On The NYSE-Deutsche Borse Merger

I saw an interesting take on the NYSE-Deutsche Borse merger from a floor broker the other day on CNBC.


A periodic guest/contributor named, I think, Peter Costas, he was livid about the merger. It shows you how far the NYSE has come from its once-cozy specialists world. The world of legal front-running, inefficient personal involvement in trades, and an avoidance of acknowledging the reality and capabilities of modern technology. For all his faults taking the Merrill Lynch CEO job and botching it, NYSE ex-CEO John Thain probably saved the place.


Yet, Costas mentioned some risks on which the Germans and current NYSE CEO Ducan Niederauer are silent. Think of it as a rerun of the Daimler-Chrysler merger.


Costas wondered aloud what would happen to the New York trading floor, should profits drop or costs rise? How committed would the merged, Germany-headquartered company really be to maintaining the current physical presences in the US?


Since so many pundits characterize the deal as really all about derivatives and other non-equity products, I suspect Costas' fears are not trivial. Nor totally misplaced.

On the other hand, also on CNBC earlier this week, Jim Chanos expressed no interest nor concern about the NYSE-Deutsche merger. But Chanos doesn't really seem all that emotional about that sort of issue to begin with. He didn't say he thought the concerns people had about the NYSE being controlled by overseas management/ownership was misplaced. He simply said he didn't really care.


Niederaur is taking pains to stress how current ownership of the NYSE and Deutsche Borse is predominantly American, by shareholders. A situation which is both fluid and uncontrollable. But his temper came out when CNBC co-anchor Mark Haines accused him of selling out Americans and repeatedly invoked the "buttonwood tree." In retaliation, Niederauer said, in a close paraphrase, while punching Haines on the arm,


'That's what I get for giving CNBC the first interview about this deal.'


Niederauer looked like he feels he needs to do all he can to convince investors, regulators and politicians to allow this merger.

Perhaps the real issues here aren't even being spotted yet. For example, listing standards. If the NYSE becomes controlled by European owners, who is to say that listing standards for what was America's largest equity market won't be controlled by Europeans?

That would indicate, however, truly global equity markets.

One thing that does make sense to me, however, is the comments of pundits regarding derivatives. Exchanges tell customers that they provide efficiency and best execution. But the truth is, profits for these entities come primarily, in a margin sense, from newer, less-well-understood, complex instruments. Like, well, derivatives.

That's why, over time, human floor specialists have declined in value. The instruments of which they allegedly facilitate the buying and selling have simply grown less profitable to intermediate.

Pepsi Joins Companies Which See Inflation Coming

My latest post concerning companies behaving differently in light of the inflation they see coming was earlier this month.

In last Friday's Wall Street Journal, Pepsi CEO Indra Nooyi defended her company's projections for lower earnings in the future,

"We have no idea what the commodity markets are going to look like in 2012 and beyond."

While one analyst was quoted in the article as chiding Nooyi and Pepsi for citing commodity price pressures, claiming that "everybody else" is facing these, as well, I think he is missing the point.

The article contends,

"At the same time, consumers are still holding back and so it will be difficult to raise prices on drinks and snacks enough to offset the higher costs."

And Nooyi is quoted, again, as saying,

"Had we not had the continued macroeconomic sluggishness and this commodity inflation, we are a solid, double-digit [percentage] player."

Simply put, commodity price inflation, at least partially induced by US monetary-policy, is affecting yet another, very large US company.

Despite Fed officials', current and former, claims to the contrary, US businesses continue to talk and behave as if inflation is coming and will affect their operations and financial results materially.

Borders' Bankruptcy & William Ackman

Back in early December- could it be that long ago?- I wrote this post regarding William Ackman's Pershing Square's attempt to have Barnes & Noble merge with Borders, one of his firm's holdings. I wrote, in part,


"It's unclear to me why Ackman has so diligently and doggedly pursued either physical book retailer over the past few years. With Amazon and Google targeting the space, and Apple's recent iPad adding to the mix, it wouldn't seem to be an easy product/market in which to earn substantial gains by maneuvering with the remaining two, damaged retailers, would it?



Ackman has a track record as a smart investor. But, then, so did Ed Lampert before his plunge into owning retailers K-Mart and Sears.


Why on earth would anyone have bought into these turkeys even as long as three years ago? Their underperformance has only increased since then.



I suppose Ackman has a very short-term, 'turnaround' sort of mentality that seeks a quick, abrupt rise in share price from an unexpected reorganization, followed by a hasty exit from his positions.


I'm just not seeing the logic to this situation for Ackman, other than desperation to rescue some value from his 1/3+ ownership of the worse-performing, lesser-sized turkey in the sector."


Perhaps I was more prophetic than I knew. This past weekend's edition of the Wall Street Journal carried the news of Borders' Chapter 11 filing. According to the article,


"Mr. LeBow, who became CEO of Borders Group last year, invested $25 million last May as Borders tried to rework its finances. Mr. Ackman's Pershiing Square Capital Management LP is expected to lose at least $125 million in its investment."


Since I don't follow Borders, I had no idea Ben LeBow had become involved. Seeing LeBow and Ackman lose at least $130MM in this turkey is surprising. Especially since LeBow's investment was so recent. Ackman's investors can't be happy to have read about this over the weekend, can they?

Why do these investors with such great reputations get involved with one of the worst companies in a market segment? Ackman is also involved with Penney's, hardly a leading retailer, either.

The Journal piece catalogued Borders' decline and fall, amidst a general shrinking of the sector. Considering its ills, I really can't comprehend why these two marquee investors got involved with the firm.

I haven't followed LeBow's moves for years, but Ackman makes generous use of CNBC, so he's much more visible.

Let's see...the failed Target deal, then Borders, now Penneys. Is he losing his touch?

Eddie Lampert & Gap

News of Ed Lampert's sizable investment in Gap, Inc sent shares of the latter up sharply yesterday.

Shares of Gap Inc. (GPS) climbed Tuesday as hedge fund billionaire and Sears Holding Corp. (SHLD) Chairman Edward Lampert reported holding a 5.8% stake in the retailer.


