Friday, April 22, 2011

Yahoo- Just Sell It Already!

In this last post about Yahoo, written in February, I suggested,

"Even the typically-competent Bartz can't seem to do more than get a few dollars for using Bing and doing an ad deal with Microsoft. But Yahoo isn't lighting the world on fire with free content anymore, and missed its chance, long ago, to be a profitable, earlier version of Facebook.

To have seen its stock price fall from over $100 to under $18 in 11 years makes me wonder just who still owns this turkey?

Where to now? With no clear mission for the firm going forward, what would a current investor do? I'd say sell. The risks of further erosion are probably at least as great, if not moreso, than Bartz magically getting a higher value now for selling the firm to someone who would, by some stretch, need whatever it is of value that Yahoo still offers.

There seems to be no solo act for Bartz at Yahoo which will do shareholders any good. Continuing to operate the firm will probably just result in a declining share price. Shutting it down would destroy value. I suppose, at some price above zero, some other tech firm will see some kind of value in the firm's assets, if only its internet traffic.

It's truly been sad watching the firm manage to evade natural exit strategies over the past few years, now to languish behind even the moribund Microsoft, watching upstart Facebook move on without even noticing Yahoo in the same general product/market space."
With its earnings report once again portraying decline, it's clear even Carol Bartz can't change the end of this story. Revenues were down 24%, while profit fell 28%, as Google had another growth quarter.
The Wall Street Journal article on Yahoo's quarterly results contained lots of excuses by Bartz, and various non-financial measures claiming to herald a brighter future.
Look at that chart of Yahoo's price since going public, compared to the S&P500 Index. The company's price is down since 2000, while the S&P was only flat. Even in the past two years, Bartz hasn't been able to lift the firm's fortunes.
I still can't figure out who would continue to hold this. Isn't it time for the CEO and board of Yahoo to stop wasting shareholder capital and sell the firm?

It's About Time!

Wednesday's Wall Street Journal contained an article disclosing that finally, after nearly ten years as inept CEO of GE, Jeff Immelt's incentive compensation is being tied to GE's performance relative to the S&P500.

In this post from early 2009, I discussed Immelt's compensation,

"As the Journal reported recently,

"In addition to not receiving a bonus for 2008, Mr. Immelt also suggested -- and the board agreed -- that he forgo a special three-year, long-term incentive payout that would have totaled $11.7 million.

Mr. Immelt, 53 years old, earned $3.3 million in salary in 2008 and hasn't received a raise since 2005. He's also receiving a $2 million equity award.

That's a 61% decline from his compensation in 2007 of $13.81 million, which included salary, the $5.8 million bonus and equity award."

Boo hoo. A 61% decline from his 2007 compensation. If you read my prior posts concerning Immelt's total compensation as GE CEO to date, you will see that he could do with a few years of no pay, and still be overly-compensated for the immense damage he's caused his shareholders.

It's truly staggering to think, based on that second chart, that the GE board could give Immelt any sort of 'award,' not to mention the gross overpayment of $3.3MM...."
I've argued for years that CEOs such as Immelt should have incentive compensation tied to beating the S&P500 total return over several trailing years.
Thus, even the newly-announced $7.4MM of GE options being conditionally granted to Immelt are, again, favoring the CEO to the detriment of the firm's long-victimized shareholders.
For instance, the Wall Street Journal reported,
"Under the new terms, 50% of the options will vest only if the company pulls in cumulative industrial cash flow from operating activities of at least $55 billion between the start of 2011 and the end of 2014.
The other half will vest only if GE's total shareholder return is equal to or better than that of the S&P500 over the same period."
Hilariously, the Journal stated,
"Mr. Immelt, who saw GE through a rocky patch during the recession, received his first bonus in three years in 2010."
Rocky patch? Immelt's firm had to be bailed out by the federal govenment, for God's sake! Look at the nearby chart comparing GE and the S&P500 Index for the past five years. Even from 2007, GE has underperformed the index.
How can the firm's board justify giving this failing CEO anything over his base salary for such poor performance?
The new options contain overly-generous terms, especially for a CEO who has, as you can read in this post from 2006,
"So that makes a total of roughly $23MM in cash Immelt has now managed to loot from his employer since late 2001, when he began his reign as a failing CEO at GE. If the firm meets certain (fairly low-ball, as I recall from earlier articles) revenue, earnings and cash generation targets, and meets some stock price performance relative to the S&P, Immelt will receive as much as $18.6MM in 2007."
Why have a cash flow-oriented bonus condition? All Immelt needs do for that is make some acquisitions which boost this measure. And only equalling the S&P's return is not sufficient for a single company's CEO to be rewarded. The S&P is a broadly-diversified index, while GE is just one firm, leading to more risk for holding it rather than an index. At a minimum, Immelt's total return hurdle ought to be risk-adjusted for the variance of its total return. An easy way to do this is to set an average total return divided the standard deviation of that return over the time period equal to or better than that of the S&P for the same period.
Once again, we see that the GE board is behaving like a bunch of shareholder-looting cronies. Even when they pretend to make Immelt's incentive compensation conditional, it's on terms which are too forgiving. For such a large industrial firm, you'd think they could manage some theoretically-sound terms which reflect a basic understanding of finance.

