The Forest Labs Mugging

It didn't get a lot of coverage, but HHS recently intimidated Forest Labs by refusing to do any more government business with the firm so long as CEO Howard Solomon remains in that position.

According to a Wall Street Journal editorial, neither the firm or the CEO did anything improper after a plea agreement was reached in September. According to the Journal, Forest Labs, as many firms do, settled the charges, rather than litigate, in order to save money. However, having that in her pocket, HHS Secretary Kathleen Sebelius then engaged in coercion.

The editorial notes that, at a minimum, Sebelius' action will drive up costs for everyone, as firms learn to litigate, rather than tacitly admit guilt, only to have that used against them in ways never intended nor imagined.

This is yet another example of how this administration continues to behave in ways which retard private investment and create more uncertainty than is warranted.

All the lose monetary policy in the world- and surely we've seen way too much already- won't overcome this sort of federal thuggery.

As the Journal's editorial noted, it's a federal version of Eliot Spitzer's unwarranted and, ultimately, unproven crusade against AIG's former CEO, Hank Greenberg. Ironically, many have opined that Spitzer's tantrum which led to Greenberg's coerced resignation was, in large part, responsible for AIG's later federal bailout, because Greenberg was absent to rein in excessive risk taking leading up to the financial sector crisis.

In this case, Sebelius continues to try to muzzle health care sector dissent from ObamaCare by any means.

The of unintended consequences remains unrepealed......

Starbucks, Yahoo & David Einhorn

Various business media carried stories yesterday concerning Starbucks and Yahoo. Since both were one-time selections in my equity portfolios, I was curious as to the dynamics accounting for positive, or negative, aspects of each company's current buzz.

For Starbucks, a Wall Street Journal story described the coffee roaster chain's steady stock price rise since the depths of the 2008-09 market lows, but cautioned that rising coffee bean prices could affect future profit growth.

Upon reviewing the company's five-year equity prices, relative to the S&P500, I saw that it has, indeed, reached new highs for the period.

I know I've written posts in recent years concerning the company's various strategies involving food, pruning store locations, and selling instant coffee.

But, for me, any solid, genuine rebirth of the company should be driven by revenue and profit growth. What I found when I checked my own numbers was somewhat surprising.

Annual revenue growth rates for Starbucks before the recession were in the 17-21% range. Rather robust, no pun intended. Since bottoming with the recession, the last two years' growth rates have been anemic by comparison- less than half a percent, and 8%. Profit growth rates are, of course, distorted by the recession and the chain's store closings. But pre-recession profit growth was in the 15-22% range, while subsequent growth has been negative, then uninterpretably high, thanks to such low profits in mid-2009. But from last year's first quarter to this year's, profits grew 38%. Hardly faltering.

Still, that said, two years is hardly sufficient time to declare Starbucks a consistently superior performer. Believe or not, my proprietary research has found that such performance is not rare by any means.

The question one has to ask, of course, is to what extent this is repeatable for another few years. Perhaps Starbucks' focus on overseas growth will allow it to regain an ability to earn consistently superior total returns, thanks to detatching its growth from the US economy and consumer, and going overseas for more revenue growth. With a softening US economy apparently ahead, Starbucks' domestic business could be headed for another flattening like that of the recent recession.

Then we turn to Yahoo, the other recent subject of much media attention. This time, it's not Carol Bartz in the spotlight, but hedge fund raider David Einhorn.

Einhorn has amassed a position in the company's equity and favorably commented on its China properties and recent 'shareholder-friendly' changes.

I'm sure remarks like that from Einhorn send chills through Bartz. Increased equity accumulation, requests for board seats, and a spinoff of Yahoo's Chinese interests can't be far behind, can they?

I suppose since Yahoo's equity price has been flat for so long, Einhorn is getting a bargain. Assuming, that is, his math on breakup values is correct, and he is able to effect that.

What I wonder, however, is how long his investors tend to wait for payoffs in these types of moves? Perhaps the patient, trusting nature of his investors gives Einhorn time to wait for Yahoo/Bartz to eventually come around to accept his type of bear hug.

But fellow hedge fund/company acquirer Eddie Lampert's Sears reported falling sales just the other day. His foray into retail hasn't had such a happy ending yet.

Of course, Einhorn probably doesn't want to run any part of Yahoo, so much as put pieces into play and hopefully make much, much more on the skyrocketing value of the Chinese properties than he will lose on the rest of Yahoo. In that regard, it's likely a safer play.

Assuming he can get the firm split up reasonably soon.

Then, again, I've argued that Bartz should just sell or liquidate the firm. This may be one of the last opportunities for a Yahoo CEO to create some value for shareholders from a position of any strength whatsoever. Maybe Einhorn's interest should be greeted with an accommodating attitude. It may be quite some time before another suitor with such manners comes calling.

John Cochrane On Inflation, Treasuries & US Spending

John Cochrane of the University of Chicago's Booth School wrote an editorial in Thursday's Wall Street Journal explaining why the US federal budget for 2025, seemingly so far off in the future, matters today.

Cochrane periodically pens editorials in the Journal, and they are always well-written and -reasoned. This one was no exception.

Early on, he associated current returns on a 30-year Treasury of 4.5% with a real 2% return, implying a long term inflation rate lower than 2.5%. With that rather risky bet as a background, he noted that such a belief of low inflation means,

"you have to bet they will solve the 2025 deficit. If you decide that the government will just keep kicking the deficit can down the road, sell your 30-year Treasuries. Sell fast, before everyone else does- because if we all try to sell, we just drive down the price and long-term interest rates rise."

Cochrane went on to chide the government for making the same mistake that Bear Stearns and Lehman did in 2008, i.e., fund excessively short-term for alleged reasons of lower cost, ignoring the risks of funding drying up when refinancing is undertaken. He warns,

"It is cheap precisely because it is dangerous."

So true, because the lender's view of short-term finance is that you aren't liable for the longer-term default. You only have to bet that the borrower, in this case the US, will manage to remain solvent for another few quarters or a year.

I won't go into Cochrane's comments on budget cuts, tax rates, etc., because they are more political in nature, and this is my business blog. However, he closes with these passages,

"The challenge is whether we will accept a vaguely rational tax system and a set of entitlements that protect the vulnerable without bankrupting the Treasury. It's not rocket science.

But we don't have much time. The bond market won't wait. The budget and debt problems will be much harder to solve if long-term interest rates spike, the dollar falls further, and inflation breaks out."

That last line caught my attention after I reread the piece following my reading of the weekend Journal's lead interview with Smithfield Foods CEO C. Larry Pope. Here are some of the passages from that piece,

"Mr. Pope is the chief executive officer of Smithfield Foods Inc., the world's largest pork processor and hog producer by volume. He doesn't mince words when it comes to rapidly rising food prices. The 56-year-old accountant by training has been in the business for more than three decades, and he warns that the higher costs may be here to stay.



