Saturday, June 04, 2011

Groupon's IPO

As expected, the announcement of Groupon's IPO has provided cable business channels with plenty of grist for their programming. And it's put more young social networking pundits on air, too.

For example, on Friday afternoon, I found myself watching a 20- or 30-something tech blog editor opine on the Groupon IPO. As I listened to his answers to questions from a Bloomberg anchor, I wondered how old this guy was when TimeWarner merged with AOL in the first of the major over-priced internet deals.

And since it made the news on the same day as a disastrous drop in the BLS monthly employment report, the Groupon IPO news provided a rather nice bookend in terms of being a potential valuation and market peak.

CNBC, Bloomberg and the Wall Street Journal were all full of interesting details from the Groupon offering package.

For example, Andrew Mason, his co-founders and some early investors have already siphoned about $800MM out of the firm from prior financings. The annual run rate of losses has been nearly half a billion dollars. The capital structure of the firm will allow class A founders shares to essentially control the firm, with public class B shares apparently being given little more than income and valuation participation.

Then there are the juicy quotes from Mason that the firm will try significant new businesses, one or more of which will be failures.

Several business cable anchors mused whether that is the sort of strategic thinking that investors are going to like hearing.

Probably not. Then, again, there are almost certain to be enough gullible buyers to make the point moot.

Perhaps the most illuminating and useful analogy was whether Groupon will become like Webvan or Amazon? I have yet to hear anything to change what I wrote in this post a little over two months ago. Despite Mason's contentions to the contrary, Groupon doesn't appear to have much in the way of barriers to competition.

A Wall Street Journal article provided anecdotal evidence from actual shopkeepers regarding how much competition already exists among online group couponing services. Add Facebook, Google and any other firm with a large list of email addresses, and Groupon's value sinks even further.

From an end user standpoint, I remain one of those who have become listed with Groupon, but have yet to spend a dime with them. Of the daily offers which stream into my email inbox, I've seen perhaps three in the two months or more that I've received them to which I gave even a second thought. I realize I may not be their primary target segment, but that only means that the ratio of paying users to listed ones is extremely important.

I suppose the most important piece of information regarding Groupon's IPO is the knowledge that it will have cashed its founders and early backers out at obscene profits, while only floating something like 20% of the company's equity. Since Groupon is primarily an online venture, as was AOL, without the physical infrastructure of an Amazon, it somehow smells of a get-rich quick scheme in which there's nothing very tangible about the company to suggest its founders will have long term ties or exposure to making it perform consistently better than the equity market average over the long term. For example, Amazon hasn't really met a viable competitor along its entire product/market space, particularly the online-shopping-to-fulfillment segment. Perhaps that's because of the fairly sophisticated global online general store logistics it has had to create, refine and manage. That took software, warehousing, many vendor relationships, and ongoing maintenance thereof.

Groupon suggests more of an ephemeral online-only presence, with a sales force soliciting vendors. Not tremendously complex or suggesting of lasting commitment to the business. Just much less of a tangible nature to own.

As I wrote that, Priceline came to mind as a firm that's appeared frequently in my equity portfolios in recent months. Originally, when it entered for the first time, I thought it to be somewhat of a joke. But it's been a consistently superior performer, both fundamentally and in total return terms, for years. It has a patented methodology at its core, and attained a first-mover advantage, like Amazon, that has limited subsequent direct competition. Plus it has apparently lasting and effective ties to sources of hotel rooms and flights, so that buyers join and create the ongoing dynamic of filling those excess capacities.

Perhaps several years from now, I'll be writing similar observations about Groupon. But at present, from its self-description, my own experiences, and what I've read about it, I rather doubt that. At its base, Groupon is really just an updated spin on old fashioned marketing by way of couponing. I don't recall that being a widely successful, publicly-owned business model. And I don't believe sticking the social networking aspect onto it will change that.