Thursday, April 21, 2011

Bad Financial Thinking On CNBC This Morning

There are really only two free choices for business television channels on cable of which I am aware- CNBC and Bloomberg. Fox Business News seems to be among a premium channel group on my service, or simply unavailable. After this morning's fiasco on CNBC, I'm viewing Bloomberg as potential alternate or main viewing choice in the morning.

With Becky Quick and Joe Kernen away for several days, the morning CNBC on-air team was basically non-existent, as far as business acumen and understanding goes. Carlos Whathisname is on Squawkbox for minority color. He asks softball questions, looks incredulous at every answer, and tries hard to swing most conversations to liberal viewpoints.

To fill in for the missing persons, the networks clueless economics reporter, Steve Liesman, and retired mutual fund manager Gary Kaminsky were pinch hitting. I had some comments on a recent post chiding me for criticizing Liesman as being a moron and an idiot. What I'm about to relate should satisfy that reader, Lisa, and others, that my choice of terms regarding Liesman was neither accidental nor wrong.

This morning's discussion on CNBC disappointingly returned, over and over, to a 'debate' between Kaminsky and Liesman regarding companies which both grow income, buy back shares, and pay healthy and/or increasing dividends.

Kaminsky was a well-regarded fund manager at Neuberger Berman for several decades, and, we learned a few months ago, did not come to the field by accident. His father was also a fund manager, which probably helps explain the son's ability to vault into a large-scale management capacity. Kaminsky co-hosts a noontime program with David Faber, on which he largely makes sensible comments. Though he's not immune to occasionally narrow-minded pursuits of questionable points. Unlike more general business analysts, fund managers tend to adopt a style which can limit their ability to consider alternative viewpoints.

Thus, Kaminsky lauded Travelers posting good earnings, buying back its shares, and paying dividends. The typically wrong-headed Liesman began bleating that if he invested in a firm, he wouldn't want his money back. A fair paraphrasing of Liesman's rant is,

'When I invest in a company, I'm giving my money to the CEO. I trust him. I want him to invest that money, not give it back to me.'

After perhaps the third round of pointless discussion on this point, which both parties mentioned they were continuing off-camera on commercial breaks, Kaminsky inadvertently displayed his ignorance, saying to Liesman,

'You're an economist,' rather than having a business background.

But Liesman is not an economist. He's a journalist who likes to believe and pretend he is an economist. With former Fed board member Rick Mishkin as a guest host this morning, Liesman tried to shout down and over the Columbia professor during another discussion. Liesman literally would not shut up, obviously believing his uneducated, ill-informed views were more important than those of a former Fed senior official.

Kaminsky and the CNBC economics reporter must have wasted about ten minutes of air time on a conversation that wouldn't merit mention in most undergraduate finance courses.

For the record, empirically, Kaminsky, while not completely correct, is much closer to the truth than Liesman.

If one wishes to own equities with consistently superior total returns for at least a year, income growth fueled by revenue growth is desirable. Whether that is dividended or not is not too material if the company is growing. Share buy backs, however, tend not to be associated with long term equity market outperformance.

Kaminsky's beliefs notwithstanding, a company that shrinks its capital base isn't a good candidate for long term profitable growth.

As an investor, you don't want your investments misspent by corporations once they've saturated their primary product/markets. Thus, dividend growth and/or share buy backs signal the beginning of the end of consistent, reliable profitable growth.

But Liesman is wrong to decry dividends, per se. When I have owned a consistently-superior performing equity that paid dividends, I viewed those cash payments as providing more funds for subsequent portfolio expansion. Anyone so stupid as to think that dividends from a growing company constitute an unwanted problem has no business being on a business-oriented cable news network in the first place.