It's also a business under enormous strain. Some "60 to 70% of the cost of raising a hog is tied up in the grains," Mr. Pope explains. "The major ingredient is corn, and the secondary ingredient is soybean meal." Over the last several years, "the cost of corn has gone from a base of $2.40 a bushel to today at $7.40 a bushel, nearly triple what it was just a few years ago." Which means every product that uses corn has risen, too—including everything from "cereal to soft drinks" and more.



Inflation: An overview of the prices consumers really pay .What triggered the upswing? In part: ethanol. President George W. Bush "came forward with—what do you call?—the edict that we were going to mandate 36 billion gallons of alternative fuels" by 2022, of which corn-based ethanol is "a substantial part." Companies that blend ethanol into fuel get a $5 billion annual tax credit, and there's a tariff to keep foreign producers out of the U.S. market. Now 40% of the corn crop is "directed to ethanol, which equals the amount that's going into livestock food," Mr. Pope calculates.


The rapidly depreciating dollar is also sparking inflation, although Mr. Pope says that's a "hard" topic for him to discuss, trying to be diplomatic. But he doesn't deny that money is cheap. Investment bankers are throwing cash at the firm—a turnaround from 2008, when money was scarce—even though Mr. Pope doesn't need it right now.


Now food price inflation is popping up across the country. A pound of sliced bacon costs $4.54 today versus $3.59 two years ago and $3.16 a decade ago, according to the Bureau of Labor Statistics. Ground beef is $2.72, up from $2.27 in 2009 and $1.74 in 2001. And it's not just Smithfield's products: "You eat eggs, you drink milk, you get a loaf of bread, and you get a pound of meat," he drawls. "Those are the four staples of what Americans eat in their diet. All of those are based on grains."
"Maybe to someone in the upper incomes it doesn't matter what the price of a pound of bacon is, or what the price of a ham, or the price of a pound of pork chops is," he says. "But for many of the customers we sell to, it really does matter." Workers can share cars when the price of oil rises, he quips, but "you can't share your food."


Mr. Pope also worries about the impact on farmers, who are leveraging up operations to afford the ever-rising price of land and fertilizer that has resulted from the increased corn demand. "There are record prices for livestock but farmers are exiting the business!" he exclaims. "Why? Farmers know they won't make money."

Weather is a factor, too. "We've had the luxury for the last three years of extremely good corn crops, with high yields and good growing conditions. We are just one bad weather event away from potentially $10 corn, which once again is another 50% increase in the input cost to our live production."


Food price inflation isn't a problem confined to America's shores. "This ethanol policy has impacted the world price of corn," Mr. Pope says. The Mexican, Canadian and European industries have "shrunk dramatically. . . . We have an unsustainable meat protein production industry," he says. "We're built on a platform of costs, on a policy that doesn't make any sense!"



Nor does the science. The ethanol industry would supply only 4% of the nation's annual energy needs even if it used 100% of the corn crop. The Environmental Protection Agency has found ethanol production has a neutral to negative impact on the environment. "The subsidy has been out there since the 1970s," Mr. Pope says. "If they can't make themselves into a viable economic model in 40 years, haven't we demonstrated that this is an industry that shouldn't exist?"


So what's the solution? First, Mr. Pope says, get rid of the ethanol subsidies and the tariff. "I am in competition with the government and the oil industry," he says. "It's not fair." Smithfield's economists estimate corn prices would fall by a dollar a bushel if ethanol blending wasn't subsidized. "Even the announcement that it is going away would see the price of corn go down, which would translate very quickly into reduced meat prices in the meat case," he says. Imagine what would happen if the mandate and tariff were eliminated, too.


He also advocates lifting regulatory and tax burdens on business. "I fundamentally don't understand the logic of corporate income taxes," he tells me. "If I have a 35% tax, all I do is take that 35% tax and I transfer it into the price of bacon and the price of pork chops."


Mr. Pope says the "losers" here "are the consumer, who's going to have to pay more for the product, and the livestock farmer who's going to have to buy high-priced grain that he can't afford because he's stretching his own lines of credit. The hog farmer . . . is in jeopardy of simply going out of business 'cause he doesn't have the cash liquidity to even pay for the corn to pay for the input to raise the hog. It's a dynamic that we can't sustain."



Coming on the heels of Bernanke's much-lauded first Fed press conference, Pope's remarks and Cochrane's editorial are quite sobering. Pope is quite explicit in painting the US ethanol policy as damaging to food prices with virtually no impact on oil importation, while ruinously effecting the price of corn as a global food supply mainstay. Then there's weather, which so few of us pay attention to for farming. Pope offers a rather cold-eyed assessment that we're almost certain to experience weather that could more than double current corn prices!

 I wrote about that Bernanke's remarks,

"Yes, Bernanke did attempt to claim that commodity prices have surged due to developing nation demand, as Cramer predicted. Not that it was such a hard call to make.



The trouble is, it's not just oil. I don't think US food demand is down as much as its oil consumption is from a few years ago. But we have broad grocery store inflation approximating 10%.


Bernanke's hopes for moderated inflation while Americans pay more for food and gasoline just aren't believable. Further, technically, inflation is a monetary phenomenon, and Helicopter Ben has been monetizing Treasury debt and presiding over a weakening dollar."


So there you have it. A rather candid triangle of Bernanke spinning the Fed's ultra-cheap dollar policy as having absolutely nothing to do with imported inflation, Cochrane warning that even a whiff of inflation makes today's 30-year Treasury yields razor thin, and Larry Pope, a pragmatic pork processor CEO forseeing years of high food price inflation.

Who do you believe? The government employee, the financial academic and/or the CEO? No more than two can be right. If either Cochrane or Pope are right, Bernanke can't be.

Tablets & Microsoft: More Pundits Finally Catch On To Microsoft's Decline

Looks like reality may finally be catching up to more observers' views of Microsoft after this quarter's results were announced last week.

An article in the Wall Street Journal's weekend edition even suggested Ballmer finally step down.

If I heard reports on Bloomberg and CNBC correctly, Apple, for the first time, out-earned Microsoft in a quarter. The nearby chart displays the price moves of Microsoft, Apple, and Google since inception, along with the S&P500 Index.

It's clear that Apple is the rarity among technology stocks, having been able to regain its meteoric trajectory. Ballmer's Microsoft, on the other hand, has never returned from the drubbing it took in the 2000 bubble-burst, while Gates still ran the show.

The Journal article, and other sources, all largely credit tablets, led by Apple's product, with hurting sales of Windows and Office, due to their dependency on PC platforms.

But I noticed this interesting passage in the Journal article,

"Spending 14% to 15% of revenues on research and development, which Microsoft has done for years, looks extravagant given Microsoft's new product history. Apple, for example, spends less than 3%....some of (Microsoft's) new products, like Windows Vista or the Zune music player, have been duds."

