Friday, September 09, 2011

The Wall Street Journal's Warm Fuzzy Review of 10 Years of GE Under Jeff Immelt

In this week's Tuesday edition of the Wall Street Journal, the feature article on the front page of the Marketplace section was a long piece discussing Jeff Immelt's 10-year anniversary as GE's CEO.

It's worth observing, in this age of blogging, how advertising-paid media still refrain from the blunt honesty of a blog like, well, this one. I've criticized Immelt for over five years, just based on the cold, available facts of GE's and Immelt's performance, Immelt's outrageous compensation, and the comparable S&P500 performance.

With the same information, the Journal was significantly kinder and less pointed in its evaluation of Immelt's reign.

For example, take the article's second paragraph,

"The part he might want to leave out: GE's stock ended that week in August down 15% from the start of the year and 61% lower than when he took over as chairman and chief executive of the industrial conglomerate 10 years ago."

Fine as far as it goes, but how about comparing GE to the index? The nearby price chart for GE and the S&P500 Index show that, while the index has been roughly flat for 10 years, GE has fallen precipitously. So much so, in fact, that Immelt has nearly wiped out the entire GE performance premium earned since 1960!

Great job, Jeff!

Why doesn't the Journal provide this objective measure? Probably because they'd like to continue to run GE advertising and have the occasional interview with GE senior management.

So much for real analysis of business news, eh?

But here's something even more bizarre. The next passage in the article reads,

"If I had to grade him, he is a solid B student, not lighting the world on fire," says Peter Klein, a senior portfolio manager at Fifth Third Asset Management in Cleveland, which holds GE shares. "The pieces now are probably at a point where they are getting polished and getting attention that profitability will improve." "

Is it just me, or is Klein more of an embarrassment to Fifth Third than Immelt may be to GE? Or this article to the WSJ? After reading Klein's rating of a guy who destroyed 40 years of value at GE, calling him a "solid B student," would you invest in his portfolio? Or anything at Fifth Third?

How completely destructive must a CEO be to earn a 'D' from Klein, if GE under Immelt is a "solid B?"

Then there's this laughable section,

"Inside the 131-year-old company, where executives are more accustomed to accolades than censure from Wall Street, the sluggish share price has created palpable frustration. Mr. Immelt counters that only two other companies, Exxon Mobil Corp. and Royal Dutch Shell, have made more money over the past decade. GE has paid out $87 billion in dividends over the period and is sitting on a company record $189 billion book of orders."

This is more of Immelt's deliberate ignorance of modern finance, in favor of the hoary old notion that simply being big is good enough.

Ever hear of total return, Jeff? And where's the Journal's criticism of a CEO so brazenly old-fashioned as to flaunt the notion of earning a competitive return for the risk he's taking on his shareholders' behalf?

The stupidity and ineptitude at GE clearly extends to its board, as we read in these passages,

"Size is working against GE as well. Mr. Welch took GE to nearly $130 billion in revenue from less than $30 billion. Today the company has $150 billion in revenue, but continuing double-digit gains is tough at that scale.

"Is it going to grow the way it did 25 years ago when it was a third or a quarter of the size? No, the math just works against you," says Ralph Larsen, the lead independent director on GE's board."

That's all that Larsen can manage to articulate about Immelt's colossal failure as CEO? Maybe he's best buddies with another firm's board member, a chairman, no less, currently under fire. Reading Larsen's quote, what sane investor would buy, or continue to hold, GE shares?

The Journal article at least includes someone else's criticisms of Immelt's bad timing on acquisitions and disposals,

"Some former GE executives and investors say Mr. Immelt sells late and buys too high.

"GE hasn't been as strategically adept as it was 25 years ago," says Jack De Gan, chief investment officer for Harbor Advisory Corp. in Portsmouth, N.H.

GE sold its plastics business after the market peaked and jumped into subprime lending too late to reap the rewards, exiting with a $1 billion loss, critics say. The company failed in a 2008 attempt to sell its slow-growth, low-margin appliance business and scrapped the plan a year later.

Mr. Immelt bought security companies after 9/11, agreed to a big premium to acquire U.K. medical research company Amersham in 2003 and is buying into the oil business with prices much higher than they were in the first half of his tenure. Buying Enron's wind business out of bankruptcy created a new business for GE, but multiple acquisitions in water treatment haven't paid off.

Mr. Immelt rejects the criticism. He says the dispositions of plastics and insurance were "home runs" and that the acquisitions were a mixed bag. "You can't do a lot of deals and have them all be great.""

