A Lesson In Schumpeterian Dynamics: ATT - Yahoo Pact Undergoing Change

The Wall Street Journal reported today on the imminent change in the 2001 joint venture agreement between ATT and Yahoo, which is due to expire next year.

Without substantially reciting the article, the essence is this. For the term of the arrangement, ATT has paid Yahoo $250MM/year to gain access to Yahoo's online information and services, hoping these would tip the scales to provide the original co-signatory, SBC, ATT's predecessor, in its quest to compete with high-speed cable delivery of online services.

However, in recent years, Yahoo's competitor, Google, has been paying its partners in similar situations- up to roughly the same $250MM level. For perspective, Yahoo's current annual revenues are roughly $6.43B, and its NIAC is $751MM. Thus, the ATT payment represents about 4% of Yahoo's current annual revenues, and a third of its net income.

Thus, Yahoo's Terry Semel and his managers must be contemplating not only losing this chunk fo high-margin revenue, but probably adding another $250MM of expenses to continue the relationship, resulting in a potential reduction of 66% of Yahoo's net income available to common.

How did Yahoo manage to wind up in this predicament?

Joseph Schumpeter wrote about this risk as long ago as 1926. His central tenet was that high-growth economies and business sectors made for constantly-changing competitive environments. Therefore, businesses were well-advised to innovate and change their competitive situations for themselves, rather than wait and be eviscerated by another company, or some uncontrolled, external influence.

In Yahoo's case, it looks like, since 2001, they've basically been sitting on their collective asses, counting the annual ATT payment, rather than taking a hard look at their unfocused, vulnerable business model.

As I discussed this with my business partner, it became clear what Yahoo's continuing vulnerability is. He described what he thinks Semel's vision of Yahoo is as 'a place to form groups,' or 'a place users go to find groups and information.' The trouble with this is that it is, for the most part, free. I have never paid a dime for any Yahoo service, although I use their portfolio tracking Finance page for my daily portfolio performance monitoring.

What I think Yahoo should have done, back in 2001, is to have immediately retained a few senior consulting partners from McKinsey and Bain to provide the Yahoo senior managers with anecdotal evidence of how other companies survived and prospered in highly-competitive, technologically-oriented business situations, when they had no clear, salient competitive advantage.

My own opinion is that Yahoo should have begun to take the things it is good at, such as information redistribution, presentation, and online groups management, and offered to private-label them to various companies which need these services, but can't get adequate results from their internal IT departments. Online brokerage services came to mind, as my partner and I discussed this. He and I both deplore Schwab's useless online portfolio performance reporting and "analysis," if you can call it that. Why didn't Yahoo provide them with a portal directly taking the Schwab customer to a Yahoo-provided, but Schwab-labeled customizable portfolio performance site/page? Or provide online retail companies with customer group-management facilities cloned from the very large, successful, but free Yahoo Groups offerings?

Such a strategy would cement Yahoo into corporate marketing and customer service functions, while, for once, actually getting paid by someone for what they do. I maintain that, with its largely free services for consumers, Yahoo continues to be the "used car" of internet information providers. It's got no software, hardware, superior search engine, or actual proprietary information for which to charge fees. Thus, I believe its hold on consumer loyalty is tenuous, at best.

Concerning the ATT-Yahoo pact, I don't actually think either company is destined for greatness, or, consistently superior total return performance in the near future. I think ATT is still going to be stuck vending commodity information distribution, while sinking ever more money into a pointless attempt to offer content, as well. As I've written in prior posts here, down that road has always lain failure.

Yahoo is unlikely to do much better, in my opinion. A la Schumpeter, the time for Yahoo to have begun a radical transformation was as soon as it cashed that first $250MM ATT payment back in 2001. By 2004, they could have been well on the way to forging new business directions and growing new fee-for-services offerings to businesses and consumers. Instead, they are now contemplating a new hole in their income statement, and even the potential loss of the ATT relationship, in its entirety.

Don't be surprised if this is the beginning of the end for Yahoo as a separate, publicly-held entity.

Video Link Replacement

If you read this recent post on Hillary Clinton's capital markets regulation remarks, you may not have been able to view the CNBC video link.

Here is a YouTube link to the same interview, at the end of my post. Sorry for the inconvenience.

The Anatomy of A Shareholder's Response To A Proxy

A few days ago, I received, in one of my email accounts, a message from my broker, containing the electronic link for the proxy to one of the equities I hold, Chicago Mercantile Exchange.

It dawned on me, while discussing this with my partner over lunch today, to describe my reaction to this email. A sort of Proustian reflection on the chain of thoughts and feelings pouring forth from that single stimuli- my own personal Madeleine, as it were.

After a few seconds of consideration, with the email opened, viewing the link to the CME proxy voting site, I hit the 'delete' key.

It was a very assured, firm delete. And I have not gone back to my 'deleted emails' folder to rescue or revisit the email.

What occurred to me in that moment, in nanoseconds, actually, was this chain of reflections.

My disciplined, quantitative, non-subjective equities selection process chose CME, and its portfolio weight. That process is the disciplined implementation and expression of my experience, subjective hypotheses, and proprietary research findings with respect to the outperformance of the market, on a consistent basis, by large-cap equities.

I am buyer of equities like CME. I don't want to manage them. I see the causality of the relationshp between CME and me as one way. CME operates, and I reap the results. My process chose CME because it fits a set of criteria which I have found to have a good probability of outperforming the S&P500 for a six-month holding period. I bought CME in order to enjoy its performance results. As of today, I am. It is clearly and handsomely outperforming the S&P, +6.5% to the index's -.25% for the period.

Why would I want to attempt to reverse the direction of causality with respect to CME? What do I think I, personally, as a portfolio manager, can add to the value-creating capability of CME? My selection process chose CME for its behavior before I owned it. It may even be the case that my proxy vote, like the butterfly's flapping wings in the South American rainforest, will have an indirect, but notable, negative effect on CME's performance.

No, I would like the context of CME's operations to be as similar to the period over which my process analyzed it, as possible. I want to effect no change in CME, nor visit any significant influence on it.

Barney Frank, be damned. He has it wrong. So do the corporate governance and "shareholder democracy" crowd.

The only "democratic" thing this shareholder wants is to know that, when I want to sell my CME shares, I can. At the market. With little brokerage expense. Period.

That's it.

I have absolutely no interest in influencing CME myself. Why would I be so arrogant as to think I could buy shares of CME, and then improve its lot with my proxy vote?

