Friday, August 19, 2011

HP To Dump PC Business

HP surprised the market with its CEO's announcement yesterday that it is planning to spin its PC operation off from the rest of the firm.

This morning I listened to one pundit attribute this to CEO Leo Apotheker's software background, i.e., he isn't a hardware guy, so, *poof* goes the hardware unit.

I doubt it was really that simple.

Take a look at the nearby five-year price chart for HP and the S&P500 Index. Mark Hurd, the prior CEO, left under an ethical cloud at the end of summer last year. Prior to that, he'd led the firm as it decisively outperformed the index in the four years to that point. Since then, it's been largely downhill, with a few positive reversals.

For the entire period, however, HP shareholders essentially took more risk than the index for no different performance.

One of today's Wall Street Journal pieces about the HP announcement observed that the then-defining deal Carly Fiorina completed- the merger with Compaq- was now being reversed. That's true enough. And to an extent is a commentary on HP from a longer perspective.

To me, it's no accident that HP's plan to separate from its PC unit comes within a week of this post from nearly a month ago, in which I wrote,

"Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.

Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.

Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell."
Dell's quarterly results disappointed investors earlier this week. Intel has been attempting to reassure one and all that its chips are too still vital, even as it has missed most of the smartphone and tablet markets.
Now HP essentially throws in the towel on a unit that it bought, rather than grew organically, while also announcing the end of its tablet and smartphone ventures.
Would Mark Hurd have been capable of leading/managing HP to a different end? Would he have materially affected the firm's outlook in the past twelve months, so that its share price wouldn't have cratered? I doubt it. Hurd couldn't personally change market demand for smartphones and tablets which affected PCs. Perhaps he'd have developed a stronger tablet entry. Perhaps not.
I see little more here than conventional Schumpeterian dynamics finally catching up to HP. It bought into business services and servers. It bought a computer business. What still works is the printer business which it has grown for decades. Printing isn't likely to entirely disappear, while PCs are fast becoming a niche commodity market. And every company depending upon PCs is fighting a losing trend.

Yesterday's Selloff & Accompanying Cable Financial Network Commentary

Yesterday's 4.5% decline in the S&P, bringing the month's return down below -12%, brought forth more of the recent and continuing parade of familiar faces of market and economic punditry on the two main free cable financial news channels- Bloomberg & CNBC.

My general impressions were that CNBC seems to be using more guests who are either older and bordering on washed up, or younger and uncredentialed. In no particular order, here's what I recall from the networks' attempts to virtually hold investors' hands during yesterday's market rout.

Over on CNBC, I believe, mid-morning, economist Michelle Meyer, formerly of Lehman, then Barclays, now Merrill Lynch/BofA, solemnly assured viewers that deflation, rather than inflation was ahead for the US economy, on account of falling demand.

I've written some pieces concerning Meyer in the past. Suffice to say, I'm never impressed. Yesterday's performance indicated that she either isn't aware, doesn't understand, or simply ignores the entire Von Mises/Von Hayek/Friedman school which defines inflation as, to quote the last, "always and everywhere a monetary phenomenon." Of the two Keynesian variants of 'inflation,' demand-pull is but one, the other major source being 'cost-push,' widely seen in the 1970s. Meyer's comments were so superficial as to, for me, further discredit her as any sort of trustworthy economist.

Then, again, when have you ever seen a large bank economist of really notable quality? Back when I was with Chase Manhattan, our Corporate Planning & Development group shared the 28th floor of 1 Chase Plaza with the economics department. Dick Zecher was the chief economist when I joined the bank, but he left to run asset manager Chase Investors, being replaced by someone whose name I can't even recall. I think Mickey Levy may have been BofA's chief economist back then. I don't recall who held the post at Citigroup. But every major bank seems to feel it's necessary to spend several million dollars annually to employ a bunch of nameless, also-ran economists. To what end, really?

At noon, David Faber on CNBC had a senior equity manager, probably the CIO, from Gary Kaminsky's old firm, Neuberger Berman, along with Lee Cooperman. It was a study in 1980s equity management- two aged subjective stock-pickers kvetching about how cheap the market has become and how bright the economic prospects really are.

The guy from Neuberger at least had a tight, cogent, if risky story explaining why they were very long in oil. Cooperman, on the other hand, actually began his spiel by confessing that he's been 'wrong so far this year,' but that, hopefully, 'the year isn't over yet.'

Then he went through a sheaf of papers so thick Faber's eyes bulged, reciting all manner of comparative facts to justify his belief that the US economy was about to go on a tear- inflation down, savings up, debt down, interest coverage up, plenty of excess capacity, a weak dollar to sustain exports.

