Yesterday's equity market surge has been attributed to several factors.
First was Citigroup CEO Vik Pandit's rather tenuous claim that the ailing/failing banking giant managed not to lose money so far this year.
Wow. If that's fuel for a rally, things are pretty bad.
Pandit's statement was totally unsubstantiated. No audited financials. Not even a full quarter's performance. Is this really all it takes to move the market up 6.4%?
Maybe not. Ben Bernanke made obtuse comments about mark-to-market in a pre-market-open address. Nobody with a brain suggests that it should be eliminated or suspended. I've argued for almost two years now that it should be modified to reflect the greater of economic or market value, especially for assets planned to be held for more than a year.
But Bernanke evidently gave reason for some hope, as he opined that it made little sense to take writedowns for paper losses on performing instruments.
For what it's worth, our volatility measure rose significantly with yesterday's market rally. It's near 3%, which is much higher than it's been for probably two months.
In any case, I suspect this was simply a short-term reaction by traders to some unexpected news.
Various pundits, including CNBC's resident senior economic moron, Steve Liesman, claim that Pandit's utterance means that maybe the federal government's various banking palliatives are working.
Fat chance. Citigroup shouldn't even be alive. It should have been seized, its management and board removed, its assets auctioned off, months ago.
For anyone to read into Citigroup's unvalidated performance claims a sign of success of federal financial services sector rescue is to mark that person as naive.
Even if Citigroup does post a profitable quarter, it means little for the economy or the entire banking sector. The bank is now getting funding almost for free. This isn't a sustainable basis for profit.
As I write this, just prior to the market open, the S&P futures are up 9 points, to 725. But I remain unconvinced that the bases for a sustained equity market recovery are in place.
Our put positions for November, December and January were all negative until two weeks ago. Then they moved steadily upwards, leaving all but one comfortably positive. The late-2008 equity market rise was totally erased by late February.
I don't think what is occurring now is much different.
Wednesday, March 11, 2009
Tuesday, March 10, 2009
Tiresome Warren Buffett's Remarks on CNBC
Once again, Warren Buffett is coasting on his reputation. Certainly, his recent performance would not get him the coverage he now enjoys.
For example, last Monday's Wall Street Journal noted that his company, Berkshire Hathaway, barely beat the equity market indices last year, and is "slightly better than the Dow Jones Industrial Average" this year.
The accompanying Yahoo-sourced chart shows Berkshire losing about 25% in the past two years, while the S&P500 Index declined about 45% in the same period.But is this the performance of, as the Journal wrote,
"The man considered by many to be the greatest investor of all time?"
It further notes that 2008 was his worst year ever. Maybe Warren is losing his touch.
Noted short-seller and fund manager (Seabreeze Partners) Doug Kass wrote in a question to Warren on his all-morning appearance on CNBC yesterday, asking if Buffett's 'buy and hold forever' strategy is not now out of date, as Kass has contended?
Buffett, of course, rambled, sputtered and replied in the manner which he obviously thinks is endearing- that trademark 'aw, shucks' sort of pause and fumbling- that buying good businesses and holding them a long time is still a wise move.
Evidently, Buffett ignores that most people need and want to make money from investments in a consistent manner. And that he has access to deals which the ordinary investor does not, such as loaning Goldman Sachs money on a guaranteed-return basis, with an embedded call option.
If you look closely at the two curves in the chart, you see that virtually all of Buffett's outperformance of the S&P in the past two years occurred between September and December of 2007. After that, Berkshire pretty much has mirrored the index. Meaning that it was a timing phenomenon that allowed him to outperform. It was by no means a consistent, recurring activity.
As I've written prior to this in other posts, such as this one last May, Buffett is more enigma than great investment manager. If he's even that, as I noted in this passage from that post,
"Funny, but actually on point. Is Buffett the portfolio manager of a very large, actively-managed, closed-end portfolio? Rather like, well, GE?
Or is Buffett just another conglomerate CEO?
Either way, I still just don't see the evidence that Buffett has rewarded his investors for most of this decade with superior total returns."
CNBC went for ratings, rather than content, yesterday, when it had Buffett on as a guest for the entire 6-9am timeslot.
Honestly, the guy is now a caricature of himself. He smirks and mumbles platitudes about how, in the long run, America is great and will come back.
As if anyone needs him to tell them that. But CNBC and other news channels played up all the footage they could of Buffett's remark, as if some national grandfather had appeared to soothe the country's nerves. I don't know which was worse, the bleating, plaintiff emails to Buffett, or his seriousness in replying, as if he actually has the power to calm the masses, or knows anything that the rest of us don't.
Personally, I'd prefer someone like John Paulson, the hedge fund manager who made a killing last year shorting residential mortgage finance. At least we know he knows how to outperform the market, and will bet on his knowledge.
Monday, March 09, 2009
An Ineffectual Competitive Response- Part Three
I last wrote about market dynamics, new entrants and competitive responses to my local fitness club market in this post from January.
In that post, I provided some quantitative estimates of the damage that a single LifeTime Fitness club had wrought on my old fitness/squash club. Since that post, another LifeTime facility has opened just about five miles from my old club, and perhaps ten miles from the first of the large-scale fitness club's location.
This past week, in anticipation of my renewal for another year, my old fitness club mailed me an invoice and accompanying letter.
The letter goes on and on about various programmatic changes at the club, as it slowly has come to grips with what a departing employee reported has been an exodus of 375 members from a one-time base of some 2,100. By the end of March, it's likely that this number will top 400, if for no other reason than that, until April, people like me, who are still members, but have not used the club since early November, have not yet been recognized, technically, as gone. Thus, the old club has sustained about a 20% loss in its customer base, including a very heavy percentage- perhaps 90%- of its higher-priced squash memberships.
Thus, in a display of panic, the owners' letter reported two unprecedented changes in the club's fee structure.
They now offer a daytime (morning-3PM) squash membership for the same price as a basic fitness membership, i.e., $100/month, and a family maximum monthly fee equal to the price of the three most expensive family memberships, with joining fees capped at $500.
This is ironic, considering the content of my first conversation with one of the owners early this fall concerning my joining LifeTime Fitness on a trial basis. At the time, in response to the owner's question as to why I had elected to try the new club, I replied,
"Bill, you know that you never priced your club to attract families. In fact, you've never really wanted them to join at all."
To which he replied, nearly verbatim,
"Well, you're right about that."
Considering that Bill and his partners had at least an eighteen month notice of LifeTime's arrival in the area, their competitive response has been, to be blunt, pathetic.
Most families who might have enjoyed the new pricing caps and remained at the old club have now tasted the forbidden fruit of 24/7 access, three swimming pools, jacuzzis, two basketball courts, more fitness equipment and a rock climbing wall. All for about half of the new, lower family price.
The only remaining members who would benefit from the new squash pricing plan are older, retired males. Everybody else, including children, use the courts after 3PM. It's not all that likely that non-squash playing members will suddenly stampede the courts during midday hours.
To me, there is a lesson in this local business case regarding the formation of competitive responses to new market entrants. An existing, dominant share player needs to begin planning their responses as soon as they are aware of the new entrant. Waiting until after the new arrival is open and has successfully stripped off customers with their new service offerings and potentially lower price points is an invitation to an imminent death of the formerly-dominant vendor.
Instead, I believe the existing market leader has to reconsider their entire marketing mix- product offerings, channel, communications and pricing- as if they are trying to resell each customer. Because, in effect, that's what they will have to do when the new entrant ramps up their marketing efforts.
If the market leader elects to compete on price, they had better do so early and in a manner calculated to cement their customer base for a period of time during which the new entrant will exert maximum effort to win new customers from existing competitors. As I wrote in my first post in this series, here, my old club could have offered pricing discounts to existing members in exchange for an immediate commitment to a long-term renewal of two years.
Failing a pricing response, or, in addition to one, the management should have worked much harder to identify, via primary research, a niche position for their club that would be believable, defensible and attractive. Lacking many appealing facilities that LifeTime Fitness clubs possess, the old club should have figured out how to package what they do offer in a comparatively
My old club ignored the new competition until literally 10% of their customers had left. Then they spent a few months redecorating the lobby and telling themselves that these 200 members would be 'begging to come back.' That's a direct quote from friends who spoke with the old club's owners.
Now, another 200 departed customers later, they are trying to stanch the outflow with some half-hearted pricing policies. When I mentioned this to the manager of one of the LifeTime Fitness facilities, he remarked that another existing, smaller fitness competitor had done the same thing, only to suffer reduced profitability as it cut prices on existing members.
This is what I prophesied would happen if my old fitness club tried to cut price to meet LifeTime's price points. The cost of retaining a few remaining customers will cost them revenue and profit at a time when they are probably near, if not below, breakeven on their volume/cost/profit line.
As I wrote in the earlier posts in this series, I genuinely like the owners of my old club. And I enjoyed my 27 years there very much. But I'm not going to renew my membership at the end of this month.
Time and trends have passed my old fitness/squash club by. By failing to adapt, modify their marketing mix, respond to new competitors with timely and effective pricing policies, though, I don't think they will be operating past the end of this year.
