Former Bear Stearns economist David Malpass wrote a great editorial in yesterday's Wall Street Journal concerning the coming effects of a continued weak US dollar policy.
In brief, Mr. Malpass notes that while a country temporarily gains trading volume from a weak or weakening, depreciating currency, those illusory profits are more than offset by a global flight from the currency.
Thus, while the US goes about its merry way flooding its trading partners and global investors with dollars and liabilities which are steadily declining in value, fewer investors will continue to want to either hold US dollars or dollar-denominated assets. In time, there will be a shortage of capital inflows to the US, and, quite possibly, a net outflow, as sophisticated investors flee the dollar for hard assets or other currencies.
Malpass gives a very good, clear account of the fall of the British pound and the accompanying hollowing out of their economy.
He writes,
"At the end of empire, the giant sucking sound was from British capital and jobs moving offshore as the pound sank."
Sound familiar?
He continues by observing,
"Some weak-dollar advocates believe that American workers will eventually get cheap enough in foreign-currency terms to win manufacturing jobs back. In practice, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create.
No countries have devalued their way into prosperity, while many- Hong Kong, China, Australia today- have used stable money to invite capital and jobs.
There's been a clear demonstration this decade. The S&P nearly doubled from 2003 through 2007. Those who borrowed to buy won big-time. At the same time, the dollar's value was cut nearly in half versus the euro and other stable measures. Capital fled, undercutting job growth. Rent, gasoline and food prices rose more than wages.
Equity gains provide cold comfort when currencies crash. From the euro perspective, the S&P peaked at 1700 in 2000, finally reattained 1100 in the 2007 bubble, fell below 600 in March and now stands at 700. With most of the market capitalization of U.S. stocks held by Americans, the dollar devaluation has caused a massive decline in the U.S. share of global wealth."
Malpass doesn't explicitly address the reserve currency issue, as I did in this recent post. But he really doesn't have to. Everything he writes points to an implicit move away from the dollar as a stable, globally-preferred store of value and safety.
His recommendations for how to fix this problem are fuzzy and lack the ability to actually be implemented. Just calling for "jobs and wealth" policies isn't enough.
What Malpass avoids saying is the obvious, i.e., that the U.S. must rein in deficit spending, stop monetizing its own borrowings with Fed purchases, and begin to behave like a world leader in commerce and economics again. Something not done since, oh, the Reagan administration, and perhaps the Clinton years, as well.
American politicians may fool the country's residents into believing that simply running the printing presses overtime and issuing excessive debt, too, won't affect America's global economic standing or hamstring monetary policy in years to come.
But global investors and trading partners understand reality, and won't be so fooled.
Friday, October 09, 2009
Thursday, October 08, 2009
Boeing's Problems Extend to The 747
In that post, I commented on Boeing CEO Jim McNerney's apparent inability, during his 4-year tenure, to get the company running on all cylinders. Two months ago, the news was more delays in the Dreamliner project.
Yesterday's Wall Street Journal reported that the company's troubles have now spread to its 747 redesign.
Apparently, the production problems with the Dreamliner have so sapped talent at the company that engineering skills shortages are now affecting the 747-8 program.
The chief of the commercial airplane division, Scott Carson, was eased out on September 1st, replaced by a Boeing military programs executive, James Albaugh. So much for bench strength in the formerly-premier Boeing commercial side of the business.Apparently the delays on the 747-8 jet have become severe enough that the company announced a $1B charge and, like the Dreamliner, delayed the first flight of the redesigned wide-body until next year.
Meanwhile, economic conditions will probably delay both planes' profitability, as airline customers struggle with decreased demand. Cargo versions of the 747-8 are much more in demand than the passenger versions.
As the nearby 5-year price chart continues to show, as in August, McNerney's Boeing can't seem to outperform the S&P500 Index.
In fact, the company's slide from its price peak in early 2007 has been much more rapid than the index's. For the past 18 or so months, the company's equity price has pretty much tracked the index.
That doesn't say a lot for McNerney's management prowess. As I mentioned in the August post, for the sort of risk one takes in holding an indvidiual firm's equity, shareholders expect and demand a better return than simply tracking the equity markets.
I wonder how long it will be before Boeing's board concludes that McNerney just doesn't have the horsepower to move Boeing's performance up above the index for the long term, and eases him out.
Wednesday, October 07, 2009
On The Dollar Losing Reserve Currency Status
My business partner and I were both horrified that yesterday, on a day when there was so much news about secretive, joint talks between Arab oil producers, Russia and China on establishing a non-US dollar reserve currency basket, the S&P500 Index didn't plummet, but rose 1.4%!
What about this potential calamity don't investors understand?
Like many other business people, I've read warnings about the loss of reserve currency status for the US dollar for decades. It's usually the same song- large deficits, inflation debauching the value of dollar assets held by foreign governments, etc.
In the past, though, no other nation held out such hope for economic growth with fairly stable regimes and legal frameworks. Next to the US, other potential reserve currencies paled in comparison.
Now, however, the threat takes a slightly different, and more credible form.
First, Arabian oil producers are viewing US military hesitancy over Iran, and potential withdrawals from Iraq and Afghanistan, with alarm.
Add to this an unprecedented flooding of the world with dollars and dollar liabilities. Despite what many talking heads my believe about current modest price deflation due to lower demand, there has never not been a relationship between excessive printing of money and subsequent hyper-inflation of said currency.
Finally, three other global powers or power blocs- Arab oil producers, Russia and China- each have a desire to see the US weakened. It's no secret that post-WWII US power has always implicitly rested on the dollar's reserve currency status.
When our own Treasury Secretary begins to talk up the use of SDRs to replace the dollar, and the US, as part of the G20, lends credibility to this move, the jig is nearly up.
This is, of course, idiocy on the part of the current US administration and its misguided new sense of multi-lateralism and global harmony.
With these forces as context, it becomes chillingly plausible that some major oil producers and a major consumer- Arabia, Russia and China- could indeed jointly agree on a basket of commodities and currencies with which oil may be purchased, none of which is the US dollar.
I'm quite familiar with what would be the counter-arguments to this development. In brief, it will be the repetition of what I, too, used to believe. That current holders of so many billions of US dollars and dollar-denominated liabilities won't dare precipitate the loss of value of their own substantial assets.
The question, now, is at what point these countries essentially choose to finally go cold turkey on the US dollar, reasoning that loss of wealth by a sudden switch to other stores of value is preferable to a few more decades of gradual erosion of value of the dollar.
Google the topic or relative currency values over time and choose any of the results you see. By many measures, be it purchasing power, other currencies, or gold, you'll see that the US dollar has fallen by at least a quarter in value in the past 8-9 years.
Now consider the massive issuance of dollar-denominated government debt in the past year, and the monetizing of that debt by our own Fed. And the coming huge inflationary spending on stimulus, health care and 'cap and trade' bills.
Any thinking person in the rest of the world is watching this and seeing a monetary train wreck ahead for the US dollar and its debt instruments.
On our current trajectory of government spending and legislation, it's not far-fetched to see a weakening of our economy, as we impose self-inflicted, crippling increases in energy prices and pollution costs, while spending money we don't have on living standards we will no longer be affording through economic growth.
Add to this the probably loss of global trade through over-priced products, again, thanks to increased energy prices and self-imposed faux pollution costs, and you come to a choice between two very bad options.
Either US tax rates will soar to previously inconceivable levels, depressing demand and wealth creation, or the crushing debt load and interest payments on said debt will result in the dollar's rapid decline in value.
All this near-term babbling about deflationary pressure on the CPI due to demand moderation misses the point.
When other major global resource players openly deny the secret talks that are obviously occurring, on the subject of replacing the dollar as oil's payment mechanism, it's finally very late in the reserve currency game for the US.
How this can possibly be seen by investors as a reason to bid up US equity prices is beyond me.
What about this potential calamity don't investors understand?
Like many other business people, I've read warnings about the loss of reserve currency status for the US dollar for decades. It's usually the same song- large deficits, inflation debauching the value of dollar assets held by foreign governments, etc.
In the past, though, no other nation held out such hope for economic growth with fairly stable regimes and legal frameworks. Next to the US, other potential reserve currencies paled in comparison.
Now, however, the threat takes a slightly different, and more credible form.
First, Arabian oil producers are viewing US military hesitancy over Iran, and potential withdrawals from Iraq and Afghanistan, with alarm.
Add to this an unprecedented flooding of the world with dollars and dollar liabilities. Despite what many talking heads my believe about current modest price deflation due to lower demand, there has never not been a relationship between excessive printing of money and subsequent hyper-inflation of said currency.
Finally, three other global powers or power blocs- Arab oil producers, Russia and China- each have a desire to see the US weakened. It's no secret that post-WWII US power has always implicitly rested on the dollar's reserve currency status.
When our own Treasury Secretary begins to talk up the use of SDRs to replace the dollar, and the US, as part of the G20, lends credibility to this move, the jig is nearly up.
This is, of course, idiocy on the part of the current US administration and its misguided new sense of multi-lateralism and global harmony.
With these forces as context, it becomes chillingly plausible that some major oil producers and a major consumer- Arabia, Russia and China- could indeed jointly agree on a basket of commodities and currencies with which oil may be purchased, none of which is the US dollar.
I'm quite familiar with what would be the counter-arguments to this development. In brief, it will be the repetition of what I, too, used to believe. That current holders of so many billions of US dollars and dollar-denominated liabilities won't dare precipitate the loss of value of their own substantial assets.
The question, now, is at what point these countries essentially choose to finally go cold turkey on the US dollar, reasoning that loss of wealth by a sudden switch to other stores of value is preferable to a few more decades of gradual erosion of value of the dollar.