At midday yesterday, the Wall Street Journal reported,


"Lampert, known for large, concentrated bets on the stocks of a small number of companies, reported the stake in a 13G filing, or a filing for passive investors, with the Securities and Exchange Commission late Monday.
Lampert's ESL Partners, along with affiliates, reported beneficially holding 35 million common shares as of Monday.
Gap shares were recently trading 5.8% higher at $22.72.
Investors are "excited that he may see some value in a retailer that has been struggling with its merchandising," said Wedbush Securities analyst Betty Chen."


Looking at the price chart for Sears Holdings, Gap, Inc. and the S&P500 Index since late 2003, it's difficult to see why Gap shareholders would cheer Lampert's control over the struggling retailer. Granted, anyone buying into it would be cause to celebrate- after dumping your shares.
 
But look at the price curve for Sears after Lampert's early-2005 takeover. It's worse than the S&P and Gap,  which tracked together over the period.
 
Just how is it that Lampert will do for Gap what he hasn't managed to do at Sears/KMart?
 
Beats me.
 
Has Lampert lost his touch, too, as I muse about William Ackman in today's next post?

Will Services Truly Go Global?

Mr. Joseph Sternberg edits the Wall Street Journal Asia's Business Asia column and recently wrote an editorial entitled Now Comes the Global Revolution in Services.

Of course this has been a feared development by many in the US economy, since our services sector is so large. The first such globally competitive service which probably comes to mind is call centers.

Sternberg wrote,

"Asia has been a big winner from the development of global manufacturing supply chains. Japan and the four tigers—Hong Kong, Singapore, South Korea and Taiwan—showed how cheaper shipping could create opportunities for factories far from the intended market. As supply chains have grown more complex, the benefits have spread. Components now travel from Thailand, the Philippines, Malaysia and Taiwan to a factory in China, where they're assembled before hitting the shelves of an Apple store in New York as a finished iPhone.


Even as the manufacturing supply chains continue their evolution, a new question confronts Asia: How to profit from increasingly sophisticated supply chains in services? Despite all the political hype in the West about the ills of outsourcing and the perceived ubiquity of overseas customer-service call centers, services supply chains are still in their infancy."

It's thought-provoking to realize how the economics of various manufactured and assembled parts of goods such as an iPhone make it affordable to ship the incomplete item around so much of the world simply to take advantage of lower labor costs. Sternberg then contends,

"We're heading for a day when a Malaysian architect will sketch out a new office tower for London, a Philippine architect will prepare detailed renderings, and a Chinese engineer will assess the structural soundness of the designs. Or a specialist firm in Bangalore will administer health benefits for a Kansas company. Indeed, such things already are happening on a modest scale.

That's particularly apparent on the infrastructure front. Ask experts what a government needs to do to develop a services- outsourcing industry, and the first answer is usually "provide more reliable electricity" or "lay fiber-optic cable." True, but more important will be the human intangibles. Educating a sufficiently skilled work force—no small task in itself—is only the start."

Sternberg's example sounds simple enough. But will it really occur? Are language barriers really so easy to overcome that complex building design will be piece-parted out as he describes?

He concluded with this passage,

"Manufacturing supply chains applied modern transportation technologies to a millennia-old principle that if someone in a neighboring village can make a good more efficiently than you can, you should buy it from him. Service supply chains derive a new principle—that you no longer need to be geographically near the person providing you a business service—from modern communications technologies. Now countries need to figure out how they fit into this trend, and how to profit from it."

Personally, I believe Sternberg is far too optimistic about the globalization of high value-added services. Especially services involving high levels of complexity.

Why?

Well, for one, globalization of product manufacture and assembly has a simple test. Does the resulting product function at a competitive price? The proof is easy to see.

Services aren't so simple. The success of a globally-designed building or other complex system using services provided in so many countries and languages might not be apparent for years. And they tend to be one-off projects, rather than, like products, things of which millions are sold and used.

Even the lowly call center has seen a reversal of outsourcing overseas from the US. Too many problems with language and basic service quality levels has resulted in some firms regaining an edge by relocating their call centers back in the US.

Then there's the recent comments of Boeing CEO Jim McNerney on CNBC. In answer to questions concerning the Dreamliner's continuing delays, McNerney confessed that the firm had overreached with its design outsourcing. He said that they won't be doing that again, focusing instead on more onshore engineering and design.

If one of the most sophisticated engineered systems we have, a modern jetliner, has failed to be reliably designed and produced globally on time, what are the prospects for equally-sophisticated systems? At least the Dreamliner results in a testable product on which quality control may be performed before it actually goes live in its initial commercial flights. And Boeing has been building such systems for decades.

I think it says a lot that they got the mix and management of global design of the various parts and subsystems of their newest jet fouled up, and are planning to move back to more centrally-sourced services in the future.

Thus, it's my guess that Sternberg's concerns and visions are very premature. And a big chunk of US exports in the service-based sector remains somewhat safe for a while.

Cisco's Continuing Woes

I recently exchanged some email missives with an old friend who escaped the collapsing financial sector for the decidedly greener fields of the California technology sector. He was glum over that day's equity price performance of his new firm, Cisco.

I didn't think much of it, until I read, later that day, of Cisco CEO John Chambers' downbeat outlook and the lackluster quarterly earnings report.

I wrote this post last November, on the occasion of the company's and Chamber's last sobering, disappointing quarterly outlook and earnings report.

"However, a much more revealing chart is the next one, spanning the public life of the firm. It produced shareholder value so fast in its early years that comparisons with the index are really pointless. But it's easy to see that, like Microsoft, Cisco has really 'enjoyed,' or, more pointedly, its shareholders have not, a lost decade. From its peak at the peak of the technology bubble in 2000, Cisco slid dramatically and really never substantially recovered.



I have checked my own records, and do not find evidence of the firm in any of my portfolios after early 2000. Between its dismal total return performance, relative to better-performing firms, and, I expect, slowed revenue growth, the firm joined the list I mentioned earlier in the post. Those technology firms whose charmed life of meteoric total return and revenue growth has slipped into history, almost certainly never to return.


Thus my amazement that pundits still put so much emphasis on the firm's every move. The information is clearly available for all to see- Cisco hasn't been a consistently superior performer worthy of long term holding for a decade. You'd have to be a market timer to have earned significant gains by owning the firm during that period. And if you simply bought and held, you'd be a big loser."