Perhaps some investors, especially institutional investors, buy shares of companies which they believe they can improve. Such as private equity investors.

I am not a private equity mogul. I have no billions with which to assume control of CME.

I just want to share in their next few months of consistently superior total returns. To want more than that is to court disaster, and succumb to hubris. The last thing I would want is to have any effect whatsoever on CME's performance. Thus, I deleted that proxy link email as quickly as possible. Lest some unknown quantuum effect derive from my mere reading of the email, and depress CME's share price. I want no part of CME's operating or governance process. I simply want to make money by owning its shares, passively.

Is this such a hard concept to fathom?

BP's New Ad Campaign

I have been watching BP's ad campaign for a few months now. You've probably seen them- interviews with people on the street about what oil companies "should" be doing.

The various staged responses involve big oil firms needing to go green, and find new energy sources to power our world more cleanly.

Then the requisite solemn voice-over announces that BP is already doing all sorts of lovely green things for its customers and the world.

There's just one problem. Oil companies historically have gotten into trouble, and wasted money, when they try to be something besides an oil company.

For example, in the 1980s, Exxon tried to break into the information equipment business. Living near their operations in NJ, I had colleagues who had worked there, and witnessed the rise and fall of the division. It stemmed from the mistaken belief, in the late 1970s, that Exxon's oil business would diminish in a few decades. The Exxon Enterprises unit was created to house a large assortment of various non-oil businesses whose mission was to grow sufficiently to take up the eventual slack of a declining crude oil-driven business.

It didn't work out that way. Instead, Exxon Enterprises' units had their collective heads handed to them in their respective product/market niches. And it never had the full support of the dominant oil executives, either. If memory serves, a future CEO, Lee Raymond, shut the group down to stem the waste of hundreds of millions of expense dollars.

It seems that utility-like firms have a tendency to wander astray when their sector's outlook is bleak, typically racking up huge losses.

Anybody else recall a little thing called "Penn Central?" When the old railroad tried to become a "transportation" company, and eventually would up in Chapter 11?

So I view these BP commercials with great amusement. I think BP is still suffering from the culture with which outgoing chairman Brown suffused it. It's trying to stray from being a good, well-run oil company, and, instead, apologize for what it is, and try to change into something else.

On the other hand, Rex Tillerson, ExxonMobil's new CEO, was unabashed today on CNBC about being a growing, well-run, profitable oil company. No apologies from him.

Oil companies should seek, find, recover, refine, and distribute oil. That's where their core strengths are. When they try to do radically different things, their shareholders suffer.

Is this really such a difficult concept to grasp?

Portfolio Risks and The Mortgage Sector

It occurred to me this week, in the midst of the continuing meltdown of the sub-prime mortgage lending sector, that my portfolio selection process exited the homebuilding and (prime) mortgage sector over six months ago. Happily, we own no mortgage or homebuilding sector stocks anymore.

I recall, however, back in 2005, that the business media was screaming about the sector's imminent collapse. At the time, a prominent fund allocator, with whom I had discussions, in hopes of attracting investments, complained that my strategy was overconcentrated in the homebuilding and mortgage sector. My response was that, to earn returns, you had to choose what was going to do well, and devote resources to those areas, rather than to mindlessly diversify. Rather like Kirk Kerkorian's own philosophy, mentioned in this post,

"Diversification is for people who aren't sure about what they are doing."

Over the time period stretching from mid-2003 to mid-2006, my selection process had selected companies in these sectors which returned a total of 4.8%. By July of last year, however, the process had rinsed mortgage lending and homebuilding out of the portfolio.

Now, everyone is worried about the sub-prime lending sector and, by extension, the homebuilders. The market's damage to the former group is making the pain felt by the conventional home building and lending equities in late 2005 and 2006 look tame by comparison.

This is a fine example of how our equity portfolio strategy and selection process' risk management has performed. As the sector's constituent companies began to underperform, both fundamentally and technically, our process had us exit the sector way before real damage occurred, and we made money on the sector over the time in which we were invested.

I wish I could speak with the analysts from that fund allocator again, now. As it happens, I heard from a friend that they sustained some heavy losses in the past year. I guess their own risk management wasn't quite up to snuff, after all.

Warren Buffett Seconds My Views on Dell, et. al.

Yesterday, I wrote about Michael Dell's return to lead the company he founded, and the likelihood that he will return it to consistently superior total return performance.

I wrote,

"Both H-P and Dell are, for the most part, engaged in the production and marketing of commodity electronic products- desktop and laptop computers, and printers. These types of firms haven't been on my equity strategy's selection lists since 1998. In the interim, the market for consumer computers has evolved to the point that most buyers can select and take home a perfectly adequate machine from a store at any one of as many as four chains (e.g., BestBuy, CircuitCity, Staples, Costco), with competitive pricing pressure providing similar values across the vendors and products.

In such a market, can we really expect either vendor, H-P or Dell, to somehow add sufficient extra value, and be paid for it, to drive its performance to a level of consistently superior total returns over several years? We're talking about producing some of the most common, nearly-disposable electronic devices you can imagine- personal computers and printers.

The competitive environment for its products, and the behavior of its target consumers, have changed to the extent that I don't think the product/market positioning of the firm will sustain consistently superior total return performance anymore.

Instead, the action seems to have moved on to online information and advertising purveyors- notable Google. This is not really a surprise. Over the years, consistent superiority of performance among technology firms has moved up the "food chain," from Intel and Microsoft, to the box makers, then the specialty applications software firms, to the online access and content providers. Now, it's moved beyond the last group, to simply providing tools to find information.

Although Michael Dell may return his firm to profitability and some revenue growth, relative to recent years, I don't think Dell has much potential to reward shareholders anymore."

Today, my partner emailed me a piece containing excerpts from Warren Buffett's annual shareholder letter. It would seem he and I share the viewpoint which I expressed above.

Here is, in part, what Buffett wrote:

"Not all of our businesses are destined to increase profits. When an industry's underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, "If you want to get a reputation as a good businessman, be sure to get into a good business.") And fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline. The skid will almost certainly continue.

Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed."

In this post, last November, I discussed the odds that Maurice Greenberg or Jack Welch can turn around the daily newspapers they are interested in buying and running. Again, Buffett has come to the same conclusion I did, by writing,

"For a local resident, ownership of a city's paper, like ownership of a sports team, still produces instant prominence. With it typically comes power and influence. These are ruboffs that appeal to many people with money. Beyond that, civic-minded, wealthy individuals may feel that local ownership will serve their community well. That's why Peter Kiewit bought the Omaha paper more than 40 years ago.

