There is one other personal experienced-based observation I'd like to add in this series of posts. It concerns the old AT&T, and innovation.
The AT&T that I joined in 1979 was a very effective hindrance to telecommunication innovation. There is no doubt in my mind that, without the breakup of the firm in 1983, we would not be enjoying much of the information revolution that has occurred since then.
What most people probably do not recall is that the DOJ's requested remedy for AT&T's alleged monopolistic practices was the divestiture of the equipment design and manufacture business units. These were key to AT&T's profitability and control over the market.
By using creative and aggressive transfer pricing when "selling" equipment manufactured by AT&T's Western Electric unit to the wholly-owned operating telephone companies, AT&T boosted the fixed asset base on which it was allowed to collect a rate of return by the various regulatory authorities. The company zealously guarded this equipment monopoly by delaying the vetting of "foreign" equipment for safe connection to "the network." Thus, both price and non-price means assured AT&T of many years of control over its marketplace.
Thanks to this type of management, end users of telephones in the US saw, in the 1960s, the introduction of the Princess phone, with a lighted dial. That was about it. A decade later, you got a push-button phone, to replace the dial. That was because it was cheaper to produce and maintain the telephone you were forced to lease, rather than allowed to buy. It wasn't to give you more features.
I can attest, from my experience in the Business Marketing group of AT&T's premises equipment business, that we were seriously hampered in our plans to address the future without end-to-end control of information management. Of particular concern was our need to interface, and exchange and store content with and from, computers.
The mere lack of a single network management entity in the US post-1983 contributed a great deal to the growth in creative uses of information, if for no other reason than the removal of a skilled, experienced and monolithic influence on telecommunications policy and legislation- the old AT&T.
So, while it may appear that the 1980s era breakup of AT&T has now been substantially nullified, I don't think that's true. We are experiencing communications technology change and benefits at heretofore unheard of rates, and I believe that is the direct result of the demise of the "old" AT&T.
Thursday, March 09, 2006
The "New" AT&T Part 2 : Content vs. Delivery
It strikes me as odd that most, if not all of the commentators and analysts addressing the AT&T-BellSouth merger focus on an apparent future of content over digital wideband loops, without coldly assessing the skills of the company's to do so.
For example, I asked my partner today at lunch if he thought it would be reasonable for GM to enter the online video content business. He replied he thought not, because it's not something they have ever done before, and there is already competent competition. Just so.
Thus, I can't understand why anyone would think a phone company could enter the content business, either. Phone companies are the ultimate delivery business. Since inception, they have focused purely on connectivity, being a "pipe," not on the content over the pipe. Why would anyone think they have any relevant expertise in the hoped-for revenue-growth enhancing areas of video and other content-on-demand?
What is more likely, per Holman Jenkins' WSJ piece yesterday, is that AT&T, Verizon, which is spending like crazy on fiber, and the cable companies will all see the value of their physical high-speed connectivity assets fall with the coming of ubiquitous, high-speed wireless wideband access.
The game, for Verizon and AT&T, seems to be to add high-speed access revenues before the declining landline business forces them to the brink of insolvency. Cable companies are likely to be reduced to carriage, too, as much of their television content revenues become priced per-usage as online access consumption.
To me, this is appropriately Schumpterian. As Jenkins wrote yesterday, these investments are not guaranteed- they are, whether realized or not, just attempts at survival in a very uncertain competitive environment.
One thing continues to stick out in my mind this week, as I continue to reflect on the merger. Lately, I have reconnected with one of my earliest, post-graduate school supervisors for whom I worked at AT&T over 25 years ago. He's still in the area, with a telecom consulting firm. At the time he and I worked together, a then-upstart consulting firm, The Yankee Group, would publish regular pieces on AT&T and its premises equipment business efforts. However, the image I still recall is a chart showing net positive cashflow over time, beginning in about 1975. The line was headed solidly downward even then. AT&T was pouring cash into its efforts to fend off competition and prepare for some sort of deregulated environment. It was obvious to me, as I contemplated that macro view with my growing knowledge of our competitive positions in various product markets, that the entire business was headed for greater customer features, functions and services, at ever-shrinking margins and price levels.
I don't think that has ever stopped. This week's merger is really just a continuation, punctuated temporarily by Judge Greene's mistaken ruling, of that trend. The combination will help lessen some of the operating costs for AT&T, but it can't affect the continuing downward pressure on its revenues.
As I sit here writing these two posts, I sit only ten miles from the headquarters of the "old" AT&T, where I once worked. Mapquest tells me it is eighteen hundred miles from here to the "new" AT&T headquarters in San Antonio. It sure doesn't feel that the company has moved very far, or that very much has changed in terms of its fortunes.
For example, I asked my partner today at lunch if he thought it would be reasonable for GM to enter the online video content business. He replied he thought not, because it's not something they have ever done before, and there is already competent competition. Just so.
Thus, I can't understand why anyone would think a phone company could enter the content business, either. Phone companies are the ultimate delivery business. Since inception, they have focused purely on connectivity, being a "pipe," not on the content over the pipe. Why would anyone think they have any relevant expertise in the hoped-for revenue-growth enhancing areas of video and other content-on-demand?
What is more likely, per Holman Jenkins' WSJ piece yesterday, is that AT&T, Verizon, which is spending like crazy on fiber, and the cable companies will all see the value of their physical high-speed connectivity assets fall with the coming of ubiquitous, high-speed wireless wideband access.
The game, for Verizon and AT&T, seems to be to add high-speed access revenues before the declining landline business forces them to the brink of insolvency. Cable companies are likely to be reduced to carriage, too, as much of their television content revenues become priced per-usage as online access consumption.
To me, this is appropriately Schumpterian. As Jenkins wrote yesterday, these investments are not guaranteed- they are, whether realized or not, just attempts at survival in a very uncertain competitive environment.
One thing continues to stick out in my mind this week, as I continue to reflect on the merger. Lately, I have reconnected with one of my earliest, post-graduate school supervisors for whom I worked at AT&T over 25 years ago. He's still in the area, with a telecom consulting firm. At the time he and I worked together, a then-upstart consulting firm, The Yankee Group, would publish regular pieces on AT&T and its premises equipment business efforts. However, the image I still recall is a chart showing net positive cashflow over time, beginning in about 1975. The line was headed solidly downward even then. AT&T was pouring cash into its efforts to fend off competition and prepare for some sort of deregulated environment. It was obvious to me, as I contemplated that macro view with my growing knowledge of our competitive positions in various product markets, that the entire business was headed for greater customer features, functions and services, at ever-shrinking margins and price levels.
I don't think that has ever stopped. This week's merger is really just a continuation, punctuated temporarily by Judge Greene's mistaken ruling, of that trend. The combination will help lessen some of the operating costs for AT&T, but it can't affect the continuing downward pressure on its revenues.
As I sit here writing these two posts, I sit only ten miles from the headquarters of the "old" AT&T, where I once worked. Mapquest tells me it is eighteen hundred miles from here to the "new" AT&T headquarters in San Antonio. It sure doesn't feel that the company has moved very far, or that very much has changed in terms of its fortunes.
The "New" AT&T Part 1
It has taken me all week to reflect on the news this past Monday that the "new" AT&T now includes BellSouth.
While others, with shorter memories and less visceral experience in the matter than me, have quickly analyzed the event in terms of current market opportunities, I take a different, multi-faceted approach in my response.
First, I must credit Alan Murray and Holman Jenkins, Jr., both of the Wall Street Journal, for their excellent written and spoken pieces this week regarding the ATT-BellSouth merger. In email exchanges with both of them, I confirmed that, beyond agreeing with their thoughts and insights, they also largely agree with my own further musings.
As both of them wrote, this is primarily a defensive move on the part of two aging CEOs who hail from the days of the original MFJ- the Modified Final Judgement which split the old AT&T into the various parts, including the seven regional bell holding companies. Despite Judge Greene's animosity toward AT&T, stemming from his involvement in an earlier antitrust case, as part of the DOJ, and his consequent decision to split the company up, much of AT&T's structure was always a necessity of minimum economic size in the telecommunications industry.
The problem was never with the monopoly on local, or even long-distance, services. It was with the cross-subsidization of equipment design and manufacture by local and toll call revenues. In fact, this was the actual relief sought by the DOJ when they brought the case. And, in the end, it probably would have been better for everyone had Charlie Brown, then-CEO of AT&T, simply acceded to the DOJ's wishes.
So, this week's reunification of more pieces of the old local service monopoly simply demonstrates that even Judge Greene's venom could not overwhelm the longer-term economic laws of costs and revenues in this sector. The purveyors of old, landline-based telecommunications are in a bad spot now. This merger may stave off economic hardship for the two companies, but it in no way has anything to do with their future growth.
Holman Jenkins, Jr.'s piece provided detail on this point. I will go further. Cellular and broadband internet access are already destroying the remaining landline telephonic revenue streams of Verizon, AT&T, and Qwest. They are fervently hoping to somehow play in the new world of broadband content before they implode with the unplugging of the last landline phone. Mr. Jenkins pointed to the arrival of WiMax as causing the ultimate collapse of even the cable monopolies. He is right.
The key point about this entire situation is that it is, as Mr. Jenkins ends his piece, "far from over." Telephone companies must, to merely survive, migrate from copper wires, but even this massively expensive move doesn't guarantee them anything. Ask Mike Armstrong, one-time CEO of the failed "old" AT&T's similar strategy. By the way, I stand by my remarks of a few months ago, that the AT&T name should be retired, in order not to make it endure the same failure, twice, by different inept managers.
To Be Continued in Part 2- Content vs. Delivery
While others, with shorter memories and less visceral experience in the matter than me, have quickly analyzed the event in terms of current market opportunities, I take a different, multi-faceted approach in my response.
First, I must credit Alan Murray and Holman Jenkins, Jr., both of the Wall Street Journal, for their excellent written and spoken pieces this week regarding the ATT-BellSouth merger. In email exchanges with both of them, I confirmed that, beyond agreeing with their thoughts and insights, they also largely agree with my own further musings.
As both of them wrote, this is primarily a defensive move on the part of two aging CEOs who hail from the days of the original MFJ- the Modified Final Judgement which split the old AT&T into the various parts, including the seven regional bell holding companies. Despite Judge Greene's animosity toward AT&T, stemming from his involvement in an earlier antitrust case, as part of the DOJ, and his consequent decision to split the company up, much of AT&T's structure was always a necessity of minimum economic size in the telecommunications industry.
The problem was never with the monopoly on local, or even long-distance, services. It was with the cross-subsidization of equipment design and manufacture by local and toll call revenues. In fact, this was the actual relief sought by the DOJ when they brought the case. And, in the end, it probably would have been better for everyone had Charlie Brown, then-CEO of AT&T, simply acceded to the DOJ's wishes.
So, this week's reunification of more pieces of the old local service monopoly simply demonstrates that even Judge Greene's venom could not overwhelm the longer-term economic laws of costs and revenues in this sector. The purveyors of old, landline-based telecommunications are in a bad spot now. This merger may stave off economic hardship for the two companies, but it in no way has anything to do with their future growth.
Holman Jenkins, Jr.'s piece provided detail on this point. I will go further. Cellular and broadband internet access are already destroying the remaining landline telephonic revenue streams of Verizon, AT&T, and Qwest. They are fervently hoping to somehow play in the new world of broadband content before they implode with the unplugging of the last landline phone. Mr. Jenkins pointed to the arrival of WiMax as causing the ultimate collapse of even the cable monopolies. He is right.
The key point about this entire situation is that it is, as Mr. Jenkins ends his piece, "far from over." Telephone companies must, to merely survive, migrate from copper wires, but even this massively expensive move doesn't guarantee them anything. Ask Mike Armstrong, one-time CEO of the failed "old" AT&T's similar strategy. By the way, I stand by my remarks of a few months ago, that the AT&T name should be retired, in order not to make it endure the same failure, twice, by different inept managers.
To Be Continued in Part 2- Content vs. Delivery
Sunday, March 05, 2006
Rewarding Losers: GE
It was only last Tuesday that I wrote of my reaction to Fortune Magazine's recent "most admired companies" survey.
At that time, I discussed GE CEO Jeff Immelt's inferior record of shareholder wealth creation, in comparison to the S&P500 index, over the past 5 years. Yesterday's Wall Street Journal provided the particulars.
In a piece buried inside the lead section, Immelt's 2005 compensation is described, along GE's continued lackluster performance. Let me get right to the heart of this piece. The WSJ piece states that Immelt owns just "...800,000 shares of his company's stock, valued at $29.1 million based on GE's $33.06 share price......Mr. Immelt receives quarterly dividends on his performance shares; he received $1 million in cash dividends in 2005, the company said."
What did not surprise me is that Immelt's 2005 salary was $3.2 million, and this year's is set at $3.3 million. He also received a cash bonus of $5.3 million in 2004.
The article goes on to detail Immelt's "request" that various performance, or bonus, shares of GE stock awarded to him be "totally aligned" with shareholders. Measures used are to include revenue, cash flow, earnings/share, and return on capital. Oh, and Immelt said he will not keep half of a 180,000 share bonus grant if total returns on GE stock don't beat those of the S&P500 over a two-year period.
Thus, despite Immelt's apparent concern with his company's shares, and their performance relative to the S&P, we see that Immelt is already a very wealthy man, any GE performance notwithstanding. At roughly $3.2 million per year since 2001, plus the $5.3 million 2004 bonus, he's already cleared at least $21 million pre-tax for heading up GE in the wake of Welch's departure. This is for running the company so that it underperforms the S&P500.
That's right. Some guy down at Vanguard in Philadelphia is getting paid probably no more than hald a million dollars a year, tops, for running a bare-bones index fund that gives its shareholders a better annual return over five years than Immelt has gotten for his shareholders. I'f I'm wrong on the Vanguard manager's compensation by a factor of 2, he's still only getting paid a tenth of Immelt's largesse, although he has outperformed the latter.
This, I maintain, is the real problem with US CEO compensation. Immelt has already "won" the compensation game. He can mouth platitudes about beating the S&P all he wants- it doesn't really matter now. Unless he has gambling, alcohol, or drug addictions, he's pretty much financially set for life right now. Think what you will, it must be hard to actually spend the roughly $15 million after-tax salary he's received, not to mention the upcoming bonuses, special share grants, and lush retirement compensation.
There is no way Immelt is going to take the risks needed to truly turn GE into a market-return-beating large-cap company anytime soon. It didn't do it under Welch over several decades. What makes you think it will happen under a guy who doesn't need the added compensation that would come from outperforming the index? A measly $3 million extra for actually beating the S&P? And, if he risks GE's current business mix to do so and fails, what does he incur? Ignominy, possible dismissal, and a fall from grace. Hardly worth risking those public humiliations for less than a quarter of his cumulative after-tax salary to date as CEO of the company.