The price chart for Cisco, Dell, Intel, Microsoft and the S&P500 Index which appears at the beginning of this post bears out my contention.
 
More surprisingly, Thursday, on CNBC, one pundit was actually arguing that it's time for Chambers to find a new job. And whereas Microsoft is usually given a magical pass for its lost decade, Cisco doesn't seem to merit the same kid glove treatment.
 
A Wall Street Journal article in the Heard On The Street column matter of factly notes that the switch market, which Cisco rode to success a decade ago, has matured and become much more competitive. Revenues and margins are down. Like so many other technology firms have experienced, it appears that Cisco's main engine of profitable growth has flamed out, or settled down to a constant, slow burn, with no similar product/market to replace its earlier performance.
 
John Chambers and Cisco, meet Joseph Schumpeter's world of competitive, dynamic capitalism. Cisco hasn't been selected for my equity portfolios in at least a decade. Like the other firms I included in the price chart- Dell, Intel and Microsoft- all were once profitable contributors to earlier portfolios. But, once growth ebbed and returns came back down to earth, they were jettisoned, never to reappear.

The US Economy's Looming Job Creation Challenge

I began to consider risks to a robust US economic recovery in this recent post, in which I noted,

"But if commodity input costs are rising, that will result in either lower margins and a curtailment of job growth, or higher prices which will cause lower quantity demand by consumers in the face of so much inflation.



One is somehow left feeling that there's considerably more economic turmoil ahead than many pundits would have us believe. We're seeing the first reactions by businesses to known inflation in input costs. How and where those costs, and the actions they have spurred, find their way into consumer prices, and how consumers react with their buying behavior, isn't being widely discussed.



However, with job growth still anemic, and US unemployment still uncomfortably high, will the Fed dare to raise rates? And would that not result in a stalled economy and job growth as higher rates choke demand?"
 
In an editorial in yesterday's edition of the Wall Street Journal, entitled Doing the Math on a Jobless Recovery, Brad Schiller explored the job growth component of the putative, but weak, US economic recovery.
 
An economics professor at the University of Nevada, he wrote, in part,
 
"The latest employment reports have not been encouraging. At the rate of 36,000 new jobs a month—the number gained in January—we will never get back to full employment. Even if we keep adding jobs at the December rate of 121,000 new jobs, we wouldn't achieve full employment in this millennium.
 

At the trend growth rate of 1.2% annually, we get another 1.8 million labor force participants a year, and with them, the need for another 1.8 million new jobs.

To get back to full employment tomorrow, we could get by with another seven million new jobs. To reach full employment by the end of this year, we would need at least nine million new jobs (some 750,000 a month). There's simply no way we will experience that kind of job creation.

Each year brings another two million-plus workers to the labor force (new workers plus the re-entry of discouraged workers). Thus we would need monthly job gains of 460,000 to achieve full employment in time for the 2012 presidential elections.


We created that many jobs one time in the last four years (May 2010)."
 
I edited out Schiller's more overtly political conclusions. But what he makes painfully clear is that there's just no prospect of sufficiently robust employment growth anytime soon that will bring unemployment, as dynamically calculated going forward, into a range that would allow the Fed to declare full-employment victory.
 
If that's true, then it means the Fed might hold rates too low for some time, stoking commodity-based inflation. If not, and the Fed raises rates, then, according to Schiller's calculations, unemployment is likely to remain distressingly high.
 
Then you have a persistent drag on US economic growth of a significant part of the workforce being unemployed. Will this not affect overall demand? That
 
Like it or not, we seem to have wandered back into the bad old days of Carter-era economics: high unemployment, prospects of higher inflation, and a need to raise rates in the face of a less-than-robustly-healthy US economy.

More Questionable Financial Coverage on CNBC

I've never really liked CNBC's equity options programs. The original, Fast Money, once hosted by now-departed Dylan Ratigan, airs after the market's close, with a 12:30PM spinoff, as well. It's not because of Melissa Lee, Ratigan's replacement, for whom I actually have great respect as a reporter and anchor. Nor several of the program's continuing contributors, including John Najarian.

It's just the fact that the network airs two programs on the topic of short-term options trading. As I've written elsewhere in a few prior posts, I don't believe many, if any, retail investors have any business dabbling in equity options. Beyond relatively safe strategies, such as covered calls, it is mostly likely an expensive waste of time and money for most retail investors. Something like 90% or more of all equity options expire without gains.

To me, the Fast Money programs aim for a rather odd segment. Few retail investors are probably interested or sufficiently confident to try to follow any of the advice emanating from the program's personalities. Institutional investors would be unlikely to need such advice- they either already have their own professional opinions as options pros, or don't go near the instruments.

Now, an even more troubling asset class is looming on CNBC's horizon- foreign exchange.

Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.

You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss.

That's also the downside- for retail would-be investors. FX is a dicey area for professionals. Never mind allowing retail investors loose in this toxic candy store.

I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse.

"Crony Capitalism"- CNBC Style

This morning's CNBC SquawkBox segment from the Harvard Business School marked a new low in the network's contribution to the notion of "crony capitalism."


It began with Carlos Q's typical looks of surprise, shock and awe as a guest who is apparently and adjunct professor, when he's not a hedge fund manager, discussed teaching HBS students about the new roles of finance in the economy. Of course the guy proclaimed such appearances with students as challenging and engaging.


Duh. He's a hedge fund manager, and the students want a job in 1-2 years. How does he think they'll react to him?


Then Bill Ackman was interviewed, giving him a platform from which to stump for his latest investment position, JC Penney. Despite his recent involvement in attempting to merge Borders and Barnes & Noble, Ackman's interest in clothing/general retailers goes back at least to his attempts to influence Target during the financial crisis of late 2008. What I notice now is that Ackman has, in both cases, ended up with interests in a more troubled firm in a sector. This morning, he actually, when asked, contended that Target's operational skills are better than Penney's. He was also a bit more vague on precisely how he'd use real estate values to turn Penney's around. Given the apparent setting of the CNBC segment in the business school library, to drive home the HBS surroundings, I'm unsure what the academic takeaway of Ackman's appearance was. Vulture hedge fund acquisition strategies? Shoot for the less-competent company in a sector and agitate from outside?

Ackman then pontificated on banking, announcing that lending to the largest US corporations was no longer profitable.

