Friday, September 24, 2010

David Tepper On CNBC This Morning

CNBC's 6-9am program featured a half-hour segment, ending at 8:30, with David Tepper, founder and head of the $12B+ hedge fund Appaloosa Management. I'm sure it's already a featured clip on the network's website, and will remain in the paid portion for some time.

Tepper said a lot during his half hour as the program's only guest. But there were two comments which, for me, were especially notable.

The first was his nonchalance concerning the bet his hedge fund made on US bank equities and debt in 2009. According to Tepper, Treasury published a white paper declaring, in advance, the bank equities it would purchase, and at what prices. Citing the failure to comply with this document as fraud under SEC rules, Tepper claimed that it was easy to go long in the bank instruments which delivered Appaloosa's reported 100%+ gains for 2009.

"Sometimes, it's that easy," the 17-year veteran hedge fund manager observed.

Despite questions from Becky Quick and Joe Kernen concerning the changes in federal government actions, versus stated intent, for TARP, and its quixotic behavior two years ago this fall, Tepper remained calmly insistent that Appaloosa's long positions going into 2009 were a simple, riskless move.

I can't help believe that Tepper is putting a different face on those risks now then he and his team viewed them two years ago.

For example, the federal government enjoys sovereign immunity from many lawsuits. And it's very unlikely that any administration would allow its SEC head to bring action against its Treasury Secretary or the Fed for failing to act upon a 'white paper.'

I'm sorry, but I just don't buy Tepper's characterization of his funds' positions as essentially riskless and a no brainer in late 2008 and early 2009.

If he'd been wrong, and Treasury had had second thoughts, we'd have read about Appaloosa's horrendous losses. And maybe a feeble attempt to bring suit. Which probably would have brought heat from the SEC to quash the attempt at forcing Treasury to follow through.

The second interesting comment from Tepper arguably began to turn equity market futures this morning. When asked about his views for the rest of the year, Tepper didn't hesitate to say he was longer than usual, and fully expected the Fed to make good on its desire to facilitate US economic growth.

According to Tepper, between continued easy money, borrowing, and/or, if necessary, QE2, he's confident that the Fed will get its wish. As he put it, to paraphrase,

'If the Fed continues easing, equities will do well, but bonds will get killed. If, on the other hand, that doesn't ignite growth, and they need to do more quantitative easing, then everything will do well for the remainder of the year.'

Tepper didn't say there wouldn't be a price to be paid for all of this easing. He simply reiterated his early comment about 2009, i.e., you should believe the Fed and Treasury when they say they want to assure an economic result which, in the short term, they have the means to effect.

Having seen some prior examples of a market heavyweight's comments on CNBC seem to move the S&P and Dow futures, I'm not at all dismissive of the impact of David Tepper's remarks. When he began speaking, the S&P futures were around 1122. Now, at 9am, an hour later, they are around 1133, with the added help of some positive economic news.

One has to wonder why Tepper suddenly appeared on CNBC this morning. Was it a function of the equity markets falling back from their recent, multi-month highs? Was Tepper concerned about the fate of his long positions?

I don't believe in coincidences of this sort. A few months ago, Doug Kass, a noted bear and also a guest/host on CNBC earlier this morning, made public his belief that equities had hit a bottom and, sure enough, they began a march upward that morning.

No matter how talented the equity manager, whether public or private/hedge fund in nature, I can't help but see them all merely talking their books when they agree to appear on CNBC.

What To Expect from the Bureau of Consumer Financial Protection

Much has been made of Elizabeth Warren's rather tortured, strangely-handled appointment to head the federal government's new Bureau of Consumer Financial Protection. I've written about that aspect of her long-awaited appointment here on my companion political blog.

In this post, though, I'd like to consider what this new agency is likely to do to and for US financial consumers.

According to a Wall Street Journal article on the subject, Warren is to oversee a staff which will now commence writing hundreds of pages of new rules and policies governing practices at financial firms.

Warren is now attempting to spin her efforts as being "willing to cooperate with business leaders."


Anyone who's seen Warren's scolding, imperious, inquisitorial manner during her TARP Oversight Committee will find it hard to believe that statement.