I feel sorry for GE's shareholders. They are saddled with a board that is rewarding a loser as CEO, and have little prospect of things improving anytime soon.
What would get my respect and attention? If Immelt had taken the CEO job for $500,000 in annual salary, with the prospect of, say, $10 million of GE stock awarded annually and retroactively, for consistently beating the S&P500 over a five year period, I'd say he was putting his money where his mouth was.
By the way, beating the S&P over a two-year period is, according to my proprietary research, far easier than doing it over five years. The probability of beating the S&P over a two-year period is roughly five times greater than the likelihood of doing it over five years. And consistently outperforming the index for five years requires a much different approach by a CEO and his company's management team than simply aiming for a two-year sprint past the index's return.
As it now stands, Immelt has set a relatively modest performance target, the compensation for which will pale beside his other annual compensation. Some risk taking board and CEO.
It brings to mind Carl Icahn's comment of last summer, when interviewed on the subject of TimeWarner's CEO, and American CEOs in general. Icahn astutely opined that we are in danger of losing our global competitive edge at the CEO level as a result of lush, no-risk compensation packages. How right he is.
At that time, I discussed GE CEO Jeff Immelt's inferior record of shareholder wealth creation, in comparison to the S&P500 index, over the past 5 years. Yesterday's Wall Street Journal provided the particulars.
In a piece buried inside the lead section, Immelt's 2005 compensation is described, along GE's continued lackluster performance. Let me get right to the heart of this piece. The WSJ piece states that Immelt owns just "...800,000 shares of his company's stock, valued at $29.1 million based on GE's $33.06 share price......Mr. Immelt receives quarterly dividends on his performance shares; he received $1 million in cash dividends in 2005, the company said."
What did not surprise me is that Immelt's 2005 salary was $3.2 million, and this year's is set at $3.3 million. He also received a cash bonus of $5.3 million in 2004.
The article goes on to detail Immelt's "request" that various performance, or bonus, shares of GE stock awarded to him be "totally aligned" with shareholders. Measures used are to include revenue, cash flow, earnings/share, and return on capital. Oh, and Immelt said he will not keep half of a 180,000 share bonus grant if total returns on GE stock don't beat those of the S&P500 over a two-year period.
Thus, despite Immelt's apparent concern with his company's shares, and their performance relative to the S&P, we see that Immelt is already a very wealthy man, any GE performance notwithstanding. At roughly $3.2 million per year since 2001, plus the $5.3 million 2004 bonus, he's already cleared at least $21 million pre-tax for heading up GE in the wake of Welch's departure. This is for running the company so that it underperforms the S&P500.
That's right. Some guy down at Vanguard in Philadelphia is getting paid probably no more than hald a million dollars a year, tops, for running a bare-bones index fund that gives its shareholders a better annual return over five years than Immelt has gotten for his shareholders. I'f I'm wrong on the Vanguard manager's compensation by a factor of 2, he's still only getting paid a tenth of Immelt's largesse, although he has outperformed the latter.
This, I maintain, is the real problem with US CEO compensation. Immelt has already "won" the compensation game. He can mouth platitudes about beating the S&P all he wants- it doesn't really matter now. Unless he has gambling, alcohol, or drug addictions, he's pretty much financially set for life right now. Think what you will, it must be hard to actually spend the roughly $15 million after-tax salary he's received, not to mention the upcoming bonuses, special share grants, and lush retirement compensation.
There is no way Immelt is going to take the risks needed to truly turn GE into a market-return-beating large-cap company anytime soon. It didn't do it under Welch over several decades. What makes you think it will happen under a guy who doesn't need the added compensation that would come from outperforming the index? A measly $3 million extra for actually beating the S&P? And, if he risks GE's current business mix to do so and fails, what does he incur? Ignominy, possible dismissal, and a fall from grace. Hardly worth risking those public humiliations for less than a quarter of his cumulative after-tax salary to date as CEO of the company.
I feel sorry for GE's shareholders. They are saddled with a board that is rewarding a loser as CEO, and have little prospect of things improving anytime soon.
What would get my respect and attention? If Immelt had taken the CEO job for $500,000 in annual salary, with the prospect of, say, $10 million of GE stock awarded annually and retroactively, for consistently beating the S&P500 over a five year period, I'd say he was putting his money where his mouth was.
By the way, beating the S&P over a two-year period is, according to my proprietary research, far easier than doing it over five years. The probability of beating the S&P over a two-year period is roughly five times greater than the likelihood of doing it over five years. And consistently outperforming the index for five years requires a much different approach by a CEO and his company's management team than simply aiming for a two-year sprint past the index's return.
As it now stands, Immelt has set a relatively modest performance target, the compensation for which will pale beside his other annual compensation. Some risk taking board and CEO.
It brings to mind Carl Icahn's comment of last summer, when interviewed on the subject of TimeWarner's CEO, and American CEOs in general. Icahn astutely opined that we are in danger of losing our global competitive edge at the CEO level as a result of lush, no-risk compensation packages. How right he is.
Friday, March 03, 2006
Googled
It was amazing to see the market's reaction earlier this week to comments from the CFO of Google regarding its future growth. Mr. Reyes acknowledged that the firm will need to find additional sources of revenue growth, and the stock fell 14% in intra-day, ending up down something like 7% at the market's close.
Obviously, this news was a big negative surprise for many investors. But how shocking can it really be to learn that a firm which has launched so many "free" services just this year believes it needs to find new sources of organic revenue growth?
I confess to still not fully understanding the profitability dynamics of Google. Fortunately, my own investment selection approach requires several years of actual performance in order to qualify as a candidate for inclusion into my portfolio. But generally speaking, I don't buy (or sell) what I can't understand. There are several reasons for this, one of which is best illustrated by the following story.
In the late '90s, I co-managed a venture with a hedge fund group. My role was the management of a static long-short version of my current equity strategy. In this capacity, I did marketing and sales work, including appearing with my colleagues at some hedge fund conferences.
On one of these sales trips, we had the occasion to dine with some Californians, among whom was a trustee and member of the investment committee of one of the state's better-known universities. At this time, Julian Robertson's Tiger Fund group had just gone out of business. Not being privy to the details of that group's fall, I opined that perhaps, like Long Term Capital, they had relied on historic correlations among various hedged instruments, and not adequately understood what would happen if their assumptions proved faulty. Upon hearing this, the university trustee exclaimed that that was exactly what had transpired. He then regaled us for some time with his story of hearing Robertson explain what had happened, as the university had invested in the Tiger fund. Essentially, the fund had hired some hot managers to do some hedging which, according to our acquaintance, Robertson himself had said he did not fully understand. The results are now well-known. That particular group made some horrendous bets which became "unhedged" and caused appalling losses which led to the liquidation of the Tiger funds. Apparently, Robertson lost it all by acquiesing to some managers whose approach he did not, in fact, comprehend.
Back to Google. From what I have read for several years, I still cannot fully understand what the revenue engine is for this firm. Can that many people be clicking on ads while using their search engine? Then there is that occasional story about click-fraud in connection with the websites using Google for their advertising.
In any case, Google's recent spread of activities into digitizing books, starting email and chat services, and global mapmaking, suggest to me, as I have written earlier, that they perceive their brand to be somewhat perishable, not to mention their current search engine advantage. Thus, it is not at all surprising to me that their CFO would admit that Google needs new sources of revenue to continue growing.
It makes me wonder how much of the investor interest in Google is purely momentum buying and holding, and how much represents fully-informed shareholders.
Obviously, this news was a big negative surprise for many investors. But how shocking can it really be to learn that a firm which has launched so many "free" services just this year believes it needs to find new sources of organic revenue growth?
I confess to still not fully understanding the profitability dynamics of Google. Fortunately, my own investment selection approach requires several years of actual performance in order to qualify as a candidate for inclusion into my portfolio. But generally speaking, I don't buy (or sell) what I can't understand. There are several reasons for this, one of which is best illustrated by the following story.
In the late '90s, I co-managed a venture with a hedge fund group. My role was the management of a static long-short version of my current equity strategy. In this capacity, I did marketing and sales work, including appearing with my colleagues at some hedge fund conferences.
On one of these sales trips, we had the occasion to dine with some Californians, among whom was a trustee and member of the investment committee of one of the state's better-known universities. At this time, Julian Robertson's Tiger Fund group had just gone out of business. Not being privy to the details of that group's fall, I opined that perhaps, like Long Term Capital, they had relied on historic correlations among various hedged instruments, and not adequately understood what would happen if their assumptions proved faulty. Upon hearing this, the university trustee exclaimed that that was exactly what had transpired. He then regaled us for some time with his story of hearing Robertson explain what had happened, as the university had invested in the Tiger fund. Essentially, the fund had hired some hot managers to do some hedging which, according to our acquaintance, Robertson himself had said he did not fully understand. The results are now well-known. That particular group made some horrendous bets which became "unhedged" and caused appalling losses which led to the liquidation of the Tiger funds. Apparently, Robertson lost it all by acquiesing to some managers whose approach he did not, in fact, comprehend.
Back to Google. From what I have read for several years, I still cannot fully understand what the revenue engine is for this firm. Can that many people be clicking on ads while using their search engine? Then there is that occasional story about click-fraud in connection with the websites using Google for their advertising.
In any case, Google's recent spread of activities into digitizing books, starting email and chat services, and global mapmaking, suggest to me, as I have written earlier, that they perceive their brand to be somewhat perishable, not to mention their current search engine advantage. Thus, it is not at all surprising to me that their CFO would admit that Google needs new sources of revenue to continue growing.
It makes me wonder how much of the investor interest in Google is purely momentum buying and holding, and how much represents fully-informed shareholders.
Hurricanes & False Positives
So now we are treated to video tapes of President Bush and his advisors being warned that Katrina was, in the "gut" of FEMA's then-head, 'the big one.'
It's all very well and good to judge in hindsight. I was driving yesterday and heard a news report on a local liberal classical music station that New Orleans Mayor Ray Nagin 'had a sinking feeling' when he heard of, or watched, the videotape. Nice dramatic touch- it's clearly his style. Find a scapegoat and pile on, while hoping everyone will forget your own culpability.
In reality, though, the situation was not nearly so clear prior to Katrina's landfall.
Let's remind ourselves of the two risks which exist in every hurricane situation. They are familiar to any data analyst. I am speaking of Type 1 and Type 2 error.
Type 1 error is that against which statisticians are trained to guard. It is the risk of rejecting an hypothesis which cannot, in fact, be confidently rejected. Most statistical tools focus on the rejection of hypotheses at some "confidence level." In this case, it is the risk of rejecting the premise, "Katrina is the ultimate lethal hurricane," or something similar, when, in fact, the premise is found later to be true.
Type 2 error is the risk of accepting a false hypothesis.
If Katrina had been judged, before it made landfall, to be as deadly as it ultimately was, then the correct decision would have been to order massive evacuations. If it turned out to be rather small instead, then authorities would have made a Type 2 error. They would have accepted the premise, "Katrina is the ultimate lethal hurricane," when, in fact, it was not. Don't think that great ridicule and anger would not have been unleashed on all authorities, beginning with President Bush, in that event. Ray Nagin would have been screaming, '...they told me to evactuate. it's not my fault that people died, were injured, and property was looted in the rush out of town.....'
As it now stands, authorities believed they should wait until they were more sure of the hurricane's strength than, evidently, the date and time of the recently-released videotape. They minimized Type 2 error, accepting a false premise, in favor of not needlessly disrupting a major city for a non-lethal hurricane. Either way, the administration was going to be criticized.
It's convenient, in the aftermath, for the mayor of New Orleans, and anyone else with a liberal-leaning agenda, to declare that the Federal authorities "knew" all along how deadly Katrina would be. But that's just not true, and it's an oversimplification of what most people understand is an always-difficult decision- if and when to evacuate a large population center in advance of a hurricane, attempting to balance the probable costs in lives and property of evacuation with those of staying put.
It's all very well and good to judge in hindsight. I was driving yesterday and heard a news report on a local liberal classical music station that New Orleans Mayor Ray Nagin 'had a sinking feeling' when he heard of, or watched, the videotape. Nice dramatic touch- it's clearly his style. Find a scapegoat and pile on, while hoping everyone will forget your own culpability.
In reality, though, the situation was not nearly so clear prior to Katrina's landfall.
Let's remind ourselves of the two risks which exist in every hurricane situation. They are familiar to any data analyst. I am speaking of Type 1 and Type 2 error.
Type 1 error is that against which statisticians are trained to guard. It is the risk of rejecting an hypothesis which cannot, in fact, be confidently rejected. Most statistical tools focus on the rejection of hypotheses at some "confidence level." In this case, it is the risk of rejecting the premise, "Katrina is the ultimate lethal hurricane," or something similar, when, in fact, the premise is found later to be true.
Type 2 error is the risk of accepting a false hypothesis.
If Katrina had been judged, before it made landfall, to be as deadly as it ultimately was, then the correct decision would have been to order massive evacuations. If it turned out to be rather small instead, then authorities would have made a Type 2 error. They would have accepted the premise, "Katrina is the ultimate lethal hurricane," when, in fact, it was not. Don't think that great ridicule and anger would not have been unleashed on all authorities, beginning with President Bush, in that event. Ray Nagin would have been screaming, '...they told me to evactuate. it's not my fault that people died, were injured, and property was looted in the rush out of town.....'
As it now stands, authorities believed they should wait until they were more sure of the hurricane's strength than, evidently, the date and time of the recently-released videotape. They minimized Type 2 error, accepting a false premise, in favor of not needlessly disrupting a major city for a non-lethal hurricane. Either way, the administration was going to be criticized.
It's convenient, in the aftermath, for the mayor of New Orleans, and anyone else with a liberal-leaning agenda, to declare that the Federal authorities "knew" all along how deadly Katrina would be. But that's just not true, and it's an oversimplification of what most people understand is an always-difficult decision- if and when to evacuate a large population center in advance of a hurricane, attempting to balance the probable costs in lives and property of evacuation with those of staying put.
Tuesday, February 28, 2006
Taking a "Haircut"
As I waited at my barber's this morning, the result of a half hour's difference in our understanding of my appointment time, I had the occasion to skim through the most recent issue of Fortune Magazine. Most "haircuts," in the financial sense, cost you money. This morning, since I do not typically read Fortune, I got a free bonus- the theme for this piece.
This issue, the first in March, contained the magazine's "most admired companies." Naturally, I was surprised to see Jeff Immelt's face on the cover. When I think of companies I admire, my thoughts turn to those rare gems which can consistently outperform the S&P500 for several years- often up to five. When I read of a current survey, I assume the performance in question must be recent.
