Sears (All) Shook Up

Following my recent post on Sears and its effective controlling shareholder, Ed Lampert's dismal track record with the retailer, the Wall Street Journal published another piece on the firm's shakeup in this past Saturday/Sunday's edition.

This time, Lampert and his team plan to prepare for a financial slicing and dicing approach, as evidenced by these passages from the Journal article,

"In a fresh effort to halt a long decline, Sears Holdings Corp. Chairman Edward S. Lampert plans to reorganize the 121-year-old retailer into several businesses with broad authority to shape their own future.

Mr. Lampert, a hedge-fund executive who acquired the retailer in 2005 through a merger with Kmart Corp., now sees a holding-company structure as the best way to breathe new life into Sears's slow-moving culture, said people familiar with the situation.

....Sears, with $50 billion in annual revenue, warned that its fiscal fourth-quarter profit would fall as much as 57% below the year-earlier level. Sears shares have lost half their value over the past year despite new marketing and advertising moves at Sears and Kmart.

The contemplated restructuring would create separate units to manage Sears's real-estate holdings and run brands such as Kenmore, Diehard and Craftsman. It isn't clear how the units would be divided or which unit would run the stores themselves.

The structure would allow Mr. Lampert to spin off or close business units more easily, said a person knowledgeable about his thinking. "He warmed to the idea of a spin-off strategy," this person said. "

This would seem to be a reversal of course for the retailer which joined with KMart, and also owns Land's End. Citing a retailing consultant, the article further noted,

"Walter Loeb, a retail consultant, said the plan flies in the face of most retailers' strategy of designing a cohesive image for their business. "He's looking to turn it around by using a different approach," said Mr. Loeb. "I think it's risky."

Sears's turnaround efforts have been hurt by a revolving door of senior executives at its Sears and Kmart retail units. John C. Walden, Sears's chief customer officer, who was hired away from Best Buy less than a year ago, resigned this week, a Sears spokesman confirmed. Mr. Walden couldn't be reached for comment."

The prior article had also noted a loss of recently-hired talent at the once-dominant retailer. With this new approach, Lampert seems to be throwing in the towel on operating a single retailer, and aiming, instead, to eventually sell off the more notable brands- Die Hard, Craftsman, Kenmore- while freeing up the real estate holdings in a single, more accessible unit.

Speaking of Lampert's desire to not be seen actually running Sears, the piece concluded,

"....He (Lampert) left Sears's Hoffman Estates, Ill., headquarters Wednesday, a day before the revamping was outlined by executive vice presidents Dev Mukherjee and Corwin Yulinsky.

Messrs. Mukherjee and Yulinsky described the plan to executives Thursday morning, saying it would allow the company to unlock the value of its real estate, proprietary brands, and online units by managing each as separate entities. The executive over Kenmore, for instance, could strike sales or licensing deals with other retailers, said a person who attended the meeting.
According to the Sears spokesman, each operating unit will have a "designated leader and an advisory group comprised of senior Sears Holdings executives to provide direction and oversee the business unit's performance." "

This passage evoked several reactions for me. First, the idea that an 'advisory group' is being provided to each business executive provides a sort of ready-made firing squad for Lampert. How many of the business unit heads are going to want this group of snitches in their operations rooms or executive suites?

If you run a business, and you have this 'advisory group' that is available to you, but is not actually accountable for decisions, how readily will most managers actually be to use this group? Wouldn't they tend to want their own, hand-picked advisers?

Second, I know one of the Sears EVPs. Long ago, in my last days at Chase Manhattan, I crossed paths with Corey Yulinsky. At the time, he was in flight from a staff job at the old, pre-Weill Citigroup. Let's just say that, as a member of the new Corporate Planning staff, Corey did not distinguish himself- neither in his grasp of the bank's businesses and situation, nor the reality of dealing with then-President and CEO Tom Labrecque.

The corporate planning staff which remained in the wake of my boss Gerry Weiss' retirement, of which Corey was reputedly a key member for the new SVP of Planning, was hardly capable, in the event, of helping guide Chase along a profitable, independent road.

From there, as I recall, Yulinsky wandered over to Mercer. I can't say that I know whether it was due to ineptitude at Chase, or part of a general flight before the Chemical takeover at the point of Michael Price's gun. Apparently some time after that, Yulinsky wound up as part of Lampert's new hires at Sears Holding.

Judging by Sears' performance since Lampert's takeover, as I mentioned in the prior post, it's doubtful that his team has been adding any substantive value. Now, evidently, Yulinky's and others' best new idea is to begin stripping the firm apart into actionable entities- brands, real estate, and separate businesses.

Can you imagine a (former) customer entering a Sears store, looking for Die Hard batteries, and being told that the store management no longer had anything to do with the availability or any other aspect of the Die Hard business? It had become an arm's length supplier?

Yeah, that's going to draw in plenty of new customers, Corey. And bring the few remaining ones running back again.

The Journal piece notes, near the end,

"The restructuring is an indication that Mr. Lampert won't be making big new investments in the business. The plan is for unit presidents to craft their own budgets and set spending priorities. With the U.S. economy heading downward into what some see as a recession, this year could be troublesome because Sears's cash cushion has declined."

I think this last passage tells you the real endgame for Lampert at Sears. He's lost enough money and time spent on this nightmare. Now, he's putting everyone into their own business lifeboat, and letting them sink or float on their wits. No more money, no more top-down direction. The strong will be kept or sold, the weak, merely scuttled.

You can already imagine the business and store closings, real estate sales, and gradual contraction of the retailer's presence. In time, the few strong brands may be spun off or just sold to other retailers.

What began for Lampert, and Sears' shareholders, as an alleged attempt by a hedge fund owner to save an ailing retailer, will probably end as just more financial maneuvering, Lampert's strong suit, to squeeze some last positive value out of this failed venture by an unqualified, wealthy financier and his less-than-capable team.

Citigroup, Merrill & Foreign Investors

It's a lot to ask of one person to make two brilliant, on-air comments in two consecutive days. But in my opinion, that's what Rick Santelli has delivered, yesterday and today.

His rejoinder to Jim Cramer on CNBC yesterday, described here, won my further respect for this straight-talking Chicago-born former futures trader and executive.

This morning, he actually topped yesterday's performance. And, in the process, publicly echoed my own beliefs about the foreign sovereign fund bailouts of Citigroup and Merrill Lynch.

The context was, as usual, CNBC's on-airhead 'senior economic report' Steve Liesman's remarks. He was prattling about the US financial system being saved by foreign capital, asking where were the well-capitalized US investors?

