CitiGroup Analyst Calls for GE Breakup

Last summer, I wrote this post regarding the reasons why GE should not exist in its current state as a conglomerate. As has happened with some other early predictions of mine, now others are coming late to this party.

Now a CitiGroup analyst has published a call for breaking up GE by spinning off its finance, real estate and media assets. He provided estimates of the value of each of the units apart from their current parent, such that the separated values sum to more than the current value of GE's stock.
Last August, I wrote,

"The days of Thomas Edison's end-to-end electrical system supply enterprise are long, long gone. I contend that each of these business units, and perhaps even more, at lower levels, could be spun off independently, to GE's investors' benefit. It's hard to believe that this collection of such different businesses can realistically derive value from being in a common corporate domicile, let alone generate excess returns because of that common home to pay for the lush compensation of the various senior executives.I can't see any downside to breaking up GE into its component businesses. Does anyone else?"

Clearly, I am no longer alone in this view, although I articulated it in detail eight months ago. Similarly to how Warren Buffett recently echoed my thoughts on Dell, discussed in this post, and the business media took six months or more, last year, to echo my own views on GM and Ford, first posted in this blog in the fall of 2005, now there's the beginning of a drumbeat to dissolve GE into its more sensible, constituent parts.

For what it's worth, the CitiGroup piece merited an on-air acknowledgement and discussion by no less than David Faber, a CNBC reporter. CNBC, of course, is owned by GE, so Faber had to be, and was, very guarded in his remarks.

On the plus side, he explicitly acknowledged GE's dismal performance under Immelt. Then, he inexplicably, and with a straight face, intoned that 'some say' Immelt has actually performed even better than Welch at the helm of GE. I have absolutely no idea how Faber would justify this, and he didn't try.

However, he went on to essentially note that Immelt has said the company won't be split up, so, there. No matter what anyone else says, Jeff likes being paid tens of millions of dollars per year for not providing shareholders even as much as the better-diversified return that they could get in the S&P500, let alone a better actual return under his term as GE's CEO. However, Faber did end his piece by opining that, if the company's stock price doesn't begin to move, relative to the S&P, by year's end, Immelt's job and GE's structure could begin to be in danger. As I've noted in prior posts, I'd love to see a wolf pack of private equity groups do to GE what the European bank consortium is now attempting to do with ABN Ambro- buy it and break up the pieces to add more value among the hunting partners.

Earlier, on CNBC's Squawkbox program, Joe Kernen, one of the co-anchors, and typically very sensible, had read aloud the Citi analyst's estimated business unit values on an as-separated basis. He then asked, to paraphrase,

'well, if we know what the pieces should be worth alone, why is it necessary to split them off? why can't we just have GE's value reflect them?'

It's actually a fair question. Since the values are different, there must be reasons. Here are two that have occurred to me in the past.

First, astute observers realize that these units would behave differently, and probably more competitively and aggressively, if they had not corporate safety net, let alone had to vie internally for investment resources. Thus, on this basis, their different behavior and, probably, performance, would justify a different value.

Second, these units are currently saddled with a sort of corporate "tax" by Immelt and his royal court. Do you think Immelt actually adds value to any specific business unit personally? Doubtful. So, in essence, Immelt, his staff, headquarters operation, and all of the ponderous GE administrative overhead is paid by a tax on the operating earnings of the various GE units. Spin off a unit, and it instantly has more net income, and probably less meddling, time-wasting activities directed upward to the GE corporate staff.

For the record, here is a passage from Immelt's prepared remarks at GE's annual meeting this week, as reprinted in the Wall Street Journal,

"You can only believe one thing if you run GE or own GE stock: consistent earnings and cash flow growth, with expanding returns, increase shareowner value. This is a long-term investment. There are no short-term tricks.

The last few years have been frustrating for all of us. Your company has performed. Our five-year earnings growth rate of 11% matches our performance over the past 25 years. Our total shareholder return was 9% in 2006, 10% over the past three years and 2% over the past five years. But we have under performed the market.

Our challenge is one of historical valuation. GE's PE ratio was 31X in 2001, a 50% premium to the S&P 500. Today, our PE ratio is 17X, equal to the S&P 500. This is a function of a broader market sentiment away from "safer" mega-cap stocks and investors' desire to see GE perform consistently as we changed our portfolio.

We will continue to perform. We may have been over valued at 31X earnings, but we are not today. Our stock should reflect our double-digit earnings growth rate in the future. As we continue to execute, our valuation should improve as well. This is the best time to own GE stock.

I am compensated to meet with your expectations as long-term investors. Approximately 20% of my compensation is in base salary; 60% is at risk based on our financial performance; and 20% is at risk based on the stock price performance versus the S&P 500. I work without a contract. My objectives and compensation are set by our independent directors. My evaluation is transparent. You can read about it on page 41 of the annual report. I own 1.2 million shares of stock, including 100K shares I purchased in the open market over the past year. I will never sell a share of GE stock while I am CEO. Believe me, I am motivated."

Regarding Immelt's remarks, I would note the following.

His observation of GE's historic earnings growth rate being stable, while its stock price has stalled, simply points up Immelt's failure to understand that the game has changed in terms of investors' expectations. First, from my proprietary research, I would note that revenue growth, not earnings growth, is significantly related to concsistently superior total returns. Second, it's Immelt's job as CEO to figure out how to get total returns which exceed those of the market, not to excuse why earnings growth, and he, aren't getting the job done.

Second, Immelt is totally disingenuous in how he portrays his compensation. By expressing his compensation in percentage terms, he hides how much actual cash he has been paid by GE to date. I've covered this in various posts, most recently here, and the number is now at or north of $18MM. If Immelt explained this, than the '20%' figure, and his insistence that he is 'motivated' become pathetically hollow. Further the 80% of his compensation 'at risk' is, in reality, based upon terms he has proposed. The internal performance portion, 60%, is likely a sandbagged number. The 20% related to GE's stock price, in relation to the S&P, is, as I recall, rather complex, rather than simply requiring Immelt to consistently better the S&P's return over several years.

I'm left feeling a bit happier today, after hearing of the Citi analyst's call to begin dismembering GE. With time and continued lackluster leadership at GE, we might just see it be pursued and broken up within the next few years. Pity, though, that Immelt will get to keep what, by then, will be more than $20MM in cash, and probably more than $100MM in additional deferred compensation, all for doing basically nothing during his tenure to add value to GE for shareholders.

AstraZeneca Acquires Medimmune: Is Big Pharma Finally Dead?