GE is not one of these companies. Go check its return versus the index on one of the free finance sites, such as Yahoo. It isn't even close. Not for the past 12 months. Not for 2 years. Not for 5 years. No contest- the race goes to the index.
I read a few more passages from the article, and noticed IBM was also touted. The phrase "turnaround" caught my eye.
So I checked IBM's return over the last five years versus the S&P500 Index. Care to guess whether this well-known information processing hardware, software and services titan did any better than GE?
IBM also failed to best the index over 1, 2 and 5 years in terms of total return. So much for a "turnaround."
Why would a business magazine such as Fortune waste so much ink and effort on "admired" losers? Is this what we have come to regard as business success in America? Maybe I'm the one who is out of step. I just can't see glorifying companies, and their managements, for underperforming an index you can buy for no more than two-tenths of a cent on the dollar from Vanguard.
My research and continuing portfolio management demonstrate that it's a rare, and "admirable" characteristic just for a company to consistently outperform the S&P500 over several years. As an investor, I could not care less what else the company does for the time I hold their stock, or how widely admired it is for other reasons, so long as they beat the index.
Did I mention that I don't subscribe to Fortune? Does it surprise you that this morning's quick read through their latest issue makes me feel I've made a wise decision?
This issue, the first in March, contained the magazine's "most admired companies." Naturally, I was surprised to see Jeff Immelt's face on the cover. When I think of companies I admire, my thoughts turn to those rare gems which can consistently outperform the S&P500 for several years- often up to five. When I read of a current survey, I assume the performance in question must be recent.
GE is not one of these companies. Go check its return versus the index on one of the free finance sites, such as Yahoo. It isn't even close. Not for the past 12 months. Not for 2 years. Not for 5 years. No contest- the race goes to the index.
I read a few more passages from the article, and noticed IBM was also touted. The phrase "turnaround" caught my eye.
So I checked IBM's return over the last five years versus the S&P500 Index. Care to guess whether this well-known information processing hardware, software and services titan did any better than GE?
IBM also failed to best the index over 1, 2 and 5 years in terms of total return. So much for a "turnaround."
Why would a business magazine such as Fortune waste so much ink and effort on "admired" losers? Is this what we have come to regard as business success in America? Maybe I'm the one who is out of step. I just can't see glorifying companies, and their managements, for underperforming an index you can buy for no more than two-tenths of a cent on the dollar from Vanguard.
My research and continuing portfolio management demonstrate that it's a rare, and "admirable" characteristic just for a company to consistently outperform the S&P500 over several years. As an investor, I could not care less what else the company does for the time I hold their stock, or how widely admired it is for other reasons, so long as they beat the index.
Did I mention that I don't subscribe to Fortune? Does it surprise you that this morning's quick read through their latest issue makes me feel I've made a wise decision?
Sunday, February 26, 2006
Orwellian "Free" Trade and U.S. Port Operations
This week's Congressional hysteria over the imminent deal to allow a United Arab Emirates-owned company manage several large US port operations is a blow to American attempts to promote global free trade.
From what I have read and seen so far, there is no security issue whatsoever with the change in ownership of a company which currently manages several large US port operations, from a British to an Arab conglomerate. US port security is managed by Customs and the Coast Guard, not operational management of a port. This was clearly stated when CNBC interviewed the chairman of the firm which operates the port of Houston last week.
So what we actually have is some of our country's 535 legislators up in arms because an agreed-upon vetting process does not give them final say. Did I mention the Wall Street Journal's comment regarding campaign contributions to some key New York-area senators and representatives by local cargo-handling interests? There is probably a good reason for the vetting process being handled by the Executive branch. You can be pretty sure that if Congressional members are involved, influence-peddling won't be far behind.
Most damaging in this affair, though, is its effect upon the efforts of the US to influence freer trade on a global basis. Thanks to our typically short-sighted members of Congress, such as Senators Clinton, Menendez and Schumer, and Representative King, countries such as China now have an example to which to point in the US, when they refuse to open their own economies to more global competition. Another significant, perhaps lesser issue, is the damage these same legislators are causing by failing to understand that, as it now stands, their opposition looks like ethnic bigotry targeted at Arabs, rather than a legitimate US security concern. It isn't a question of US management versus foreigners, but "these" foreigners.
Hopefully, President Bush will stick to his guns on this issue, and, after a second vetting of the deal, it will be cleared and closed. Otherwise, we risk damage to both the cause of free trade, and our image in the Arab world.
From what I have read and seen so far, there is no security issue whatsoever with the change in ownership of a company which currently manages several large US port operations, from a British to an Arab conglomerate. US port security is managed by Customs and the Coast Guard, not operational management of a port. This was clearly stated when CNBC interviewed the chairman of the firm which operates the port of Houston last week.
So what we actually have is some of our country's 535 legislators up in arms because an agreed-upon vetting process does not give them final say. Did I mention the Wall Street Journal's comment regarding campaign contributions to some key New York-area senators and representatives by local cargo-handling interests? There is probably a good reason for the vetting process being handled by the Executive branch. You can be pretty sure that if Congressional members are involved, influence-peddling won't be far behind.
Most damaging in this affair, though, is its effect upon the efforts of the US to influence freer trade on a global basis. Thanks to our typically short-sighted members of Congress, such as Senators Clinton, Menendez and Schumer, and Representative King, countries such as China now have an example to which to point in the US, when they refuse to open their own economies to more global competition. Another significant, perhaps lesser issue, is the damage these same legislators are causing by failing to understand that, as it now stands, their opposition looks like ethnic bigotry targeted at Arabs, rather than a legitimate US security concern. It isn't a question of US management versus foreigners, but "these" foreigners.
Hopefully, President Bush will stick to his guns on this issue, and, after a second vetting of the deal, it will be cleared and closed. Otherwise, we risk damage to both the cause of free trade, and our image in the Arab world.
Reforming Health Insurance: Cream Skimming vs. Responsibility
The Wall Street Journal carried an article last week featuring a South African life insurer which offers the equivalent of "frequent flyer" points to customers who engage in healthy activities. Without reprinting the entire piece here, suffice to say, the insurer rewards various activities, such as exercise, checkups, and other activities shown to be related to better health, with points which may be redeemed for various things, such as inexpensive stays at resorts, etc.
This insurer is now entering the US market with its programs. As might be expected, the company is being accused of "cream skimming," both in its home country, and in this one. Essentially, sceptics believe that this insurer seeks to hold costs down by insuring only the healthiest individuals, thus avoiding expensive claims which would depress profits.
This brings me to the point of this post. The salient issue of this situation is, quite simply, responsibility. Who is responsible for poor health? For disease? And, thus, who should pay for the condition?
What is wrong with incenting people to behave in healthier ways? Nothing. Merely incenting me to exercise more, not become obese, etc, is good for me, and the insurer.
Clearly, the key question is something more along the lines of the following example. Suppose a child is born with a serious disease which cannot be "cured." The child will be ill, and nonproductive, in the sense of being capable of living as a self-sustaining individual. Who is "responsible," who should pay for that outcome? If an insurer chooses not to underwrite that child, or the adult with the child, is that "wrong?"
It seems to me that the general notion that "cream skimming" is bad always revolves around this question. Whether it involves private (Catholic) education, driving, or health, the real issue is how to distribute the real cost of high risk in society.
It seems to me that perhaps there is a better approach than the binary "all or none." Perhaps each person, or family, should be insured by society, i.e., government, at an agreed-upon level of "benefit," or claims, reflecting the probabilities that they will incur specific uncontrollable diseases. In addition to that, one may purchase, as available, private insurance. This at least acknowledges the reality of the occurrence of such diseases, and offers a minimal level of support for same.
There are, of course, a host of complications. How do we define these diseases? Which ones qualify? Does DNA testing mean there will be no effective private underwriting of such additional risk? Does it even go so far as to suggest that society may withhold coverage from individuals with unacceptably high probabilities, as predicted by DNA samples, of producing children with these diseases or conditions?
These are serious moral and economic questions for any society. How we choose to allocate our resources, in a world of competing national economies, is not a trivial question or topic.
Thus, the question with which this note opened, that of "cream skimming," is a much deeper one than it may initially appear. How we view the answer to this question suggests how we view answers to the deeper related questions of responsibility for situations which may be, for now, uncontrollable. It seems to me that exploring the answers to these questions is a good thing. Simply demonizing those who offer products and services from one vantage point is not.
This insurer is now entering the US market with its programs. As might be expected, the company is being accused of "cream skimming," both in its home country, and in this one. Essentially, sceptics believe that this insurer seeks to hold costs down by insuring only the healthiest individuals, thus avoiding expensive claims which would depress profits.
This brings me to the point of this post. The salient issue of this situation is, quite simply, responsibility. Who is responsible for poor health? For disease? And, thus, who should pay for the condition?
What is wrong with incenting people to behave in healthier ways? Nothing. Merely incenting me to exercise more, not become obese, etc, is good for me, and the insurer.
Clearly, the key question is something more along the lines of the following example. Suppose a child is born with a serious disease which cannot be "cured." The child will be ill, and nonproductive, in the sense of being capable of living as a self-sustaining individual. Who is "responsible," who should pay for that outcome? If an insurer chooses not to underwrite that child, or the adult with the child, is that "wrong?"
It seems to me that the general notion that "cream skimming" is bad always revolves around this question. Whether it involves private (Catholic) education, driving, or health, the real issue is how to distribute the real cost of high risk in society.
It seems to me that perhaps there is a better approach than the binary "all or none." Perhaps each person, or family, should be insured by society, i.e., government, at an agreed-upon level of "benefit," or claims, reflecting the probabilities that they will incur specific uncontrollable diseases. In addition to that, one may purchase, as available, private insurance. This at least acknowledges the reality of the occurrence of such diseases, and offers a minimal level of support for same.
There are, of course, a host of complications. How do we define these diseases? Which ones qualify? Does DNA testing mean there will be no effective private underwriting of such additional risk? Does it even go so far as to suggest that society may withhold coverage from individuals with unacceptably high probabilities, as predicted by DNA samples, of producing children with these diseases or conditions?
These are serious moral and economic questions for any society. How we choose to allocate our resources, in a world of competing national economies, is not a trivial question or topic.
Thus, the question with which this note opened, that of "cream skimming," is a much deeper one than it may initially appear. How we view the answer to this question suggests how we view answers to the deeper related questions of responsibility for situations which may be, for now, uncontrollable. It seems to me that exploring the answers to these questions is a good thing. Simply demonizing those who offer products and services from one vantage point is not.
Lance Armstrong's Troubling Endorsement
Last week I noticed an ad in the Wall Street Journal for a mutual fund complex, American Century Investments.
What was unusual, if I am not mistaken, is that the ad featured an endorsement by Lance Armstrong. A picture of the cycling great was the background for the text, which compared Lance's focus on winning to the presumed need of customers everywhere to focus on their financial performance.
If this is, indeed, an explicit endorsement by Armstrong, I confess to being dismayed.
First, who cares what a bicyclist thinks of a mutual fund complex? Armstrong is rather noted for employing a coterie of handlers to deal with the many complicated details of his operating empire. Why would anyone think he knows about equity or debt fund management?
Second, this is the first time I can recall seeing Armstrong endorse a non-athletic product which he, presumably, has not used. Or is not a tangible good. Isn't this insanely risky on his part?
It's one thing to oversee the design and production of, say, a bicycle, or an accessory, or whatever else Armstrong endores. Perhaps a car, I think? But the ongoing managment of a mutual fund complex?
Wow. Talk about financial risk!
Does this imply Armstrong's desperation, or naviete? And what of the perceived value of his endorsement, now that he's peddling money management to the masses?
I liked it better when he just rode his bicycle.
What was unusual, if I am not mistaken, is that the ad featured an endorsement by Lance Armstrong. A picture of the cycling great was the background for the text, which compared Lance's focus on winning to the presumed need of customers everywhere to focus on their financial performance.
If this is, indeed, an explicit endorsement by Armstrong, I confess to being dismayed.
First, who cares what a bicyclist thinks of a mutual fund complex? Armstrong is rather noted for employing a coterie of handlers to deal with the many complicated details of his operating empire. Why would anyone think he knows about equity or debt fund management?
Second, this is the first time I can recall seeing Armstrong endorse a non-athletic product which he, presumably, has not used. Or is not a tangible good. Isn't this insanely risky on his part?
It's one thing to oversee the design and production of, say, a bicycle, or an accessory, or whatever else Armstrong endores. Perhaps a car, I think? But the ongoing managment of a mutual fund complex?
Wow. Talk about financial risk!
Does this imply Armstrong's desperation, or naviete? And what of the perceived value of his endorsement, now that he's peddling money management to the masses?
I liked it better when he just rode his bicycle.
Inverted Curves
A very hot topic in financial circles for the past month has been the inversion of the Treasury yield curve. Currently, it is in a condition such that longer-term yields are lower than current yieleds.
At various times in the past, and I mean long past, such as up to 20 years ago, this has been coincident with the onset of recessions.
So, as you might imagine, quite a few financial media types are all over this story, to sell more ads and newspapers.
Here's a headline, though, to pour cold water on the hot topic. When asked about this, directly, during his recent Congressional testimony. He succinctly and directly replied that the inverted curve does not now portend economic recession.
How much clearer can you get? The chief monetary expert in the country, who has made it his research focus, does not believe that current conditions sustain the hypothesis that an inverted curve always portends recession.
At various times in the past, and I mean long past, such as up to 20 years ago, this has been coincident with the onset of recessions.
So, as you might imagine, quite a few financial media types are all over this story, to sell more ads and newspapers.
Here's a headline, though, to pour cold water on the hot topic. When asked about this, directly, during his recent Congressional testimony. He succinctly and directly replied that the inverted curve does not now portend economic recession.
How much clearer can you get? The chief monetary expert in the country, who has made it his research focus, does not believe that current conditions sustain the hypothesis that an inverted curve always portends recession.
This notwithstanding, the journalistic airheads on CNBC keep ranting about the inverted curve. All month long they have ignored Bernanke's comments, and sensationalized a host of minor analysts.
For the record, times have changed. I have found, in my own equity research, that the markets are qualitatively different now than prior to 1985 or so. It's easy to forget how scarce and expensive fundamental and technical information was in those days, compared to today. Computers were slower, less capable, not "online," and much more expensive. There is a sort of "one way" arrow of information effects over time. My own equity approach was less consistently successful in the era before the inexpensive and ubiquitous availability of performance data.
It pays to focus on credible sources, and ignore the lesser lights. I think Bernanke is viewing global economic expansion, and seeing the current yield curve inversion as evidence that the mediocre 70% of market participants are not processing market information correctly.
Wednesday, February 22, 2006
You Can't Judge a Book......?
Yesterday, I came home to find an unexpected bulky package in my mailbox.