Leave it to Immelt to simply stonewall the facts when he doesn't like them. The record on his disposal of plastics, NBC/Universal and parts of its financial business is quite clear, and it's not pretty.
The simple truth is that GE is an anachronism- a dinosaur. As a diversified conglomerate in an age of hyper-efficient capital markets and ultra-low brokerage fees, there is no longer any reason for such a corporation to exist. It should have been split into its large constituent businesses many years ago. That Jack Welch was able to confuse and bedazzle analysts and investors for so long with his charm and character just served to obscure this truth.

If Welch had truly had shareholder interests at heart, he'd have broken up GE after he stabilized it in the early 1980s. Then he'd have avoided the disastrous RCA and Kidder Peabody acquisitions, as well as the mistaken swelling of GE Capital, while allowing shareholders to directly benefit from each large unit's individual performances.

Thursday, September 08, 2011

More Disappointment Involving CNBC's Guests and Guest Hosts

This morning I happened to catch a few minutes of self-aggrandizing New York Times columnist Tom Friedman on CNBC. It seems he and a co-author are out with a new book which celebrates the decline of the US. I write celebrate because, despite what Friedman likes to portray himself as on CNBC- a champion of individual initiative- he is, after all, a liberal Times columnist who never met a government program he doesn't like.

Today, he was breaking the shocking news that globalization of competitions means that every worker is now subject to those forces.

What previously unthought insight will Friedman provide us with next?

Of course, I'm being sarcastic. I wrote this post in late June, spurred by Michael Spence's WSJ editorial, regarding how globalization has likely rendered a global lowest-ranking group of people unfit for competitive employment. Specifically, I contended,

"Every nation has some bottom quartile of adults in terms of intellect, skills and education. In fortunate times, the nation can employ those people in lower-value-added jobs like construction, basic materials extraction or simple fabrication of materials and goods.

But the days of America being competitive at producing commodities is long gone. And, with it, I believe, a brief, probably unreproducible period from 1945-1970, in which lesser-educated and -intelligent Americans could make middle-class wages and enjoy "30-and-out" careers with bountiful pensions and healthcare.

My late father's cohort, he being born in 1927, enjoyed this golden era. Those before did not, nor those who followed.

It seems to me that Americans have become used to two generations, my father's and the early baby-boomers, of economically-lucky circumstances and have cemented their financial life expectations at an unsustainable level.

Today, the only long term sustainably-competitive businesses and jobs are those which can continue to innovate, create value and move forward technologically and in terms of meeting consumer needs. Static professions and jobs are all seeing declining wages and benefits.

While I'm not happy to acknowledge this, I must admit that today's interlinked global economy can no longer inexpensively shield and support the lowest quartile, decile, or whatever economically-determined least-productive, -skilled and -employable portion of any nation's workforce.

Nobody's worried about the workforce at Google, Amazon or Facebook. But the marginal banker, auto assembler or generic factory worker is a real problem for all of us. If they can't be re-employed at anywhere near their historic standards of living, how does that affect and change the US?

Here's what the modern interlinked global economy has done. It's forced economically-mature, once-vibrant advanced economies to decide, with their antiquated mix of unions, defined benefit pensions and health care systems and raised expectations, how to deal with the costs of supporting the now-unemployable citizens who have been taught for one or two generations to expect lavish standards of living by historic comparison.

A well-educated, bright, risk-taking young person who is comfortable with a long, changing, working life will probably get a reasonable facsimile of "the American Dream." Others will not.

I think it's time we acknowledged that, in America, a high-school graduate with an average intellect and skill set has a near-zero chance of achieving "the American dream" of a good-paying, secure job leading to a comfortable, decent home, spouse and family, health care, pension, vacations and a pleasant retirement after age 70.

Thanks to the global ubiquity of better education, I would guess that even an average US college graduate can't count on that dream anymore, either.

America won't, as a nation, I believe, be able to protect and employ it's least-productive citizens without paying unaffordable social costs. The time for that has long since passed, and, absent another devastating, global-economy-wrecking war, natural disaster or crisis, I don't see it ever returning."

Friedman solemnly intoned that now every US worker must adopt two attitudes- that of an immigrant (being hungry) and of an artisan (provide unique skills).

