Saturday, March 05, 2011

The Good, The Bad & The Ugly: CNBC Reporters & Anchors

Over the past few weeks, it's dawned on me that there are three types of business reporters or anchors. Being a prominent business/financial cable network, CNBC offers examples of all three.

The Good: Michelle Caruso Cabrera
Ms. Caruso Cabrera is one of the only, if not the only, CNBC on-air anchor with an economics or business degree. Her questions are typically well-reasoned and germane. She is well-informed and isn't afraid to ask tough questions of her guests and let them ensnare themselves in hypocritical positions.

The Bad: Tyler Mathisen, Bob Pisani
These two epitomize bad anchoring and reporting.

Consider Tyler Mathisen. I wrote here of his incredible naivete during his special grocery sector program. I think that's the signature characteristic of what I mean by bad anchors and reporters. They are surprised by everything. Their curiosity is, sadly, born of ignorance and cluelessness. In his grocery store special, Mathisen actually asked a store design expert why milk and dairy are always located at a rear corner of the store.

Honestly, if I were a senior executive at CNBC and saw/heard that, I'd immediately fire Mathisen. Can anyone past the age of 25 with a college education really be that stupid?

Pisani spends too much of each weekday looking astonished or surprised by some move in equities. That's when he isn't anthropomorphizing the market and cheering it onward to new heights, rather than simply reporting the facts.

Anchors and reporters who can't add value beyond restating the obvious or bringing some level of knowledge to a topic, so that they can at least ask questions you would, or hadn't considered, are just a waste.

The Ugly: Steve Liesman
I've reserved this category for those anchors and reporters who, far from adding value to interviews or segments with their knowledge, or adding no value by being ignorant or clueless, actually spread misinformation and falsehoods.

There's no doubt the posterchild for this category is CNBC's senior economic idiot, Steve Liesman. You can search my blog by his name to get a list of posts which will give you a fair sampling of his daily antics on the network.

Whether he's attempting to lecture actual, degreed economists- Liesman is a journalist with no economics or business education- or pontificating on economics statistics and/or patterns about which he has no formal training, Liesman typically spreads suspect 'knowledge.'

Fortunately for CNBC viewers, Chicago-based Rick Santelli is often on hand to counter, de-bunk and generally demolish whatever Liesman has just said.

Unfortunately for viewers, however, CNBC has far too many bad and ugly reporters, and too few good ones. Among the last, though, I think you can count, in addition to Santelli and Caruso Cabrera, Trish Regan, Melissa Frances, Joe Kernen and, often, Larry Kudlow.

Friday, March 04, 2011

And Another Thing......

In today's earlier post, I described some of the blather which comprised David Faber's noontime half hour on CNBC this past Wednesday. As I listened to the program again today, while multi-tasking, an on-air conversation reminded me of one more verbal blunder on Wednesday's edition of the program which had slipped my mind.

Somewhere in the middle-late portion of that program, Kaminsky was on his anti-technology jag again. At some point, a guest, either the Evercore guy or some portfolio manager- I think the latter- was asked about, I believe, Twitter. It was something estimated to be worth about $4B, and it wasn't Facebook.

In any case, the $4B number was tossed out, and this guy says, to paraphrase,

'Well, it probably will be worth $4B at some point, just not now.....maybe in a few years....'

He went on to essentially advocate holding the issue.

Kaminksy, meanwhile, was silent. I was incredulous.

Yes, and in a few years, what, maybe Yahoo will turnaround? Wal-Mart will come up with a strategy that works during economic expansions?

Isn't this sort of thinking about future large market caps the way the original technology bubble grew? Yes, it is.

There's a fine line between buying something before it's generally recognized to be as excellent performing as it may be, and buying something years in advance of a big total return payday. Kaminsky, of all people, with his fund management background, should know this. I expected him to excoriate the guest.

Instead, he was mute.

You can't make this stuff up.

Inanity on CNBC Wednesday At Noon

Just when I favorably mentioned David Faber's noon CNBC program, it turned inane on Wednesday afternoon.

Gary Kaminsky led off the nonsense purporting to prove that 'slow and steady' wins, by showing a price chart of three companies over 10 or 20 years- McDonalds, Colgate-Palmolive and Dwight & Church. All three had average annual total returns of 13+%, with low betas, which I guess Kaminskly judged acceptable.

He made some derisive remarks about technology stocks, although I didn't see comparable charts, returns or betas. Maybe I missed them. But Kaminsky actually concluded by judging low beta stocks to be preferable to those with high betas.

The problem is, equity selection is just not that simple. And if it really were, tens of billions of hedge fund dollars would have erased any such performance difference.

