Friday, July 16, 2010

More CEO Idiocy On CNBC This Morning

Probably because BofA announced earnings yesterday or this morning, its CEO, Brian Moynihan, had a lengthy interview on CNBC this morning.

After reading about Moynihan's checkered corporate past, about which I wrote here, I have zero interest in anything the guy would say. I'm guessing I'm not alone.

So why is Becky Quick breathlessly asking Moynihan about the state of the American consumer, after stating that BofA has relationships with some large percentage of them?

C'mon, Becky, you're smarter than that. That so-called "relationship," is, for many of the bank's customers, a checking account.

And why would Moynihan, a lawyer with a now-publicly highlighted spotty record of mediocre management at several banks, know anything more about American consumers than, say, someone who has actually conducted market research? Or a qualified economist?

Even Joe Kernen's pointed question about BofA being whipsawed by the feds to both lend more money, but make no bad loans, got a punt from Moynihan. Obviously, given the predatory regulatory environment in Washington these days, the BofA CEO wasn't going to utter a single word that could be viewed as combative by the federal government.

So much for honesty and candor from CEOs. Anywhere. Which is sort of the topic of this morning's prior post.

Anyway, I suppose this morning's puff session with Moynihan is CNBC's attempt to deify anyone in a CEO suite, no matter how unqualified or lacking in experience. Which is really just plain stupid.

It's A Little Late For That Now.....

Tenneco's CEO, Gregg Sherrill, wrote an editorial in yesterday's Wall Street Journal entitled Speaking Up for American Capitalism.

Nice, Gregg, but you're about 18 months too late, and by your own admission.

Consider this passage from Sherrill's piece,

"In one such poll, as the Economist reports in a feature titled "The 70-30 Nation," the Pew Research Center asked respondents whether they were better off in a free market rather than a socialist economy "even though there may be severe ups and downs from time to time." Seventy percent said yes.

So why are the 30% in charge of the 70%? According to American Enterprise Institute President Arthur Brooks, the "game changer" was the economic crisis. It was the financial crisis of 2008-2009, which was used as a tool to attack the free enterprise system..."

Mr. Sherrill neglects to mention what Mr. Brooks also omitted in the quoted passage, i.e., that American investment and commercial bankers threw themselves on the federal government's and the Fed's mercies to save their institutions from ruin.

As I wrote in a prior post, both business and government leaders failed the American people in this regard. CEOs never should have asked for government help, and George W. Bush should have steadfastly refused said requests.

Instead, Americans witnessed overpaid CEOs of badly-run financial institutions beg to be individually rescued with taxpayer funds.

Never mind that failed institutions would not have destroyed either our economy, nor our financial system. With some alacrity, the attractive portions of said institutions would have found backers or buyers in short order, while the money-losing businesses and their inept management would have been closed.

That's how free markets are supposed to work. Mr. Sherrill doesn't acknowledge that some American businessmen chose to succumb to socialism, rather than suffer the consequences of their mistakes and fall on their financial swords.

Thus, I found Sherrill's entire editorial to be largely empty words and sanctimonious preaching. And very late.

His protestations would have been appropriate during the financial crisis, not after. The time to remind people of the realities of capitalism was at its worst, so that there wouldn't have been so much aberrant government and business behavior.

Not now, when the damage has been done.

Americans won't easily root out and destroy the recent socialistic changes to our economic system until they are confident that the resulting businessmen will live with the consequences of their decisions, and not go running to the federal government for rescues.

Thursday, July 15, 2010

A Wacky Call For Government-Funded Journalism

Yesterday's Wall Street Journal contained a wacky piece by Columbia University president, Lee Bollinger, entitled Journalism Needs Government Help.

You can view Bollinger's bio on any number of webpages. While this isn't my political blog, suffice to say, Bollinger's background, including stints in significant administrative positions at several liberal universities, a JD, and clerking for Warren Burger, certainly lead you to expect non-market solutions from him.

And you wouldn't be disappointed in the content of the Journal editorial. Essentially, Bollinger idolizes the BBC and, in the same breath, PBS, calling for an official federal government underwriting of US news gathering.

Apparently blind to the prevalent form of news consumption, as I noted in this post on Rupert Murdoch's bid for Dow Jones, Bollinger argues,

"We should think about American journalism as a mixed system, where the mission is to get the balance right."

