Friday, May 27, 2011

David Einhorn Echoes My Position On Ballmer & Microsoft

I noticed that David Einhorn took time out from his purchase of a minority interest in the New York Mets to echo my long-held contentions, expressed in prior numerous posts (under labels Microsoft and/or Steve Ballmer), that Bill Gates' successor as CEO should be fired.

According to Bloomberg on Thursday, Einhorn's Greenlight Capital's 8th largest position is Microsoft.


First things first. Does noted wealthy hedge fund investor Einhorn's agreement with my long-held call for Ballmer's departure mean I am now correct? Or was I correct all along? Does it matter that someone with billions to invest decides on publicly stating the same sentiments I've written for a few years?

In some ways, it does matter. For instance, I don't hold Microsoft, and, even if I did, I wouldn't own as much as Einhorn's fund probably does. So I wouldn't have the investor influence that Einhorn does.

But, then again, Einhorn's fund owns Microsoft. Wouldn't his statements be expected, in the days ahead, to drive the price of the firm's shares down? Does Einhorn want to accumulate more shares, at cheaper prices, the better to insinuate himself into the firm's management?

That is, after all, Einhorn's modus operandi, is it not? To invest in firms with challenges, hoping to affect a resolution, and thereby see gains from his pre-existing positions in the firm?

But by criticizing Ballmer and Microsoft, while owning the share, Einhorn would seem to be taking some risk, seeing the value of the firm's shares potentially drop for a while, before possibly rising again. Perhaps on Ballmer's exit or Einhorn's securing some role in influencing the firm's strategic direction.

But, in another way, it doesn't matter that Einhorn has now agreed with a position I've held for years. The facts of the case should be based on their merits, not simply on who is voicing them. In fact, sometimes you should assign more credibility to someone who is objective. Someone like me who doesn't own Microsoft shares, but simply observes real performance and comments thereon.

Of course, another reality is that I can write about Microsoft's, Ballmer's and Gates' failure over the past decade all I want, and I'm not going to get the coverage on CNBC, Bloomberg and in the Wall Street Journal that a wealthy hedge fund manager like Einhorn will receive for pithier comments at a much later date.

Is it gratifying for me to see business media embrace Einhorn's views on Microsoft and Ballmer, which are, essentially, my own for years? Yes.

Is it frustrating to know that I can write the same conclusions as Einhorn, for years, and garner no media attention? No. I'm sanguine about having one of millions of blogs. Mine is neither famous nor, on a traffic basis, very heavily read.

However, that said, a series of equally-candid posts about GE earned me an appearance on the most-watched cable news program, O'Reilly's Factor on Fox News, a little over three years ago. And that appearance got the attention of GE's headquarters staff.

Years ago, when the Wall Street Journal featured blogs which discussed topics appearing in the paper, I routinely saw my blog posts featured, driving readership of my blog up over 100 daily visits. Even now, I have about as many daily RSS feed readers as I average in direct readership. And it's fairly common for me to see IP addresses from companies like Goldman Sachs, Lehman and other well-known firms, as well as the US Senate, House and other government entities and universities visiting my blog.

The truth, however, is that I write the blog for two reasons that have nothing to do with other people. The first is to provide myself with ongoing anecdotal reinforcement of the key proprietary research findings which drive my equity strategy. The second is to compile a library of my own thoughts and observations, the better to use to build upon those prior recorded impressions and advance my own ideas about business, finance and economics.

Whether those thoughts and observations are widely-read or bring a significant revenue stream was never the primary purpose of the blog.

All that expressed, however, I do take some measure of satisfaction that someone like David Einhorn took years to arrive at the same conclusions I reached much earlier. And that, thanks to his obsessive attention to mentions of himself in online venues ( grist for another post based upon a brief email exchange he and I had a few years ago), he'll probably read this post and my observations about his being so late to an obvious story.

Is There A Social Networking Business Bubble Forming?

What to make of the uproar over LinkedIn's IPO valuation? I haven't kept abreast of all the details, but I'm aware that the value of the IPO soared, then fell.