This reinforces something I've observed for years. It's not how much money is spent on research, per se, but how good the research is. Sounds tautological and obvious, but look at those numbers again while considering the new product torrent flowing from Apple since the introduction of the iPod.

Somehow, you get the feeling that Apple's environment is both more attractive and conducive to creative techies, while Microsoft probably resembles some sort of software factory. Its hardware releases have been few and poor, except for the Xbox. But that's something more like an Apple device- it isn't so totally restricted to computing.

However, it makes the point that with an activity like R&D, quality matters more than quantity.

Microsoft looks like it has finally had its growth crimped for good by technological evolution. Tablets are on the rise, while desktops are nearly gone, and laptops are suffering attrition from the tablets.

A product that didn't exist, what, two years ago, has now torn a hole in Microsoft's vaunted cash machines.

Of course, if the firm had split itself up into several homogeneous pieces several years ago, such as Windows, Online, Office, and Gaming, then tablets wouldn't have damaged all four. But, as it is, all must suffer as one equity.

Perhaps, now, even the staid portfolio managers who feel Microsoft is a safe tech stock will see that it is far more vulnerable and risky than they dared imagine.

Cornpone Buffett Evades CNBC's Questions

If you wanted more proof than I offered in this post that Warren Buffett is one shrewd public relations bastard, and not an open, forthcoming CEO, you need have looked no further than CNBC last Friday.

Becky Quick caught Buffett outside of a traditional Thursday evening bridge game with Fortune writer Carol Loomis. Quick tried to get Buffett to comment on the Berkshire board's published report on the Sokol-Buffett-Lubrizol scandal prior to his Saturday shareholder meeting remarks.

In true cornpone tradition, Buffett guffawed and aw-shucks-ed his way past Quick's questions and microphone. Meaning, in effect, that he totally manipulates CNBC and Quick for his own purposes. He grants them interviews and close-up face time when it suits his needs, then shuts them down when it is inconvenient.

Plus, he uses CNBC to air himself with his own faux-folksy demeanor, the better to use it every time he's on camera.

It's clearly an artifice he's created so that his every corporate move is seen not as that of a calculated, clever CEO, but your that of your wizened old good-natured Grandpa.

Yep, that's Warren. So deft that even the usually-savvy Wall Street Journal columnist Holman Jenkins, Jr., gave him a pass in this weekend's edition.

I nearly vomited from nausea as I listened to Buffett's chuckle-punctuated remarks to Quick as he brushed her off. There was nothing about the subject that would invite humor, so you knew that Buffett thought he ought to be in character because he was, well, on camera.

Imagine the same words and actions from another CEO, not laughing. It would be quite cold, off-putting and look like what it is- damage control.

But Buffett has so defanged Quick and CNBC that they happily play clips of him guffawing his way out of the awkward moment that night. And Quick, once a well-regard reporter for the Journal, simply smiles and refrains from any comments, .either on or off camera, which might jeopardize her prized access to Buffett- but always and only on his terms.

Shameful.

The NFL Union's Decertification- I'm Confused

Roger Goodell, Commissioner of the NFL, wrote a thought-provoking editorial in the Wall Street Journal last week. Coming on the heels of the court decision upholding the players' union's decertification, he enumerated a set of consequences which seem to contradict the original reason for that union.

With so much government machinery in place since the 1930s to facilitate unionization, it is rare, perhaps unprecedented, for a union to dissolve itself as a response to a breakdown of negotiations with management.

To an observer like me, reading Goodell's piece, it seems that all the conventional reasons for unionization were simply tossed out the window by the better players, to the detriment of the worse.

Among the items the Commissioner cited were: no more standardized pensions; no minimum salaries; no balancing of teams with respect to salary caps, probably resulting in some teams becoming permanent 'farm teams' for better ones; no standardized rules of pension eligibility.

I have regular discussions with a friend who is a New Jersey public school teacher. He is, of course, unionized. It's not a choice, if he wants to teach in that school system. He often claims he could or should make more money for what he does, and I point out that, were teaching not unionized, he well might. But, as it is, his union protects inept teachers, thus holding down his own compensation.

In the NFL players case, we see a union, as a maneuver in response to the owners' lockout, simply contradict decades of verbiage concerning labor solidarity. Instead, they have literally abandoned each player to his own fate.

Goodell correctly asked why there is even a draft this week? The union structure with which it is associated, due to the union-pressured rules governing club hiring of players, free agency, etc., has vanished. So, in theory, every club with an interest in the best first draft choice could, and should, pursue him.

It's going to be fascinating to see how professional football morphs as a result of this novel, unexpected union move.

But it sure does seem to contradict all the usual arguments unions give for their necessity.

Enjoying Bloomberg

After so many negative posts concerning business, economic and political coverage on CNBC, I was delighted to learn that I now receive Bloomberg from my cable provider.

So for the past few days, I've been liberally sampling the channel's offerings. What I've discovered is that Bloomberg has more energetic, objective and hard-hitting, unfiltered coverage of all three topics.

For example, on the day following Bernanke's press conference this week, there was a lot of criticism of his remarks by the anchors.

Similarly, there was quite a roasting of Buffett over the Lubrizol incident. He came under fire for essentially having been lax in probing Sokol's investment. Not something CNBC would ever dare suggest, since Becky Quick gets so many exclusive interview opportunities with Buffett.

Yet, from watching Bloomberg, it seems their own coverage of Berkshire's annual meeting and interviews with Munger and Buffett will be quite extensive.


Unlike CNBC, which has anchors who either ask questions so dumb and obvious that their heads must hurt, or voice no opinion at all, the Bloomberg on-air staff seem vibrant, well-informed and offer interesting commentary. It's an interesting mix, because the anchors seem better-informed and less hesitant to state facts. Their questions are sharper.

Additionally, the anchors and reporters did a fairly bare-knuckles story on Donald Trump, pointedly detailing each of his three corporate bankruptcy filings. They pulled no punches in declaring that he'd be torn to shreds by Republican opponents for his business missteps.

Perhaps the most notable difference from CNBC is Bloomberg's much more candid, objective coverage of the Fed and politics. I never saw a single sitting Fed official interviewed, so maybe it wasn't a coincidence that so much more of Bloomberg's coverage of that institution was negative and blunt regarding inflation and excessively easy monetary policy.

It really highlighted how much of a Fed and administration lapdog CNBC has become.

This morning I sampled some of the Bloomberg content opposite Squawkbox, and found it quite acceptable. And devoid of empty-headed commentary so often present on CNBC at that hour.

I expect that as time passes, I'll be viewing CNBC a lot less, and Bloomberg a lot more.

Boeing, The NLRB, Right-To-Work States & Bernanke

The NLRB's ruling against Boeing's production facilities in right-to-work South Carolina are clear evidence of government's schizophrenic attitudes toward business.