After listening to this pointless discussion on CNBC for far too long this morning, I thought about how badly managed the morning lineup is, that they can't manage to sustain the loss of two anchors without degenerating into meaningless babble.

Bloomberg isn't sounding so bad right now....I may miss Rick Santelli......

Regarding Intel's Quarterly Results & Investment Strategy

Intel's earnings report after the market's close on Tuesday evidently surprised analysts. As I write this before Wednesday's market open, the firm's equity price has risen some 7% in after-hours trading.

Intel CEO Paul Otellini hurried onto CNBC's morning program to stump for his firm and its future prospects. No real surprise there.

Way back in 1997, when I bought my first live portfolio based upon my equity strategy, Intel was one of the selections. That was the only time it was a holding.

The first chart compares Intel's equity price to the S&P500 Index's for the past five years. For all the risk you'd assume in holding the single issue, Intel, you would have had a return virtually identical to that of the broadly-diversified index.

But what about Intel's fundamental performance? After all, Otellini was crowing about their revenue growth.

So I reviewed the firm's relative revenue growth for the past five years from the analysis my quantitative selection process performs each month. As I expected, on a multi-year basis, Intel's revenue growth rates have been either inconsistent, or below-average during the past several years. It's never been above-average on anything approaching a long term basis.

This means that, to capture gains in Intel's share price, which are inconsistent, you have to be a market-timer. That's a very risky strategy, as most professional investors will tell you.

If, instead, you prefer to hold Intel for the long term, well, look at the second chart comparing it's price with the S&P500 since the mid-1980s. Even as a meteoric growth issue back in the early years of the timeframe, it was not a smoothly-rising curve. Then the late-1990s technology sector bubble broke the back of the stock's growth character.

Despite what some pundit on CNBC blustered about Intel having revenue growth that now makes it, well, a growth's not. A quarter here, a quarter there...does not a growth issue make.

Has Intel suddenly recaptured the magic of its old, 30 years ago self? Doubtful. Last time I checked, they hadn't entered a radically new business. Yes, they bought McAfee. But it's not like they've suddenly entered online social networking or online couponing. Neither of which would probably help them at this point.

No, I think all we're seeing is an unexpectedly strong quarter of revenue growth for Intel. If anything, its being unexpected is probably a greater testament to shoddy sell-side analysis than anything else.

But unless you believe Intel has magically entered a new era with its same old business mix, you'd probably be better-advised to observe the equity's performance from the sidelines, rather than risk your own capital on the rollercoaster that is Intel's equity over time.

Wednesday, April 20, 2011

The Magic of Blogging, Search & Social Networking

My blog is one of at least thousands which presume to observe and comment on business matters. Its followers number less than 10, and I don't believe it's permanently linked to any large, famous blogs.

On an average day, it probably draws 50-70 readers. Most, I know from Sitemeter, find a specific post due to a search. Sometimes a post about a company is linked on some major stock information site and draws above-average traffic.

Occasionally, one of my posts, such as a prescient one about unfundable municipal pensions, over a year ago, become a lightning rod and draw a few hundred visitors. That post was linked on the main page of some national government workers union's website, accounting for the stampeded of readers eager to learn, before the topic was so mainstream, that, and why, they may never receive their pensions.

Yesterday, however, saw a very new, yet commonplace combination of new media occurrences drive readership of my blog over the 1,000 mark for the first time. It took a little digging into Sitemeter's referral data to learn why.

Apparently, sometime yesterday afternoon, Dave Ramsey twittered about this post I wrote last year, prior to the elections last year. I know of Ramsey from his weekly appearances on Neil Cavuto's Fox News program at 4PM, but I have never listened to his radio program.

What surprises me is that my post is over six months old. It was written about a piece that Art Laffer wrote in the Wall Street Journal concerning Bill Gates, Sr.'s funding of a campaign to initiate a personal income tax in Washington state. Laffer presented some empirical work which clearly demonstrated that US states with higher tax rates experienced less economic growth than states with lower rates. No real surprise there, but some people refuse to acknowledge natural human economic behavior.

So, perhaps since it's tax season, or because Congressional Democrats and our president want to raise tax rates again, Ramsey somehow found my post and twittered Laffer's conclusion, with a URL for my post. I'm sure Ramsey has a ton of followers- he's a very popular radio personality. Next thing I know, by mid-evening yesterday, I had over 300 visitors, mostly from Twitter or iPhone apps.