For the second time in as many weeks, I had received an unsolicited book. Not exactly a typical occurrence, as I am neither a publisher, nor a reviewer of books.
However, these two particular books gave me pause, as they are exceptions to the old saying to which the title of this piece refers. Sometimes, there is enough information on a book's dust jacket to prioritize one's reading list. In this case, one volume went straight to the bottom of my list. The other is my current read.
The losing title was some combination of words like "innovation," "entrepreneurship," and, maybe, "American values," or "American economy." I really cannot recall. The author is the named donor of an entire center of study at a second- or third-tier US university. Are we surprised to learn that the center in question is focused on entrepreneurship? The gist is that without innovation, our entrepreneurship won't continue to drive our economy. Or maybe it was, 'without entrepreneurship, our economy won't be innovative.' Or was it, 'without an economy, innovators can't be entrepreneurs?' Well, you get the general sense of it.
Thanks- I was really losing sleep over these burning questions.
What sealed this book's fate was a quick look inside the cover, to see if the sender had inscribed a message. He is a classmate from graduate school, from whom I had not heard in years. No inscription. But in accidentally turning a page further, there was a page of acknowledgements, including one to the sitting CEO of GM, Rick Waggoner. That did it.
Does anyone really think Waggoner has demonstrated knowing anything about "innovation," "entrepreneurship," or running anything well during his tenure at the now-prostrate auto maker? Merely mentioning the guy on that page made me question the judgement of the author and co-author. Plus, the book's stated topics don't seem all that insightful. I would hazard to guess that our economy has out-performed most of the world's other economic systems due to its inherent risk-taking, risk-rewarding nature. Innovation and entrepreneurship would seem to be key elements of our economy on the face of it.
The other unexpected book I received recently, however, is a gem. My business partner, Steve, bought it for me on Amazon. Entitled, "Mean Markets and Lizard Brains," by Terry Burnham of Harvard. It is a rare breath of fresh air on a business-related topic from a school that is not noted, anymore, for empirical research. Burnham is a member of the second generation of academics doing work in behavioral finance, and this book is well worth reading. The title was rather obtuse, but compared to the other book, at least it wasn't uninteresting on its face.
So, maybe sometimes you can judge some things on face value, at least to rank order their worth.
I'll be writing more on Burnham's excellent book soon, as it provides some empirical foundations for why my own equity strategy has performed so consistently well over the last fifteen years.
For the second time in as many weeks, I had received an unsolicited book. Not exactly a typical occurrence, as I am neither a publisher, nor a reviewer of books.
However, these two particular books gave me pause, as they are exceptions to the old saying to which the title of this piece refers. Sometimes, there is enough information on a book's dust jacket to prioritize one's reading list. In this case, one volume went straight to the bottom of my list. The other is my current read.
The losing title was some combination of words like "innovation," "entrepreneurship," and, maybe, "American values," or "American economy." I really cannot recall. The author is the named donor of an entire center of study at a second- or third-tier US university. Are we surprised to learn that the center in question is focused on entrepreneurship? The gist is that without innovation, our entrepreneurship won't continue to drive our economy. Or maybe it was, 'without entrepreneurship, our economy won't be innovative.' Or was it, 'without an economy, innovators can't be entrepreneurs?' Well, you get the general sense of it.
Thanks- I was really losing sleep over these burning questions.
What sealed this book's fate was a quick look inside the cover, to see if the sender had inscribed a message. He is a classmate from graduate school, from whom I had not heard in years. No inscription. But in accidentally turning a page further, there was a page of acknowledgements, including one to the sitting CEO of GM, Rick Waggoner. That did it.
Does anyone really think Waggoner has demonstrated knowing anything about "innovation," "entrepreneurship," or running anything well during his tenure at the now-prostrate auto maker? Merely mentioning the guy on that page made me question the judgement of the author and co-author. Plus, the book's stated topics don't seem all that insightful. I would hazard to guess that our economy has out-performed most of the world's other economic systems due to its inherent risk-taking, risk-rewarding nature. Innovation and entrepreneurship would seem to be key elements of our economy on the face of it.
The other unexpected book I received recently, however, is a gem. My business partner, Steve, bought it for me on Amazon. Entitled, "Mean Markets and Lizard Brains," by Terry Burnham of Harvard. It is a rare breath of fresh air on a business-related topic from a school that is not noted, anymore, for empirical research. Burnham is a member of the second generation of academics doing work in behavioral finance, and this book is well worth reading. The title was rather obtuse, but compared to the other book, at least it wasn't uninteresting on its face.
So, maybe sometimes you can judge some things on face value, at least to rank order their worth.
I'll be writing more on Burnham's excellent book soon, as it provides some empirical foundations for why my own equity strategy has performed so consistently well over the last fifteen years.
Monday, February 20, 2006
Animal Spirits
It seems that last week, the equity markets decided to revalue energy company stocks upwards, while softening on technology issues.
At times like these, I am reminded of Ben Graham's famous depictions of the equity markets as person who, on some days will sell the same thing cheaply that, on other days, it will hold much more dear. With no apparent relationship between the two.
The wild ride of energy stocks so far this year bears this out. They were up significantly in January, and, then, as if a switch had been thrown, plummeting in the first ten trading days of this month. How can the long term outlook for the sector, and its various components, have been affected so much in so little time, absent any serious exogenous influences?
The answer is, as Graham observed, and Keynes, before him, "animal spirits." They seem to move investors and traders to value things in unsupportable and unsustainable ways in the short term. Thus the reason I hold stocks for several quarters. In market conditions such as these, who can possibly know that a daily value is "correct?"
Rather than attempt to trade frequently, attempting to anticipate volatile short-term price moves, I prefer to invest and hold, taking advantage of superior management and longer-term trends.
At times like these, I am reminded of Ben Graham's famous depictions of the equity markets as person who, on some days will sell the same thing cheaply that, on other days, it will hold much more dear. With no apparent relationship between the two.
The wild ride of energy stocks so far this year bears this out. They were up significantly in January, and, then, as if a switch had been thrown, plummeting in the first ten trading days of this month. How can the long term outlook for the sector, and its various components, have been affected so much in so little time, absent any serious exogenous influences?
The answer is, as Graham observed, and Keynes, before him, "animal spirits." They seem to move investors and traders to value things in unsupportable and unsustainable ways in the short term. Thus the reason I hold stocks for several quarters. In market conditions such as these, who can possibly know that a daily value is "correct?"
Rather than attempt to trade frequently, attempting to anticipate volatile short-term price moves, I prefer to invest and hold, taking advantage of superior management and longer-term trends.
Wednesday, February 15, 2006
Federal Power
This morning, while watching a portion of Ben Bernanke's first testimony on Capitol Hill as Chairman of the Federal Reserve, I listened to the whining of a Democratic Congresswoman from the state of New York.
She kept pestering Bernanke about job creation, complaining that many of her constituents were well-educated, white-collar professionals whose jobs had been eliminated or outsourced. Her tone suggested that there was some evil plot afoot to furlough the voters in her district, and Ben had better have some answers.
How sad. Why is it that so many members of Congress can't understand that it is not the job of the Federal Government to directly create jobs? In our system, the private sector is where that occurs.
Restrained spending, minimal lawmaking, and a stable currency are about all the Federal Goverment can effectively do to foster a positive economic climate in this country. Plus, of course, one of its crown jewels, the rule of law.
Think of it this way. Do you really want a job created by the same folks who waste so much of your tax dollars now in the bureaucratic morass that has become our Federal Government?
She kept pestering Bernanke about job creation, complaining that many of her constituents were well-educated, white-collar professionals whose jobs had been eliminated or outsourced. Her tone suggested that there was some evil plot afoot to furlough the voters in her district, and Ben had better have some answers.
How sad. Why is it that so many members of Congress can't understand that it is not the job of the Federal Government to directly create jobs? In our system, the private sector is where that occurs.
Restrained spending, minimal lawmaking, and a stable currency are about all the Federal Goverment can effectively do to foster a positive economic climate in this country. Plus, of course, one of its crown jewels, the rule of law.
Think of it this way. Do you really want a job created by the same folks who waste so much of your tax dollars now in the bureaucratic morass that has become our Federal Government?
Monday, February 13, 2006
No Moving Parts
My business colleague is fond of remarking, about the portfolio management business, that it has "no moving parts."
In contrast to many businesses, such as producing automobiles, information feeds, cereal, or broadband capacity, managing an equity portfolio has a very simple operational structure.
Your manufacturing floor is open every day, from 9:30am-4pm. Somebody else pays all, or most, of the expenses associated with operating this facility. There is nearly always inventory to buy, or buyers for your unwanted items. No new "deals" to find every day, week, or even month.
In my view, portfolio management distills business to its essence. Are you capable of demonstrating a facility for adding value over the always-available option of simply buying the S&P500 Index? There are a host of equities from which to choose. And many styles to adopt, or adapt, with which to do so.
But at its heart, the business of managing equity portfolio has "no moving parts." It is the ultimate outsourced business model. True, one must manage the provision of normal business functions- sales, accounting, and finance. Nevertheless, the value-added portion of the business, outperforming the market, is chillingly clear-cut.
When I first developed the research on which my strategy is based, I knew there were only two potential applications. One was to market my knowledge to CEOs and CFOs of larger corporations, as performance improvement tools. The other was to skip trying to convince CEOs that they could do better, and simply select the promising companies which actually exhibited the consistently superior performances on which I focused.
To be honest, I really had hopes for the consulting applications early on. However, I suspect the same mediocrity that results in few consistently superior large-cap companies also accounts for why few CEOs are interested in learning how to improve their company's performances.
In the end, I guess it's better to just buy and sell equities of companies, based upon their ability to perform with consistent superiority, rather than attempt to guide CEOs of companies to achieve this lucrative performance pattern.
In contrast to many businesses, such as producing automobiles, information feeds, cereal, or broadband capacity, managing an equity portfolio has a very simple operational structure.
Your manufacturing floor is open every day, from 9:30am-4pm. Somebody else pays all, or most, of the expenses associated with operating this facility. There is nearly always inventory to buy, or buyers for your unwanted items. No new "deals" to find every day, week, or even month.
In my view, portfolio management distills business to its essence. Are you capable of demonstrating a facility for adding value over the always-available option of simply buying the S&P500 Index? There are a host of equities from which to choose. And many styles to adopt, or adapt, with which to do so.
But at its heart, the business of managing equity portfolio has "no moving parts." It is the ultimate outsourced business model. True, one must manage the provision of normal business functions- sales, accounting, and finance. Nevertheless, the value-added portion of the business, outperforming the market, is chillingly clear-cut.
When I first developed the research on which my strategy is based, I knew there were only two potential applications. One was to market my knowledge to CEOs and CFOs of larger corporations, as performance improvement tools. The other was to skip trying to convince CEOs that they could do better, and simply select the promising companies which actually exhibited the consistently superior performances on which I focused.
To be honest, I really had hopes for the consulting applications early on. However, I suspect the same mediocrity that results in few consistently superior large-cap companies also accounts for why few CEOs are interested in learning how to improve their company's performances.
In the end, I guess it's better to just buy and sell equities of companies, based upon their ability to perform with consistent superiority, rather than attempt to guide CEOs of companies to achieve this lucrative performance pattern.
Jack Welch's Grab For Another Five Minutes
Holman Jenkins, Jr., the very talented editorial columnist for the Wall Street Journal, wrote yesterday of his recent interview with Jack Welch, retired CEO of GE.
What struck me most about the piece is that Jack Welch seems to be desperately grabbing for another five minutes of fame, to paraphrase the late Andy Warhol. Wasn't running GE for more than a decade sufficient?
It seems you can't turn on CNBC, open the WSJ, or visit a bookstore without seeing Neutron Jack's mug or byline. What is it with him? Does he have insecurity issues?
However, with regard to the interview piece, I continue to be mildly surprised, and, frankly, underwhelmed, that Welch seems to believe his great contribution now is to preach (the article featured a caricature of Welch in a minister's collar) about hiring great employees, being honest in performance reviews, and letting your managers run the company.
It seems to me that the first two are old hat. Who seriously needs Jack Welch to tell them to hire smart people, or fire the nonperformers? The last is perhaps why GE has never been included in my portfolio selections of consistently superior fundamental and technical performers. As a conglomerate, Welch didn't really seem to "lead" strategically, so much as "cheerlead."
Some years ago, I had the occasion to meet with Mr. Welch to discuss a new value-added measurement and management approach I had developed, which led to the portfolio management approach I now use. In the discussion, I showed him a chart using an early version of a concept I now view as crucial for CEOs. It plotted GE's market value change versus the market. At that time I used the Dow. Now it would be the S&P500.
What was evident then, in the mid-1990s, was that the bulk of Welch's market value creation at GE, relative to what an investor could have gotten in the market, occurred in the initial years of his tenure. His successful triage, upon becoming CEO, was instrumental in creating relative value for his shareholders.
So it seems to me that what would be most compelling to hear from Welch is how he did that. His defining value-creation era was, I believe, when he culled the mess he inherited from Reg Jones.
I'm not at all sure GE has been a consistently superior company since then. Its description by some market analysts as a close-ended mutual fund seems on target. For the last five years, it has lagged the S&P500. What does that say about the company Welch handed to Immelt?
In fact, it may be recalled, Immelt was roundly criticized for "owning" two inherited practices of Welch. One was overleveraging GE Capital, in order to grow earnings faster. The other was using these earnings to subsidize, dare I say mask, the slower growth and margin challenges of GE's industrial businesses.
It seems to me that Welch is trying awfully hard to remain in the business spotlight after his allotted five minutes of fame, and not even by counseling others on what he did uniquely well as CEO. Why?
What struck me most about the piece is that Jack Welch seems to be desperately grabbing for another five minutes of fame, to paraphrase the late Andy Warhol. Wasn't running GE for more than a decade sufficient?
It seems you can't turn on CNBC, open the WSJ, or visit a bookstore without seeing Neutron Jack's mug or byline. What is it with him? Does he have insecurity issues?
However, with regard to the interview piece, I continue to be mildly surprised, and, frankly, underwhelmed, that Welch seems to believe his great contribution now is to preach (the article featured a caricature of Welch in a minister's collar) about hiring great employees, being honest in performance reviews, and letting your managers run the company.
It seems to me that the first two are old hat. Who seriously needs Jack Welch to tell them to hire smart people, or fire the nonperformers? The last is perhaps why GE has never been included in my portfolio selections of consistently superior fundamental and technical performers. As a conglomerate, Welch didn't really seem to "lead" strategically, so much as "cheerlead."
Some years ago, I had the occasion to meet with Mr. Welch to discuss a new value-added measurement and management approach I had developed, which led to the portfolio management approach I now use. In the discussion, I showed him a chart using an early version of a concept I now view as crucial for CEOs. It plotted GE's market value change versus the market. At that time I used the Dow. Now it would be the S&P500.