The nearby chart displays the first few days of the firm's equity prices. Suffice to say, overall, lucky buyers of the issue have enjoyed a handsome return in just the first five days.

Of course, there are all manner of opinions on LinkedIn's prospects.

For example, some co-anchors on Bloomberg did the math and contended that the newly-public firm would need to grow at a rate of some 50% per year for the next two years to justify its price/sales ratio.

Others have noted how slim the actual base of publicly-offered shares is, how dilutitive employees' options will be, and how much volume could be dumped by underwriters at the first chance to do so.

Regardless, the feeding frenzy by other social networking-based companies is now afoot. Zynga has plans to go public in June. Margaret Brennan of Bloomberg quizzed an analyst about how serious one should take Zynga's revenues, where real money is spent to buy cyber items in virtual worlds.

Point taken.

Take a big step back and ask yourself, just what is the nature of these firms? What are they selling, and how competitively defensible is it?

LinkedIn sells recruiters and HR people access to business professionals. I believe there is some other membership upgrade, as well as the ubiquitous online advertising play. So LinkedIn actually has something to sell, but as for how much growth there is, well, it's not exactly Facebook.

Zynga seems to be mostly an online gaming site. It's unclear how much long term value that site really has. Thus, I suppose, the great dispatch with which the founder is planning an IPO.

One of the social networking site founder wunderkinds was on one of the business cable channels expounding on how all sites wishing to gain or retain allure need to add a group or social aspect to their offerings. That is precisely the sort of sentiment that got the original internet-based technology bubble off to its start.

Recall, if you will, that suddenly clicks outshone bricks, and online companies marketing everything from business supplies to pet items soared.

Let's assume their is some value in social networking aspects of some online behavior. How much of it is truly defensible from a business sense? As I wrote in this post concerning Groupon, the barriers to entry in some of these product/markets  are much lower than you might initially believe.

A while later, I wrote this post reinforcing my earlier impressions,

"Groupon and its ilk just aren't businesses which I see as capable of delivering long term consistently superior shareholder returns, when they are public. There seem too few barriers to entry, too little in the way of proprietary, defensible competitive advantages, and an evolving sense by many customers, i.e., retail merchants, that what these services provide is, in the end, not really all that different than conventional couponing, and not necessarily loyal, full-price customers, either."

I've yet to actually see a firm which has begun with a social networking application, other than Facebook, a first-mover, which doesn't seem to be fairly defenseless and vunerable. On the other hand, it's much easier for an Amazon or Apple to add social networking, links to Facebook, or what have you, to their existing, robust business model. In that sense, my equity strategy process is thus already in a position to own social networking assets with relatively lower risk than chasing after Zynga or LinkedIn.

It's hard not to see a bubble forming in this online social networking space. The fundamentals are pretty much in place- hot user acceptance, more eager retail investors than companies and shares to buy, and a still-recovering IPO market.

But, investment bubbles being what they are, we'll probably be observing this one in hindsight sometime next year, or the year after.

Thursday, May 26, 2011

Re Mark Haines, RIP

I wasn't going to write a post about the recent death of Mark Haines, CNBC anchor. But the network's relentless self-promotion, with large doses of hype, lies and selective memory tossed in for good measure, have become so stomach-turning that they have driven me to it.

There are really two topics in this post. The first is Haines himself.

Like many other viewers, I found Mark Haines to be, to use the already-overused terms, gruff, likable, direct, contentious, and objective. There were times when I'd had enough and muted the program, but, for the most part, I found him to be refreshingly honest and candid, unlike most of his colleagues.

Even Tom Keene, on Bloomberg, gave an eloquent eulogy to Haines yesterday as the signoff of his noontime hour program. From all the personal anecdotes from the many reporters and pundits who knew him, Haines appears to have been a genuinely kind, interesting, good person.

I found, just randomly Googling Haines this morning, this webpage which included these passages,

"Haines was known for his sharp tongue and contentious tone. “He was the first business journalist ever to ask a C.E.O. a hard question,” CNBC host Jim Cramer told The New York Times in an e-mail statement.