On one hand, we have Wednesday's remarks by Fed chairman Bernanke, at his press conference, that employment and economic growth are desirable objectives. His maintenance of ultra-low rates reflects his belief and hope that these, alone, will spur economic growth.

Then we have the NLRB's partisan, pro-union vote to curtail Boeing's opening of a second production line for its 787 Dreamliner in a state that doesn't require closed or union shops.

Lamar Alexander wrote a persuasive editorial just a week later explaining how, as governor, he was able to lure Nissan's plant to Tennessee, rather than neighboring Kentucky, because the former is a right-to-work state.

Alexander went further, arguing that the NLRB's Boeing decision will cause foreign and even domestic producers to see a risk that having operations in even one unionized state could subject them to capricious NLRB rulings forbidding them from doing business in any of the 23 states that are right-to-work.

Makes no sense, does it? Bernanke claiming to be holding rates low to facilitate greater economic activity and employment, while the NLRB rules to restrict employment to higher-wage states that will, consequently, employ fewer to build those 787s.

Easy money and government hand-wringing over slow employment growth are false when the same government acts to create such massive uncertainty for corporations, such as in the Boeing case. Decisions such as the NLRB's effectively abrogate corporate decisions on locating production facilities, which will necessarily affect their subsequent decisions concerning putting their companies at risk in the US to such deep and serious government intervention into their internal operations.

Perhaps Boeing's next move is to relocate the South Carolina lines in other countries.

Bernanke On Inflation & The Dollar

Who hasn't weighed in by now on Bernanke's press conference yesterday afternoon?

Contrary to CNBC blowhard Jim Cramer's predictions that Bernanke would silence all inflation critics, the reality was more like a Hail Mary pass. Yes, Bernanke did attempt to claim that commodity prices have surged due to developing nation demand, as Cramer predicted. Not that it was such a hard call to make.

The trouble is, it's not just oil. I don't think US food demand is down as much as its oil consumption is from a few years ago. But we have broad grocery store inflation approximating 10%.

Bernanke's hopes for moderated inflation while Americans pay more for food and gasoline just aren't believable. Further, technically, inflation is a monetary phenomenon, and Helicopter Ben has been monetizing Treasury debt and presiding over a weakening dollar.

I thought all the hoopla over how Ben would handle the press conference was overdone. He's a smart guy and has taught at Princeton. He's suredly used to intelligent questions. Trouble is, his answers weren't comforting for the US economic outlook on inflation, prices and dollar valuation.

But, on hearing that rates won't be rising anytime soon, the equities indices, of course, went wild.

Well, I guess it's one silver lining amidst some pretty unsettling comments from the guy who is supposed to defend the dollar and provide for stable, healthy monetary conditions in the US economy. Neither of which he's doing at present.

Subtle Political Bias On CNBC Yesterday Morning

Sometimes political bias seeps into business coverage so subtly that you don't really notice it at first.

This morning, on CNBC, this was on display front and center.

David Faber was co-anchoring with Becky Quick and Joe Kernen. Faber projects serious analytical credentials, which served to further blur what was about to take place. The guy he replaced for the morning has no such credentials, having apparently been selected to provide ethnic balance on the morning program.

Thus, when House GOP Majority Leader Eric Cantor appeared for an extensive discussion regarding the upcoming action on the nation's debt limit, the biased stage was set.

I won't give a blow by blow account of the discussion. You can probably correctly guess that Cantor defended the need to cut spending while raising the debt limit.

Faber, who leans politically fairly far left, judging by his on-air comments over a decade, chided Cantor for potentially creating a monetary disaster by causing the federal government to default on its debt.

For the record, despite what so many pundits, and Tim Geithner, allege, that's not the only outcome of a failure to raise the debt limit. The House can easily pass a bill to direct the Treasury to prioritize spending in order to pay interest, retire maturing debt, etc., so that internal spending is left unfunded.

What was so subtle, however, was how the network employed Faber to give a patina of credible analysis to what is largely a political topic.

Cantor gave as good as he got, being the intelligent and poised guy that he is. But what struck me as I listened was how, given Faber's line of attack, was his clear desire to put Cantor on the defensive, and completely ignore the excessive spending in Washington.

How differently another network could have handled the same appearance. Imagine a co-anchor asking Cantor if it were wise to pass the debt limit increase without any corresponding spending cuts to at least try to rein in federal fiscal excess?

The debate ran to issues like tax reform, on which Faber used the magic liberal phrase about wealthy people and corporations paying "their fair share." In this instance, Faber's analytical credibility was perhaps most misused, because his comments displayed a total misunderstanding of the difference between tax rates for and total taxes paid by various income strata. But, to hear Faber tell it, right along Democratic party lines, Cantor was espousing cutting spending on the poor, giving tax relief to the wealthy, while flirting with US government default.

Later, Texas Congressman Ron Paul made a guest appearance to discuss his announcement of an exploratory committee for a presidential candidacy, as well as his views on Bernanke's afternoon press conference.

In Paul's case, the subtle bias was to play a sort of video rope-a-dope. Paul is very serious and well-informed, being the current chair of the sub-committee of the House overseeing the Fed. When Paul lit into the Fed's opaqueness, failure to maintain the dollar's value, and a host of other mistakes, the co-anchors were largely mute. Nobody tried to debate Paul's allegations, nor make him out to be a wing nut. Instead, it was like Paul was declaiming into an empty room.

Sometimes I think CNBC is the anti-business network. This morning was a good example of it.

Derivatives Clearinghouses

This past weekend edition of the Wall Street Journal featured a lead staff editorial commenting on mandates for derivatives clearinghouses contained in Dodd-Frank.

The editorial made much of the many warnings now being uttered by people who either voted for the bill or were silent when their comments would have mattered. Specifically, the piece cites Ben Bernanke's reference to Pudd'nhead Wilson and the matter of 'watching that basket' very closely.

Perhaps I'm in the minority, but I believe that well-run clearinghouses or exchanges for derivatives would be an improvement over what went before.

Remember how Lehman's demise triggered concerns over daisy-chains of various derivatives? How AIG was seized because of fears of too many little-understood connections among its financial products unit's many credit default swap positions?

Back then, the fear was unknown linkages among many derivatives, some of which may have even been sold by parties which could not actually fulfill their obligations under the agreement.

Shouldn't we then welcome having well-capitalized, monitored exchanges where parties have posted sequestered collateral for their derivatives? Where sellers are vetted for their financial capability to perform? Or at least are clearly analyzed by counterparties? Where rules are clear regarding what happens when a counterparty fails to perform?