Google the topic or relative currency values over time and choose any of the results you see. By many measures, be it purchasing power, other currencies, or gold, you'll see that the US dollar has fallen by at least a quarter in value in the past 8-9 years.
Now consider the massive issuance of dollar-denominated government debt in the past year, and the monetizing of that debt by our own Fed. And the coming huge inflationary spending on stimulus, health care and 'cap and trade' bills.
Any thinking person in the rest of the world is watching this and seeing a monetary train wreck ahead for the US dollar and its debt instruments.
On our current trajectory of government spending and legislation, it's not far-fetched to see a weakening of our economy, as we impose self-inflicted, crippling increases in energy prices and pollution costs, while spending money we don't have on living standards we will no longer be affording through economic growth.
Add to this the probably loss of global trade through over-priced products, again, thanks to increased energy prices and self-imposed faux pollution costs, and you come to a choice between two very bad options.
Either US tax rates will soar to previously inconceivable levels, depressing demand and wealth creation, or the crushing debt load and interest payments on said debt will result in the dollar's rapid decline in value.
All this near-term babbling about deflationary pressure on the CPI due to demand moderation misses the point.
When other major global resource players openly deny the secret talks that are obviously occurring, on the subject of replacing the dollar as oil's payment mechanism, it's finally very late in the reserve currency game for the US.
How this can possibly be seen by investors as a reason to bid up US equity prices is beyond me.
Tuesday, October 06, 2009
Further Thoughts On GE's Disposal Of Its Media Businesses
Over the weekend I wrote this brief post on GE's overdue admission that it needs to begin unraveling the underperforming, diversified conglomerate.
Perhaps my most succinct piece on the pointlessness of GE's current incarnation was this May, 2007 post. In it, I noted,
"Simply put, corporate diversification for cash flow smoothing has been a discredited management approach for creating consistently superior total returns for some time. My own proprietary research, which drives my equity portfolio selection of consistently superior large-cap companies, confirms this. Back some thirty or forty years ago, when trading equities was expensive and information and innovation were in shorter supply, it may have made sense for investors to hold shares of conglomerates. And, in the day, they existed- Gulf&Western, ITT, and Litton, to name just a few. But they are gone now. ITT still exists, but in nothing like the shape it had under Harold Geneen.
Today's large firms are usually focused on a particular product/market. Diversified conglomerates are pretty much a thing of the past. Mediocre analysts and fund managers might confuse large focused global firms, such as Intel, Cisco, or ExxonMobil, with yesteryear's broadly diversified giants. You should not. I don't think investors do, either. That's why GE's stock is in suspended animation. Everyone can diversify more cheaply today than they can by paying an enormous tax on operating earnings of GE's business units in order to keep them under one administrative regime.
What's ironic is how everyone seems to have forgotten GE's heritage of being subjected to wrenching change with each new CEO of the prior forty years, except for Immelt. He's the only one not to have actually made a big change in the firm, and it has stalled."
I've had a couple of conversations with business colleagues about GE's newly-disclosed decision that it's time to unload the media businesses. While I am not, of course, privy to the board's or senior managements' private discussions, it seems to me that one or more of the following may be reasons why Immelt has suddenly come clean that GE needs a "greater fool" to buy NBC/Universal, and that fool is Brian Roberts.
First, according to the Wall Street Journal articles about the GE media unit, NBC's network operations are finally, inexorably sliding in profitability terms. While the company doesn't break out results in any more detail than the major business units, somewhere down in the depths of the NBC/Universal unit is, we are told, a declining network income statement. With each passing month/year, these properties become bigger drags on GE profit growth and total return.
Next is the Universal studio property. This morning's Journal announced that the studio co-heads are being shot and tossed out. Apparently, this unit, too, has been suffering from poor performance. Taking the network and movie studio together, I find myself recalling an Immelt remark about how much fun it was sitting in meetings to decide on production slates for both units.
Guess Jeff's touch isn't so good. And other executives will pay the price.
Then we come to NBC's cable properties. The ones with which we are well-acquainted, CNBC and MSNBC, are fairly small in the larger cable world. CNBC may be a the premier business cable channel, but it's woefully small next to general cable news networks like Fox or CNN.
However, the company also owns Oxygen, SyFy and USA Network, in addition to which it recently bought The Weather Channel. However, this collection of entertainment channels isn't going to carry the underperforming assets of the remainder of the entire NBC/Universal business group.
So, just in terms of the arithmetic of assets, revenues and profits, GE's media group is finally beyond a tipping point in its effect on GE's overall performance.
Beyond financial performance, there's the issue of the media unit's growing prominence as a lapdog for the current administration. There's been much written about NBC's and related properties' leftward political tilt. It could be that Immelt and his minions are beginning to realize that it's becoming riskier, given the actions of the current administration, to be seen as apologizing and cheerleading for it.
There is also growing awareness that GE stands to benefit financially from a government-run health care system and the crackdown on CO2 emissions and greenhouse gases. This bargain with the devil in Washington may be just a touch too cozy when the company also owns a collection of media properties which trumpet those government programs.
Simply put, it borders on GE churning out propaganda for the government, in return for favored treatment in various new programs. That makes the company a target for lots of criticism.
My next point is one that, ideally, would be a subject on my companion political blog. But I feel it's necessary to mention it here, and will do so as non-partisanly as possible.
If Immelt and his board feel that current legislative difficulties are likely to increase the chances that this will be a one-term administration, then the risks of betting everything on Washington's initiatives, and broadcasting them, too, literally, becomes higher.
If GE didn't own a media business, it would avoid and evade quite a bit of criticism for conflicts of interest. And, later, could duck a lot of flak for having been tailoring news and opinion to please Washington. Being seen as the media stooge for a failed administration might add unwanted pressure to the already long-underperforming conglomerate.
Then there's the embarrassment of GE's having to have taken government funding handouts to stabilize its over-leveraged, ailing finance unit. It was a pretty bitter pill to swallow for Immelt to have to rely on federal help to avoid a serious funding crisis of his own.
How can a company with the federal life support needle in its arm appear to run an objective, credible media group? It can't.
This, too, might now be seen as a real point of vulnerability moving forward. Thus, another reason to dump the media businesses ASAP.
Finally, there's the old adage, "strike while the iron is hot."
Just when the financials and, perhaps, political winds are beginning to blow ill for GE's media business, someone came along with an interest in relieving the company of this headache.
If GE can successfully get Brian Roberts to buy out Viviendi's interest in the media group, and then take it off GE's balance sheet, leaving the Connecticut-based conglomerate with a minority interest, it will have managed to unload a problem child before the value in it really craters.
One trend that is afflicting both GE's networks, and cable properties, as well as Roberts' cable business, is the move by many consumers to direct viewing of entertainment and other video content on the internet, rather than through intermediaries such as cable channels.
Roberts thinks he can scoop up enough content to be a key player in even internet-based content, just in case his distribution pipes really do begin to empty.
Whether this makes sense would be the subject of another post focused on Comcast. For right now, it's enough to note that Robert believes in this strategy.
There's nobody else on the horizon capable of taking NBC/Universal off GE's hands like this. TimeWarner is so messed up it couldn't possibly consider it. And, anyway, even Bewkes might be wary of having so many old network properties dumped on his balance sheet. TimeWarner seems to be moving out of content, at least on the print side. It's far from clear it would suddenly try to move into video content, but not in a gigantic way.
No, Brian Roberts is probably the last, best hope for GE, short of an outright spin-off of the media group. Which, by itself, is not a bad idea. And one I've advocated for over two years.
Having now broached the notion that it should jettison its media businesses, it may be hard for GE to avoid the spin-off route, if the Comcast talks fall through.
Of course, deep in the background of all this negotiating is the unspoken but implicit judgement that Jack Welch probably messed up in buying NBC to begin with. If it was such a great, strategic move, why is it being uncoupled now?
In fact, you could argue that the media group, as a standalone unit, might have been more nimble, savvy, and successful at doing what was necessary to enhance performance long ago. But, as part of the larger GE conglomerate, it was hamstrung by a corporate parent's oversight, bureaucracy, and funding.
But, now, there are a legion of reasons for GE to do something to shed the businesses. And no time like the present. Because, frankly, the present is still way too late for this move.
Perhaps my most succinct piece on the pointlessness of GE's current incarnation was this May, 2007 post. In it, I noted,
"Simply put, corporate diversification for cash flow smoothing has been a discredited management approach for creating consistently superior total returns for some time. My own proprietary research, which drives my equity portfolio selection of consistently superior large-cap companies, confirms this. Back some thirty or forty years ago, when trading equities was expensive and information and innovation were in shorter supply, it may have made sense for investors to hold shares of conglomerates. And, in the day, they existed- Gulf&Western, ITT, and Litton, to name just a few. But they are gone now. ITT still exists, but in nothing like the shape it had under Harold Geneen.
Today's large firms are usually focused on a particular product/market. Diversified conglomerates are pretty much a thing of the past. Mediocre analysts and fund managers might confuse large focused global firms, such as Intel, Cisco, or ExxonMobil, with yesteryear's broadly diversified giants. You should not. I don't think investors do, either. That's why GE's stock is in suspended animation. Everyone can diversify more cheaply today than they can by paying an enormous tax on operating earnings of GE's business units in order to keep them under one administrative regime.
What's ironic is how everyone seems to have forgotten GE's heritage of being subjected to wrenching change with each new CEO of the prior forty years, except for Immelt. He's the only one not to have actually made a big change in the firm, and it has stalled."