Haines, however, told The Chicago Tribune in 1998 that his style made for good television. “If we don’t get people who watch, we’re out of business…At the same time, you have to have a core of people who understand business,” he said."

Leave it to blowhard Cramer to engage in hyperbole. Was Haines truly "the first business journalist to ever ask a CEO a hard question?" Probably not. But this morning's Wall Street Journal obit noted his relentless dogging of former Kodak CEO George Fisher for lying to Haines in an interview. According to the Journal piece, Fisher misled Haines regarding a rumored imminent price cut, so when the action occurred a few days later, Haines began replaying Fisher's on air lie frequently. In that regard, he was unique.

However, to me, the second passage reveals Haines' true sensibility. He was in the business of working to "get people to watch." Because his job was to sell those eyeballs to advertisers.

Haines could be irascible, but, on balance, he was largely objectively sceptical and truth-seeking. Whereas other anchors would tiptoe around an obvious falsehood- Becky Quick and Carlos Whathisname continue to be timid even today- Haines was not.

That said, the other topic of this post is CNBC's shameless use of Haines' death to promote phenomena that either never were, or never should have occurred. That was the stomach-turning part of the past day-plus' CNBC coverage of his passing.

I'm speaking of this morning's continued use of Haines' memory for CNBC's anchors and reporters to flog its own image as ground-breaking, crucially important to financial markets, and the very beacon of all that is right, just and true in financial news coverage.

To hear, for example, from Maria Bartiromo this morning, that her reporting from the floor of the NYSE was somehow instrumental in capitalism's growth and importance. Sundry pundits and CNBC persona solemnly note how Haines & Co. provided "the viewers" with such valuable insights and calls, the better to assist them in leveling the playing field with Wall Streeters.

Don't believe a word of it.

Haines understood that his job wasn't to help viewers invest, but to sell advertising through watchable, entertaining business and finance coverage on cable television.

Perhaps that is why several of Haines' colleagues noted that he got his game on for the camera but, before and after, dressed down and essentially moved on to other, more personally-fulfilling topics, such as, we were told, the Mets, gardening and tomatoes. Apparently, Haines' viewed his on-air time as, well, theater, not his real life.

Bartiromo, as expected, used Haines' death to bolster her own ego and self-image this morning. Sanctimonious to a fault, she centered her comments on her own early career, invoking time after time how she did it all for "the viewers" as investors. Never mind that the NYSE floor was never where most of the buy and sell orders originated. Or that the very emptiness of the trading floor is a testament to how inefficient and rife with front-running the old specialist-dominated NYSE was. That's why it's in the process of selling itself to Deutsch Borse.

Bartiromo is the most assertive of a history that never was, perhaps because, in that false past, her role as "the first woman to report from the floor of the NYSE" has some meaning or value.

As if.

How is it that all these colleagues of the late, appropriately honored Haines, celebrate his dogged, candid pursuit of the truth from his interviewees with hardball questions and tactics, yet almost none of them do the same?

How is it that Bartiromo tears up when remembering Haines' style, only to have become her network's biggest embarrassment as an interviewer, lobbing softball after softball at her guests, often revealing her own ignorance by her misunderstanding their responses? How does a network that supported Haines' brand of tenacious truth-finding tolerate Bartiromo's and so many other reporters' and anchors' ineptnesses and lack of courage with their guests?

How can a network which celebrates Vanguard group founder John Bogle, of buy-and-hold index fame, at the same time regale viewers with tales of how CNBC has done so much for the individual investor who trades individual equities?

Perhaps the best way in which CNBC could honor Haines would be to finally clean house of its mealy-mouthed, poorly-informed and inadequate reporters and anchors. That would be a lasting testament to the man's memory. Not just using his voice over to announce the beginning of the 9am CNBC program.