The truth is, Kaminsky, you or I could choose 3 equities with any one attribute to prove pretty much anything we wished.

For example, I would guess GE has a pretty tame beta, but it's been a complete turkey for a decade.

Moreover, Colgate-Palmolive is a rather special company. Years ago, when I first undertook my proprietary equity performance research, I found Colgate, then run by deservedly-legendary CEO Ruben Mark, to be the longest-running example of a firm whose total return had outperformed the S&P annually. And it is a slow-growth firm. Thus, it's by no means an accidental choice of Kaminsky. But I can assure you that it would be very easy for me to find a handful of similar slow-growth firms whose total returns have under-run the S&P for most of one or two decades.
Further, beta is debatable as the proper measure of volatility.

Given Kaminsky's years as a big-time portfolio manager with Neuberger Berman, you wonder if this really represents how he thinks about and manages equity portfolios. If not, what was this little demonstration for?

You don't present a seemingly-random, or worse, contrived sample of 3 companies' performance as proof of anything. Rather, you state hypotheses, build multi-factor models, construct hold-out samples, then use some data and periods to estimate parameters, and others to test the models.

After that farce, a guest from Evercore Partners appeared to opine on whether another 1990s-style technology issues bubble is building. I don't recall the guy's name, but he was introduced as having been instrumental in four of the largest telecom M&A deals of the past decades, including the sale of MCI to Worldcom.

I'm not making this up. You'd think with an introduction like that, well, Faber would think twice about even having the guy on his program.

If there were ever a case of expedient deal-making without concern for the fundamentals, not to mention the veracity of the financial conditions of the parties involved, this deal would be it.

Once again demonstrating how so much of CNBC's lineup is business and financial entertainment, not solid analysis or useful information.

Thursday, March 03, 2011

Foreclosures: Pro & Con

Last week brought a pleasant surprise to David Faber's CNBC program. Former Salomon Brothers Vice-Chairman and mortgage-backed securities pioneer Lew Ranieri gave his first live televised interview.

Ranieri is a seriously smart and sophisticated guy, so I hung around within range of a television after I'd finished what I was doing, just to listen to his entire set of comments.

His version of how the late 2000s mortgage lending bubble occurred is objective and credible. He gives weight to both so-called Wall Street houses for securitizing questionable mortgages, and to the GSEs for accepting them to back their own securities, too. He cited some numbers regarding GSE explosion of pass-throughs which were simply incredible.

To his credit, Ranieri personally apologized for not having screamed louder and longer as the bubble grew beyond any sustainable size. He identified poor underwriting standards and an over-reliance on FICO scores, rather than prior, more involved and often qualitative mortgage lending standards.

When the conversation turned to foreclosures, Ranieri cited a stunningly large supply of unsold or foreclosed housing. I don't recall the exact numbers, but I believe he said several months supply had been the historical norm, but today's supply was something like almost two years' worth, if not more.

Never the less, he came out against massive foreclosures. He said that foreclosures destroy neighborhoods and cause them to rapidly degenerate into ghettos. He also cited a lack of government programs to promote and assist local entrepreneurs in buying foreclosed properties, repairing/renovating them and putting them back up for sale at new, lower, market-clearing prices.

Separately, Joseph Mason, a professor of banking at Louisiana State University, wrote an editorial in the Wall Street Journal last week entitled Why Regulators Should Let Banks Foreclose.

 Mason  providing evidence that foreclosure delays don't help

"On Capitol Hill last week, federal banking regulators suggested that the government may soon reach a comprehensive settlement with banks on foreclosure procedures and servicing. In theory such a settlement could unlock housing markets and boost the economy. But recent statements by Comptroller of the Currency John Walsh and FDIC Chair Sheila Bair suggest that they remain focused on using the settlement to extend, rather than end, ongoing foreclosure delays.

Meanwhile, states including New Jersey and Hawaii are considering imposing their own moratoriums on foreclosure that, if they conflict with federal policy, may lead to protracted litigation. This approach is the wrong medicine for our ailing economy.

For borrowers, delaying foreclosure only provides false hope. Today, a borrower faces a foreclosure sale only after failing to make a payment for more than a year. There is no reason to believe a brief additional time-out will allow such borrowers to become current. To the contrary, data from the Mortgage Brokers Association indicate that loans reaching the foreclosure stage almost never avoid default, and that borrowers who become 90 days delinquent cure their default only about 1% of the time.

Similarly, recent research done for the National Bureau of Economic Research demonstrates that loan-modification programs have mixed effectiveness. Data suggest that many delinquent borrowers have the means to afford their mortgage payments, but are so deeply "under water" on their mortgages that they are simply no longer willing to pay. Others have insufficient income to afford any reasonable mortgage payment.