We are likely therefore to see non-economic individual buyers of newspapers emerge, just as we have seen such buyers acquire major sports franchises. Aspiring press lords should be careful, however: There's no rule that says a newspaper's revenues can't fall below its expenses and that losses can't mushroom. Fixed costs are high in the newspaper business, and that's bad news when unit volume heads south. As the importance of newspapers diminishes, moreover, the "psychic value" of possessing one will wane, whereas owning a sports franchise will likely retain its cachet."

It's nice to be in the philosophical and intuitive company of someone so well-regarded as Warren Buffett.

Dell's Attempt To Regain Past Glory

Last Thursday's Wall Street Journal contained an article detailing the many recent senior level management changes at Dell Computer. I won't go into all the details. Suffice to say, the article presented the situation as one in which Michael Dell has returned to the computer maker which he founded, and is evidently leaving no organizational or personnel stone unturned, in his determination to revive the firm's fortune.

Instead, I'd like to focus on a more strategic view of the Dell situation. For starters, consider the Yahoo-sourced price chart above, comparing Dell, H-P and the S&P500 for the past five years (please click on the chart to see a larger version). While H-P has outperformed both Dell and the index, it was effectively flat from early 2003 until mid-2005, or two and a half years. Dell, too, was flat for most of 2005, until it began its recent decline. Neither has been particularly consistently superior to the index over much of the five year period.

Both H-P and Dell are, for the most part, engaged in the production and marketing of commodity electronic products- desktop and laptop computers, and printers. These types of firms haven't been on my equity strategy's selection lists since 1998. In the interim, the market for consumer computers has evolved to the point that most buyers can select and take home a perfectly adequate machine from a store at any one of as many as four chains (e.g., BestBuy, CircuitCity, Staples, Costco), with competitive pricing pressure providing similar values across the vendors and products.

In such a market, can we really expect either vendor, H-P or Dell, to somehow add sufficient extra value, and be paid for it, to drive its performance to a level of consistently superior total returns over several years? We're talking about producing some of the most common, nearly-disposable electronic devices you can imagine- personal computers and printers.

If price- and feature-based competition is so fierce, one would expect the performance differences among the firms to be in market segment growth or penetration. Here, Dell is notably scarce on dealer shelves, in a market in which buyers no longer seem content to wait for a 'custom' machine. So I don't really expect Dell to be returning to its past glory of nearly a decade ago. The competitive environment for its products, and the behavior of its target consumers, have changed to the extent that I don't think the product/market positioning of the firm will sustain consistently superior total return performance anymore.

Instead, the action seems to have moved on to online information and advertising purveyors- notable Google. This is not really a surprise. Over the years, consistent superiority of performance among technology firms has moved up the "food chain," from Intel and Microsoft, to the box makers, then the specialty applications software firms, to the online access and content providers. Now, it's moved beyond the last group, to simply providing tools to find information.

Although Michael Dell may return his firm to profitability and some revenue growth, relative to recent years, I don't think Dell has much potential to reward shareholders anymore.

Hillary Clinton's Call For Capital Flow Restrictions

The market, and America, got a good look at Hillary Clinton's misunderstanding of capital markets and economics, in an interview on CNBC this week, seen here.

The video clip is a discussion by members of CNBC's morning show, Squawkbox, of the interview, whose tape from the prior day is featured in the clip.

I would like to say that, having revealed herself to be a proponent of returning to an era of international capital flow controls, Clinton has severely damaged her presidential campaign and aspirations. Sadly, probably less than half of the American voting population will even understand what Hillary means by her statements, and how devastating her threats would be to the US and global economy.

Hillary expresses so many misunderstandings of economic reality that it is difficult to know where to begin critiquing her remarks.

First, of course, she is incorrect to suggest that we, the US, is at risk because we have debt outstanding held by foreigners. The debt is issued in our own currency. It is the debt of the world's leading economic growth engine, and only large, reliable and safe economy. The governments of China, and other nations, hold US debt because it affords them a competitive return on low-risk financial assets.

As Larry Kudlow pointed out, our allies hold approximately 80% of foreign-held debt. Further, Fed Chairman Ben Bernanke pointed out this week that our foreign-held debt is not a risk, in that they choose to hold these assets. Our debt is sought after for its relative return and low risk.

Next, Hillary indicated her lack of understanding of a growth economy. As one of the world's largest economies, the leading growth economy, and also a large, consuming nation, the US attracts capital from overseas to fund its growth. Foreigners buy US equities and debt, including that of our federal government, in order to participate in the growth in the American economy. We could not possibly fund all of our growth with domestic assets or savings anymore.

Further, when we spend money to import products, those dollars have to go somewhere. They return to the US via spending on exported US goods, and by investment in US enterprises or government debt. The mechanism of international investment requires US dollars to be used to pay for US investments. Thus, one way or another, US spending and growth leave claims on US assets in the hands of overseas individuals, companies, and other countries. This is simply a fact of global economics.

Hillary made a rather inane comment to the effect that the more we issue debt, the more the Asians buy it. Were that true! It's not that they buy because we issue. They buy our debt because it is offers a good return for the risk.

Finally, Hillary's hint at capital controls and somehow interfering with the issuance of debt or its purchase by foreigners runs the serious risk of triggering a global economic recession.

It was only with the dawn of the 1980s that better information and looser capital controls allowed private investors to discipline heretofore lax central bankers by punishing the currencies of profligate countries. International economics and finance have evolved to the point at which country finance ministers and central bankers must fear and respect the judgement of capital flows when managing their economies and currency issuance.

To retreat from this desired state, and return to the days of artificial controls on international capital movement, is to dismantle our relatively free and efficient global trading system, and harm global economic growth.

I'm very surprised Hillary's handlers even let her give this interview, let alone go afield with the absurd comments she made. It's on video, and will last through the entire election campaign.

Let's hope, first, that she doesn't get elected, and, second, that enough Americans understand what she meant to fear her appropriately.

The Equities Markets Recent Turmoil

The business media is all a buzz with the biggest equity market news in years. A 3.5% drop in the S&P on Tuesday has everyone scrambling to discern whether this is a "corrective" phase in the equity markets, or the beginning of the dreaded "crash."

So, which is it? Well, I confess to being no seer of the future of the equity markets. But I can offer some observations on the past and current situations.

It's important to recall that, over the long term, equity market troubles inevitably reflect real economic issues.