Gee, thanks for that stunning insight, Bill. We already knew that at Chase Manhattan 20 years ago.

It seemed mostly to be little more than another opportunity for Ackman to republicize his fund's Penney's position, demonstrating, once more, that it's nice, professionally, to be a crony of CNBC.

Then it was time for Michael Porter to trade on his decades-old reputation for a series of strategy books which mostly restated existing microeconomics. He babbled on about exchange-rate-based terms of trade and the usual verbiage about retaining a US base of suppliers and production. Nothing new, nor particularly relevant to his supposed specialty of strategy.

You'd like to hear Porter expound on how we should expect other countries to naturally compete for and capture lower value-added, less-technically complex production and other business functions and processes. That US competitiveness and ability to employ our workforce depends upon creating more value-added production and service jobs and functions. That we don't want to simply take back lower-skilled jobs, but, ideally, leave businesses free to innovate and create value that necessitates new jobs with different, greater value added. But that we have to accept the fact that an evolving, multi-lateral global economy will force the US to cede lower value-added jobs and grow only by creating new, higher value-added positions.

But nothing remotely like that escaped Mike's lips.

More cronyism in search of a purpose.

Perhaps the most egregious example of cronyism came next, as the hapless Vik Pandit, CEO of government-rescued Citigroup, appeared.

First, Carlos Q let everyone know that, off camera, Ackman had told Pandit he was 'the most underrated CEO in America.'

Really? Do tell, Bill. Why the sudden, undeserved accolade? Is Ackman greasing the skids for backup funding for his next takeover?

Meanwhile, Pandit gave one of the most stomach-churning performances I've seen on business/financial television in ages. After saying how grateful he and his bank are to the US taxpayer for saving his mismanaged company, he then went on to characterize his bank an institution. It's more than a bank, he claimed- it's an institution. So, you know, the US has to rescue Citigroup, no matter how ineptly it is run. Along the way, he mentioned a $12MM profit for the Treasury in exchange for saving Citi from bankruptcy. That's it? That's all we got for all the risk inherent in propping up that mess?

Pandit then claimed that his bank is 'back to basics,' but will repay American taxpayers by advising their companies abroad as the nation's 'only international bank.'

Can it get more cronyish than this? Here's the guy whose hedge fund, which was eventually closed amidst poor performance, was generously bought for cash by Citigroup, then magically elevated to CEO by a board dominated by a non-executive chairman, Bob Rubin, who helped lead the firm into near-ruin. Pandit doesn't have a banking background. He ran a middle-office operation at Morgan Stanley, then left to open a hedge fund. If there were ever an unqualified and unprepared guy heading a major bank, it would have to be Pandit.

If you look at the nearby price chart for Citi and the S&P500Index, beginning at December, 2007, when Pandit became CEO, you see how dismally the bank has performed.

Why on earth Ackman thinks Pandit has done well is anyone's guess. Why Pandit merits an appearance on CNBC's program, moreover at HBS, is equally curious.

Seems to be just more of CNBC's brand of crony capitalism.

The AOL-Huffington Post Deal

In Monday's post, I commented dismissively on AOL buying the Huffington Post with this passage,

"AOL, now spun back out from the disastrous TimeWarner linkage, just announced this morning that it is buying the online Huffington Post for $315MM. Does anyone really care that much? What does AOL bring to the table?"



Since then, various pundits have weighed in on the deal. Tim Armstrong and Arianna Huffington appeared on CNBC to tout the deal. Armstrong somewhat disingenously claimed there was "no risk" to the deal, while Huffington claimed that those who took AOL stock would outperform the cash recipients. This despite some observers chortling that the HuffPost owners had learned from TimeWarner-AOL and demanded mostly greenbacks this time.

As the Wall Street Journal noted,

"No doubt Huffington Post Chairman and co-founder Ken Lere, an AOL veteran who saw the Time Warner nightmare firsthand, knew the dangers of accepting too much stock in AOL."

Regarding Armstrong's claim, check out the nearby price chart showing that the new AOL has languished since its inception. Armstrong, I am sure, badly hopes that the Huffington Post's readership can work magic on AOL's ad revenues. Putting Arianna in charge of a bigger chunk of content? Who knows how that will turn out? She's known for liberal politics, despite what Armstrong yammered about new content 'beyond left and right.'

Given the only-recent profits realized by Huffington, and just a $50MM revenue estimate for FY2011 for the online media property, the $300MM in cash plus $15MM of AOL equity seems a pretty rich price. I always wonder, in these situations, why the acquirer doesn't just form a marketing alliance, exchanging cash for product and/or access? Thus saving shareholders' the risks of actual acquisition, while extending financial benefits to the media property, and forcing continued performance for the deal to continue.

But, as I noted in my initial comment, so what? What's really clear is that the four owners of Huffington got a nice $300MM for a recently-, barely-profitable online business. Sounds a lot like TimeWarner-AOL, only one company removed, doesn't it? What AOL gets is anybody's guess. But investors clearly didn't like the deal. And it's going to take a lot to get AOL anywhere near the S&P since its rebirth.

Personally, I don't think Armstrong and the addition of the Huffington Post properties, including Arianna herself, are going to do the trick.

Paul Ryan Teaches Economics To The "Senior Economics Reporter" On CNBC This Morning

Now that he's Chairman of the House Budget Committee, Wisconsin Republican Paul Ryan has been appearing on CNBC's morning program, SquawkBox, more frequently.

If you haven't seen, heard or read Ryan, he's a remarkably intelligent and economically savvy elected official.

This morning saw a priceless moment wherein Ryan befuddled the economically-challenged, CNBC so-called "senior economic reporter" Steve Liesman.

Ryan was responding to questions regarding monetary policy and the Fed. He had contended in a remark that the nation's fiscal and monetary policies are heading for conflict. Liesman, hoping for an easy chance to make Ryan look bad, jumped in to ask for elaboration.

