Friday, July 15, 2011

Bank Stock Portfolio Manager Tom Brown Talks His Book On Bloomberg This Morning

I happened to catch bank sector portfolio manager and long-ago bank stock analyst Tom Brown's appearance on Bloomberg television this morning. The occasion was apparently yesterday's Chase earnings release.

Listening to/watching Brown was fascinating, in that he was questioned, and answered, as if he were simply a bank stock analyst, as he once was.

But, in reality, the entire episode was Bloomberg's way of doing bank stock portfolio manager Tom Brown a big, big favor, letting him talk his book without advertising it.

For example, Brown kept downplaying the capital inadequacy of the big four US banks- BofA, Chase, Citi and WellsFargo. He continually claimed that they have "til 2017" to reach then-required capital levels, and would do so with so much extra capital that they'll 'have to buy back stock' with the surplus.

Then he decried those who would worry that Chase used significant loan loss reserves to boost this past quarter's profit.

Brown also excelled at turning the anchors' questions to topics he wanted to highlight, such as his forecast that all the major banks would be growing loans and business volumes in 2012, thus making now a great time to buy before the profits roll in.

I've been following Brown's comments on Bloomberg for a few months now, and the last word you'd use to describe them is objective.

The truth is, Brown has to have a reason to push owning bank stocks, so no news is ever bad. Good earnings mean jump on the bandwagon, while lackluster results mean buy before performance improves.

Never mind that Brown evidently piled into BofA before its shares plummeted on higher capital concerns and the expensive mortgage loan distribution settlement it announced recently.

No, the bank sector is just wildly attractive, in Brown's view. No chance that a faltering economy could cause renewed credit problems, slow loan growth and generally stagnant performance.

As I listened to him predict how much profitable growth would occur at the four large banks from now until 2017, I considered how much trouble those same banks had managed to run into just from 2006-08. A fraction of the timeframe over which Brown is forecasting such bountiful banking profits.

But I'm sure such losses like those recent mortgage problems will never recur, will they Tom?

NetFlix Announces New Pricing Strategies

Netflix made news this week for announcing new pricing strategies aimed at incenting (not incentivizing- which is not a word) customers who don't use DVDs to migrate to the firm's streaming service.

It's a bold move, but may mitigate the ongoing criticisms of the firm's financials by CNBC analyst Herb Greenberg. He's complained about the way Netflix accounts for the costs of their content deals. This new pricing approach may moot those complaints.

I received an email a few days ago informing me that my combined 2 DVDs/month + free streaming plan was discontinued, effective September. Instead, my formerly $15/month service would be replaced by two separate plans, the total price for which is $20/month.

Various business media have reported a customer uproar over this move. I confess to not being entirely sure why. Well, I mean, yes, I understand no customer writes to a service provider to say thanks for a price increase.

But, that said, it's not a big deal. In my case, I simply went online this morning and cut my DVD plan to 1/month, returning my monthly fee to what it was before, give or take a few pennies. Fact is, I want the ability to order DVDs, but rarely use them. The first two discs for the HBO series Rome have lain on my living room floor for about four months now, unwatched. But as some pundits have noted, the Netflix instant streaming library of movies is still pretty spare.

However, for the under-30 set, who watch a lot of television series seasons via Netflix streaming, this plan will allow the firm to better-control its physical distribution costs while separating streaming and teaching customers to pay for it, rather than expect it as a free luxury with the DVD service.

As an equity portfolio investment, Netflix's move will probably draw fire from analysts and lose some value initially as a result of the pricing moves. In my own portfolios, it shows a not-too surprising $10 drop by mid-Thursday (when I am writing this) on a roughly $300 stock price at the day's open. Never the less, the issue is up 25% since early May- not too shabby, with the S&P negative by almost 2% over the same period.

Yesterday's Wall Street Journal carried a piece arguing that Netflix's new pricing structures, which will push more users to streaming, will eventually create so much more bandwidth demand as to push internet access providers to price said access into basic and higher-usage components.

As I wrote in a post several months ago regarding my equity portfolios' recent holdings, most are pretty robust and less-vulnerable to recent economic shocks. I believe Netflix continues to be.