In that post, I provided some quantitative estimates of the damage that a single LifeTime Fitness club had wrought on my old fitness/squash club. Since that post, another LifeTime facility has opened just about five miles from my old club, and perhaps ten miles from the first of the large-scale fitness club's location.
This past week, in anticipation of my renewal for another year, my old fitness club mailed me an invoice and accompanying letter.
The letter goes on and on about various programmatic changes at the club, as it slowly has come to grips with what a departing employee reported has been an exodus of 375 members from a one-time base of some 2,100. By the end of March, it's likely that this number will top 400, if for no other reason than that, until April, people like me, who are still members, but have not used the club since early November, have not yet been recognized, technically, as gone. Thus, the old club has sustained about a 20% loss in its customer base, including a very heavy percentage- perhaps 90%- of its higher-priced squash memberships.
Thus, in a display of panic, the owners' letter reported two unprecedented changes in the club's fee structure.
They now offer a daytime (morning-3PM) squash membership for the same price as a basic fitness membership, i.e., $100/month, and a family maximum monthly fee equal to the price of the three most expensive family memberships, with joining fees capped at $500.
This is ironic, considering the content of my first conversation with one of the owners early this fall concerning my joining LifeTime Fitness on a trial basis. At the time, in response to the owner's question as to why I had elected to try the new club, I replied,
"Bill, you know that you never priced your club to attract families. In fact, you've never really wanted them to join at all."
To which he replied, nearly verbatim,
"Well, you're right about that."
Considering that Bill and his partners had at least an eighteen month notice of LifeTime's arrival in the area, their competitive response has been, to be blunt, pathetic.
Most families who might have enjoyed the new pricing caps and remained at the old club have now tasted the forbidden fruit of 24/7 access, three swimming pools, jacuzzis, two basketball courts, more fitness equipment and a rock climbing wall. All for about half of the new, lower family price.
The only remaining members who would benefit from the new squash pricing plan are older, retired males. Everybody else, including children, use the courts after 3PM. It's not all that likely that non-squash playing members will suddenly stampede the courts during midday hours.
To me, there is a lesson in this local business case regarding the formation of competitive responses to new market entrants. An existing, dominant share player needs to begin planning their responses as soon as they are aware of the new entrant. Waiting until after the new arrival is open and has successfully stripped off customers with their new service offerings and potentially lower price points is an invitation to an imminent death of the formerly-dominant vendor.
Instead, I believe the existing market leader has to reconsider their entire marketing mix- product offerings, channel, communications and pricing- as if they are trying to resell each customer. Because, in effect, that's what they will have to do when the new entrant ramps up their marketing efforts.
If the market leader elects to compete on price, they had better do so early and in a manner calculated to cement their customer base for a period of time during which the new entrant will exert maximum effort to win new customers from existing competitors. As I wrote in my first post in this series, here, my old club could have offered pricing discounts to existing members in exchange for an immediate commitment to a long-term renewal of two years.
Failing a pricing response, or, in addition to one, the management should have worked much harder to identify, via primary research, a niche position for their club that would be believable, defensible and attractive. Lacking many appealing facilities that LifeTime Fitness clubs possess, the old club should have figured out how to package what they do offer in a comparatively
My old club ignored the new competition until literally 10% of their customers had left. Then they spent a few months redecorating the lobby and telling themselves that these 200 members would be 'begging to come back.' That's a direct quote from friends who spoke with the old club's owners.
Now, another 200 departed customers later, they are trying to stanch the outflow with some half-hearted pricing policies. When I mentioned this to the manager of one of the LifeTime Fitness facilities, he remarked that another existing, smaller fitness competitor had done the same thing, only to suffer reduced profitability as it cut prices on existing members.
This is what I prophesied would happen if my old fitness club tried to cut price to meet LifeTime's price points. The cost of retaining a few remaining customers will cost them revenue and profit at a time when they are probably near, if not below, breakeven on their volume/cost/profit line.
As I wrote in the earlier posts in this series, I genuinely like the owners of my old club. And I enjoyed my 27 years there very much. But I'm not going to renew my membership at the end of this month.
Time and trends have passed my old fitness/squash club by. By failing to adapt, modify their marketing mix, respond to new competitors with timely and effective pricing policies, though, I don't think they will be operating past the end of this year.
Friday, March 06, 2009
Have US Commercial Banks "Failed?"
Wells Fargo @ $8.12. Chase @ $16.60. BofA @ $3.17. Citigroup trading @ $1.02.
Yes, you can't even buy McDonalds snackwrap with a share of Citi stock.
Have our largest commercial banks really "failed?" Failed, in the Depression-era sense?
Clearly, they have not. Commercial banks are no longer the same as they were in FDR's era.
In fact, many people mistakenly identify our commercial banks as our total financial system, but nothing could be further from the truth.
First, all of these institutions have, for all practical purposes, had totally-insured deposits for decades. For several months, even their money-market funds have been federally insured, too.
The nation's financial plumbing system- clearing, settlement, electronic cash movement, etc., are separable, if necessary. Loans are made by several sorts of financial service firms, and more could enter at any time.
"Wealth management," a/k/a brokerage and money management, is a sector unto itself, even with the collapse of Merrill Lynch.
Truly, there is little, if any real economic damage from simply letting badly-run commercial banks fail.
From the nearby chart, it's easy to see that, among the surviving large US commercial banks, Vik Pandit, Ken Lewis and the management of BofA and Citigroup should be fired.
Citigroup is, for all intents and purposes, currently a government bank. How can any administration leave Pandit & Co. in charge, when, by comparison, Chase and Wells did so much better, if not so great in absolute terms?
BofA is a wreck, too, now. Lewis has to go.
But there's no actual risk to the economy's health in closing Citigroup and BofA. If anything, as Anna Schwartz noted, that would leave fewer, healthier banks, and opportunities for capital to move into the sector, should it require more lending capacity.
But with two of the largest US commercial banks trading nearly as penny stocks, reflecting investor doubts about the true, intrinsic values of their assets, it's ridiculous to keep them open.
Let's get the thing done, close or nationalize Citi and BofA, bring in new management, and get on with modifying mark-to-market rules to allow for economic valuation.
Thursday, March 05, 2009
Where Will Sovereign Stimulus Funding Come From?
Yesterday's equity market rise was allegedly due, in part, to hopes of China's stimulus plan and news of possible economic near-expansion.
However, I find this confusing.
We have recently experienced significant deleveraging in the private capital markets. Debt and equity prices are far below their year-ago levels. The S&P500 Index has declined more than 50% in the past year.
Now, with the destruction of capital values on a scale not seen in decades, two large governments intend to fund large spending programs with debt.
Who will buy this debt? Where is the money, given the significant capital losses of the past year?
Even my sixteen year-old daughter understands instinctively that if $1T is spent using mostly printed money, the dollar will be worth less. Of course, if buyers of US debt were found, their interest rate demands are almost certainly going to be crippling.
China and the US together tapping capital markets for between 1 and 2 trillion dollars is incomprehensible.
It's the equivalent of these two nations telling the world,
'We don't want our citizens to feel any pain whatsoever right now. So we're going to borrow or print several hundred billion dollars and dispense it to our people, giving them money on which to live, hoping it will restart our economies. Then, later, we'll buy the debt, yuan and dollars back.'
Why would anyone in their right mind by this idea? Or the debt to fund it?
It's ludicrous. Isn't it much more reasonable for governments to be cutting tax rates and letting people retain more of their own money? Perhaps local governments will have infrastructure projects which are economically viable.
But to engage in wasteful, nationwide spending as an excuse to spare citizens the pain of their earlier bad financial choices, on the face of it, cannot work in the long run.
Either the money will be wasted, and/or the immense debt loads, at high interest rates, will result in dampened GDP growth rates for a decade or more.
In the worst case, nobody can buy this debt, the spending is funded by printing presses, and inflation rates on a scale that will make the Carter era look tame may be with us. It would seem that there is simply not enough capital to fund these immense governmental spending plans and provide for private uses of capital at the same time.
However, I find this confusing.
We have recently experienced significant deleveraging in the private capital markets. Debt and equity prices are far below their year-ago levels. The S&P500 Index has declined more than 50% in the past year.
Now, with the destruction of capital values on a scale not seen in decades, two large governments intend to fund large spending programs with debt.
Who will buy this debt? Where is the money, given the significant capital losses of the past year?
Even my sixteen year-old daughter understands instinctively that if $1T is spent using mostly printed money, the dollar will be worth less. Of course, if buyers of US debt were found, their interest rate demands are almost certainly going to be crippling.
China and the US together tapping capital markets for between 1 and 2 trillion dollars is incomprehensible.
It's the equivalent of these two nations telling the world,
'We don't want our citizens to feel any pain whatsoever right now. So we're going to borrow or print several hundred billion dollars and dispense it to our people, giving them money on which to live, hoping it will restart our economies. Then, later, we'll buy the debt, yuan and dollars back.'
Why would anyone in their right mind by this idea? Or the debt to fund it?