Too bad Lee missed unemployment levels and the recent anemic GDP growth, both in the US and globally, along with- how timely- that day's forecasts from major banks for lower global growth.

Every time I see Cooperman, his famous comb-over looks worse and worse. I'm waiting for the day he just spray paints hair on that head.

Sometime during the day, one of the networks- I'm guessing CNBC- had Donald Trump on a phone interview. Now, Trump admitted a few weeks ago to his first foray into equities. I recall that Intel and perhaps BofA were among his purchases. Yesterday, he was stumping for the major commercial banks, declaring that BofA was really cheap, so he bought a lot of it.

Thankfully, whichever network on which this occurred had an actual equity strategist on later who politely said that Trump, and anyone who listened to him, was making a very serious error. That the large banks were cheap for a reason- especially BofA.

Then there were the battles of competing equity strategists throughout the day on both networks. Barton Biggs was on, I believe, Bloomberg, calling this a great buying opportunity and demanding QE3 and yet another round of federal fiscal stimulus to jump-start the US economy.

I recall thinking, as I listened to this hopeful drivel, how much of an inside game punditry is on these networks. Biggs was essentially calling for ruinous national government policies which would quickly line his equity management pockets. Nothing more, nothing less.

In general, I noted a lack of:

a) credible, marquee name economists weighing in on current and probably future conditions in the US and globally.

b) equity managers with a good performance record this year and this month.

What we see, instead, is too many unproven youngsters who can't recall 1987 or 1998, and too many equity management has-beens. These two networks' guests lists are beginning to resemble the fruits of all those competing late night talk shows whose schedulers dial so many potential guests in hopes of filling their sets with some warm bodies who will prop up ad rates.

Thursday, August 18, 2011

Google's Motorola Bid

There has, of course, been much discussion of Google's surprise bid to buy Motorola's hand set company with its associated, valuable patent portfolio.

As is often the case, the Wall Street Journal's Holman Jenkins, Jr., in his weekly column yesterday, wrote what is perhaps the best overview of the situation. He characterizes Google's move as wanting to follow Apple into the territory of providing ubiquitous device access of content on a company's software platforms, from PC to cell phone to tablet.

It occurred to me that my equity portfolio selections have routinely included Apple for years, but not Google. Not ever, to my knowledge. Or, perhaps, only briefly.

Initially, the latter was too pricey. Now, it may be too sluggish, both from a revenue and total return standpoint. Consider the nearby price chart of Apple, Google and the S&P500 Index for the past five years.

Coming out of the 2008 financial and market crisis, the two companies' equity price paths began to diverge significantly by the end of 2009. The gap between Apple and Google is, to me, stunningly larger than that between Google and the index. Not surprising, mind you, but stunning, none the less.

Google has been celebrated for its record-breaking growth, and, certainly, the sources of its revenues was a departure from past technology startups. Prospering from selling participation in searches for what became the dominant online search engine was probably outside most strategists' box, as it were.

Now we see it apparently return to earth, actually buying a hardware manufacturer.
Will the senior management of Google be capable of not screwing up Motorola's business? Will they capably handle an actual physical product business? Will said business alter the market performance of Google?

All interesting and important questions.

But I wonder what the Motorola bid says about Google's business strategy, objectives, etc. Do the founders simply view the company as able to do whatever they wish? Do they have financial or strategic objectives?

The firm doesn't seem to have specific product/markets it chooses to enter first, so much as businesses it enters to prevent others, like Facebook or Apple, from expanding their own businesses in ways which could negatively affect Google's.

Thus, so much of what we see of Google's recent moves seem to be defensive. I suspect they just don't have any tangible, solid objectives, so much as a desire to protect their existing businesses from falling victim to other companies' strategies.

Perhaps they've watched the decline of Yahoo and Microsoft, and wish mostly little more than not to let the fates of those once high-fliers become that of Google, as well.

Which probably means, as wireless connectivity and ubiquity is driving so much content access to every platform, that Google's actions may become more frenzied and less integrated as uncoordinated technological advances push it into more frequent defensive moves.

Wednesday, August 17, 2011

Lew Lehrman Reminds Us of Nixon's Mistake On Gold

Lew Lerhman wrote a timely piece in the Wall Street Journal recently reminding readers of who took the key step that led to today's weak dollar and incredibly bloated federal debt situation- Richard Nixon. On Sunday, August 15th, 1971, forty years earlier to the day of Lehrman's piece, Nixon appeared on television to announce that the US was terminating the dollar's convertibility to gold, making it a complete fiat currency.

While I do recall the event from my youth, the details which Lehrman provided were fascinating. With today's events providing more perspective, I can't help but see a lot of Obama in Nixon and his actions. A lawyer with no significant adult work experience outside of politics. An ideologue, of sorts, without understanding the ramifications of many of his ideas.