Over the last decade, we've seen, significant and, at times, rapid consolidation of the pharmaceuticals sector. I can't even begin to recall the various once-independent names from the 1980s anymore. I do recall the latter years of Roy Vagelos' reign at Merck, when it was a paragon of a well-managed company and pharma operation.

Does this week's acquisition of MedImmune by AstraZeneca (one of the big pharma giants that is the resulting combination of some of those firms whose names I can't recall) signal the final bankruptcy, from a total return perspective, of big pharma?

Is bio-pharma finally, legitimately replacing big pharma as the most efficient and effective means of discovering new medicines?



A look at the various Yahoo-sourced charts (please click on each to view a larger version) reveals some of the answer. The first chart depicts AstraZeneca's performance over the past five years, versus the S&P. Not only is AstraZeneca performing worse than the index, but it's inconsistent, as well.

Considering my latter question regarding big pharma vs. bio pharma, I charted several big pharma staples- AstraZeneca, Novartis, Merck and Glaxo, versus the S&P and Medimmune. With the exception of Novartis, the big pharma names lag both the S&P and Medimmune over the past five years.



Turning to the bio pharmas, we have this result. Gilead (one of my portfolio holdings) and Genentech lead the pack, with Genzyme and Medimmune also leading the S&P. Further, the graphic display demonstrates that Gilead and Genentech have continued to outperform recently, while the other two bio pharmas have coasted back down toward the S&P's return.


This would suggest that Carl Icahn has not lost his touch, and is focusing on one of the weaker-performing companies in a sector that is capable of far better performance.


Putting the two pharma sub-sectors together, you get this picture. Big pharma as a group clearly lags bio pharma in generating superior total returns for their shareholders. Thus, AstraZeneca is probably wise to turn to an undervalued bio pharma for help in re-igniting growth and, hopefully, the ability to generate consistently superior total returns.

Does this mean we might see additional consolidations of big pharmas chasing bio pharmas? The chart suggests it will continue to be a compelling consideration for the worst performing big pharma, Merck.

Trouble Hedging Oil Prices: West Texas Crude

Monday's Wall Street Journal contained a sleeper of an article about the behavior of West Texas crude as oil's benchmark pricing instrument.

While the details of how and why this type of oil has become the instrument on which hedging instruments are built may be rather dull, it turns out that they are important. For, recently, the price of West Texas crude, and the hedging vehicles built upon it, have been moving in the opposite direction from the prices of the bulk of oil traded on world markets.

It goes to show, once again, that hedging is typically built on historical pricing behaviors, but is not always a lock. Right now, airlines and other major institutional consumers of energy hedges are seeing those financial insurance policies double down the wrong way. Instead of offsetting oil's price rise, the West Texas hedges are adding to the damage.

We saw this nine (has it been that long already?) years ago, when the wizards at John Merriwether's Long Term Capital Management, including two Nobel Laureates, misunderstood the behavioral assumptions they had made regarding various instruments used for hedging, and took them, instead, as tautological relationships. When a combination of market forces, including a Russian default, upset past relationships between the financial instruments, LTCM began its four month slide into bankruptcy and dissolution.

Now, we have a view of something similar, although simpler, occurring. The physical site chosen for delivery of West Texas crude-based derivatives is Cushing, Oklahoma. For a variety of reasons, the storage facilities in Cushing are full, thus depressing prices.

So, while attempts are being made to develop new benchmark oil instruments for other grades of crude, in other locations, let's not lose sight of the underlying lesson from this situation.

Relationships between financial instruments are observed behaviors within certain contexts. They are not laws, nor tautological truths. There can be occasions when conditions will be violated, relevant ranges of underlying or associated phenomena may be exceeded, and the relationships upon which hedges built with these financial instruments will fail to behave as expected.

It happened with "portfolio insurance" in the early 1990s. It happened again in 1998. It might be happening again now.

And it's almost certain to happen again, in some instruments, in the future.

Financial Academics as Wall Street Fund Managers

"Those who can't do, teach."

That's an old adage from my youth. However, Saturday's Wall Street Journal featured an article concerning academics who teach finance at our nation's universities, and also have developed and/or run asset strategies via hedge or mutual funds.

My initial question is, why would you think finance professors should necessarily know more about developing hedge or mutual funds that outperform the market than anyone else? If they did, and they knew it, wouldn't they be doing it already? Or, perhaps, have done it, become wealthy, and then retired to teach finance at a major university?

Unlike bygone eras before 1990 or so, when universities often had data, computational resources, and a collection of talent that was unmatched elsewhere, it's unclear what competitive edge would exist nowadays in the academic world. What is it that university finance professors have that is now unique? The days of University of Chicago's CRISP data base being unique, or Wharton's Rodney White Center having some edge, are gone. I can't imagine any leading trading or investing operation, let alone an exchange, releasing data in that manner anymore.

Would universities have better research resources, such as people? Probably not. Funds and investment banks with fund management shops are chockablock with young, eager twenty somethings on the make. In fact, my partner and I even pause when offered an opportunity to meet with some financial services concerns, because we don't see benefits to speaking to a room full of young, inexperienced analysts, all of whom are looking for some edge with which to make partner at their firm.

Computing power is cheap and plentiful now. That is not likely to be a source of advantage for a finance professor nowadays

How about innovative concepts? Perhaps the leading finance professors think better thoughts about investing strategies. The article mentions Wharton's Jeremy Siegel, Yale's Robert Shiller, and Princeton's Burton Malkiel. It neglects to name Robert Merton and Myron Scholes, co-recipients of the 1997 Nobel Prize in Economics, who assisted Long Term Capital Management in causing self-immolation, and the loss of $4.6B, back in 1998. Neither does it discuss Robert Haugen, a UCLA finance professor who applied the theories from his book, The New Finance, to mutual funds in the 1980s. As it happens, my colleagues at a hedge fund worked with Haugen in the late 1980s, using his data and models, and were unable to effect any significantly superior returns from the effort.

The article also omits any mention of Fisher Black's and Richard Roll's track records at Goldman Sachs, back in the 1980s and '90s. Black, of course, was hired for his part in the now-famous Black-Scholes options model (he died while at Goldman, so LTCM had to settle for his partner, Scholes), while Roll was instrumental in the application of a rather garden-variety statistical technique, factor analysis, to portfolio management, which was renamed Arbitrage Pricing Theory, or APT.

Whatever asset management vehicles other famous finance professors, such as Eugene Fama, and/or his research colleague, Ken French, have created, are also omitted.