What was evident then, in the mid-1990s, was that the bulk of Welch's market value creation at GE, relative to what an investor could have gotten in the market, occurred in the initial years of his tenure. His successful triage, upon becoming CEO, was instrumental in creating relative value for his shareholders.
So it seems to me that what would be most compelling to hear from Welch is how he did that. His defining value-creation era was, I believe, when he culled the mess he inherited from Reg Jones.
I'm not at all sure GE has been a consistently superior company since then. Its description by some market analysts as a close-ended mutual fund seems on target. For the last five years, it has lagged the S&P500. What does that say about the company Welch handed to Immelt?
In fact, it may be recalled, Immelt was roundly criticized for "owning" two inherited practices of Welch. One was overleveraging GE Capital, in order to grow earnings faster. The other was using these earnings to subsidize, dare I say mask, the slower growth and margin challenges of GE's industrial businesses.
It seems to me that Welch is trying awfully hard to remain in the business spotlight after his allotted five minutes of fame, and not even by counseling others on what he did uniquely well as CEO. Why?
Not-So-Golden Oldie
This past Thursday, the Wall Street Journal printed an editorial by Peter Chernin, credited as president and CEO of (Rupert Murdoch's) News Corporation. Judging by Mr. Chernin's articulation of the return of "old media," I believe I better understand why it has been on its way out to begin with.
Under the guise of any media-related technology, Mr. Chernin asserts that "old media" is not dead. Far from it, he maintains. All these new technologies- broadband, wireless, cheaper storage, on-demand viewing, interactivity- all allegedly actually play to "old media's" strengths.
Funny, but I could have sworn that all or most of these forces are precisely why "old media" is, well, old.
Take interactivity, for example. Old media can't do this. If a medium can, then by definition, it's not "old." Same with on-demand, or wireless.
The whole point, Chernin's protestation to the contrary, is that "new media" can do more rifle-shooting of segments. Such as cable, video on-demand, and itunes. In fact, it's because of this sort of competition, ultimately ending in any video content being available wirelessly from a url, that is causing conventional network TV to lose value faster than the contents of an unrefrigerated Good Humor truck on a midwestern August afternoon.
Perhaps it is due to companies like News Corp having CEOs like Mr. Chernin that their ilk have never been selected for inclusion into my equity portfolio's strategy of consistently-superior fundamental and technical companies. If the strategic thinking in his recent WSJ piece reflects News Corp's view of the world, I'd say Mr. Murdoch has overpaid his own management, and it's not going to do much to increase shareholder value at the company very consistently in the near future. Perhaps in the conference rooms of News Corp, this type of thinking counts as nimble, longterm strategy. I suspect that, in the rest of the competitive environment, it marks "old media," News Corp included, as badly out of position as new technologies gut the value of yesterday's communications titans.
Under the guise of any media-related technology, Mr. Chernin asserts that "old media" is not dead. Far from it, he maintains. All these new technologies- broadband, wireless, cheaper storage, on-demand viewing, interactivity- all allegedly actually play to "old media's" strengths.
Funny, but I could have sworn that all or most of these forces are precisely why "old media" is, well, old.
Take interactivity, for example. Old media can't do this. If a medium can, then by definition, it's not "old." Same with on-demand, or wireless.
The whole point, Chernin's protestation to the contrary, is that "new media" can do more rifle-shooting of segments. Such as cable, video on-demand, and itunes. In fact, it's because of this sort of competition, ultimately ending in any video content being available wirelessly from a url, that is causing conventional network TV to lose value faster than the contents of an unrefrigerated Good Humor truck on a midwestern August afternoon.
Perhaps it is due to companies like News Corp having CEOs like Mr. Chernin that their ilk have never been selected for inclusion into my equity portfolio's strategy of consistently-superior fundamental and technical companies. If the strategic thinking in his recent WSJ piece reflects News Corp's view of the world, I'd say Mr. Murdoch has overpaid his own management, and it's not going to do much to increase shareholder value at the company very consistently in the near future. Perhaps in the conference rooms of News Corp, this type of thinking counts as nimble, longterm strategy. I suspect that, in the rest of the competitive environment, it marks "old media," News Corp included, as badly out of position as new technologies gut the value of yesterday's communications titans.
Wednesday, February 08, 2006
CNBC: The Tower of Babble
My two main daily sources of business news are CNBC and the Wall Street Journal. I've subscribed to the latter since I left graduate school. CNBC is typically on in the background throughout the day while I am working.
In general, I find the WSJ to be the best daily business reporting available. With the exception of the entertainment-oriented Money & Investing Section, it's a great paper.
However, I have found CNBC to be almost purely entertainment. In fact, recently I went thru the bios for their on-air personalities. What I found caused me some surprise, but even more dismay. From 6am to when Larry Kudlow comes on, at 5pm, there is only one person on CNBC who is listed as having an economics or business degree. Everyone else has english, journalism, or other unrelated degrees.
The reason this matters, in my opinion, is because the shows also cover breaking market news during the day. There is nobody on the network's staff, with the possible exception of Joe Kernan, who appears to be able to provide intelligent, insightful and concise interpretation of news topics. Rather, vague questions and fuzzy comments abound.
For instance, one of the staff was reporting on a recent energy conference onsite from Texas. She provided a "breaking story" concerning the Saudi oil minister announcing that country's plans to double refining capaciy. Sue Herrera, the New York anchor during that show, breathily summed up the reporter's comments with words to the effect, and this is a parphrase, 'well, there you have it, perhaps some important developments coming out of that conference on energy......' So instead of a seasoned pundit, you get airhead remarks like that.
Don't get me wrong- they do occasionally have some good guests. Not blowhards like Jack Welch or his faithful disciple, Larry Bossidy. I am referring to guests like Mike Holland, Mario Gabelli, Larry Kudlow, or former Commerce Secretary Don Evans. And it is primarily to hear these people that I tune in the CNBC network.
However, seeing all these under-educated writers as talking heads, I have come to conclude that CNBC is trying to give the "man in the street" approach fresh legs. Instead of providing in-depth expertise on the program staff, they stand in for the clueless individual by appearing to be clueless themselves.
It would be funny, if I didn't feel that they magnify fluff while missing in depth analysis of the more important business stories. While I do not ascribe such power to CNBC that I believe their lightweight on-air staff causes market volatility, I do believe their reporting misses the opportunity to provide more thoughtful interpretation of business and market developments.
In general, I find the WSJ to be the best daily business reporting available. With the exception of the entertainment-oriented Money & Investing Section, it's a great paper.
However, I have found CNBC to be almost purely entertainment. In fact, recently I went thru the bios for their on-air personalities. What I found caused me some surprise, but even more dismay. From 6am to when Larry Kudlow comes on, at 5pm, there is only one person on CNBC who is listed as having an economics or business degree. Everyone else has english, journalism, or other unrelated degrees.
The reason this matters, in my opinion, is because the shows also cover breaking market news during the day. There is nobody on the network's staff, with the possible exception of Joe Kernan, who appears to be able to provide intelligent, insightful and concise interpretation of news topics. Rather, vague questions and fuzzy comments abound.
For instance, one of the staff was reporting on a recent energy conference onsite from Texas. She provided a "breaking story" concerning the Saudi oil minister announcing that country's plans to double refining capaciy. Sue Herrera, the New York anchor during that show, breathily summed up the reporter's comments with words to the effect, and this is a parphrase, 'well, there you have it, perhaps some important developments coming out of that conference on energy......' So instead of a seasoned pundit, you get airhead remarks like that.
Don't get me wrong- they do occasionally have some good guests. Not blowhards like Jack Welch or his faithful disciple, Larry Bossidy. I am referring to guests like Mike Holland, Mario Gabelli, Larry Kudlow, or former Commerce Secretary Don Evans. And it is primarily to hear these people that I tune in the CNBC network.
However, seeing all these under-educated writers as talking heads, I have come to conclude that CNBC is trying to give the "man in the street" approach fresh legs. Instead of providing in-depth expertise on the program staff, they stand in for the clueless individual by appearing to be clueless themselves.
It would be funny, if I didn't feel that they magnify fluff while missing in depth analysis of the more important business stories. While I do not ascribe such power to CNBC that I believe their lightweight on-air staff causes market volatility, I do believe their reporting misses the opportunity to provide more thoughtful interpretation of business and market developments.
Tuesday, February 07, 2006
GM: More Ado About Nothing
With all the media attention to the so-called news out of GM this morning, you would think they actually have accomplished something.
Nothing could be further from the truth. All that happened is that Kirk Kerkorian got his guy, Jerry York, onto GM's board. This will ostensibly protect Kirk's losing investment in the once-proud auto giant. However, it is widely reported that most, if not all, of what York clamored for has now been done- the reduced dividend, the executive pay cuts, and a few other items.
Perhaps it was just a slow newsday that brought such attention to the ailing auto maker. Seriously, does adding one person to the board really change anything in GM's future?
Nothing could be further from the truth. All that happened is that Kirk Kerkorian got his guy, Jerry York, onto GM's board. This will ostensibly protect Kirk's losing investment in the once-proud auto giant. However, it is widely reported that most, if not all, of what York clamored for has now been done- the reduced dividend, the executive pay cuts, and a few other items.
Perhaps it was just a slow newsday that brought such attention to the ailing auto maker. Seriously, does adding one person to the board really change anything in GM's future?
Monday, February 06, 2006
Hybrid Hoo Haa
It is with some dismay that I have watched the wave of public acclaim wash over the hybrid automobile market segment recently. Even my two daughters have been summarily brainwashed by their liberal teachers to believe that hybrids will be the salvation of our pollution crisis.
The most piercing analysis of the product group which I have read was written a few weeks ago by Holman Jenkins of the Wall Street Journal's OpEd page. In that piece, and it may even have been two pieces, he accurately roasted vendors for preying on consumers' naivete and consciences, while doing virtually nothing to "solve" any "crisis."
Basically, Mr. Jenkins pointed out that, with the current demand for gasoline, hybrid owners are not "saving" any of the fuel, so much as they are allowing others to buy an unchanged amount of it at possibly lower prices, should hybrids actually reduce overall gasoline demand. If anything, they may actually increase energy usage, as they use the power grid to recharge, thus consuming even more hydrocarbons. So much for less pollution.
But the best part of his editorial was his analysis of the economics of buying one of these cars. I don't have the detailed numbers at hand, but he essentially demonstrated that, at the incredible premiums these vehicles command at retail, they set consumers back far, far more in cash than they can reasonably be presumed to be "saving" at the gas pump.
Now, that last point is important, because I have noticed Ford recently pinning its hopes for survival on hybrids. This morning, a representative of the company was on CNBC, touting it's "long" history of producing the vehicles. My question is, exactly who is supposed to be shelling out the extra thousands of dollars one pays to cleanse one's conscience when purchasing a hybrid vehicle?
Is it reasonable to expect to save Ford on the back of a vehicle that is actually uneconomical to buy? Just because George Bush mentioned the vehicle type in his State of the Union address does not, I think, mean it's going to bail out Ford or GM.
However, in the spirit of green folk everywhere, please do go out and buy a hybrid. Save me some money at the gas pump this winter!
The most piercing analysis of the product group which I have read was written a few weeks ago by Holman Jenkins of the Wall Street Journal's OpEd page. In that piece, and it may even have been two pieces, he accurately roasted vendors for preying on consumers' naivete and consciences, while doing virtually nothing to "solve" any "crisis."
Basically, Mr. Jenkins pointed out that, with the current demand for gasoline, hybrid owners are not "saving" any of the fuel, so much as they are allowing others to buy an unchanged amount of it at possibly lower prices, should hybrids actually reduce overall gasoline demand. If anything, they may actually increase energy usage, as they use the power grid to recharge, thus consuming even more hydrocarbons. So much for less pollution.
But the best part of his editorial was his analysis of the economics of buying one of these cars. I don't have the detailed numbers at hand, but he essentially demonstrated that, at the incredible premiums these vehicles command at retail, they set consumers back far, far more in cash than they can reasonably be presumed to be "saving" at the gas pump.
Now, that last point is important, because I have noticed Ford recently pinning its hopes for survival on hybrids. This morning, a representative of the company was on CNBC, touting it's "long" history of producing the vehicles. My question is, exactly who is supposed to be shelling out the extra thousands of dollars one pays to cleanse one's conscience when purchasing a hybrid vehicle?
Is it reasonable to expect to save Ford on the back of a vehicle that is actually uneconomical to buy? Just because George Bush mentioned the vehicle type in his State of the Union address does not, I think, mean it's going to bail out Ford or GM.
However, in the spirit of green folk everywhere, please do go out and buy a hybrid. Save me some money at the gas pump this winter!
Wednesday, February 01, 2006
Dispassion
I've had a dry spell for the last few days. Nothing, or almost nothing, in the business press incited a passionate response in me. I have been dispassionate.
On reflection, though, I have decided there are two things which elicit sufficient passion to merit a post.
First, my equity portfolio strategy registered a 7.7% gain for the month of January. The S&P500, by comparison, returned 2.6%. I'm quite pleased by this performance. In fact, I had to take a look at my 2005 performance to recall that the strategy's performance in this month just ended is nearly as good as my best month last year. As this blog is notionally about my musings with respect to the equity markets in which I invest, I suppose this is a relevant topic on which to write.
Second, a friend (the same NYTimes-reading friend who passed me the recent piece about Les Moonves and the recent TV network consolidation) passed me a NYT piece by Ben Stein. Ben was writing indignantly about Glenn Tilton and friends, who manage UAL and have just led it out of Chapter 11. He is indignant that, through various financial steps, the management which led the firm into bankruptcy, i.e., a less than competent team, has rewarded itself handsomely on the way out, with a multi-million dollar compensation pool. This is presumably at the expense of the owners/workers of the airline, who are its union employees.
I happen to like Ben Stein a lot- as a conservative thinker, an actor, and a writer. On one level, I share his indignation.
However, on another, I do not. As I wrote earlier in this blog, regarding our nearly-hopelessly-fouled-up pension system, the dog that has not barked, to paraphrase Conan Doyle, is the media outrage over the inept union leaders who consented to owning a piece of UAL in the first place.
How many times do these geniuses have to mess up to learn that, when a corporate management errs so badly as to go bankrupt, it is not a good idea to take your receivable in the form of equity in a reorganized company that these same managers are going to continue to run? Duh....
For goodness sake, just get in line in court and take the cash when you can. Or bargain for the right to hire your own management. But to supinely hang around and watch Act II, complete with a questionable payout to the team that got you into the mess in the first place, just seems too incredulous for words.
My own take on this sorry situation is that the union rank and file have, once again, gotten the "benefit" of the union leadership they elected and, so, deserve. Welcome to democracy, guys and gals. You voted for it, you own it!