It's ludicrous. Isn't it much more reasonable for governments to be cutting tax rates and letting people retain more of their own money? Perhaps local governments will have infrastructure projects which are economically viable.
But to engage in wasteful, nationwide spending as an excuse to spare citizens the pain of their earlier bad financial choices, on the face of it, cannot work in the long run.
Either the money will be wasted, and/or the immense debt loads, at high interest rates, will result in dampened GDP growth rates for a decade or more.
In the worst case, nobody can buy this debt, the spending is funded by printing presses, and inflation rates on a scale that will make the Carter era look tame may be with us. It would seem that there is simply not enough capital to fund these immense governmental spending plans and provide for private uses of capital at the same time.
Tuesday, March 03, 2009
Personal Music Players: A Retrospective
Much is made these days of the failure of the music industry to fend off piracy and fail to profit adequately from the huge technological advances which occurred with the coming of the CD.
That may be so, but in this era of over-consumption, houses with many large closets and master baths bought on no money down, let's not overlook how the basic standard of living for an average American has improved by leaps and bounds. Sometimes in deceptively small ways.
For example, many years ago, in the age of the audio cassette tape, I used to ski while listening to music. In those early years, it took a fair amount of initiative and a tolerance for some pain to do this.
I vividly remember some yard sales at Jackson Hole, in which my headphones were ripped off of my head- painfully. After my ears had already been crushed all morning by wearing goggles over the headphones, with the metal headpiece pressed into my ears and skull.
Changing tapes and batteries on the slope was not a simple process. Nor was carrying spares. Cassette tape boxes didn't do well in violent falls. The intense cold tended to drain batteries very quickly.
Ski clothing didn't accommodate music hardware. You had to figure out how to either use a pocket for a smaller cassette player, risking damage to the headphone cord as it flopped around outside your jacket, or clip the player somewhere inside ski your suit/jacket, feeding the cord up under it.
I don't think I had skied with music since the arrival of the CD player. With its bulk, sensitivity to jarring, and delicate controls, it was never, at least for me, a favored ski accessory.
All that has now changed. Yesterday, for perhaps the first time in two decades, I skied all day to music with almost no effort.
Thanks to iTunes and a $50 iPod Shuffle the size of a small refrigerator magnet, and a ski suit designed for music players, I had a surprisingly wonderful, hassle-free reintroduction to music on the slopes.
My ski suit features a small hole up near the collar for an ear bud cable to pass from a special, outside-accessed, internal pocket with a purpose-designed, Velcro closed music player pouch. The iPod's earbuds eliminate the goggle-hat-headphone bar problem and attendant pain.
The Shuffle, being solid state, with an internal battery, functioned perfectly in the cold as I skied bumps, steeps and cruisers. Even a fall could not stop it from playing. The small size of the MP4 player made it literally unnoticeable all day.
No tapes or CDs to change. No batteries to swap on a cold, steep slope while exposed to the wind.
And with iTunes, I could literally fill the Shuffle with new music daily, if I so chose. No time spent recording tapes or CDs with my favorite music.
Unlike twenty years ago, personal music for skiing is now inexpensive, unobtrusive, highly customized, and much longer-lasting and easy to operate.
It's a small creature comfort. And it never was a huge expense item. But, for me, it's a milestone of improved living standards. The sort of techno-business advance in hardware, software, and clothing for sport that offers much better value and enjoyment for your money than in the past.
Amidst much economic and business confusion and pain right now, it's nice to savor an example of innovative, productivity- and pleasure-enhancing progress which emerged, unplanned, from several different places in our economy.
No government could have orchestrated such lifestyle and standard of living improvement.
That may be so, but in this era of over-consumption, houses with many large closets and master baths bought on no money down, let's not overlook how the basic standard of living for an average American has improved by leaps and bounds. Sometimes in deceptively small ways.
For example, many years ago, in the age of the audio cassette tape, I used to ski while listening to music. In those early years, it took a fair amount of initiative and a tolerance for some pain to do this.
I vividly remember some yard sales at Jackson Hole, in which my headphones were ripped off of my head- painfully. After my ears had already been crushed all morning by wearing goggles over the headphones, with the metal headpiece pressed into my ears and skull.
Changing tapes and batteries on the slope was not a simple process. Nor was carrying spares. Cassette tape boxes didn't do well in violent falls. The intense cold tended to drain batteries very quickly.
Ski clothing didn't accommodate music hardware. You had to figure out how to either use a pocket for a smaller cassette player, risking damage to the headphone cord as it flopped around outside your jacket, or clip the player somewhere inside ski your suit/jacket, feeding the cord up under it.
I don't think I had skied with music since the arrival of the CD player. With its bulk, sensitivity to jarring, and delicate controls, it was never, at least for me, a favored ski accessory.
All that has now changed. Yesterday, for perhaps the first time in two decades, I skied all day to music with almost no effort.
Thanks to iTunes and a $50 iPod Shuffle the size of a small refrigerator magnet, and a ski suit designed for music players, I had a surprisingly wonderful, hassle-free reintroduction to music on the slopes.
My ski suit features a small hole up near the collar for an ear bud cable to pass from a special, outside-accessed, internal pocket with a purpose-designed, Velcro closed music player pouch. The iPod's earbuds eliminate the goggle-hat-headphone bar problem and attendant pain.
The Shuffle, being solid state, with an internal battery, functioned perfectly in the cold as I skied bumps, steeps and cruisers. Even a fall could not stop it from playing. The small size of the MP4 player made it literally unnoticeable all day.
No tapes or CDs to change. No batteries to swap on a cold, steep slope while exposed to the wind.
And with iTunes, I could literally fill the Shuffle with new music daily, if I so chose. No time spent recording tapes or CDs with my favorite music.
Unlike twenty years ago, personal music for skiing is now inexpensive, unobtrusive, highly customized, and much longer-lasting and easy to operate.
It's a small creature comfort. And it never was a huge expense item. But, for me, it's a milestone of improved living standards. The sort of techno-business advance in hardware, software, and clothing for sport that offers much better value and enjoyment for your money than in the past.
Amidst much economic and business confusion and pain right now, it's nice to savor an example of innovative, productivity- and pleasure-enhancing progress which emerged, unplanned, from several different places in our economy.
No government could have orchestrated such lifestyle and standard of living improvement.
Will The Equity Markets "Crack"?
Yesterday's equity market sell-off has brought us close to 700 on the S&P. My partner and I both feel that, if the S&P closes below 700, a whole new psychology will affect it, sending it down in a near free-fall for a while.
After patiently riding out a negative return to our January puts for most of the past six weeks, they have moved up by 50 percentage points in the past week, resulting in the commencement of selling the better-performing ones for returns in excess of 100%.
It's not particularly gratifying to bet on extreme market declines in order to profit from financial positions. But, as one of my prior research partners, and a fairly wealthy private investor counseled me, sometimes, you have to acknowledge market forces and go short.
Our February put options are now up about 70% for the entire portfolio, with at least one position returning over 100%.
Looking at our volatility measure, we expect this downward trend to continue for at least the next few months. One of the mathematical facts which affect the S&P now is how large a percentage change a given point move represents. Seven points down is now 1% of the index, instead of half of that, only last summer.
I saved an early January piece from the Wall Street Journal in which several market strategists made convincing cases for a -20% S&P in 2009. At least one thing that was prominently mentioned in article is coming true. As the effects of various negative performances cascade, the magnitude of the consequences are outstripping expectations.
Given the losses in the S&P thus far in 2009, a 20% or 30% decline this year in the S&P could easily mean several more months of significant losses, followed by large gains later in the year.
But for now, the various signals which I follow do not seem to be predicting any lasting trend up in the equity or derivatives markets any time soon.
After patiently riding out a negative return to our January puts for most of the past six weeks, they have moved up by 50 percentage points in the past week, resulting in the commencement of selling the better-performing ones for returns in excess of 100%.
It's not particularly gratifying to bet on extreme market declines in order to profit from financial positions. But, as one of my prior research partners, and a fairly wealthy private investor counseled me, sometimes, you have to acknowledge market forces and go short.
Our February put options are now up about 70% for the entire portfolio, with at least one position returning over 100%.
Looking at our volatility measure, we expect this downward trend to continue for at least the next few months. One of the mathematical facts which affect the S&P now is how large a percentage change a given point move represents. Seven points down is now 1% of the index, instead of half of that, only last summer.
I saved an early January piece from the Wall Street Journal in which several market strategists made convincing cases for a -20% S&P in 2009. At least one thing that was prominently mentioned in article is coming true. As the effects of various negative performances cascade, the magnitude of the consequences are outstripping expectations.
Given the losses in the S&P thus far in 2009, a 20% or 30% decline this year in the S&P could easily mean several more months of significant losses, followed by large gains later in the year.
But for now, the various signals which I follow do not seem to be predicting any lasting trend up in the equity or derivatives markets any time soon.
Monday, March 02, 2009
Dell's Failed "Turnaround" Confirms My Prediction
Over a year ago, I wrote this post concerning a Wall Street Journal article about CEOs returning to rehabilitate the companies they founded or led to prominence.