By "mixed system," Bollinger means government involvement. In a free press.

Yeah, that'll happen.

Bollinger claims that this is required because, in the current situation, news organizations will accept advertising from firms they cannot thus criticize, e.g., BP.

In this, Bollinger exposes his incredible naivete and, frankly, ignorance of both business evolution and plain common sense.

First, there are millions of bloggers and ordinary people with cell phones possessing motion and still video capabilities. How many news stories of the Malaysian tsunami of several years past were based on those?

Between immediate image capture and blogging by the public, now, more than ever before, contrary to Bollinger's contentions, we are able to sample unbiased, raw news from all over the globe.

Second, today's modern method of monetizing news is more video than text. That's just the truth. Sorry to break it to you, Lee, but humans can listen at much faster rates than they can read, video allows for spontaneous debate that clumsy text does not, and multiple-sense information processing actually tends to increase retention.

Even if Bollinger were right, and print media was some sort of sacrosanct icon, news gathering funded by the government is an obvious trap.

Instead, the Schumpeterian result should be the resurgence of the wire services. AP still exists.

If so many viable print entities needed unaffordable news feeds, then shared feeds would be the obvious solution. I believe that, years ago, the larger newspapers gradually could afford their own foreign correspondents, negating some of the benefits of the old UPI and AP systems.

If business conditions have made that model more profitable again, so be it. The last thing we need is yet another dinosaur of a business sector on government life support, in addition to auto assembly and finance.

But between truly international print media, such as the Economist, and daily cable news programs, Bollinger's view of print journalism looks pathetically quaint and out-dated.

Is this guy living in a time capsule?

Wednesday, July 14, 2010

Bloomberg's Expansion Into Legal Research Business

Last week's Wall Street Journal contained a type of article which I haven't seen in ages. It used to be a staple of the paper, but no longer. Especially not since Murdoch's NewsCorp bought Dow-Jones and turned the WSJ into a set of editorial pages with some shallow business headline stories on the front page.

The piece in question described Bloomberg's entry into the legal research market, challenging Westlaw, LexisNexis and Thomson Reuters.

Citing market share concentrations and sporting a graph arraying revenue growth versus market share, the article did a fabulous job explaining the long shot on which the financial data firm is embarking. By the way, the Big3 share in the industry is over 75%, which alone tells you Bloomberg must be desperate to even attempt entry into this product/market.

The Journal piece quotes Greg Lambert, an apparently well-known blogger in the field and "library and records manager for law firm King & Spalding" as saying that,

"Bloomberg Law will be a flop."

Later, upon being told the service is offered for a flat fee, in contrast to existing competitive services, Lambert upgraded Bloomberg's chances to a "long shot."

Personally, from my own strategy consulting and academic background, I'd go with Lambert's first prediction.

I've seen similar situations in information services business niches before. It's not an uncommon dilemma.

A large, very successful firm has exhausted growth in its original, primary product/market segments. Recall that the firm has branched out into Bloomberg Television and recently bought BusinessWeek from McGraw-Hill.

Such a firm will be faced with a crisis of growth. Total returns typically grow best and longest at growth-oriented firms. Bloomberg isn't in the sorts of businesses which tend to wring out costs and succeed at boosting total returns from low or no revenue growth. For that, think Ruben Mark's old Colgate-Palmolive.

Thus, Bloomberg is turning to product/markets which could leverage one or more of its existing strengths. Electronic distribution is a no-brainer for that, isn't it? They have the database and business management, hardware, software expertise and the pipes.

All they need, so the thinking must have gone, is some new content to pour into their servers, down their pipes, into customer premises.

The firm with which I'm most familiar having done this, and not to great success, was ADP. It's moves out of payroll processing never sustained the firm's original profitable growth.

So, too, will it likely be with Bloomberg.

After all, there are a very few strongly-entrenched, capable existing competitors. The field, law, doesn't really change all that much.

It's an old maxim that to switch buyers from a current vendor with whom they are content or happy, a new entrant typically must offer at least a 15% price/performance improvement. In this case, that's probably going to be heavy on the price aspect. One early customer quoted in the Journal contended that there is at least one performance feature on which the Bloomberg offering is superior- speed of updating docket information. Whether this alone will be sufficient to win significant share remains to be seen.