Santelli, without missing a beat, asked how the investments of those foreign sovereign funds in Merrill and Citigroup had fared so far? Liesman admitted they had not done well.

Santelli retorted with a simple, smirking,

"I rest my case."

In this recent post, I argued that, among the reasons for the Abu Dhabi investment in Citigroup, total return wasn't one of them. I was being charitable. I also wrote this, in which I was much less charitable.

A week or so ago, again, on CNBC, when someone asked Treasury Secretary Hank Paulson if sovereign fund investors were dumb to buy American financial services firms' equities, Paulson necessarily, astutely replied with something like,

"I would never say that anyone who invests capital in the US is dumb. We welcome foreign investment in our economy."

Well spoken, Hank. We do welcome investors.

That doesn't mean they are all smart.

Santelli continued this morning's remarks by noting that Warren Buffett seemed preoccupied with other matters, and wasn't rushing into positions in Citigroup or Merrill.

At this, Liesman muttered something about sovereign fund time horizons and different objectives.

However, most investors like to make consistently positive returns. 'Buy, hold, lose for a while, and hope to eventually make it back,' is usually a recipe for an investment manager who wants to get fired.

As I noted in this recent post, investment banking doesn't really seem all that attractive, as a sector. Neither does commercial banking, as I've written numerous times in recent months, such as here and here,

"Personally, I think these foreign investors are making a common mistake- buying damaged firms at the bottom, and hoping they will turn around. Were they to have a basket of such bets, that might be a good, risk-adjusted bet.

Somehow, though, I suspect that they are taking outsized, non-diversified bets that won't do as well, on a risk-adjusted basis, as alternatives such as US index funds or buying shares in Goldman or Lehman. Or, over the next few years, perhaps even Blackstone."

No, the dirtly little secret, to which Rick Santelli gave voice, is that these overseas investors have, in all probability, mistakenly bought into faded marquee names in American finance. Those names haven't been stellar, consistently superior performers very often, if ever, in the recent decade.

It would take the typically clueless Steve Liesman to ask why savvy hedge funds aren't buying into loss-making, crippled financial service has-beens like Citigroup and Merrill Lynch. Buying either one right now is a fairly concentrated turnaround bet. Maybe John Thain will do well with Merrill over time, but right now, an investor could probably do better elsewhere.

As a side note, Liesman also chose to debate veteran asset manager Mike Holland on an investing point this week on CNBC. I don't recall the exact issue, but Holland made a lot of sense, in the calm, thoughtful manner that is his hallmark. He's a long-experienced, successful money manager.

Liesman jumped on Holland's comment and said something like,

'I have to differ with you, Mike.'

It would have been funny, had it not simply been so pathetic. Liesman isn't even an economist, much less one of any note. He's a journeyman journalist cum TV 'economic reporter.'

Thank you, Rick Santelli, for a simple, direct observation on why you don't see American hedge funds rushing into shares of the two crippled US financial service leviathans.

Sears Struggles Under Ed Lampert

Tuesday's Wall Street Journal's Marketplace section featured an article on hedge fund maven and Sears Holdings owner Ed Lampert entitled "Why Sears Must Engineer Its Own Makeover."

It's a very revealing piece, in my opinion, in terms of being evidence in the perennial debate regarding 'corporate governance.' Specifically, it's been my belief that investors should only buy shares of firms whose performance they already find attractive. It makes little sense to buy something whose performance you don't like, betting that you can fix it, or persuade management to fix it.

While there may be occasional stories of investors who've done that, the simpler approach is that of private equity- simply buy the firm and totally refit and restructure it.

Ed Lampert's Sears-KMart play is the most visible example of the hybrid approach. Lampert took control of both firms, but left the combined firm publicly-held.

The results have been disastrous. According to the Journal article,

"With a potential recession on the horizon, retail experts say it is now clear Chairman Edward S. Lampert must engineer a radical makeover of the 121-year-old retailer to prove it can thrive alongside bigger rivals. To halt the sales and profit declines, the company's Sears and Kmart stores must forge new roles for themselves that will distinguish them in customers' eyes from competitors such as Kohl's Corp., J.C. Penney Co., Target Corp. and Wal-Mart Stores Inc.

"Sears and Kmart can't continue in the format they now do," said Love Goel, chairman of Minnesota retail investment group Growth Ventures Group and a former consultant to the retailer. "The time to fix strategy and execution issues has passed; it's an existential issue now," he said. A Sears spokesman said executives weren't available to comment."

Early on, Mr. Lampert stepped into a direct role in operations, overseeing marketing and strategy, and putting finance, until just recently, under his hedge-fund colleague at ESL Investments, William C. Crowley. Mr. Lampert has top Sears executives fly to Connecticut twice a month to brief him and his ESL colleagues. Messrs. Lampert and Crowley's direct involvement left Aylwin B. Lewis, the company's chief executive, to oversee store operations, focusing on revitalizing a store culture that seemed disillusioned and exhausted amid steady sales declines.

Executives have declined to elaborate on what those actions might be, but keeping Sears and Kmart as separate units will no longer work to carry a turnaround at either, says Growth Ventures' Mr. Goel. Kmart has lost too many customers to Target and Wal-Mart and would be better off converted to Sears's brand, he says. Craftsman tools, Kenmore appliances, and Diehard automotive lines have consumer trust and distinct identities that could make for standalone operations in a future revamping, he says.

Mr. Lampert also must make hard decisions to outsource or exit businesses, such as clothing and home goods, that have little hope of regaining customer favor. Kohl's, Penney's, Target and Wal-Mart distinguish themselves with better selection, a better shopping experience, or better prices.

The retailer's Kenmore brand has dominated the home-appliance market for years, but Sears's share of major U.S. appliance sales dropped. Only recently has Sears tried to stop the losses with a new marketing and services push. Sears blamed increased competition and a crashing housing market that has dogged home products sales for its fourth-quarter sales decline."

The portrait that the Journal piece paints is one of a successful trader who came to believe he could simply step into an operational role of a major retailer, too, and repair its shortcomings.

It hasn't turned out that way. In fact, it seems, according to the article, that Lampert's golden touch may be fading,

"Mr. Lampert and his ESL funds own nearly 48% of Sears shares, according to the most recent securities filings. The retailer's losses were a big reason ESL was down more than 20% last year. But Sears isn't his only big setback lately. ESL has almost 22% of its cash in shares of Autozone Inc., the auto-parts retailer that has dropped more than 13% in the past year, according to FactSet Research Systems Inc. He also invested more than 7% of ESL's portfolio in Citigroup Inc., raising the hedge fund's stake for the past year, even as Citigroup has lost 44% of its value."