I'd rather see a separate, well-run exchange for derivatives than rely on the same type of inept regulators who allowed the last financial crisis to occur. Mind you, nobody has either proven or determined that derivatives, per se, brought about the collapse. But because of derivatives risks at firms like Lehman and AIG, which were affected by the mortgage market collapse, regulators and legislators pulled those instruments into the maelstrom when new, excessive, poorly-understood regulations were written and passed.

Of course, if we truly expect and want federal bailouts for any large financial entities, then it may be moot to observe that exchanges can fail, too.

But, absent that, I would expect a standalone exchange for derivatives to provide much more clarity regarding their risks to firms and counterparties, going forward.

More Bad Politics From Rattner On CNBC

CNBC seems to have a pretty bare cupboard of guests these days. This morning they again featured the truth-challenged Steve Rattner. Ethically-challenged, too, it appears.

This morning, the network wanted someone to do a beat-down on Paul Ryan's budget proposals. So they logically turned to a former Obama administration czar. One who never saw government power he wasn't happy to use to coerce investors, rather than adhere to Constitutionally-enshrined bankruptcy processes.

What's rather strange is that the Squawkbox producers would have Rattner, who doesn't have a long career background in federal budgetary matters, appear solely to comment on Ryan's budget.

Rattner duitfully trashed the House GOP member's proposals, solemnly declaring that Americans weren't ready for, didn't want, Medicare to become a voucher program. That they want their promised benefits as is.

As I discussed in today's post on my companion political blog, it's not so clear-cut. Having given Americans an unsustainable, unaffordable benefit for nearly 50 years, Democrats now cry foul when Republicans- or anyone, for that matter, including independents, Tea Partiers, whomever- point out that the choice being framed between realization of this unsustainability and unaffordability or bankrupting the country, is an inconvenient truth.

Despite Rattner's claim to political neutrality, by no longer making campaign contributions, his very position on Medicare paints him as one of those who chooses to be blind to reality.

Of course, his next statements were predictable. Taxes have to rise. No question- in order to fulfill unwise promises made by dim-witted politicians in the late 1960s, in an era of feel-good American economic hegemony, the rich must be sheared.

Too bad an ostensible business network has to engage in such partisan politics, and attempt to disguise such antics as objective punditry.

Indexing- What's In A Name?

In the Wall Street Journal's weekend edition of two weeks ago, Matt Phillips wrote a nice piece describing fund manager Joel Greenblatt's recently-initiated "value-weighted indexing" funds.

I've read the book Greenblatt, founder of Gotham Capital, wrote for the Little Book of Investing series. Frankly, I like Vanguard founder John Bogle's volume better. Perhaps because, as the developer and manager of a quantitative equity portfolio strategy, I'm biased. If I weren't using my own approach, I'd generally adhere to Bogle's. Greenblatt is a value style investor who relies on fundamentals which my proprietary research found to be relatively weak. It remains challenging for me to distinguish between a "value" equity and, well, a poorly-performing equity.

But, to each his own.

However, Phillips' piece described Greenblatt's latest creations. You can read the article for details. Basically, Greenblatt employs what he calls "value weighting," wherein the funds weight holdings based on value-oriented scores.

With all the buzz around broadly-based ETFs and concerns over expensive, actively-managed funds, one wonders whether Greenblatt hasn't just produced a sort of 'fighting brand' category of funds with an index label.

But, as Phillips quoted one observer,

"This is an actively managed quant fund. There's no indexing involved. Just beause you use math doesn't make you and indexer."

So true.

Perhaps Greenblatt is simply becoming a more astute marketer, while following an old brokerage habit- create new products when the older ones become too efficient, i.e., have declining margins. Or, in this case, perhaps become less fashionable as expensive actively-managed funds.

On Research Design: Coffee Loyalty

Just about two weeks ago, the Wall Street Journal published an article by Julie Jargon (is that a cool reporter's name, or what?) discussing the results of coffee drinker loyalty research from CustomersDNA.

I kept the article because of the counter intuitive results presented in the piece, i.e., McDonalds had the highest scores on customer loyalty among the three major US chains- Starbucks, Dunkin' Donuts and the golden arches.

With my background in marketing research stretching back to my undergraduate studies in marketing, I was perplexed that an independent firm which, apparently, conducted objective research, would reach such surprising conclusions.

What would have to be true for that conclusion to make sense?

After all, nearly everyone I know who frequents Starbucks swears by it. Same for Dunkin' Donuts. My own experience at McDonalds, except for outlets located at major highway rest stops, is service so poor that their espresso-based coffees are simply not memorable.

That's when I reread the article for the second time and realized what was wrong.

CustomersDNA only surveyed patrons about coffee. Any and all coffee.

Well, for Christ' sake, McDonalds has been selling coffee for longer than Starbucks has been in business. That's not the point.

In a paragraph located near the end of her story, Ms. Jargon discussed pricing for basic, brewed coffee at the three chains, repeating the contentions of the researchers that McD's lower prices were the prime cause of their superior loyalty measures among customers.

Having realized this flaw in the study, the whole piece became of basically no importance to me. Nor, I would suspect, anyone else actually interested in how the three chains stack up competitively in espresso and non-coffee beverages.

What I can't figure out is why a research firm wouldn't understand this point and design their surveys and methodologies accordingly. After all, McDonalds entered the espresso-based coffee segment recently because of its higher margins and price points. Same with DD.

And, if you've been to Starbucks or Dunkin' Donuts very often, you would, like me, probably see very few basic, brewed coffee orders. Who cares about that segment? Sure, Starbucks introduced Via, but that's primarily for the home market.

It goes back to something my mentor at Penn's business school's marketing department, Jerry Wind, taught me so long ago. You should be able to specify your detailed research plan, down to the output tables and hypotheses tested, before going to the field with your research. But if you have failed to design the instrument and sampling plan correctly, you're already screwed.

In this case, hard as it is for me to believe, apparently CustomersDNA didn't bother to distinguish between espresso and brewed coffees.

Or did they, but one has to pay for those results?

Too bad if it's the latter, because as Jargon's article reads, and this isn't her fault, the results are, well, boring enough to make you need a cup of coffee to stay awake.

Yahoo- Just Sell It Already!

In this last post about Yahoo, written in February, I suggested,

"Even the typically-competent Bartz can't seem to do more than get a few dollars for using Bing and doing an ad deal with Microsoft. But Yahoo isn't lighting the world on fire with free content anymore, and missed its chance, long ago, to be a profitable, earlier version of Facebook.



To have seen its stock price fall from over $100 to under $18 in 11 years makes me wonder just who still owns this turkey?


Where to now? With no clear mission for the firm going forward, what would a current investor do? I'd say sell. The risks of further erosion are probably at least as great, if not moreso, than Bartz magically getting a higher value now for selling the firm to someone who would, by some stretch, need whatever it is of value that Yahoo still offers.