So Bloomberg is probably going in with lower prices, which will help commoditize the entire sector, and make any victories it achieves that much less profitable.

At best, one senses a Phyrrhic victory for Bloomberg. At worst, an expensive waste of resources.

With existing share concentrations and the nature of the market segment's content, it's a reasonable bet that the truth will be closer to the latter.

Tuesday, July 13, 2010

More Reflections on This Morning's CNBC Travesty

I wrote earlier today about an appalling hour of liberal excess on CNBC this morning.

Congressman Paul Ryan was assailed by two CNBC co-anchors and a Democratic House member from Illinois, all, I suppose, part of an attempt to either portray Ryan as detached, cold-hearted and naive, or change his mind. Neither occurred.

But as I replayed some of the exchanges in my mind later this morning, while swimming, another revelation came to me.

Having been educated in both classical and Keynesian economics, I am aware that, even in the latter system, investment decisions are allegedly a function of supply and demand for capital interacting in the form of interest rates.

Since even Keynes believed that no single person knew the correct amount of investment for an economy, he, too, relied on interest rates, set in a free market, to attract sufficient capital for available projects. Less investment would leave some desirable projects unfunded, while more investment would waste capital on projects which wouldn't return sufficient profits to justify their risk.

What isn't invested by consumers, i.e., saved, is spent.

Thus, in an economy in which, hypothetically, there was no government spending, consumers would invest what they don't spend, and spend what they don't invest.

Funny, then, isn't it, how the two CNBC co-anchors and the Illinois Democrat kept harping that the government had to provide the 'necessary spending' in the economy?

If even Keynes believed that markets had to allocate savings among investments, then it follows that he, conversely, believed that consumers, individually, decided on spending levels. Cumulatively, that provided a total spending level.

How is it that our modern day economic savants, who happen to moonlight as CNBC co-anchors, plus the Democratic Congress, believe they can do what even their economic patron saint, Keynes, never contended, i.e., that government knows what is the 'right' level of aggregate economic spending?

Here's another insight from my morning swim.

Ryan contended that consumers and investors are scared by so much heavy-handed government intervention in various economic sectors, so they refrain from investing. Savings, in the form of bank deposits or mutual funds, may be invested by professionals in Treasuries, since risk assets are now, well, so risky, due to the potential for government intervention affecting investment results.

But it may go further than that. Perhaps consumers are very aware of Congress' decade-long love affair with Fannie and Freddie, and their direction of those GSEs to back bad mortgages to less well-off borrowers who couldn't actually afford the homes they bought. Maybe those consumers have concluded that, with Congress willing to behave so recklessly with taxpayer dollars, taking actions which led to a financial sector crisis that amplified the effects of an already-occurring economic slowdown, it's wiser to just sit tight and try to save and avoid losing more money, either directly or through wasted tax dollars.

Then there's the leverage issue. Congress, in the wake of the financial crisis it brought about through lax supervision of Fannie and Freddie, when it wasn't forcing them into buying questionable mortgages, decried excessive leverage in the financial sector.

Now, though, the federal government is borrowing, printing money and spending it at rates far in excess of what the private sector was doing before that crisis.

If private leverage was a bad thing, why is government leverage a good thing? Further, why is it better for government to choose how much to spend, which is really all that government can do with money, rather than let people make their own spending choices?

It makes no sense.

Rather than allow for savers, investors and entrepreneurs to find the right level of investment and, as a result, spending, for the economy, we have a federal government determined to choose investment and spending levels all on its own, employing terrifying levels of leverage in the process.

I have read Keynes' original work, and I seriously doubt even he would approve of the current US federal government fiscal policies.

CNBC's Explicit Liberal Bias On Display with Congressman Paul Ryan (R-WI)

I am watching Congressman Paul Ryan (R-WI) appear on CNBC this morning's Squawkbox program as a guest host to discuss federal deficits, spending and tax policy.

In his opening few minutes, an exchange occurred which was simply priceless, displaying Carl Whathisname's and Becky Quick's undeniable, purely-liberal biases. I wish I could link to a video clip, because I can't recall the give and take verbatim.

However, I can give a pretty good sense of the comments.