Maybe Lampert has been distracted by Sears. Originally, wags touted his acquisition of KMart and Sears as a long-term play for the real estate beneath all the stores. But Lampert's actions have belied that.

In any case, as the nearby two-year price chart for Sears Holdings and the S&P500 Index reveal, the latter has been on a downward slide since May of last year, following a see-sawing of the stock's price throughout the earlier part of the year.

Now, however, we see his troubles extend beyond just Sears. His Citigroup investment has to be among the worst decisions a fund manager could have made.

Perhaps what we are witnessing in Lampert's struggles at Sears Holding, and ESL Investments, is simply good, old-fashioned hubris.

Did Ed Lampert just become too wealthy to remember his own personal limits? Did he think that his own substantial personal wealth would buy him the time for any investment to eventually pay off? And, then, with a little help from the other shareowners, he could sit and bide his time while the turkeys he bought gradually became swans?

It's certainly turning out much differently.

Instead, Lampert's experience with Sears validates one of my long-held beliefs. Mono-line firms in today's world tend to outperform their diversified competitors. The former have only one shot at success, so the successful ones focus intently on winning in their product/market segments. The latter have other business challenges which sap their focus, time, energy and capital. They seem to behave as if they can sustain some setbacks, due to their diverse sources of income. Ultimately, it tends to spell doom for the diversified competitors.

The best examples of this which come to mind were the standalone credit card companies of the 1990s. The best of them handily outperformed their competing divisions of large banks. Eventually, BofA even bought MBNA.

Sadly, one can easily envision the end of Sears and, probably KMart, too, as retail brands, when the agonizing Lampert saga ends. Both chains have now languished under Lampert's hand for nearly three years. That may be too much time for the once-proud Sears to overcome in its quest to reacquire customers to its brands and stores.

Jim Cramer, Donald Trump & CNBC

This morning brought another grandstanding, self-involved performance by Jim Cramer on CNBC's morning program, Squawkbox. If you needed to see more evidence of why CNBC is in the "business entertainment," rather than the "business news" business, this would have been it.


Cramer's appearance was directly connected with a purely entertainment topic- his inclusion in one of Donald Trump's "Apprentice" episodes. From a trailer I saw a few days ago, Kodak was involved, and I'll probably write about that later. Suffice to say, both Trump and Cramer extolled the firm's 'successful' move into digital photography.

I think that would be news to Kodak shareholders.


As a sort of benchmark on Cramer's, and Trump's, judgments, let's look at Kodak's trailing two-year price chart, compared with the S&P500.

It looks to me as if both "The Donald," and his new acolyte, Cramer, reside on another planet. Kodak has managed to lose some 20% of its value over the past two years, while the S&P rose just under 10%.



In fact, if you look even longer term, as this chart does, you see that Kodak has never really regained its footing, in terms of shareholder returns, from the decades of the 1960s and 1970s.

After a mediocre tracking of the S&P throughout the 1990s, Kodak's share price has sunk as digital photography eviscerated the firm's business model. At best, from a long term perspective, you might charitably say that the worst bleeding has ended by 2001. But, since then, it's still drifted downward in a rising equity market.



So much for Cramer's- and Trump's- business judgments.



Now, back to this morning's performance by the Mad Money Maniac. For however long it lasts, here's the link to CNBC's video clip of this morning's rant. After viewing it myself, I see it begins after Cramer's comments about Bush and Bernanke.



Cramer took questions from the CNBC co-anchors and guest host, Greg Ip of the Wall Street Journal. Prominent among Cramer's jabs were, as expected, that Fed Chairman Ben Bernanke has performed abysmally, and that President Bush is equivalent to President Herbert Hoover. The latter comparison was obviously Cramer's way of announcing that he believes we are in economic straits similar to, and fully the equal of, the 1930s Great Depression. His cute way of doing this was to say,


"...President Hoover...uh....I mean Bush....."



Cramer catalogued the recent decimation of capital at Merrill Lynch and Citigroup, declaring that we were now turning to,



'communist countries and countries that fund terrorists'



to recapitalize our banks. He then announced that, but for these funding sources, the two large 'banks' would be, in fact, bankrupt. Along the way, he savaged, appropriately, Stan O'Neal, Sandy Weill and Chuck Prince. This would lead you to believe that Cramer blamed them for nearly wrecking Merrill and Citigroup.



He then decried the Fed's actions in 2007, implying that Merrill's and Citigroup's near-failures were the fault of Bernanke & Co.



Quite a flip-flop, n'est pas? It seems Cramer couldn't keep his views straight from minute to minute this morning.



When CNBC co-anchor Becky Quick asked Cramer about the moral hazard of bailing out the institutional investors, and their firms, who made unwise bets on CDOs and other, mortgage-related structured financial instruments, Cramer's faced showed a silly little grin and he said something like,



'I think you just have to do it.'



This, of course, is vintage Cramer. Going back to my post here, he has consistently railed against the Fed for not bailing out his friends who made injudicious financial bets on bad paper. There's a reason why people like Cramer aren't on the Federal Reserve system Board. They'd ladle out liquidity anytime their neighbor lost money on a business venture. It's essentially a modern version of William Jennings Bryant's "Cross of Gold" free silver coinage position.



Cramer then goes on to savage MBIA, AMBAC, and the whole idea of their insuring structured finance instruments. Most of Cramer's comments center on his own hallowed status as the 'only' person to be honest about this.



In fact, the seizing up of credit markets demonstrated that their backing didn't really matter. I won't claim to have predicted the failure of either insurance firm here, but I pointed out here that they had strayed very far from their original, sound business model. The fact that the equity values of the two firms have plummeted so far, so quickly, tells you that the market already knew, and knows, what Cramer claims to be alone, martyr-like, in stating this morning.



Next, Cramer does another rather stunning piece of waffling. He goes ballistic so fast that it's hard to keep his remarks straight, but I believe he begins his rant about the sales of structured finance instruments in response to Rick Santelli's reasonable retorts to Cramer's overall hand-wringing. More on that a little later in this post.



Cramer then begins by saying that, while at Goldman, he and his colleagues packaged junk paper and 'jammed' it on customers. He tells brief, clipped anecdotes of himself and his fellow Goldman workers laughing at how they dumped junk investments on Australian or German banks and other Goldman customers. It's actually quite reminiscent of Michael Lewis' similar stories in his excellent first book, Liar's Poker. As well as the now-infamous, long-ago 'jamming' of overpriced, needless derivatives by Bankers Trust salesmen onto companies such as Gibson Greeting Cards and P&G, which led to the bank's demise, Charlie Sanford's ouster, and its eventual sale to Deutsche Bank.



