out of touch Jobs is on this matter.

Very sad to see.

The Jobless Expansion Continues

Friday's payroll numbers helped to tank the US equity markets by day's end, resulting in a 3.4% drop in the S&P500 Index.

After stripping out government-created census jobs, I believe the net private sector jobs created was about 41,000. Positive, but pathetically anemic for this point in a recovery which is allegedly over a year old. For comparison, the same data items for March and April were 158,000 and 218,000, respectively.

The administration hustled out various people, including the president, to excuse, explain and otherwise try to minimize the ugly May payroll numbers.

Is it possible that the coming tax increases are beginning to show their consequence in employment data? Could the cumulation of health care taxes, higher payroll taxes and the inclusion of payroll taxes on dividends and profits which small businesses operating as entities which file through 1040 forms will experience, be causing a drag on hiring?

I guess time will tell. But with each passing month, the gap between the available US labor force and the employment base grows larger. Pundits hopefully suggest that inventory restocking and foreign demand will surely, eventually require more US workers.

Yesterday morning, Morgan Stanley senior executive and economist Stephen Roach admitted, on CNBC, that a double-dip recession could occur. He bluntly said the inventory builds were merely the result of stimulus-fed business spending.

For how long can the US have both expanding business profitability and stagnant or anemic employment growth? And can this combination, in the long run, deliver a healthy US economy?

Monday, June 07, 2010

Art Laffer In Today's WSJ

You can't say Art Laffer is ambivalent about his opinions. His editorial in today's Wall Street Journal, entitled Tax Hikes and the 2011 Economic Collapse, holds nothing back.

Despite having been Reagan's economic adviser, Laffer didn't write a partisan piece. While parenthetically noting which administration has chosen to raise taxes, he concentrates almost exclusively on empirical evidence of tax rate increases and decreases, and associated economic activity.

On the strength of just this evidence, Laffer projects the coming rise in existing tax rates, and new taxes, at the dawn of 2011, into a renewed recession. Thus the article's title.

The details of next year's tax rate hikes are chilling. Did you realize that the top personal federal income tax rate rises to 39.6% from 35%, a 13% increase? Or that the highest dividend tax rate rises to the same 39.6% rate from 15%? How about the capital gains tax rate rising by 33%, from 15% to 20%?

These are stunning marginal increases which, as Laffer illustrates, are sure to have compressed economic activity into this year, in order to escape these coming higher rates.

This quote from Laffer's piece puts his opinion right out in the open,

"Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market."

Laffer's observations seem so simple and intuitive, yet don't seem to be generally acknowledged. He writes,

"It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet."

Nobody can say Laffer hasn't placed a rather large stake in the ground with his prediction of the US economy returning to recession next year, absent relief from the coming tax rate increases.

The New Sovereign Debt Crisis- Hungary

As I write this at 8:15AM this morning, the S&P futures are at 1068, up slightly from Friday's close. Apparently, European equity markets have recovered from some serious declines, thus relieving pressure on the US equity market's open this morning.

The news on CNBC was all glowing about Hungary, seeking to minimize the effects and implications of Friday's disclosure that the country's prior administration had misrepresented its fiscal situation.

I swear it looked like the European correspondent for CNBC behaved like the network had become a paid publicity agent for the country and its new government.

We were told that Hungary's debt/GDP level isn't nearly as bad as Greece's, being only about 78%, and only 4 points above the EU average. It's debt as a percentage of its budget was something like 3%, whereas Greece's was said to have been 9%.

See? Hungary's really okay. You were worried over nothing.

I don't believe it.

To me, the lesson of Friday's sudden, Hungarian-induced selloff in US equities, was about lying. About official governmental misstatements of fiscal facts.

It isn't about whether Greece is only 5% of the EU's GDP, or whether Hungary is as badly-off as Greece. Or, for that matter, whether the source of the comments on Hungary's prior fiscal lies was some administration official speaking to a small group of entrepreneurs in a town of which he was once the mayor.

It's about the slowly-dawning realization by global investors that, unlike private sector companies, whose accounting statements are at least cursorily audited by outside parties, governments can simply lie about their fiscal condition and get away with it for years.

Since governments everywhere printed money and stimulated like crazy in the past 18 months, global investors are now understandably worried about the capacity for those countries to repay their debts. And about the whether they can even rely on stated financial conditions of said countries.

Gone from business news headlines are discussions of the Euro's future. But I don't think the actual crisis has passed.

To me, the fundamental concern is not knowing which country, on which day, will suddenly announce that its prior stated financial condition was all wrong. Regardless of the reason, we'll learn that the truth is much uglier.

This is about confidence. The confidence global investors can have in the stated condition of the finances of many European, and probably other countries.

I doubt we're finished with this topic yet.

McDonalds' Shrek Glass Recall

It's almost too incredible to be true. McDonalds' has had to recall 12 million collectible Shrek drinking glasses because the vendor which the fast food firm hired to manufacture them apparently used cadmium, a toxic metal.

According to a Wall Street Journal piece, McDonalds had tested samples, which were found to have cadmium levels below then-existing federal standards.

Still, in this era, when thrift shops can't even take toys anymore because of concerns over lead-based paint and/or lead, how could McDonalds not see fallout from giving away children's curious containing the toxic metal?

Why do drinking glasses even have to contain cadmium?

I'm just shocked that the fast food giant which does so much so well would stumble over something so simple and obviously troublesome.

Sunday, June 06, 2010

Hospital Ships Anyone?

In the aftermath of the recently-enacted healthcare legislation, I've been considering what sorts of unintended consequences will occur.

Of course, everyone with a brain has already identified the phenomenon of corporations dumping their employees onto the federal government, rather than continue to pay for anything but bare-bones health care. So much for that 'keep the plan you like' lie from Congress and the administration.

And it's becoming clear that many older doctors won't wait around to see their incomes slashed as they become de facto federal employees. Thus, just as millions are added, at below-cost premiums, to health insurance rolls, the capacity of the medical field to treat them will shrink drastically.

But I think there will be another, more surprising development in the provision of healthcare. It occurred to me while watching a History channel program concerning 1920s rum runners. The fast small boats ferried loads of illegal alcohol from mother ships hovering just outside the limits of US jurisdiction at sea.

My prediction is that someone will organize a business providing full-service medical and hospital care on ships sailing just beyond the reach of US law. Probably domiciled in a small country where permissions may be cheaply obtained, the services will offer or arrange for insurance policies, the claims on which will be fulfilled on board the medical ships.

Being out of US jurisdiction, but near to the country's shores, retired US doctors and nurses of all ages will staff the floating care centers. Look for regular helicopter services from major US cities to the ships, carrying both employees on rotations of at least a week, as well as patients.

It seems logical that, if the world's ultimate premier medical destination, the US, outlaws private medicine, then the US medical sector will relocate to the nearest unregulated location. And that, I predict, will be the high seas just outside the legal and physical reach of Obamacare.