Carl and Becky professed amazement that Ryan thought the US government should trim spending. Carl said, on several occasions, words to the effect,

'But if government didn't spend that money, then you have a spending shortfall.'

Quick contended,

'Surely even you don't believe that government shouldn't have enacted some sort of stimulus spending, do you?'

To which Ryan replied that, yes, he thought a stimulus was needed, in the form of tax cuts. Letting people spend their own money.

He then turned to Carl and refuted his points, noting that government borrowing and spending crowded out people using their own money to invest or spend.

The look on Carl's face was as if he'd been slapped, he was so dumbfounded.

This went on for a few rounds, with Quick and Carl desperately trying to get Ryan to admit that government had to spend lots of money to shore up the economy, no matter what. For co-anchors of a business program on a business cable network, they displayed unusual ignorance of basic economics, not to mention empirical work which has routinely been published in the pages of the Wall Street Journal by noted economists.

The two things which most greatly troubled and shocked me were Carl's inability to fathom that, if government didn't tax and borrow your own money, that money does not just hide in a mattress, and that federal discretionary spending, according to Ryan, doubled last year.

When Ryan said that, both Quick and Carl jumped on the economic weakness, assailing Ryan for perhaps saying no spending was needed.

That's when Quick tried to entrap Ryan by insisting he was for some sort of stimulus, thinking, of course, with her one-track mind, that this would necessarily mean spending.

Ryan then landed a Sunday punch, pointing out that only 4% of the $700B stimulus bill was for Keynesian infrastructure, with most of the rest going for social spending. The program's co-anchors then said, nearly in unison, that this was, of course, necessary to keep teachers, firemen and policemen employed.

Ryan countered, immediately, that this was simply delaying states' having to reckon with their own fiscal problems, and, thus, a red herring. Either way, Ryan noted, it was excessive spending. For good measure, Ryan noted that everyone supports Keynesian automatic stabilizers, such as COBRA, job training benefits and such. But the uncertainty stemming from government takeover of key industrial sectors had sent capital scurrying to the sidelines, inhibiting economic recovery.

Even now, as I'm finishing this post, the programmers recruited a liberal Democrat Congresswoman from Illinois, Rep. Schakowsky, to repeat the same contentions as the co-anchors. She is evidently ignorant of this recent piece by Art Laffer in the Journal, claiming that giving unemployment insurance creates demand that would not have otherwise existed. She also just assumes that federal spending is necessary because you can't rely on people to spend their own money in useful economic ways.

There have been few instances of such blatant liberal and socialistic economic bias on CNBC as this morning's hour-long assault on Paul Ryan and his prudent fiscal concepts.

Monday, July 12, 2010

Recent Punditry On US Equity Markets

There's been some striking divergence among equity and capital market pundits recently. Especially just in advance of, then, in light of, last week's outsized gains in US equity indices.

For example the Yahoo Finance page featured these pieces last week.

The first was by Mohamed El-Erian. While not, to my knowledge, a degreed economist, he never the less is the first well-known pundit of whom I am aware to suggest that unemployment has become a leading, not a lagging, economic indicator. Noteworthy passages include,

Unemployment has shifted from a lagging indicator to a leading one and is warning government policymakers to confront problems in an economy mired in slow growth, Pimco co-CEO Mohamed El-Erian told CNBC.

The consideration of unemployment as a lagging indicator is a favorite mantra among economists who believe the rate primarily looks at the past rather than what is to come.

But the internal details of current trends paint a different picture: More than half the labor force out of work for more than 26 weeks, the average length of unemployment at greater than 35 weeks, and the unemployment rate of 25.7 percent for 16- to 19-year olds.

"These are structural aspects which cannot be solved overnight, cannot be solved with a cyclical mindset," El-Erian said. "And they are worrisome because they make the unemployment rate not only a lagging indicator but also a leading indicator."

Then there is well-known equity bear Doug Kass. Here's what was written about his predictions last week,

Doug Kass of Seabreeze Partners, famous for calling the market bottom in March 2009, isn't worried. In fact, he's bullish. "I think we've seen the lows of the year," he tells Tech Ticker guest host Jon Najarian of "The market's are traveling on a path of fear and share prices have significantly disconnected from fundamentals," he says.Kass predicts stocks will rise 10%-12% by year's end on the back of strong earnings and a better-than-expected economic recovery. He says positive trends in the ISM manufacturing and non-manufacturing index and improved labor market conditions point to "moderate domestic economic expansion, not a double dip."