I've had a couple of conversations with business colleagues about GE's newly-disclosed decision that it's time to unload the media businesses. While I am not, of course, privy to the board's or senior managements' private discussions, it seems to me that one or more of the following may be reasons why Immelt has suddenly come clean that GE needs a "greater fool" to buy NBC/Universal, and that fool is Brian Roberts.
First, according to the Wall Street Journal articles about the GE media unit, NBC's network operations are finally, inexorably sliding in profitability terms. While the company doesn't break out results in any more detail than the major business units, somewhere down in the depths of the NBC/Universal unit is, we are told, a declining network income statement. With each passing month/year, these properties become bigger drags on GE profit growth and total return.
Next is the Universal studio property. This morning's Journal announced that the studio co-heads are being shot and tossed out. Apparently, this unit, too, has been suffering from poor performance. Taking the network and movie studio together, I find myself recalling an Immelt remark about how much fun it was sitting in meetings to decide on production slates for both units.
Guess Jeff's touch isn't so good. And other executives will pay the price.
Then we come to NBC's cable properties. The ones with which we are well-acquainted, CNBC and MSNBC, are fairly small in the larger cable world. CNBC may be a the premier business cable channel, but it's woefully small next to general cable news networks like Fox or CNN.
However, the company also owns Oxygen, SyFy and USA Network, in addition to which it recently bought The Weather Channel. However, this collection of entertainment channels isn't going to carry the underperforming assets of the remainder of the entire NBC/Universal business group.
So, just in terms of the arithmetic of assets, revenues and profits, GE's media group is finally beyond a tipping point in its effect on GE's overall performance.
Beyond financial performance, there's the issue of the media unit's growing prominence as a lapdog for the current administration. There's been much written about NBC's and related properties' leftward political tilt. It could be that Immelt and his minions are beginning to realize that it's becoming riskier, given the actions of the current administration, to be seen as apologizing and cheerleading for it.
There is also growing awareness that GE stands to benefit financially from a government-run health care system and the crackdown on CO2 emissions and greenhouse gases. This bargain with the devil in Washington may be just a touch too cozy when the company also owns a collection of media properties which trumpet those government programs.
Simply put, it borders on GE churning out propaganda for the government, in return for favored treatment in various new programs. That makes the company a target for lots of criticism.
My next point is one that, ideally, would be a subject on my companion political blog. But I feel it's necessary to mention it here, and will do so as non-partisanly as possible.
If Immelt and his board feel that current legislative difficulties are likely to increase the chances that this will be a one-term administration, then the risks of betting everything on Washington's initiatives, and broadcasting them, too, literally, becomes higher.
If GE didn't own a media business, it would avoid and evade quite a bit of criticism for conflicts of interest. And, later, could duck a lot of flak for having been tailoring news and opinion to please Washington. Being seen as the media stooge for a failed administration might add unwanted pressure to the already long-underperforming conglomerate.
Then there's the embarrassment of GE's having to have taken government funding handouts to stabilize its over-leveraged, ailing finance unit. It was a pretty bitter pill to swallow for Immelt to have to rely on federal help to avoid a serious funding crisis of his own.
How can a company with the federal life support needle in its arm appear to run an objective, credible media group? It can't.
This, too, might now be seen as a real point of vulnerability moving forward. Thus, another reason to dump the media businesses ASAP.
Finally, there's the old adage, "strike while the iron is hot."
Just when the financials and, perhaps, political winds are beginning to blow ill for GE's media business, someone came along with an interest in relieving the company of this headache.
If GE can successfully get Brian Roberts to buy out Viviendi's interest in the media group, and then take it off GE's balance sheet, leaving the Connecticut-based conglomerate with a minority interest, it will have managed to unload a problem child before the value in it really craters.
One trend that is afflicting both GE's networks, and cable properties, as well as Roberts' cable business, is the move by many consumers to direct viewing of entertainment and other video content on the internet, rather than through intermediaries such as cable channels.
Roberts thinks he can scoop up enough content to be a key player in even internet-based content, just in case his distribution pipes really do begin to empty.
Whether this makes sense would be the subject of another post focused on Comcast. For right now, it's enough to note that Robert believes in this strategy.
There's nobody else on the horizon capable of taking NBC/Universal off GE's hands like this. TimeWarner is so messed up it couldn't possibly consider it. And, anyway, even Bewkes might be wary of having so many old network properties dumped on his balance sheet. TimeWarner seems to be moving out of content, at least on the print side. It's far from clear it would suddenly try to move into video content, but not in a gigantic way.
No, Brian Roberts is probably the last, best hope for GE, short of an outright spin-off of the media group. Which, by itself, is not a bad idea. And one I've advocated for over two years.
Having now broached the notion that it should jettison its media businesses, it may be hard for GE to avoid the spin-off route, if the Comcast talks fall through.
Of course, deep in the background of all this negotiating is the unspoken but implicit judgement that Jack Welch probably messed up in buying NBC to begin with. If it was such a great, strategic move, why is it being uncoupled now?
In fact, you could argue that the media group, as a standalone unit, might have been more nimble, savvy, and successful at doing what was necessary to enhance performance long ago. But, as part of the larger GE conglomerate, it was hamstrung by a corporate parent's oversight, bureaucracy, and funding.
But, now, there are a legion of reasons for GE to do something to shed the businesses. And no time like the present. Because, frankly, the present is still way too late for this move.
Monday, October 05, 2009
An Important Detail On Unemployment Measures
Last week on CNBC there was a fascinating discussion by an economist on the mechanics of unemployment rate measurement.
I can't recall who was speaking, but his details called to mind similar comments by another economist last year on the network. The difference was, this time, the guest linked it to the allegation that rising unemployment lags an economic recovery.
The specific detail is this. When employment is surveyed, it's by telephone. The two key questions asked are:
1. Are you employed?
2. Are you looking for work?
The response to the first is pretty simple. If you answer "no," then, at that point in the survey, you are unemployed.
However, the second question is asked if the answer to the first was "no." If you answer "no" to this question, you suddenly become not unemployed, but simply not counted as either employed or unemployed. That's because if you say are not looking for work, you effectively reduce the denominator of people looking for work who are either working, or not.
From a purely arithmetic viewpoint, you can understand this logic. However, it has, as the CNBC guest noted, perverse consequences on the stated US unemployment rate.
For example, he said, during many months of no expansion whatsoever, people simply stop spending time and money looking for a job. Thus, by the survey's standards, they are not unemployed.
Then, one month, say, last month, the person hears of hiring activity somewhere in the economy, and decides to once again seek employment. The monthly phone survey now finds him "unemployed," because he's not working, but looking for work.
The guest pointed out that, in reality, nothing changed about the person's employment circumstance. What changed is the survey's treatment of this not-working person.
Because behavior like this tends to occur later in a recession, as some hiring begins to take place, the measured unemployment rate thus rises.
And that is why it appears that continued rising unemployment lags a recovery. It's an statistical measurement artifact, not a real phenomenon at the basic level of people who are, or are not employed.
Not only does this explain why unemployment appears to lag economic recoveries. It also sheds light into the probable underestimation of unemployment throughout a recession.
With the current unemployment rate standing at 9.8%, this suggests that you can bet the real rate of unemployment topped 10% a while ago. Perhaps in mid-summer. Nobody knows for sure.
Thanks to this pollution of the unemployment measure by removing those who once sought work, then did not, then did, again, what we have is consistent measure which we know is wrong.
Wouldn't it be better for the survey to be modified to track whether the respondent was looking for work, if not now, some months ago? Or ask how many months it has been since they last actively sought work?
Then several measurements of unemployment could be provided, with varying denominators, according to what one chose to measure.
As it is now, a supposedly "hard" number rests, in fact, on psychological influences upon the unemployed as to whether they will say they are actively seeking work.
I can't recall who was speaking, but his details called to mind similar comments by another economist last year on the network. The difference was, this time, the guest linked it to the allegation that rising unemployment lags an economic recovery.
The specific detail is this. When employment is surveyed, it's by telephone. The two key questions asked are:
1. Are you employed?
2. Are you looking for work?
The response to the first is pretty simple. If you answer "no," then, at that point in the survey, you are unemployed.
However, the second question is asked if the answer to the first was "no." If you answer "no" to this question, you suddenly become not unemployed, but simply not counted as either employed or unemployed. That's because if you say are not looking for work, you effectively reduce the denominator of people looking for work who are either working, or not.
From a purely arithmetic viewpoint, you can understand this logic. However, it has, as the CNBC guest noted, perverse consequences on the stated US unemployment rate.
For example, he said, during many months of no expansion whatsoever, people simply stop spending time and money looking for a job. Thus, by the survey's standards, they are not unemployed.
Then, one month, say, last month, the person hears of hiring activity somewhere in the economy, and decides to once again seek employment. The monthly phone survey now finds him "unemployed," because he's not working, but looking for work.
The guest pointed out that, in reality, nothing changed about the person's employment circumstance. What changed is the survey's treatment of this not-working person.
Because behavior like this tends to occur later in a recession, as some hiring begins to take place, the measured unemployment rate thus rises.
And that is why it appears that continued rising unemployment lags a recovery. It's an statistical measurement artifact, not a real phenomenon at the basic level of people who are, or are not employed.
Not only does this explain why unemployment appears to lag economic recoveries. It also sheds light into the probable underestimation of unemployment throughout a recession.
With the current unemployment rate standing at 9.8%, this suggests that you can bet the real rate of unemployment topped 10% a while ago. Perhaps in mid-summer. Nobody knows for sure.
Thanks to this pollution of the unemployment measure by removing those who once sought work, then did not, then did, again, what we have is consistent measure which we know is wrong.
Wouldn't it be better for the survey to be modified to track whether the respondent was looking for work, if not now, some months ago? Or ask how many months it has been since they last actively sought work?