Cramer then does an about face and claims that he never 'jammed' anyone at Goldman, and that's why he didn't make more money there. That he 'had a conscience.' And that Goldman taught him and others not to 'jam' customers, because everyone else did, so the one firm that did not would win their loyalty.



This from a guy who admitted, years later, to manipulating information flows, while a hedge fund manager, including the Wall Street Journal and CNBC, in order to pump equity positions he had already taken, then dump them into the resulting follow-on buy orders.



Frankly, this little episode left me reeling in confusion. I think Cramer cut loose on the real stories, then realized what he'd admitted, and, in unfazed, continued manic fashion, attempted to retract the truth and claim that he and Goldman never actually did what he'd just said they did.



Rick Santelli brought sanity back in the final moments of Cramer's appearance by reminding him that adult institutional investors willingly bought structured financial instruments, thinking they were conning the sellers, as I noted here, and in prior related pieces on what I call the "double con."

In fact, going back a few days ago, Santelli noted that the futures traders in the Chicago pits were already indicating that more Fed action was moot. They were pricing in their expectations of a weakened, but still growing economy, through which companies would simply have to work, and no further rate cuts would really affect this. Santelli said as much again this morning, adding that all Cramer was asking was for bad investments by institutional professionals to be bailed out by the Fed.



I'm sure that having Cramer appear on CNBC's morning program increases its viewership, and probably stampedes many of them into a worried exit from the exit markets. But, viewed from a more dispassionate, broader perspective, Cramer, in my opinion, lacks credibility in his basic business judgments, and typically makes himself, and his own imagined ethics, the center of his manic performances. It's entertainment, pure and simple.



Thirty seconds of Rick Santelli in the same video space as Cramer, and you see the difference between business entertainment, and business news, information and analysis.

The Evolving Structure of Capital Markets: Hedge Funds As Newly-Public Investment Banks

There was a story in Monday's Wall Street Journal from the "Breakingviews.com" column concerning hedge fund managers going public via existing investment bank hookups, rather than via IPOs.

According to the column,

"Shares in Fortress Investment Group and Bear Stearns have fallen more than 50% since the days after Fortress's initial public offering last February. The two recently discussed whether they had more than that in common, according to the Financial Times. Although no deal transpired, the implication is that Fortress was looking to become more than just a hedge fund and private-equity manager. Like some other fund groups, it has intentions eventually to compete on Wall Street's turf.

Ambitious rival managers such as Citadel Investment Group might take note. Citadel is just one of several fund firms that were rumored to be on the brink of going public until the markets turned against them. Such firms might find inspiration in the abortive Fortress-Bear talks.

For alternative-asset managers that lack a stock-market currency, it is tougher to expand quickly. Yet Citadel, for one, has the ambition to take on Wall Street. It already has turned trading know-how into separate businesses, and its executives clearly relish creating an institution with a Goldman Sachs-like reputation. For Citadel or another privately held rival, a bigger deal with a publicly traded investment bank, perhaps modeled on the Fortress-Bear idea, could simultaneously help achieve strategic diversification and provide a traded stock."

My question is, why are these firms planning to take on existing publicly-held investment banking firms?

What's so special about the business of underwriting? Is the market for underwriting enjoying better margins, or substantial new growth? Last time I looked, it hasn't been a source of extraordinary profits for quite some time.

Trading doesn't require being publicly held, unless the firm wants to make a huge jump in assets committed to that business line. Judging by last year's results, most investment banks didn't do all that well for themselves. Two apparently superior risk management, Goldman Sachs and Lehman, come to mind.

But Paulson Capital, the alleged big winner in shorting the mortgage securities market, is a privately-held hedge fund. So successful asset management doesn't require going public, either.

Why would Fortress or Citadel want to become full-fledged, publicly-held companies in what seems to be a cutthroat business in which several existing players- Bear, Morgan Stanley and Merrill- are actually shrinking, due to sizable losses in 2007?

If anything, capital markets have become much more efficient in the last decade, leading the sector's competitors to risk more of their own capital in proprietary trading. It was the lack of growth and margins that caused Stan O'Neal, late of Merrill, to take so much risk in buying a mortgage originator and holding so much structured finance paper.

Why would a successful, profitable, privately-held hedge fund or private equity group want to expose themselves to public scrutiny?

I wrote a series about some of these issues when Blackstone went public, the last of which may be found here. My guess is that Citadel and Fortress are hoping that the current market turmoil will obscure investors from properly assessing the future value of the core of these firms' businesses.

Going public now, via marriage with an existing outfit, will let them, similarly to Blackstone's owners, collect cash for the presumed value of their business up front, and let new shareholders bear the brunt of any downward valuation corrections.

Between current competitiveness in the sector, recent losses by experienced players, and a lack of significant bases of differentiation and advantage as I wrote here recently, it's difficult for me to see how a newly-public hedge fund or private equity group will perform substantially better than the current crop of investment banks on Wall Street.

Is it simply a case of these firms' managements wanting a higher cash-out value from a publicly-traded stock for the same business? I think it is.

That, or simply a common case of good old-fashioned hubris. An attitude on the part of the senior partners of these private financial services firms that they can swagger into the publicly-held sector and take business from Goldman and Lehman, or make more money competing with them.

Either way, if this occurs, it's going to be a very interesting show to watch.

Wither Citigroup Now? Pandit's Pronouncement

It's just after noon on Tuesday, January 15th, 2008. Citigroup CEO Vikram Pandit has concluded his first earnings announcement a little while ago, and the markets are not pleased.

The write-offs are huge. Losses are near $10B. The dividend has finally been cut nearly in half. Apparently, it wasn't enough.

Seen on the left, my first Yahoo-sourced chart indicates that the company's stock price has gapped significantly lower today, back down to or below 27, from its recent 5-day high of 29.

According to some of the pundits talking on CNBC this afternoon, including one fairly prominent fund manager, Vince Farrell, Pandit blew his chance to make a good first impression. There was no talk of significant, immediate job cuts.

Let's take a longer look at Citi's stock. Here's a chart of the S&P and Citi's stock price for the last three months. The latter has been pretty much in free-fall for that entire time. It had a few local minima, where the price moved up by 5 or 10 percentage points over a few weeks. But the trend has been steadily downward.