"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."
This past Friday's Journal reported on Dell's most recent quarterly results. They bear out my prediction. Profits slid 48%, so the firm is planning even more cuts.
This is what is known as a death spiral.
Sure, Michael Dell returned. He's reshuffled executives and pushed some new products. It's not working.
As I expected over a year ago, many trends are against him and his company. Frankly, it remains somewhat surprising to me that so many observers- pundits, analysts, journalists- continue to expect some sort of resurrection of Dell.But, as my business partner reminds me, most people are sentimental. They like a good human-interest story. They enjoy the emotions accompanying a would-be come back story. Or the failure of one.
But people continue to expect businesses to live forever.
They just don't. Some die. Others should die sooner than they are allowed.
Would not Dell's shareholders have been better off with an orderly dismantling of the firm a year ago, when more value might have been realized for them? Rather than feeding the founder's ego?
Saturday, February 28, 2009
In Celebration of Bloggers
Sometimes I get to certain conclusions and recommendations long before mainstream pundits do. I like to think that, when this happens, it helps cement the credibility of this alternate media torrent we call blogging.
For instance, in Wednesday's Wall Street Journal, James Glassman and William Nolan took about half a page to come to the stunning conclusion that financial services giants took excessive risks about the time they ceased being partnerships, and began to bet other people's money.
No kidding.
Back about five months ago, I wrote this post, in which I observed,
"3. In the 1970s, many of Wall Street's formerly-private investment banks and retail wire houses- First Boston, Morgan Stanley, EF Hutton, to name a few- go public, reaping windfalls and subtly transferring formerly partner-shouldered risks of the firm's positions and businesses to thousands of retail and institutional investors."
And in this post, from July of last year, I observed,
"Only in financial services, the 'wheel' is between publicly- and privately-held concentrations of capital and risk management. Again, viewed from afar over decades, the story of commercial and investment banking for the past forty years has been a gradual selling of transactions, asset and risk management businesses at their 'tops,' as formerly-private banks of both stripes went public, followed by managerial ineptitude, decline in risk management, and excesses in pursuit of growth via more risk."
Or how about this post, from October, 2007, in which I noted,
"In short, it's risk management that brings down large, diversified financial service firms every time. More than anemic growth, excessive growth in one or two businesses inevitably leads to excessive risks, which are typically hidden from the credit and audit functions, as well as senior management. After all, the executives are playing with the firm's money, so it's a win/win or lose/win proposition for them. Either way, their firm takes any losses.
The days of smallish Wall Street partnerships in which risks were well-understood, acknowledged, and managed, because the partners owned the risk, are long gone now. Instead, diversified financial mega-firms such as Merrill and BofA own many business units, in which managers play a risky game to advance their careers.
Thus, the entire complexion of financial service businesses, markets, and the risks inherent in them, have changed irrevocably, as a function of the sector's current organization. That's why you can expect something like the current Merrill writedowns and firings every few years at one or more diversified financial giants."
And, back in August of 2006, in this post, I made the same point for the first time in this blog,
"As capital and capital markets activity began to mushroom unexpectedly in the early 1980s, investment banks scaled up massively to take advantage of the deal/money flow, and not be left behind as market share midgets. Not only did old wire houses end up as public entities, but so did firms like Salomon Brothers. As this type of growth accelerated, senior partners took their one-time windfall and went public, culminating with Goldman some years ago. In the consulting world, the same thing happened with the old "Big 8." Andersen Consulting eventually became the publicly-held Accenture.
Since public companies can't really have private partners, that model went out the window. And with it, the ability of the firms to internally manage through soft periods with their own plentiful capital. So, welcome to the world of management by objectives, or, as the author phrases it, "short-term greedy."
In short, just because something is published as an editorial on the pages of the Journal doesn't mean it's a fresh idea. Some of us working away quietly via daily blogs get to the same ideas much sooner.
Then we come to yesterday's Wall Street Journal. One Peter J. Wallison, of the American Enterprise Institute, waxed for half a page on how to thread the needle of valuation of toxic securities on bank balance sheets.
Funny how I came to a similar conclusion almost exactly a year ago, in this post, when I wrote,
"Why should a firm be forced to keep its balance sheet on a 'breakup' valuation basis? If the firm doesn't plan to sell itself or liquidate, why must every scrap of every asset be current-valued?
What about industry sectors in which substantial investment is required in assets whose value will grow with time, such as cable, mining, or technology? Or commercial banks which legitimately desire to be portfolio lenders to the housing sector, and, thus, are not affected by performing loans whose values are temporarily depressed due to market or credit conditions?
It's one thing to force market valuations on assets which are purposefully traded frequently, such as bond or equity funds. But forcing firms which own significant amounts of assets that are not intended to be liquid seems silly, especially if the 'market' for those assets temporarily dissolves, creating an apparent value of zero."
Since then, I wrote several other pieces arguing for, not a suspension, but a modification of 'mark-to-market' valuation to explicitly consider economic value, as measured by cash flows.
Again, it didn't take an AEI fellow to come up with this notion, either. Anyone with a background in commercial bank treatment of bad loans, reserve accounting, and 'workouts,' is already familiar with the notion of non-market, economic-value approaches to the valuation of instruments on balance sheets.
What does it portend for business idea generation when just a single blogger- me- can lead the Wall Street Journal on editorial topics of such import as these by as much as an entire year? I'm sure there are many other examples of talented business people writing informed, paradigm-breaking pieces well in advance of editorials in major media publications which echo the same ideas.
For instance, in Wednesday's Wall Street Journal, James Glassman and William Nolan took about half a page to come to the stunning conclusion that financial services giants took excessive risks about the time they ceased being partnerships, and began to bet other people's money.
No kidding.
Back about five months ago, I wrote this post, in which I observed,
"3. In the 1970s, many of Wall Street's formerly-private investment banks and retail wire houses- First Boston, Morgan Stanley, EF Hutton, to name a few- go public, reaping windfalls and subtly transferring formerly partner-shouldered risks of the firm's positions and businesses to thousands of retail and institutional investors."
And in this post, from July of last year, I observed,
"Only in financial services, the 'wheel' is between publicly- and privately-held concentrations of capital and risk management. Again, viewed from afar over decades, the story of commercial and investment banking for the past forty years has been a gradual selling of transactions, asset and risk management businesses at their 'tops,' as formerly-private banks of both stripes went public, followed by managerial ineptitude, decline in risk management, and excesses in pursuit of growth via more risk."
Or how about this post, from October, 2007, in which I noted,
"In short, it's risk management that brings down large, diversified financial service firms every time. More than anemic growth, excessive growth in one or two businesses inevitably leads to excessive risks, which are typically hidden from the credit and audit functions, as well as senior management. After all, the executives are playing with the firm's money, so it's a win/win or lose/win proposition for them. Either way, their firm takes any losses.
The days of smallish Wall Street partnerships in which risks were well-understood, acknowledged, and managed, because the partners owned the risk, are long gone now. Instead, diversified financial mega-firms such as Merrill and BofA own many business units, in which managers play a risky game to advance their careers.
Thus, the entire complexion of financial service businesses, markets, and the risks inherent in them, have changed irrevocably, as a function of the sector's current organization. That's why you can expect something like the current Merrill writedowns and firings every few years at one or more diversified financial giants."
And, back in August of 2006, in this post, I made the same point for the first time in this blog,
"As capital and capital markets activity began to mushroom unexpectedly in the early 1980s, investment banks scaled up massively to take advantage of the deal/money flow, and not be left behind as market share midgets. Not only did old wire houses end up as public entities, but so did firms like Salomon Brothers. As this type of growth accelerated, senior partners took their one-time windfall and went public, culminating with Goldman some years ago. In the consulting world, the same thing happened with the old "Big 8." Andersen Consulting eventually became the publicly-held Accenture.
Since public companies can't really have private partners, that model went out the window. And with it, the ability of the firms to internally manage through soft periods with their own plentiful capital. So, welcome to the world of management by objectives, or, as the author phrases it, "short-term greedy."
In short, just because something is published as an editorial on the pages of the Journal doesn't mean it's a fresh idea. Some of us working away quietly via daily blogs get to the same ideas much sooner.
Then we come to yesterday's Wall Street Journal. One Peter J. Wallison, of the American Enterprise Institute, waxed for half a page on how to thread the needle of valuation of toxic securities on bank balance sheets.
Funny how I came to a similar conclusion almost exactly a year ago, in this post, when I wrote,
"Why should a firm be forced to keep its balance sheet on a 'breakup' valuation basis? If the firm doesn't plan to sell itself or liquidate, why must every scrap of every asset be current-valued?
What about industry sectors in which substantial investment is required in assets whose value will grow with time, such as cable, mining, or technology? Or commercial banks which legitimately desire to be portfolio lenders to the housing sector, and, thus, are not affected by performing loans whose values are temporarily depressed due to market or credit conditions?
It's one thing to force market valuations on assets which are purposefully traded frequently, such as bond or equity funds. But forcing firms which own significant amounts of assets that are not intended to be liquid seems silly, especially if the 'market' for those assets temporarily dissolves, creating an apparent value of zero."