Friday, June 03, 2011

Tom Brown's BofA Call

I happened to catch long time bank analyst, now, a sector portfolio manager, Tom Brown's appearance on Bloomberg television yesterday.

During his interview, Brown disclosed that for the first time in years, his fund has gone long BofA equity.

When questioned on his decision, Brown outlined his view of the bank's near term future under CEO Brian Moynihan. Essentially, Brown sees Moynihan shrinking the bank, which he believes is a good thing.

Running through the sort of micro-analysis that people like Brown do, he rattled off EPS and P/E numbers, claiming that the share price should double sometime in the next 18-24 months.

Wow. That's some performance!

If you look at the nearby price chart of BofA and the S&P500 Index, you can see this would be new territory for the bank's stock price performance.

Over the past two years, it's essentially been flat. Over five years, it's down nearly 80%. Is Tom Brown making a simple timing bet that BofA will eventually regain its valuation at roughly pre-crisis levels? A variant of the old P/E target approach, whereby one treats P/E as a cause, rather than an effect of a company's fundamental performance?

It seems like a pretty tall order to me. Typically, shrinking firms don't perform consistently well for very long. And total returns of 100% over two years seems heroic. Especially when it's supposed to magically result from a change in the firm's direction, rather than something like better execution of a good strategy.

Personally, I would be surprised if my equity strategy selection process even includes a bank anytime soon. I know it certainly wouldn't be including BofA by the time Brown predicts the firm's stunning performance success.

But...But....I Know David Tepper! - A Humorous Networking Tale

Actually, I don't know David Tepper. Never met the man, nor do I expect to.

This post is about networking. And how it isn't all it's cracked up to be. And sometimes can be downright exasperating, though, at the same time, rather humorous.

Take, for example, a recent so-called networking experience I endured over a period of a month or so.

It all began when a well-intentioned friend contacted one of his friends who allegedly has ties to the hedge fund community. One thing led to another, and the alleged contact called me, leaving a message basically instructing me to call him back and show appropriate gratitude for his attention because he knows David Tepper. In fact, he has known him for years!

David Tepper is, of course, the legendary hedge fund titan, billionaire and philanthropist. I don't know David Tepper, although I live within a stone's throw of the offices of his firm, Appaloosa. Of course, anyone in the business of managing equities would love to be allocated even morsels of Apaloosa's funds under management. The closest I've been to Tepper is, like thousands of other people, seeing him once or twice on CNBC.

Within a few days, my friend and I had a conversation about the phone message. He informed me that his contact told him I wasn't showing appropriate homage, so maybe he wasn't going to do me a favor by introducing me to David Tepper.

My friend, who is well-intentioned but naive, works in a white collar union job in the public sector. So his idea of networking was that someone does a favor for a favor-seeker. It took a few conversations to explain to him that real networking is quite different. It's not about favor-seeking, but, rather, someone with a business deliverable of real, demonstrated value being connected, via someone else's network, to third parties who may have use for, and be in a position to benefit from, the first person's valuable business deliverables.

My friend repeated this to his contact, explaining that it wasn't a favor to me, but, if anyone, to the contact's hedge fund community contacts, that was involved.

A week or so passed, and I received a copy of email correspondence between my friend's contact and one of his investment community contacts. From that email, however, I learned that my friend's contact doesn't actually know David Tepper. At all.

No, it seems the contact's investment community colleague works at a firm that may do business with Tepper's Apaloosa Management. Big difference. In fact, not only was it now clear that my friend's contact had simply lied about knowing Tepper, but his contact was not clear that even he knew the hedge fund mogul.

What that investment firm colleague actually wrote was something like,

'I'm not about to introduce your contact (me) to David Tepper- for several reasons.'

Fair enough. I can think of three reasons for his reluctance, nay, refusal to introduce me to David Tepper.