Over the past year, the picture is similar. The price of Citi's stock has declined over 40%. Even before the summer credit market debacle, Citigroup's stock had been fading, relative to the S&P.

Finally, we have a Yahoo-sourced chart of the S&P and Citigroup for the past five years.

In this view, we see that for largely the entire period, except for a brief few months in mid-2003, the bank's stock has performed, at best, like a market-tracking stock, and, since January of 2005, three years ago, significantly worse.

Taking a look at all of these views- multi-day, multi-month, 1 & 5 years- it's hard to argue that Citigroup has been a desirable investment, or well-managed, for the past half-decade.

So, does Pandit's poor opening performance as CEO today matter?

As I jokingly wrote in this spoofish post last month, Pandit's already won. He's made at least tens of millions by selling his mediocre hedge fund to Citi last summer.

So, in all honesty, I think the answer is, "no," it doesn't matter. Nothing has changed at Citigroup.

And, according to some pundits speaking about the situation today on CNBC, it could be years before the nation's largest bank regains any semblance of traction in terms of operating performance and total return performance.

What really shocks me, though, is Punk Ziegel bank analyst Dick Bove's continuing 'buy' position on Citigroup for the past two years. At least I think his eternal optimism on the bank extends that far back. I know he was touting it heavily last spring, claiming that its best days were just around the corner.

Even this morning, he was shilling for the crippled bank on CNBC, issuing yet more strongly-worded statements of hope and support for Pandit's financial Pig.

You have to wonder what in the world would possess a veteran analyst like Bove to hew to a single view of such a mediocre, troubled bank for so long.

To me, reviewing the performance of Citigroup's stock over such a long timeframe, and comparing that to its erratic and troubled operational performance during the same period, I would have to agree with those who advise steering clear of this financial utility for the forseeable future. Aside from continuing to enrich Vik Pandit, and impoverish the poor shareholders whose original positions are being so rapidly diluted by new capital-raising efforts, I can't imagine anyone who would even consider owning this company's shares.

Returning CEOs: Buying Opportunity, or More Trouble?

Herb Greenberg wrote a fascinating piece in the weekend Wall Street Journal entitled "Why Investors Should Applaud A CEO's Encore Performance."

Drawing on the work of an Ohio State University assistant professor of finance named Rudi Fahlenbrach, Greenberg wrote

"Here is some good news for Howard Schultz and Michael Dell, both of whom have boomeranged back to become chief executives of their respective companies, Starbucks and Dell: History is on their side. It is for their investors, too.

This doesn't guarantee a happy ending, but a study of encore performances led by Rudi Fahlenbrach, an assistant finance professor at Ohio State University, shows that, on average, the stocks of companies run by CEOs on a second tour of duty outperform the market by 6% annually during their comebacks."

I like Herb Greenberg's work and am typically interested in his opinions. So when I read these opening paragraphs to his article, I took notice. My own proprietary research, while not confined to turnarounds involving returning CEOs, found them to be rarely profitable for shareholders. So I was, and am, very interested in Greenberg's and Fahlenbrach's views on this. Greenberg further wrote,

"According to Mr. Fahlenbrach, from 1995 through 2004 at least 75 CEOs at the country's 1,500 largest companies were called back to active duty from either retirement (especially if they still have a large financial stake in the company) or having been relegated to the chairman's outpost.

"One of the most significant predictors of someone coming back is poor stock-market performance of the current CEO," he said.

On average, before the ex-CEO gets the call, the stock has fallen 40% over two years. Starbucks -- a broken stock, not yet a broken brand -- had skidded by a greater amount in a shorter amount of time. Ditto for Dell. When that happens, Mr. Fahlenbrach said, "They're in need of a quick turnaround."

Not that all former bosses are better than their successors. Notable failures the second time around include Gateway's Ted Waitt, Lucent's Henry Schacht and Xerox's Paul Allaire. And don't forget the late Ken Lay, whose return as CEO of Enron coincided with the final stages of the company's downfall."

Greenberg quotes Jeff Sonnenfeld of Yale, who speaks highly of Houghton, thusly,

"Mr. Sonnenfeld says those who succeed in coming back have three qualities. The first is they came back with great reluctance; they weren't trying to undermine their successor. Second is they aren't coming back for some unmet ego need. Many had better things to do with their time, and came back "because they were being drafted by all of their key constituencies -- because of relationships, knowledge and a cultural aura they can do things nobody else can do to fix the problem." Third, and perhaps most important, he said, is "they recognize what they had built isn't a religion. At Corning, Mr. Houghton had to revisit all kinds of decisions he may have been part of making." "

Stepping back, Greenberg lists Jamie Houghton of Corning, Michael Dell of Dell, Howard Schultz of Starbucks, William Stavropoulos of Dow Chemical, and Chuck Schwab of Schwab among those who either have been successful at returning to turn their old company around, or are expected to do so.

Let's have a closer look at these, dispensing with those even Greenberg cited as ineffective- Schacht of Lucent, Waitt of Gateway, and Allaire of Xerox.

Nearby is a long term price chart for Dell, Starbucks, Corning (GLW), and Dow Chemical. Have any of them returned to a consistent path of outperformance of the S&P? Because the 6% per annum mentioned by Fahlenbrach wouldn't be all that spectacular if it only lasts one or two, perhaps even three years.

It's easy to see Dell's slide and Starbucks slowly running out of gas before failing in 2006. Of course, Schultz didn't actually leave the company, just the CEO position. I think Michael Dell was further removed and out of Dell when it finally began to actually decline.

According to Greenberg's piece, Houghton and Stavropoulos returned to their respective firms in 2002, the former for three years, the latter for two.

I can't honestly see a difference in Dow from 2000 until now. Corning fell after Houghton returned, and seems to have only clawed back to even by the time he left. Since then, it's climbed a bit, but has only matched the S&P for the past two years.

This next chart displays recent price activity more clearly. Corning is definitely still wandering aimlessly since early 2006. That's a two-year stint of inferior performance. So much for Sonnenfeld's admiration for Houghton. In fact, if he left in 2005, it seems that things actually took off, briefly, for a year after his departure, before running out of steam again.

Dow, too, clearly has not been giving shareholders consistently superior returns, either, since 2004.

How about Chuck Schwab? He returned in mid-2004, making him CEO for the past 3 1/2 years. The nearby chart seems to show he's done better than the other examples in Greenberg's article.

Even so, he has yet to get Schwab back to consistent outperformance. But he may be close. If he can continue the firm's total return performance path in 2008, he'll have done it. And it looks as if he is the only one of those mentioned by Greenberg and Fahlenbrach who actually has done so.