For those who do obtain modifications, roughly half become delinquent again within six months. Thus, while modification efforts are laudable, they are not the solution.

The unfortunate reality is that efforts to lengthen the foreclosure process will not substantially alter borrower outcomes. They will only extend a painful time for borrowers and the economy. During that time, uncertainty will prevent borrowers from moving on with their lives, including starting to pay rent and make purchases that would inject money into the economy.

For neighborhoods, every day without foreclosures means another day of deteriorating home values. A recent study of the Cleveland area published in Urban Affairs Review found that neighborhood home values are largely unaffected by foreclosures that take less than a year. But foreclosures that take longer than a year have a negative impact on home values as the effects of neglect and vandalism mount.

One of the root causes of the economic crisis was a deterioration of underwriting standards: We stopped focusing on whether people could afford the homes they were buying. Continuing to delay foreclosures reflects the same kind of wishful thinking. California's 90-day moratorium in 2009 did not improve the state's economic performance, and moratoriums in other states would only prove again that a delay can't turn an unaffordable mortgage into an affordable one.

Kicking the foreclosure problem down the road creates uncertainty that discourages investment—and delays our desperately needed economic recovery."

Mason seems to provide evidence contradicting Ranieri on foreclosures. Rather than worry about allowing them, Mason suggests getting them over quickly is the better alternative. And his end-game is Ranieri's, too- repurchase of foreclosed properties at lower, market-clearing prices.

Personally, I believe it's foolish to delay foreclosures, especially when it's governmentally-coerced. It unfairly penalizes some while allowing others to evade the proper consequences of their failure to fulfill financial contracts, as well as discriminating against all those who behaved properly and did not buy an unaffordable home, only to see such behavior rewarded.

Wednesday, March 02, 2011

More Warren Buffett Cornpone on CNBC This Morning

This morning was a good one to skip watching CNBC. I don't know how often they do this each year, but it's one of those marathon Buffett chuckle-manias from Omaha. Becky Quick sits there with him and he pontificates on lots of subjects about which he knows little more than anyone else. Given the setting and someone's recent reference to Buffett's annual shareholders' letter, I assume Berkshire Hathaway's annual meeting is the occasion.

Much of the time is wasted by Buffett saying things which are patently obvious, e.g., Steve Jobs is a uniquely-talented and successsful entrepreneur with a gift for "knowing what we want before we know we wanted it."

That's when he's not contradicting actual experts in a field, such as mortgage banking. Last week, on David Faber's noontime program, industry veteran and CMO pioneer, one-time Salomon Brother's Vice-Chairman Lew Ranieri cited a market overhang of unsold homes which, I believe, was far larger than the one year cited by Buffett as the date by which said inventory will be gone.

And, of course, it's all done with that annoying aw shucks guffaw. I don't know which would drive me insane faster, constantly being subjected to Buffett's trademark country guffaw or Maria Bartiromo's lisp.

But on one subject, Buffett is positively misleading.

Only about 15 minutes ago, he railed against perceived income inequality in the US. His evidence?

Buffett pulled out some apparently IRS-sourced document, and had Becky Quick read off some numbers. Buffett alleged that in the past few years, the 400th largest AGI on a tax return soared from about $43MM to $340MM or so. Buffett then contended that the associated tax rate on that 400th return fell over time, too.

Unfortunately, as you may read here, the subject is much more complex than Buffett either understands or acknowledges. Add to Reynolds' arguments the fact that many private enterprises show up for tax purposes as schedules on an individual 1040 return, and you blow Buffett's contention out of the water.

But this is CNBC, so Buffett's every aside or chuckle must be fawned over. No matter how misinformed or misguided it may be.

The Ben Bernanke On Capitol Hill Yesterday

I caught some of The Ben Bernanke's testimony on the Hill yesterday, and let me tell you, it was nauseating.

But for me, the two low points were Ben insisting:

- the Fed needs to retain its dual mandate of managing the money supply and targeting full employment.

- there's no risk of US economic inflation.

The first must have Milton Friedman spinning in his grave. And perhaps Paul Volcker spit out his cigar when/if he heard it. Ever since dim-witted Hubert Humphrey championed the added full employment mandate, the Fed has been hampered in its ability to do focus on the one thing that nobody else can do- manage the US money supply. To finally face a friendly House and possibly ambivalent Senate and refuse the chance to formally escape this monstrosity is unforgivable.

The second certainly had Milton spinning. Not to mention tons of pundits laughing at Ben's sophistry.

It got so bad that later, on CNBC, senior economic idiot Steve Liesman made up a whole spiel to explain why Ben was right.

Between excessive money creation over the past two and a half years, and easy dollar-induced rises in commodity prices, we certainly have inflation. The fact that it's not conventional labor-sector cost-push doesn't mean it isn't happening.