By way of background, Ryan offhandedly referred to a piece he and heavyweight monetary policy economist John B. Taylor had co-authored in Investors Business Daily recently. Taylor is, of course, the author of the influential Taylor Rule, explained below by Taylor,

"Let me start with the example of the Taylor rule. It says that the short term interest rate equals one-and-a-half times the inflation rate plus one-half times the real GDP utilization rate plus one. So, in 1989, for example, when the federal funds rate was about 10 percent in the United States you could say that the 10% was equal to 1.5 times the inflation rate of 5% (or 7.5) plus .5 times the GDP gap of about 3% (or 1.5, which takes you to 9) plus 1, which gives you 10. Now this is a very specific rule, and it can be written down mathematically as shown in Figure 1, which also shows the way the rule was written when first presented in 1992. Of course, I did not name it the Taylor rule. Others did that later. Originally the rule was meant to be normative: a recommendation of what the Fed should do. It was derived from monetary theory, or more precisely from optimization exercises using new dynamic stochastic monetary models with rational expectations and price rigidities. Like most rules or laws in economics it is not as precise as most physical laws, though that does not mean it is less useful. It was certainly not meant to be used mechanically, though it now appears that monetary policy might operate even better if it stayed closer to the rule."
 
Ryan is an explicit Friedmanite on most economics issues. Especially, if you listen closely to his comments, monetary policy.


The priceless moment came when Liesman demanded that Ryan cite, on the spot, the rule he preferred the Fed follow for monetary policy.

Ryan slowly, carefully explained that he is a member of Congress, not a professional economist. Therefore, he said, he could not and should not specify the rule, but he knew he preferred that the Fed use one.

All the while, the camera showed Liesman's pudgy face in a frown, with a sort of dull-witted mask of slow comprehension. He began to slowly realize that Ryan is far, far more intelligent than he, Liesman, is, both economically as well as in terms of the media dynamics going on at the moment.

You can't possibly script this sort of thing. Ryan just seems to mesmerize Liesman and leave him dumbfounded. Emphasis on the dumb part.

Immediately on the heels of that exchange, Rick Santelli chimed in to chide Liesman for being harder on Ryan than he's ever been on Bernanke. Whereupon the so-called senior economic reporter retorted/admitted that he'd never actually interviewed the Fed Chairman.

Priceless, unscripted business and economic comedy this morning.

How GSE's Stifle Mortgage Finance Innovation

Peter Wallison wrote a clearly expressed editorial in a recent edition of the Wall Street Journal explicitly identifying the GSE-provided subsidy to conventional 30-year, fixed-rate mortgages.

Wallison's point was that many people mistakenly believe that you can't offer an uninsured 30-year, fixed-rate mortgage, completely ignoring the existence of the jumbo-loan market. He went on to catalogue the mistakes Fannie Mae made in easing eligibility requirements for its mortgage guarantees, including downpayments of as little as 3%.

The editorial got me thinking about the reasons for such long duration mortgages. Wallison pointed out that they build equity value very slowly, maximizing the interest expense deductions available in the current tax code.

If I'm not mistaken, part of the reason for the lengthy duration was the experience Americans had with balloon-payment mortgages of shorter duration during the 1930s. When monetary policy brought about a severe contraction of the monetary base, money simply wasn't to be had. And many borrowers probably couldn't requalify for a mortgage during the Depression.

I'm familiar with the current existence of shorter-duration mortgages, but, of course, those leave a homeowner vulnerable to needing to refinance at an inopportune time. Those mortgages don't typically get the exposure that traditional 30 year fixed-rates do. However, many homeowners never come close to living in their home for 30 years.

Is it possible that the GSE's backing of selected mortgages stifled innovation in the field? Wallison concentrates on the dubious policy of government subsidies to conventional mortgages. But it occurs to me that another cost of those subsidies is to make it harder for other, more innovative mortgages to gain popularity. I'm not talking about lower downpayments but, rather, a homeowner choosing to take duration risk in exchange for a lower rate.

It would seem that, as is frequently the case, government-sponsored distortions in credit markets may have created unintended consequences which rob consumers of more choices in their buying behaviors. In this case, in choosing the duration of their mortgage, should they have reason to believe they do not need a 30-year funding commitment.

More Bad News from Yahoo

Sadly, even last month's improved Yahoo profit didn't do enough to lift it's equity price up anywhere near enough to make Carol Bartz' 18 months heading the firm look positive.

In fact, the firm's performance over the period now stands at roughly half the return of the S&P500 Index, as shown in the nearby chart.

It seems that Facebook's rise as the social networking phenomenon- large enough to worry Google- has now totally eclipsed the old self-proclaimed social networking site- Yahoo.

In this post, written last May, I confirmed my belief that Bartz was brought in too late for even someone with her considerable talents to rescue Yahoo. That post mentioned Facebook's performance as surpassing Yahoo's on a measure of ad display impressions.

The language emanating from Yahoo concerning their recent results has become full-mode corporate speak. For example, this from Bartz,

"We're not trying to cut our way to revenue growth. We're investing for future revenue growth."

Well, yes. Except it's just not working. In a Facebook world, nobody thinks about Yahoo as a connection site anymore. It's just one more free information site. With a deal with Microsoft involving Bing, if I recall, that brought some much-needed money.

AOL, now spun back out from the disastrous TimeWarner linkage, just announced this morning that it is buying the online Huffington Post for $315MM. Does anyone really care that much? What does AOL bring to the table?

In the natural, Schumpeterian order of business, Yahoo and AOL, two giants of the early internet era, have now lost purpose and significance. I wonder just who even owns shares in these firms anymore?

Odds & Ends From CNBC

I saw a couple of inane segments recently on CNBC that I felt merited comment.

This morning, former Fed member Randy Krozner appeared on the morning program to do damage control in the wake of Helicopter Ben's recent public remarks at a press club.

Unbelievably, Krozner denied that there's any inflation coming down the road in the US economy! No chance. None. Totally unfounded fears. This seems curiously at odds with a recent Wall Street Journal article (post about it here) and the comments of a guest on CNBC just this week.

Energy, in the form of oil prices, and food both seem empirically to be heading sharply upward. So why can't Krozner see that?

Oh, wait. The government uses an inflation measure that strips out.....food and energy!

Perfect. Our central bank has blinders on when it comes to inflation.

Then Krozner waved off concerns that any inflation would require rate increases that could choke off employment gains. Again, hardly reassuring or based in reality.