Instead, Warren has spoken of "tricks and traps" that consumer lenders employ, and of calling for "fundamental changes to the way rules are written in Washington." According to the Journal article, Warren wants two-pages contracts for mortgages and credit cards. It's not clear how that would offer more protection to consumers, unless the language is so sweeping as to provide for nearly-unlimited lender liability.

You don't really have to know just what new regulations will be written to understand the effects they are likely to have on consumer lending. Rather than allocate credit according to a consumer's ability to pay, new regulations are more likely to result in no access to credit whatsoever for borderline borrowers.

If consumer lending documents truly become distilled to one or two pages, it's reasonable to assume that only the safest credits will be funded. The fewer terms and conditions are allowed, the more assured lenders will want to be that their customers, and their loans to them, are very low-risk.

Just stepping back and considering Warren's overall belief that lenders have behaved predatorily, and consumers need to be 'protected,' it's a good bet that the price of credit will rise, when it's available.

Perhaps a good example of this likelihood was Warren's reaction to a question from Jack Welch on CNBC's morning program yesterday. When Welch asked Warren if she thought her efforts would increase the price of credit, she replied,

'That's the wrong question to ask.'

Amazing, isn't she? Simply ruling an inconvenient question off limits, out of bounds, to be ignored. Which she did.

She went on to claim, without any examples, that whole companies existed simply to take advantage of consumers with 'tricks' to make them pay exhorbitant fees and rates. Then resorted to the hoary old references to 'families' to contend that all was amiss in the finance industry. Not just a few bad apples, according to Warren, because she never actually admitted that there were honest lenders out there.

Instead, Warren painted a picture of poor, uneducated, stupid consumers waiting to be fleeced by sharp lenders. In her world, consumers sign loan agreements they don't read or understand, despite being adults and understanding that nobody is making them borrow money. For a glimpse of this, go find and watch CNBC's House of Cards documentary. The scene with the large California woman who knew she couldn't afford her mortgage, but figured that 'if they want to give me the money, they must believe it's okay and I can afford it.'

That woman is the prime example of the average consumer in Elizabeth Warren's world. In reality, of course, no amount of regulation or protection will prevent such a person from making mistakes, borrowing too much money, at unaffordable rates. But don't try to tell that to Warren.

Thus, as with most regulatory overkill, the results of her efforts will, typically, be the opposite of intentions. In this case, it will not facilitate borrowing for lower-income borrowers, but probably eliminate them from qualifying for loans at all.

Thursday, September 23, 2010

A Downside of Low Interest Rates

Earlier this week, the Wall Street Journal ran an article discussing a somewhat hidden downside to the US economy's current ultra-low interest rates. That problem is what such rate levels do to assumptions driving pension fund values versus long term liabilities.

Simply put, companies- and states, for that matter- are facing much greater shortfalls in their pension funding. For example, the article cited GM sources as saying that "every .25 percentage-point decline in its discount rate could increase its pension obligation by about $2.4 billion."

That obligation as "underfunded by $17.1 billion at the end of 2009."

On a larger scale, the article noted,

"If S&P 500 companies took account of the interest-rate decline as of Aug. 31 to calculate their pension-fund balances, the combined deficit would increase by about $167 billion, or nearly two-thirds more than the year-end 2009 deficit of about $260 billion, estimates Jack Ciesielski of the research firm Analyst's Accounting Observer."

Leave it to the free market's checks and balances to identify this risk. Between suspect private sector growth rates inhibited by government interference, taxation and deficit policies, and these low interest rates, one wonders how any ground will be gained on these pension liabilities.

Down the road, of course, this could morph into lower demand and savings, as retirees don't collect expected pension payments.

Jeff Sonnenfeld's Misinformed Praise of Ann Mulcahy & Xerox

With Larry Summers' resignation from the administration's economic team, every pundit worth her/his salt has been tossing names out for his replacement. Among business people, to my astonishment, former Xerox CEO Ann Mulcahy has been mentioned as an inside favorite.

Jeff Sonnenfeld lauded Mulcahy on CNBC yesterday afternoon as having had a "fabulous tour of duty" as the struggling firm's CEO.