First, he isn't in a position to do so without losing his job. As it happens, upon seeing the email exchange, I recognized the guy's address as being at an institutional broker that caters to hedge funds. Quickly Googling the firm, I had no trouble finding the guy's picture and bio. He is by no means a heavyweight, either at the firm, or in the general investment community. He's not on the firm's board. He's not even listed as an "executive." No, he's a 'market strategist' for one of the firm's asset classes. That means his job is to try to come up with daily ideas to pitch to traders at hedge funds, hoping that they'll bite and reward his firm with some brokerage volume. I've read some of his observations- they're not a lot different from some of my own blog posts, except he's a lot pithier.

The guy's picture reinforced this. He had a worried, frazzled look, as if he was only two bad daily market direction calls away from unemployment. Despite the firm's contention that its people appear on widely-viewed business cable programs, I've never seen this guy on CNBC or Bloomberg nor, for that matter, anyone from the firm. There was no way this guy was introducing anyone directly to any heavyweights at his firm's clients without substantial vetting by his superiors.

The second reason the guy wouldn't introduce me to David Tepper could be that he doesn't actually know David Tepper. My friend assured me that the this brokerage employee 'lived in the same complex as Tepper,' and/or 'has been to Tepper's parties.'

Indeed? But the guy's brokerage firm isn't located anywhere near Tepper's firm's Short Hills/Chatham, New Jersey offices. And Tepper reportedly lives in nearby Livingston, so it's unlikely they actually were residential neighbors, either. Unless, that is, the brokerage firm's market strategist has a 90 minute one-way commute each morning across the NYC metro area to his middle-management job. Possible, but unlikely.

My friend's contact asserted this guy is a multi-millionaire with a huge house in a fashionable financial services-dominated NJ town. Again, unlikely, because if he was that wealthy, he probably wouldn't be a middle-manager at an institutional brokerage firm.

It's possible that Apaloosa holds some annual holiday bashes to which hundreds of people from its many supporting vendor firms are invited. Perhaps this was the sort of party at which the daily strategist had "met" Tepper. A cozy little gathering of 400-500 financial sector employees all on the make to strengthen personal contacts with Apaloosa and other sector personnel.

Then there's the third reason this daily strategist wasn't going to introduce me to David Tepper. I'll get to that one shortly.

One thing led to another, and the investment guy, whom I'll call R, and I arranged, via emails to speak one afternoon. I had sent him a one-page overview of my strategy's style, history, performance and methodology. He acknowledged it in an email about an hour before our scheduled talk, only to ask me to re-send it.

Not a good sign. This talk was about as welcome for him as, I'd guess, a root canal.

Now, being a corporate veteran of many years, I had gone over his firm's website pretty thoroughly, as well as done some conceptual rehearsal of what value my work would have for him or his colleagues. Both out of respect for the guy's time, and self-respect to demonstrate I knew how to do professional networking. Frankly, I was coming up short on the value point, and had emailed him, thus,

"I'm appreciative of your taking some time to have read the description I sent you and talk by phone. In order to make the most productive use of our time, I'd like to ask if you could take the lead by letting me know what your thoughts are regarding my equity strategy. I'm not really sure at this point if you have interested parties at other firms in mind, or what. So perhaps you can directly let me know your reaction and any ideas you have as to whom would benefit from my work."