The other segment which left me somewhat incredulous earlier this week as yet another discussion between co-anchors spotlighting, ex post, one or two companies which have had huge total returns for the last 12 or 18 months. This seems to be a favorite CNBC pastime. Find a company with a single period of incredible market outperformance, preferably in triple digits, then laud it as an investment, and ask the perennial question,

'So, is it still a good investment, or is it too late to get in, and time to unload?'

My own proprietary equity research found that there are a fairly large number of such short-term outperforming companies. The problem is that few of them become long term outperformers. So investors are forced to time their exits. Never an easy task.

In effect, CNBC's continuing focus on recent one-hit wonders seems to me to be the epitome of irresponsible reporting on financial investing. I pity anyone who takes any investment advice from the network seriously.

Jon Corzine & MF Global

The Wall Street Journal ran a somewhat scathing article on Jon Corzine's plans for MF Global, the firm of which he became CEO last March, after losing his re-election for governor of New Jersey in late 2009.

You know the Journal isn't positive on Corzine's ambitions, because the headline, Corzine Builds MF In Goldman's Image, suggests a sort of vengeful lack of imagination on the part of the failed politician and former Goldman co-head. They also quote Corzine as arrogantly declaring,

"We had such a limited business plan the day I walked in the door."

The article alleges that Corzine denies he's trying to clone Goldman at MF Global, but his plans for expansion feature proprietary trading, government bond dealing, and the potential purchase of an asset management operation.

If that were all there were to the story, it would be pretty much open and shut that it's likely Corzine is attempting what the Journal article contends, bolstered by this passage,

"Mr. Corzine likely wants his job at MF Global to end differently than his 24-year career at Goldman. In 1999, after Mr. Corzine pushed for a Goldman initial public offering that would make him and other partners of the firm very wealthy even by Wall Street standards, he was pushed out in a power struggle with Goldman bankers led by former Treasury Secretary Henry Paulson, who went on to become CEO.

In terms of revenue, MF Global is about 2% of the size of Goldman."

But wait....there's more.

At the very end of the piece is this passage,

"After losing a re-election bid in 2009, Mr. Corzine was encouraged to take the top job at MF Global by J.C. Flowers & Co., which owns a stake in MF Global. The private equity firm's founder, J. Christopher Flowers, was a colleague of Mr. Corzine's at Goldman. Mr. Corzine is a partner at J.C. Flowers."

Now the picture becomes a bit different. It's not so hard to connect the dots.

Corzine loses re-election, but his friend and former colleague, Christopher Flowers, gives him a partnership in his firm. After all, despite his failed political career, Corzine has made many contacts while in the Senate, and at Goldman, so, like many former politicians or candidates (NJ's Bill Bradley and, before him, Pete Dawkins, come to mind), remains a potential rainmaker. Flowers has a significant stake in sleepy MF Global, for what reason we don't know. But he would like to transform it into something with selected aspects of the Goldman Sachs both he and Corzine helped run.

So Flowers, whose firm has a board seat at MF Global, held by partner David Schamis, convinces the rest of the board to hire Corzine, now a Flowers partner, too, as CEO.

At a stroke, Flowers has cleverly taken effective control of a public company by handpicking the CEO. His plan is evidently to transform the staid financial services firm into something more robust and profitable, albeit with more risk. But through his holdings, Flowers essentially gets other people's money to absorb risk and fund his plan to use MF Global to do things he probably can't accomplish with his own private equity firm.

So, now, the spotlight really shifts from Corzine to Flowers. We don't know if the business plan to which Corzine referred was limited in terms of timeframe or scope. But it really doesn't matter so much what Corzine thought of it. He's a high-priced, high-profile pawn in this affair, and the public face of Christopher Flowers at MF Global.

It's Christopher Flowers' views that really matter. Views which we will likely never know directly, because he's implementing them through two MF Global board members who are also Flowers partners.

And you wonder why retail investors and the public in general are concerned about webs of influence and suspect dealings in private equity and the non-commercial side of banking?

This is why.

Scary Company Behavior In Anticipation of Inflation

Inflation has been a recent topic in my blog posts, such as here and here. Today's edition of the Wall Street Journal contains one of those quintessential articles on the topic that is destined to be cited in the future as a clear warning sign.

In the piece, several examples are given of companies scrambling to buy large amounts of inventory in advance of vendor price increases. From cotton t-shirts to spices to metal for mufflers, retailers and middlemen are noting the difference between interest rates on financing for inventory and expected price increases for that inventory, then buying the larger-than-normal amounts of the goods for future sale.

Sure enough, the article discussed how this distorts inventory-based measures for purposes of assessing economic cycles and trends. As well as noting that many companies were already trying to slim their inventories in order to manage risk amidst economic uncertainty.

However, this article provides some evidence that an economic conundrum may soon be at hand.

Just this week, we saw positive employment-related numbers suggesting a slowly-expanding economy with job growth finally appearing, albeit at modest monthly levels.

But if commodity input costs are rising, that will result in either lower margins and a curtailment of job growth, or higher prices which will cause lower quantity demand by consumers in the face of so much inflation.

Thus, the very inventory bloating behavior now underway by many companies might come back to haunt them when demand slows in reaction to the rising prices. Then we'll have overextended companies with unsalable inventories for which they are paying interest to fund. In retrospect, will they look foolish for having so aggressively bought real inventory, rather than used some type of financial hedging, to manage cost increases?

Or is it even possible that companies which simply accept the higher-cost inputs and raise prices with expectations of lower demand will avoid this entire mess?

One is somehow left feeling that there's considerably more economic turmoil ahead than many pundits would have us believe. We're seeing the first reactions by businesses to known inflation in input costs. How and where those costs, and the actions they have spurred, find their way into consumer prices, and how consumers react with their buying behavior, isn't being widely discussed.

However, with job growth still anemic, and US unemployment still uncomfortably high, will the Fed dare to raise rates? And would that not result in a stalled economy and job growth as higher rates choke demand?

Johnsonville Sausage's CEO On Food Inflation

Yesterday morning on CNBC, the CEO of Johnsonville Sausage, a Wisconsin-based company, spoke out clearly on the coming food inflation.

He indicated that his company's input costs are rising, so overall food inflation is on its way. Then he commented indirectly on the folly of 'using corn to make gasoline,' meaning the government's push for ethanol, about which I wrote here recently. His tone was dismissive as well as incredulous, as he described himself as 'just a guy who makes sausage.'