After all, what might look like a 25% increase in service price to me was still only $5/month. Less than $100/year. And my reaction was what Netflix probably wanted- the same revenue at lower costs to serve.

Meanwhile, most younger users are now paying $8/month for streaming-only, which is minimal and, I think, less than the prior lowest-cost plan.

One of the aspects of Netflix's business which I admire is how inexpensive it is for what it offers. In an era of $10 movie tickets as the local dump of an art house theatre, $55/month cable television bills for a basic bundle, having online streaming of Netflix offerings to any device is a bargain.

A few bucks a month, more or less, won't change that anytime soon.

Thursday, July 14, 2011

Glenn Beck's & Oprah Winfrey's New Media Strategies- Which Will Work?

Back on July 1st, the day after Fox News lost Glenn Beck's program, I wrote this post on my political blog discussing Beck's next act.

This week, I read that Ophrah Winfrey's nascent cable network is having teething problems, prompting the networks namesake co-owner to step up as its new CEO.

As I wrote in that linked post, I think Beck has gone Winfrey one better. He's simply moved to the web with his entire non-radio empire.

Perhaps the most notable phenomenon is that both media moguls have departed their former homes- one broadcast network, the other a major cable network- to own their own operations. Or, in Winfrey's case, co-own with Discovery Network.

According to yesterday's Wall Street Journal, Winfrey's new network, OWN, is "struggling" amidst the departure of several senior execs and the firing of the CEO. So she's taking over and moving members of her production company's staff into those senior business management slots.

I'm not clear on why Winfrey partnered with Discovery, rather than going it alone. Perhaps it had to do with the cost and ability to access a slot on cable distributor systems like Comcast and Cablevision. Or perhaps it was to piggy back on Discovery's existing production and management assets.

Either way, Winfrey is still mired in the world of quasi-regulated communications, cable system distributors and advertising. Not to mention the need to pay carriage fees to distribute her network.

Just because Winfrey found a sweet spot with her own long-running talk show and amassed a fortune from the spinoffs and such doesn't mean she really belongs among the Allen & Co. conference attendees. It seems to remain to be seen if her one-hit talent will translate into the acumen to run an entire network and demonstrate what amounts to master-programming skills.

In contrast, Glenn Beck leapt from cable giant Fox News to his own website-based streaming video channel. Like the actors who broke away to found 7Artists studio, simply took advantage of modern technology such as the internet, smart phones and tablets, offering access to his video site for about $5/month or $100/year, with free upgrade to a 'plus' membership through the fall.

I have no idea what the approximate revenue numbers may be for Beck, because I am not familiar with what his actual average daily viewership on Fox was. I know he consistently won his 5-6PM time slot against news programs. It's reasonable to expect that he's looking at several million dollars/month of direct membership fees he can pocket, while drastically simplifying and cutting his total operations costs.

Meanwhile, Beck took the opportunity of his departure from Fox to air a long infomercial on GBTV, showcasing his senior executive team, new on-air personalities and various associated business initiatives.

I gathered from a chance remark on one of Beck's programs that he spends "about a million dollars a year on security." That would suggest he's making tens of millions of dollars per year from his radio program, paid website access, books, and associated businesses.

If so, I think he'll have no problem funding his new website-based media empire on his own. The credentials of his new staff were impressive, e.g., the woman who 'put The Huffington Post on the map,' a senior executive from CNN, and other accomplished managers. And he's clearly had them on staff and working for many months.

It seems to me that, regardless of how you feel about his views and content, Beck took the more sensible route to his own media empire, than Winfrey. With a direct streaming website to any medium of the subscriber's choice, there's no potential for boycotts from advertisers or cable systems. No FCC concerns. I'm not even sure that Beck is counting on advertising for much of his revenues.

As I mentioned in my linked post, the various initiatives which Beck unveiled in his infomercial suggest an anti-Soros type of hydra-headed businesses which include John Doe-like clubs, charitable onshore production efforts, like Paul Newman's enterprise, and more political-action-oriented projects directly addressing liberal-leaning US college campuses.

In short, Beck is putting his fortune where his mouth is, hiring top talent to get him there, and choosing a venue which is at the leading edge of technology, with the fewest regulatory constraints possible.