I don't disagree with Friedman, but I've been thinking and behaving along those lines since 1983. That's when I left a dissolving AT&T. Looking up the management chain above me, I realized none of those self-satisfied, but mostly insecure executives were going to magically protect me or my job. When I went seeking other employment, and landed at Chase Manhattan, that view was reinforced, along with Friedman's second point.

Within just a year or so of arriving at the bank, it began its first rounds of hiring freezes, then layoffs. It was at that time that I began, with my late business partner, Debbie Smith, to create a body of intellectual property that was severable from my employer and transportable to other venues.

I view Friedman's current realizations as ones that I came to nearly 30 years ago. Rather than write about them, I, as tens of thousands of other entreprenurially-oriented Americans also have done, I behaved according to these understandings.

From his longstanding, cushy job at the liberal New York Times, Friedman seems so isolated from reality that his every thought seems, to him, worthy of a book informing us lesser beings of the truth he just discovered.

But I have another story of a fairly frequent CNBC guest which is interesting for another reason. It's in the vein of my posts about how the ethically-challenged network continues to use also ethically-challenged Steve Rattner as a guest-host and guest. Searching on "Rattner" on this blog will provide you with a list of posts, among which are some that detail his run-ins with the SEC and implicit admission of some pretty serious misbehaviors concerning 'pay to play' asset management.

On the theme of "it's a small world after all," I happened to make the acquaintance, on my recent hiking trip to the White Mountains of New Hampshire, of a criminal practice attorney whom I'll call Dave. Learning of my professional activities in equity investing, and one-time hedge fund partnership with a former Salomon Brothers partner of some repute, he asked if I knew a hedge fund manager whom I'll call Mr. O. O is a periodic guest on CNBC.

When I related my close 'degrees of separation,' but not personally-direct, connection to O through the former Salomon partner, Dave related the following story.

Dave has a client who was induced to participate in one of O's hedge fund investments. I should clarify that, when O appears on CNBC, he's always portrayed as a large-cap US equities investor. His background is one of being an equity strategist at a noted Wall Street firm some years ago. He usually speaks of specific US equities, effectively talking his book.

In this case, however, the investment was an energy project in either Russia or one of its former Republics. The investment went bad, and Dave's client's stake was entirely lost.

Dave then recounted some of the developments of the subsequent lawsuit over the investment. It seems that there were violations of the Foreign Corrupt Practices Act, which is the law that forbids US firms from paying bribes overseas in order to secure business. Dave told me that O escaped conviction but was pretty clearly involved. One of O's lieutenants, however, was not so lucky, was convicted, and did jail time.

Needless to say, O continues to appear on CNBC. This, and the use of people like Rattner, with whom Dave was also familiar, in the same manner as I am, was why, Dave explained, he doesn't even bother to watch the network anymore.

What struck me as interesting new information from Dave was that O's hedge fund apparently involves not-inconsequential investment activity in vehicles which are quite far afield from the traditional, liquid US equities with which he and his fund are typically identified. And they would seem to be fairly important as a proportion of the fund's activities, if members of the fund's management are being convicted of violating federal laws in order to operate said investments.

Maybe CNBC should do themed mornings with guest hosts and guests who all share a trait, like having entered into a settlement with the SEC, or having employees convicted of violating federal laws in the course of managing fund investments.

One More Parallel Between GE & Yahoo

After I wrote this post yesterday, I heard and read some more punditry regarding Yahoo. The salient points which I found insightful, as I don't follow Yahoo as if I were an analyst, were that the firm's breakup value is almost certainly far higher than its current value because of its passive investment in Alibaba.

Thus, another parallel between GE and Yahoo arose. Both essentially shouldn't exist as they are any longer. I've argued for years that GE should have been split up after Welch left. It appears that Bartz should have set about spinning out the Alibaba investment from the start, which would have increased shareholder value by putting that extra piece of equity paper into each shareholder's hands.

What was left could then have been either restructured to actually make some money, or sold for parts to another online-oriented firm.

One more parallel? Roy Bostwick, Yahoo's chairman, is a long-standing board member. When I heard how much he paid Terry Semel for presiding over the firm's stall- hundreds of millions of dollars- I realized that, like GE, Yahoo also has a lapdog board. Between Jerry Yang and Bostwick, the board's ineptitude is so enormous as to basically absolve Bartz of any failure. Bostwick is such a shadowy chairman that yesterday was the first I'd heard of him in ages. Yet, when his long, sorry involvement in the firm was catalogued by an analyst on Bloomberg, it became clear that Bostwick, far more than Bartz, owns the current Yahoo mess.