Since then, I wrote several other pieces arguing for, not a suspension, but a modification of 'mark-to-market' valuation to explicitly consider economic value, as measured by cash flows.
Again, it didn't take an AEI fellow to come up with this notion, either. Anyone with a background in commercial bank treatment of bad loans, reserve accounting, and 'workouts,' is already familiar with the notion of non-market, economic-value approaches to the valuation of instruments on balance sheets.
What does it portend for business idea generation when just a single blogger- me- can lead the Wall Street Journal on editorial topics of such import as these by as much as an entire year? I'm sure there are many other examples of talented business people writing informed, paradigm-breaking pieces well in advance of editorials in major media publications which echo the same ideas.
Friday, February 27, 2009
Samuelson's & Stout's Wrong Views On Executive Compensation & Related Matters
It's rare that the Wall Street Journal's editorial page carries two completely erroneously-reasoned, ill-logical and, frankly, bone-headed pieces in the same day. But yesterday was such a day.
The two editorials to which I refer, of course, are "Are Executives Paid Too Much?" by Judith Samuelson and Lynn Stout, and "We Cannot Delay Health-Care Reform" by Senators Max Baucus and Teddy Kennedy. I'll deal with the first piece in this post, and the second in a later one.
In order to make the most focused, germane comments possible, I'll intersperse my remarks between the italicized text from Samuelson's and Stout's article.
"Our economy didn't get into this mess because executives were paid too much. Rather, they were paid too much for doing the wrong things."
This is true. I have long held, going back to the early 1990s, well over fifteen years ago, as a result of my proprietary equity research, that senior executives should be granted incentive compensation as a function of a five-year-lagged difference between their firm's total return and the S&P500 Index. Thus, Samuelson and Stout are observing nothing new whatsoever.
"In the summer of 2006, well before most economists had any inkling of the calamity that was about to unfold, the Aspen Institute brought together a diverse mix of high-level business leaders, investment bankers, governance experts, pension fund managers, and union representatives. When you put successful people with such disparate and conflicting backgrounds and loyalties together in the same room, the result can be a shouting match. But the members of the newly formed Aspen Corporate Values Strategy Group found they shared an unprecedented consensus: Short-term thinking had become endemic in business and investment, and it posed a grave threat to the U.S. economy."
I wonder what a "governance expert" is? Who is s/he? What are such a person's credentials? This seems like another one of those loony "institutes" cooked up by so-called experts on the outside, with no prior, inside experience actually doing any of that about which they opine.
Honestly, the term "Aspen Corporate Values" seems a contradiction in terms to begin with. The entire name of the group seems an amalgam of feel-good, sound-good business terms with no discernible meaning.
"This collective myopia had many causes. One cause, the Aspen Group concluded, was the demands of the very shareholders who are now suffering most from the stock market's collapse. It is extremely difficult for an outside investor to gauge whether a company is making sound, long-term investments by training employees, improving customer service, or developing promising new products. By comparison, it's easy to see whether the stock price went up today. As a result, institutional and individual investors alike became preoccupied with quarterly earnings forecasts and short-term share price changes, and were quick to challenge the management of any bank or corporation that failed to "maximize shareholder value."
The authors are wrong in their basic contentions, as expressed in this paragraph.
It is precisely the company's total return that is the sum total and expression of whether the company is "making sound, long-term investments by training employees, improving customer service, or developing promising new products," as such activities add comparative value for that enterprise.
To denigrate the maximization of shareholder value per se is wrong. Short-term maximization, yes. Again, I wrote about this in a Directorship piece over fifteen years ago. But long term, consistently superior total returns is the hallmark of corporate success. Samuelson and Stout mention this basic, simple and rather obvious concept nowhere in their piece.
"Meanwhile, inside the firm, executives were being encouraged to adopt a similarly short-term focus through the widespread use of stock options. The value of a stock option depends entirely on the market price of the company's stock on the date the option is exercised. As a result, managers were incentivized to focus their efforts not on planning for the long term, but instead on making sure that share price was as high as possible on their option exercise date (usually only a year or two in the future), through whatever means possible.
Executives eager to maximize the value of stock options began adopting massive stock-buyback programs that drained much-needed capital out of firms; jumping into risky "proprietary trading" strategies with credit default swaps and other derivatives; cutting payroll and research-and-development budgets; and even resorting to outright accounting fraud, as Enron's options-fueled and stock-price obsessed executives did."
The authors mix too many examples from vastly differing sectors, and attempt to give the impression all are alike. They are not. Rather than provide credible evidence, the authors simply advertise their lack of understanding of business.
And, for the record, next time, ladies, use the correct, pre-existing English language term, "incented," rather than the made-up, goofy-sounding "incentivized."
Did "massive stock-buyback programs" drain "much-needed capital out of firms?" Perhaps not. When managers believe that their firm's equity is undervalued, it is a reasonable use of resources to buy some of that equity back, then reissue it when investors realize the intrinsically higher value later on. Of course, if an inept management is, in fact, destroying value, then buying back stock hastens the proper result- withdrawal of capital from an ailing firm.
Samuelson and Stout miss this fact entirely, railing instead at any withdrawal of capital from any enterprise. In effect, the authors of the editorial seem to claim omniscience, implying that any cost-cutting of R&D budgets, staff, or mitigation of risk with reasonable employment of hedges via derivatives, are wrong on their face.
The business world is not that simple, but, evidently, Samuelson and Stout are, in their own mindset.
"The system was perfectly designed to produce the results we have now. To get different results, we need a different system.
To get business back on track, the Aspen Group concluded, it is essential to focus on not just one but three strategies: designing new corporate performance metrics, changing the nature of investor communications, and reforming compensation structures.
Starting with metrics, we need new ways to measure long-run corporate performance, rather than simply relying on stock price. In terms of investor communications, companies need to ensure corporate officers and directors communicate with shareholders not about next quarter's expected profits, but about next year's and even next decade's."
The authors begin this passage correctly. A change is required, and it is the change about which I wrote for my Directorship article over a decade ago. It's simple and requires no new measures, just the extension of the measurement of existing ones over more years, and subtracting the free ride of the S&P500's effect on corporate total return over five-year periods, in arrears.
The idea that any corporate officer can speak with clarity and credibility concerning expected profits over a year in the future is ludicrous. A decade? What are these women smoking? The only thing that would arise from such practices is frivolous shareholder lawsuits.
Oh, wait. I get it. Lynn Stout is a professor of corporate and securities law at UCLA. Makes sense. Demand that business executives make more litigation-producing earnings forecasts. Great business for law school grads, eh?
Only a lawyer out of touch with real business could write that and believe it has any relationship to the modern, fast-paced world of global business. Company fortunes can change in just a few years, due to competitive actions half a world away.
"Finally, and perhaps most importantly, companies must change the ways they reward not only CEOs and midlevel executives, but also institutional portfolio managers at hedge funds, mutual funds, and pension funds. Executives and managers should be rewarded for the actions and decisions within their control, not general market movements. Incentive-based pay should be based on long-term metrics, not one year's profits. Top executives who receive equity-based compensation should be prohibited from using derivatives and other hedging techniques to offload the risk that goes along with equity compensation, and instead be required to continue holding a significant portion of their equity for a period beyond their tenure."
Huh? You're going to forbid an executive from hedging stock options? I seriously doubt that is legal. And, anyway, all that will happen is that they will find a way, or some smart trust attorneys (wow, there are those smart lawyers again) will find it for them, to have an unrelated trust or a family relation hold the hedged position.
And how in the world can you not compensate "institutional portfolio managers at hedge funds, mutual funds and pension funds" based on their correct bets on market index movements? Not everyone invests directly in equities. Or even equity options. Some managers simply buy and sell indices and their options.
Mutual fund managers rarely, if ever, are paid incentive compensation by customers. Perhaps by the firm's managment, but not the customers directly. Hedge and pension fund managers, if they have 2/20 compensation, typically have their "20" subject to a high water mark, i.e., they can't get incentive compensation when the value of the fund declines, until the fund value rises above the prior highest value. Some funds even have escrows which hold back the 20% incentive fees for a year or more, so the manager doesn't even receive that money if short results are reversed. Samuelson and Stout once again display their naivete about that which they write so emphatically.
It's clear Samuelson and Stout aren't living in the real world of business and finance. Perhaps too much time in that Rocky Mountain air?
"So long as our metrics, disclosures and compensation systems encourage executives and institutional fund managers to look only a year or two ahead, we have to expect that that is what they'll continue to do. It's time for a long-term investment in promoting long-term business thinking."
Well, their conclusion is correct. But, as I noted in my first remarks to their opening paragraphs, this is not a new idea by a long shot. Their overall goal is fine, but their details are all wrong. And completely lacking in common sense, real world applicability, and credibility.
I wonder how this piece of bad reasoning ever made it onto the Journal's editorial pages.
Thursday, February 26, 2009
An Update On Citigroup
It's been a while since I've written about Citigroup's troubles. Since that post late last month, the big news is the federal government's imminent conversion of its preferred equity stake in Citi into a 40% or so common equity position.