If you look at the accompanying chart of the price series of Xerox and the S&P500 Index, it's hard to understand Sonnenfeld's enthusiasm for Mulcahy's performance.

Mulcahy became CEO of Xerox on 1 August, 2001.

After a smartly-rising performance from 1990-1999, Xerox's share price deflated, along with that of many other technology firms, when the tech bubble burst in 2000. By 2001, the company's stock price had begun to recover, but has basically flat-lined over the period of Mulcahy's management. The S&P did roughly the same.

How does this make Mulcahy some sort of management maven? And why does anyone even bother with Xerox anymore? It's been a technology also-ran for at least a decade.

Leave aside that she's never been considered an economist. Precisely what is it about Mulcahy's lackluster reign at the copier company that would make anyone believe she's somehow qualified to be an economic adviser, or process coordinator, at the White House?

I know. Sonnenfeld probably believes that without Mulcahy, Xerox would have performed even worse since 2001! That's the sort of performance that could well find Mulcahy a spot on the administration's economic team.

Because it certainly wouldn't have been due to Mulcahy's doing her shareholders any favors during her term as CEO at Xerox.

By the way, in his long-winded comments, Sonnenfeld confided that Summers' post was only created in the Clinton administration to give Bob Rubin a place to hang until he could be made Treasury Secretary. If that's really true, how about letting Summers leave and just save the money? It's not like we need more economists in the administration, is it? With their current performance, I'd say rather fewer might be better.

If the stories about Mulcahy being a serious contender for Summers' job are true, I'm not sure who comes off worst- Sonnenfeld, Mulcahy, or the White House.

Wednesday, September 22, 2010

Is Google A Monopolist?

That was the title of last Friday's Wall Street Journal presentation of two editorials arguing the question.

It's nice to have a topic to discuss that involves more pure business and strategy than government intervention, although, the very question actually begs the latter.

The Google case seems, on the surface, to resemble that of the infamous browser wars in which Microsoft drove Netscape into oblivion. That certainly is the contention of one of the editorialists, Rick Rule, now retained by Microsoft and other firms in an anti-trust action against Google.

However, as I thought about this question over the weekend, I found myself believing that Mr. Rule is engaging in a deceptive and erroneous comparison.

Google offers a free search engine to anyone wishing to use it. But it is not the only search engine available. In fact, so robust is the search engine market that Microsoft re-entered the fray recently with its branded Bing service. And just this past week, a co-anchor on CNBC announced that she had gone back to Yahoo's search engine and found it better than the other two.

Since one accesses Google's search engine as an online service, it immediately begins to depart from the browser example, in that those software programs were coming pre-loaded on personal computers of the day.

If memory serves, one of the major anti-competitive behaviors by Microsoft involved tying its browser to its Windows personal computer operating system when selling the latter to PC producers such as Dell. The argument against Microsoft was that it was illegally using the ability of Dell to sell PCs pre-loaded with the most popular operating system, Windows, to force it to also pre-load the included Internet Explorer web browser, and exclude Netscape's or any other firm's browser.

As such, Microsoft's alleged anti-competitive behavior involved violating the Robinson-Patman Act's provisions involving illegal tying.

Google, however, isn't tying anything to a product for which money is paid.

No, the current argument is really about advertising market foreclosure. Even the debate concerning Google's alleged manipulation of search results is baseless in that nobody pays for searches.

Thus, despite a long-winded diatribe, Mr. Rule's only real well-founded point is that Google's share of online advertising exceeds 70%, which he claims exceeds the Sherman Act's "consensus" threshhold.

However, again, online advertising isn't "sold" to users. It's bought by those wishing to advertise, and they can choose all three search engines, if they wish, on which to advertise their products and services.

It reminds me of my local, freely-distributed weekly 'newspaper.' Many communities have them. A local publisher prints and distributes variants of the same weekly paper to many nearby towns through contracted carriers. Nobody pays for these nuisances, and often they receive multiple copies. Thus, it could be said that the publisher in question has a monopoly, in that every house in a town is given at least one copy of the paper. Companies pay to advertise in the paper, but nobody suggests that these small entities have a harmful monopoly on advertising.