Reading the Wall Street Journal's piece this morning on Bartz's dismissal, I was amused to see that the board set as her goals to halt the viewership slide, raise revenues, and improve the price of the firm's equity. All reasonable over time, perhaps, but not on a quarterly basis. Further, if Bartz hadn't done it in two years, another 6 months was unlikely to matter.

No, what's becoming clear in Yahoo's case is that the real solution was and remains one that Bartz probably wasn't allowed to consider- sell or spinoff the valuable parts to unlock value, then deal with the detritus.

Wednesday, September 07, 2011

Dick Bove's Sensible Comments on BofA's Executive Changes

I rarely find that longtime banking analyst Dick Bove has much of interest to say. His buy ratings on large banks are often so short-term as to be encouraging retail investors to time their trading to quarters.

But this morning, Bove had several useful comments regarding BofA CEO Brian Moynihan's so-called Tuesday afternoon massacre, in which Sally Crawchuck and Joe Price, both consumer senior executives, were fired. Two institutional banking executives were elevated in rank.

Bove sees the moves as reasonable reactions to Dodd-Frank, which has made consumer banking more difficult and less profitable. He further forecast 600 branch closures and 30,000 employees shed on the consumer side of BofA in the next two years, as the bank shifts resources from consumer to institutional businesses.

That makes sense.

But perhaps the shrewdest insight Bove made was one worthy of my old boss, Gerry Weiss, of Chase Manhattan Bank. By reshuffling senior executives, Moynihan, in Bove's opinion, bought himself several years time as CEO.

It's an old trick, yet, still works. A struggling CEO, rather than wait for the board to fire him, moves first and rearranges the deck chairs himself. This allows him to do three things: blame the fired execs for problems, claim to be (and look) forceful in making the changes, then, most importantly, use the new appointments to buy himself time while the newly-promoted managers and organization structures pan out.

It should not surprise that CEOs using these maneuvers are typically the ones whose companies are in the most trouble. Here, Bove and I part company. I believe Bove, with Tom Brown, predictably, both reacted with even more praise for the large, stumbling bank.

I believe it signals just how troubled BofA actually is. Moynihan's had plenty of time to do this, and Dodd-Frank is a year old. Either he's slow- take that any way you wish- or he realized, with this summer's appalling collapse of BofA's stock price, that if he didn't act soon, he'd be out.

Carol Bartz Fired....Why Not Jeff Immelt Too?

One of the big business news items out this morning was Carol Bartz' firing in a phone conversation late yesterday. Pundits on both CNBC and Bloomberg were all over the story this morning, harping on the flat performance of Yahoo's stock during her 21/2 year tenure which began in early 2009.

Meanwhile, just yesterday the Wall Street Journal did a Marketplace section lead feature on GE's hapless CEO Jeff Immelt. More details on that in a later post.

For now, let's look at a chart I think I can safely guarantee you will see nowhere else this morning. It's the past five years of performance for the S&P500 Index, Yahoo and GE.

Look closely at the chart from early 2009 onward. I last wrote about Bartz and Yahoo here, in early July, when the rumors of her exit began to heat up in earnest. I noted there that, under Bartz, at least Yahoo's price had stabilized- stalled- in contrast to its decline prior to Jerry Yang begging her to become the firm's CEO. The chart illustrating that is in the linked post.

Exact timing to the day is impossible to do from this chart, but, generally, from early 2009, when Bartz assumed the helm at Yahoo, to now, both GE and Yahoo have had about the same relative stock price performance- up slightly, but much less than the S&P500, which rose more than 30%.

So doesn't that make you wonder why Bartz is getting axed, while Immelt gets a softball puff piece in the Journal, complete with friendly reviews from a fund manager?

For the full five years, Immelt's down nearly 60%! And so is Yahoo.

Regarding Bartz, I stand by my comments of my early July post,

"Personally, I think Yahoo's sluggish performance is less about Bartz and more about the wreck she inherited. A wreck with nearly nothing left on which to build the fabled "turnaround."

As I've contended in many posts, after Jerry Yang screwed up the exit strategy of selling the firm to Microsoft, there was little left to do. For shareholders, just selling and walking away was the best option.

Whether Bartz ought to be replaced or not is probably moot. Yahoo's fortunes are unlikely to improve under any other CEO. At this point, though, there may not be any buyers for the firm at prices that the board and shareholders will tolerate, so badly has the firm been mismanaged since when Terry Semel ran it."
Anytime a marquee CEO is bought by a desperate, failing firm, that CEO really has no downside. If s/he succeeds, everyone applauds yet another lustrous chapter in her/his turnaround and leadership career. If s/he fails, many judge the situation inherited as too far gone for even that well-regarded CEO to salvage.

