Actually, I don't know David Tepper. Never met the man, nor do I expect to.
This post is about networking. And how it isn't all it's cracked up to be. And sometimes can be downright exasperating, though, at the same time, rather humorous.
Take, for example, a recent so-called networking experience I endured over a period of a month or so.
It all began when a well-intentioned friend contacted one of his friends who allegedly has ties to the hedge fund community. One thing led to another, and the alleged contact called me, leaving a message basically instructing me to call him back and show appropriate gratitude for his attention because he knows David Tepper. In fact, he has known him for years!
David Tepper is, of course, the legendary hedge fund titan, billionaire and philanthropist. I don't know David Tepper, although I live within a stone's throw of the offices of his firm, Appaloosa. Of course, anyone in the business of managing equities would love to be allocated even morsels of Apaloosa's funds under management. The closest I've been to Tepper is, like thousands of other people, seeing him once or twice on CNBC.
Within a few days, my friend and I had a conversation about the phone message. He informed me that his contact told him I wasn't showing appropriate homage, so maybe he wasn't going to do me a favor by introducing me to David Tepper.
My friend, who is well-intentioned but naive, works in a white collar union job in the public sector. So his idea of networking was that someone does a favor for a favor-seeker. It took a few conversations to explain to him that real networking is quite different. It's not about favor-seeking, but, rather, someone with a business deliverable of real, demonstrated value being connected, via someone else's network, to third parties who may have use for, and be in a position to benefit from, the first person's valuable business deliverables.
My friend repeated this to his contact, explaining that it wasn't a favor to me, but, if anyone, to the contact's hedge fund community contacts, that was involved.
A week or so passed, and I received a copy of email correspondence between my friend's contact and one of his investment community contacts. From that email, however, I learned that my friend's contact doesn't actually know David Tepper. At all.
No, it seems the contact's investment community colleague works at a firm that may do business with Tepper's Apaloosa Management. Big difference. In fact, not only was it now clear that my friend's contact had simply lied about knowing Tepper, but his contact was not clear that even he knew the hedge fund mogul.
What that investment firm colleague actually wrote was something like,
'I'm not about to introduce your contact (me) to David Tepper- for several reasons.'
Fair enough. I can think of three reasons for his reluctance, nay, refusal to introduce me to David Tepper.
First, he isn't in a position to do so without losing his job. As it happens, upon seeing the email exchange, I recognized the guy's address as being at an institutional broker that caters to hedge funds. Quickly Googling the firm, I had no trouble finding the guy's picture and bio. He is by no means a heavyweight, either at the firm, or in the general investment community. He's not on the firm's board. He's not even listed as an "executive." No, he's a 'market strategist' for one of the firm's asset classes. That means his job is to try to come up with daily ideas to pitch to traders at hedge funds, hoping that they'll bite and reward his firm with some brokerage volume. I've read some of his observations- they're not a lot different from some of my own blog posts, except he's a lot pithier.
The guy's picture reinforced this. He had a worried, frazzled look, as if he was only two bad daily market direction calls away from unemployment. Despite the firm's contention that its people appear on widely-viewed business cable programs, I've never seen this guy on CNBC or Bloomberg nor, for that matter, anyone from the firm. There was no way this guy was introducing anyone directly to any heavyweights at his firm's clients without substantial vetting by his superiors.
The second reason the guy wouldn't introduce me to David Tepper could be that he doesn't actually know David Tepper. My friend assured me that the this brokerage employee 'lived in the same complex as Tepper,' and/or 'has been to Tepper's parties.'
Indeed? But the guy's brokerage firm isn't located anywhere near Tepper's firm's Short Hills/Chatham, New Jersey offices. And Tepper reportedly lives in nearby Livingston, so it's unlikely they actually were residential neighbors, either. Unless, that is, the brokerage firm's market strategist has a 90 minute one-way commute each morning across the NYC metro area to his middle-management job. Possible, but unlikely.
My friend's contact asserted this guy is a multi-millionaire with a huge house in a fashionable financial services-dominated NJ town. Again, unlikely, because if he was that wealthy, he probably wouldn't be a middle-manager at an institutional brokerage firm.