Funny, though, how he's in fairly-rural Wisconsin, or, at least, not back East, so you'd think, according to Newt Gingrich, that the CEO would be raving about ethanol.

He's not. Instead, as a food producer, he clearly sees the mistake in taking food and pointlessly wasting it in gasoline, where it doesn't even deliver sufficient power to maintain octane ratings.

But, unlike the Fed or other seemingly-blind pundits, the guy was crystal-clear in warning that major food inflation is coming down the pike, like it or not.

I believe him.

Scott Adams On Taxing The Rich

Scott Adams, a one-time Pacific Bell engineer, now famous semi-autobiographical cartoonist (Dilbert), wrote a hilarious piece in last weekend's edition of the Wall Street Journal. He's evidently entered into some sort of contributor relationship, because this is the second piece he's done in the last few months.

Adams begins by suggesting that by writing a 'bad version,' in Hollywood parlance, of how to tax the rich, millions of Americans can read it and invent better ideas for solving our fiscal mess. He then offers some ideas. Humorous, yes. But in the kernel of some of his wacky ones seem to me to be real opportunities.

For example, he wrote,

"Incentives. Another approach, also a bad idea, might be to treat the rich more like venture capitalists than sources of free money. Suppose the tax code is redesigned so that the rich only pay taxes to fund social services, such as health care and social security. This gives the rich an incentive to find ways to reduce the need for those services, which would in turn keep their taxes under control. Perhaps you'd see an explosion of private investment in technologies that make it less expensive to provide health care. You might see rapid advances in bringing down the cost of housing for seniors.



Meanwhile, the middle class would be in charge of funding the military. That feels right. The country generally doesn't go to war unless the middle-class majority is on board."

It strikes me that there's some rationale for dedicated spending of exorbitant tax rates. Such money has to go to a specific use, and no other. Adams' idea for the rich figuring out how to minimize the costs of what their (higher) taxes are spent on, so to reduce those taxes. But, generally, what if we simply designated some social services as being paid for by certain income classes or other source. When that source is exhausted, so is the spending.

It could be a backwards way of forcing Congress to cut spending by allocations. If they won't stop promising benefits, we'll just have them allocate tax sources, which are limited, so that the spending can't be unlimited anymore.

I also thought Adams was not too far off base in considering giving the rich, higher-taxed benefits such as preferred government service, a la concierge-level attention, use of HOV lanes, handicapped parking, or an extra political vote. There are, after all, some benefits that are better than the money that buys them.

Then there's his solution for cost cutting,


"Pull a random yet round number out of your ear, let's say a 10% cut, just for argument's sake, and apply it across the board. No exceptions. Everything from the military to welfare to federal pensions to government salaries would take the same hit. Managers in the private sector have been handling budget cuts this way for years. They know that their subordinates are all professional liars, so there is no reliable information for making cuts in a more reasoned way. They also know that any project can get by with 10% less money if there is no alternative."



Having just struggled through ex-IBM and RJRNabisco CEO Lou Gerstner's detailed steps for re-engineering government, I have to say, I'm actually more inclined toward Adams' jocular version.

Why? Because, although Gerstner wrote in the vein of classic, thorough process re-engineering, it's actually unlikely that such a process will occur as written. At least in the federal government.

Truth is, Adams is right. Anything can generally sustain a 10% cut in expenses. And doing so will, according to Gerstner, avoid allowing special dispensations.

Adams closes his piece with these astute observations,

"The way our political system is designed, politicians are not free to float bad ideas. Doing so is a sure way to lose an election. Politicians aren't even free to support good ideas if they are too far from the norm. But as citizens, we're free to speculate all we want. And if some new and better idea gains popularity at the grassroots level, our elected leaders would then be able to embrace it. In other words, it's literally your job to fix the budget problem because your government isn't equipped to handle it. The ideas I've mentioned here are bad by design. But if a few million people start brainstorming their own ideas for solving the debt problem, someone might come up with a winner. And if that idea gains popular support on the Internet, it frees politicians to consider it. I have no problem imagining that something along those lines can happen, and the thought feels delightful."



Sadly, I think he's right. Politicians are rarely able to speak the unspeakable. Consider Paul Ryan's Roadmap. He's taken incredible flack for that.

It probably is the case, for now, that our spineless politicians can't really fix our spending mess, or tax more intelligently, without being led from the rear, by ordinary citizens.

An Objective Forensic View of the Sources of the 2007-08 Financial Crisis

The Wall Street Journal has recently published a spate of editorials and columns regarding the official FCIC final report. One of those editorials was by the authors of a minority report- Messrs. Thomas, Hennessey and Holtz-Eakin. Mr. Thomas is a former Republican congressman from California. Mr. Hennessey served as director of the White House National Economic Council in 2008. Mr. Holtz-Eakin is a former director of the Congressional Budget Office.

Here are some key passages from their Journal editorial synopsizing their report,


"Today, six members of the Financial Crisis Inquiry Commission—created by the last Congress to investigate the causes of the financial crisis—are releasing their final report. Although the three of us served on the commission, we were unable to support the majority's conclusions and have issued a dissenting statement.



In a November 2009 article, Brookings Institution economists Martin Baily and Douglas Elliott describe the three common narratives about the financial crisis. The first argues that the primary cause was government intervention in the housing market. This intervention, principally through Fannie Mae and Freddie Mac, inflated a housing bubble that triggered the crisis. This is the view expressed by one of our co-commissioners in a separate dissent.


The second narrative blames Wall Street and its influence in Washington. According to this narrative, greedy bankers knowingly manipulated the financial system and politicians in Washington to take advantage of homeowners and mortgage investors alike, intentionally jeopardizing the financial system while enjoying huge personal gains. That's the view of the six majority commissioners.


We subscribe to a third narrative—a messier story that emphasizes both global economic forces and failures in U.S. policy and supervision. Though our explanation of the crisis doesn't fit conveniently into the political order of Washington, we believe that it is far superior to the other two.


We recognize that the other two narratives have popular appeal: They each blame a clear entity, and thus outline a clear set of reform proposals. Had the government not supported housing subsidies (the first narrative) or had policy makers implemented more restrictive financial regulations (the second) there would have been no calamity.