Don't come crying to the rest of us about what a bad deal you made in the quest to keep UAL alive, in the face of obvious excess global airline capacity. Elect better leaders in your union next time, and maybe you won't make this mistake twice.
Oh, and because this blog is, notionally, about the large-cap equity markets, let me add this. I seriously doubt that my portfolio selection approach will ever own an airline like UAL, or, specifically, UAL. It has, in the past, briefly selected Southwest Air. But a major carrier remnant? Not a chance. We go for consistently superior performance by quality management. UAL would never make that cut.
On reflection, though, I have decided there are two things which elicit sufficient passion to merit a post.
First, my equity portfolio strategy registered a 7.7% gain for the month of January. The S&P500, by comparison, returned 2.6%. I'm quite pleased by this performance. In fact, I had to take a look at my 2005 performance to recall that the strategy's performance in this month just ended is nearly as good as my best month last year. As this blog is notionally about my musings with respect to the equity markets in which I invest, I suppose this is a relevant topic on which to write.
Second, a friend (the same NYTimes-reading friend who passed me the recent piece about Les Moonves and the recent TV network consolidation) passed me a NYT piece by Ben Stein. Ben was writing indignantly about Glenn Tilton and friends, who manage UAL and have just led it out of Chapter 11. He is indignant that, through various financial steps, the management which led the firm into bankruptcy, i.e., a less than competent team, has rewarded itself handsomely on the way out, with a multi-million dollar compensation pool. This is presumably at the expense of the owners/workers of the airline, who are its union employees.
I happen to like Ben Stein a lot- as a conservative thinker, an actor, and a writer. On one level, I share his indignation.
However, on another, I do not. As I wrote earlier in this blog, regarding our nearly-hopelessly-fouled-up pension system, the dog that has not barked, to paraphrase Conan Doyle, is the media outrage over the inept union leaders who consented to owning a piece of UAL in the first place.
How many times do these geniuses have to mess up to learn that, when a corporate management errs so badly as to go bankrupt, it is not a good idea to take your receivable in the form of equity in a reorganized company that these same managers are going to continue to run? Duh....
For goodness sake, just get in line in court and take the cash when you can. Or bargain for the right to hire your own management. But to supinely hang around and watch Act II, complete with a questionable payout to the team that got you into the mess in the first place, just seems too incredulous for words.
My own take on this sorry situation is that the union rank and file have, once again, gotten the "benefit" of the union leadership they elected and, so, deserve. Welcome to democracy, guys and gals. You voted for it, you own it!
Don't come crying to the rest of us about what a bad deal you made in the quest to keep UAL alive, in the face of obvious excess global airline capacity. Elect better leaders in your union next time, and maybe you won't make this mistake twice.
Oh, and because this blog is, notionally, about the large-cap equity markets, let me add this. I seriously doubt that my portfolio selection approach will ever own an airline like UAL, or, specifically, UAL. It has, in the past, briefly selected Southwest Air. But a major carrier remnant? Not a chance. We go for consistently superior performance by quality management. UAL would never make that cut.
Thursday, January 26, 2006
Misunderstanding Consolidating Industries: A Lesson From Schumpeter
Two of our nation's large daily papers contained articles this week which shared a common misunderstanding of the implications of sector consolidation.
A friend sent me the New York Times piece on Les Moonves' newly hatched television network hookup with Time Warner's WB. The new network, a combination of CBS's UPN with WB, to be known as CW, should be somewhere south of the #3 broadcast network.
Meanwhile, Jesse Eissinger wrote about GM's woes, and some second-tier sell-side analyst's wacky scheme for giving the thing to the employees to run, in yesterday's Wall Street Journal.
Now, I will grant Mr. Moonves his "midas touch" with programming. However, sadly, that does not a CEO make. It's all well and good to stanch the bleeding fiscal wound that has been UPN, but it doesn't mean CBS is suddenly reinvigorated by this combination. I think, at best, it's triage.
So, is it me, or do the writers in the business section of the Times not understand what this consolidation really means? The Big 3 broadcasters are already worried about their survivability in current form. What do you think this means for the smaller broadcasters? In this case, consolidation means the entire sector is finally succumbing to competitive pressure from cable, satellite, and, yes, the internet. The last of these is now nearly indistinguishable from digital cable, in that both will allow users to watch what they want, when the want.
Presto....chango......and the broadcasters vanish! I'm not sure Harry Houdini would be able to make them reappear again, at least not in recognizable form.
Now to Mr Eissinger's handwringing about GM. He begins by noting that the firm is once again, with Ford, making huge capacity and employee cuts, while foreign-based auto manufacturers continue to put up more plants and hire more workers in the US. So far, so good. He understands that Ford and GM are poorly-run companies on their way into bankruptcy.
Then Mr. Eissinger loses his perspective, and begins to wail about how important it is for the US that GM be preserved.
First, let me say that this is his second really ill-conceived article in the Journal within a fairly short timespan. I can hardly wait for strike three. Frankly, I'm beginning to wonder why he is still on the paper's staff, unless it is to be their new "Al Hunt" in training.
Second, Eissinger, like the Times writer, has it all wrong.
Joseph Schumpeter first wrote about the (now overused to the point of naseau-induction) "gale of creative destruction" in the 1920s. That is what we are seeing in these two industries now.
Both sectors, broadcast television and automobile manufacturing, have become much less value-adding than they were as recently as a decade ago. So it is no wonder that resources are being pulled out of them, voluntarily or not, to feed new sectors. In this case, ironically, probably the same new one- online communications. It is clear that broadcast television is being devoured by cable and the internet. It may well be argued that these same advances have resulted in a lessening of primary demand for vehicles of the type Detroit-based manufacturers have produced, making them less important as well.
In any case, neither demise is by any means lethal for our Republic. Nor should they surprise us. If the largest phone company on earth, AT&T, could have vanished without a trace, why should the disappearance of broadcast networks and auto makers be any different? UPN's and WB's is a totally predictable, but not very important, event from an industrial structure viewpoint. GM's demise is actually a good thing. There is way too much capacity in that sector as it is, and the weakest firm is the one most likely to die first.
Do you really want to commit serious capital to an industry, such as auto making, where most of the value-adding is now done in the design function, whereas most of the components are produced by parts vendors? Vehicle production is more assembly than "manufacturing" nowadays. It's arguable that a billionaire could profitably hire a team to design cars, license dealers to sell them, and job out the actual assembly via competitive bidding to some current car "manufacturer."
When the provision of a service or product such as these companies offer becomes so commoditized that consolidation is necessary to achieve any semblance of profitability, that's a good thing for consumers in terms of living standards and quality of life. This is what Schumpeter saw before anyone else. The perennial gale of resource reuse among sectors is the hallmark of a successful, dynamic economy in which consumers continually enjoy increased living standards, while resources are productively recycled.
The UPN/WB merger is a good, but probably not very earthshaking development. Whether it marks Moonves as a great CEO is unclear at this time, but it does mark him as a pragmatic, informed one. And that alone may signal that he is on his way to success in the role. The GM crisis is, as Eissinger ruminated, the beginning of the end for the weakest player in an overcrowded global vehicle production sector.
The markets are working as intended. Here's to better living standards from the most productive resource "recycling" that our society ever does.
A friend sent me the New York Times piece on Les Moonves' newly hatched television network hookup with Time Warner's WB. The new network, a combination of CBS's UPN with WB, to be known as CW, should be somewhere south of the #3 broadcast network.
Meanwhile, Jesse Eissinger wrote about GM's woes, and some second-tier sell-side analyst's wacky scheme for giving the thing to the employees to run, in yesterday's Wall Street Journal.
Now, I will grant Mr. Moonves his "midas touch" with programming. However, sadly, that does not a CEO make. It's all well and good to stanch the bleeding fiscal wound that has been UPN, but it doesn't mean CBS is suddenly reinvigorated by this combination. I think, at best, it's triage.
So, is it me, or do the writers in the business section of the Times not understand what this consolidation really means? The Big 3 broadcasters are already worried about their survivability in current form. What do you think this means for the smaller broadcasters? In this case, consolidation means the entire sector is finally succumbing to competitive pressure from cable, satellite, and, yes, the internet. The last of these is now nearly indistinguishable from digital cable, in that both will allow users to watch what they want, when the want.
Presto....chango......and the broadcasters vanish! I'm not sure Harry Houdini would be able to make them reappear again, at least not in recognizable form.
Now to Mr Eissinger's handwringing about GM. He begins by noting that the firm is once again, with Ford, making huge capacity and employee cuts, while foreign-based auto manufacturers continue to put up more plants and hire more workers in the US. So far, so good. He understands that Ford and GM are poorly-run companies on their way into bankruptcy.
Then Mr. Eissinger loses his perspective, and begins to wail about how important it is for the US that GM be preserved.
First, let me say that this is his second really ill-conceived article in the Journal within a fairly short timespan. I can hardly wait for strike three. Frankly, I'm beginning to wonder why he is still on the paper's staff, unless it is to be their new "Al Hunt" in training.
Second, Eissinger, like the Times writer, has it all wrong.
Joseph Schumpeter first wrote about the (now overused to the point of naseau-induction) "gale of creative destruction" in the 1920s. That is what we are seeing in these two industries now.
Both sectors, broadcast television and automobile manufacturing, have become much less value-adding than they were as recently as a decade ago. So it is no wonder that resources are being pulled out of them, voluntarily or not, to feed new sectors. In this case, ironically, probably the same new one- online communications. It is clear that broadcast television is being devoured by cable and the internet. It may well be argued that these same advances have resulted in a lessening of primary demand for vehicles of the type Detroit-based manufacturers have produced, making them less important as well.
In any case, neither demise is by any means lethal for our Republic. Nor should they surprise us. If the largest phone company on earth, AT&T, could have vanished without a trace, why should the disappearance of broadcast networks and auto makers be any different? UPN's and WB's is a totally predictable, but not very important, event from an industrial structure viewpoint. GM's demise is actually a good thing. There is way too much capacity in that sector as it is, and the weakest firm is the one most likely to die first.
Do you really want to commit serious capital to an industry, such as auto making, where most of the value-adding is now done in the design function, whereas most of the components are produced by parts vendors? Vehicle production is more assembly than "manufacturing" nowadays. It's arguable that a billionaire could profitably hire a team to design cars, license dealers to sell them, and job out the actual assembly via competitive bidding to some current car "manufacturer."
When the provision of a service or product such as these companies offer becomes so commoditized that consolidation is necessary to achieve any semblance of profitability, that's a good thing for consumers in terms of living standards and quality of life. This is what Schumpeter saw before anyone else. The perennial gale of resource reuse among sectors is the hallmark of a successful, dynamic economy in which consumers continually enjoy increased living standards, while resources are productively recycled.
The UPN/WB merger is a good, but probably not very earthshaking development. Whether it marks Moonves as a great CEO is unclear at this time, but it does mark him as a pragmatic, informed one. And that alone may signal that he is on his way to success in the role. The GM crisis is, as Eissinger ruminated, the beginning of the end for the weakest player in an overcrowded global vehicle production sector.
The markets are working as intended. Here's to better living standards from the most productive resource "recycling" that our society ever does.
Wednesday, January 25, 2006
Ford's New Way Forward
It was with a fair degree of irony that I read in Monday's Wall Street Journal about Bill Ford's "way forward" on the very same page as an article about knowledge management and transfer.
Suffice to say that I think Ford is in far more serious trouble than it probably realizes, and more trouble than a few plant closings will solve.
When a CEO begins to tout his, and his company's, sudden embrace of basic marketing concepts taught to me, literally, in my introductory marketing course, MK100, 30 years ago, you know his company is in deep, deep trouble.
The salient strength of any company, and a salient measurement of my equity portfolio strategy's selection process, is success at identifying and selling to the right mix of segments in a company's market. If this is flawed, there is no basis for longterm consistently superior fundamental performance of the type that brings consistently superior total return performance over time, either.
What really struck me, however, is that this is at least the third time in 20 years that Ford has had to tout its (re) conversion to basic marketing. Is it not ironic that in the same issue of the Journal, on the same page, another article discusses how to recover important management and operations information within a company, and disseminate it among employees? When I was with Accenture, this was typically called "best practices". You would think that Bill Ford and his team might have invited Ford's erstwhile, successful Chairman/CEO team of Don Peterson and Harold "Red" Poling from the late '80s and early '90s, in for coffee, or more, to pick their brains.
From what I have read this morning in googled articles from that era, Poling had to do essentially what Bill Ford is attempting again. Maybe the latter has talked to the former, in private. For the shareholders' sakes, I hope so.
In the meantime, though, I wouldn't be buying Ford's stock. It may beat the odds and actually turn around in time, but it seems like an overly risky proposition to me. Any company that has to rediscover the sine qua non of a successful enterprise, which is great marketing and marketing strategy, is a poor bet for longterm consistently superior performance. In the auto sector, I'd even say it's more a question of survival, now, rather than longterm performance.
Suffice to say that I think Ford is in far more serious trouble than it probably realizes, and more trouble than a few plant closings will solve.
When a CEO begins to tout his, and his company's, sudden embrace of basic marketing concepts taught to me, literally, in my introductory marketing course, MK100, 30 years ago, you know his company is in deep, deep trouble.
The salient strength of any company, and a salient measurement of my equity portfolio strategy's selection process, is success at identifying and selling to the right mix of segments in a company's market. If this is flawed, there is no basis for longterm consistently superior fundamental performance of the type that brings consistently superior total return performance over time, either.
What really struck me, however, is that this is at least the third time in 20 years that Ford has had to tout its (re) conversion to basic marketing. Is it not ironic that in the same issue of the Journal, on the same page, another article discusses how to recover important management and operations information within a company, and disseminate it among employees? When I was with Accenture, this was typically called "best practices". You would think that Bill Ford and his team might have invited Ford's erstwhile, successful Chairman/CEO team of Don Peterson and Harold "Red" Poling from the late '80s and early '90s, in for coffee, or more, to pick their brains.
From what I have read this morning in googled articles from that era, Poling had to do essentially what Bill Ford is attempting again. Maybe the latter has talked to the former, in private. For the shareholders' sakes, I hope so.
In the meantime, though, I wouldn't be buying Ford's stock. It may beat the odds and actually turn around in time, but it seems like an overly risky proposition to me. Any company that has to rediscover the sine qua non of a successful enterprise, which is great marketing and marketing strategy, is a poor bet for longterm consistently superior performance. In the auto sector, I'd even say it's more a question of survival, now, rather than longterm performance.
Tuesday, January 24, 2006
The Real Meaning of Disney's Acquisition of Pixar
Out of curiosity, I watched the CNBC coverage of the Iger-Jobs announcement of Disney's acquisition of Pixar this afternoon. To say it was anticlimactic is an understatement.