If anything, finance professors may be more likely to be hidebound, since they must teach what has already been vetted. Or, if it's cutting-edge, what they teach becomes the market behavior. You'd expect to find the more successful asset management strategists out of the limelight, and certainly not prostyletizing their concepts to the masses in MBA and PhD programs.

As an example of this, several years ago, I worked with a wealthy private investor who desired to develop his own hedge fund complex. He told me that he and his colleague, Burton Malkiel, managed the money of some associates.

Did they employ some abstruse black-box econometrically-based model? No. Did they engage in esoteric hedging strategies across currencies, durations, and asset classes? They did not.

Their approach was almost comically simple. It used the yield on Treasuries, and a simply-derived proxy of yield for the S&P500 from its forecasted earnings and PE multiple. They then simply moved client funds between two publicly-available, pure index funds based upon the relative values of the two forward-looking yields.

Hardly rocket science.

However, my comments are hypotheses. Anecdotal, if you will.

What we really need to know, in order to determine whether ex- or current finance professors are uniquely talented asset managers, is whether, as a group, finance professors have outperformed their non-academic peers in the marketplace with their hedge, mutual fund, and/or private account strategies. Did they also outperform the average comparable fund or account? How about the S&P500 index, for equities, or other relevant indices for other asset classes?

This would be fascinating work for some financial media company, such as the Wall Street Journal, Barrons, Forbes, or CNBC to undertake or commission. Just using a few high-profile names and some anecdotes isn't sufficient to demonstrate or conclude anything.

For example, as noted above, Long Term Capital Management blew up, losing billions of investor dollars, with the help of two ex-academic, Nobel Laureates. Siegel's strategies, somewhat disingenuously called 'index funds,' have been off to a rocky start at Wisdom Tree, according to a recent Journal article.

There's no clear sense in the literature as to whether academics have done a better job consistently outperforming their respective market indices, or non-academic asset management peers. From that perspective, the Wall Street Journal article is an intriguing start on this topic, but by no means the final word.

Wall Street on Wal-Mart

Friday's Wall Street Journal ran a piece in their Money & Inveseting section on what ails wal-mart, and how to fix it. Trouble is, they mostly asked a group of money managers. Why they think those guys would have a lock on such knowledge is beyond me.

In my opinion, most of them are barking up the wrong tree. Wal-Mart isn't 'coming back' as they knew it. It's big, sluggish, and hard to manage with its saturated markets.

A look at the Yahoo-sourced chart above ( please click on it to view a larger version) displays the firm's stock price over the past five years. To call it 'stalled' would be kind. It's in deep trouble.

Among the suggestions from the analysts and portfolio managers were: improve customer service; focus on same-store sales, not new growth; exit Japan; enter another foreign market like Mexico, and; sell the Sam's Club operation.

It's quite a mix of advice, but I doubt most of it will result in consistently superior returns for Wal-Mart, like its heyday in the 1980s and '90s.

From what I've read of the firm's travails of the past few years, customer service, per se, is not the problem. Certainly not of the sort that matters to McDonalds. It's a totally different customer satisfaction model.

Rather, Wal-Mart is likely at a crossroads. If it desires to regain consistently superior total return performance via growth, then it needs to do a better job identifying those markets which will sustain its traditional, logistics-dependent strategy for dominating the low end of retail merchandising. Whether this means staying or leaving Japan, I don't know. But Wal-Mart's management should.

Similarly, selling or keeping Sam's Club is strictly a matter of whether it contributes to high-margin, high-revenue growth, or not.

However, what all of these observers miss is that real companies become senescent. Eventually, investor expectations become adjusted to their performance, their competitive environment brings the firm to parity, and, like Wal-Mart, it may even draw the focus and ire of public interest and governmental groups, further burdening the firm's efforts to outperform the market.

My own view is that it's unlikely that Wal-Mart will regain its former consistently superior outperformance record. Its size, need to be in multiple countries and exposed to radically varying cultures and logistics environments probably presents the firm's management with too many challenges to overcome simultaneously.

But, since I'm neither a broker, nor a current investor in Wal-Mart, I don't have a stake in convincing others to either buy, or sell the firm's stock based upon expectations. I'm just writing what I have observed, from both my proprietary research, track record of portfolio selections, and the recent media coverage of Wal-Mart's performance.

Blackstone's "Fair Value" Valuation

Wednesday's Wall Street Journal's Money & Investing section featured an article discussing the method by which Blackstone is valuing itself. The firm, on account of holding non-market priced assets, will use "fair value" to estimate the worth of its various parts.

To quote Charles Niemeier, a member of PCAOB, the accounting oversight board,

"The biggest problem with fair-value accounting is management bias."

Blunt and pregnant with implications, if ever a brief statement was.

The article quotes Mr. Niemeier again as stating that the rule is "bad business" and will "come back to haunt" the accounting rule makers.

Needless to say, Blackstone is keeping mum on the issue. No surprise there. As I wrote recently, here and here, I'd be very careful of being on the other side of Blackstone on any equity deal. This fair value issue explains much of why I feel that way.

Not only is Blackstone allowed wide latitude to account for revenues as it chooses, mixing fees it pays to itself from acquisitions, in effect, transferring funds from one pocket to another, but, now, it also is given wide latitude to determine the underlying value of those assets, too.

When I was at Chase Manhattan Bank years ago, I spent a lot of time troubleshooting our financial information services unit, IDC, in Boston. One of their businesses was providing bond matrix data- in effect, estimating value for infrequently-traded debt by using values from various issues with similar attributes. As the CFO for the business told me,

"Merrill's biased and we're wrong,"

meaning that Merrill, having the debt in its inventory, had an interest in specific valuation biases, while IDC, although objective, was less likely to get the valuation right.

Blackstone is now in the position of Merrill. Its investors are in IDC's position- on the outside, hoping to guess reasonably correctly about the actual value the assets in Blackstone's "poke."

A further complication is touched upon later in the Journal article. It notes that there is a risk of favoring current investors in Blackstone's deals, over new investors, due to the differing information flows to each.

This is a dilemma about which I have written before, and is the crux of why I favor using a 'consistently superior return' over time, rather than instantaneous measures of performance. It's too easy for management to 'maximize present value' when their interest is involved, essentially leaving no additional value to be created from the existing situation for future investors.

This is yet another reason I would be cautious about being on the buying side of a deal, when the seller is Blackstone, and the assets are its partners' interests.