Clearly, mobile and social networking access, combined with Twitter, catapulted my brief, derivative, dated blog post into brief popularity. There are still visitors coming on today based on the same twitter link. Apparently Facebook is also involved, as quite a few referring URLs are that site's exit page. Perhaps Ramsey's Facebook page has his Twitter link.

In any case, it's a testament to the unpredictability of the effect of current communications technologies.

Who would have guessed that, on some random day, a well-known radio personality's brief comment about the effect of state tax rates, as discovered by Art Laffer, in a major daily paper without free access to archived material, then observed by me, in a public venue, months ago, would result in a torrent of mobile traffic to my blog?

If you need some evidence of why we don't want excessive FCC regulation, this anecdote is a good one.

Zipcar's Prospects

The Wall Street Journal's Heard On The Street column in last weekend's edition dealt with the recently-public Zipcar. What struck me was the poor quality of Rolfe Winkler's thought process by comparing Zipcar to Netflix.

According to Winkler, Zipcar has decent profitability in what he characterizes as four mature markets for the firm- Boston, New York, San Francisco and Washington. He then observes that Hertz' Connect service is already challenging Zipcar, and provides a one-way rental and drop off that the former does not.

So far, so good. Having been aware of Zipcar for a few years, it always impressed me as the sort of business model which can prosper in niches, but has little or no competitive advantage to protect itself from larger rental car companies, should its growth see it become a threat to the latter.

Winkler suggested that Zipcar "can pull a Netflix." Which is odd, considering the radically different nature of the businesses. Netflix has been around for a long time, originally offering convenience and fixed pricing over Blockbuster's legendary stock outages. Aside from some warehouses and disc inventories, Netflix wasn't a particularly capital-intensive business.

Zipcar, on the other hand, rents cars. Cars that must be, I presume, cleaned, maintained, and frequently inspected for possible repairs. Further, the risks of damage to cars would seem to be financially larger and probably more frequent than the risks of damages to DVDs.

So I don't really see much of a similarity in the two business models at all. The fact that Blockbuster failed to effectively copy Netflix's approach had, I believe, less to do with, as Winkler contends, Netflix being a "sexier rival," and much more to do with Blockbuster's already declining fortunes and poor reputation for service. Because Netflix easily became a national brand and service without locations, while Blockbuster tended to be associated with local neighborhoods, it was tough for the latter to provide a compelling value proposition when it finally got around to emulating the former's business model.

Zipcar reminds me, instead, of Minnetonka's original Softsoap product in the 1980s. While it offered a valuable new feature for handsoap, the company's product was never likely to become a market share leader for long without provoking lethal competitive response from the major soap makers. Another example might be People's Express, which also competed in a capital-intensive business. It grew profitably until it saturated smaller markets and routes. When it moved into larger markets and created route- and seat-management challenges which outstripped its primitive systems, it quickly lost momentum and money. Bankruptcy followed.

I suspect Zipcar will have similar segmentation saturation issues, even as it has identified "100 metro areas and and hundreds of colleges." Without knowing the exact numbers, I don't believe the major rental car companies will cede that much share before moving to blunt Zipcar's growth with similar services, as Hertz evidently has already begun to do.

Tuesday, April 19, 2011

Myopia From Dinallo & Geithner On CNBC This Morning

Sometimes you can understand why business people have such fear of government. This morning's incredibly myopic comments and narrow minded recollection of history by former New York Insurance Commissioner Eric Dinallo and Treasury Secretary Tim Geithner gave clear examples of grounds for this fear.

First Dinallo crowed about how effective his and Geithner's illegal taking of AIG by declaring it insolvent had been. It was truly scary to listen to Dinallo self-absorbed remarks, never allowing for the possibility, as several observers described at the time, that AIG's troubled financial products unit could have been separated from the solvent insurance operations, and separately taken through a Chapter 11 process, with all derivatives creditors taking proportional haircuts to resolve the unit's problems.

To hear Dinallo tell it, he crafted the best of all possible solutions, irrespective of the capricious nature of the seizing, or the general sense that, due to former NY AG Eliot Spitzer's animus toward AIG's former CEO, Hank Greenberg, the giant insurer was in for some truly 'special' treatment at the hands of New York and the feds.

Sadly, the co-anchors on the set let Dinallo spin his fairy tale of the soundness of the AIG seizure without a single probing question.

Then Tim Geithner appeared from Washington to easily hit some softball questions from the networks  hapless senior economic reporter. Once again, the government official was allowed to go on and on without any interruptions for probing questions or serious challenges to his fairy tale.