Of far more interest, I found, were the various pundits and analysts weighing in with opinions on the brewing deal throughout the day. My favorite is a guy whose name escapes me, but is a contributing editor to Vanity Fair.
He stated what I believe is the most lucid and informed view of the combination. A view which I share.
Basically, he felt that, had Michael Eisner spent more wisely over the past 5-10 years, Disney would have had a capable team of new animators to drive a more integrated, home-grown value-adding capability for more digitally animated movies.
Instead, Eisner skimped, and drove off other talented Disney senior managers, leaving the company to rely on an outsider, Pixar, for most of the value-added components to its animated features. The result is a $7B price tag for Disney's existing shareholders.
The commentator went on to note that Disney already owns the rights to distribute the current and next animated films from Pixar. Thus, the $7B is being paid for future efforts. A well-regarded senior Pixar employee, John Lasseter, director of animation, was mentioned as certainly costing much less than $7B to recruit to Disney.
Despite all the hoopla about this combination, and what it means for Apple, Disney and digital media content development and distribution, it really seems to be a very simple story.
Disney has been mismanaged for a decade, and lost control of the evolving digital animation components for its signature feature films. Steve Jobs, while wandering out in the wilderness during his exile from Apple, founded Pixar. The latter ultimately came to provide what Disney shortsightedly failed to develop- digital animated content creation. The result is a $7B tab presented today to Disney shareholders, further enriching Steve Jobs and partners.
Nevermind the nattering about Jobs and Iger, or Disney and Apple, or Pixar and Apple. Even your grandmother knows, at this point, that all the entertainment and other content shops are going to be looking to distribute digital media content onto every handheld, wireless, desktop and laptop device they can, anyway they can. Jobs and Apple, aside from their current lead in music, probably don't have that much of a conceptual advantage in this regard.
No, this story is solely about Disney's failure under Eisner to invest for the future, and Iger's need to purchase Pixar in order to gain control of the creative engine for digital animated feature-length films in the future.
Credit Iger with saying not a word about his predecessor's mistake. And with being able to get Jobs to the negotiating table. It's not Iger's fault that this was a necessary step for Disney. However, that said, I don't think it materially enhances Disney's value. It probably just keeps it from deteriorating in the near future. Marriages of creative functions and companies are fraught with peril.
Stay tuned to see if this one follows the usual script.....
Of far more interest, I found, were the various pundits and analysts weighing in with opinions on the brewing deal throughout the day. My favorite is a guy whose name escapes me, but is a contributing editor to Vanity Fair.
He stated what I believe is the most lucid and informed view of the combination. A view which I share.
Basically, he felt that, had Michael Eisner spent more wisely over the past 5-10 years, Disney would have had a capable team of new animators to drive a more integrated, home-grown value-adding capability for more digitally animated movies.
Instead, Eisner skimped, and drove off other talented Disney senior managers, leaving the company to rely on an outsider, Pixar, for most of the value-added components to its animated features. The result is a $7B price tag for Disney's existing shareholders.
The commentator went on to note that Disney already owns the rights to distribute the current and next animated films from Pixar. Thus, the $7B is being paid for future efforts. A well-regarded senior Pixar employee, John Lasseter, director of animation, was mentioned as certainly costing much less than $7B to recruit to Disney.
Despite all the hoopla about this combination, and what it means for Apple, Disney and digital media content development and distribution, it really seems to be a very simple story.
Disney has been mismanaged for a decade, and lost control of the evolving digital animation components for its signature feature films. Steve Jobs, while wandering out in the wilderness during his exile from Apple, founded Pixar. The latter ultimately came to provide what Disney shortsightedly failed to develop- digital animated content creation. The result is a $7B tab presented today to Disney shareholders, further enriching Steve Jobs and partners.
Nevermind the nattering about Jobs and Iger, or Disney and Apple, or Pixar and Apple. Even your grandmother knows, at this point, that all the entertainment and other content shops are going to be looking to distribute digital media content onto every handheld, wireless, desktop and laptop device they can, anyway they can. Jobs and Apple, aside from their current lead in music, probably don't have that much of a conceptual advantage in this regard.
No, this story is solely about Disney's failure under Eisner to invest for the future, and Iger's need to purchase Pixar in order to gain control of the creative engine for digital animated feature-length films in the future.
Credit Iger with saying not a word about his predecessor's mistake. And with being able to get Jobs to the negotiating table. It's not Iger's fault that this was a necessary step for Disney. However, that said, I don't think it materially enhances Disney's value. It probably just keeps it from deteriorating in the near future. Marriages of creative functions and companies are fraught with peril.
Stay tuned to see if this one follows the usual script.....
Thursday, January 19, 2006
Jamie Dimon's "Second Chance"
I honestly don't know whether to laugh or cry. This morning's Wall Street Journal piece on the front page of section C, complete with frameable cartoon of Jamie Dimon carrying a ladder, hammer and blueprints, contains enough material to do both.
My first reaction is to wonder at the paucity of capable leaders and managers which requires that the once-failed protege of Sandy Weill is called on to head a major US bank. Can there really be no better CEO for Chase than this retread? The article correctly points out that Dimon hasn't really had significant management experience in anything but cutting costs and operations, as befits a student of the now-departed Citigroup CEO.
So I guess we are to believe that a cost-cutter is now the best candidate to try to grow a company which (and I say this as a former "old Chase" staffer who has met and worked with several former CEOs of the company, including Mr. Rockefeller) has never successfully grown at a consistently superior rate without engendering serious credit problems and losses.
Without going into detail on each of the article's points regarding Chase's current business positions, let me suggest two things.
First, the management team at Chase, including it's recycled new leader, is probably not up to the task. None of the precursor banks (Chase Manhattan, Chemical, Manufacturers Hanover, JP Morgan, Banc One, First Chicago) which are now embodied in JP Morgan Chase ever attained performances which consistently placed them among the very best US financial institutions. Why should the aggregation of mediocrity change this? As my old boss and mentor at Chase used to observe, "what good would putting Manny Hanny, Chemical and Chase all together do? All you'd get is single larger mediocre bank!"
Second, the mere installation of Dimon as Chase's CEO may well indicate how meaningless the gesture actually is. Chase is but one, and third in size at that, of a new breed of financial utilities. In a world in which technology has allowed more nimble and innovative firms to outperform larger competitors, BofA, Citigroup and Chase predictably have moved to bulk up. I actually doubt it's that important who runs these shops anymore. Their CEOs probably can't profitably exercise all that much influence on such large organizations of risk-averse employees.
For example, Weill left Citigroup amidst a host of problems stemming from his leadership style. His successor, Charles Prince, is still struggling to repair the damage. I can't even tell you who heads up BankAmerica anymore. It seems such a faceless financial conglomerate.
Still, it pains me somewhat to see yet another large US corporation resort to recycling a failed executive, rather than look for fresher, more talented and creative candidates. Perhaps like voters and their elected governments, shareholders get the CEOs they deserve.
It is doubtful to me that a Dimon-led Chase will qualify as a holding among the consistently superior growth companies in my equity portfolio anytime soon.
My first reaction is to wonder at the paucity of capable leaders and managers which requires that the once-failed protege of Sandy Weill is called on to head a major US bank. Can there really be no better CEO for Chase than this retread? The article correctly points out that Dimon hasn't really had significant management experience in anything but cutting costs and operations, as befits a student of the now-departed Citigroup CEO.
So I guess we are to believe that a cost-cutter is now the best candidate to try to grow a company which (and I say this as a former "old Chase" staffer who has met and worked with several former CEOs of the company, including Mr. Rockefeller) has never successfully grown at a consistently superior rate without engendering serious credit problems and losses.
Without going into detail on each of the article's points regarding Chase's current business positions, let me suggest two things.
First, the management team at Chase, including it's recycled new leader, is probably not up to the task. None of the precursor banks (Chase Manhattan, Chemical, Manufacturers Hanover, JP Morgan, Banc One, First Chicago) which are now embodied in JP Morgan Chase ever attained performances which consistently placed them among the very best US financial institutions. Why should the aggregation of mediocrity change this? As my old boss and mentor at Chase used to observe, "what good would putting Manny Hanny, Chemical and Chase all together do? All you'd get is single larger mediocre bank!"
Second, the mere installation of Dimon as Chase's CEO may well indicate how meaningless the gesture actually is. Chase is but one, and third in size at that, of a new breed of financial utilities. In a world in which technology has allowed more nimble and innovative firms to outperform larger competitors, BofA, Citigroup and Chase predictably have moved to bulk up. I actually doubt it's that important who runs these shops anymore. Their CEOs probably can't profitably exercise all that much influence on such large organizations of risk-averse employees.
For example, Weill left Citigroup amidst a host of problems stemming from his leadership style. His successor, Charles Prince, is still struggling to repair the damage. I can't even tell you who heads up BankAmerica anymore. It seems such a faceless financial conglomerate.
Still, it pains me somewhat to see yet another large US corporation resort to recycling a failed executive, rather than look for fresher, more talented and creative candidates. Perhaps like voters and their elected governments, shareholders get the CEOs they deserve.
It is doubtful to me that a Dimon-led Chase will qualify as a holding among the consistently superior growth companies in my equity portfolio anytime soon.
Market Expectations for 2006
I'm not a professional economist , although I have studied economics, both micro and macro, extensively. As an equity portfolio manager, however, I believe I need to have some sense of what may affect the US equity markets in the coming year. Here is my current “back of the envelope” forecast for the coming year's equity market.
From what I have read, I expect US economic growth will continue to be decent for at least the first few months of 2006- perhaps through June. Estimates seem to indicate a range of 2.5-3%. Maybe less than prior years, but still decent. I don't think energy prices will unreasonably curtail this growth rate.
However, I suspect that by June, the prospect of the Iranian mullah-bomb will begin to affect investor psychology and dampen growth expectations. Fears of destabilized trade, a nuclear-fallout-tainted eastern Mediterranean and southern Europe, may cause market wobbles.
This will become a major drum beat for the mid-term US Congressional and scattered state gubernatorial elections. what to do about Iran? Is it another Iraq in the making? Is that a good or a bad thing? It’s probably a good thing, if you liked the way George Bush defused the outlaw menace that was Iraq under Saddam Hussein. It’s a bad thing if you like Al Gore.
The worst case would be a two-year drift of a weakened Rebublican-controlled House and Senate majority, or maybe even the outright loss of the House, coupled with the increasingly-lamer-duck status of President Bush. This latter development of a split in Congressional control between a Republican Senate and a Democratic House could mark the return of semi-gridlock. Only this time, rather than be a check on the liberal agenda of Bill Clinton, it could be a brake on important foreign policy action.
It is useful to remember that Iraq tried to play with nukes by starting almost from scratch. We know Iran actually has the material, facilities and people to do this. It’s a very different and far more explicit, verified threat this time.
The silver lining may be this. Iran hates Israel and is sworn to destroy it. Israel has the implicit backing of the Democratic party, and the Democrats in particular will not want to see Israel attacked and/or destroyed by an Iranian nuclear weapon. They may surprisingly decide to back George Bush on military action to remove the Iranian nuclear threat.
If I am remotely close in my conjectures, it probably spells another anemic year for US equity markets. Uncertainty, particularly concerning global conflict, tends to have that effect. I hope I’m wrong. Or, if I am right, that the threat is dispatched quickly and cleanly, leaving the markets to rise in subsequent appreciation.
From what I have read, I expect US economic growth will continue to be decent for at least the first few months of 2006- perhaps through June. Estimates seem to indicate a range of 2.5-3%. Maybe less than prior years, but still decent. I don't think energy prices will unreasonably curtail this growth rate.
However, I suspect that by June, the prospect of the Iranian mullah-bomb will begin to affect investor psychology and dampen growth expectations. Fears of destabilized trade, a nuclear-fallout-tainted eastern Mediterranean and southern Europe, may cause market wobbles.
This will become a major drum beat for the mid-term US Congressional and scattered state gubernatorial elections. what to do about Iran? Is it another Iraq in the making? Is that a good or a bad thing? It’s probably a good thing, if you liked the way George Bush defused the outlaw menace that was Iraq under Saddam Hussein. It’s a bad thing if you like Al Gore.
The worst case would be a two-year drift of a weakened Rebublican-controlled House and Senate majority, or maybe even the outright loss of the House, coupled with the increasingly-lamer-duck status of President Bush. This latter development of a split in Congressional control between a Republican Senate and a Democratic House could mark the return of semi-gridlock. Only this time, rather than be a check on the liberal agenda of Bill Clinton, it could be a brake on important foreign policy action.
It is useful to remember that Iraq tried to play with nukes by starting almost from scratch. We know Iran actually has the material, facilities and people to do this. It’s a very different and far more explicit, verified threat this time.
The silver lining may be this. Iran hates Israel and is sworn to destroy it. Israel has the implicit backing of the Democratic party, and the Democrats in particular will not want to see Israel attacked and/or destroyed by an Iranian nuclear weapon. They may surprisingly decide to back George Bush on military action to remove the Iranian nuclear threat.
If I am remotely close in my conjectures, it probably spells another anemic year for US equity markets. Uncertainty, particularly concerning global conflict, tends to have that effect. I hope I’m wrong. Or, if I am right, that the threat is dispatched quickly and cleanly, leaving the markets to rise in subsequent appreciation.
Wednesday, January 18, 2006
Multimedia Hoopla: Google Everywhere for Everything
As I mentioned in my previous post, I'm making up for lost time over the past few weeks due to the press of portfolio management-related activities. In reading my short list of blog topics, I see I was enamored with the notion of Google and the rise of the "new" multimedia.
Of course, it's sort of apropos that I am writing this in the wake of yesterday's awful tech sector bellwether earnings reports. The S&P is down slightly more than 5 points today as I write this, largely in reaction to the tech sector weakness.
However, back to my theme for this post- the hoopla over Google becoming, in addition to a titan in so many other areas, the new multimedia mogul sourcing everything.
Something about this scenario doesn't make sense to me. First, other than capital and a brand name, what does Google bring to the provision of on-demand accessible multimedia content that is not duplicable? Are not Apple, the old-line networks, Comcast, Microsoft, etc, all equally qualified for this role?
In fact, does not the ubiquity of broadband, and the accessibility of unlimited sources of media content, via unlimited websites offering said content, argue against a monolithic giant with a strangehold on "all" desirable multimedia content?
Is it not reasonable, much as with your (cable or satellite) television now, to expect people to have a clutch of favorite URLs (instead of television channels) to which they go for various movie, television, music, video, news and other entertainment content? Why would anyone expect to find everything valuable at one location?