Yahoo's Disappointing Results

Yesterday's Wall Street Journal carried the following piece:

Yahoo Slumps on Earnings Drop

Shares of Yahoo sank $3.78, or 12%, to $28.31 on the Nasdaq Stock Market. Investors have pushed up the company's stock price in anticipation of Panama, its overhauled online-advertising platform, but Yahoo said the financial benefits of the system won't materialize until the next quarter.

I cannot say I am surprised in the least. Susan Decker, the new CFO, notwithstanding, this seems reinforce Yahoo's inability to pull a consistently superior-performing business out of a collection of various online initiatives.

In this case, the blame is placed on their new ad system. Even if Panama had delivered, does anyone expect Yahoo to overtake Google in this product/market? I don't think so.

As the Yahoo-sourced chart above, comparing Yahoo, Google and the S&P500 demonstrates, the Yahoo has plateaued for the last two years, while Google has outperformed the index from its IPO date.

In this post from March, I discussed how Yahoo had squandered its rich deal with AT&T in 2001, only to have it about to be renegotiated upon its expiration next year. Yahoo failed to use the funds to develop either leadership in the areas in question, or new services which would continue to differentiate it in the online marketplace.

Now, one of the few paying services it has, online ad sales, is faltering as it tries to compete with Google and Microsoft. Perhaps it's time for the Yahoo board to consider replacing Terry Semel, before the only major decision they have left is to whom to sell, or with whom to merge, to salvage some value from the Yahoo brand franchise.

Time Warner's Big Cable Decision

Yesterday's Wall Street Journal featured an article in its Marketplace section which reported that Time Warner is seriously considering unloading its cable holdings. CNBC, as it often does, due to its alliance with the newspaper, featured a discussion of the article. At least one fairly on-air-headed anchorperson wagged her tongue about the 'fat cash flows' from Time Warner's cable businesses.

That, of course, misses the point. Public companies are not run for cash flows, because, in a capital market which is liquid, cash can be borrowed. Shareholders rarely seem to buy stocks for dividends, as they did thirty years ago, when transaction costs were exhorbitant. Instead, stocks are viewed with an eye to total returns.

There was one key passage in the Journal article that says it all about Time Warner's situation,

"For years, Time Warner has believed in wedding its movies and television programs to powerful distribution networks- primarily its cable operation- as a way to ensure that their content wouldn't be blocked by rivals. But with the Internet increasingly serving as a home for TV and film offerings, content companies may feel they no longer need to control old-style distribution networks such as cable or satellite TV."

In prior posts, here, and here, plus a handful of others you can find by searching my blog for the term 'Time Warner,' I have argued that old media, as represented by Time Warner and the networks, have ignored the coming, now at hand, disintermediation of broadcast and cable channels by direct URL access.

My post yesterday concerning H-P's entry into the hardware product/market space for this missing link portends just how broad this disintermediation is likely to become- quickly.

Taking all of this into account, I can only marvel that Time Warner has dawdled as long as it has to come to the realization that its cable assets are about to become as 'valuable' as the old Bell System's local copper loops and land lines. Being a common carrier is simply not likely to earn consistently superior returns in the future of direct video content access from URLs on the internet to a TV.

Beyond that, Time Warner's strategy of attempting to own both the distribution and the content was never fated to work well. It never has, and never will. I've written about this as recently as February of this year, here. Essentially, superior content will always find a market. Superior carriage will always command a premium and have supply. Owning a mediocre combination of both assures that, in time, both will fail to provide consistently superior returns.

I've included a Yahoo-sourced chart of Time Warner's past five-year stock price performance, compared with the S&P500. It's pathetic. The firm's stock price has ended up essentially flat, having plunged early on, plateaued, then rose, and now sunk again. It has woefully underperformed the index over the period. It's hard to believe the firm's senior management and/or board has been attentive to its long term prospects.

The Journal article alleges that the two-pronged strategy involving holding cable assets is CEO Parson's preference. That figures, since Parson's has pretty much bumbled the management of the combined Time Warner-AOL since he took over from Gerald Levin. Parsons is a lawyer with no evident grasp of business strategy.

Thus, it's no surprise that Time Warner might be as much as five years too late in exiting cable systems and using the resulting funds to buy into online properties at lower prices than today's.

HP's Entry Into Web-TV Integration

This past weekend's Wall Street Journal featured Mark Hurd, H-P CEO, as its customary interview.

It's a nice piece, and Hurd seems like a fine CEO. But what really drew my attention was this little passage,

...Hurd points to H-P's new MediaSmart HDTV, which can receive entertainment directly from a PC, as a glimpse of where the company is headed: "to integrate content across the home, whether it's emanating from the Web, from satellites, from cable, or the PC, and bring that to the consumer's touch."

Then Hurd reportedly said that he'd 'probably just told you more than I should have...'

This pretty clearly positions H-P to be in the running, with Apple and TiVo, to market the missing link in video content for the home. That is, the server with wireless access to high-speed cable, et.al., and wired delivery of downloaded and stored content onto home video devices, such as television screens.

In this respect, H-P is certainly morphing itself from a collection of old, force-fit computing platforms (DEC, Compaq), into a competitively-positioned, modern technology-producing device manufacturer. H-P will probably never be the Windows-based equivalent of Apple when it comes to novel and beautifully-designed digital devices, but it seems to be heading toward that ideal under Hurd.

This is great news for consumers, and uncertain news for investors. Were Apple to have had the AppleTV space all to itself for an extended period of time, its investors would probably be ecstatic. The way things are shaping up, though, it looks as though at least TiVo and H-P are going to be joining in, with who knows how many other solution providers on their collective heels.

Does this not bode well for: rapid technological advancement in the product space, falling prices, and ever-wider distribution points for the devices? Perhaps they will be the coming years' equivalent of large, flat-screen TVs for the big box electronics retailers?

Time will, of course, tell all. But personally, I'm excited to see so many technological resources being poured into this rather obvious 'missing link' device space. It should speed the demise of cable companies, push the creaky old media video content owners into a final solution, and provide, at last, a nearly seamless way of acquiring, storing and viewing/consuming digital video content.

Seeing as how I mentioned the cable companies' upcoming dilemma, and noting today's Wall Street Journal piece concerning Time Warner's deliberations on that business, I will write about that tomorrow.

From The Files: Edward Prescott on 'Competitive Cooperation'

When it's been a slow couple of days for business strategy or equity markets news, I often turn to a pile of choice articles I have saved from earlier editions of various business publications.