There seems to be no solo act for Bartz at Yahoo which will do shareholders any good. Continuing to operate the firm will probably just result in a declining share price. Shutting it down would destroy value. I suppose, at some price above zero, some other tech firm will see some kind of value in the firm's assets, if only its internet traffic.


It's truly been sad watching the firm manage to evade natural exit strategies over the past few years, now to languish behind even the moribund Microsoft, watching upstart Facebook move on without even noticing Yahoo in the same general product/market space."
 
With its earnings report once again portraying decline, it's clear even Carol Bartz can't change the end of this story. Revenues were down 24%, while profit fell 28%, as Google had another growth quarter.
 
The Wall Street Journal article on Yahoo's quarterly results contained lots of excuses by Bartz, and various non-financial measures claiming to herald a brighter future.
 
Look at that chart of Yahoo's price since going public, compared to the S&P500 Index. The company's price is down since 2000, while the S&P was only flat. Even in the past two years, Bartz hasn't been able to lift the firm's fortunes.
 
I still can't figure out who would continue to hold this. Isn't it time for the CEO and board of Yahoo to stop wasting shareholder capital and sell the firm?

It's About Time!

Wednesday's Wall Street Journal contained an article disclosing that finally, after nearly ten years as inept CEO of GE, Jeff Immelt's incentive compensation is being tied to GE's performance relative to the S&P500.

In this post from early 2009, I discussed Immelt's compensation,

"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...."
 
I've argued for years that CEOs such as Immelt should have incentive compensation tied to beating the S&P500 total return over several trailing years.
 
Thus, even the newly-announced $7.4MM of GE options being conditionally granted to Immelt are, again, favoring the CEO to the detriment of the firm's long-victimized shareholders.
 
For instance, the Wall Street Journal reported,
 
"Under the new terms, 50% of the options will vest only if the company pulls in cumulative industrial cash flow from operating activities of at least $55 billion between the start of 2011 and the end of 2014.
 
The other half will vest only if GE's total shareholder return is equal to or better than that of the S&P500 over the same period."
 
Hilariously, the Journal stated,
 
"Mr. Immelt, who saw GE through a rocky patch during the recession, received his first bonus in three years in 2010."
 

Rocky patch? Immelt's firm had to be bailed out by the federal govenment, for God's sake! Look at the nearby chart comparing GE and the S&P500 Index for the past five years. Even from 2007, GE has underperformed the index.
 
How can the firm's board justify giving this failing CEO anything over his base salary for such poor performance?
 
The new options contain overly-generous terms, especially for a CEO who has, as you can read in this post from 2006,
 
"So that makes a total of roughly $23MM in cash Immelt has now managed to loot from his employer since late 2001, when he began his reign as a failing CEO at GE. If the firm meets certain (fairly low-ball, as I recall from earlier articles) revenue, earnings and cash generation targets, and meets some stock price performance relative to the S&P, Immelt will receive as much as $18.6MM in 2007."
 
Why have a cash flow-oriented bonus condition? All Immelt needs do for that is make some acquisitions which boost this measure. And only equalling the S&P's return is not sufficient for a single company's CEO to be rewarded. The S&P is a broadly-diversified index, while GE is just one firm, leading to more risk for holding it rather than an index. At a minimum, Immelt's total return hurdle ought to be risk-adjusted for the variance of its total return. An easy way to do this is to set an average total return divided the standard deviation of that return over the time period equal to or better than that of the S&P for the same period.
 
Once again, we see that the GE board is behaving like a bunch of shareholder-looting cronies. Even when they pretend to make Immelt's incentive compensation conditional, it's on terms which are too forgiving. For such a large industrial firm, you'd think they could manage some theoretically-sound terms which reflect a basic understanding of finance.

Bad Financial Thinking On CNBC This Morning

There are really only two free choices for business television channels on cable of which I am aware- CNBC and Bloomberg. Fox Business News seems to be among a premium channel group on my service, or simply unavailable. After this morning's fiasco on CNBC, I'm viewing Bloomberg as potential alternate or main viewing choice in the morning.

With Becky Quick and Joe Kernen away for several days, the morning CNBC on-air team was basically non-existent, as far as business acumen and understanding goes. Carlos Whathisname is on Squawkbox for minority color. He asks softball questions, looks incredulous at every answer, and tries hard to swing most conversations to liberal viewpoints.

To fill in for the missing persons, the networks clueless economics reporter, Steve Liesman, and retired mutual fund manager Gary Kaminsky were pinch hitting. I had some comments on a recent post chiding me for criticizing Liesman as being a moron and an idiot. What I'm about to relate should satisfy that reader, Lisa, and others, that my choice of terms regarding Liesman was neither accidental nor wrong.

This morning's discussion on CNBC disappointingly returned, over and over, to a 'debate' between Kaminsky and Liesman regarding companies which both grow income, buy back shares, and pay healthy and/or increasing dividends.

Kaminsky was a well-regarded fund manager at Neuberger Berman for several decades, and, we learned a few months ago, did not come to the field by accident. His father was also a fund manager, which probably helps explain the son's ability to vault into a large-scale management capacity. Kaminsky co-hosts a noontime program with David Faber, on which he largely makes sensible comments. Though he's not immune to occasionally narrow-minded pursuits of questionable points. Unlike more general business analysts, fund managers tend to adopt a style which can limit their ability to consider alternative viewpoints.

Thus, Kaminsky lauded Travelers posting good earnings, buying back its shares, and paying dividends. The typically wrong-headed Liesman began bleating that if he invested in a firm, he wouldn't want his money back. A fair paraphrasing of Liesman's rant is,

'When I invest in a company, I'm giving my money to the CEO. I trust him. I want him to invest that money, not give it back to me.'

After perhaps the third round of pointless discussion on this point, which both parties mentioned they were continuing off-camera on commercial breaks, Kaminsky inadvertently displayed his ignorance, saying to Liesman,

'You're an economist,' rather than having a business background.

But Liesman is not an economist. He's a journalist who likes to believe and pretend he is an economist. With former Fed board member Rick Mishkin as a guest host this morning, Liesman tried to shout down and over the Columbia professor during another discussion. Liesman literally would not shut up, obviously believing his uneducated, ill-informed views were more important than those of a former Fed senior official.

Kaminsky and the CNBC economics reporter must have wasted about ten minutes of air time on a conversation that wouldn't merit mention in most undergraduate finance courses.

For the record, empirically, Kaminsky, while not completely correct, is much closer to the truth than Liesman.

If one wishes to own equities with consistently superior total returns for at least a year, income growth fueled by revenue growth is desirable. Whether that is dividended or not is not too material if the company is growing. Share buy backs, however, tend not to be associated with long term equity market outperformance.

Kaminsky's beliefs notwithstanding, a company that shrinks its capital base isn't a good candidate for long term profitable growth.

As an investor, you don't want your investments misspent by corporations once they've saturated their primary product/markets. Thus, dividend growth and/or share buy backs signal the beginning of the end of consistent, reliable profitable growth.

