Friday, February 11, 2011

The US Economy's Looming Job Creation Challenge

I began to consider risks to a robust US economic recovery in this recent post, in which I noted,

"But if commodity input costs are rising, that will result in either lower margins and a curtailment of job growth, or higher prices which will cause lower quantity demand by consumers in the face of so much inflation.

One is somehow left feeling that there's considerably more economic turmoil ahead than many pundits would have us believe. We're seeing the first reactions by businesses to known inflation in input costs. How and where those costs, and the actions they have spurred, find their way into consumer prices, and how consumers react with their buying behavior, isn't being widely discussed.

However, with job growth still anemic, and US unemployment still uncomfortably high, will the Fed dare to raise rates? And would that not result in a stalled economy and job growth as higher rates choke demand?"
In an editorial in yesterday's edition of the Wall Street Journal, entitled Doing the Math on a Jobless Recovery, Brad Schiller explored the job growth component of the putative, but weak, US economic recovery.
An economics professor at the University of Nevada, he wrote, in part,
"The latest employment reports have not been encouraging. At the rate of 36,000 new jobs a month—the number gained in January—we will never get back to full employment. Even if we keep adding jobs at the December rate of 121,000 new jobs, we wouldn't achieve full employment in this millennium.
At the trend growth rate of 1.2% annually, we get another 1.8 million labor force participants a year, and with them, the need for another 1.8 million new jobs.

To get back to full employment tomorrow, we could get by with another seven million new jobs. To reach full employment by the end of this year, we would need at least nine million new jobs (some 750,000 a month). There's simply no way we will experience that kind of job creation.

Each year brings another two million-plus workers to the labor force (new workers plus the re-entry of discouraged workers). Thus we would need monthly job gains of 460,000 to achieve full employment in time for the 2012 presidential elections.

We created that many jobs one time in the last four years (May 2010)."
I edited out Schiller's more overtly political conclusions. But what he makes painfully clear is that there's just no prospect of sufficiently robust employment growth anytime soon that will bring unemployment, as dynamically calculated going forward, into a range that would allow the Fed to declare full-employment victory.
If that's true, then it means the Fed might hold rates too low for some time, stoking commodity-based inflation. If not, and the Fed raises rates, then, according to Schiller's calculations, unemployment is likely to remain distressingly high.
Then you have a persistent drag on US economic growth of a significant part of the workforce being unemployed. Will this not affect overall demand? That
Like it or not, we seem to have wandered back into the bad old days of Carter-era economics: high unemployment, prospects of higher inflation, and a need to raise rates in the face of a less-than-robustly-healthy US economy.

Thursday, February 10, 2011

More Questionable Financial Coverage on CNBC

I've never really liked CNBC's equity options programs. The original, Fast Money, once hosted by now-departed Dylan Ratigan, airs after the market's close, with a 12:30PM spinoff, as well. It's not because of Melissa Lee, Ratigan's replacement, for whom I actually have great respect as a reporter and anchor. Nor several of the program's continuing contributors, including John Najarian.

It's just the fact that the network airs two programs on the topic of short-term options trading. As I've written elsewhere in a few prior posts, I don't believe many, if any, retail investors have any business dabbling in equity options. Beyond relatively safe strategies, such as covered calls, it is mostly likely an expensive waste of time and money for most retail investors. Something like 90% or more of all equity options expire without gains.

To me, the Fast Money programs aim for a rather odd segment. Few retail investors are probably interested or sufficiently confident to try to follow any of the advice emanating from the program's personalities. Institutional investors would be unlikely to need such advice- they either already have their own professional opinions as options pros, or don't go near the instruments.

Now, an even more troubling asset class is looming on CNBC's horizon- foreign exchange.

Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.

You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss.

That's also the downside- for retail would-be investors. FX is a dicey area for professionals. Never mind allowing retail investors loose in this toxic candy store.

I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse.

Wednesday, February 09, 2011

"Crony Capitalism"- CNBC Style

This morning's CNBC SquawkBox segment from the Harvard Business School marked a new low in the network's contribution to the notion of "crony capitalism."

It began with Carlos Q's typical looks of surprise, shock and awe as a guest who is apparently and adjunct professor, when he's not a hedge fund manager, discussed teaching HBS students about the new roles of finance in the economy. Of course the guy proclaimed such appearances with students as challenging and engaging.