Recall, if you will or, if you are too young, learn that it was a moderate Republican president to be the first in the nation's history to impose wage and price controls without the nation being in a state of declared war.

At the time, inflation was tame compared with the later Carter era.

As Lehrman tells it, again, like Obama, Nixon prized big, sweeping pronouncements and gestures. Having been convinced of going off the gold standard by his newly-appointed Treasury Secretary, Texan John Connally, Nixon hastily gathered some advisors at Camp David that weekend to arrange the details and plan his speech.

According to Lehrman's article, only Volcker is on record as having regretted being part of the fateful decision.

Perhaps, given Europe's eventual economic palsy due to so many of it's nations becoming high-cost, high-tax and low-economic growth welfare states, the US would not have been in so much pain for very long, had we curbed spending to defend the dollar. We'd have tackled ruinous spending, the disastrous new Medicare program, and continuing deficits long before they reached their current unsustainable levels.

In retrospect, Nixon's own contribution to US profligacy was uniquely damaging because it appeared to have little immediate cost or consequence. Sure, inflation rose, but compared to the later Carter era, it was mild. The real damage was the loss of an external control- gold redemptions of dollars by foreign creditors- on US government debt and spending.

Lehrman's advocated for a return to the gold standard for years, so it was no surprise to see his name as the author of the article. With the passage of time, it seems increasingly likely that Nixon's action was the key enabling factor in the rapid decline in value of the dollar (now worth 18 cents compared to forty years ago).

Microsoft's Operating System Headaches

I read with great interest a recent Wall Street Journal article which noted that Microsoft's Windows' market share of devices, when tablets are included with PCs, has fallen to 82%- the lowest in its history. And this year's expected sales and profits from Windows are lower than last year's.

Now there's even concern about how many third-party software writers will pay much attention to Windows 8, with so many apps to write for Apple and Android devices.

Of course, had Microsoft followed my advice and broken up its empire into operating systems, applications software, gaming and online, as I suggested years ago, this may not have occurred.

Freed from each other, operating systems and applications businesses could have each developed software not intended for use with the other. A Windows division could have expanded into developing operating systems for other devices, perhaps as an outsourced vendor. The Office group could have been freed to develop apps for any platform in which it saw profit.

Instead, now even David Einhorn is echoing my years-old call for Ballmer's replacement.

This is how companies become fodder via Schumpeterian dynamics. The growth of Microsoft's main platform, the PC, has finally given way to other devices- smart phones and tablets. And so its fortunes are probably on a monotonic downward trend after treading water for the past decade.

Tuesday, August 16, 2011

More Not-So-Subtle Liberal Bias On CNBC This Morning

This morning was one of those on CNBC's Squawkbox program when its overall liberal bias was blazingly explicit.

Sure, liberal co-anchor Becky Quick was replaced this morning by the network's most conservative journalis and on-air personality, Michelle Caruso-Cabrera.

But the guest host for the morning was a guy named Harry Wilson, billed as a member of the administration's Treasury team which bailed out GM and Chrysler. During the last hour, New York Times columnist and, thus, card-carrying liberal journalist Tom Friedman served up his brand of liberal ideology, though he attempted to cloak it in the guise of being for the 'little guy.'

First Harry Wilson. This guy was some piece of work. When quizzed by Cabrera, Wilson gave an unvarnished spiel which was, I am guessing, a very close approximation of the case made inside Geithner's Treasury for raping bondholders with legitimate senior claims and shoveling money into the two automakers and/or, more correctly, their employees' union's pension funds.

The single statement which gave Wilson away as narrowminded or uninformed was, after his longwinded claim that to fail to save GM in the manner the administration did was to have brought about Ford's liquidation, his reponse to Cabrera's contradicting reply. She contended that, should things have become that bad, vulture financiers would have gladly stepped in to rescue Ford as the lone remaining Detroit-based automaker.

Wilson countered, to paraphrase,

'What, in the world's largest car market, there'd only be room for one automaker?'

Just what does Wilson think BMW, Mercedez-Benz and a host of Japanese car makers with plants south of the Mason-Dixon line are? Chopped liver?

Well, what they are, are non-unionized car making facilities.

By the way, who is to say that in such a low-margin business, the US even wants substantial assets deployed for what are, in real market terms, fairly low-paying jobs? The equity markets have signaled that GM and Chrysler weren't desirable investments with those characteristics.

Wilson belied his attempt at presenting himself as objective by clearly dismissing market/investor opinion and attempting to justify the federal government's financial override of said dollar votes.