 See, given his day job, it didn't seem that he was really in a position to pass me along to his clients, which would be the natural interested parties for my equity portfolio work. And his firm was unlikely to just have wealthy individuals pining for new equity strategies. So I wasn't really seeing the point in even talking. But, in order to exhibit due diligence to my friend and his contact, I played along.
Upon speaking with R, despite my email and one-pager, his opening remark was calculated to show me who was who, and who (R)  was going to show whom (me) where to piss, so to speak,
'So, what's your story?'
That was it. I was to verbally prostrate myself and hurriedly give him a 30-second elevator pitch on the phone.
Instead, I reminded him of my email of that morning, and quickly moved to conclude, for him, that, given his position at the firm, the firm's business, etc., it didn't seem likely he could just pass me along to his firm's multi-billion dollar hedge fund clients on the strength of a phone call.
That caught him by surprise, and he paused, noticeably. Then he shot back with a snarky,
'Well, that's not my entire job, you know. I do other things here, too. And your results of an average gross annual 20% return over 20 years isn't so exceptional. I've done the same over 30 years!'
Hey, maybe he handles making coffee, too? Or perhaps he captains the firm's annual United Way campaign? Maybe they just failed to mention that in his bio.
'Really?' I replied. 'So you manage a large chunk of institutional money at your firm, in addition to your daily market strategy job? Because I'm looking at your firm's website page with your bio and picture right now, as we speak So I'm just going by what your own website says are your job responsibilities.'
'Ah, no....... Actually, it's a personal account,' he replied rather sheepishly.
So now the third reason he wouldn't introduce me to David Tepper becomes clear.
R has his own agenda. Like many analysts, market strategists, and other people who are not and have never actually been professional managers of portfolios of other peoples' money, he secretly hopes to join those ranks some day. On the strength of his 30-year personal account track record.

Of course, if he's the multi-millionaire he was asserted to be by my friend's contact, he'd more likely have retired by now to manage his own money and that of various friends and colleagues. If you do the math, having even as little as $5MM of personal money self-managed at 20% per annum, on average, gives him a pre-tax $1MM/year. Add a few of his 30 years of 20% annual gains while living off of his day job salary and he's not going to be putting up with where he currently is. Then, again, considering that the guy making these assertions also claimed, falsely, to know David Tepper, one would be forgiven for simply disbelieving his entire story about R.
However, if anyone was going to be calling David Tepper about an equity strategy to which to allocate a few crumbs from Apaloosa's groaning board, it sure as hell wasn't going to be me.
It's going to be R, and he's going to be talking about his own equity strategy.
But if he does know David Tepper, and he's been beavering away on his secret little personal account strategy for over a quarter of a century, what's he waiting for? The Second Coming? December 21, 2012 and the Mayan calendar end of days?
Seriously, if R, who allegedly knows David Tepper, hasn't, by now, cashed in on that close, intimate and personal connection to join Apaloosa as one of its portfolio management masters of the universe, just when does he plan on doing so?
Perhaps the reality is that R has surreptitiously felt out contacts at his institutional brokerage firm's various clients, on the quiet, to see if he could join the other side. After all, it's no secret that an equity portfolio manager, or even analyst, at a firm like Apaloosa can make much more money than one of several mere market strategists at an institutional brokerage firm.
And he's probably had to be careful, because exposure of his atttempt to bolt from his current gig might jeopardize that job and subsequent career. But, judging from R's current day job and 30-year private efforts at equity portfolio management, it hasn't apparently been going very well. Perhaps he approached Apaloosa but his strategy wasn't a stylistic fit. Or was too volatile. Or wouldn't scale up in volume once Apaloosa directed some of its massive asset base to it. Or maybe Apaloosa understandably just doesn't need nor want strategies invented elsewhere, because they make so much money with their own ideas.
R could see from the one-page overview I'd provided him that I had managed money with one hedge fund, and had another started around my strategy by a legendary ex-Salomon Brothers partner, after only two years of work on the research and implementation of my business strategy and equity portfolio management concepts. Then developed, at a former business partner's request, a robust and profitable equity options strategy based upon my consistently superior-performing equity strategy. And he subsequently learned, from our conversation, that I was open to investors or partners because my recent, now former, business partner had misrepresented his financial ability to invest as promised in either the options or equity strategy. It wasn't the failure of either strategy's performance, but that of my erstwhile partner to fulfill his partnership obligations, that led me to acquiesce to my friend's networking initiatives.

It wouldn't be the first time that envy, jealousy and/or simple insecurity has driven someone to react negatively to another's profitable business opportunities.
After an awkward 15 minutes or so of conversation in which I provided some additional details about my work to R, after which he fell conspicuously silent, I again took the initiative to end the call by wishing him luck. From his silence and long failure to attract any other investments, I'm guessing his approach is qualitative, not prone to scalability, and/or probably exhibits more volatility than institutional clients typically prefer. In short, he's not bolting his day job to work for David Tepper at Apaloosa anytime soon. But, he can, like all of us, dream.