I didn't watch Haines for 22 straight years, so I can't say I know Haines' exact views on retail investor trading. But I would guess, from the 15 years or so during which I did watch SquawkBox with varying degress of frequency, that Haines was rather sanguine about the fact that there's never been a level playing field between the retail investor and the financial communities' investment, trading and institutional investment houses. And there's never going to be one.

That retail investors were foolish to believe watching a network like CNBC would magically mint them profits by trading equities and other instruments at retail brokerage fees.

It's a shame that CNBC is using Haines' death to glorify itself and push the falsehood that watching its programs is good for retail investors.

The entire raison d'etre of the CNBC network is to sell gullible retail viewership to advertisers. That's it. End of story.

Here's something to consider. Haines was at CNBC and/or its predecessors since 1989. That's 22 years. In all that time, have you ever seen a CNBC study which took a randomly-selected group of its viewers with a certain minimum investment amount and tracked their total returns over the time they regularly watched CNBC, versus a control group of similar investors who did not watch CNBC?

No, you haven't. Neither have I. Because the results wouldn't be pretty.

I'd love to hear Mark Haines' thoughts on that topic.

That said, I sincerely do hope Mark Haines rests in peace, and I empathize with the family members whom he has left behind.

Private Equity & Dunkin' Donuts' Impending IPO

Several months ago I wrote this post describing some awful customer experiences I suffered at a few Dunkin' Donuts franchise locations. The events involved a bungled new product introduction which DD's corporate unit, currently a private equity property, had poorly executed.

Some weeks later, I was informed of this post/comment on a franchise-oriented blog. A bit later, I was directed to this post on the same blog, in which the role of private equity firms, such as Bain, in franchiser buyouts such as Dunkin' Donuts, was discussed. An additional example of private equity behavior in buyouts of restaurant businesses was forwarded to me, as well, in the form of the filing of a suit involving a private equity firm and one of its acquisitions.

I"m not focusing on the detailed dynamics of franchising in this post, nor the particular details described (far better) in that second linked post from the franchising blog.

But what does seem reasonable to assume in the matter of private equity deals is that the private equity group(s) take fees and special dividends out of the acquisitions, further leveraging them up beyond what leverage they already had.

It doesn't take a genius to consider what this sort of cash siphoning by the private equity firm can do to the long term viability of the acquisition, once it has been prepared for an IPO.

Which brings me to Dunkin' Donuts.

In recent weeks, business media have begun to anticipate the return of DD, the franchiser, to public capital markets via an IPO.

Prior to the information I received regarding my post's reference in the franchise blog, I didn't really give much thought to any connection between DD's product launch issues and its franchiser's private equity status.

Since then, I have. Specifically, what the risks are to franchisees of buying into a system, the franchiser of which is vulnerable to takeover by a private equity firm.

Just a few days ago, in the Wall Street Journal, there was a positive article regarding McDonalds commencement of a physical overhaul of up to half of its franchised stores. Being as large and reasonably well-managed as it is, McDonalds seems to be in no danger of being taken private, so its franchisees are pretty safe from uncontrollable damage being inflicted by a new owner.

However, I've learned that this was far from true in the Dunkin' Donuts case. For example, DD, upon going private, engaged in a practice by which they receive extra fees by exercising clauses in franchisees' agreements to essentially take units from current owners and resell them, for more money, to other parties.

Known as "refranchising," this allowed the franchiser, DD, to selectively break up smaller, multiple-unit franchisees who were profitable, but whose stores would be more valuable to slightly larger franchisee groups.

Further, as some of these franchisees who were being, in effect, driven out of business, litigated these moves, resulting fees from the resale of the units became income to the franchiser, or private equity group. Through a process that is rather murky to those of us not in the business, the private equity groups were able to fund such a program from the franchisees' own marketing expenditures, but keep the gains for the corporate unit.

The larger point of all of this is that what has been transpiring at DD under private equity ownership may well be considered activities which aren't exactly "business as usual." Thanks to the magic of IPO accounting, the imminent spinning of DD, the franchiser, back into public hands, seems, well, rather like a pig in a poke.