It's possible that Apaloosa holds some annual holiday bashes to which hundreds of people from its many supporting vendor firms are invited. Perhaps this was the sort of party at which the daily strategist had "met" Tepper. A cozy little gathering of 400-500 financial sector employees all on the make to strengthen personal contacts with Apaloosa and other sector personnel.
Then there's the third reason this daily strategist wasn't going to introduce me to David Tepper. I'll get to that one shortly.
One thing led to another, and the investment guy, whom I'll call R, and I arranged, via emails to speak one afternoon. I had sent him a one-page overview of my strategy's style, history, performance and methodology. He acknowledged it in an email about an hour before our scheduled talk, only to ask me to re-send it.
Not a good sign. This talk was about as welcome for him as, I'd guess, a root canal.
Now, being a corporate veteran of many years, I had gone over his firm's website pretty thoroughly, as well as done some conceptual rehearsal of what value my work would have for him or his colleagues. Both out of respect for the guy's time, and self-respect to demonstrate I knew how to do professional networking. Frankly, I was coming up short on the value point, and had emailed him, thus,
"I'm appreciative of your taking some time to have read the description I sent you and talk by phone. In order to make the most productive use of our time, I'd like to ask if you could take the lead by letting me know what your thoughts are regarding my equity strategy. I'm not really sure at this point if you have interested parties at other firms in mind, or what. So perhaps you can directly let me know your reaction and any ideas you have as to whom would benefit from my work."
See, given his day job, it didn't seem that he was really in a position to pass me along to his clients, which would be the natural interested parties for my equity portfolio work. And his firm was unlikely to just have wealthy individuals pining for new equity strategies. So I wasn't really seeing the point in even talking. But, in order to exhibit due diligence to my friend and his contact, I played along.
Upon speaking with R, despite my email and one-pager, his opening remark was calculated to show me who was who, and who (R) was going to show whom (me) where to piss, so to speak,
'So, what's your story?'
That was it. I was to verbally prostrate myself and hurriedly give him a 30-second elevator pitch on the phone.
Instead, I reminded him of my email of that morning, and quickly moved to conclude, for him, that, given his position at the firm, the firm's business, etc., it didn't seem likely he could just pass me along to his firm's multi-billion dollar hedge fund clients on the strength of a phone call.
That caught him by surprise, and he paused, noticeably. Then he shot back with a snarky,
'Well, that's not my entire job, you know. I do other things here, too. And your results of an average gross annual 20% return over 20 years isn't so exceptional. I've done the same over 30 years!'
Hey, maybe he handles making coffee, too? Or perhaps he captains the firm's annual United Way campaign? Maybe they just failed to mention that in his bio.
'Really?' I replied. 'So you manage a large chunk of institutional money at your firm, in addition to your daily market strategy job? Because I'm looking at your firm's website page with your bio and picture right now, as we speak So I'm just going by what your own website says are your job responsibilities.'
'Ah, no....... Actually, it's a personal account,' he replied rather sheepishly.
So now the third reason he wouldn't introduce me to David Tepper becomes clear.
R has his own agenda. Like many analysts, market strategists, and other people who are not and have never actually been professional managers of portfolios of other peoples' money, he secretly hopes to join those ranks some day. On the strength of his 30-year personal account track record.
Of course, if he's the multi-millionaire he was asserted to be by my friend's contact, he'd more likely have retired by now to manage his own money and that of various friends and colleagues. If you do the math, having even as little as $5MM of personal money self-managed at 20% per annum, on average, gives him a pre-tax $1MM/year. Add a few of his 30 years of 20% annual gains while living off of his day job salary and he's not going to be putting up with where he currently is. Then, again, considering that the guy making these assertions also claimed, falsely, to know David Tepper, one would be forgiven for simply disbelieving his entire story about R.
However, if anyone was going to be calling David Tepper about an equity strategy to which to allocate a few crumbs from Apaloosa's groaning board, it sure as hell wasn't going to be me.
It's going to be R, and he's going to be talking about his own equity strategy.
But if he does know David Tepper, and he's been beavering away on his secret little personal account strategy for over a quarter of a century, what's he waiting for? The Second Coming? December 21, 2012 and the Mayan calendar end of days?
Seriously, if R, who allegedly knows David Tepper, hasn't, by now, cashed in on that close, intimate and personal connection to join Apaloosa as one of its portfolio management masters of the universe, just when does he plan on doing so?