Then several measurements of unemployment could be provided, with varying denominators, according to what one chose to measure.
As it is now, a supposedly "hard" number rests, in fact, on psychological influences upon the unemployed as to whether they will say they are actively seeking work.
Saturday, October 03, 2009
GE Negotiates To Sell Media Unit to Comcast
Color me stunned at the recent news that GE is actually considering divesting itself of its ill-fitting, value-destroying media unit.
However, I've been more stunned by the apparent inability by many pundits and analysts to comprehend why this is such a no-brainer for GE.
For example, on Friday morning, CNBC's David Faber sputtered as he groped for an explanation as to why GE CEO Jeff Immelt is now consenting to that which he has refused for so long- the spin-off of the firm's media properties.
I've written countless posts, found under the "GE" label, about why this conglomerate no longer has a reason to exist. How all 5 or 6 major businesses should be standalones. How shareholders are being ripped off by Immelt and the board, forced to pay a corporate overhead tax for people and functions which add no value to GE's owners, but line the pockets of Immelt and his staff.
Apparently, GE's senior management finally came to view the NBC network's accelerating decline with alarm. Add to that the dismal MSNBC and uneven Universal Studios performances, the minority ownership by Vivendi, and the whole thing probably became a headache best jettisoned while it still has some value.
Like so much else that GE owns, e.g., the credit card and other finance units Immelt tried, belatedly, to unload during last year's credit crisis, the best time to have sold it was years ago.
Now, it's probably going to have to settle for a spin-off of some sort.
Separately, there is the question of just what Comcast thinks it is doing. Brian Roberts is going all in on content as so much entertainment moves to web-based sources. And, again, as I have written in prior posts, owning both media distribution pipes and content has never been a winning hand.
But that's another post.
For now, I'm happy to see that time and fortune have finally eroded GE's objections to the inevitable, and the conglomerate is beginning to be split asunder.
I wonder which GE unit will be teed up for separation next?
However, I've been more stunned by the apparent inability by many pundits and analysts to comprehend why this is such a no-brainer for GE.
For example, on Friday morning, CNBC's David Faber sputtered as he groped for an explanation as to why GE CEO Jeff Immelt is now consenting to that which he has refused for so long- the spin-off of the firm's media properties.
I've written countless posts, found under the "GE" label, about why this conglomerate no longer has a reason to exist. How all 5 or 6 major businesses should be standalones. How shareholders are being ripped off by Immelt and the board, forced to pay a corporate overhead tax for people and functions which add no value to GE's owners, but line the pockets of Immelt and his staff.
Apparently, GE's senior management finally came to view the NBC network's accelerating decline with alarm. Add to that the dismal MSNBC and uneven Universal Studios performances, the minority ownership by Vivendi, and the whole thing probably became a headache best jettisoned while it still has some value.
Like so much else that GE owns, e.g., the credit card and other finance units Immelt tried, belatedly, to unload during last year's credit crisis, the best time to have sold it was years ago.
Now, it's probably going to have to settle for a spin-off of some sort.
Separately, there is the question of just what Comcast thinks it is doing. Brian Roberts is going all in on content as so much entertainment moves to web-based sources. And, again, as I have written in prior posts, owning both media distribution pipes and content has never been a winning hand.
But that's another post.
For now, I'm happy to see that time and fortune have finally eroded GE's objections to the inevitable, and the conglomerate is beginning to be split asunder.
I wonder which GE unit will be teed up for separation next?
Friday, October 02, 2009
Vaccines: The New Pharma Strategy
Tuesday's Wall Street Journal featured an article that confirms that creativity is still alive in the pharmaceutical sector.
Faced with an impending US government takeover of health care, drug makers are focusing on vaccines.
It's a very logical move. If you're going to research, produce and market drugs, why settle for those, the value of which can be debated, because they contribute to easing disease.
Vaccines are a much more binary sort of thing. It's an all or none proposition, and, for certain at-risk groups, there's no alternative.
If the drugs are marketed from outside the US, there's a much better chance these companies can maintain profit margins and price levels on vaccines than on conventional drug products.
Even with government action threatening most of the workings of the pharmaceutical sector, it's good to see that they are still thinking ahead and targeting the most profitable areas of their markets. Those with the highest price inelasticities.
If they didn't, you can forget even seeing vaccines like these appearing to aid consumers who will be at risk.
Faced with an impending US government takeover of health care, drug makers are focusing on vaccines.
It's a very logical move. If you're going to research, produce and market drugs, why settle for those, the value of which can be debated, because they contribute to easing disease.
Vaccines are a much more binary sort of thing. It's an all or none proposition, and, for certain at-risk groups, there's no alternative.
If the drugs are marketed from outside the US, there's a much better chance these companies can maintain profit margins and price levels on vaccines than on conventional drug products.
Even with government action threatening most of the workings of the pharmaceutical sector, it's good to see that they are still thinking ahead and targeting the most profitable areas of their markets. Those with the highest price inelasticities.
If they didn't, you can forget even seeing vaccines like these appearing to aid consumers who will be at risk.
Finally- A Realistic Review of Jamie Dimon's Tenure At Chase
About two years ago, I wrote this post, amidst a business media groundswell of adoration over Jamie Dimon's first three years at Chase. I ended the post with this passage,
"Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either.
It would take at least four years of consistently strong revenue growth at Chase, with corresponding NIAT growth, before I would believe that Dimon is capable of leading a financial services conglomerate to consistently superior performance, either fundamentally or technically."
Of course, at that time, nobody foresaw a shrinking 2008. As a matter of fact, Chase's revenues and profits did shrink that year. But these things are relative, so I won't be unfair and criticize Dimon for not achieving the impossible last year.
However, a quick look at the nearby price chart for Chase and the S&P500 Index for the past five years shows that the bank has not been significantly better than the index. And to the extent it's marginally outperformed after five years, which is now Dimon's tenure as CEO, it clearly underperformed for 2007 & 2008.
So, simply by looking at equity prices, you can see Dimon hardly merited all the accolades.
Now, we have a "Heard On the Street" column in yesterday's Wall Street Journal calling attention to the reality of Chase's performance. It read,
"Much has happened over the past two years that will benefit J.P. Morgan's earnings. However, going into the crash, the bank showed lackluster returns in several areas.
Once rivals reassert themselves, J.P. Morgan mightn't look so impressive.
Even so, investors need to track closely how the once-mediocre investment bank and once-patchy retail-banking franchise are doing."
I could not agree more.
As the nearby price chart, with BofA, Wells Fargo, Citigroup and Goldman added, shows, Chase still operates in the shadow of the newly-baptised commercial bank, Goldman Sachs.
Leaving aside the hapless Citi and BofA, Chase's one-time international, US-based money center bank competitors, only Wells and Goldman remain as viable, healthy rivals.
Wells Fargo's performance actually apes that of Chase. But the real class act in a badly-hit sector is still Goldman Sachs. Over the five-year period, Goldman rose further and fell less-far than any of the other commercial banks. Granted, Goldman hasn't even been a commercial bank for more than a year.
Never the less, the former investment bank remains poised to outperform as the sector is revived by somewhat healthier credit markets. Meanwhile, Chase and Wells Fargo will continue to grapple with the typical large commercial bank woes of credit card and mortgage delinquencies and defaults.
It's no surprise to me, and other friends who were once Chase executives, that the bank fared well in bad times. Simply put, it's been a laggard ever since David Rockefeller's attempts to diversify the bank in the 1970s and '80s were rebuffed. Few now remember David's attempt to buy Dial, a consumer loan business.
Since then, Chase has been late to every lending party, and sustained a few self-inflicted wounds, as well. It's very ineptness at financial innovation is what kept Dimon from racing into the mortgage-backed securities party like Citigroup.
As the Journal column astutely notes, Chase has never been a banking sector performance leader in healthy, growth-oriented times. At best, it's been hurt less badly in downturns.
I don't think Dimon's slash-and-burn style has changed that. Sure, he scooped up a few other banks which the markets and FDIC obligingly set before him. Having not blown out a huge hole in Chase's own balance sheet with ill-advised SIVs and such, Dimon had some powder left to take on the branches and deposits of WaMu. Bear Stearns was basically a gift from the federal government.
It remains to be seen, once more, whether Dimon is capable of besting the sector's other competitors, and the S&P, over a longish term in healthy markets.
Thursday, October 01, 2009
Ken Lewis Resigns!
It's official! Ken Lewis announced yesterday that he will resign...err.....retire.....at the end of this year.
This has touched off a huge debate all morning long on CNBC regarding Lewis' legacy and merit. Due to co-anchors Becky Quick and Joe Kernen being absent, this unfortunately left resident idiot Steve Liesman free to run at the mouth about more things about which he knows far too little.
But perhaps the best exchange was very early in the morning, before 7AM, when longtime bank analyst Dick Bove fenced with another banking sector pundit over Lewis' merits.
Bove, ever the apologist and cheerleader for all things banking, championed Lewis as the architect of the current BofA.
His opponent, a large BofA institutional shareholder, more correctly noted that former NationsBank CEO Hugh McColl was primarily responsible for assembling the bulk of BofA, including the merger with that formerly California-based bank in 1988.
Bove claimed the shareholder was factually in error, but, from what I heard, Bove was the one who had his facts wrong.
The nearby price chart for BofA, Chase, Citigroup and the S&P500 Index provides some assistance in assessing Lewis' performance.What's interesting to me is that, over the 20+ year period shown, from 1985-present, BofA has rarely consistently outperformed the Index. In fact, as I expected, only Citi, briefly, actually outperformed on a consistent basis.