But Liesman is wrong to decry dividends, per se. When I have owned a consistently-superior performing equity that paid dividends, I viewed those cash payments as providing more funds for subsequent portfolio expansion. Anyone so stupid as to think that dividends from a growing company constitute an unwanted problem has no business being on a business-oriented cable news network in the first place.

After listening to this pointless discussion on CNBC for far too long this morning, I thought about how badly managed the morning lineup is, that they can't manage to sustain the loss of two anchors without degenerating into meaningless babble.

Bloomberg isn't sounding so bad right now....I may miss Rick Santelli......

Regarding Intel's Quarterly Results & Investment Strategy

Intel's earnings report after the market's close on Tuesday evidently surprised analysts. As I write this before Wednesday's market open, the firm's equity price has risen some 7% in after-hours trading.

Intel CEO Paul Otellini hurried onto CNBC's morning program to stump for his firm and its future prospects. No real surprise there.

Way back in 1997, when I bought my first live portfolio based upon my equity strategy, Intel was one of the selections. That was the only time it was a holding.

The first chart compares Intel's equity price to the S&P500 Index's for the past five years. For all the risk you'd assume in holding the single issue, Intel, you would have had a return virtually identical to that of the broadly-diversified index.

But what about Intel's fundamental performance? After all, Otellini was crowing about their revenue growth.

So I reviewed the firm's relative revenue growth for the past five years from the analysis my quantitative selection process performs each month. As I expected, on a multi-year basis, Intel's revenue growth rates have been either inconsistent, or below-average during the past several years. It's never been above-average on anything approaching a long term basis.

This means that, to capture gains in Intel's share price, which are inconsistent, you have to be a market-timer. That's a very risky strategy, as most professional investors will tell you.

If, instead, you prefer to hold Intel for the long term, well, look at the second chart comparing it's price with the S&P500 since the mid-1980s. Even as a meteoric growth issue back in the early years of the timeframe, it was not a smoothly-rising curve. Then the late-1990s technology sector bubble broke the back of the stock's growth character.

Despite what some pundit on CNBC blustered about Intel having revenue growth that now makes it, well, a growth stock....it's not. A quarter here, a quarter there...does not a growth issue make.

Has Intel suddenly recaptured the magic of its old, 30 years ago self? Doubtful. Last time I checked, they hadn't entered a radically new business. Yes, they bought McAfee. But it's not like they've suddenly entered online social networking or online couponing. Neither of which would probably help them at this point.

No, I think all we're seeing is an unexpectedly strong quarter of revenue growth for Intel. If anything, its being unexpected is probably a greater testament to shoddy sell-side analysis than anything else.

But unless you believe Intel has magically entered a new era with its same old business mix, you'd probably be better-advised to observe the equity's performance from the sidelines, rather than risk your own capital on the rollercoaster that is Intel's equity over time.

The Magic of Blogging, Search & Social Networking

My blog is one of at least thousands which presume to observe and comment on business matters. Its followers number less than 10, and I don't believe it's permanently linked to any large, famous blogs.


On an average day, it probably draws 50-70 readers. Most, I know from Sitemeter, find a specific post due to a search. Sometimes a post about a company is linked on some major stock information site and draws above-average traffic.


Occasionally, one of my posts, such as a prescient one about unfundable municipal pensions, over a year ago, become a lightning rod and draw a few hundred visitors. That post was linked on the main page of some national government workers union's website, accounting for the stampeded of readers eager to learn, before the topic was so mainstream, that, and why, they may never receive their pensions.


Yesterday, however, saw a very new, yet commonplace combination of new media occurrences drive readership of my blog over the 1,000 mark for the first time. It took a little digging into Sitemeter's referral data to learn why.


Apparently, sometime yesterday afternoon, Dave Ramsey twittered about this post I wrote last year, prior to the elections last year. I know of Ramsey from his weekly appearances on Neil Cavuto's Fox News program at 4PM, but I have never listened to his radio program.

What surprises me is that my post is over six months old. It was written about a piece that Art Laffer wrote in the Wall Street Journal concerning Bill Gates, Sr.'s funding of a campaign to initiate a personal income tax in Washington state. Laffer presented some empirical work which clearly demonstrated that US states with higher tax rates experienced less economic growth than states with lower rates. No real surprise there, but some people refuse to acknowledge natural human economic behavior.

So, perhaps since it's tax season, or because Congressional Democrats and our president want to raise tax rates again, Ramsey somehow found my post and twittered Laffer's conclusion, with a URL for my post. I'm sure Ramsey has a ton of followers- he's a very popular radio personality. Next thing I know, by mid-evening yesterday, I had over 300 visitors, mostly from Twitter or iPhone apps.

Clearly, mobile and social networking access, combined with Twitter, catapulted my brief, derivative, dated blog post into brief popularity. There are still visitors coming on today based on the same twitter link. Apparently Facebook is also involved, as quite a few referring URLs are that site's exit page. Perhaps Ramsey's Facebook page has his Twitter link.

In any case, it's a testament to the unpredictability of the effect of current communications technologies.

Who would have guessed that, on some random day, a well-known radio personality's brief comment about the effect of state tax rates, as discovered by Art Laffer, in a major daily paper without free access to archived material, then observed by me, in a public venue, months ago, would result in a torrent of mobile traffic to my blog?

If you need some evidence of why we don't want excessive FCC regulation, this anecdote is a good one.

Zipcar's Prospects

The Wall Street Journal's Heard On The Street column in last weekend's edition dealt with the recently-public Zipcar. What struck me was the poor quality of Rolfe Winkler's thought process by comparing Zipcar to Netflix.

According to Winkler, Zipcar has decent profitability in what he characterizes as four mature markets for the firm- Boston, New York, San Francisco and Washington. He then observes that Hertz' Connect service is already challenging Zipcar, and provides a one-way rental and drop off that the former does not.

So far, so good. Having been aware of Zipcar for a few years, it always impressed me as the sort of business model which can prosper in niches, but has little or no competitive advantage to protect itself from larger rental car companies, should its growth see it become a threat to the latter.

Winkler suggested that Zipcar "can pull a Netflix." Which is odd, considering the radically different nature of the businesses. Netflix has been around for a long time, originally offering convenience and fixed pricing over Blockbuster's legendary stock outages. Aside from some warehouses and disc inventories, Netflix wasn't a particularly capital-intensive business.

Zipcar, on the other hand, rents cars. Cars that must be, I presume, cleaned, maintained, and frequently inspected for possible repairs. Further, the risks of damage to cars would seem to be financially larger and probably more frequent than the risks of damages to DVDs.