Both of these views are incomplete and misleading. The existence of housing bubbles in a number of large countries, each with vastly different systems of housing finance, severely undercuts the thesis that the housing bubble was a phenomenon driven solely by the U.S. government. Likewise, the multitude of financial-firm failures, spanning varied organizational forms and differing regulatory regimes across the U.S. and Europe, makes it implausible that the crisis was the product of a small coterie of Wall Street bankers and their Washington bedfellows.


We believe the crisis was the product of 10 factors. Only when taken together can they offer a sufficient explanation of what happened:


Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to pay.


Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed?


Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.


These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. Some firms had large counterparty credit risk exposures, and the sudden and disorderly failure of one firm risked triggering losses elsewhere. We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing, and thus unconnected firms failed for the same reason and at roughly the same time.


A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10).


We agree with our colleagues that individuals across the financial sector pursued their self-interest first, sometimes to the detriment of borrowers, investors, taxpayers and even their own firms. We also agree that the mountain of government programs supporting the housing market produced distorted investment incentives, and that the government's implicit support of Fannie Mae and Freddie Mac was a ticking time bomb.


But it is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more, had fewer housing subsidies, and had more responsible bankers. Simple narratives like these ignore the global nature of this crisis, and promote a simplistic explanation of a complex problem. Though tempting politically, they will ultimately lead to mistaken policies."


The Journal's Holman Jenkins, Jr., a regular columnist, wrote his own piece commenting on the FCIC's various reports. He concurred with these three, and others, in decrying the commission's chairman's politically convenient tactic of simply blaming "Wall Street." But he also criticized Thomas, Hennessey and Holtz-Eakins for not concluding a simple, actionable source of the crisis.

To me, this minority explanation most closely approximates what is probably the truth. It addresses elements of the crisis that other explanations do not, i.e., its global nature, the different types of firms which failed, and the related, but not identical sources of mortgage-lending-sourced and -related factors which spread throughout the global financial system.

I think these authors stretched to arrive at the memorable round number of 10 factors. But, given a choice between competing explanations, I'd go for this one over all the others I've read.

Which leads to a conclusion I've expressed in prior posts on this topic. There were plenty of regulations and regulators already in existence to observe and act upon dangerous behaviors by various sector players. So rewriting regulations, adding more, or reshuffling regulators, won't likely change anything.

Moreover, consumer borrowers, investors, and various financial entities all behaved in ways which exacerbated the crisis, because that's human nature. Borrowers took sweet mortgage deals they couldn't likely afford under most scenarios. Lenders bet that they could pass their mortgage trash to investors before the stuff imploded. Too much greed and belief that creating and circulating mortgage-related assets of questionable value would not result in a systemic disaster.

In an earlier post, I likened it to too many people dumping toxic waste into a common sewer that drained into a drinking water supply. Like actually occurred in London before its modern sewer system, this will cause contagious diseases to spread.

So long as people are allowed to generate and circulate toxic waste with no regard for the systemic consequences, we'll see more of these crises in the future. If you don't believe regulators can effectively stop another crisis, then you should monitor the financial system for simple signs of building asset bubbles and make sure your assets are not in those instruments. Protection from broader equity market consequences and the progression of the shock to the real economy are more difficult effects from which to insulate or isolate oneself.

That appears to be an undiversifiable risk of modern financial systems and economies.

CNBC's Tyler Mathisen Exhibits His Naivete Of The Grocery Sector

CNBC seems to have developed a style of tossing co-anchors a bone in the form of their own subject-specific one-hour specials. They've done programs on airlines, McDonald's, Goldman Sachs, high-end prostitution, growing marijuana, the video porn industry, garbage and, now, Tyler Mathisen's piece on grocery stores.


I will admit at the outset that I have yet to see the entire hour-long program, but I did see most of the second half of it last night.
However, all last week, Mathisen related anecdotes from the program and introduced brief clips.


You don't really need to see the grocery documentary to grasp what struck me about it, or, more specifically, Mathisen. He seems to be incredulous about everything.


Over and over the guy keeps announcing into a camera, horrified, that these food chains are trying to make money! Oh, the shame! The danger! The horror!


He confides a secret- grocery managers place wine next to fish, hoping you'll buy both. Shocking!


Oh, the evils of this sector! Trying to make a profit by selling food to you. Knowing you must eat to live.


From the shape of mayonnaise bottles (svelte rather than bulbous) to the size of shopping carts (larger than in the past, so you won't think twice about buying more items), it's all just a trap to make money on your need to eat.


For all that, however, the average checkout ticket is remarkably small- under $20. Even in this era of food price inflation.


I have two marketing degrees, so I cut my business education teeth on reading marketing research articles about consumer buying behavior and was taught how attention to many details have a major effect on the profitability of grocery stores. They typically operate on sales margins of 1-2%. Not much room for mistakes. Turnover, of course, is, ideally, quite high, if a competitive ROI is to be earned.

What surprised me, though, was that Mathisen is either completely lacking in curiosity, or just really not at all intelligent. He looks to be at least in his 50s, yet it seems that he's gone his entire life unaware of how supermarkets use location and point-of-purchase displays to stimulate consumer buying. Since purchasing food is probably one of the two most basic recurring buying behaviors for most Americans that doesn't involve immediate total consumption- the other I'd guess being gasoline- grocery store marketing has been the subject of countless newspaper articles for decades.

How could Mathisen be so dense as to have learned nothing about the sector during his entire life? The look on his face as he apparently discovers for the first time that people respond to package design is over the top.

On the larger subject of the documentary, I'd have to say it was decidedly underwhelming. As I contended earlier in this piece, anyone who's middle-aged and remotely curious has, by now, learned some of the basics of supermarket marketing. Higher margin items around the outside of the store, frequently-purchased staples (milk, bread and juice) typically in the corner diagonally furthest from the main entrance, less-expensive, lower-margin items (processed foods) typically in the cluttered middle aisles. Shelf facings paradoxically reflect market share or fees paid to the grocer, and eye-level facings are choicest.

It's one thing to learn a lot about fairly hidden business sectors like growing marijuana, video pornography or ultra-high end prostitution/escort services. But you'd have to live under a rock to be surprised by much in Mathisen's supermarket piece.