Why do you suppose that Fahlenbrach, and Greenberg, are so enamored of a few short-run CEO return successes, and a few who didn't even manage that?

Personally, I think it demonstrates how low most analysts and observers set the bar for 'excellent' performance. To paraphrase Fahlenbrach and, by inference, Greenberg, a two or three years of besting the S&P by only 6 percentage points draws notice.

My own research shows this is actually well within the range of pretty average performance. Many companies can do that, and don't need to be turning around while they do it.

Why do you suppose that these CEOs, as a group, mostly failed to move their firms to consistently superior total return performance?

In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance.

Dow and Corning represent, I think, business models which have been uneven at best for a long time. They don't tend to have even been consistently superior growth firms to begin with. Given their stock price paths, it's clear that holding the S&P instead of ever holding the those companies' shares would have been a safer and more profitable choice for over twenty-five years.

In the final analysis, while I enjoyed reading Herb Greenberg's piece on Fahlenbrach's work, I found the conclusions to be largely unsustained. I guess my expectations of outstanding CEO and investment performance are higher than those of either of those two guys.

BofA Buys Countrywide Financial Corp.

Today's news that BofA is buying crippled mortgage lender Countrywide Financial Corp. for some $4B is the big news in this sector.

Remember that Ken Lewis, BofA CEO, bought a big stake in CFC back in August for $18/share of the mortgage lender.

CFC closed below $8/share yesterday.

Is this an opportune deal for the money center bank?

As the nearby Yahoo-sourced, five-year price chart comparing BofA, CFC and the S&P500 shows, neither company has shown marked outperformance of the S&P in the past five years.

BofA has only matched the index for most of the past five years, recently underperforming. Countrywide stalled for much of the past five years, after an initial outperformance burst in 2003. After that, housing sector weakness began to affect investor confidence in the long-term position of CFC.

As this morning's Wall Street Journal article on the deal observed, BofA is protecting its own interest in the ailing mortgage company. If it were to go bankrupt, BofA's prior investment would become nearly worthless, and Lewis would look especially foolish.

So, basically, what we have is a very large money center bank using its 'cannot fail' position to buy a potentially dead mortgage lender, in which it already has a significant equity position. It is, in essence, borrowing from the Fed/economy, long, to buy an investment before that investment's value goes to nearly zero.

Of course Lewis casts this as a vote of confidence in the long term viability of CFC and mortgage markets. And he's right, given a very long time horizon.

The question is, were Lewis not already an owner of CFC, and at a much higher price, would he be rushing to buy it now? With his own loan losses potentially looming this quarter, and perhaps a need for more capital?

My own opinion is that two mediocre companies do not, generally, when combined, make a better resultant company. I think this is strictly a case of salvaging a soured investment. On that basis, it may make accounting and short-term capital sense for BofA.

But it begs the larger question of whether Lewis used, and will continue to employ, flawed judgment in both buying a stake in CFC at more than double today's price, and running the giant money center bank in the future.

By the way, I don't own any BofA. It doesn't look like I will be buying any for the forseeable future, either.

Alan Schwartz' Big Challenge At Bear Stearns

Yesterday's Wall Street Journal's Money & Investing section featured Alan Schwartz and Bear Stearns in the article "Can New CEO Repair Bear?"

Coincidentally, I heard parts of Schwartz' interview on CNBC that morning, as well. In the interview, Schwartz was careful to avoid saying anything negative whatsoever about his longtime employer. The recent mortgage excesses are 'old news.' They are, according to the new CEO, well-balanced and focused on sustained growth businesses.

To hear Schwartz describe Bear Stearns, you'd think his ascendancy to the CEO position at Bear is business as usual.

However, the Journal asks,

"How would Mr. Schwartz turn around a company, which is now trading at a level below its stockholders' equity?"

How indeed? In a market already roiled by mortgage woes, partially of Bear's own making. Fueled by its chairman, Jim Cayne's, intemperate, self-serving comments last summer that it was the 'worst fixed-income market (he'd) ever seen,' or words to that effect.

Schwartz' initial comments on his plan to revive Bear, as reported in the Journal piece, include,

"exiting from unwanted positions in leverage loans and in mortgages; find new ways to make profits in the changing fixed-income business; and nurture Bear's healthier business units, like its growing international operations and energy unit."

Oh boy. Not one of these avenues out of Bear's mess involves unique strengths or any sort of competitive advantage for the ailing firm.

As I considered the article, the interview, and this post, it occurred to me to ask a simple question about the major, publicly-held US investment banks:

"What, if any, is the key source of competitive advantage for each one?"

What I came up with, off the top of my head, is:

Goldman Sachs: risk management and focused trading expertise

Merrill Lynch: ostensibly broad, valued retail distribution

Morgan Stanley: perhaps a one-time strength in old-line industrial investment banking contacts

Lehman: focused fixed income trading businesses

Bear Stearns: entrepreneurial zeal and nimbleness borne of small size

Given that Bear took mortal body blows to its capital and reputation in 2007, I think it no longer has a competitive advantage. Its prior strength has become its Achilles heel.

Too bad for Alan Schwartz. He seems to be a very competent M&A guy who has been handed an atrociously bad hand in a long-running card game, but without many chips.

Between the currently volatile financial markets, Bear's competitors, and its own badly damaged reputation, involving the two mutual funds from which Cayne tried to absolve any responsibility last year, I'd be disinclined to believe that Bear Stearns has any significant chance of earning consistently superior total returns for its shareholders for years.

It may get a temporary pop in its stock price at some point, if it simply survives for a while. But I don't see a long term basis for its ability to ever justify investment in it for total return performance.

Another Vote For Microsoft's Breakup

Today's Wall Street Journal contained an article by their minority-owned analyst firm, breakingviews.com, echoing my own calls for breaking up Microsoft, entitled "A Microsoft Midlife Crisis?"

I wrote about Microsoft here, here and here, in some cases, quite some time ago, that it would be better for shareholders if it were split into logically consistent pieces: applications, operating systems, online, and gaming.

Now, Steve Rosenbush, Rob Cox and Martin Hutchinson write,

"Microsoft is spending freely because it has been unnerved by the rise of Google. Google has advertising revenue that Microsoft, despite the billions of dollars it has invested in search technology, has been unable to match. This potentially subsidizes Google's practically free offering of software that competes with Microsoft's core products.