Today, I want to touch on an excellent piece by Nobel Laureate, and periodic Wall Street Journal contributor, Edward Prescott. Back on February 15 of this year, Prescott wrote about 'competitive cooperation,' with the just-turned-50 European Economic Union, the product of the 1957 Treaty of Rome.

Among the many pieces of economic data Prescott cites, these are some of the most compelling. The original six Common Market countries progressed from having a productivity level that was 55% of that of the US, to having achieved rough parity twenty-five years later. However, three countries which did not enter the pact- Denmark, Ireland and the UK- but were near parity on productivity with the six in 1957, fell behind. The same trends held true for subsequent signatories to the Treaty in in the 1980s, '90s and this decade.

Prescott continues the analogy by noting the progress made in Australia and its trading partners in Southeast Asia. The glaring laggard geographic area is Latin America. There, Prescott cites the region's preference for protectionism as having predictably 'poor' results and consequences. Specifically, referring to research by some of his Minneapolis Fed colleagues, he writes,

".....from 1950 to 2001, per capita GDP for Europe increased 68% relative to the US; Asia increased by 244%, while Latin America decreased by 21%. This is all the more striking when we realize that Latin America's per capita GDP actually exceeded Asia's by 75% in 1950."

Prescott sums up his article by noting that protectionism's short term seductiveness inevitably has disastrous long term consequences for relative and absolute wealth creation. Getting the flywheel of economic development and growth going is key, and protectionism tends to slow that flywheel down and cement existing economic conditions in place, while the rest of the competitive global economies move forward.

With this point in mind, I will close this piece with a quote from the beginning of Prescott's editorial,

"If the government has any economic role at all, surely, this.......(to protect US industry, employment and wealth against the forces of foreign competition).....must be it. Actually, no. Government has a higher calling in this country...which is to provide the opportunity for people to seek their livelihood on their own terms, in open international markets, with as little interference from government as possible."

While Prescott is understandably vague on the particulars, I'll be more blunt. At a time when the US Congress has been taken over by liberal Democrats, and their economic protectionist and income redistribution agenda, this sage advice is more crucial than ever. It's a big mistake for government to attempt to manage the how of economic activity, in hopes of attaining a collective economic welfare. The names we have historically used for that vary, but include socialism and fascism.

Rather, the US has historically allowed its citizens to determine the organization of economic resources, as well as own them, while simply setting some minimum, and minimally changing, guidelines within which to pursue their individual economic welfares. If we depart from that history to any great degree, thanks to the current Democratic Congressional agenda, I fear that Prescott's warnings will ring true in America quite soon.

Another Take on Local TV Stations & The Internet

Last June, I wrote a post about consolidation in the local TV station sector. In part, I wrote,

"I can't help but see a parallel to the troubles and solutions of daily newspapers a decade or more ago. Papers began to share printing plants, and, essentially, become differently positioned products freelancing off of the same production assets. It would not surprise me if local television stations, including the major city stations, do the same.

... I'd expect that, over the next few years, competing local broadcast stations will pool their facilities and news gathering, perhaps simply merging into one station per local market. If not the latter, then at least sharing all possible resources, save on-air staff, content selection, and idiosyncratic local programming.

Yet another example of Schumpeterian dynamics at work without any overt organizing entity to guide it, save technological change and consumer behavioral responses."

A recent Wall Street Journal article updated the situation, noting how many TV stations are losing ad revenues faster than they can transit to web-exclusive content.

But this time, what struck me, in addition to my prior observations, is that there is no particular difference between the online presence of a newspaper, and that of a TV station. Once they both go to the internet, how could you tell which is which, if they weren't labeled? I suppose, initially, because one would feature more writing than the other. However, I'm not sure that will last.

Because online is a medium tailored to video, won't both morph in that same direction?

Last year, I foresaw multiple TV stations in a single market combining online. Now, I wonder if we won't see all, or most, print and TV assets/organizations combine online? Essentially, both types of local information media companies are struggling with the web's erosion of all of their exclusively non-local content.

Isn't the obvious solution for them all to simply combine into one new media outlet? Further, if one were starting up a local information content business, wouldn't you just develop a web-based multi-media site? Offer written pieces, news, editorials, video news, ads, and local commercial, community, etc., information? Of course you would.

I can't see much meaningful differentiation in local print or video media, once it moves onto the web. Seems to me the consolidation has at least one more important step to go.

Question is, where would that leave the local affiliation to a broadcast network? Would it even have economic value anymore, in a world in which every entity, whether local media outlet or network, can provide its own content on separate websites?

Citi's Ongoing Troubles

The big news out of the financial sector this week seems to be Citigroup's latest efforts to resolve its ongoing troubles.



This time, reports have it firing 17,000 people, or about 5% of its staff. Of course, various expense equivalents are presented, and bandied about by analysts, to demonstrate the intended effects on Citi's future performance. One waggish brokerage analyst was so bold as to cry for 80,000 job cuts, to arithmetically bring the firm's revenue/employee in line with Citi's competitors.



Then we have the solemn intonations of every talking head and analyst in sight that,



'this is only half the job.'



Thanks for that. The rest of us would have forgotten that Income Statements begin with the revenue line. God save us from arrogant analysts.

Appearing, from first to last, in this post, are five Yahoo-sourced price charts (click on any chart to view a larger image) for Citigroup, Chase, and the S&P500 Index from 12 months to 30 years. What is clear from the broad array of charts is that, over most timeframes, these two former money center, now universal banks, are typically subject to the same market forces. On occasion, however, one or the other will perform a bit better than the other.

Lately, Chase has done better. So much so that, contrary to my wildest expectation, it has been selected in the high-growth component of my equity strategy's portfolio for April of this year. It's very rare that a large, diversified financial services firm would perform in such a manner as to merit this inclusion.

Citigroup, however, seems to have lost ground most recently at the beginning of this year, for a performance penalty of roughly 10 percentage points over the past year. The five-year view shows the two firms to be roughly equal, while the thirty-year view displays Citi's recent flattening, along with Chase.

So, in a sense, Citigroup does need to address its high-cost operating issues. However, given that, according to my proprietary research, revenue growth is key to long term, consistently superior total return performance, I wonder how capable Citi will be of revenue generation, in the wake of its expense surgeries? If, as many call for, the company cuts further, it almost has to affect the firm's ability to generate revenues at significantly higher rates.

Further, the company has reshuffled senior executives, adding several, and generally given the impression that nobody is in charge.