Trading at around 11 times earnings, stocks are fairly inexpensive, says Kass. He notes stocks generally trade at around 15 times future earnings, and even higher in periods of tame inflation and low interest rates, as we're currently experiencing.

While I don't have the article quotes, Wells chief investment officer Jim Paulsen weighed in essentially in lockstep with Kass in another Yahoo piece.

Finally, Michael Shedlock was the focus of a piece that featured these passages,

Having already heard the bullish case from Doug Kass and James Paulsen earlier this week, Tech Ticker decided to invite Mike "Mish" Shedlock, author of Mish's Global Economic Trend Analysis, back on the show to hear the other side of the argument.

Is he bearish? You bet!

"The optimism out there is rather insane," he says. There’s only a 15-20% chance of the market rallying, Mish tells guest host and Business Insider deputy editor Joseph Weisenthal. "It's more likely we go down there and test the March lows, and there's a decent chance actually that we break those lows," he says.

Mish says "it is nuts to be net long" stocks right now in the face of all these headwinds:
-- Slowdown in Europe as austerity measures take hold.
-- Slowdown in U.S. as stimulus fades, housing remains weak, state and local governments cutback
-- China looks to cool its economy in the face of growing housing bubble
Until Mish sees signs of sustainable job growth, he'll be firm in his bearish stance. "Without a driver for jobs I don't know how someone could be bullish on the stock market."

Who to believe?

Well, first, realize that every one of these guys is talking his book. None of them go public like this without first positioning the funds they manage. Thus, they hope to trigger a stampede of the large, mindless herd of institutional portfolio managers who are responsible for the bulk of market capital.

That said, the next thing to consider is how each pundit calculates these managers will perceive their remarks.

For example, Kass is more notable predicting rising markets then falling ones, because of his reputation as a short-seller and general market bear. Thus, his remarks are most visible because they are contrarian to his perceived sentiments.

The others are less connected with any particular sentiment. But, speaking of sentiment, Kass' commentary put a very light weight on that factor. He articulated his own view of market influences, which include fundamentals, valuation and sentiment. He claimed that fundamentals carry a 70% weighting.

Kass and Paulsen both cited various market valuation mechanics and upcoming S&P earnings, suggesting that consensus earnings and a market-multiple of 12-13 gives you an implied higher S&P than the 1023 to which Kass felt the market should never have sunk.

So basically, you have two pundits stressing math and historical averages to defend a higher equity index, and two other pundits stressing macroeconomic factors.

Something that Shedlock said, in contrast to Kass and Paulsen, was that, in bear markets, market multiples shrink. Thus, if earnings are lower than expected, not only does the imputed S&P fall, but so does the multiple in a downward market.

Don Luskin wrote a piece in last week's Wall Street Journal which observed the same phenomenon.

Personally, I'm swayed in this situation by El-Arian and Shedlock. I understand that sentiment and broadscale opinions of the mediocre bulk of equity managers can drive markets in the short term. But, longer term, macroeconomic realities inevitably triumph.

For example, the March 2009 S&P low from which the index rose nearly 100% was a consequence of an 'end of the financial world' concern of late 2008. That was a valuation correction, more than a vote of confidence in a healthy economy.

Last week's two day upsurge in the S&P is hardly the same thing. If anything, viewed from the April 2010 S&P high of 1217, last week's peak of 1078 seems pathetically weak. A 50-point, four-day rise, predominated by a one-day surge, doesn't a market recovery make.

Here's another conundrum. Last week's equity index surge was reputed to be in anticipation of good corporate earnings numbers during the coming weeks. Doesn't that mean optimistic results are already baked into the S&P? So it shouldn't rise any more, and, if anything, might fall on profit taking.

Or fall if some earnings fall short of expectations, or, even as they meet them, do so on inadequate revenue growth.

I continue to be amazed at how investors have begun to ignore revenue growth, as if companies can cut costs to zero. They can't. At some point, probably in the next two quarters, lack of revenue growth will become an issue.

The next few weeks will give us a better view of that performance and investor reactions to it.