Remember, just 21/2 years ago, Yahoo wanted Bartz so badly that they gave her a contract that runs through 2013.

Not surprisingly, as my many posts about GE under Immelt contend, I believe he should have been gone over five years ago, and GE broken up into its large business units. It's an aged, diversified conglomerate with absolutely no reason for being in the modern financial era.

So if Carol Bartz deserves to be fired for her last 2 1/2 years of performance at Yahoo, so, too, does GE CEO Jeff Immelt.

Tuesday, September 06, 2011

How Not To Create Jobs

I returned from some time away just before Labor Day to read and hear that the administration is now really focused on jobs!

Nice, but it demonstrates a predictable, lamentable failure to comprehend the nature of job creation.

Many politicians of both parties speak of jobs as if they are simply units of income-production which magically appear if and when government does things with taxes. Currently, the thinking is to spur job creation by lowering the after-tax cost of employees with various employment tax reductions.

As it happens, I met a genuine small businessman on last week while hiking in New Hampshire's White Mountains. While discussing the recent behavior of US equity markets, social welfare programs and the economy, I asked him if lowering the costs of hiring and paying workers would lead him to bring on more people.

It would not. He owns and operates a picture-framing business. Over the past few years, he's had to lay off most of his small staff. As is often the case, family members will assist him to meet peak demand. But he only has one remaining full time employee.

He confirmed that he could only hire another worker if demand for his services rose and remained steady. That might take 6 months to a year. But there's simply no way, in this economy, that a reduction in payroll taxes will have any effect on his hiring plans.

The current political thinking about reversing causality, and the confirmation of my view which I received from my fellow hiker, led me to recall the words of an old grad school professor.

Morris Gomberg, one-time labor leader and, many years ago, management professor at Penn's business school, was lampooning federal inflation-fighting efforts. I remember Gomberg laughing at the notion of government capping prices, thus expecting that by manipulating an output, inputs would react accordingly and fall, too.

He quickly offered a comparison that went something like this,

'It's like you want someone to eat less, so you shove what comes out of them back in. What you would get, instead, is a very foul and disgusting mess.'

So it is with this equally backward notion of attempting to game payroll taxes, which is a result of hiring, hoping that by temporarily lowering them, hiring will magically appear. It is a sad statement on the state of government that the best economists federal money can buy don't have a clue regarding what drives job creation. At best, their tax reductions could affect the prices at which additional labor would be hired, meaning a total after-tax cost could be maintained and more paid to workers, or the savings kept and workers paid no more. But the payroll tax gimmick won't spur raw demand for hiring.

It's the prospect, for a business owner, of steadily rising demand for his products or services which cause him to add employees. Not a totally unrelated cost element being temporarily lowered.

Of course, the federal government tried several times in the past three years to stoke demand via its stimulus programs. Nothing worked.

So now it's on to completely unrealistic fantasy schemes which display a gross lack of appreciation for how businesses actually function.

Equities & Friday's Jobs Numbers

I was away for most of last week, having set two posts to auto-publish. The post for 31 August failed, per Blogger's frequent problems with scheduled posts, so I manually published it this morning.

When I began to clear my inbox over the weekend, I noted the precipitous fall in the S&P500 on Friday after fairly uneventful days from Tuesday through Thursday. Guessing I'd read of some significant event or news for that day, I was not surprised in the least to learn of the jobs report showing no net employment increase for August. The net result for the S&P for last week was to end essentially flat.

Happily, when I checked the values of the equity portfolios selected by my proprietary quantitative process, I saw that they continue to average more than 10 percentage points of total return above the S&P returns for the respective matching timeframes. For 2011, at Friday's close, the index had lost 6.65%. As of late morning today, it's lost more than an additional 2%.

The pundits and co-anchors on CNBC and Bloomberg all have 'this might be a rerun of 2008' looks on their faces and distress in the tones of their voices. Finally, after many months of administration attempts to make mountains out of pathetically weak economic data, said data is looking decidedly worse, and these financial news network on-air staff can't hide it anymore.

Between continued investor nervousness about European debt problems, and their hyper-sensitivity to bad US economic data, it probably won't take much non-good news during September to drive equity markets down even further.