For instance, in October, 1987, it was my alma mater, the Chase Manhattan Bank's refusal to back the United Airlines ESOP loan, that triggered Black Monday, on which the S&P fell 20.5% by that day's end. This called into question the overall credit expansion, and resulted in market turmoil for several months thereafter. But that single month was the one really bad one for equities.

The Asian debt crisis of 1997 had little effect on US equity markets, but crippled Asia for some time.

In 1998, Long Term Capital's demise resulted in a 14.4% loss for the S&P in August. However, with no actual real economy basis for this incident, the market recovered within only a few months.

With those incidents as background, we need to identify what would be current sources of weakness and shock to the current economic situation in the US, or around the world. From watching CNBC and reading the Wall Street Journal this week, I confess to not finding the smoking gun which would make the volatility of the past few days into the equity markets expression of a looming economic catastrophe.

Let's consider the most frequently named culprits: sub-prime mortgage lending, Asian equity markets, US and global economic growth, excess liquidity, hedge fund excesses.

As far as I can tell, the sub-prime lending troubles do not constitute the bulk of mortgage lending. True, lending standards are tightening again, which will lead to a continued pacing of any residential real estate sector recovery. But is sub-prime lending going to trigger a recession? From what I have read and heard, it's doubtful. Some companies will go bankrupt, and some homes will go empty for a while. But I don't think it will, on its own, tip the US economy into recession. If anything, it might lead to a quarter point rate cut by the Fed by the fall of this year.

The Asian equity market's 9% decline earlier this week was apparently more of a reaction to a similar runup in prices over the prior six trading days. There seems to be no visible, underlying economic weakness which triggered the decline. Chalk it up to short-term market froth in Asia.

While recent GDP adjustments have trimmed growth from 3.3% to 2.2%, the economy is still growing. Even given Samuelson's accelerator/multiplier effect, we should only see a slowing of overall economic activity, not an outright, longer-term decline or recession. There are some focused sectors of weakness- Detroit, for auto production, and selected real estate markets around the US- but overall economic activity remains strong, with low inflation. Even today's manufacturing report is positive.

Every spring for the past two calendar years, a legion of second- and third-tier economists have attempted to make their names by forecasting a "soft patch" or a recession, only to be proven wrong by fall of that year. It looks like 2007 is shaping up similarly.

While I'm tiring of his using it relentlessly, Larry Kudlow is right when he asserts, continuously, that this economic expansion is "the greatest story never told." As such, global economic growth seems to be keeping pace with the US.

The liquidity issue may affect equity markets if, in fact, as Doug Cass, of Seabreeze Partners, alleges, much of current hedge fund capital is, in fact, leveraged on the way in. If this is true, and recent performance weakness leads to large redemptions by European institutional investors of mostly-borrowed money, then US equity market prices might decline in the face of reduced supply of funds. That probably won't change relative values, though. And it might not even affect the market for much more than a few months. It's simply unknown what the size of such investments might actually be.

Consider that the US equity market. According to IMF data, it was roughly $11 trillion in 2004. If a hedge fund like SAC has even $40B under management, it accounts for less than .50% of the equity market. So the effect which Cass mentions may not be all that important.

Similarly, hedge fund losses would certainly affect prices. But it's somewhat of a chicken and egg issue. If the funds lose money because prices fall, do prices fall further because the hedge funds lost money? That's not clear, either. Certainly, the more risk averse retail investors may be running to the sidelines right now. But the cooler-headed professional investors are not.

Overall, I don't see the pundits I tend to trust- John Rutledge, Arthur Laffer, Larry Kudlow, Brian Wesbury- running for cover or sounding alarms. They all feel that, if anything, the current market represents a buying opportunity.

GE CEO Immelt's 2006 Compensation: The Comedy Continues

Today's Wall Street Journal details GE CEO Jeff Immelt's most recent compensation. In my last post on this topic, here, I noted that Immelt has already reaped at least $18MM in cash from GE since he took over from Welch.

As the Yahoo-sourced five-year price chart of GE vs. the S&P500 depicts nearby (please click on the chart to see a larger version), Immelt continues to lead GE to underperform the index for yet another year. This makes a total of six years during which he has received millions of dollars in cash, stock and performance units for doing less for his shareholders than a passive S&P Index Fund manager would have accomplished for them.

So, the news today is that Immelt received $8.3MM in "salary and bonus." So that makes a total of roughly $23MM in cash Immelt has now managed to loot from his employer since late 2001, when he began his reign as a failing CEO at GE. If the firm meets certain (fairly low-ball, as I recall from earlier articles) revenue, earnings and cash generation targets, and meets some stock price performance relative to the S&P, Immelt will receive as much as $18.6MM in 2007.

Immelt's base salary was $3.3MM in 2006, to which was added, unbelievably, a cash bonus of $5MM,"citing Mr. Immelt's 'offensive portfolio moves' and GE's 15% earnings-per-share growth in 2006."

Offensive indeed. It's another black day for corporate governance and responsible boards of directors.

Do you think any of these directors would dare to explain this compensation package to a live shareholders' meeting, and expect to make it out of the building in one piece?

I guess there is one consolation. The market is, in effect, voting on Immelt's lackluster performance and financial games, by leaving GE's stock price flat over such a long period. For the past five years, the stock price change is now actually negative.

Nice job, Jeff. And nicer that you have a board full of morons to pay you so handsomely for such mediocre performance.

The Vix Rises....Then Falls Again

So, equity volatilty surges on the day I write about its being dampened. Go figure.

Former Fed Chairman Greenspan's misunderstood comment about recession potential spooked investors in the Asian markets, triggering the 9% sell-off in China. The ripple effect drove the S&P500 down 3.5% yesterday. The Vix rose roughly 50% yesterday, to around 17, from 11.

Today, during and after current Fed Chairman Bernanke's Q&A with the House Budget Committee, the index is recovering, up .66% as of 12:30PM EST. And the Vix had fallen 2.7 points for the day so far.

To me, investing for the 'long term' does not mean leaving one's money in any one thing for very long, as I wrote in yesterday's post. It means following a disciplined, reasoned strategy over a long period of time.

In fact, my partner expressed delight in the fact that, despite yesterday's market trauma, we didn't have to to anything. Nothing that occurred yesterday affected the strategy or its management. In a different context, it might have done so, but yesterday's events came nowhere near triggering any changes.