Mr. Singhal, a Google fellow and the Journal's choice to represent Google's viewpoint in the other editorial, argues that Google is always vulnerable to its search engine being eclipsed by a better one, thus upsetting its business model. I wrote a post several years ago contending precisely this case. Everything else that Google has pursued has necessarily been dependent upon revenues from search-related advertising. If search goes down, Google's entire empire is in jeopardy.

As an aside, while I understand that Google's, and other search providers, receive their ad revenues from those wishing to place product and service ads, I continue to marvel that companies do this. My own behavior almost never results in purchasing goods or services directly from an ad on an online search. True, a company purchasing a keyword might get a click-through from me, but rarely a purchase.

In any case, businesses do see value in buying various search words and terms, fueling Google's, Yahoo's and Microsoft's search-related advertising revenues.

But none of those seem to even remotely pass the test of current anti-trust laws which require the guilty party to actively foreclose markets to suppliers or predatorily price goods or services to buyers in order to eliminate competitors.

It seems that, like it or not, existing anti-trust laws do not easily apply to the world of online search and advertising. Google's predominance, when viewed objectively, would not seem to be a result of any illegal activity, whether it is a monopoly, or not.

Tuesday, September 21, 2010

New Fed Rules & Commercial Bank Presidents: Does It Even Matter?

Sometimes it's worth considering the output of a system, before getting excited about changes to its inputs.

In this case, I'm referring to a recent Wall Street Journal article professing concern that Chase's Jamie Dimon doesn't feel he can "perform his duties on the Fed board" because of recent financial regulatory reform legislation.

Is the the same Fed which has been reduced to a 0% interest rate policy and quantitative easing in order to effect monetary policy in the US? The Fed which is dominated by its chairman, currently known for throwing liquidity at any crisis, rather than let natural systemic reactions help to right the nation's economy?

Having work with several CEOs of large US banks in my past, I'm wondering just what it is for which Dimon is required on a regional Fed board. Even that of New York.

I'm one of those people who doesn't believe that large company CEOs magically become omniscient and smarter, i.e., someone they never were before, just by being anointed with the title.

In Dimon's case, he was never considered a monetary or economic policy savant when he carried Sandy Weill's bags for years at Shearson, American Express, Travelers or Citigroup. Why should he have such wisdom now?

The gritty, operational details of banking, the expertise with which might be a necessity on a regional Fed board, aren't generally possessed by bank CEOs, either.

In short, I wonder just what a bank CEO can provide to a Fed board that reports and analysis from his/her bank's various functions can't, with greater specificity?

The most important element of the Journal article to me was the potential conflict now created by new legislation and the existing Federal Reserve. It could well be that the recently-passed law improperly and illegally infringes upon Fed powers. Or maybe it's a legal curtailment that constitutes a sort of 'back door' curbing of Fed powers which has been threatened by Congress, but never implemented, for decades.

That would seem to be the real story. Not just whether a certain bank CEO on a certain regional Fed board is no longer able to "perform his duties."

Monday, September 20, 2010

Private Equity's Comeuppance

Last Wednesday's Wall Street Journal had an article highlighting the challenges of private equity firms attempting to cash out of firms via IPOs in the current thin market for such issues.

The overall thrust of the article was simply that the private equity groups are now facing the fact that they constitute the bulk of IPOs and, as such, might drive down prices for the firms they are now trying to unload. And that many are under the pressure of expiring fund pools to liquefy their gains via sale of the firms they once took private.

But my own takeaway was that, as with all markets, timing is everything. And what seems to be a great strategy at one point in time can become a curse at another time.

In fact, this article illustrated to me that there is a second risk to the private equity business besides the one that recently became evident by Cerberus' debacle with Chrysler and GMAC. That problem is simply too many private equity firms chasing too few opportunities, leading to deals with little chance of paying off. Combinations of excessive prices paid by the private equity groups, and poor choice of targets, results in some deals never making it through the process and back out into the public markets.

Now, in addition to failure on the front end of the private equity process, however, we see that simply having a fund near its dissolution date can result in a group having to dump properties back into the equity markets at a bad time. Not only are there few other IPOs, but, in the current market, it's not clear that prices will be the best they could be.

Seems all is not unalloyed gold in the private equity business, after all.