As I have written in earlier posts about these scale and banking, it may well be that neither firm is capable of long term outperformance of the market, at their current sizes. Prince is an ineffective executive, and has been given, in my opinion, far too long to do his job. However, it is a rather tall order to wring consistently superior performance from these financial concerns. Even Dimon, at Chase, deserves little credit for its current, perhaps temporary, out-performance, since he only took the helm there recently.

Bottom line, as one might say, I would not bet on Citigroup's recent actions to return it to consistently superior total return performance any time soon.

Investing: John Bogle's Book & Oppenheimer's Fund Activism

Today's Wall Street Journal carried two interesting pieces on investing.

The first one that caught my eye was a review of John Bogle's The Little Book of Common Sense Investing, by Burton Malkiel. Apparently, there is a series of Little Books, and Bogle's is but one. Malkiel, a financial maven of no small repute, recommends Bogle's volume over those of Joel Greenblatt and Christopher Browne. The former has received good reviews, so it's no minor thing that Malkiel makes this recommendation.

Perhaps the most revealing part of the book, to judge by Malkiel's review, is Bogle's no-nonsense chapter entitled "The Grand Illusion." In it, Bogle provides an analysis of why the average investor earns so much less than the market rate of return. Parenthetically, last week on CNBC, Schwab Chief Market Strategist Liz Sonders noted, based upon Schwab research, that frequently-trading investors earned, on average, as little as 4-6% per annum, versus the S&P index's long-run 10-11% per annum average. That's a stunning differential.

In effect, Bogle, at a stroke, explains why the 'average' investor has no business owning almost any equities directly. For so many reasons involving management and timing, well beyond simply selection issues, s/he typically underperforms the market. Of course, from Bogle's perspective, being the inventor of the passive (sector) index fund concept, this is heartbreaking.

Further on, Malkiel chides Bogle for resisting ETFs. But it's my sense that, whereas Malkiel gives the instrument a pass on tax efficiency bases, Bogle objects to them simply on principle. Anything that facilitates more frequent trading and, thus, opportunities to mis-micro-manage their investments, is a bad thing, in his opinion, for the average retail investor.

The other piece of interest to me is the article on Oppenheimer's mutual fund's involvement in the management shake-up at Take-Two Interactive Software. As I wrote here recently, and here, over a year ago, I see essentially two polar positions.

The first is that of minority shareholders who are simply price- and management-takers. I'm one of those. I buy shares of companies for their existing performance prospects. If those change, I sell. I don't really care to have any truck with affecting their operations.

The second is that of shareholders who, even if technically a minority, hold, like Oppenheimer's fund does, a very large chunk of some company. In Take-Two's case, it's up to 25! I would hazard to guess that, combined with the hedge funds, with whom they are collaborating, Oppenheimer's shares are part of a majority of shareholders.

Thus, I say, bully for Oppenheimer & friends! Really. If you're going to own a quarter or more of a company, you are responsible for oversight. You'd better have a board seat. You are, in effect, a shadow management. I think this is one instance in which mutual fund activism is warranted. Once you get past the dubious wisdom of a publicly-traded fund owning 25% of a smallish, illiquid company.

New Competition for Apple's iPod

Yesterday's Wall Street Journal featured an article describing the latest attempt to dethrone Apple's iPod franchise.

The device in question, the "Sansa Connect," is an MP3 player from Zing, a startup founded by an ex-Apple senior developer, combined with SanDisk and Yahoo.

According to the article, the leading 'wow' feature of the Sansa Connect is its wireless connectivity. Apparently, though, the main method of using the Sansa Connect is to rent music from Yahoo for $11.99/month. Music is downloaded in pre-packaged mixes from Yahoo, rather than on a song-by-song basis, as with iTunes.

According to Ian Rogers, general manager of Yahoo Music,

"We want to be the music dial tone for connected devices."

OK. Sounds puzzling to me, but perhaps I'm not a member of their target market.

What strikes me about the Sansa Connect, however, is how it seems to demonstrate an innovation-related idea I first conceived back in 1984 or thereabouts, when I was with AT&T. At the time, it occurred to me that one of the very major advantages of a first-moving innovator was that s/he faces an unploughed field of opportunity. Given some sort of technological or feature/function innovation, the first entrant can pretty much move in any direction.

However, second and later entrants are restricted by existing market positions and strengths of earlier innovators in the product market. The image I had was of a farmer allowed to plough new furrows in the field of opportunity, but none of which could cut across existing furrows of other farmers/earlier entrants.

As such, Sansa Connect seems to be grasping at a few technological frills, such as wireless downloads, while omitting the powerful, simple and useful features of iTunes. It can't apparently offer owned music, nor individually-selected artists, songs, etc. But you can download wirelessly. Yessir.

It's a curious approach to taking on the juggernaut that is now Apple's iPod franchise. Somehow, for me, it befits Yahoo's perennial 'day late and a dollar short' style in most of what it does. I suppose Zing will sell some hardware, as will SanDisk. But, once again, I expect Yahoo to come up short in yet another product/market. Not to mention that it seems to stretch the company pretty thin, to be competing with Google on one hand, and Apple on the other. Even savvy, deep, talented managements would, I think, have their hands full pulling this off. How Yahoo expects to do so is beyond my understanding.

Diebold and Jim Collins

Carol Hymowitz wrote a piece in today's Wall Street Journal reviewing CEO reading lists.

Leaving aside her assessment of the new trend in these reading lists, away from celebrity authors and CEOs, and back to basic business operations, I did observe one oddity.

Hymowitz, whose work I generally like, spotlighted Diebold CEO Tom Swidarski. He allegedly returns frequently to his dog-eared copy of Jim Collins' "Good to Great."

Maybe Tom should toss the book and try another author, because, juding by Diebold's performance over the past five years, and longer, whatever he's doing isn't working.

According to the Yahoo-sourced charts above, for both five years and going back nearly twenty years, Diebold has failed to outperform the S&P500. I suppose with dividends, Diebold may have eked out a slight edge. However, it's recent performance has clearly been inconsistently mediocre.

If Swidarski is using Collins' ideas, this doesn't speak well for them. As I noted in this post, Collins' work has some very serious problems. It does not seem to translate well to a multi-period, total return-oriented world.

I wonder if Diebold's performance is indicative of what happens when CEOs try to apply Collins' insights and 'findings' in a real company, ex ante?

CNBC's Confusion On The NYSE Floor

This morning, one of CNBC's anchors (Liz Claman, I believe), promised that their floor reporter from the NYSE would have 'the scoop on all the hot trading buzz,' or some such verbiage, while waiting to speak with Diana Olick.