So I don't really see much of a similarity in the two business models at all. The fact that Blockbuster failed to effectively copy Netflix's approach had, I believe, less to do with, as Winkler contends, Netflix being a "sexier rival," and much more to do with Blockbuster's already declining fortunes and poor reputation for service. Because Netflix easily became a national brand and service without locations, while Blockbuster tended to be associated with local neighborhoods, it was tough for the latter to provide a compelling value proposition when it finally got around to emulating the former's business model.

Zipcar reminds me, instead, of Minnetonka's original Softsoap product in the 1980s. While it offered a valuable new feature for handsoap, the company's product was never likely to become a market share leader for long without provoking lethal competitive response from the major soap makers. Another example might be People's Express, which also competed in a capital-intensive business. It grew profitably until it saturated smaller markets and routes. When it moved into larger markets and created route- and seat-management challenges which outstripped its primitive systems, it quickly lost momentum and money. Bankruptcy followed.

I suspect Zipcar will have similar segmentation saturation issues, even as it has identified "100 metro areas and and hundreds of colleges." Without knowing the exact numbers, I don't believe the major rental car companies will cede that much share before moving to blunt Zipcar's growth with similar services, as Hertz evidently has already begun to do.

Myopia From Dinallo & Geithner On CNBC This Morning

Sometimes you can understand why business people have such fear of government. This morning's incredibly myopic comments and narrow minded recollection of history by former New York Insurance Commissioner Eric Dinallo and Treasury Secretary Tim Geithner gave clear examples of grounds for this fear.

First Dinallo crowed about how effective his and Geithner's illegal taking of AIG by declaring it insolvent had been. It was truly scary to listen to Dinallo self-absorbed remarks, never allowing for the possibility, as several observers described at the time, that AIG's troubled financial products unit could have been separated from the solvent insurance operations, and separately taken through a Chapter 11 process, with all derivatives creditors taking proportional haircuts to resolve the unit's problems.

To hear Dinallo tell it, he crafted the best of all possible solutions, irrespective of the capricious nature of the seizing, or the general sense that, due to former NY AG Eliot Spitzer's animus toward AIG's former CEO, Hank Greenberg, the giant insurer was in for some truly 'special' treatment at the hands of New York and the feds.

Sadly, the co-anchors on the set let Dinallo spin his fairy tale of the soundness of the AIG seizure without a single probing question.

Then Tim Geithner appeared from Washington to easily hit some softball questions from the networks  hapless senior economic reporter. Once again, the government official was allowed to go on and on without any interruptions for probing questions or serious challenges to his fairy tale.

In Geithner's case, the fairy tale is that yesterday's S&P warning on US debt is misplaced. That we haven't created too much debt which will be bequeathed to our children, and that extra spending on infrastructure and education is perfectly fine. Yes, the debt needs to be reduced, but certainly not at the cost of reining in special spending. Make sense? Not to me, either.

Both Dinallo's and Geithner's nearly robotic, surreal views that ignore reality ought to put fear into business people throughout  the US. This is the attitude that causes investment to remain on the sidelines and hiring to be delayed. With government officials like these two inventing their own reality to justify power grabs and fiscal imprudence, there's no telling what overreach could come next from Washington or your own state capital.

At this point, in the interest of truth in packaging, CNBC should just relabel itself as a government public relations agency.

A Short Talks His Book On CNBC

It isn't always portfolio managers with long positions who take the opportunity to cause a stampede in their favor by talking their book on CNBC.

Last week, Jim Chanos appeared on the network's morning program to discuss a range of topics. Asked for information on his current positions, he concisely explained why his fund is short First Solar Energy (FSLR).


Chanos cited the departure of several senior managers in the past year and the CEO and other senior officers unloaded much of their own positions in the company's equity, as well. Taken together, he said, these were very bad signs..


The stock was down about 2.3% by mid-afternoon.

As it happens, FSLR was a minor-weighted selection in one of my recent portfolios. At the time, I thought it interesting that an alternative energy issue had exhibited sufficiently good and lengthy performance to be selected by my quantitative process. But it only appeared in one portfolio, and, then, with a relatively light weight.

Every equity manager, every selection process, makes mistakes, and this would evidently be one in mine. The good news is that the solo appearance of FSLR suggests that my process is rigorous enough to limit such damage. A similar phenomenon occurred last year with the inclusion of McAfee and Intuitive Surgical, neither of which proved to be a stellar performer. Fortunately, Priceline was included heavily in a series of portfolios, and it was stellar selection.

Thus proving that portfolio management is, in the end, about the collective performance of the selections, not how much was lost by the worst one, or gained by the best.

Investing In US Money Center Banks- The Recent Track Record

It's earnings season, and already two of the nation's largest money center banks- Chase and BofA- have reported disappointing results.

It's also just a little over two years since the post-financial crisis market bottom of March 2009.

So how have the largest US commercial banks- Chase, Citi, BofA, Wells Fargo- performed, relative to the broad US equity market, as represented by the S&P500 Index?

Not so well. The first three have underperformed the index on an absolute basis. Wells has done a bit better, but not sufficiently so for the relative risk of a single equity to the broader index.

I had lunch with a long time business colleague on Tuesday of last week. Neither Chase nor BofA had, at that point, reported earnings. Still, we laughed at how many pundits had recommended bank stocks over the past few years. While I can't cite specific dates, I'm pretty sure both Jim Cramer and Dick Bove have gushed over Chase or Citi in the past two years.

Despite the many years which have passed since my friend and I both worked at Chase, the basic character of each of the nation's largest banks has not changed materially.

Citigroup's risky business strategies should have resulted in its dissolution, except for the general financial crisis in which it luckily happened to occur. Once upon a time, long ago, I suggested to colleagues that the way for Chase to have been better-valued was for the whole sector to become as mediocre as our bank was. Citi took the idea to new lows, and survived.

BofA continues to labor, as the nation's bank with the largest consumer business, under the burden of being more or less tied to that sector's fortunes. With high unemployment, stagnant wages and rising prices for ordinary consumer purchases, being the country's largest consumer banker is no picnic, as last week's BofA earnings report proved.

Chase remains the sluggish, less-well-defined bank which just never seems to either soar, or crash. As my friend reminded me, it was Chase's genetic inability to do anything quickly which allowed Jamie Dimon to avoid the worst of the mortgage-related disasters and therefore be relatively better positioned to scoop up some failed large commercial banks, such as Washington Mutual, as well as a government-insured bid to takeover failing Bear Stearns.

Wells Fargo continues to be a bit nimbler and better-managed than its eastern counterparts, but its attempts to bulk up have ensnared it in continuing mortgage problems. By swallowing Wachovia, which had purchased California's Golden West S&L, Wells inadvertently exposed itself to more losses and trouble than it probably expected.

It's been years since a commercial bank was selected by for one of my equity portfolios, and the appearances, even then, were few and brief.

I can't see anyone who seeks to consistently outperform the S&P500 using large US commercial banks to do so- now, or anytime soon.