Then the network's commercial promos billed Tom Friedman as 'the one man who can speak' on various wide-ranging business, economic and political topics. Which Friedman felt completely comfortable doing with clear confidence that he is right, and you or anyone else who disagrees with him is wrong.

First Friedman let all and sundry know that we must- must- have higher taxes. Spending cuts just aren't going to do it. No empirical evidence- just big Tom's instincts.

Then he solemnly invited America to form a vibrant third party, because Congress isn't working. That's right- the Tea Party's re-invigoration of the GOP doesn't count for s**t. Not in Tom's view.

No, you see, because it wants spending cuts, not higher taxes. And since Tom doesn't allow for that, another force must appear to rescue America.

Then Tom weighed in against Joe Kernan's charge that he is, well, what he is- a big-spending liberal apologist who works for the New York Times. Friedman declared that he was for small business and becoming a an 'innovation nation.'

Trouble is, as Rick Santelli noted a few minutes later, over-regulation along the lines of this morning's lead staff editorial in the Wall Street Journal make that unlikely in today's environment.

That's just a small example of how CNBC, by its selection of overtly-liberal guests and hosts, skews its presentation of economics, business an finance to the liberal end of the spectrum.

BofA Slowly Implodes

On Friday I wrote this post concerning banking analyst/fund manager's latest Tom Brown's latest comments praising BofA. Brown has been doing this ever since he put his fund's investors into BofA equity back in the spring of this year. I've written several pieces describing his various appearances on Bloomberg television shilling for his positions.

Yesterday came fresh news regarding Bofa's growth prospects. It announced the sale of its Canadian credit card portfolio, part of the expensive business it acquired from former credit-card segment leader MBNA, to Toronto Dominion Bank.

But that's not all. In the same Wall Street Journal article on this sale, BofA disclosed plans to sell several of its European card portfolios, as well.

Now, I distinctly recall Tom Brown talking last week about how much BofA was going to be growing earnings in the future.

But when a bank sells credit card portfolios, it's a signal that the bank is in serious trouble. Never mind the excuse BofA gave- to focus on other management issues.

Credit card lending is a core bank business. It's a bread-and-butter consumer business. A key component of relationships with consumers.

For BofA to be auctioning off its overseas credit card portfolios is to basically concede the final loss of international business which began with Sam Armacost's initial troubles back in the 1980s. Back then, BofA began dismantling its overseas network, then one of only three among American money center banks.

Since growth in the US, a developed economy, is probably going to be slower than overseas growth, BofA is essentially withdrawing from the sort of growth opportunities which Tom Brown promised would be coming in just a few years.

It's understandable, with similar examples among large US banks now over 20 years old, that many pundits and analysts aren't comprehending the gravity of this latest BofA move. But I vividly recall credit card portfolio sales as a harbinger of the decline of commercial banks. The resignation of a bank's management to balance sheet problems by, in effect, selling the silver to meet the mortgage payment.

That's what BofA is now doing.

Monday, August 15, 2011

Last Week's US Equity Markets & P/E Ratios

On last Wednesday, I wrote this post discussing equity markets performances at the half-way point of the week. Since then, the S&P finished the week at a net loss of just -1.7%. But, of course, this grossly understates what actually transpired.

We saw a week of daily S&P returns of -6.7%, -4.4%, +4.6% and +4.7%. My own volatility measures jumped almost two-fold by the end of the week.

Yet at least one Bloomberg co-anchor attempted to assure viewers that it wasn't such a bad week after all, with such a modest net decline in the major equity averages.

Give me a break. The average retail investor probably bailed out somewhere near a bottom point, no doubt losing about as much as one could. This sort of behavior have been well-documented by Charles Schwab's previously-discussed research.

But I had to laugh at the Wall Street Journal's Money & Investing Section's lead article in this morning's edition. Clinging to hoary old notions of the importance of P/E ratios in a predictive sense, the article focused on recent declines in the 'P,' with forecasted declines in the 'E,' as well. Then there was the requisite nod to trailing versus forecasted earnings, etc.

Too bad none of this actually has anything to do with total returns. My proprietary research has convinced me that dwelling on P/Es is a mistake, since it's a product of primary drivers of performance, not a driver itself.

Further, it's a static measure attempting to capture time and trend. But it can't. Instead, various pundits and analysts ascribe all manner of benefits or drawbacks to using various massaged measures of the numerator or denominator in order to try to give it some rationale and technical luster.

I don't buy any of it.

Rather, I look at my market turbulence signal, and find that it is quite far from registering a market which one should leave, or short. My equity selections continue to nicely outperform the S&P.

For a lot of reasons, developed economies may be entering a period in which revenue growth for top performing firms slows. But, at least for now and the near future, it doesn't appear that it's time to panic if one holds the right equities, or even, for that matter, the S&P500.