Last night, my business partner and I ran into an old friend, while playing squash, who works for Citigroup. Given the bank's problems, and his position in one of the planning groups, he'd been scarce for months.
Suppressing jokes about offering to buy coffee with a few shares of Citigroup stock, we asked him how things are on the inside. There wasn't that much he could say. Other than the allowable teasing about becoming a government employee, it was just a sad situation.
Drawing back from the personal anecdote, I recall a few articles in the Wall Street Journal cataloguing Vik Pandit's recent travails trying to get some direction from his new, largest shareholder. Geithner's evidently been reduced to cryptic, late night phone calls to Pandit, vaguely urging that 'something' be done soon.
Pandit is reported to be begging for a chance to fix the unwieldy financial conglomerate, despite its continued slide since the waning days of Chuck Prince's misguided leadership in 2007.
The more I ponder the status of the large US commercial banks, the more I'm taken back to the Journal interview with Anna Schwartz in October of last year, about which I wrote in this post. It's becoming increasingly clear that she is correct.
Better for the FDIC, Federal Reserve, and OTC to have enlarged the capacity to close insolvent banks, transfer deposits to other banks, writedown the bad loans and sell them back into the market.
Like it or not, the way in which our financial system functions, allowing banks to accumulate bad loans results in taxpayers eating those losses. This is why government oversight of lending practices is so critical. When a bank is closed, we can't expect another bank to buy bad assets at face value, when they are clearly impaired.
I believe it's past time for us to lose our attachment to specific organizations and put badly-managed, bankrupt firms to death.
Those outside the financial services sector may not realize it, but commercial banking became a commodity business long ago. Aside from their names, there's not much difference between large banks. Why keep a Citigroup, but close a WaMu or Wachovia?
I remain convinced that Schwartz is correct in observing that the key to repairing the health of the US commercial banking sector is to close insolvent banks. If there is more demand for banking than there is capacity, new capital will flow into the sector, either through existing, healthy banks, new banks, or banking units created by private equity firms.
Geithner's fuzzy private-public asset holding trust doesn't, on the face of it, get the job done. It simply continues to dance around the issue, unaddressed since late 2007, of modifying mark-to-market to allow for economic valuation, if it is higher than a non-existent market price, and taking losses.
Until this is done, capital won't flow into existing banks. And until the federal gorilla stops lumbering through the sector in a haphazard fashion, capital won't flow into the sector at all.
Last night, my business partner and I ran into an old friend, while playing squash, who works for Citigroup. Given the bank's problems, and his position in one of the planning groups, he'd been scarce for months.
Suppressing jokes about offering to buy coffee with a few shares of Citigroup stock, we asked him how things are on the inside. There wasn't that much he could say. Other than the allowable teasing about becoming a government employee, it was just a sad situation.
Drawing back from the personal anecdote, I recall a few articles in the Wall Street Journal cataloguing Vik Pandit's recent travails trying to get some direction from his new, largest shareholder. Geithner's evidently been reduced to cryptic, late night phone calls to Pandit, vaguely urging that 'something' be done soon.
Pandit is reported to be begging for a chance to fix the unwieldy financial conglomerate, despite its continued slide since the waning days of Chuck Prince's misguided leadership in 2007.
The more I ponder the status of the large US commercial banks, the more I'm taken back to the Journal interview with Anna Schwartz in October of last year, about which I wrote in this post. It's becoming increasingly clear that she is correct.
Better for the FDIC, Federal Reserve, and OTC to have enlarged the capacity to close insolvent banks, transfer deposits to other banks, writedown the bad loans and sell them back into the market.
Like it or not, the way in which our financial system functions, allowing banks to accumulate bad loans results in taxpayers eating those losses. This is why government oversight of lending practices is so critical. When a bank is closed, we can't expect another bank to buy bad assets at face value, when they are clearly impaired.
I believe it's past time for us to lose our attachment to specific organizations and put badly-managed, bankrupt firms to death.
Those outside the financial services sector may not realize it, but commercial banking became a commodity business long ago. Aside from their names, there's not much difference between large banks. Why keep a Citigroup, but close a WaMu or Wachovia?
I remain convinced that Schwartz is correct in observing that the key to repairing the health of the US commercial banking sector is to close insolvent banks. If there is more demand for banking than there is capacity, new capital will flow into the sector, either through existing, healthy banks, new banks, or banking units created by private equity firms.
Geithner's fuzzy private-public asset holding trust doesn't, on the face of it, get the job done. It simply continues to dance around the issue, unaddressed since late 2007, of modifying mark-to-market to allow for economic valuation, if it is higher than a non-existent market price, and taking losses.
Until this is done, capital won't flow into existing banks. And until the federal gorilla stops lumbering through the sector in a haphazard fashion, capital won't flow into the sector at all.
Wednesday, February 25, 2009
Bernanke's Capitol Hill Testimony
I listened yesterday as Fed Chairman Ben Bernanke re-applied for his job.
That's pretty much how I viewed his remarks. Others may, and will differ.
But as I worked on various items throughout the morning and afternoon, I kept hearing Bernanke solidly endorsing whatever new, half-baked financial rescue scheme is coming out of the administration.
My mind went back to Bernanke's testimony only last year, when Democrats were querying him on the need to cut spending. At the time, anxious to clip a Republican administration's wings and raise taxes, Congressional Democrats were nearly tripping over themselves to ask Bernanke to agree with them that deficits should be closed.
Now, in the wake of a $1T spending bill, Ben was silent on the matter. As were his Congressional inquisitors.
Instead, it was all about propping up famously-named US banks, rather than let them go through the natural process of insolvency, closure and seizure by the FDIC, and the next steps that all failed banks experience.
For example, where was Bernanke's defense of his own staff's bank examinations? Why defer to some new 'stress test' by Geithner's people, when the Fed was presumably stress testing and examining federally-chartered banks all along?
How could Geithner's purportedly "new" idea add anything that hasn't already been, or should have been done?
If anything, following in the footsteps of Volcker and Greenspan, Bernanke seems to cut a decidedly smaller, less confident and powerful figure. With a Congress controlled by the same party as the President who would renominate him in 2010, it's no surprise that Bernanke is appearing as eager and compliant as possible with anything the administration wants to do.
Nationalize a bank, but not call it that? Fine by Ben.
Spend a trillion dollars, but say you'll also cut the deficit? Totally believable, says Ben.
Keep interest rates low and demand more lending by already-crippled banks? Done, says Ben.
I suspect we are in for a very, very dangerous next few years, due to the recent, more acutely-politicized nature of Bernanke's position at the Fed.
That's pretty much how I viewed his remarks. Others may, and will differ.
But as I worked on various items throughout the morning and afternoon, I kept hearing Bernanke solidly endorsing whatever new, half-baked financial rescue scheme is coming out of the administration.
My mind went back to Bernanke's testimony only last year, when Democrats were querying him on the need to cut spending. At the time, anxious to clip a Republican administration's wings and raise taxes, Congressional Democrats were nearly tripping over themselves to ask Bernanke to agree with them that deficits should be closed.
Now, in the wake of a $1T spending bill, Ben was silent on the matter. As were his Congressional inquisitors.
Instead, it was all about propping up famously-named US banks, rather than let them go through the natural process of insolvency, closure and seizure by the FDIC, and the next steps that all failed banks experience.
For example, where was Bernanke's defense of his own staff's bank examinations? Why defer to some new 'stress test' by Geithner's people, when the Fed was presumably stress testing and examining federally-chartered banks all along?
How could Geithner's purportedly "new" idea add anything that hasn't already been, or should have been done?
If anything, following in the footsteps of Volcker and Greenspan, Bernanke seems to cut a decidedly smaller, less confident and powerful figure. With a Congress controlled by the same party as the President who would renominate him in 2010, it's no surprise that Bernanke is appearing as eager and compliant as possible with anything the administration wants to do.
Nationalize a bank, but not call it that? Fine by Ben.
Spend a trillion dollars, but say you'll also cut the deficit? Totally believable, says Ben.
Keep interest rates low and demand more lending by already-crippled banks? Done, says Ben.
I suspect we are in for a very, very dangerous next few years, due to the recent, more acutely-politicized nature of Bernanke's position at the Fed.
AmEx In Full Retreat From Credit Card Business
Almost two weeks ago, I wrote this followup post concerning American Express' rough treatment, without cause, of a colleague. In a prior post, linked to the followup, I had written,
"Going back some twenty years, it was common knowledge at Chase Manhattan Bank that credit card users charged more in proportion to their credit lines. The key to the process of profitably growing credit card businesses is to sensibly extend more credit to capable, creditworthy customers, who will then, as a group, on average, obligingly carry higher balances.
AmEx has stood this principle on its head now, cutting credit lines, and, thus, balances and spending with their cards.
It should come as no surprise that the firm is now seeing a plunging net income."
Yesterday's Wall Street Journal published an article entitled, "AmEx Encourages Cardholders to Leave."