Perhaps the reality is that R has surreptitiously felt out contacts at his institutional brokerage firm's various clients, on the quiet, to see if he could join the other side. After all, it's no secret that an equity portfolio manager, or even analyst, at a firm like Apaloosa can make much more money than one of several mere market strategists at an institutional brokerage firm.
And he's probably had to be careful, because exposure of his atttempt to bolt from his current gig might jeopardize that job and subsequent career. But, judging from R's current day job and 30-year private efforts at equity portfolio management, it hasn't apparently been going very well. Perhaps he approached Apaloosa but his strategy wasn't a stylistic fit. Or was too volatile. Or wouldn't scale up in volume once Apaloosa directed some of its massive asset base to it. Or maybe Apaloosa understandably just doesn't need nor want strategies invented elsewhere, because they make so much money with their own ideas.
R could see from the one-page overview I'd provided him that I had managed money with one hedge fund, and had another started around my strategy by a legendary ex-Salomon Brothers partner, after only two years of work on the research and implementation of my business strategy and equity portfolio management concepts. Then developed, at a former business partner's request, a robust and profitable equity options strategy based upon my consistently superior-performing equity strategy. And he subsequently learned, from our conversation, that I was open to investors or partners because my recent, now former, business partner had misrepresented his financial ability to invest as promised in either the options or equity strategy. It wasn't the failure of either strategy's performance, but that of my erstwhile partner to fulfill his partnership obligations, that led me to acquiesce to my friend's networking initiatives.
It wouldn't be the first time that envy, jealousy and/or simple insecurity has driven someone to react negatively to another's profitable business opportunities.
After an awkward 15 minutes or so of conversation in which I provided some additional details about my work to R, after which he fell conspicuously silent, I again took the initiative to end the call by wishing him luck. From his silence and long failure to attract any other investments, I'm guessing his approach is qualitative, not prone to scalability, and/or probably exhibits more volatility than institutional clients typically prefer. In short, he's not bolting his day job to work for David Tepper at Apaloosa anytime soon. But, he can, like all of us, dream.
As for Apaloosa, David Tepper and me? Well, I already know from a cursory Google search and years of being aware of the firm that my equity management style is quite different from Tepper's firm's. They thrive on turnarounds and wounded companies, while I stick to consistently superior performing firms. As it happens, I was acquainted with one of Apaloosa's partners a few years back. When I struck up a conversation, in which I carefully did not suggest that he introduce me to someone at the firm, nor consider vetting me for an allocation to manage, he basically sniffed, looked down his nose at me, and sagely intoned that first I should get about $25MM to manage. After that, things would be easier. Somehow, after that incident, I wasn't particularly keen on making further contacts at Apaloosa.
I related the whole story involving R to my friend, who was understandably a bit chastened. He remained in denial that his prized contact had, quite clearly, lied about and invented his nonexistent direct personal connection with David Tepper. A direct connection about which he had boasted to both of us not once, but several times. Further, the contact couldn't engage in mutually-beneficial networking, confusing it, instead, with a game of parading his delusional and/or real social connections with other people, of whose jobs he had no comprehension whatsoever.
So much for networking among those who lie about relationships with famous portfolio managers, insecure portfolio management-wannabes and the like. Networking can be far more challenging than one might think, even when a product or service of clearly-demonstrable value is involved. But it can also provide some laughs along the way, as one sees human nature and all its foibles up close.
Friday, June 03, 2011
Thursday, June 02, 2011
Flawed Economics On ABC
Diane Sawyer's appearance last night on Bill O'Reilly's Fox News Factor program demonstrated that economic fallacies remain widespread and embraced by media personnel who are in a position to influence masses of Americans.
I'm speaking of Sawyer's/ABC's 'buy American' push, in the mistaken belief that it is the best way to further its explicit aim of trying to find jobs for unemployed Americans.
Sawyer was on O'Reilly's program ostensibly to answer questions regarding ABC's liberal bias in the 2008 presidential election, and its putative continued bias in the 2012 election cycle. I won't bother with Sawyer's platitudes on that topic.