Duh. He's a hedge fund manager, and the students want a job in 1-2 years. How does he think they'll react to him?

Then Bill Ackman was interviewed, giving him a platform from which to stump for his latest investment position, JC Penney. Despite his recent involvement in attempting to merge Borders and Barnes & Noble, Ackman's interest in clothing/general retailers goes back at least to his attempts to influence Target during the financial crisis of late 2008. What I notice now is that Ackman has, in both cases, ended up with interests in a more troubled firm in a sector. This morning, he actually, when asked, contended that Target's operational skills are better than Penney's. He was also a bit more vague on precisely how he'd use real estate values to turn Penney's around. Given the apparent setting of the CNBC segment in the business school library, to drive home the HBS surroundings, I'm unsure what the academic takeaway of Ackman's appearance was. Vulture hedge fund acquisition strategies? Shoot for the less-competent company in a sector and agitate from outside?

Ackman then pontificated on banking, announcing that lending to the largest US corporations was no longer profitable.

Gee, thanks for that stunning insight, Bill. We already knew that at Chase Manhattan 20 years ago.

It seemed mostly to be little more than another opportunity for Ackman to republicize his fund's Penney's position, demonstrating, once more, that it's nice, professionally, to be a crony of CNBC.

Then it was time for Michael Porter to trade on his decades-old reputation for a series of strategy books which mostly restated existing microeconomics. He babbled on about exchange-rate-based terms of trade and the usual verbiage about retaining a US base of suppliers and production. Nothing new, nor particularly relevant to his supposed specialty of strategy.

You'd like to hear Porter expound on how we should expect other countries to naturally compete for and capture lower value-added, less-technically complex production and other business functions and processes. That US competitiveness and ability to employ our workforce depends upon creating more value-added production and service jobs and functions. That we don't want to simply take back lower-skilled jobs, but, ideally, leave businesses free to innovate and create value that necessitates new jobs with different, greater value added. But that we have to accept the fact that an evolving, multi-lateral global economy will force the US to cede lower value-added jobs and grow only by creating new, higher value-added positions.

But nothing remotely like that escaped Mike's lips.

More cronyism in search of a purpose.

Perhaps the most egregious example of cronyism came next, as the hapless Vik Pandit, CEO of government-rescued Citigroup, appeared.

First, Carlos Q let everyone know that, off camera, Ackman had told Pandit he was 'the most underrated CEO in America.'

Really? Do tell, Bill. Why the sudden, undeserved accolade? Is Ackman greasing the skids for backup funding for his next takeover?

Meanwhile, Pandit gave one of the most stomach-churning performances I've seen on business/financial television in ages. After saying how grateful he and his bank are to the US taxpayer for saving his mismanaged company, he then went on to characterize his bank an institution. It's more than a bank, he claimed- it's an institution. So, you know, the US has to rescue Citigroup, no matter how ineptly it is run. Along the way, he mentioned a $12MM profit for the Treasury in exchange for saving Citi from bankruptcy. That's it? That's all we got for all the risk inherent in propping up that mess?

Pandit then claimed that his bank is 'back to basics,' but will repay American taxpayers by advising their companies abroad as the nation's 'only international bank.'

Can it get more cronyish than this? Here's the guy whose hedge fund, which was eventually closed amidst poor performance, was generously bought for cash by Citigroup, then magically elevated to CEO by a board dominated by a non-executive chairman, Bob Rubin, who helped lead the firm into near-ruin. Pandit doesn't have a banking background. He ran a middle-office operation at Morgan Stanley, then left to open a hedge fund. If there were ever an unqualified and unprepared guy heading a major bank, it would have to be Pandit.

If you look at the nearby price chart for Citi and the S&P500Index, beginning at December, 2007, when Pandit became CEO, you see how dismally the bank has performed.

Why on earth Ackman thinks Pandit has done well is anyone's guess. Why Pandit merits an appearance on CNBC's program, moreover at HBS, is equally curious.

Seems to be just more of CNBC's brand of crony capitalism.