By the time Lewis took over BofA in 2001, the bank had actually underperformed the S&P since 1985. The price trajectory under Lewis was pretty flat, if slightly upward, mostly mirroring the S&P, until, of course, last year.
Certainly, nothing in BofA's share price performance suggests Lewis did an exemplary job as CEO, Bove's sputtering to the contrary.
The apparent hot topic of discussion regarding Lewis' departure is whether the board conspired to bring it about. If they didn't, why not?
Lewis' murky behavior in last year's purchase of Merrill Lynch, for which he overpaid with his shareholders' money, then failed to inform them of material facets of the deal, would be sufficient to have dismissed him. It doesn't help that Lewis has gone on to tell different things to different audiences regarding who told him to do what during that deal.
If Lewis had led BofA to a clearly consistently superior total return performance during his eight years at the helm of the bank, this debate might be understandable. But he didn't.
Xerox Apes Dell & Bids On A Service Provider
Earlier this week, a big business story was Xerox's bid to buy services provider Affiliated Services Corp.
"The mergers and acquisitions race is warming up. Xerox, the world's biggest producer of high-speed printers, said Monday it is bidding $6.4 billion U.S. for Affiliated Computer Services Inc. in an effort to expand into document services.
Xerox values ACS at $63.11 a share or a premium of 33 per cent over Friday's market close. "It's a game change for Xerox and the deal will provide stronger revenue and earnings growth," said Xerox's CEO Ursula Burns. It will triple its services revenue to $10 billion U.S. annually, she added,
ACS is the biggest supplier of managed services to the U.S. government and as an outsourcer operates in the telecoms, healthcare, education and retailing sectors. The merger offers annual synergies up to $400 million U.S. for the first three years.
Xerox offers $18.60 cash and 4.935 Xerox shares for each ACS share. The deal closes early in 2010 and CEO Lynn Blodgett will continue to run ACS."
Xerox currently has about $1.2B in cash on its balance sheet. By my arithmetic, they are offering about $1.8B in cash, the balance in Xerox equity.
When I read this story, I immediately thought of the recent Dell acquisition, at an outrageous premium north of 50%, of Perot Systems. I wrote in that post,
"Personally, I don't see it that way. Instead, Michael Dell, like so many other CEOs, can't let go. He should just sell or merge Dell to create a larger PC manufacturer. Let his shareholders buy a pure systems integrator play, or HP, if that's what they desire.
Michael Dell is using his shareholder's money to continue having a company to run. How he is going to make Perot something it can't be on its own should worry Dell shareholders. Perot could have borrowed money, were its business opportunities sufficiently attractive. If Michael Dell better knows how to run a systems integrator than do the senior management of Perot Systems, Dell could have grown its own unit, for much less money.
There's nothing about this deal that makes sense, except prolonging Michael Dell's personal joyride running a Fortune 500 company.
Much as I suggested for Kodak's shareholders, Dell's should be bringing a lawsuit over this egregious use of their money. "
I think Ursula Burns is doing the same thing. Mind you, as I wrote here, in May, I'm not exactly wowed by her to begin with. I wrote,
"Ann Mulcahy, CEO of Xerox, is retiring. Replacing her will be Ursula Burns. Who cares?
It doesn't take a genius to see that a company that mainly focuses on print technology in an increasingly virtual, online technology world is probably not going to become a consistently superior performer again. If it did, it would be a true exception.
As the price chart shows, Xerox hasn't had a sustained period of market outperformance in the period from 1978 to the present. This is a company whose 'go-go' years were the 1960s. That's 40 years ago.
When I think of Xerox, I think of the company that punted away truly promising technologies in its once-famed Palo Alto Research Center. You know, those ideas which Apple's Steve Jobs incorporated into his firm's breakthrough personal computers.
Why anyone would pay special attention to a changing of stewards of a once-dynamic, now merely-average, backwater technology firm, is unclear to me."
At least Burns isn't paying over 50% too much for ACS. It's only about 33% over current market value. Yikes!
You cannot tell me that Xerox shareholders would not have been better off to have received a $1B cash distribution, borrowed or used other funds, and bought ACS shares at the market.
As I asked in the Dell case, just what are Burns and Xerox going to do for ACS that it hasn't or can't do for itself?
As the nearby 5-year price chart for Xerox, ACS and the S&P500Index shows, the acquired firm has done a much better job of at least matching the S&P than Xerox has.
Other than cash, what can Burns hope to provide ACS? Schumpeterian dynamics have more or less shut the door on Xerox's days of consistent market-outperformance. So Burns' answer is to squander shareholder value on a better-run company, at a huge premium?
Looking at the past two years' performances of the same three- Xerox, ACS and the S&P500- the next chart illustrates that ACS managed to ride out the recent economic turbulence surprisingly well. Much better than the management of Xerox.
But how does this justify Burns throwing her shareholders' money at ACS? On this basis alone, she should be fired by the board.
After all, look at this second price chart. On Monday, the day the deal was announced, Xerox's price quickly lost about 20%, ending Tuesday still down 15%. ACS mirrored this in picking up similar percentages, indicating investors viewed the deal much as I do- a mistake for Xerox, a bonanza for ACS.
Whether ACS is a growth firm, and better managed than Xerox, is beside the point. There's nothing special that the two firms couldn't do via a marketing agreement, without the expensive premium. This deal is simply a way for Burns to guarantee herself a job by buying a better firm with her shareholders' money. But it won't make Xerox's core businesses any better, for the same reasons Perot Systems cannot magically stuff Dell products into each of its customer engagements. That is, if Dell wasn't a good alternative before, it's no better just because they are owned by the same firm. That's true for Xerox and ACS, as well.
No, this is yet another pointless acquisition of a decent company by a corporate has-been.
Wednesday, September 30, 2009
About Extractive Industries: Peter Maass' Book "Crude World"
Last Wednesday's Wall Street Journal had a fascinating review of "Crude World," a book about the oil industry by Peter Maass.
Robert D. Kaplan, the reviewer, provides a very clear sense of what is newly observed in Maass' book. That is, as Kaplan writes,
"Oil, corrupts, Mr. Maass says, because it is an "extractive" industry. The computer business and other industries actually design and produce something, but oil is simply taken out of the ground. Thus power lies in the hands of the king, dictator or prime minister who controls the real estate and with whom all sorts of unsavory deals can be struck. Extractive industries "do most of their business in compromise-inducing countries," Mr. Maass explains. "The problem is not that extractive industries have lower principles than other industries. The problem is that they must have better principles"- something that shareholders do not necessarily encourage. Because the number of oil fields on the planet is finite, and the oil in many of them is difficult to extract, the industry is governed by a zero-sum and aggressive realism of the bleakest sort." "
For me, it's a very illuminating statement of fact that I confess to not having understood prior to reading Mr. Kaplan's review.
Elsewhere in his review, Kaplan relates Maass' observations that "Oil, he seems to say, exaggerates the worst human tendencies." By that, he means the rulers of oil-rich countries confiscate the wealth for themselves, leaving most of their countries' citizens to starve. As an example, Kaplan notes that Nigeria has earned $400 billion from oil, but 9 out of 10 Nigerians live on "less than $2 a day, and one out of five children dies before his fifth birthday."
It certainly explains why oil multi-nationals come under such heavy fire for ethics issues and producing wealth that somehow never benefits the entire countries from which they extract the oil. The same, of course, seems to go for basic mining companies, as well.
This is a fascinating aspect of the structure for extractive industries that I hadn't really grasped before. No matter what the scale of competitors, and it usually evolves to few and massive, the behaviors always seem to end up the same. And now Mr. Maass has explained why.
Robert D. Kaplan, the reviewer, provides a very clear sense of what is newly observed in Maass' book. That is, as Kaplan writes,
"Oil, corrupts, Mr. Maass says, because it is an "extractive" industry. The computer business and other industries actually design and produce something, but oil is simply taken out of the ground. Thus power lies in the hands of the king, dictator or prime minister who controls the real estate and with whom all sorts of unsavory deals can be struck. Extractive industries "do most of their business in compromise-inducing countries," Mr. Maass explains. "The problem is not that extractive industries have lower principles than other industries. The problem is that they must have better principles"- something that shareholders do not necessarily encourage. Because the number of oil fields on the planet is finite, and the oil in many of them is difficult to extract, the industry is governed by a zero-sum and aggressive realism of the bleakest sort." "
For me, it's a very illuminating statement of fact that I confess to not having understood prior to reading Mr. Kaplan's review.
Elsewhere in his review, Kaplan relates Maass' observations that "Oil, he seems to say, exaggerates the worst human tendencies." By that, he means the rulers of oil-rich countries confiscate the wealth for themselves, leaving most of their countries' citizens to starve. As an example, Kaplan notes that Nigeria has earned $400 billion from oil, but 9 out of 10 Nigerians live on "less than $2 a day, and one out of five children dies before his fifth birthday."
It certainly explains why oil multi-nationals come under such heavy fire for ethics issues and producing wealth that somehow never benefits the entire countries from which they extract the oil. The same, of course, seems to go for basic mining companies, as well.
This is a fascinating aspect of the structure for extractive industries that I hadn't really grasped before. No matter what the scale of competitors, and it usually evolves to few and massive, the behaviors always seem to end up the same. And now Mr. Maass has explained why.
Tuesday, September 29, 2009
3Q Profit Expectations & The Economy
Yesterday's Wall Street Journal's Money & Investing section featured a lead article concerning third quarter performances of US companies, entitled "Profits Poised to Surprise Again."
To my own surprise, the piece suggested an analysts' convergence on predictions that third quarter profits will beat expectations. Of course, there are many assumptions tied to that statement.