Beck's move finally proves my point concerning the relative disutility and ability to be easily disintermediated of cable media distribution. And, of course, broadcast networks. Rather like what I wrote about in yesterday's post.

Beck made sure his new venture is easily found, cheap to join, and ubiquitous. By emphasizing smart phones and tablets, plus political action projects, he's opened up his venture to younger audiences, as well as older ones.

Whether Winfrey or Beck proves to be more financially successful might be less important for the old media world, in the long run, than that both former conventional media stars bolted their former homes to control their future media destinies with so much apparent ease. How they fare may vary, of course, as Winfrey's management headaches attest. But their example may begin to sink in with more conventional entertainment creators who, until now, have sold their television series to broadcast and cable networks.

How long will it be before Glee, MadMen and Psyche simply go to websites and enjoy 100% of subscriber fees, selling by the episode, season or more, via credit cards and PayPal?

Wednesday, July 13, 2011

Going Wireless for Everything

For some time I've been observing the potential for the disintermediation of cable offerings by less expensive alternatives. My focus had been primarily on cable-provided television, which has become much more significantly affected among younger adults.

However, in the past few weeks, I've had personal experience and talks with friends involving cutting various wired communications or entertainment services to go wireless.

For example, a few weeks ago I finally terminated my landline telephone and associated ATT long-distance service. I'd had that phone number since 1999, but, increasingly, it was turned off and disused. My cell phone provides effectively free long distance, while the landline's total monthly costs, including long distance, mostly due to legacy regulatory fees and taxes, was in the neighborhood of $40-50.

I don't actually know of a single adult, including those, like me, over 50, who has moved within the past two years and installed a landline telephone. Not one. One squash partner is now considering following my lead on dropping his landline, since he's become angry with Verizon's forcing him into Fios at much higher prices than he used to pay for phone and internet.

Next, a cycling partner asked me about alternatives to cable television, as she feels she gets virtually no use from it at all, for about $60/month. As one of the few subscribers to AppleTV, considered a failure even by Steve Jobs, she often watches "tv" with her daughter on an Apple laptop propped up on their dinner table. Her daughter finds various sources for content- Hulu, YouTube, to name just the most obvious two.

We discussed how she could buy a high-end Tivo with web access, connect it wirelessly to her internet service, and obtain her movies and older television series content via Netflix through the Tivo. Plus directly access all the websites from a television, rather than the Apple laptop.

Then I ran into a squash friend with whom I discussed dropping landlines. She wasn't so fixated on cable television, but asked what I thought could be options for dropping her high-speed cable internet service. She confided that both of her sons, who are on the same wireless plan with her, use their Android cell phones for internet access, in effect making them cellular modems for their laptops. I agreed that she could just do that and save those monthly charges. She has an Optimum Online triple play package for about $150/month, so dropping the phone and internet may save her more than $100 of that.

I related the conversation I'd had with my other friend about dropping cable television, and this friend thought about that, as well. Overall, she could recover the full $150/month from Optimum and simplify her life, as she prepares to return to Canada in the next few years. Further, she noted that she didn't need a Tivo to get Netflix, since her kids had left a PS3 at home, which now serves as a platform for Netflix, as does the Wii.

One woman I know who moved into an apartment last year after a divorce skipped the landline and internet access, simply searching for other wireless signals in her complex rather than paying the $60/month for said connectivity.

It's expected nowadays that 20-somethings use cell phones and whatever internet connection they find at work or in their neighborhood to save on cable, internet access and conventional telephone expenses. But I think it would surprise many strategists at Comcast, Verizon, Cablevision to discover how many older, well-educated, higher-income adults are cutting as many cords, cables and wires as possible in their homes to save money and consolidate communications and entertainment budgets. I suspect it's happening among older Americans of that segment far faster than was forecast perhaps even just a year ago.

Tuesday, July 12, 2011

Housing's Misplaced Role in Personal Finance

Robert Bridges, described as "professor of clinical finance and business economics at the University of Southern California's Marshall School of Business," wrote a very useful editorial in yesterday's edition of the Wall Street Journal entitled A Home Is a Lousy Investment.