The AOL-Huffington Post Deal

In Monday's post, I commented dismissively on AOL buying the Huffington Post with this passage,

"AOL, now spun back out from the disastrous TimeWarner linkage, just announced this morning that it is buying the online Huffington Post for $315MM. Does anyone really care that much? What does AOL bring to the table?"

Since then, various pundits have weighed in on the deal. Tim Armstrong and Arianna Huffington appeared on CNBC to tout the deal. Armstrong somewhat disingenously claimed there was "no risk" to the deal, while Huffington claimed that those who took AOL stock would outperform the cash recipients. This despite some observers chortling that the HuffPost owners had learned from TimeWarner-AOL and demanded mostly greenbacks this time.

As the Wall Street Journal noted,

"No doubt Huffington Post Chairman and co-founder Ken Lere, an AOL veteran who saw the Time Warner nightmare firsthand, knew the dangers of accepting too much stock in AOL."

Regarding Armstrong's claim, check out the nearby price chart showing that the new AOL has languished since its inception. Armstrong, I am sure, badly hopes that the Huffington Post's readership can work magic on AOL's ad revenues. Putting Arianna in charge of a bigger chunk of content? Who knows how that will turn out? She's known for liberal politics, despite what Armstrong yammered about new content 'beyond left and right.'

Given the only-recent profits realized by Huffington, and just a $50MM revenue estimate for FY2011 for the online media property, the $300MM in cash plus $15MM of AOL equity seems a pretty rich price. I always wonder, in these situations, why the acquirer doesn't just form a marketing alliance, exchanging cash for product and/or access? Thus saving shareholders' the risks of actual acquisition, while extending financial benefits to the media property, and forcing continued performance for the deal to continue.

But, as I noted in my initial comment, so what? What's really clear is that the four owners of Huffington got a nice $300MM for a recently-, barely-profitable online business. Sounds a lot like TimeWarner-AOL, only one company removed, doesn't it? What AOL gets is anybody's guess. But investors clearly didn't like the deal. And it's going to take a lot to get AOL anywhere near the S&P since its rebirth.

Personally, I don't think Armstrong and the addition of the Huffington Post properties, including Arianna herself, are going to do the trick.

Tuesday, February 08, 2011

Paul Ryan Teaches Economics To The "Senior Economics Reporter" On CNBC This Morning

Now that he's Chairman of the House Budget Committee, Wisconsin Republican Paul Ryan has been appearing on CNBC's morning program, SquawkBox, more frequently.

If you haven't seen, heard or read Ryan, he's a remarkably intelligent and economically savvy elected official.

This morning saw a priceless moment wherein Ryan befuddled the economically-challenged, CNBC so-called "senior economic reporter" Steve Liesman.

Ryan was responding to questions regarding monetary policy and the Fed. He had contended in a remark that the nation's fiscal and monetary policies are heading for conflict. Liesman, hoping for an easy chance to make Ryan look bad, jumped in to ask for elaboration.

By way of background, Ryan offhandedly referred to a piece he and heavyweight monetary policy economist John B. Taylor had co-authored in Investors Business Daily recently. Taylor is, of course, the author of the influential Taylor Rule, explained below by Taylor,

"Let me start with the example of the Taylor rule. It says that the short term interest rate equals one-and-a-half times the inflation rate plus one-half times the real GDP utilization rate plus one. So, in 1989, for example, when the federal funds rate was about 10 percent in the United States you could say that the 10% was equal to 1.5 times the inflation rate of 5% (or 7.5) plus .5 times the GDP gap of about 3% (or 1.5, which takes you to 9) plus 1, which gives you 10. Now this is a very specific rule, and it can be written down mathematically as shown in Figure 1, which also shows the way the rule was written when first presented in 1992. Of course, I did not name it the Taylor rule. Others did that later. Originally the rule was meant to be normative: a recommendation of what the Fed should do. It was derived from monetary theory, or more precisely from optimization exercises using new dynamic stochastic monetary models with rational expectations and price rigidities. Like most rules or laws in economics it is not as precise as most physical laws, though that does not mean it is less useful. It was certainly not meant to be used mechanically, though it now appears that monetary policy might operate even better if it stayed closer to the rule."
Ryan is an explicit Friedmanite on most economics issues. Especially, if you listen closely to his comments, monetary policy.

The priceless moment came when Liesman demanded that Ryan cite, on the spot, the rule he preferred the Fed follow for monetary policy.