First, everyone is conveniently basing this anticipated performance on long-ago expectations. First quarter profits, though negative, were couched as being not so bad as expected, thus the equity rally beginning in March. Same thing with the second quarter profits.
Second, everyone accepts that these profits to come are going to be less than last year's in the quarter. But, again, the focus is on expectations. Earlier expectations.
Never mind that these analysts probably raised their true expectations of this quarter by, say, May of this year.
Then we have a fairly narrow focus on profits, although we just saw last quarter's performance come in on flat to lower revenues. On this point, there is a sort of vague punt to various pundits claiming and end to the recession, therefore, sales must go up. QED.
Even so, sales aren't expected to top last year's third quarter. So one analyst is cited as advising clients to go long in US equities until mid-2010, then batten down the hatches for an equity market decline.
All of which leaves me seeing this as nothing so much as a giant recommendation to time the market. That seems to me a foolish thing to suggest to retail investors.
What disturbed me about this article was its sunny outlook on relative performance of this past quarter's equities, rather their absolute performance from a long term perspective.
It very much bears on and is part of the question as to whether the US economy is in a recovery, or simply no longer collapsing as fast as it was a 12-18 months ago. Or whether, if not collapsing anymore, it is really growing at any significant rate. And on what basis- profits, or revenues?
Given most analysts' historic track record at being wrong on earnings estimates, and not really focusing on revenues much at all, I'm less than excited by this Journal piece. I think it shows that too many people continue to observe too narrowly and for too short a term, leaving the equity markets easily subject to rapid reversals of sentiment when the larger, longer term realities differ from one quarter's profits.
To my own surprise, the piece suggested an analysts' convergence on predictions that third quarter profits will beat expectations. Of course, there are many assumptions tied to that statement.
First, everyone is conveniently basing this anticipated performance on long-ago expectations. First quarter profits, though negative, were couched as being not so bad as expected, thus the equity rally beginning in March. Same thing with the second quarter profits.
Second, everyone accepts that these profits to come are going to be less than last year's in the quarter. But, again, the focus is on expectations. Earlier expectations.
Never mind that these analysts probably raised their true expectations of this quarter by, say, May of this year.
Then we have a fairly narrow focus on profits, although we just saw last quarter's performance come in on flat to lower revenues. On this point, there is a sort of vague punt to various pundits claiming and end to the recession, therefore, sales must go up. QED.
Even so, sales aren't expected to top last year's third quarter. So one analyst is cited as advising clients to go long in US equities until mid-2010, then batten down the hatches for an equity market decline.
All of which leaves me seeing this as nothing so much as a giant recommendation to time the market. That seems to me a foolish thing to suggest to retail investors.
What disturbed me about this article was its sunny outlook on relative performance of this past quarter's equities, rather their absolute performance from a long term perspective.
It very much bears on and is part of the question as to whether the US economy is in a recovery, or simply no longer collapsing as fast as it was a 12-18 months ago. Or whether, if not collapsing anymore, it is really growing at any significant rate. And on what basis- profits, or revenues?
Given most analysts' historic track record at being wrong on earnings estimates, and not really focusing on revenues much at all, I'm less than excited by this Journal piece. I think it shows that too many people continue to observe too narrowly and for too short a term, leaving the equity markets easily subject to rapid reversals of sentiment when the larger, longer term realities differ from one quarter's profits.
Monday, September 28, 2009
Peter Kann's Thoughts On Newspapers
This past weekend's Wall Street Journal carried an extended editorial by the chairman of Dow Jones, part of NewsCorp, Peter Kann. Kann is a longtime Journal man, and his editorial contains so much historical perspective on the sector that it almost qualifies as an in-depth strategy piece.
Pity, really, because that sort of piece is almost nonexistent in today's Journal, post-Murdoch.
But, I digress.
The headline of Kann's article, "Quality Reporting Doesn't Come Cheap," has, as its main purpose, to belatedly lecture all of us on how the demise of newspapers will hurt society, because no other entity reports raw news anymore of similar "quality."
Kann meanders through the past, noting how newspapers were advised by "bright young managers" to give away electronic copies of their print editions. Long story very short, in a decade, print circulation fell disastrously, without an offsetting revenue stream from online sites.
Kann is quick to note that the Wall Street Journal, alone among US newspapers, has always charged for access to its online paper, beyond the day it is published, and ruminates that, perhaps if the NY Times, Washington Post, and a few others, had gone along with this, the entire industry would have followed, and they'd all be in great shape now.
But these passages, near the closing, reveal Kann's emotionally-tilted "analysis,"
"The reason any of this matters has little to do with the plight of newspaper publishers or even with the future of newspapers. The real threat is to the future of news—informative, relevant, reliable news of the wider world around us. And that is disappearing as newspapers, whose reporting staffs still produce most of the news, no longer can afford to do so. As their news budgets and staffs continue to shrink, the key question is what can fill that gap?
Television does not begin to fill it. To the extent broadcast networks ever tried they now have abdicated to so-called cable news channels. These, in turn, now devote most of their resources to covering celebrities, crimes and sundry social trivia and to prime-time programming that pretends to be analysis and informed opinion while mostly offering the spectacle of extremist heads yelling at each other. There are few resources and even less commitment to covering significant news beyond floods and fires.
The Internet is not filling news vacuums either. There are hundreds upon hundreds of online sites and blogs that claim to provide news, but virtually none of them even pretend to pursue the traditional news role of newspapers, which is to invest in professional staffs dispersed around a community and across the country or the globe to cover, analyze, and only then comment on, events. Actually, all they do is comment.
As to all the free online editions of our newspapers, their business model does not begin to cover the cost of significant news reporting. So the online editions with growing audiences—largely cannibalized from print audiences—rely on the poor print editions for almost all the news they give away.
Sadly, there is less and less of that, and the ultimate loser, of course, is the public."
I actually don't agree with Kann's diagnosis of cable news. On national topics, it is more timely and possessing of greater impact than print journalism. As I wrote about a year and a half ago, on the occasion of NewsCorp's purchase of Dow Jones,
"The reality is that print is a dead, bygone medium. The CBS franchise program, 60 Minutes, breaks tons of stories. How? By using television, not print. Do you think for a moment that the same program, as a print medium, could ever have lasted? Not a chance.
What Murdoch understands is that by marrying the Dow Jones assets and brands, particularly The Wall Street Journal, to his existing multimedia empire, he will enable those brands to actually create more value while doing even more investigative journalism.
The Dow Jones board's recent Chair has been trying to goose the company's performance, to little avail. My guess is that most investors understand that the old media pond within which Dow Jones lives is going to overwhelm the effects of any one firm's individual efforts. It's time for a more modern media vehicle to properly invest in and use the Journal's brand franchise.
No, the narrow version of the journalistic independence argument won't work for a publicly held company. Maybe if Ottoway and the Bancrofts wanted to take the firm private. But that's not what they want. They want top dollar and journalistic immunity from any economic realities."
Print media simply can't deliver the same punch that a live cam feeding a cable news channel's programming, then residing on its website, can. Nobody said newspapers can't continue to serve a very local function in society. But in the era of ubiquitous cable news, YouTube, video on cell phones, and the internet, print just can't compete on national news stories. And if it has superior opinion and analytical pieces, then it has value, and product, but it's not news reporting.
Pity, really, because that sort of piece is almost nonexistent in today's Journal, post-Murdoch.
But, I digress.
The headline of Kann's article, "Quality Reporting Doesn't Come Cheap," has, as its main purpose, to belatedly lecture all of us on how the demise of newspapers will hurt society, because no other entity reports raw news anymore of similar "quality."
Kann meanders through the past, noting how newspapers were advised by "bright young managers" to give away electronic copies of their print editions. Long story very short, in a decade, print circulation fell disastrously, without an offsetting revenue stream from online sites.
Kann is quick to note that the Wall Street Journal, alone among US newspapers, has always charged for access to its online paper, beyond the day it is published, and ruminates that, perhaps if the NY Times, Washington Post, and a few others, had gone along with this, the entire industry would have followed, and they'd all be in great shape now.
But these passages, near the closing, reveal Kann's emotionally-tilted "analysis,"
"The reason any of this matters has little to do with the plight of newspaper publishers or even with the future of newspapers. The real threat is to the future of news—informative, relevant, reliable news of the wider world around us. And that is disappearing as newspapers, whose reporting staffs still produce most of the news, no longer can afford to do so. As their news budgets and staffs continue to shrink, the key question is what can fill that gap?
Television does not begin to fill it. To the extent broadcast networks ever tried they now have abdicated to so-called cable news channels. These, in turn, now devote most of their resources to covering celebrities, crimes and sundry social trivia and to prime-time programming that pretends to be analysis and informed opinion while mostly offering the spectacle of extremist heads yelling at each other. There are few resources and even less commitment to covering significant news beyond floods and fires.
The Internet is not filling news vacuums either. There are hundreds upon hundreds of online sites and blogs that claim to provide news, but virtually none of them even pretend to pursue the traditional news role of newspapers, which is to invest in professional staffs dispersed around a community and across the country or the globe to cover, analyze, and only then comment on, events. Actually, all they do is comment.
As to all the free online editions of our newspapers, their business model does not begin to cover the cost of significant news reporting. So the online editions with growing audiences—largely cannibalized from print audiences—rely on the poor print editions for almost all the news they give away.
Sadly, there is less and less of that, and the ultimate loser, of course, is the public."
I actually don't agree with Kann's diagnosis of cable news. On national topics, it is more timely and possessing of greater impact than print journalism. As I wrote about a year and a half ago, on the occasion of NewsCorp's purchase of Dow Jones,
"The reality is that print is a dead, bygone medium. The CBS franchise program, 60 Minutes, breaks tons of stories. How? By using television, not print. Do you think for a moment that the same program, as a print medium, could ever have lasted? Not a chance.