Friedman was right. Get rid of the Fed and use a Taylor-style rule to manage the money supply.

Tuesday, March 01, 2011

Unfunded Liabilities: Pensions & Entitlements

Karl Rove wrote in a recent Wall Street Journal weekly column, regarding the Wisconsin public sector union protests and Governor Walker's bill to repeal collective bargaining rights,

"Union demands have helped produce an estimated $3.5 trillion in unfunded liabilities for state and local government pension and health-care plans. They've also led to personnel practices that tie the hands of local elected officials, often resulting in perverse outcomes. For example, union insistence on "Last In, First Out" often means the best and brightest teachers are let go when districts downsize or schools close."

I had a long talk recently with a close friend who is a political conservative and, as a New Jersey school teacher, a member of their union.

As we discussed the Wisconsin situation, and she dutifully, but reluctantly, read the related posts on my companion political blog, she bluntly told me this had become a painful topic for her, with me. But she also admitted that her union's members needed to pay for their health care and pension benefits.

She then returned to a topic she'd ranted on in previous conversations with me, i.e., going back several administrations, the New Jersey state government had emptied her union's pension fund by 'borrowing' from it and then failing to maintain promised annual funding. In short, the State of New Jersey has already brazenly failed to fund the promised lavish retirement benefits for the teachers' union.

She railed over the likelihood that her contributions would probably be in vain, with her promised pension never to actually be paid in full.

Welcome to the club.

I vividly recall learning in Professor Peter Kundsen's 'Great Moments in Balance Sheet Accounting' course in graduate school, back in the late 1970s, how unfunded pension liabilities were confined to footnotes. The midterm for that course was a list of questions attached to the Bethlehem Steel 10K. Needless to say, one of the questions was, I am sure, related to the firm's unfunded pension obligations.

Within a few years of graduating, I saw bankruptcies roll through the steel and airline sectors. And Chrysler require a government bailout.

With the rise of hostile takeovers and raiders taking their targets private, or into Chapter 11, many more businessmen learned about the PBGC. The Pension Benefit Guaranty Corporation is the federal agency which is charged with administering the failed, under-funded pensions of bankrupt firms.

The truth is, the private sector has seen, for some thirty years, a series of sectors experience bankruptcies which dumped underfunded pension plans onto the PBGC. At the same time, many other companies switched to defined-contribution plans, terminating their defined-benefit plans and putting the resulting lump sum into the former.

In short, private industry has learned, over the past three decades, that the defined-benefit pensions are, for the most part, illusory and unworkable.

What's happening now is that public sector employees are discovering the same truth. The major difference, however, is that because state and local governments foolishly agreed to these plans, the public sector unions have, as a counterparty, an entity that cannot, as easily as a private sector company, declare bankruptcy and subsequently renegotiate the pension obligations.

It goes without saying that Social Security, Medicare and Medicaid are all federal programs which share the same foolish defined-benefit mentality. And we've all been aware for decades of the chronic insolvency of the first, and the obscene growth of the second and third.

How is it that what business people have understood for thirty years as infeasible, i.e., the defined-benefit approach to any long run pension or health care obligations,has only now come to be seen as unworkable in the public sector?

Monday, February 28, 2011

Economic Growth vs. Jobs

Sometimes, well, actually, many times, those without any economic background or education run at the mouth about related topics, getting relationships all wrong.

Such was the case earlier this morning, when I heard the first few minutes of the president's remarks about from where new jobs would come.

So often, we hear people with no economics training whatsoever harp on job growth, as if they can magically wave a wand or fund a program, and paying jobs will appear.

That's just not true. In fact, the whole point of a market economy is for government to enact stable, lasting policies which promote business and capital formation, which leads to economic growth, which then creates jobs.

A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.

In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.

Perry observes,

"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.

The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.

The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972.

These increases are a direct result of capital investments in productivity-enhancing technology, which last year helped boost output to record levels in industries like computers and semiconductors, medical equipment and supplies, pharmaceuticals and medicine, and oil and natural-gas equipment."

It's the productivity and volume of economic activity that drive further growth. And productivity is enhanced when more capital is provided. Sure, there are eventually diminishing returns. But it's simply wrong to try to force-feed an economy the jobs government thinks ought to exist.

Haven't we learned from Russia's failed 50+ year experiment with a centrally-planned economy that such efforts are pointless?

With capital availability, mobil labor resources and high productivity, and low barriers to new businesses and innovation, an economy is poised to grow, thus leading to new jobs as a consequence.

Jobs aren't the ultimate objective of economic policy, per se. They are important, but follow economic activity. Not vice versa.