There's just one problem. The camera was panning over the mostly-empty trading floor at mid-morning. As has been reported for months now, the place is fast becoming a ghost town.

Many of the old floor-handled trades are migrating to the electronic Archipelago system.

Ooooops! Claman demonstrated her typical on-air headed confusion by forgetting the reality of what is happening to equity markets around the globe.

By insisting that the floor is a font of wisdom and knowledge for viewers, Claman once again provided evidence that most of CNBC's air time is spent entertaining viewers, not informing them.

This is why I pay attention to CNBC for just two things: actual 'news;' and the occasional interview with a well-known, respected and savvy pundit. Otherwise, it's just background noise.

Still, I wish these people would get their stories straight and at least be up to date on the changes in the exchanges they cover so meticulously. Is that too much to ask?

Potpourri: Schumpeter & Leon Black's Apollo Group

As expected from the recent quasi-public offering of Blackstone Group shares, its competitors are lining up to cash in on the current premiums for private equity firms.

According to yesterday's Wall Street Journal, the latest private equity shop approaching the market valuation trough is Leon Black's Apollo Group. Apollo has done some indirect public issuances in smaller ways over the last few years, but, now, it is rumored to be unloadi....er....issuing....shares in its main operations.

Allegedly, Leon Black doesn't want to jeopardize his company's valuation by mimicking Blackstone, so he is reported to be leaning to selling unregistered shares to institutional investors. This provides some time for the market to forget about Blackstone before the Apollo Group shares could be registered and traded. Meanwhile, Leon & Co. would be counting the cash from the sale of 10% of their firm.

The land rush is on! Of course, as is typical with financial services trends, need we be reminded by something other than the current sub-prime lending debacle, most trends end in underpriced risk for assets. It's likely that private equity IPOs will be no different.

Come a year or so hence, one of the lower-tiered private equity firms will probably issue public shares and promptly tank, sparking immediate and huffy calls from Congress for "an investigation."

On a more upbeat topic, today's Journal featured an interesting profile of Joseph Schumpeter, one of my personal favorites among economists. Much of my own proprietary work is based upon my readings of, and insights gained from his early work in the 1920s. While the review of Thomas McGraw's book discussed both the professional and personal aspects of his life, I particularly enjoyed the author's focus on Schumpter's beliefs on the ultimate fate of free-market capitalism.

Briefly, Schumpeter felt that, in time, capitalism's superb ability to create societal wealth would be overtaken by its effects on those creatively 'destroyed' in the process. Much like an Ayn Rand novel, he foresaw ungrateful, misunderstanding pseudo-intellectuals, many of whom owe their wealth to his principles, attacking the system for its very successes.

Of equal interest to me was Schumpeter's prescience with respect to monopoly power. He correctly predicted, a la AT&T, Xerox, and Microsoft, that monopoly power did not need to be regulated, because it would tend to die of its own weight, under the attack of new, more technologically-adept competitors. Considering the now laughable concern over Microsoft's browser antics, Schumpeter's clarity of vision on this topic is remarkable.

Even today, a good 80 years after some of his most important work, Schumpeter is still over the heads of most of our politicians, legislators, and regulators.

More On Starbuck's Expansion

Tuesday's Wall Street Journal featured a very good piece describing the tactical considerations involving how Starbucks sites new stores.

As with most business operations, the details of each site's size, funding, and expectations paint a picture of how the company uses its knowledge of consumer behavior to capitalize on its brand, and drive growth.

Thus, one observes the phenomenon, written about in the story, of as many as three out of four corners of an urban intersection sporting a Starbucks coffee store, of one size and ownership or another.

This reminds me of nothing so much as the late-1980's growth of another fast-service, convenience-oriented purveyor of morning comestibles- Au Bon Pain. Many years ago, the Journal featured a similar article on that older chain. At the time, I traveled to Boston frequently on business, and noticed the saturation of the Downtown Crossing area with Au Bon Pain stores.

If I recollect, the chain found pretty much the same behavioral information on its customers as Starbucks has on theirs. For many urban areas, total sales actually rose with a saturation of stores, rather than splintering a seemingly-fixed demand among more outlets. Traffic patterns and purpose-specific visits allowed for more sales as the brand was more conveniently placed in the paths of more consumers.

Even Coke knows this, as its CEO has recently articulated a goal of putting a Coke within some very short distance or time period from every thirsty consumer on the globe.

It's hard to say whether or not this type of attention to operational detail and consumer behavior will result in Starbucks' total return reversing its recent stall, as depicted in the Yahoo-sourced chart (click on the chart to view a larger version) at the beginning of this post. I wrote much the same in my piece on Schultz's now-infamous memo, back in February of this year, here.

So, while I applaud Schultz's honesty about the changing nature of his brand's face, and his minion's careful study of consumer behaviors in their siting and expansion of outlets, I remain sceptical (hey, I am "the reasoned sceptic") that these well-intentioned efforts will reverse the firm's fortunes, and its senescence, on behalf of its shareholders.

The New Anti-YouTube Consortium

The recent alliance of MySpace (NewsCorp), NBC, AOL, Microsoft and Yahoo for video clip distribution, obviously presents a competitive presence to Google's YouTube unit.

The Wall Street Journal article on the subject, from 23 March, included this passage,

"This is a game changer for Internet video," said News Corp. President Peter Chernin in a statement announcing the deal. "We'll have access to just about the entire U.S. Internet audience at launch." News Corp. and NBC said the four portals account for 96% of the monthly U.S. unique users on the Web.

In the past, I have found Peter Chernin to be distinctly "old media" in his outlook, and I believe that continues here. Despite Chernin's rather pompous statement, I'm not at all sure the alliance is a "game changer."

If anything, YouTube was and is the "game changer." Does anyone seriously think this recently-announced alliance would have occurred, but for the competitive pressure and observed consumer behaviors brought about by YouTube's popularity? When Google bought it, that only added to the sense of urgency on the part of old media interests who own old content. My prior posts about this, found by clicking on the labels for "old media" and "new media," discuss some of these issues. Older, as-yet unlabeled posts, do so as well. Of the newer ones, this one, here, perhaps best reflects my thinking.

That is, this alliance reflects a broad "hunkering down" of old media behind its own walls, hoping to stave off the inevitable move by consumers to view short, compressed video clips of its own choosing. Paul Kedrovsky has likened this to the Napster-originated trends that have eviscerated the music business sector of late.