In the light of this afternoon, with Bernanke's testimony, and re-interpretations of Greenspan's remarks, the market has recovered, and yesterday's panic now looks excessive. Thus, the comfort of knowing we could sit tight, and confidently so, was very calming.

In the wake of a day like yesterday, it's important to note that relative longer-term values are difficult to assess amidst such rapidly falling prices. Probably the best, simplest decision is simply to either stay in one's long equity positions, go to cash, or go short. But not to try to trade amongst various equities.

Late last night, there were reports of unprocessed trades at the close of the market, and clearing running more than half an hour behind the market's close. In conditions like that, trading between equities is almost as risky, if not riskier, than simply doing nothing.

Equity Vix: Duration & Volatility

Yesterday's Wall Street Journal contained a piece on equity holding durations, trading frequencies and volatility.

Among the interesting factoids cited by the article were these:

-in 1999, the average holding period for equities was more than a year.
-in 2006, the average holding period for equities was less than seven months.
-The CBOE's volatility index is at its lowest level in 10 years.

According to Justin Lahart, the Journal article's author, computing and communications technology are mostly responsible for the changes. Lower trading costs, decimalization, and increased computing power has allowed for some previously theoretically-only strategies to become reality. Such developments would tend to exploit inefficiencies in prices, moving them closer together.

Hedge funds are also believed to be a cause of the shorter holding periods for equities, due to their own need to meet quarterly performance expectations.

Funny how that works, isn't it? Even privately-held financial firms offer vehicles whose performance is judged over short time periods, just like the non-financial, publicly-held firms whose equities the hedge funds trade.

Reading the piece, however, brought me to wonder about the artificiality of the terms "trading" and "investing."

What is the difference? Perhaps trading is what you do to implement investment strategies.

However, my biggest surprise was that as recently as 1999, investors typically held equities for over a year. Even I haven't done that since I began actively using my proprietary equity strategy. For a brief time, the holding period was a year, but for nearly a decade, it has been six months.

Furthermore, I don't think there is any meaning to the equity duration timeframe. With trading costs so low, why should anyone overstay the performance of an equity they hold, relative to expectations about its performance, and the performance of other equities?

I cannot understand how, with rapid dissemination of information, low trading costs, and quarterly publication of company fundamental results, investors can justify planning to hold equities for as long as a year. There have been some equities which my selection process has chosen for as many as three sequential six-month holding periods. But I never planned, a priori, to hold the stock that long.

Rather, it is difficult for me to believe that most equities can offer an expectation of relatively consistently superior returns for over a year. Thus, I would not expect to buy an equity and expect to hold it for that long.

With all the reasons investors have for trading any given equity on any given day- price appreciation, breaking news, a better opportunity in another equity, cash needs- why is it so important for investors to hold equities for as long as a year? Furthermore, doesn't frequent trading contribute to more price information and, thus, an expectation of fewer large-scale price changes, i.e., decreased volatility? Isn't lower volatility preferable for any equity holder?

Based upon Lahart's article, I don't see any particular cause for concern in emerging trading patterns which support equity investments

Fox To Start Business Channel in Late 2007

Finally, it looks like there will be some competitive pressure for CNBC. Fox has announced that it will commence operating a business news channel in late 2007.

As I wrote recently, expect to see Fox poach some of CNBC's better, more attractive female anchor personnel. My prediction is that Rebecca Jarvis and Erin Burnett will be lured to the new network. They are the brightest, most articulate, attractive female anchors who also have limited exposure.

While Becky Quick and Michelle Cabruso-Cabrera are probably better, more knowledgeable and skilled anchors than Burnett and Jarvis, they enjoy maximal exposure already.

Then again, who knows how many women, and men, may wish to bolt to Fox just to get away from "money honey" (is that trademarked yet?) Maria Bartiromo.

Additionally, I understand that, perhaps because of the 'glamor' of network exposure, compensation for anchors at CNBC is not all that lavish.

Should be interesting to see who jumps, and what the eventual anchor lineups are come fourth quarter of this year.

Starbucks' Schultz Sees Senescence

Saturday's Wall Street Journal carried a lengthy article concerning an internal email from Howard Schultz, the firm's chairman, regarding his concerns for the firm.

Back in April of 2006, in this post, I wrote,

"So Howard Schultz is opening more than 10 company stores per week, which would account for the employee growth. That is, 2 company stores per day, plus 5 licensee stores per day, plus turnover. With 'more than 100,000' employees currently, they are adding roughly 1% to their employee base per week. Allow for some Kentucky windage, and they are growing like topsy.

At these rates, I would guess Schultz lies awake nights wondering how his company's culture can withstand this sort of dilution and explosion among its ranks. When the US military saw these levels of growth during WWII, they employed the "cadre" system- seeding new units with experienced combat veterans. Is Starbucks doing this? Can they afford to, if they are moving into new locales?"

Interestingly, Schultz isn't planning to limit growth- he plans to more than triple the current number of stores to 40,000. Rather, he frets over the changes that have been wrought in Starbucks stores in order to maintain revenue and volume growth.

Changes such as automatic espresso machines which are tall and obscure the sight of the "barista" at work. A switch to pre-ground and packaged coffee, so that one no longer smells roasted coffee upon entering a Starbucks store. The aroma of burnt cheese on occasion, as the chain's new breakfast sandwiches cause some mess that is not immediately cleaned out of the ovens.

On one hand, I have to admire Schultz for his ethic in understanding that "success is not an entitlement." I really do admire that realistic attitude in a CEO or company leader. However, when Schultz wrote in his email,

"We desperately need to look into the mirror and realize it's time to get back to the core," just what does he mean? Hire more people and backtrack to more labor-intensive, poorer-quality service levels of the past? Trim the product offerings, and drop skim milk?

Perhaps Schultz is simply confusing limits to growth and consistently superior returns, with his company's own recent history. My proprietary research has found that there is a natural senescence that all successful firms experience. Just as athletes age, firms eventually outgrow their initial markets, attract competition, and simply become harder to lead, manage and grow in a manner that sustains consistently superior total returns than they once were.

This Yahoo-sourced chart (click on the chart to see a larger version) illustrates that, versus the S&P500, Starbucks has actually been stuck in neutral for about two years. While the company's stock price has outpaced the S&P for the last five years in total, it's been flat for the last two. The S&P is higher over that period, while Starbucks has plateaued. In fact, Starbucks is among the better performing shorts in my equity strategy, were we to be using the short strategy right now. It's been superior over several years in terms of total return, but inconsistently.