I found, as I read his piece, that much of what he contends meshes well with some of the points I made in this July 4th post.

Bridges begins by providing some factual evidence that homeownership in a state once considered home to many Americans who grew prosperous with the nation's and state's economy has actually been a comparatively bad deal,

"Between 1980 and 2010, the value of a median-price, single-family house in California rose by an average of 3.6% per year—to $296,820 from $99,550, according to data from the California Association of Realtors, Freddie Mac and the U.S. Census. Even if that house was sold at the most recent market peak in 2007, the average annual price growth was just 6.61%.

So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.

Here's another way of looking at the situation. If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850."

Note that Bridges provides data on end values before the recent financial crisis destroyed so much California residential real estate wealth.

If you argue that California became a less-desirable state in which to own a home over the period, that, too, is evidence. Who, nowadays, can predict a state's spending and taxation climate over 30+ years? Or even 20 years?

My current state of residence, New Jersey, went from a fiscally more responsible neighbor to New York to one of the nation's worst economic disasters from 1970 to today.

Bridges continues, based upon his knocking the supports out from under the 'housing as investment' argument, to ask why we, as a nation, are so preoccupied with housing as an driver of our economy,

"In light of this lackluster investment performance, and in the aftermath of the recent housing-market collapse, why is there such rapt attention to the revival of the homebuilding industry and residential property markets? The answer is that for policy makers whose survival depends on economic recovery, few activities have such direct, intense and immediate positive economic impact as new home construction.

Home values may gain value over time, but home equity is locked-in until the house is sold. The profits may then be reinvested or spent, creating significant stimulative effects, but usually this happens when market conditions are strong, exacerbating unsustainable market booms. When troubled assets are dumped, or when defaults occur during weak market conditions, the trough is deepened.

Housing markets may be forever doomed to cyclicality for many reasons, but public policies that stimulate new construction or home purchases by tax and financing subsidies, reduction of qualifying incomes, buyer credits, mortgage backstopping, and preferential zoning and permitting, only intensify these cycles. Efforts to reduce loan balances and to create special rescue programs have reduced the security of loans, challenged the enforceability of contracts, and driven up real borrowing costs. Nearly a third of our states do not allow lenders the recourse provisions necessary to go after a borrower's personal assets in case of default on a residential mortgage. The sanctity of mortgage obligations has become the rough moral equivalent of the 55-mile-per-hour speed limit."

Next, Bridges debunks the myth of home as emergency piggy bank,

"There is also a misconception that paying off a home mortgage is a path to financial or retirement security. The reality is that tapping the equity is expensive: Home-equity loans or lines of credit made with low qualifying incomes often command high interest rates and costs. If an emergency occurs—the loss of a job, or a business setback—it's likely that the same conditions creating the problem will lower the value and impede the marketability of the home and curtail the availability of financing for a buyer. Funds set aside for emergencies should always be liquid assets."

Having cast serious doubt over the wisdom of homeownership, Bridges then directly asks,

"Is it wise for coming generations to continue to view ownership as the cornerstone of personal finance? Young people planning for retirement increasingly face a choice between house payments and contributions to retirement accounts. They simply can't afford both. With the specter of looming cuts in Social Security and other entitlement programs, or even possible systemic insolvency, the challenge for tomorrow's retirees is income self-sufficiency.

A nation of house buyers becomes captive to the economic cyclicality caused by bursts of construction activity, and it is not lifted or sustained by the limited levels of service employment related to existing housing. By contrast, a nation of business startups and investors supports our capital markets and creates long-term employment, income, exports and the myriad technological advancements desperately needed by an expanding American society.

New home construction and the markets for existing homes should be recognized as activities secondary to, and dependent on, employment. Healthy job markets create healthy property markets, not the reverse. Housing demand driven by job growth creates conditions capable of sustaining a stable level of construction employment, attracting private equity investment, sustaining competitive private debt markets, encouraging capital growth, and ensuring the lowest possible housing prices."

The observation that "healthy job markets create healthy property markets, not the reverse," is, I believe, more important historically than Bridges realizes.