Given the remarks in one of the franchise blog posts regarding extra leverage being applied to DD during its private equity ownership period, one wonders how capable the newly-independent corporate franchiser will be to fully service its franchisees, its announced expansion into India, and, generally, growth activity, if its laboring under a large debt load.

It's an interesting story for me, as it started with a simple observation of a product launch gone wrong, and ended with my learning more about the mechanics of private equity management of franchisers, just as Dunkin' Donuts is about to go public again.

My own equity portfolio selection process would not see DD as a candidate for some time, if ever. But I wonder how much the average investor, even on the institutional side, really comprehend about what may have been done to and with DD, the franchiser, during its tenure as a private equity-owned acquisition.

Wednesday, May 25, 2011

Horrific Housing Data Predicts Continued Economic Sluggishness

It's no secret that the housing sector has been a drag on the US economic recovery. But different pundits are putting different spins on the recent data showing flat April home sales at, to quote Kelly Evans from the Wall Street Journal, "a seasonally adjusted annual pace of 300,000."

Evans compared current sales to the past with this chilling passage,

"Unless sales pick up materially this year, 2011 will mark a sixth year in a row of new-home-sales declines and the fewest sales since records began being kept in 1963. One statistic tells the story: The 323,000 new homes sold in 2010 was less than 60% of the number of new homes sold in 1963, even though the population today is nearly two-thirds bigger."

According to Evans, "housing is the business cycle."  She concludes her Ahead of the Tape column by contending,

"We are stuck today, as in the 1930s, in a household recession triggered by excessive debt levels. These, unfortunately, can take many years- not months- to fix."

It's now almost ten full years since 9/11, when Alan Greenspan lowered rates and kicked off the post-technology equity bubble mortgage finance orgy. What is so troubling is that it apparently never occurred to Greenspan, nor his successor, current Fed chairman Bernanke, that allowing the housing sector to create its own asset bubble would be such a crippling, lasting mistake.

Whereas the technology company bubble involved much intangible value which rapidly grew, then shrank, in web-based business, the housing sector bubble left real physical assets that have overhung the market in ways not seen for literally decades in the US economy's recession-expansion dynamic.

Reading Evans' column gives one pause to wonder how, if the last two Fed chairman could make such a huge, fundamental mistake with their gross mismanagement of the money supply and associated interest rates, just why are we so afraid of significant change at the Fed. Perhaps in the direction of Friedman's automated monetary policy ideas?

Surely before 2000, the Fed contained at least a few capable staff economists who knew of the historic role a vibrant, growing housing sector had in driving the US economy. Were they really completely blind to how the easy money policies of Greenspan were building a large pool of unaffordable housing? Even during the bubble, the Wall Street Journal and CNBC regularly featured pundits who pointed to unaffordable ratios of mean income/mean home price and their changes.

Now that we're saddled with the outcome of the housing-fueled financial mess and its effect on the economy, as Evans notes, we have both physical housing assets and excessive household debt related to it. Plus the continuing depressive effects of soon-to-be-foreclosed houses on the values of currently-occupied homes on which mortgages are still being paid.

While some pundits have suggested literally plowing unoccupied housing under, to magically reduce their affect on the value of existing homes, some entities will have to record those permanent losses. Equity will be destroyed.

Is that really a cure for what ails the US economy now? Is it really intelligent to simply zero out even more housing value on bank balance sheets? Or transfer the losses to government balance sheets?

Meanwhile, recent housing news is abuzz with forecasts of more price declines, perhaps fueling even more foreclosures. At this rate, who in their right mind would borrow- or lend- to build a new home?

I can't help but think that most of this mess, including the cocaine-like effects of QE2, are just more symptoms of our inability to let market forces work on problems like the housing bubble.

Michael Steinhardt opined as much in a March, 2009 appearance on CNBC. I wrote at the time of Steinhardt's observations, including these two,

"The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive.