What Murdoch understands is that by marrying the Dow Jones assets and brands, particularly The Wall Street Journal, to his existing multimedia empire, he will enable those brands to actually create more value while doing even more investigative journalism.
The Dow Jones board's recent Chair has been trying to goose the company's performance, to little avail. My guess is that most investors understand that the old media pond within which Dow Jones lives is going to overwhelm the effects of any one firm's individual efforts. It's time for a more modern media vehicle to properly invest in and use the Journal's brand franchise.
No, the narrow version of the journalistic independence argument won't work for a publicly held company. Maybe if Ottoway and the Bancrofts wanted to take the firm private. But that's not what they want. They want top dollar and journalistic immunity from any economic realities."
Print media simply can't deliver the same punch that a live cam feeding a cable news channel's programming, then residing on its website, can. Nobody said newspapers can't continue to serve a very local function in society. But in the era of ubiquitous cable news, YouTube, video on cell phones, and the internet, print just can't compete on national news stories. And if it has superior opinion and analytical pieces, then it has value, and product, but it's not news reporting.
However, earlier in his piece, Kann slipped this little nugget in,
"If publishers were at fault here for chasing ever larger audiences, editors and even reporters all too often were complicit. The list of modern journalistic flaws and failings is long, but surely includes the blurring of traditional lines between news and opinion and news and entertainment, predatory pack journalism, an undue emphasis on conflict rather than context, pessimism and cynicism (as differentiated from appropriate skepticism and criticism), social orthodoxy, elitism, flea-like attention spans, and more. Yes, the traditional newsprint medium was becoming less appealing, but its messages also were becoming less enlightening."
As a business person and strategist, once I read that paragraph, the rest of Kann's editorial became largely moot.
You see, what Kann unwittingly did, with these admissions, is essentially prove that poor management led to print news' downfall. The publishers made bad revenue strategy choices. The editors got carried away slanting the news, dumbing it down, and treating their customers as if they were morons.
Now, they complain that, having gutted their own product of much of its past value, nobody will pay for it.
Well, boo-hoo, Peter. You print guys did it to yourselves, and you got what you deserved. Newspapers are dying for a reason. Their operators lost sight of their strengths, screwed up their strategies, then lay weak and helpless in the face of advancing new technlology- cable news.
By the way, I doubt a Glenn Beck would find a supportive home in print, or have anything like the reach and punch he now has. And, yes, he actually reports news. And then also mixes it with analysis.
But I can't honestly say I believe, as Peter Kann does, that print could in any way rival the impact of well-honed video news and opinion programs now available to the viewing public- for free.
Friday, September 25, 2009
Stop&Shop: A Failure of Customer Service
One of the larger grocery stores in my area is a Super Stop&Shop. I'm uncertain as to the ownership of the chain. It's based in the Boston/Rhode Island area, but I cannot find it as a publicly-listed company.
(Author's note: I have since verified that Stop&Shop is a division of Royal Ahold, the Dutch-based food retailer.)
In recent years, the chain has upgraded stores, adding departments and various services. Recently, it took a giant step to distinguish itself by adding hand-held scanners. This product allows a customer to scan bar codes while shopping, including using custom-printed produce bar codes generated by electronic scales. The result is potentially the quickest possible checkout experience, bar none.
Not only does a customer not have to re-scan each item, but, due to having nothing to scan, s/he may use the express lane. The only significant activity at checkout is paying for the merchandise.
Due to this technology, I had shifted nearly my entire food purchasing activity to Stop&Shop, from a local, smaller chain, Kings. That chain had been owned by British-based Marks&Spencer for years. I'm not sure of its ownership status now, but I believe M&S at least reduced their stake, if they did not succeed in divesting themselves of their entire interest.
The Stop&Shop hand-held scanner is apparently a third-party provided solution, as I learned this summer.
One evening, having successfully sped around the store scanning away, I was checking out in the express lane, when the monitor announced that I "needed help," and suspended checkout. I was the victim of a cart audit.
Understandably, the hand-held scanner system generates "random" audits of shoppers, at which a S&S employee comes over to randomly scan items from the customer's purchases, confirming that each re-scanned item matches an originally-scanned item.
However, this became a problem when I was subjected to this so-called "random" event at least 4 times this summer.
Since the entire purpose of the combination of self-checkout lanes and a hand-held scanner is to deliver a speedy shopping experience to the customer, being stopped for an interaction with a low-paid, low-skilled clerk defeats the entire purpose. A well-designed audit program would balance stopping theft through unscanned items with truly random, or, better, system learning, so that customers who are audited, and not found to be stealing, are rated a lower risk, and subject to fewer random checks over time.
After the third audit this summer, I demanded to see the manager on duty at the time. In a long conversation, I explained that I did effectively all my grocery shopping at that store, because of the self-checkout and hand-held scanners. And that it was difficult for me to believe that I was "randomly" audited 3 times in, at most, as many months. That each audit was, to me, as a customer, a pending accusation of theft.
I told the employee, actually the store's assistant manager, that if I was subjected to one more audit within the next three months, I would stop patronizing his store. I didn't care how he would arrange it, but this was my promise.
Last week, I was stopped again for a cart audit. This time, as I loudly asked if the audit did not mean the store management suspected me of theft, and, when I passed the audit, was I not innocent of said assumption, I demanded to see the on-shift manager. This time, it was the store's manager, and he was standing only a few feet away. With him was the man I recognized, from my earlier conversation, as the store's assistant manager.
That's when the real fun began.
By now, a short line of people were queued up behind me in the express lane. I had a heated conversation with the manager, who tried to excuse the situation by claiming that the system was not under his control. That a third party was managing it.
I retorted that, as a customer, that made no difference to me. I was in a Stop&Shop store, so I had a reasonable expectation that the store's manager was responsible for my treatment. We went on like this for some minutes, with the manager incredibly contending that if I were to contact his corporate management, it would have more impact than his own complaint.
I replied that I had better things to do with my time, and that, if his statement were true, his firm is in more trouble than they probably realize. And that, as promised to the assistant manager, who had not recognized me, I was now returning to Kings to do all of my grocery shopping.
When I tried to check out, after the employee had done the required cart audit, the monitor froze, then came back up blank. The manager was horrified. Because my purchase used the scanner, the hand-held unit was needed to restart the checkout process.
But the audit employee had taken it. She, and it, were nowhere in sight.
I then had the pleasure of an event of which many of us have probably dreamt, but few have done.
I announced loudly that the store's system and management were totally inept, and could not even check out my purchases.
And then, I began to unload my very full canvas shopping bag onto the floor.
Again, clearly and loudly, to the manager, explaining that I did not even want the merchandise I had just selected and tried to buy, I placed various produce items and packaged goods in and around a small hand-basket, then left the store. Again, announcing my next stop- the rival grocery chain store down the street.
This is a store manager's worst nightmare. The cost of reshelving items is pretty high. Basically, with 1% sales margins in grocery stores, it effectively wipes out profit on those items, and then some. Not to mention the produce, which might have to be discarded.
Then there is the visual of a customer dumping items back onto a floor in full view of other customers. It's the ultimate repudiation of a retailer.
Honestly, I'm surprised the manager let me do this, and didn't offer almost anything to prevent it.
Ironically, as I processed what had just happened, with this post in mind, I realized that Stop&Shop's failure in this case was not its use of technology. Or the technology's failure.
No, the real culprit was the store's manager, assistant manager, and staff.
The assistant manager had never taken my name or contact information during our initial conversation in July. I clearly warned of the consequence of my experiencing another cart audit within the next few months.
Had the assistant manager been alert and competent, he would have taken my contact information, and at least begun a communications process that would lead me to believe, and, more importantly, feel that the store's management sympathized with my plight, and was doing something about it.
Even during my second conversation, with the store manager, he, too neglected to take any identification or contact information whatsoever.
Here, he had a disappointed, angry soon-to-be-ex-customer loudly denouncing his store in front of several lines of other customers at the checkout lanes. You'd think he would take the opportunity to exhibit maximal empathy and a show of action calculated to defuse my frustration and demonstrate real concern for his customer.
Instead, he appealed to me to contact his own senior management, though offering no advice as to how to do that, or whom to contact.
If that store manager had taken my contact information, apologized for the occurrence, and promised to 'do something,' he would have kept my business for at least a week or so, and have put on a wonderful show of positive, caring customer service in front of several dozen other customers.
This is, I think, a rather important lesson. Blaming the technology that a firm chooses to provide in its stores for its customers, for a bad shopping experience, is hardly productive or effective.
But almost any bad customer experience can be, at least temporarily, assuaged by genuine attention, collection of the customer's name and contact information, and a promise of imminent contact and communication to remedy the situation.
As I have mulled over this experience for the past week, I become more and more amazed at the lack of training, sophistication and innate instinct for good customer service that was displayed by the store manager of the Stop&Shop. What's sad, of course, is that if this constitutes "leadership" at the store, imagine how inept and ineffective customer service must be among the lower-level employees.
Isn't it ironic that Stop&Shop has invested substantial sums of money to become a leader in allowing very fast shopping trips, with no interaction with the store's staff, only to blunt this potentially important competitive advantage through poor control and oversight, and integration, of the technology with the store's management. And, then, compounding this error with poor customer service.
Customer service really is the first- and last- line of defense for a retailer. It can at least temporarily blunt and offset a poor customer experience with the store. But if this line of defense fails, the retailer is lost.
(Author's note: I have since verified that Stop&Shop is a division of Royal Ahold, the Dutch-based food retailer.)