My guess is that Starbucks is simply reaching a Wal-Mart-like limit to profitable growth that can sustain a consistently superior total return performance.


From the Journal article, it appears that Schultz is not exactly a well-educated, deeply knowledgeable businessman. Rather, it notes that he was a salesman who moved to Seattle in 1982 to join the coffee roasting firm. It's just possible that he does not realize what happens when a firm outgrows its initial niche. In Starbuck's case, it must now add food, music, etc., to maintain growth levels. And it has engendered renewed competition in coffee from the likes of Dunkin' Donuts and McDonalds.


I should probably note here that I hold McDonalds in my equity portfolio. And that, truth be told, when offered a choice, I'm a Dunkin' Donuts guy, not a Starbucks aficionado, for takeout coffee. I do, however, religiously buy one-pound bags of espresso beans at Starbucks, because Dunkin' Donuts refuses to sell me bags of the espresso beans they have in the store to brew their own espresso.

However, back to the Schultz email. It surprised me to read that Schultz puts so much emphasis on the "romance and theatre" of a Starbucks store. I guess I really am not their target market customer, because I've never had a romantic or theatrical experience in one of their units. I've had bad service. But I could personally care less if I see the guy/gal - excuse me, the barista- actually make my cup of coffee.


If Schultz and his crew plan to hit their target of 40,000 stores, I think they will find themselves making lots more changes than they have yet anticipated. If anything, a Starbucks will probably become even more distant than Schultz' dreamy original-style store than it already is.

So, kudos to Schultz for being uncomfortable and suspicious of what success his firm has enjoyed. But I'm not sure there's that much he can actually do to avoid the inevitable effects of senescence upon Starbucks.

H-P's New Direction: Software

Last Tuesday's Wall Street Journal reported that H-P is planning to boost growth by bundling its various software offerings, including those of Mercury Interactive, and Bristol Technology.

The software in question is corporate-oriented systems management software. Allegedly, the effort didn't work well prior to this because it was not sufficiently important to merit H-P's full support.

Now, H-P has hired Thomas Hogan, former CEO of Vignette, a software firm, to lead the new effort. Focus is being placed on sales force training and compensation, to facilitate the success of the new endeavor.

Even with all this, I doubt this effort will re-ignite H-P to be a firm with consistently superior total return performance over several years.

First, while Mark Hurd has led H-P through a recovery from its malaise under Carly Fiorina, I don't think that the firm has, by any means, locked up the consumer laptop and personal computer market. It has enjoyed a short-term bounce in its stock price thus far, but I'm not sure it is poised to continue that consistently going forward.

Second, the Journal article notes that corporate customers are already migrating to online, "on-demand" software services, rather than the traditional type that H-P envisions selling.

Third, H-P is coming to the corporate software market long after many competent competitors have already settled in, such as IBM.

Fourth, there is the issue of credibility. I would think that commitment to a software vendor is a very serious issue, and H-P isn't really much of a presence yet in that world. This could take quite some time to pay off.

Overall, I think this new direction probably won't change the fortunes of H-P, which are heavily wedded to selling commodity computing and related hardware- laptops, printers, etc. Hurd has fixed some of the firm's earlier problems, but I do not think this necessarily presages a return to H-P's former days. As the Yahoo-sourced chart on the left depicts (click on it to see the larger version), over 40 years, the company has had some runs of clearly consistently superior returns. For much of the 1990s, and the early 1980s, the firm appears to have outperformed the S&P500. However, beginning in the mid-1990s, H-P's performance began to revert to average and/or inconsistency.

Over the past 5 years, as shown in the chart on the left, H-P hasn't really outperformed the index until the last 20 months or so. Hardly a long-term return to consistent superiority. Based upon my proprietary research findings, H-P's recent performance is far from sufficient to merit ascribing to it long-term outperformance of the index. Even three years of relatively high total returns is no solid predictor of consistent outperformance of the S&P.

So, I think it remains to be seen whether H-P can even be a high-growth, long-term consistently superior total return company again, going forward. As I have written in prior posts, creating a successful second act for a technology company is a nearly-impossible task to achieve.

Google & The Networks: Is Content King?

Yesterday's Wall Street Journal featured an article discussing the push back of NBC, CBS and Viacom to YouTube's approach to airing their video libraries. Additionally, Paul Vigna, a writer for Dow Jones, wrote an editorial declaring the networks safe, for now, because content will always be king.

This week's alliance between online video site Joost, and Viacom, is clearly aimed at setting up and reinforcing a competitive threat to Google's YouTube.

Did Google make a mistake buying the best-known piece of online video distribution real estate? Probably not.

Does Google, via YouTube, expect to air all the video content of the networks for free, or just shares of advertising revenues? Again, probably not.

Is Viacom going to get as much viewership for its content at Joost as it has, or would, at YouTube? Once again, probably not.

I don't think the issue here is whether YouTube will successfully deprive owners of existing video content of value for distributing that content directly online at a very popular site. I also think many pundits mistake YouTube as a joke, just full of some home movie producers.

The issue is whether YouTube successfully exemplifies the ability of one or two sites to become so valuable that they will rival the owners of content in importance.

In this regard, I disagree with Mr. Vigna. I don't believe the networks have much time to build any proprietary online distributions sites. YouTube is already pervasive. Why won't some creative production team approach YouTube directly for a distribution deal, and never even stop at the networks? Just release content on their own URL, and via YouTube. Or Joost. Perhaps one or two other sites.

What Mr. Vigna overlooks, a la AOL-TimeWarner, is that nobody has successfully owned distribution pipes and content. Either one may be managed successfully, for a time, to provide consistently superior total returns. But it's doubtful any company can provide both and have that performance.

Other content originators suspect a distributor who also produces content. Other distributors suspect a content provider who also owns distribution.

But, alone, the best-run, most creative distributor or content producer can easily dominate their business, and even fight its functional counterpart to an even revenue-sharing arrangement.

YouTube isn't an empty threat just yet. I think it will simply take a little time for the reality of the new, disintermediating online opportunities to fuel the move of content producers directly online. If so, then Google's bet on YouTube will look smart after all.

The CIO as Strategy Officer- Again

Yesterday's Wall Street Journal contained an article discussing a new trend toward involving CIOs in company strategy deliberations and formulations. Included in this is an old holy grail of technology/operations management- the commercialization of internal IT operations as a business development function to produce revenue.

"Companies are requiring CIOs to be more thoughtful about strategy," Reynold Lewke, a recruiting partner at Egon Zehnder, is quoted in the article.