As for Apaloosa, David Tepper and me? Well, I already know from a cursory Google search and years of being aware of the firm that my equity management style is quite different from Tepper's firm's. They thrive on turnarounds and wounded companies, while I stick to consistently superior performing firms. As it happens, I was acquainted with one of Apaloosa's partners a few years back. When I struck up a conversation, in which I carefully did not suggest that he introduce me to someone at the firm, nor consider vetting me for an allocation to manage, he basically sniffed, looked down his nose at me, and sagely intoned that first I should get about $25MM to manage. After that, things would be easier. Somehow, after that incident, I wasn't particularly keen on making further contacts at Apaloosa.
I related the whole story involving R to my friend, who was understandably a bit chastened. He remained in denial that his prized contact had, quite clearly, lied about and invented his nonexistent direct personal connection with David Tepper. A direct connection about which he had boasted to both of us not once, but several times. Further, the contact couldn't engage in mutually-beneficial networking, confusing it, instead, with a game of parading his delusional and/or real social connections with other people, of whose jobs he had no comprehension whatsoever.
So much for networking among those who lie about relationships with famous portfolio managers, insecure portfolio management-wannabes and the like. Networking can be far more challenging than one might think, even when a product or service of clearly-demonstrable value is involved. But it can also provide some laughs along the way, as one sees human nature and all its foibles up close.

Thursday, June 02, 2011

Flawed Economics On ABC

Diane Sawyer's appearance last night on Bill O'Reilly's Fox News Factor program demonstrated that economic fallacies remain widespread and embraced by media personnel who are in a position to influence masses of Americans.

I'm speaking of Sawyer's/ABC's 'buy American' push, in the mistaken belief that it is the best way to further its explicit aim of trying to find jobs for unemployed Americans.

Sawyer was on O'Reilly's program ostensibly to answer questions regarding ABC's liberal bias in the 2008 presidential election, and its putative continued bias in the 2012 election cycle. I won't bother with Sawyer's platitudes on that topic.

Instead, of interest was her turning the conversation to some feature on its news hour where the network apparently tries to compete with The Ladders or, connecting unemployed Americans with jobs.

Sawyer went on to challenge O'Reilly to conduct an audit of his home to discern how many items were not 'made in America.' Then compounded her idiocy by wondering aloud which was 'more American,' a GM vehicle or a Toyota vehicle, both of which were assembed in the US?

David Ricardo must be spinning in his grave. Haven't Sawyer and O'Reilly heard of Ricardo's Law of Comparative Advantage?

So now, along with O'Reilly's misinformed belief that high oil prices are always the result of immoral speculation and manipulation, we can add his apparent tacit approval of beggar-thy-neighbor trade practices and outdated economic thinking.

As for Sawyer and ABC, can't someone like John Taylor, Alan Reynolds or Nouriel Roubini take her to task and end the domestic preference nonsense on that network?

Perhaps counsel them to dump the amateur-hour job placement charade and use their media pulpit to argue for lower tax rates and less government intrusion into the private sector, thus providing more money and less uncertainty, which would facilitate private investment, GDP and, with it, job growth?

Eric Schmidt Is Wrong- Google Isn't A Social Network Company

I found Eric Schmidt's mea culpa for leading Google to miss business opportunities in social networking to be profoundly misplaced. Perhaps even a touch too egotistical, as if merely spotting the customer needs meant Google would have dominated or even seriously contested the product/market.

On the contrary, I find myself in agreement with a guest who appeared on Bloomberg yesterday. I can't recall his name, but he was a youngish man with a rather hip manner who apparently founded some social-networking-related consulting or other type of firm. He opined that the attributes and skill set which made Google what is is- search algorithms, advertising and some competitive inroads in the area of basic business application software- made it an unlikely candidate to either originate or successful develop social networking businesses.