So Microsoft is understandably nervous. But overpriced deals won't solve its problems. Microsoft is behind the curve on developing applications such as social networking and advanced search. Its over-engineered products are still too complex. The answer to Microsoft's problems must come from within. Breaking the company into more-manageable parts, instead of adding layers through overpriced shopping, would be a better way forward."

It's nice to have my analytically-based views reinforced by other observers, albeit much later. Granted, I don't typically give the folks at breakingviews much credit for original or controversial thinking. But in this case, I am pleased that somebody else sees the same irrational, inefficient behavior at the Redmond software giant, the same consequences and probably solution.

McDonalds vs. Starbucks- A Marketing Battle You Just Have To Love

Yesterday's Wall Street Journal featured an article on the marketing battle currently brewing (yes, I know- a bad pun) between McDonalds and Starbucks over upscale coffee.

The Journal article displayed a one-year stock price chart for the two companies. I prefer two other timeframes- two and five years.

The nearby two-year chart for McDonalds, Starbucks and the S&P500 Index clearly show Starbuck's recent decline. It was holding flat, even up a bit in mid-2006, then slumped monotonically beginning in October of that year, rising nearly without pause since then.

McDonalds' stock price over the same period is almost directly opposite. Its price was truly flat for mid-late 2006, then took off in September of that year.

The next, five-year price chart for the same entities reveals how Starbuck's decline is a serious departure from its prior, longterm trend. The red curve, depicting the coffee giant's price over time, enjoyed two years of growth which outstripped the S&P in 2003-4, then flattened in 2005-6, and began to fall.

McDonalds have been on a steady upward trajectory over the entire five year period.

With that backdrop, I found the article suggestive that McDonalds is about to take a major piece out of Starbucks' recently-earned volume growth. McDonalds' move into higher-end coffee is the next in a series of revitalizing moves that have turned around the formerly-ailing fast-food giant.

For Starbucks, however, as I've written in prior posts, here, here and here, their expansion strategy has brought new headaches, as they try to buck the natural limits to growth of their business model. To me, it seems a clear indication of Schumpeterian dynamics at work, signaling an end to Starbucks' salad days of growth and total return superiority.

Particularly worrisome, as was also voiced this morning on CNBC, is Howard Schultz' preoccupation with 'returning to the core' of Starbucks. For example, in this passage from his nearly year-ago internal memo, Schultz wrote,

"We desperately need to look into the mirror and realize it's time to get back to the core,"

Thus, this morning's announcement that Schultz forced out his CEO, Jim Donald, and is resuming that title and role at the coffee roasting titan.

However, McDonalds' push into coffee has more to do with raw market opportunity than simply competing with Starbucks. That is, as the Journal article notes,

"The confrontation between Starbucks Corp. and McDonald's Corp. once seemed improbable. Hailing from very different corners of the restaurant world, the two chains have gradually encroached on each other's turf. McDonald's upgraded its drip coffee and its interiors, while Starbucks added drive-through windows and hot breakfast sandwiches.

The growing overlap between the chains shows how convenience has become the dominant force shaping the food-service industry. Consumers who are unwilling to cross the street to get coffee or make a left turn to grab lunch have pushed all food purveyors to adapt the strategies of fast-food chains.

It also shows how the chains' efforts to adapt to a changing market have had drastically different results on their bottom lines. McDonald's is entering the sixth year of a successful turnaround, while Starbucks has begun struggling after years of strong earnings and stock growth.

McDonald's executives watching the growth of Starbucks at the beginning of this decade realized that they were missing out on the fastest-growing parts of the beverage business. Data showed that soda sales had flattened while sales of specialty coffee and smoothies were growing at a double-digit rate outside McDonald's. Customers were buying food at McDonald's, then going to convenience stores to get bottled energy drinks, sports drinks and tea, as well as sodas by Coke competitors."

The fact that McDonalds wasn't originally remotely considered a competitor of Starbucks makes this a fascinating marketing battle. It's like watching a football wide receiver and his defender both leap for a pass, each having an equal 'right' to catch the ball, neither having especially wanted to collide with the other. But the ball is in only one place, so there they all are- the receiver, defender, and the ball.

In this case, it's the fast food and drink consumer, McDonalds and Starbucks. If McDonalds had identified something else, such as upscale desserts, or pizze, or what have you, somebody else might be in their way. Or perhaps nobody.

But as it is, Starbucks moved so far downscale, and reprogrammed so much of America to drink better coffee, that they created a market too tempting for McDonalds to avoid. And Starbucks developed its business model to be perilously close to that of McDonalds, in terms of satisfying instant consumer demands for food and/or drink, but being less efficient in its provision.

Chance are good you can learn to make better coffee more easily than you can instill a new, faster service ethic in your sprawling employee base. For what its worth, I happened to have sampled McDonalds' upscale coffee salons in New Zealand several years ago, and found it every bit as acceptable as Starbucks or, for that matter, Dunkin' Donuts.

In this passage, the Journal piece provides a wonderful insight into how McDonalds used classic, grass roots market research to unearth the opportunity they are developing,

"McDonald's researchers contacted customers of Starbucks and other coffee purveyors and conducted three-hour interviews where they videotaped the customers talking about their coffee-buying habits. The researchers got in the cars of the customers and drove with them to their favorite coffee place, then took them to McDonald's and had them try the espresso drinks.
"There was a surprise factor," says Patrick Roney, a director of U.S. consumer and business insights at McDonald's. "The people who were on the fence...there was an opportunity to get those." "

And McDonalds is using some of its classic strengths- ubiquity and reasonable prices, to move into the upscale coffee product/market, as seen from this passage,

"Heather Pelis, a 19-year-old babysitter from Rayville, Mo., says she didn't like the McDonald's vanilla latte when she tried it. "It was a little syrupy tasting," Ms. Pelis said recently while drinking a drip coffee at a McDonald's in Liberty, Mo. But she says she'd be willing to try another espresso drink because they are cheaper than the caramel macchiatos she buys at Starbucks, and because McDonald's is more conveniently located. The nearest Starbucks is a 30-minute drive from her, she says.

McDonald's franchisees say they think the new coffee drinks will be particularly helpful in drawing young consumers who prefer them to drip coffee. Gary Granader, a Detroit-area McDonald's franchisee, has started seeing groups of teenagers at some of his restaurants after school since he added espresso drinks a year ago. Mr. Thompson says McDonald's also is considering adding some type of music-downloading service at its locations."

Toward the end of the Journal article, it discusses Starbucks' reaction to its current dilemma,

"Starbucks executives have attributed the slowdown in sales growth and store traffic in the U.S. to the weak economy.