You have to read to the end of the piece to get the real message, however. Louie Erlich, formerly just CIO of Chevron, now also VP for Strategy and Services, is quoted as saying,

"The CIO title is misused, frankly. If all a CIO does is oversee tech systems, they should be named a tech manager. A CIO should be enabling a business to grow."

Mr. Erlich's statements seems eminently sensible. It also points up the likelihood that, for several decades now, "CIOs" have, in fact, been over-elevated, misnamed technology and operations managers who have not had a clue as to how to integrate their functions into the support of corporate growth and development strategies.

I saw the first run of that movie at Chase Manhattan Bank some years ago, and it wasn't pretty then. The hoped-for commercializations of internal operations never materialized. Managers were more comfortable with technology, and building walls around their fief, than they were venturing out to support and facilitate business development. That's why so much financial services innovation tends to occur in monoline startups, be they credit card, mortgage banking, hedge funds, or private equity firms.

I suspect that the moral of this story is to watch for some quasi-spectacular failures as corporations try to market their own IT groups' interpretations of how to assemble systems which their vendors are already marketing, right beside them, to other customers.

Erlich's focus on truly broadening the scope of "information" used to facilitate Chevron's strategy sounds reasonable and may potentially lead to more profitable growth and consistently superior total return performance. Trying to commercialize internal IT doesn't.

The New Kraft Foods

Yesterday's Wall Street Journal's Marketplace section featured an interview with the CEO (as of last June) of Kraft Foods, Irene Rosenfeld.

The genesis of the piece is Kraft's imminent spinoff from Altria, and an analysts' conference for Rosenfeld, on that occasion.

By all indications, Ms. Rosenfeld is a capable and sensible businesswoman. What is troubling is the simplicity and classic nature of her prescription for fixing Kraft.

Essentially, she arrived, toured the company's facilities, talked to employees, and conducted ground-level, personal visits to customers and their kitchens throughout the world.

Here's what the Journal had to report,

"Ms. Rosenfeld concluded the nation's largest food maker- whose household-name products range from Jell-O to Maxwell House coffee to Velveeta cheese- had lost sight of how its offerings fit into consumers' lives. Deep cost cutting had eaten into Kraft's product quality, eroding the strength of some brands and causing the company to lose market share. Workers were afraid to speak up when they saw problems.

Today, at an analysts' conference....Ms. Rosenfeld plans to unveil a new strategy to reignite Kraft's growth as it gets ready to spin off from Altria Group Inc. Instead of just selling meal components, Kraft will make more complete meals like prepackaged salads and ready-made sandwiches with its Oscar Mayer meats and Planters nuts."

This all sounds great. Except for one thing. Where was this strategy for the past several years? What was the board at Altria doing for the past five years or so, while Kraft slipped into the coma from which Ms. Rosenfeld intends to wake it?

How sad that a leading brand name in American consumer packaged foods simply lost the salient skill of such vendors- staying close to the consumer and her/his habits and needs. Nearly thirty years ago, when I was a graduate student at Penn, we were constantly regaled with tales from our consulting marketing professors of the various new products and consumer research being conducted at their clients, who were typically large US packaged goods purveyors.

As a little consumer behavior aside, Ms. Rosenfeld refers to something that has remained true for over thirty years. Back in the day, one of my marketing professors, Jerry Wind, related how research revealed that completely prepared foods didn't score as well with consumers as 'mostly' prepared foods did. For instance, instant cake mixes didn't use powdered eggs, so consumers could add fresh eggs and feel that they prepared the cake.

Today, Ms. Rosenfeld relates how they leave the consumer to zap a product in the microwave, to give the illusion of a freshly-cooked meal that, in reality, was essentially already prepared in the box.

Still, while Ms. Rosenfeld seems like the real McCoy when it comes to marketing and new product/growth development, isn't it sad that this conventional wisdom of more than three decades is now required as major surgery on a fallen consumer brand portfolio? This is the true failure of corporate governance.

Why didn't Altria's board ask questions about growth and new product introductions? Why didn't they ask what the impact of the ready-to-eat food assortment at 7-11 had to do with Kraft's demise?

How many tens of millions of dollars do you think were paid to inept, under-performing heads of the Kraft unit under Altria?

Well, the silver lining for me is that, perhaps in four more years, I'll be able to invest in Kraft, when Ms. Rosenfeld leads it to performance that qualifies it for my equity portfolio selection criteria.

Investors, Hedge Funds, and Market Timing

My partner and I were discussing private equity takeovers last week over lunch. It was a continuation of an earlier discussion involving timeframes of various investors.

I was relating some business reporting on these private equity groups looking to clean up and "unlock value," as the pundits were saying of Goldman Sachs last week, in regard to the rumored AMR-BA merger.

It occurs to me that there are basically two kinds of investing: betting on continued excellence, or betting on someone bailing out and fixing a loser.

The latter approach requires at least three assumptions:

1. Someone else will view the poorly-performing asset of which you own a share as fixable
2. The right person/group will come along to fix that asset
3. You will be allowed to realize increased value from the fixing of the asset, or the act of buying it from you (and other shareholders) in order to privately fix it

To me, these seem very problematic and risky assumptions to make, and they must all come true if the investment is to be worthwhile.

It's at least a timing issue, and more. That is, this type of investment is a variation of market timing. The white knight which comes along to 'save' or fix the asset in which you have invested is looking to 'unlock' value and sell, not necessarily reorganize the company for long-term, consistently superior total return performance.

Along these lines, my partner sent me a New York Times article from this past Sunday by Mark Hulbert entitled "A Good Word for Hedge Fund Activism."

Herewith is some of the text of his article,

"WHEN hedge funds buy shares of a company and start agitating for changes in the way it is being managed, they may seem to be gunning for a quick killing at the expense of longer-term shareholders.

But, in fact, the evidence shows that for the most part, buy-and-hold investors ought to cheer when hedge funds jump aggressively into a stock, according to a new study. Titled “Hedge Fund Activism, Corporate Governance and Firm Performance,” it was written by Alon Brav, a finance professor at Duke; Wei Jiang, an associate professor of finance and economics at Columbia; Frank Partnoy, a law professor at the University of San Diego; and Randall S. Thomas, a professor of law and business at Vanderbilt. The study has been circulating in academic circles since the fall.