This reminds me of the ongoing fear various pundits have always had about the current most-valuable technology company. In the past, the villains have been IBM, CDC, Xerox, Microsoft, Dell, Yahoo, and, now, Google. How much longer before Google is on the "prior" list?
If anything, this latest wrinkle in the provision of multimedia content is one of the best "quality of life" breaks the average American, nay, world citizen, has gotten in a while. This sort of change promotes liberty and individual initiative in ways undreamt during my youth in the 1960s.
Of course, it's sort of apropos that I am writing this in the wake of yesterday's awful tech sector bellwether earnings reports. The S&P is down slightly more than 5 points today as I write this, largely in reaction to the tech sector weakness.
However, back to my theme for this post- the hoopla over Google becoming, in addition to a titan in so many other areas, the new multimedia mogul sourcing everything.
Something about this scenario doesn't make sense to me. First, other than capital and a brand name, what does Google bring to the provision of on-demand accessible multimedia content that is not duplicable? Are not Apple, the old-line networks, Comcast, Microsoft, etc, all equally qualified for this role?
In fact, does not the ubiquity of broadband, and the accessibility of unlimited sources of media content, via unlimited websites offering said content, argue against a monolithic giant with a strangehold on "all" desirable multimedia content?
Is it not reasonable, much as with your (cable or satellite) television now, to expect people to have a clutch of favorite URLs (instead of television channels) to which they go for various movie, television, music, video, news and other entertainment content? Why would anyone expect to find everything valuable at one location?
This reminds me of the ongoing fear various pundits have always had about the current most-valuable technology company. In the past, the villains have been IBM, CDC, Xerox, Microsoft, Dell, Yahoo, and, now, Google. How much longer before Google is on the "prior" list?
If anything, this latest wrinkle in the provision of multimedia content is one of the best "quality of life" breaks the average American, nay, world citizen, has gotten in a while. This sort of change promotes liberty and individual initiative in ways undreamt during my youth in the 1960s.
CBS Redux
I have lately been busy with portfolio management activities. However, I made a note to comment on this new year's return of CBS as a listed equity issue. Viacom split, as of the new year, back into two parts again.
It seems like yesterday when Sumner Redstone went after CBS, declaring how powerful it would be to link content and distribution. Same old same old. Now it's five years later, and there he was, doddering around on the floor of the NYSE, babbling about how much value was being unlocked for shareholders by reversing what he did five years earlier.
Here's what really annoys me. If one of Redstone's lieutenants had made an error of this magnitude (excepting, perhaps, his daughter, now installed in the senior management of Viacom), that guy or woman would be history. Cashiered for wasting shareholder's money and pursuing grossly unprofitable ideas.
Instead, Sumner Redstone dictates to his shareholders that, having undone his colossal mistake, he'll still be chairman of both entities. Nice work if you can get it, eh?
As I noted in a recent post, there's not much to be done but sell the stocks if you owned them, or don't buy them if you don't already own them. Forget "corporate governance" as a relief on this one.
It just goes to show how one needs to take so much of Wall Street's sales pitches, and even those of bumbling, aging CEOs, with large grains of salt. Assuredly, they are more concerned with filling their own pockets than they are with filling yours.
Caveat emptor indeed.
It seems like yesterday when Sumner Redstone went after CBS, declaring how powerful it would be to link content and distribution. Same old same old. Now it's five years later, and there he was, doddering around on the floor of the NYSE, babbling about how much value was being unlocked for shareholders by reversing what he did five years earlier.
Here's what really annoys me. If one of Redstone's lieutenants had made an error of this magnitude (excepting, perhaps, his daughter, now installed in the senior management of Viacom), that guy or woman would be history. Cashiered for wasting shareholder's money and pursuing grossly unprofitable ideas.
Instead, Sumner Redstone dictates to his shareholders that, having undone his colossal mistake, he'll still be chairman of both entities. Nice work if you can get it, eh?
As I noted in a recent post, there's not much to be done but sell the stocks if you owned them, or don't buy them if you don't already own them. Forget "corporate governance" as a relief on this one.
It just goes to show how one needs to take so much of Wall Street's sales pitches, and even those of bumbling, aging CEOs, with large grains of salt. Assuredly, they are more concerned with filling their own pockets than they are with filling yours.
Caveat emptor indeed.
Wednesday, January 11, 2006
Executive & Star Employee Compensation
There was an interesting juxtaposition of positions on executive and 'star employee' pay today from two staffers of the Wall Street Journal.
Alan Murray spoke on CNBC regarding Sirius radio's payment of many millions of dollars to Howard Stern. Mr. Murray provided stock price and recent product sales information to demonstrate that Stern is, in fact, proving to be worth the immense compensation package he received for switching employers to Sirius.
Meanwhile, in this morning's Wall Street Journal's Money & Investing section, on page one, Jesse Eisinger babbles about the need for hedge funds to be responsible for policing exhorbitant executive pay. He includes some formative academic research results to bolster his case that too much of net after-tax profits of some companies are going, on a percentage basis, to the CEOs of those companies.
Personally, I believe Alan Murray is on the right track. I think Jesse Eisinger has lost perspective.
As portfolio management has been my primary occupation for some time, I have reflected on so-called "corporate governance" issues, executive compensation being one of them, for years. I even have had discussions about it with a friend who is a noted retired Fortune 50 CEO and sometime-speaker on the topic.
As a portfolio manager, I will say that you only really have one effective lever- buy/hold/sell a stock. Period. As my father used to advise me when I was a child, "son, we live in a democracy. But your dollar vote counts much more than your ballot box vote, because you vote more times each year with your dollars while buying things than you ever vote in a year."
And that, dear readers, is what being in a mixed-free economic democracy is all about. Ultimately, dollar votes reflect reactions to political or moral dilemmas.
In this case, after all the brouhaha over executive and key employee compensation, the truth is that you buy or sell stocks of companies based upon relative expected performance. Frankly, so long as a stock is likely to exceed everybody else's expectations, and, thus, earn an above-average return, I could care less what they pay the janitor, the CEO, or anybody else at the company. It's up to the CEO and his team to figure out what levers to pull. I just hope I've bought the right teams of leaders and managers in the right sectors.
In my opinion, people who debate this compensation issue are sadly misinformed as to how much power or control they have over the issue. They would likely be better off accepting that they have none, and stick to selling poor performers, and buying those with good prospects of out-performance. Leave the operating management and board of directors to affect compensation, and stop spilling so much ink, real or cyber, over this red herring.
Alan Murray spoke on CNBC regarding Sirius radio's payment of many millions of dollars to Howard Stern. Mr. Murray provided stock price and recent product sales information to demonstrate that Stern is, in fact, proving to be worth the immense compensation package he received for switching employers to Sirius.
Meanwhile, in this morning's Wall Street Journal's Money & Investing section, on page one, Jesse Eisinger babbles about the need for hedge funds to be responsible for policing exhorbitant executive pay. He includes some formative academic research results to bolster his case that too much of net after-tax profits of some companies are going, on a percentage basis, to the CEOs of those companies.
Personally, I believe Alan Murray is on the right track. I think Jesse Eisinger has lost perspective.
As portfolio management has been my primary occupation for some time, I have reflected on so-called "corporate governance" issues, executive compensation being one of them, for years. I even have had discussions about it with a friend who is a noted retired Fortune 50 CEO and sometime-speaker on the topic.
As a portfolio manager, I will say that you only really have one effective lever- buy/hold/sell a stock. Period. As my father used to advise me when I was a child, "son, we live in a democracy. But your dollar vote counts much more than your ballot box vote, because you vote more times each year with your dollars while buying things than you ever vote in a year."
And that, dear readers, is what being in a mixed-free economic democracy is all about. Ultimately, dollar votes reflect reactions to political or moral dilemmas.
In this case, after all the brouhaha over executive and key employee compensation, the truth is that you buy or sell stocks of companies based upon relative expected performance. Frankly, so long as a stock is likely to exceed everybody else's expectations, and, thus, earn an above-average return, I could care less what they pay the janitor, the CEO, or anybody else at the company. It's up to the CEO and his team to figure out what levers to pull. I just hope I've bought the right teams of leaders and managers in the right sectors.
In my opinion, people who debate this compensation issue are sadly misinformed as to how much power or control they have over the issue. They would likely be better off accepting that they have none, and stick to selling poor performers, and buying those with good prospects of out-performance. Leave the operating management and board of directors to affect compensation, and stop spilling so much ink, real or cyber, over this red herring.
Tuesday, January 10, 2006
2005 Equity Markets and Portfolio Strategy Observations
This year has demonstrated once again that our portfolio strategy consistently out-performs the market, despite our infrequent trading and sometimes concentrated positions. We reselected the portfolio once in January and in July. The portfolio’s focus on home building, energy supply and distribution, and retailers, returned 15.2%, which was 10.3 gross percentage points above the S&P500 index for the year.
Despite several mediocre months at the year’s outset, the portfolio actually gained in 8 out of the 12 months of 2005. This is a typical year’s performance pattern. When the portfolio and the index both gained or lost, the portfolio had a greater return in the same direction as the index, with the exception of February’s modest gains. This confirms our conviction that the portfolio’s declines during periods of mild market pessimism are inevitably compensated by its greater gains in the subsequent months of positive market performance. For instance, note the portfolio’s April decline, followed by May’s 8% return, the year’s largest.
This year’s major stories centered around economic weakness, the imminent collapse of what has been termed a “real estate bubble,” two natural disasters, and the effects of energy prices on the economy. Our patient maintenance of portfolio positions paid off handsomely when the pessimists were proved wrong throughout the year.
Last year may be portrayed as one in which the market staggered under a variety of negative forces, bumping along for much of the year with effectively no return at all, as displayed in the chart below.
Early in the year, inflation worries and repeated stories of an economic “soft patch” depressed the market for large cap equities. In a pique of contrariness, good job growth numbers were seen as baiting the Fed to raise rates, and thus choke off any US economic growth. Sell-side analysts’ reports of $100/bbl oil and raw material price inflation added to the malaise. Throughout the period, we remained long, confident that our long/short allocation signals correctly saw no major market decline coming. We felt that reports of energy “paper trading” pressures were partially responsible for energy price spikes, and raw materials price rises reflected economic growth, not pure inflation. We noted that, despite the Fed’s continued tightening, Treasuries were still not yielding above 5%, a level at which the economy is certainly capable of performing robustly. Our expectation at this time was for a modest S&P500 index performance for 2005 in the neighborhood of 5-8%.
In the second quarter, May’s sharp gains for both our portfolio and the index signaled the turnaround in investor confidence. By remaining patiently long, we avoided missing key days of large gains by being on the sidelines. As frequently happens in these circumstances, when investors return to a belief in future healthy economic growth, the portfolio gains even more than the index.
After a –4% return in April, the strategy had its best month in May, for a 7.9% gain, since November of last year. Unlike the index, however, in June, it continued to show strength with a 2.6% return. The various forces reacting to global geo-political and economic news seemed to have achieved a confused and confusing result as the second quarter ended. Oil prices continued to fluctuate at high levels. Interest rates, while higher over the second quarter, were still not high historically.
Rising rates may shift the growth prospects of various economic sectors, but they do not mean the end of growth per se. Most companies have business models designed to profit in conditions with interest rates above current levels. The levels have been rising ever since Alan Greenspan decided that the post-bubble liquidity provision by the Fed needed to be reversed. However, they were and are still not anywhere near the levels of the late 1970s, when the US economy experienced stagflation.
The third quarter featured one negative return month out of three for the S&P 500 index, like the second quarter, resulting in a return of 3.6%. The Pathfinder portfolio returned 12.3% for the quarter. It was the best quarter of 2005 for both the index and Pathfinder.
The Pathfinder portfolio for the second half of this year, which was the portfolio predominantly in place in the third quarter, was markedly different in its sector focus than the January selections.
Taken together, the portfolio indicated an expectation of continued profitability and market price rewards for energy producers and distributors, upscale retail goods, housing and lodging. It fit with a healthy, growing economy that is consuming more energy to fuel such growth—and can afford it. Consumer retail demand was expected to move from the Wal-Mart style discounters to upscale retailers and products.
In July, the S&P500 index posted the third of three consecutive positive months. However, the effects of hurricane Katrina dampened the August performance of the index. As hurricane Rita turned out to be milder than expected, and the aftermath of Katrina began to be clearer in September, the market eked out a small gain that month.
Taken together, however, it still resulted in the market’s best quarter of the year thus far.
The portfolio outpaced the market in July, as pre-hurricane energy concerns began to drive our energy and utility holdings higher. Home builders came under almost immediate pressure again, due to concerns over energy prices and interest rates. August saw the same directional results in these sectors, only more so. With hurricane Katrina, energy prices and the stocks of companies in those sectors skyrocketed. In Katrina’s aftermath, and with hurricane Rita affecting natural gas production and distribution, September added more stimulus to the same sectors.
As a result, the portfolio’s energy and utility holdings more than compensated for softness in the home building, retail, entertainment and upscale luxury brands holdings.
Did the continued rise in interest rates and energy prices again signal an end to growth, as they were expected to do in every quarter of this year? Similar to prior quarters, economic growth fundamentals—specifically, job creation and profits—continued to show strength. So, we believed the answer to this question to be “no,” and remained confidently long in our positions.
Our expectation was that the equity market was positioned for a continued healthy rise over the last quarters of 2005. Not stratospheric, like 2003, but more like the gentler gains of 2004. Our exposure signals remained, at this time, “long.”
The fourth quarter featured one negative return month out of three for the S&P 500 index, like the second and third quarters, resulting in a return of 2%. The Pathfinder portfolio returned 1.4% for the quarter, as October’s –5.4% loss dampened its performance.
Three major forces drove the market in the last quarter of 2005; the fallout from September’s hurricanes, fears of Fed action coupled with economic impacts of its tightening, and then, as always, retail holiday sales. Thus, October was the worst month for both the index and our portfolio since April. However, as the year ended, Greenspan remarked on the US economy’s robust strength in accommodating natural disasters and higher raw material and energy prices, while still continuing its modest, healthy growth. In fact, home building did not completely collapse and energy prices moderated. Inflation was not running away and both job and overall economic growth—despite media insistence to the contrary—remained and finished strong.
For the year overall, we feel our portfolio management approach served to ideally weather the uncertain psychological conditions of 2005. Attempting to time last year’s equity market could have been disastrous. After May, the S&P500 had only one significant positive month until November, but our portfolio had three solid months of performance in that period. We correctly remained long all year and easily out-performed the market.
Our disciplined management of a superior equity selection process resulted in another solid year of performance during an unusually choppy and uncertain year in the US equity markets. The process’ selection of energy-related, home building, luxury goods, basic materials and selected medical-related equities proved effective in capturing healthy growth. This was amidst an uneven response by the market to the year’s various pressures and their effects on various economic sectors.
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