Ryan slowly, carefully explained that he is a member of Congress, not a professional economist. Therefore, he said, he could not and should not specify the rule, but he knew he preferred that the Fed use one.

All the while, the camera showed Liesman's pudgy face in a frown, with a sort of dull-witted mask of slow comprehension. He began to slowly realize that Ryan is far, far more intelligent than he, Liesman, is, both economically as well as in terms of the media dynamics going on at the moment.

You can't possibly script this sort of thing. Ryan just seems to mesmerize Liesman and leave him dumbfounded. Emphasis on the dumb part.

Immediately on the heels of that exchange, Rick Santelli chimed in to chide Liesman for being harder on Ryan than he's ever been on Bernanke. Whereupon the so-called senior economic reporter retorted/admitted that he'd never actually interviewed the Fed Chairman.

Priceless, unscripted business and economic comedy this morning.

How GSE's Stifle Mortgage Finance Innovation

Peter Wallison wrote a clearly expressed editorial in a recent edition of the Wall Street Journal explicitly identifying the GSE-provided subsidy to conventional 30-year, fixed-rate mortgages.

Wallison's point was that many people mistakenly believe that you can't offer an uninsured 30-year, fixed-rate mortgage, completely ignoring the existence of the jumbo-loan market. He went on to catalogue the mistakes Fannie Mae made in easing eligibility requirements for its mortgage guarantees, including downpayments of as little as 3%.

The editorial got me thinking about the reasons for such long duration mortgages. Wallison pointed out that they build equity value very slowly, maximizing the interest expense deductions available in the current tax code.

If I'm not mistaken, part of the reason for the lengthy duration was the experience Americans had with balloon-payment mortgages of shorter duration during the 1930s. When monetary policy brought about a severe contraction of the monetary base, money simply wasn't to be had. And many borrowers probably couldn't requalify for a mortgage during the Depression.

I'm familiar with the current existence of shorter-duration mortgages, but, of course, those leave a homeowner vulnerable to needing to refinance at an inopportune time. Those mortgages don't typically get the exposure that traditional 30 year fixed-rates do. However, many homeowners never come close to living in their home for 30 years.

Is it possible that the GSE's backing of selected mortgages stifled innovation in the field? Wallison concentrates on the dubious policy of government subsidies to conventional mortgages. But it occurs to me that another cost of those subsidies is to make it harder for other, more innovative mortgages to gain popularity. I'm not talking about lower downpayments but, rather, a homeowner choosing to take duration risk in exchange for a lower rate.

It would seem that, as is frequently the case, government-sponsored distortions in credit markets may have created unintended consequences which rob consumers of more choices in their buying behaviors. In this case, in choosing the duration of their mortgage, should they have reason to believe they do not need a 30-year funding commitment.

Monday, February 07, 2011

More Bad News from Yahoo

Sadly, even last month's improved Yahoo profit didn't do enough to lift it's equity price up anywhere near enough to make Carol Bartz' 18 months heading the firm look positive.

In fact, the firm's performance over the period now stands at roughly half the return of the S&P500 Index, as shown in the nearby chart.

It seems that Facebook's rise as the social networking phenomenon- large enough to worry Google- has now totally eclipsed the old self-proclaimed social networking site- Yahoo.

In this post, written last May, I confirmed my belief that Bartz was brought in too late for even someone with her considerable talents to rescue Yahoo. That post mentioned Facebook's performance as surpassing Yahoo's on a measure of ad display impressions.

The language emanating from Yahoo concerning their recent results has become full-mode corporate speak. For example, this from Bartz,

"We're not trying to cut our way to revenue growth. We're investing for future revenue growth."

Well, yes. Except it's just not working. In a Facebook world, nobody thinks about Yahoo as a connection site anymore. It's just one more free information site. With a deal with Microsoft involving Bing, if I recall, that brought some much-needed money.

AOL, now spun back out from the disastrous TimeWarner linkage, just announced this morning that it is buying the online Huffington Post for $315MM. Does anyone really care that much? What does AOL bring to the table?

In the natural, Schumpeterian order of business, Yahoo and AOL, two giants of the early internet era, have now lost purpose and significance. I wonder just who even owns shares in these firms anymore?