-What is meant by a "depression" in our current environment? Due to automatic stabilizers, i.e., transfer payment mechanisms, Steinhardt believes that an unemployment rate as low as 12% will trigger consumer behaviors and public sentiment generally associated with much higher 'depression' unemployment levels."

Kelly Evans' focus on the horrific current housing statistics seem to reinforce Steinhardt's thoughts of over two years ago. Unemployment and housing sector activity are certainly related. So continued severe weakness in the latter is continuing to have an impact on the former. And there seems, as Evans contends, to be no simple nor quick resolution.

Tuesday, May 24, 2011

Holman Jenkins, Jr. On The Missing Rajaratnam Fallout

The Wall Street Journal's Holman Jenkins, Jr. wrote a recent column concerning the Rajaratnam trial and verdict.

Leaving aside the allegations of Jenkins and others that Rajaratnam's crimes were more or less victimless, he rightly expressed outrage that, so far, the real crimes unveiled have gone unpunished.

Specifically, a McKinsey consultant leaking client information, Intel being betrayed by one of its executives and Goldman board meetings being compromised.

Whether or not these are prosecuted, they seem to have paled besides what remains problematic insider trading rules. And how those rules seem to run counter to the principle of wanting as much information represented in stock prices as possible.

It's pretty clear that Rajaratnam knew he was almost certainly violating SEC rules and existing law. It remains unclear whether those laws do much more than occasionally make people feel better by seeing someone prosecuted for violating laws that have dubious value in the first place.

But knowing that these other business people fed Rajaratnam information which was clearly wrongly disclosed is distressing.

As Jenkins noted, those, at least, are the real crimes we can all agree should be wrongful behavior and prosecuted.

The Non-Fallout From Facebook's Dirty PR Tricks

It's been a few weeks since Facebook admitted that it hired Burson-Marsteller to smear Google via placed media pieces. The facts seem not to be in dispute, i.e., Facebook retained the public relations firm to solicit media pieces critical of Google. Burson-Marsteller admitted having violated its own policies by not disclosing Facebook's identity while it solicited the articles.

I'm rather shocked by the lack of outcry among Facebook's users and the technology community in general. To those of us old enough to remember, this smacks of Tricky Dicky Nixon's infamous enemies lists and his campaign staff's dirty tricks.

For a company which doesn't seem to really do much of anything, and has had some issues of its own with misusing its members privacy at time, you'd think there would be a much greater reaction in the sector or the media.

Instead, it's been rather quiet. No pillorying of Zuckerberg in the public media.

How'd he get off so lightly?

Monday, May 23, 2011

Job Market Context Statistics

Edward Lazear, former Council of Economic Advisers chairman for President George W Bush, wrote an informative editorial a week ago in the Wall Street Journal.

With all the hoopla surrounding changes of a few tens of thousands of newly-employed in recent monthly BLS numbers, Lazear provided some useful background to these series.

First, Lazear reminded readers that changes in employment are a function of lack of layoffs and new hires- not just the latter- among some 150MM "workers or job seekers."

Recently, net positive monthly employment numbers have been the result of "a decline in the number of layoffs, not from increased hiring."

He notes that,

"In a healthy labor market like the one that prevailed in 2006 and early 2007, American firms hire about 5.5 million workers per month." Meaning that there is tremendous monthly churn in the overall employment base.

Lazear wrote his editorial to argue for lower taxes, less regulatory burden and such to foster more investment that would lead to more hiring.

That all may be true. But my reason for discussing his piece is how it calls into question so much micro-concentration on the series that is the net of hiring and layoffs, rather than paying attention to the current monthly employment base, hires and separations.

Against a 150 million-person workforce, monthly net gains of some 200,000, or .00133%, seems insignificant. By dwelling on the mean and variance of the net series, we miss how woefully inadequate the mean is when set against the overall labor market.

No more 'new jobs created' scenario as the government would like us to believe, but, rather, simply a recognition of less need to shed existing workers.

To now learn that the past two years of net gains have been almost totally accounted for by layoffs ebbing, rather than all new hires, paints a much different picture, doesn't it?