In recent years, the chain has upgraded stores, adding departments and various services. Recently, it took a giant step to distinguish itself by adding hand-held scanners. This product allows a customer to scan bar codes while shopping, including using custom-printed produce bar codes generated by electronic scales. The result is potentially the quickest possible checkout experience, bar none.
Not only does a customer not have to re-scan each item, but, due to having nothing to scan, s/he may use the express lane. The only significant activity at checkout is paying for the merchandise.
Due to this technology, I had shifted nearly my entire food purchasing activity to Stop&Shop, from a local, smaller chain, Kings. That chain had been owned by British-based Marks&Spencer for years. I'm not sure of its ownership status now, but I believe M&S at least reduced their stake, if they did not succeed in divesting themselves of their entire interest.
The Stop&Shop hand-held scanner is apparently a third-party provided solution, as I learned this summer.
One evening, having successfully sped around the store scanning away, I was checking out in the express lane, when the monitor announced that I "needed help," and suspended checkout. I was the victim of a cart audit.
Understandably, the hand-held scanner system generates "random" audits of shoppers, at which a S&S employee comes over to randomly scan items from the customer's purchases, confirming that each re-scanned item matches an originally-scanned item.
However, this became a problem when I was subjected to this so-called "random" event at least 4 times this summer.
Since the entire purpose of the combination of self-checkout lanes and a hand-held scanner is to deliver a speedy shopping experience to the customer, being stopped for an interaction with a low-paid, low-skilled clerk defeats the entire purpose. A well-designed audit program would balance stopping theft through unscanned items with truly random, or, better, system learning, so that customers who are audited, and not found to be stealing, are rated a lower risk, and subject to fewer random checks over time.
After the third audit this summer, I demanded to see the manager on duty at the time. In a long conversation, I explained that I did effectively all my grocery shopping at that store, because of the self-checkout and hand-held scanners. And that it was difficult for me to believe that I was "randomly" audited 3 times in, at most, as many months. That each audit was, to me, as a customer, a pending accusation of theft.
I told the employee, actually the store's assistant manager, that if I was subjected to one more audit within the next three months, I would stop patronizing his store. I didn't care how he would arrange it, but this was my promise.
Last week, I was stopped again for a cart audit. This time, as I loudly asked if the audit did not mean the store management suspected me of theft, and, when I passed the audit, was I not innocent of said assumption, I demanded to see the on-shift manager. This time, it was the store's manager, and he was standing only a few feet away. With him was the man I recognized, from my earlier conversation, as the store's assistant manager.
That's when the real fun began.
By now, a short line of people were queued up behind me in the express lane. I had a heated conversation with the manager, who tried to excuse the situation by claiming that the system was not under his control. That a third party was managing it.
I retorted that, as a customer, that made no difference to me. I was in a Stop&Shop store, so I had a reasonable expectation that the store's manager was responsible for my treatment. We went on like this for some minutes, with the manager incredibly contending that if I were to contact his corporate management, it would have more impact than his own complaint.
I replied that I had better things to do with my time, and that, if his statement were true, his firm is in more trouble than they probably realize. And that, as promised to the assistant manager, who had not recognized me, I was now returning to Kings to do all of my grocery shopping.
When I tried to check out, after the employee had done the required cart audit, the monitor froze, then came back up blank. The manager was horrified. Because my purchase used the scanner, the hand-held unit was needed to restart the checkout process.
But the audit employee had taken it. She, and it, were nowhere in sight.
I then had the pleasure of an event of which many of us have probably dreamt, but few have done.
I announced loudly that the store's system and management were totally inept, and could not even check out my purchases.
And then, I began to unload my very full canvas shopping bag onto the floor.
Again, clearly and loudly, to the manager, explaining that I did not even want the merchandise I had just selected and tried to buy, I placed various produce items and packaged goods in and around a small hand-basket, then left the store. Again, announcing my next stop- the rival grocery chain store down the street.
This is a store manager's worst nightmare. The cost of reshelving items is pretty high. Basically, with 1% sales margins in grocery stores, it effectively wipes out profit on those items, and then some. Not to mention the produce, which might have to be discarded.
Then there is the visual of a customer dumping items back onto a floor in full view of other customers. It's the ultimate repudiation of a retailer.
Honestly, I'm surprised the manager let me do this, and didn't offer almost anything to prevent it.
Ironically, as I processed what had just happened, with this post in mind, I realized that Stop&Shop's failure in this case was not its use of technology. Or the technology's failure.
No, the real culprit was the store's manager, assistant manager, and staff.
The assistant manager had never taken my name or contact information during our initial conversation in July. I clearly warned of the consequence of my experiencing another cart audit within the next few months.
Had the assistant manager been alert and competent, he would have taken my contact information, and at least begun a communications process that would lead me to believe, and, more importantly, feel that the store's management sympathized with my plight, and was doing something about it.
Even during my second conversation, with the store manager, he, too neglected to take any identification or contact information whatsoever.
Here, he had a disappointed, angry soon-to-be-ex-customer loudly denouncing his store in front of several lines of other customers at the checkout lanes. You'd think he would take the opportunity to exhibit maximal empathy and a show of action calculated to defuse my frustration and demonstrate real concern for his customer.
Instead, he appealed to me to contact his own senior management, though offering no advice as to how to do that, or whom to contact.
If that store manager had taken my contact information, apologized for the occurrence, and promised to 'do something,' he would have kept my business for at least a week or so, and have put on a wonderful show of positive, caring customer service in front of several dozen other customers.
This is, I think, a rather important lesson. Blaming the technology that a firm chooses to provide in its stores for its customers, for a bad shopping experience, is hardly productive or effective.
But almost any bad customer experience can be, at least temporarily, assuaged by genuine attention, collection of the customer's name and contact information, and a promise of imminent contact and communication to remedy the situation.
As I have mulled over this experience for the past week, I become more and more amazed at the lack of training, sophistication and innate instinct for good customer service that was displayed by the store manager of the Stop&Shop. What's sad, of course, is that if this constitutes "leadership" at the store, imagine how inept and ineffective customer service must be among the lower-level employees.
Isn't it ironic that Stop&Shop has invested substantial sums of money to become a leader in allowing very fast shopping trips, with no interaction with the store's staff, only to blunt this potentially important competitive advantage through poor control and oversight, and integration, of the technology with the store's management. And, then, compounding this error with poor customer service.
Customer service really is the first- and last- line of defense for a retailer. It can at least temporarily blunt and offset a poor customer experience with the store. But if this line of defense fails, the retailer is lost.
Thursday, September 24, 2009
Cadbury's Stitzer's Key Customer Insights
Tuesday's Wall Street Journal featured an article detailing a supposed "softening" of Cadbury CEO Todd Stitzer.
However, buried deep within the story were two refreshing and insightful quotes by Mr. Stitzer. The first was,
"I completely respect the fact that we would be attractive to someone else, but the world of large conglomerates has passed," he said. "Shareowners recognize that focused businesses, and focused in an area that has commercial and operational synergies, is a very good space to be."
This is a rare, honest admission for a CEO. Granted, Stitzer's Cadbury is the prey, not the hunter. So it's self-serving. But it's also true. Contrast his candor with both parties' words in the recent Dell-Perot Systems deal.
This was followed by the article's noting,
By buying individual confectionery brands, Mr. Stitzer said Cadbury has tried to grow bigger within the category, rather than by teaming up with a bigger food company.
Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,
"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."
Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.
With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.
After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?
If anything, Stitzer is really making the case, by omission, for another approach entirely.
Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?
That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.
The nearby price chart for Cadbury, Kraft and the S&P500 Index shows an interesting picture. Over the period, though moving in similar patterns, Cadbury has substantially outperformed Kraft. In fact, Kraft ended down, in absolute terms, about even with the index, while Cadbury managed to have gradually, consistently bested Kraft's performance.
It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage.
Granted, Irene Rosenfeld has shown promise. But as I noted in this post from early 2007, Kraft has been plagued by management lethargy for years.
Looking at the price chart again, while mystified how Kraft could have a stock price prior to 2007, when it was part of Altria, I can't help but think that my idea would be better for shareholders of both firms than Ms. Rosenfeld's attempt to take over Cadbury.
However, buried deep within the story were two refreshing and insightful quotes by Mr. Stitzer. The first was,
"I completely respect the fact that we would be attractive to someone else, but the world of large conglomerates has passed," he said. "Shareowners recognize that focused businesses, and focused in an area that has commercial and operational synergies, is a very good space to be."
This is a rare, honest admission for a CEO. Granted, Stitzer's Cadbury is the prey, not the hunter. So it's self-serving. But it's also true. Contrast his candor with both parties' words in the recent Dell-Perot Systems deal.
This was followed by the article's noting,
By buying individual confectionery brands, Mr. Stitzer said Cadbury has tried to grow bigger within the category, rather than by teaming up with a bigger food company.
Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,
"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."
Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.
With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.
After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?
If anything, Stitzer is really making the case, by omission, for another approach entirely.
Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?
That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.The nearby price chart for Cadbury, Kraft and the S&P500 Index shows an interesting picture. Over the period, though moving in similar patterns, Cadbury has substantially outperformed Kraft. In fact, Kraft ended down, in absolute terms, about even with the index, while Cadbury managed to have gradually, consistently bested Kraft's performance.
It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage.
Granted, Irene Rosenfeld has shown promise. But as I noted in this post from early 2007, Kraft has been plagued by management lethargy for years.
Looking at the price chart again, while mystified how Kraft could have a stock price prior to 2007, when it was part of Altria, I can't help but think that my idea would be better for shareholders of both firms than Ms. Rosenfeld's attempt to take over Cadbury.
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