Much as I contended in my recent, linked post, that much bad US social welfare policy was posited on a brief, passing period of economic hegemony from 1945-75, so, too, I realized, after reading Bridges' excellent piece, has been US housing policy and beliefs thereabout.

For, contemporaneous with returning GIs, the rise of suburbs, etc., after WWII, was the new phenomenon of widespread middle-class ownership of non-farm homes.

I read an editorial in the Journal sometime within the past two years which contrasted US cities having advanced technology jobs with those having more blue-collarish, heavy industry employment. This isn't an exact list, but the former included San Francisco, whereas the latter included St. Louis and Cleveland.

What the author found was that homeownership was associated with cities having older, more industrial job bases. In effect, employees of high technology firms expected to be more mobile and, thus, didn't bother to own homes in as high proportions as blue-collar workers.

Could it be that much of our American view of the importance, the near-necessity of homeownership, result from a short period of just 30 years after WWII, when so many middle-class, blue-collar Americans enjoyed the fruits of the nation's unchallenged economic supremacy?

I did a little informal survey of friends last winter. All are college-educated and work in white-collar jobs. I asked what their grandparents did for work, and in what sort of homes they lived?

Without exception, most grandparents were not college-educated and lived in rental housing. One of my friends had a grandmother whose lumberjack husband was crushed to death on the job, requiring her to become a maid and laundress to support her children.

The mythic imagery of poorer, less-educated ancestors sacrificing so that future generations could own homes as a major part of "the American Dream," is, I believe, a curiously materialistic side-effect of a temporary period of American economic power.

It takes little thought to see that education is the most valuable asset a person can ever possess. It's portable, can be applied as creatively as the person to whom it belongs and, once acquired, is never truly lost.

Physical homes are different. They are, in truth, expensive luxuries in an unpredictable world. As investments, they are lumpy, costly to buy and sell, and require constant, expensive maintenance.

How we got to the point of subsidizing those who could barely afford to own homes is less a mystery than the continued misguided conclusions of Americans and their government, from 1945 onward, that the nation had come into some sort of economic and financial Promised Land of eternally rising living standards. In short, the exception became the norm, became the expected birthright of employed, educated Americans.

Bridges ends his piece with this passage,

"Owner-occupied homes will always be the basis for healthy and stable neighborhoods. But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence."

I would go further. Owned homes may be "part of a good life," but, more correctly, they would be part of "a good, predictable, dependable economic life."

Otherwise, they are a cursed millstone. I suspect that while land or judiciously-chosen investments in rental properties would be good investments, homes, generally, across all economic eras, are not. And won't be in the future.

Monday, July 11, 2011

Goldman Sachs' Secret Fed Bailout Becomes Public

Last Thursday's Wall Street Journal contained some of the detailed information recently released by the Fed under FOI filings by various business media involving previously-undisclosed emergency loans to large US financial services firms during the financial crisis of 2008-09.

Prominently appearing was Goldman Sachs, for a $15B loan for a month at a laughably low rate. Also included were a few foreign-domiciled banks and various US entities, as well.

This sort of activity and inexplicably fickle discretionary lending is precisely why some call for an end to the Fed.

Why, for example, was AIG never given the opportunity to access these loans? How about Countrywide, WaMu and Wachovia? On what basis were they less deserving than Goldman Sachs?

I suppose Bear Stearns' failure to attract Fed loans would be excused on the basis of it being so early in the crisis. But the others are legitimate questions.

This is the type of selective, subjective government intervention to save favorites and punish those it didn't favor, which upsets investors and causes them to shy away from risking capital when government behaves so punitively with public money and unlimited credit.

Personally, I would have loved seeing Goldman Sachs forced into Chapter 11 protection, its trading units continuing to function to support prices of its inventories of instruments in their markets, while bids for the profitable units were entertained and the management which allowed Goldman to become overextended on unrenewable short-term funding were dismissed.

The ultimate penalty to those senior managers, and the investors who so unwisely trusted them, would have been a deserved loss of jobs and equity investments.

Markets would have continued to function, and useful units would have continued to operate, as well. But those who bet foolishly on a constant ability to fund the firm short-term would have suffered appropriately.