In this latest piece, Journal reporter Mary Pilon wrote that AmEx is now literally paying some cardholders with a $300 gift card to close their account. Essentially, the firm believes some customers are accidents waiting to happen, and want payment in full, less a $300 writeoff, before something worse occurs.
It seems incredible that the firm is basically admitting it has failed in its prior judgment as to who were good credit risks, and who were not.
If you needed more evidence as to the total bankruptcy of AmEx's business model, I guess this would be it. They lost their natural funding hedge years ago. Then they converted to become a commercial bank, in order to tap taxpayers for help in funding themselves, when debt markets were no longer forthcoming.
Now, the firm is shedding customers by paying them a rebate to leave.Truly, if any financial services firm should have been left to die on its own, American Express is that firm.
AmEx's share price hasn't been significantly or long above its 2000 high in the past nine years. Congratulations, Ken Chenault, on a stellar management job!
Tuesday, February 24, 2009
More On Internet Video Viewing
Only yesterday, I wrote this post concerning cable television companies moving to control internet distribution of their content-providers material. In that day's Wall Street Journal, a smallish column on the back page of the Marketplace section
"Online video is cutting into television, albeit slowly.
People are watching more video than ever on every type of screen -- television, the Internet and mobile devices -- according to a report on the nation's viewing habits to be released Monday by Nielsen Co.
Nielsen found that during the fourth quarter of 2008 the number of users and the time spent watching each of the three screen media rose from the previous quarter. "If people like video, they like it wherever they can get it," said Susan Whiting, vice chair of Nielsen.
The biggest jumps came in the number of viewers watching video on mobile devices and "time shifted" television, that is, programming viewed with a digital-video recorder. Each rose about 9% in the fourth quarter from the third quarter. Roughly 11 million people used mobile viewing and 74 million people watched DVR programming. Internet video users increased 2.3% to 123 million people.
In both time spent and number of viewers, Internet video grew at a rate twice that of television. Michael Vorhaus, president of consulting firm Frank N. Magid Associates, points to the growth as a threat to traditional television viewing. "It's not going to go away and it's not going to get better," he said.
For the first time in the Nielsen study, people ages 18-24 spent nearly the same amount of time -- roughly five hours -- watching Internet video each month as they did watching DVR programs. Other age brackets watched half as much or less Internet video than they did DVR video."
It reinforces why cable executives are so worried. Clearly, the tide is shifting more rapidly to DVR and internet. But since so much video is now being viewed straight from the internet, it's quite possible that the cable companies have already lost the entire younger, under-30 generation.
"Online video is cutting into television, albeit slowly.
People are watching more video than ever on every type of screen -- television, the Internet and mobile devices -- according to a report on the nation's viewing habits to be released Monday by Nielsen Co.
Nielsen found that during the fourth quarter of 2008 the number of users and the time spent watching each of the three screen media rose from the previous quarter. "If people like video, they like it wherever they can get it," said Susan Whiting, vice chair of Nielsen.
The biggest jumps came in the number of viewers watching video on mobile devices and "time shifted" television, that is, programming viewed with a digital-video recorder. Each rose about 9% in the fourth quarter from the third quarter. Roughly 11 million people used mobile viewing and 74 million people watched DVR programming. Internet video users increased 2.3% to 123 million people.
In both time spent and number of viewers, Internet video grew at a rate twice that of television. Michael Vorhaus, president of consulting firm Frank N. Magid Associates, points to the growth as a threat to traditional television viewing. "It's not going to go away and it's not going to get better," he said.
For the first time in the Nielsen study, people ages 18-24 spent nearly the same amount of time -- roughly five hours -- watching Internet video each month as they did watching DVR programs. Other age brackets watched half as much or less Internet video than they did DVR video."
It reinforces why cable executives are so worried. Clearly, the tide is shifting more rapidly to DVR and internet. But since so much video is now being viewed straight from the internet, it's quite possible that the cable companies have already lost the entire younger, under-30 generation.
Carol Bartz Begins To Deliver At Yahoo
It has indeed been just about six weeks since veteran AutoDesk CEO & Chairman Carol Bartz took the helm at Yahoo. I wrote, in closing that post,
"In any case, Bartz is already taking charge and making it clear she'll be the one running Yahoo and doing the talking. And more than likely, her counterparts elsewhere realize the days of pushing the hapless internet company around are over."Looking at the nearby Yahoo-sourced price chart for the company, compared with Microsoft and the S&P500 Index, you can see that Yahoo is the only one of the three that is higher now than it was in late January.
In fact, this morning on CNBC, technology reporter Jim Goldman reported that Microsoft CEO Steve Ballmer's comments on his firm's market share loss to Apple, and his desire to do some deal with Yahoo, drove his company's equity price even lower, while Yahoo rose again.
According to Goldman, the more Ballmer talks about wanting a deal with Yahoo, the lower his company's stock falls, while he gives Bartz' firm's equity price a boost.
Yesterday's Wall Street Journal had a fairly in-depth piece on Bartz' rapid moves at her new firm. She's making significant organizational changes, searching for selected new senior executives, such as a chief marketing officer.
It's very clear from the article that Yahoo's board is getting exactly what Bartz promised, and was expected to deliver. An adult with common sense and experience is now quickly moving to make the firm's moves more coherent and sensible. She's not making a knee-jerk decision on the firm's search engine and business, but she is, evidently, making fast progress on determining what she will do with it, soliciting information from both lower- and senior-managers to assist her in that effort.
This focused energy, alone, has apparently been sufficient to give Yahoo's shares a boost for the first time in recent memory, excepting when it was due to rumors of a sale of the firm.
Too bad the board was asleep for so long, first letting Terry Semel dawdle while the firm's fortunes waned, then stupidly replacing him with differently-, but equally-inept co-founder Jerry Yang.
It took a few years.....yes, years.....but at least Yahoo's board finally delivered for its battered remaining shareholders. It's probably a good bet that, whatever the longer term outcome for Yahoo, Carol Bartz will make it better for her shareholders than it was going to be before she arrived.
Monday, February 23, 2009
Cable Television Bids To Control Internet Distribution
I wrote my last post about the coming trouble for cable television here, only a few weeks ago.
Thanks to my acquisition of a TiVo unit, which connects wirelessly with my computer network, I wrote,
"My TiVo accesses NetFlix through a wireless adapter which gives it access to my home computer network. While I can't program NetFlix choices on the TiVo controller, TiVo can access my NetFlix account on its own to retrieve my selections.
Thus, it would seem only a matter of time before TiVo provides a feature on its own website that would let me either type in my preferred websites, or simply import my web browser bookmarks, so that I can access this menu on my television screen via TiVo's content menu.
Once I can do this, TiVo would let me watch various programming websites, such as HuLu, as well as NBC's own content, delayed, on its website.
As I discussed this with my business partner Sunday morning, I remarked that, once TiVo does this, I am just one step away from cancelling my cable television service.
The only missing content would be my two primary news channels, CNBC and Fox. Once I could stream these, I'd be ready to cut the cable connection, slicing my monthly content delivery bill in half."
I've been writing about this eventuality for several years, and it would seem that it is finally within sight for an average American internet user and cable television subscriber.
Imagine my surprise, then, when I read an article in last week's Wall Street Journal revealing that US cable systems are in talks with content providers about restricting the latter's distribution of said content, for free, on the internet, on pain of losing some of the revenues they receive from the carriers.
Cable systems like Comcast, Cablevision, et.al., are not stupid. They see the future, and it looks like what happened to the music industry.
So they plan to provide extra internet-accessible content to those who retain their cable television subscriptions, thus, hopefully, saving the vulnerable half of their revenue streams.
I have been reflecting on this approach for the past few days, and I don't think it is a universal solution for the cable system companies.
Back in August of 2006, I wrote this post, in which I mused,
"I don't know what the arrangements are for the provision of, say, ABC's Lost or Desperate Housewives. But it would seem reasonable that production contracts for serial programming is going to change. Before, it was just about syndication rights and royalties. Now, a good production company with a hot property can air it initially via a network, then go solo after the brand has been built. Or, perhaps they'll just go directly to a YouTube or other online video content concentrator site.
Then again, perhaps a really good production shop will simply secure its own financing via the capital markets. Maybe they'll sign a long-term distribution agreement with YouTube to provide basic cashflow while they develop properties for the online market. The possibilities seem truly too many to contemplate just yet."
I still think that scenario can occur. It boils down to branding, doesn't it?
Someone like Larry David, Jerry Seinfeld, or Dick Wolf can probably secure financing, run a few pilot videos on YouTube or another popular site, and then invite viewers to screen a new series directly from their website, going to a paying basis after one viewing from that address.
My point is, while new, unknown content providers may still have to approach networks, cable or broadcast, and be handled by the cable television systems, established artists would not seem to have this problem.
Whether they be actors, writers, directors or producers, veteran talent would seem to be able to marshal other necessary talent, funding, and equipment, in order to create and market their new content directly to viewers' televisions over the internet.
They might go directly to TiVo, as a distributor, among other outlets, for preferred, easy access.