The authors examined nearly 900 instances from 2001 through 2005 of what they call hedge fund activism. The professors compiled their database in large part from the reports that hedge funds must file with the Securities and Exchange Commission whenever they acquire at least 5 percent of a company’s outstanding shares and intend to get involved in running the company.

Though the professors concede that they have no way to know whether their sample included every instance over this five-year period of hedge funds trying to change a company’s behavior, they write that they believe the sample “includes all the important events.” Included in the professors’ database are not only aggressively hostile actions like threats of lawsuits, proxy fights and takeovers, but also offers to help management enact policies intended to bolster the company’s stock price. Inherent in such cases, Professor Brav said, is an implied threat of hostile actions if management rebuffs those offers.

The professors found that the stock of the average company singled out by a hedge fund outperformed the overall market by 7 percentage points over a four-week period: the two weeks before and the two weeks after the hedge fund’s public acknowledgment that it was aiming at the company. ........If hedge funds did nothing to improve the target company’s profitability, this short-term boost to its stock price would be temporary, and the stock would fall back. But that is not what the professors found. In the year after that initial month of market-beating performance, the average target company’s stock kept pace with the overall market. And over the subsequent two years, the professors also found, the operating performance of the target companies improved markedly.

In finding that the market’s reaction to this type of activism was the rule, not the exception, the professors concluded that the average long-term investor in companies singled out by hedge funds has benefited significantly."

I found this article to be very interesting for two reasons.

First, that the best that could be found for hedge-fund activism, which, for an existing shareholder, is probably better than private equity activism, in which the shareholder loses his shares and all future gains in the company, is a month's worth of outperformance. That's it. One month.

Clearly, these hedge funds are out to "unlock value," meaning, get a quick pop and unload most of the position, a la the Goldman Sachs activity in the airline sector.

Apparently, in the best case, as in the bolded passage, there's a one month outperformance, followed by a year of average performance. The comment about "operating performance of the target companies improved markedly," is code for, 'darn, no more total return effects after that month, but, hey, at least the fundamentals seem to have improved, although without any corresponding stock price gain.'

Second, the authors of the paper, and the NYTimes piece, Hulbert, all consider timeframes longer than a month to be "long term." Even as little as that extra year of average returns is ostensibly good for "long term" shareholders.

Yet, my own research has demonstrated that even for periods as long as three years, there are incredibly large volatilities associated with total returns, such that they are neither predictable, nor reliable.

Further, even I am not a "long term" shareholder. I look for long term patterns of consistency, but I only hold for a period sufficient to suggest I will reliably earn another increment of superior total returns. Holding an equity for years, on the hopes of some sort of magical uplifting of the stock price above the market, is a mug's game.

The paper to which Hulbert refers reinforces my point. One has to be extremely fortunate to already be in an equity which is sufficiently depressed to attract the right sort of attention. Timing has to be down to the month, to really optimize one's gains. Who among us, not managing a hedge fund, is that good at market timing?

I'd much rather identify patterns of consistently excellent fundamental and technical performance, and buy, in the expectation that such above-average performance is causally based, and likely to last just a little longer. That way, I don't need to rely on a somewhat complicated, loose transmission system of poorly-performing equities, white knights, and timing.

It takes discipline to use my approach, rather than simply hoping for good luck and a white knight.

Home Depot & Relational Investors

There were amazing developments at Home Depot last week. According to Alan Murray's comments on CNBC on Monday afternoon, here's what happened.

First, Relational apparently got the Home Depot board to agree to revisit the 'supplier' business which Nardelli and his lieutenant, now CEO, Frank Blake, built and acquired.

Second, in presenting their analysis, Relational allegedly corrected a prior mistake in calculating this unit's ROI. This part is just amazing. So Blake and Nardelli, two exorbitantly-compensated senior executives, couldn't even do the basic math to correctly determine the return to HD of a new business? Can we say "mediocrity?"

Consequently, third, the board is now agreeing to consider getting rid of the unit. Maybe a good idea, maybe not, as some note, because they would be selling 'at the bottom,' the housing sector being as weak as it is just now.

How can the board actually retain a CEO, even a new one, who was responsible for incorrectly providing the basic arithmetic of calculating operating performance for the new business unit, and presenting it to the board? For more thoughts on this, see my post on MBAs this week, as well as this one on a recent application of a very old marketing management method at GE/NBC. It's easy to see why I am so sceptical of the value of an MBA, isn't it? Somehow, common sense was simply lacking, even among GE-trained senior operating executives. Neutron Jack would be so proud.

Does the Relational Investors saga make you wonder what else is going on at Home Depot that smacks of grade school ineptitude? Not to mention how little spine the Home Depot board seems to have, bending to whomever has pushed on it with the most force most recently?

More MBA Nonsense

This past Monday's Wall Street Journal featured an article entitled, "M.B.A. Programs Hone 'Soft Skills.' Apparently, the new idea is to add 'soft skills' and people focus to the MBA curriculum.

Warren Bennis, professor at Southern Cal's business school, claims that schools are 'responding to employers' growing interest in soft skills. Executive suites are increasingly composed of managers running far-flung operations who must attract and retain knowledgeable workers. That puts a premium on skills such as communicating and brokering compromises.'

Having been to graduate business school, I must say, that's an awfully ambitious agenda for people with, realistically, 18 months of focus, little knowledge of business. In fact, the article goes on to note that the schools "are copying and adapting popular corporate techniques such as coaching, personality assessments and peer feedback."

The worst is that second year students are counseling new first-year students on these topics. And, just what great font of 'soft skill' wisdom would a second-year MBA student have? If I were a student, paying for a two-year MBA education, I'd be livid about this.

Talk about the blind leading the blind. No wonder 'average' business management remains so, well, average, throughout time. I've written elsewhere (December 28th post) in this blog recently about MBA programs churning out decades-worth of mediocre business people. I believe this new trend promises to intensify the mediocre output of MBA programs.

For example, see my recent posts on auto inventories, or NBC ad sales. We can't even get existing senior managers to use tried and proven management concepts from the 1950s, like 20/80 analysis, let alone sensibly manage inventories to relate to sales and profit volumes.

And now they are teaching 'soft skills' in the same schools that have failed to graduate students who can get the simple, mathematical stuff right? I think, in reality, the so-called 'soft skills' are the product of one's career. You may not be able to teach some of them, and, others, need to be developed in the real world, not in some B-school game environment, or among "peers" whose motivation is to get a job, not teach other students.

How about MBA programs doing more with topics like how to identify, foster and commercialize innovation- the real driver of value-added growth and overall shareholder returns?