Mr. Schultz has said that new competition actually helps Starbucks by expanding the specialty-coffee category. "Those consumers over time are going to trade up," he told investors in November. "They're going to trade up because they are not going to be satisfied with the commoditized experience or the flavor." He has emphasized that Starbucks's baristas, who are instructed to memorize customers' drink orders and make genuine conversation with patrons, will continue to set the chain apart.

But some Starbucks baristas say that the chain's push into food and drive-through service has made that a lot more difficult. Some workers say their managers instruct them to ask customers whether they want a breakfast sandwich with their coffee -- a selling technique that feels unnatural when they know the customer doesn't want one.

"The more and more business they get in the store, the more it seems like another fast-food job," says Joe Tessone, a Chicago barista who has worked at Starbucks for three years."

To me, having followed this building story for nearly a year, Schultz' and Starbucks' logic and expectations are wrong. They expanded into more price-sensitive, lower-income segments, and are now struggling to make that business more constant. But it will be precisely those customers who are vulnerable to McDonalds and Dunkin' Donuts. Further, the changes in its product strategies is causing confusion and morale problems among Starbucks' workforce.

In today's article on Schultz takeover of the CEO spot, they write,

"Mr. Schultz wouldn't specifically address the coming competition from McDonald's but said he will work to make the experience at Starbucks more distinctive. "We have to be able to restore that in a way that significantly differentiates us from everyone else," he said."

Clearly, this makes sense. It's simple, basic marketing- provide a clearly differentiated offering if you have different price points than your competitors. Doing that, however, after having lost the magic, is a pretty tall, or is that venti or grande, order. However, they also quoted from Schultz' recent internal letter to employees,

"Some of Mr. Schultz's objectives stated in the letter, such as "re-igniting the emotional attachment with customers," are so difficult to measure that it may be hard for investors to know whether they are happening."

Maybe it's me, but I don't really want an emotional attachment to my coffee purveyor, when I do buy coffee from a retailer. I guess that's why I've been a Dunkin' Donuts guy up until now. I only buy whole espresso beans from Starbucks, although my children will sometimes ask to buy a drink when I stop to do that.

Of course, I'm only one coffee drinker, albeit a fussy one. The outcome of this battle royale between two retail food giants, Starbucks and McDonalds, with Dunkin' Donuts also roaming the same terrain, will be fun to watch. If you ever wanted to view a classic marketing struggle between two fairly well-matched firms in a clearly-defined market, this is your chance.

Employment Numbers Revisions & Friday's Selloff

Yesterday morning on CNBC, economist Brian Wesbury shed some light on the employment numbers which caused Friday's sharp equity markets selloff.


When discussing the economy for 2008, Wesbury contended that it is in solid shape, with basic employment and incomes growth intact. He cited the Friday number of 18,000 newly employed and agreed that 'we'd all like that to be higher.'


Then he went on to recall that, in August, the same report caused another market selloff when it registered -4,000 new jobs.


However, Wesbury explained, that -4,000 subsequently became adjusted to a positive 90,000. That's some difference.


Wesbury then remarked that low or negative numbers, in the context of this still-growing economy, typically get revised upward at a later date. But we don't hear about these revisions as front page news.


If you recall, after a lackluster, but positive August, the S&P500 Index registered a gain of almost 4%.


Makes you wonder how equities will fare in February, if the January employments numbers are also revised upwards at a later date.

Cable vs. Telephony Valuations

Friday's Wall Street Journal carried a piece by its minority-owned analyst's shop, breakingviews.com. This particular piece involved the assessment of market valuations of cable companies versus those of ATT and Verizon.

Specifically, Robert Cyran and Lauren Silva argued that,

"The phone companies furthest along in their rollouts are pummeling cable groups. Shares of Verizon and AT&T both rose more than 15% in 2007, while shares in Comcast and Charter Communications have fallen 35% and 62%, respectively. This trend isn't over.

Cablevision and Comcast increased their capital-spending plans last quarter. However, the average cable company has a prodigious amount of debt. In the short term, it could be difficult for them to take on much more in order to build better networks. Despite all this, the average cable stock trades at a 30% premium to the big telephone companies, based on estimated 2008 earnings before interest, taxes, depreciation and amortization. This doesn't look right. Cable companies may be overvalued or phone companies undervalued -- either way they should converge over time. Playing that trend again in 2008 is likely to reward investors."

Whenever I read people quibbling or arguing over valuations, a red flag goes up. In this case, note the use of the word 'estimated 2008 earnings.'

Whose estimates?

Essentially, Cyran and Silva complain that cable stocks are probably 30% overvalued (from their prose earlier in the piece), but that, either way, they should converge to a similar multiple as that of ATT and Verizon. Oh, and, by the way, according to the article's numbers, cable is still 'overvalued,' despite a 2007 decline of as much as 60% or 30% in value among selected cable equities.

Maybe I'm wrong, but didn't I read articles in the Journal over the last year concerning Verizon's difficulties in stringing fiber through every town and hamlet? That local regulatory fiefdoms were holding it up for special deals and payments? That it's not the cost or technical aspect of running fiber, per se, that dogs Verizon, but, to put it bluntly, the extortion money the company must pay to every little 'burb that it wants to serve with fiber-optic.

Perhaps, as the piece alleges,

"Installing fiber may be costly, but it enables the phone companies to leapfrog their cable rivals. While expensive to install, fiber is cheaper to operate because many repairs can be done off-site. Verizon claims a saving of around $900 a customer a year. More important, a fiber connection to the home offers a faster Internet service than the cable companies serve up."

But if the local regulatory/payoff issue hasn't been resolved for the long term, I think that could go a long way toward explaining the valuation differences. Cable has been a community staple for decades. It doesn't have to negotiate for access anymore, if it ever did. Maybe that's why the article stated,

"Verizon and AT&T both offer the so-called triple play: phone, television and Internet service. While the big cable guys have about 10 million customers for their phone service, the phone companies are just getting started in video. AT&T has around 250,000 customers and Verizon about one million."

Clearly, the phone companies have a long way to go to reach the same numbers in high-speed access as cable currently has in telephone. Even my father recently switched his telephone to his cable provider.

Additionally, as I recall, DSL is more susceptible to local traffic congestion, by virtue of its loop technology, than is high-speed cable.

It just seems to me that Cyran and Silva paint an incomplete picture of the various bases of competition and consumer choice for high-speed access. The fundamental regulatory and technical aspects of cable and telephony are still quite different.

Might not that, alone, account for valuation differences?