In Geithner's case, the fairy tale is that yesterday's S&P warning on US debt is misplaced. That we haven't created too much debt which will be bequeathed to our children, and that extra spending on infrastructure and education is perfectly fine. Yes, the debt needs to be reduced, but certainly not at the cost of reining in special spending. Make sense? Not to me, either.

Both Dinallo's and Geithner's nearly robotic, surreal views that ignore reality ought to put fear into business people throughout  the US. This is the attitude that causes investment to remain on the sidelines and hiring to be delayed. With government officials like these two inventing their own reality to justify power grabs and fiscal imprudence, there's no telling what overreach could come next from Washington or your own state capital.

At this point, in the interest of truth in packaging, CNBC should just relabel itself as a government public relations agency.

A Short Talks His Book On CNBC

It isn't always portfolio managers with long positions who take the opportunity to cause a stampede in their favor by talking their book on CNBC.

Last week, Jim Chanos appeared on the network's morning program to discuss a range of topics. Asked for information on his current positions, he concisely explained why his fund is short First Solar Energy (FSLR).

Chanos cited the departure of several senior managers in the past year and the CEO and other senior officers unloaded much of their own positions in the company's equity, as well. Taken together, he said, these were very bad signs..

The stock was down about 2.3% by mid-afternoon.

As it happens, FSLR was a minor-weighted selection in one of my recent portfolios. At the time, I thought it interesting that an alternative energy issue had exhibited sufficiently good and lengthy performance to be selected by my quantitative process. But it only appeared in one portfolio, and, then, with a relatively light weight.

Every equity manager, every selection process, makes mistakes, and this would evidently be one in mine. The good news is that the solo appearance of FSLR suggests that my process is rigorous enough to limit such damage. A similar phenomenon occurred last year with the inclusion of McAfee and Intuitive Surgical, neither of which proved to be a stellar performer. Fortunately, Priceline was included heavily in a series of portfolios, and it was stellar selection.

Thus proving that portfolio management is, in the end, about the collective performance of the selections, not how much was lost by the worst one, or gained by the best.

Monday, April 18, 2011

Investing In US Money Center Banks- The Recent Track Record

It's earnings season, and already two of the nation's largest money center banks- Chase and BofA- have reported disappointing results.

It's also just a little over two years since the post-financial crisis market bottom of March 2009.

So how have the largest US commercial banks- Chase, Citi, BofA, Wells Fargo- performed, relative to the broad US equity market, as represented by the S&P500 Index?

Not so well. The first three have underperformed the index on an absolute basis. Wells has done a bit better, but not sufficiently so for the relative risk of a single equity to the broader index.

I had lunch with a long time business colleague on Tuesday of last week. Neither Chase nor BofA had, at that point, reported earnings. Still, we laughed at how many pundits had recommended bank stocks over the past few years. While I can't cite specific dates, I'm pretty sure both Jim Cramer and Dick Bove have gushed over Chase or Citi in the past two years.

Despite the many years which have passed since my friend and I both worked at Chase, the basic character of each of the nation's largest banks has not changed materially.

Citigroup's risky business strategies should have resulted in its dissolution, except for the general financial crisis in which it luckily happened to occur. Once upon a time, long ago, I suggested to colleagues that the way for Chase to have been better-valued was for the whole sector to become as mediocre as our bank was. Citi took the idea to new lows, and survived.

BofA continues to labor, as the nation's bank with the largest consumer business, under the burden of being more or less tied to that sector's fortunes. With high unemployment, stagnant wages and rising prices for ordinary consumer purchases, being the country's largest consumer banker is no picnic, as last week's BofA earnings report proved.

Chase remains the sluggish, less-well-defined bank which just never seems to either soar, or crash. As my friend reminded me, it was Chase's genetic inability to do anything quickly which allowed Jamie Dimon to avoid the worst of the mortgage-related disasters and therefore be relatively better positioned to scoop up some failed large commercial banks, such as Washington Mutual, as well as a government-insured bid to takeover failing Bear Stearns.

Wells Fargo continues to be a bit nimbler and better-managed than its eastern counterparts, but its attempts to bulk up have ensnared it in continuing mortgage problems. By swallowing Wachovia, which had purchased California's Golden West S&L, Wells inadvertently exposed itself to more losses and trouble than it probably expected.

It's been years since a commercial bank was selected by for one of my equity portfolios, and the appearances, even then, were few and brief.

I can't see anyone who seeks to consistently outperform the S&P500 using large US commercial banks to do so- now, or anytime soon.