It's an astute and, I believe, correct assessment. The co-founders of Google were geeks. They recruited Schmidt, after his lost battles with Microsoft while at Novell, to be the adult in charge at Google.

The Bloomberg guest even noted the somewhat disdainful manner in which Schmidt referred to "the friends thing" to describe Facebook's core business focus. If any firm could have pre-empted Facebook, it was, as I have written in prior posts, Yahoo. Yahoo had both information and facilities to set up accounts and connect with people years ago. But Jerry Wang and Terry Semel botched that aspect of the firm's business, leaving the door open for what humbly began as a college picture book migrated to the online world.

If Google had driven heavily into the social networking product/market, it probably would have caused distractions, created a sort of split-personality among the company's business groups, and perhaps have caused more overall harm than good for Google's financial performance.

It's a rare firm that can do more than one major thing, perhaps with affiliated minor things, well. Apple has sort of done it, but not really. Jobs' Apple has become a specialized digital device firm with linking content management via iTunes.

Other than that, no technology firms, to my knowledge, have succeeded in two radically disparate businesses.

There's absolutely no reason to believe Google would have, had Schmidt, or anyone else at the firm, spotted the opportunity prior to Facebook's rise. To think it would have seems rather arrogant on Schmidt's part.

Wednesday, June 01, 2011

Talking A Fixed-Income Book

This past weekend's Wall Street Journal contained an article by Dave Kansas concerning Pimco's recent government bond sell-off and the subsequent fall in rates and corresponding rise in bond prices.

Pimco's Bill Gross apparently believed that the time is right, or nearly so, for inflation to begin to erode the value of fixed income instruments.

Of course, many forces affect US Treasuries. Phenomenon like a flight to quality from the Euro sector, or weak corporate sector performances or war can send their prices higher despite poor longer-term monetary or inflationary outlooks.

Kansas cited two bond enthusiasts, Albert Edwards of Societe Generale and Jeffrey Gundlach of DoubleLine, an investment firm, as being bullish on sluggish economic growth and a QE3 program.

Kansas closed his piece with this,

"It should be pointed out that Messrs. Edwards and Gundlach are "talking their book."....But at least they have put their money is where their mouths are."

I think Kansas has it backwards. It's not that the two investors "put their money...where their mouths are," but that they put their mouths where their money has already been placed.

It's a calculated risk that the two take as they loudly proclaim economic events which will play to their positions' advantages. We know that Fed-administered rates aren't rising any time soon. So they are unlikely to be blind-sided.

With the public finance problems in Greece, Portugal and other countries, a sluggish US economy and reported softening in China, odds are probably higher of global economic weakness rather than strength.

That suggests, unwise though it is, more central bank easing.

As to Bill Gross? He probably has the biggest bully pulpit in the fixed income world after Ben Bernanke. It's probably unwise to discount either his moves or his words. Especially when he so prominently speaks out about the former.

Tuesday, May 31, 2011

A Private Sector Diagnosis Of The Global Financial System

I happened to catch a clip of Templeton investment management veteran Mark Mobius this morning on Bloomberg. There's something refreshing about an experienced private sector investor who talks sense without talking his book in detail.

To paraphrase Mobius,

'We haven't seen the last of financial crises. There's going to be higher volatility, more crises. Why?

We haven't solved the things that caused the first crisis.

Are the too-big-to-fail banks even larger than last time? Yes.

Have derivatives been regulated? No.

Are derivatives growing again? Yes.
Meanwhile, Greece is seeing more riots, with this morning's Wall Street Journal stating "default appears more imminent" with a "contagion" to follow.

And more observers of US debt rates are sanguinely noting that the Treasuries market is currently hopelessly queered by the Fed's monetizing Treasury's borrowing. Claiming that global investors aren't worried because rates are still low ignores the fact that the Fed has had a stabilizing bid under the market.