The move by cable companies, of which the Journal article wrote, is surely a clever step, if not a bit late in the game. It will keep a number of viewers connected to video content via their cable television subscriptions.
But I do not think it's a long term, nor necessarily foolproof solution. It seems to me that the Schumpeterian winds of change have already begun blowing at gale force through this sector. As the Journal piece noted,
"Some critics say it might be too late to put the online-video genie back in the subscription bottle. A growing number of people are growing accustomed to watching TV shows online, without paying. About 136 million people watched online video content in January, up 16% from the same period in 2008, according to Nielsen Online."
That would not seem to bode well for cable systems, no matter what they try to do to block this trend. But, they can always ask the music industry executives about this sort of trend. Their experience may hold more parallels than cable industry executives dare to imagine.
Thanks to my acquisition of a TiVo unit, which connects wirelessly with my computer network, I wrote,
"My TiVo accesses NetFlix through a wireless adapter which gives it access to my home computer network. While I can't program NetFlix choices on the TiVo controller, TiVo can access my NetFlix account on its own to retrieve my selections.
Thus, it would seem only a matter of time before TiVo provides a feature on its own website that would let me either type in my preferred websites, or simply import my web browser bookmarks, so that I can access this menu on my television screen via TiVo's content menu.
Once I can do this, TiVo would let me watch various programming websites, such as HuLu, as well as NBC's own content, delayed, on its website.
As I discussed this with my business partner Sunday morning, I remarked that, once TiVo does this, I am just one step away from cancelling my cable television service.
The only missing content would be my two primary news channels, CNBC and Fox. Once I could stream these, I'd be ready to cut the cable connection, slicing my monthly content delivery bill in half."
I've been writing about this eventuality for several years, and it would seem that it is finally within sight for an average American internet user and cable television subscriber.
Imagine my surprise, then, when I read an article in last week's Wall Street Journal revealing that US cable systems are in talks with content providers about restricting the latter's distribution of said content, for free, on the internet, on pain of losing some of the revenues they receive from the carriers.
Cable systems like Comcast, Cablevision, et.al., are not stupid. They see the future, and it looks like what happened to the music industry.
So they plan to provide extra internet-accessible content to those who retain their cable television subscriptions, thus, hopefully, saving the vulnerable half of their revenue streams.
I have been reflecting on this approach for the past few days, and I don't think it is a universal solution for the cable system companies.
Back in August of 2006, I wrote this post, in which I mused,
"I don't know what the arrangements are for the provision of, say, ABC's Lost or Desperate Housewives. But it would seem reasonable that production contracts for serial programming is going to change. Before, it was just about syndication rights and royalties. Now, a good production company with a hot property can air it initially via a network, then go solo after the brand has been built. Or, perhaps they'll just go directly to a YouTube or other online video content concentrator site.
Then again, perhaps a really good production shop will simply secure its own financing via the capital markets. Maybe they'll sign a long-term distribution agreement with YouTube to provide basic cashflow while they develop properties for the online market. The possibilities seem truly too many to contemplate just yet."
I still think that scenario can occur. It boils down to branding, doesn't it?
Someone like Larry David, Jerry Seinfeld, or Dick Wolf can probably secure financing, run a few pilot videos on YouTube or another popular site, and then invite viewers to screen a new series directly from their website, going to a paying basis after one viewing from that address.
My point is, while new, unknown content providers may still have to approach networks, cable or broadcast, and be handled by the cable television systems, established artists would not seem to have this problem.
Whether they be actors, writers, directors or producers, veteran talent would seem to be able to marshal other necessary talent, funding, and equipment, in order to create and market their new content directly to viewers' televisions over the internet.
They might go directly to TiVo, as a distributor, among other outlets, for preferred, easy access.
The move by cable companies, of which the Journal article wrote, is surely a clever step, if not a bit late in the game. It will keep a number of viewers connected to video content via their cable television subscriptions.
But I do not think it's a long term, nor necessarily foolproof solution. It seems to me that the Schumpeterian winds of change have already begun blowing at gale force through this sector. As the Journal piece noted,
"Some critics say it might be too late to put the online-video genie back in the subscription bottle. A growing number of people are growing accustomed to watching TV shows online, without paying. About 136 million people watched online video content in January, up 16% from the same period in 2008, according to Nielsen Online."
That would not seem to bode well for cable systems, no matter what they try to do to block this trend. But, they can always ask the music industry executives about this sort of trend. Their experience may hold more parallels than cable industry executives dare to imagine.
Sunday, February 22, 2009
Immelt Continues Ruining GE
It's almost March, and time for GE to release information on compensation for its inept CEO, Jeff Immelt.
Now, of course, it's too late. Every one of the needlessly- and pointlessly-diversified conglomerate's businesses is being tarred with the problems of the financial services units. Immelt can't sell his trash, because a) nobody wants it, and b) nobody could get financing if they did want his poor performers. 
Immelt waited far too long to do the sensible thing, splitting up the company. Now, shareholders are paying a price for this mistake.
Mr. Immelt, 53 years old, earned $3.3 million in salary in 2008 and hasn't received a raise since 2005. He's also receiving a $2 million equity award.
That's a 61% decline from his compensation in 2007 of $13.81 million, which included salary, the $5.8 million bonus and equity award."
But, before I get to that topic, let me touch on some other ones mentioned in this weekend's edition of the Wall Street Journal, in the piece entitled "For GE's Immelt, Blue-Chip Blues."
In a longer article on the ailing conglomerate, these passages brought to mind a number of thoughts,
"There's a real drumbeat of negative sentiment out there," said Peter Sorrentino, a portfolio manager at Huntington Asset Advisors in Cincinnati, which owns GE shares. "I'm not sure it is legitimate." He said Mr. Immelt and other GE executives have been making strides in shrinking the company's riskier financial units and being transparent about company strategy.
In past years, half the company's profit came from financial services, which have been hit hard by losses and delinquencies during the credit crisis and economic downturn in the past 18 months. GE, one of the largest corporate-bond issuers, saw liquidity seize up last fall and had to use a government bond-guarantee program to issue bonds in recent months. It also had to sell commercial paper to the government last fall when such short-term funding markets dried up.
"You can't fault them," said Deane Dray, an analyst with FBR Capital Markets in New York. "If they had been asleep at the switch during this process, you can criticize them. But they have been pretty proactive."
When I read that last comment by Mr. Dray, I nearly fell off my chair in surprise. Beginning back with this post in August of 2006, fully two and a half years ago, I demonstrated why GE should have been broken up. I noted,
"On balance, GE has been, for the last 7 12-month periods, an inconsistently mediocre company. The slim margin of 2.5 percentage points of outperformance over the S&P is hardly worth the risk entailed by holding the company's stock for 7 years.
So, I ask again, for "what" exactly is GE "sized to perform for investors?" Certainly not returns.
No, I've come to the conclusion that GE is sized to provide highly compensated jobs for its senior managers, particularly Jeff Immelt."
To argue, now, that GE has been "proactive" about getting its house in order is simply wrong and naive. I'm not a sell-side analyst, nor a GE-only follower, and I was able to make a strong case over two years ago, when capital markets were healthy, for spinning GE's units into standalone entities.
Now, of course, it's too late. Every one of the needlessly- and pointlessly-diversified conglomerate's businesses is being tarred with the problems of the financial services units. Immelt can't sell his trash, because a) nobody wants it, and b) nobody could get financing if they did want his poor performers.The nearby price chart for GE shows that Immelt has finally succeeded in making the equity a single-digit stock, with a closing price, last Friday, of $9.38, now down from a high of around $40 in late 2007. The next chart depicts the hapless conglomerate's slide as being far worse than that of the S&P500 Index.
Once again, Immelt has penalized GE shareholders for sticking with him since he assumed the mantle of misleadership from Jack Welch in late 2001.
Immelt waited far too long to do the sensible thing, splitting up the company. Now, shareholders are paying a price for this mistake.Now, to King Jeff's pay package.
Of course, now being partially owned by the US government, Immelt doesn't want to attract additional ire from Washington. So he wisely chose to publicly beseech his board not to grant him his various planned bonuses.
High theatre for both him and the board, to show their contrition and public spirit. As the Journal reported recently,
"In addition to not receiving a bonus for 2008, Mr. Immelt also suggested -- and the board agreed -- that he forgo a special three-year, long-term incentive payout that would have totaled $11.7 million.
Mr. Immelt, 53 years old, earned $3.3 million in salary in 2008 and hasn't received a raise since 2005. He's also receiving a $2 million equity award.
That's a 61% decline from his compensation in 2007 of $13.81 million, which included salary, the $5.8 million bonus and equity award."
Boo hoo. A 61% decline from his 2007 compensation. If you read my prior posts concerning Immelt's total compensation as GE CEO to date, you will see that he could do with a few years of no pay, and still be overly-compensated for the immense damage he's caused his shareholders.
It's truly staggering to think, based on that second chart, that the GE board could give Immelt any sort of 'award,' not to mention the gross overpayment of $3.3MM, other than a kick out the door of the company's Fairfield, Connecticut's headquarters. Oh, and then toss a box of Jeff's belongings out after him.
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