So, if anything has been game changing, it would seem to be YouTube's allowing consumers to expect short clips to be viewable for free.

However, take a step back, and ask yourself, 'what do the alliance partners stand to gain by their rejection of YouTube, that they could not have had through an alliance with YouTube?'

It seems to me that it is simply advertising revenues. Pure and simple.

Like Amazon, or eBay, YouTube has staked out, developed, and established a single, highly-visible, valuable piece of online real estate. For all Chernin's puffery, consumers go to YouTube for video. They go to the other sites for a plethora of needs, but it's unclear that video is one of them, or a salient one. Visits to the various sites are not all 'equal,' in this sense.

More to the point, do I, or most consumers, really want to have to guess, or try to keep straight, which sites have which content? When visiting YouTube, I just search, and view. Pretty much any significant, recent news clip will be there. Plus much entertainment, as well. How do I determine, in advance, the URLs and specific content type of each of the 'alliance' sites?

I still contend that the networks', and all video library owners,' best alternative was and is to revenue share with YouTube and distribute on that site. It's unclear that the financial economics of all these other video distribution sites will pan out, whereas, when they are concentrated on a provider's site, the content owners simply collect a payment for their share of ad revenue, plus any sales revenues from consumers who choose to buy the clip they are watching on YouTube.

So, in conclusion, I think that I am underwhelmed by the NewsCorp-Yahoo-NBC-MSN-AOL alliance. It smacks, to me, of old media trying, once more, to lasso a consumer behavior trend that is already out of the gate and roaming far afield from the old consumption models for video content.

The Street.Com On Dell: 'Who Cares?'

I admit, it's not something I ever thought I'd be doing. But I have to write a post to compliment The Street.com.

Finally, someone there said something with which I can strongly identify. Not that I ever expected it from staffers at firm, founded by Jim Cramer. But one of their number spoke truth to power last week on CNBC, boldly contending, about Dell's recent malaise and accounting troubles,

'who cares? it's an old tech has been,' or words to that effect.

When the CNBC on-air anchor/interviewer sputtered unbelievingly, and stated that many people have a lot of money in Dell, and it's a big company, the Street guy retorted something like,

'so is Xerox. How big is its market cap? Does anyone think it is a leading tech firm anymore?'

Very well put. Big does by no means equal important. Often, it simply means 'still bloated and primed to collapse like a souffle' when sufficient technological change finally sweeps away the last of its ancient underpinnings. Like Kodak. A victim of corporate senescence. Its best days of profitable growth are in the rear view mirror. Consistently superior returns, if they ever happened at Kodak, are a thing long past.

This is yet another example of Schumpeterian dynamics in action. Dell's model went out of fashion some years ago. The guy from the Street echoed my own analysis, noting that Dell hasn't been an outperformer in many years- nearly a decade. It's not just 'having a few bad years.' It's history, as an outperforming company. So are Xerox, Kodak, IBM, and Microsoft. Their earlier technological breakthroughs are now parts of the fabric of our current world, and no longer offer the potential for consistently profitable growth that distinguishes a consistently superior company in terms of total returns.

The truth is, companies, like athletes, slow with age, then die. Aging may be prolonged. Death may come by acquisition, dissolution, or bankruptcy. But it inevitably comes. In the meantime, watching some companies is like going to a baseball game and seeing the 'oldtimers' play between halves of a doubleheader. I guess somebody has to be CEO of Kodak, IBM and Xerox, but does anyone really care anymore? Personally, I can no longer name those people off the top of my head, as I can with Google.

The guy from The Street.com has it right. These firms may once have been fast-growing, leading tech icons. But now, they are just old, large, slow tech has-beens.

Richard Breeden's New Career: Interventionist Hedge Fund Manager

The weekend's Wall Street Journal carried a piece describing former SEC Chairman Richard Breeden's new career. He runs nine-month old hedge fund which actively harangues the management of its holdings to "improve strategy and governance."

OK, other hedge fund managers spout off about this a lot these days. And I'm on record as thinking that, unless, like Eddie Lampert, you actually buy the company, who cares what some shareholder thinks about corporate strategy? As Holman Jenkins noted, in agreement with me, in an article about which I wrote recently, here, there are plenty of other types of companies to buy, rather than become an activist outside shareholder.

According to the article, Calpers has invested $400MM with Breeden's fund. Yet, Breeden is a novice at this. Reading further, the Journal piece states,

"(Breeden's) basic idea is to take modest stakes in smaller companies whose stocks have been lagging due to strategic missteps, out-of-whack compensation structures or other problems, and then advise management on how to get back on track."

Allegedly, Breeden's efforts at strategy advisory led Alexander & Baldwin, one of his holdings, to listen to him, and the stock price rose 18%.

However, I Googled Breeden's bio, and found that he has essentially no business background whatsoever, save for a brief stint as a legal beagle at the resuscitated WorldCom. And some unspecified work in 'his own turnaround and workout' firm. No strategy consulting stretches at McKinsey or Bain. No tenure as Chief Strategy Officer at some large-cap companies. Nada.

Calpers & company are betting hundreds of millions of dollars on the strategic insights of a non-practicing lawyer.

Breeden has certainly cashed in on the current rage among institutional investors for "relational" fund management. Whether he can actually maintain a healthy margin over the S&P500 returns for more than his first year of management remains to be seen. Given how hard it is for seasoned managers to outperform the S&P, you'd think Breeden has to do more than just run around waving the ethics flag and shouting, in effect, 'listen to me!'

Had I known it would be that easy, and could have gotten tens of millions in client money myself, I guess I could have saved a lot of time and trouble actually researching what corporate performance patterns tend to consistently outperform the index.

Corn Farming, Ethanol. and Innovation

Normally, I read stories about midwestern farmers being myopic or whiny, grasping, transfer-payment-consuming small businessmen. However, the one in Thursday's Wall Street Journal was different.

Instead of the typical subsidy theme, this one featured a dynamic, heads-up Iowa farmer, Mr. Nelson, who epitomizes how innovation can occur, even in something as commoditized as corn farming.

He has already forward-integrated into ethanol production, capturing value with production plants. Additionally, he uses financial futures aggressively to hedge his production income.

To me, this is real progress. An operating farmer who is able to respond to market dynamics, move to add more value than simply growing crops, and use available derivatives and insurance vehicles to manage his income more smoothly.

If someone can do this in corn, and move from being a victim-like farmer, to one who takes advantage of market changes to add more value, then I believe it demonstrates that such behavior is inherently achievable in any product/market.