Instead, of interest was her turning the conversation to some feature on its news hour where the network apparently tries to compete with The Ladders or Monster.com, connecting unemployed Americans with jobs.
Sawyer went on to challenge O'Reilly to conduct an audit of his home to discern how many items were not 'made in America.' Then compounded her idiocy by wondering aloud which was 'more American,' a GM vehicle or a Toyota vehicle, both of which were assembed in the US?
David Ricardo must be spinning in his grave. Haven't Sawyer and O'Reilly heard of Ricardo's Law of Comparative Advantage?
So now, along with O'Reilly's misinformed belief that high oil prices are always the result of immoral speculation and manipulation, we can add his apparent tacit approval of beggar-thy-neighbor trade practices and outdated economic thinking.
As for Sawyer and ABC, can't someone like John Taylor, Alan Reynolds or Nouriel Roubini take her to task and end the domestic preference nonsense on that network?
Perhaps counsel them to dump the amateur-hour job placement charade and use their media pulpit to argue for lower tax rates and less government intrusion into the private sector, thus providing more money and less uncertainty, which would facilitate private investment, GDP and, with it, job growth?
I'm speaking of Sawyer's/ABC's 'buy American' push, in the mistaken belief that it is the best way to further its explicit aim of trying to find jobs for unemployed Americans.
Sawyer was on O'Reilly's program ostensibly to answer questions regarding ABC's liberal bias in the 2008 presidential election, and its putative continued bias in the 2012 election cycle. I won't bother with Sawyer's platitudes on that topic.
Instead, of interest was her turning the conversation to some feature on its news hour where the network apparently tries to compete with The Ladders or Monster.com, connecting unemployed Americans with jobs.
Sawyer went on to challenge O'Reilly to conduct an audit of his home to discern how many items were not 'made in America.' Then compounded her idiocy by wondering aloud which was 'more American,' a GM vehicle or a Toyota vehicle, both of which were assembed in the US?
David Ricardo must be spinning in his grave. Haven't Sawyer and O'Reilly heard of Ricardo's Law of Comparative Advantage?
So now, along with O'Reilly's misinformed belief that high oil prices are always the result of immoral speculation and manipulation, we can add his apparent tacit approval of beggar-thy-neighbor trade practices and outdated economic thinking.
As for Sawyer and ABC, can't someone like John Taylor, Alan Reynolds or Nouriel Roubini take her to task and end the domestic preference nonsense on that network?
Perhaps counsel them to dump the amateur-hour job placement charade and use their media pulpit to argue for lower tax rates and less government intrusion into the private sector, thus providing more money and less uncertainty, which would facilitate private investment, GDP and, with it, job growth?
Eric Schmidt Is Wrong- Google Isn't A Social Network Company
I found Eric Schmidt's mea culpa for leading Google to miss business opportunities in social networking to be profoundly misplaced. Perhaps even a touch too egotistical, as if merely spotting the customer needs meant Google would have dominated or even seriously contested the product/market.
On the contrary, I find myself in agreement with a guest who appeared on Bloomberg yesterday. I can't recall his name, but he was a youngish man with a rather hip manner who apparently founded some social-networking-related consulting or other type of firm. He opined that the attributes and skill set which made Google what is is- search algorithms, advertising and some competitive inroads in the area of basic business application software- made it an unlikely candidate to either originate or successful develop social networking businesses.
It's an astute and, I believe, correct assessment. The co-founders of Google were geeks. They recruited Schmidt, after his lost battles with Microsoft while at Novell, to be the adult in charge at Google.
The Bloomberg guest even noted the somewhat disdainful manner in which Schmidt referred to "the friends thing" to describe Facebook's core business focus. If any firm could have pre-empted Facebook, it was, as I have written in prior posts, Yahoo. Yahoo had both information and facilities to set up accounts and connect with people years ago. But Jerry Wang and Terry Semel botched that aspect of the firm's business, leaving the door open for what humbly began as a college picture book migrated to the online world.
If Google had driven heavily into the social networking product/market, it probably would have caused distractions, created a sort of split-personality among the company's business groups, and perhaps have caused more overall harm than good for Google's financial performance.
It's a rare firm that can do more than one major thing, perhaps with affiliated minor things, well. Apple has sort of done it, but not really. Jobs' Apple has become a specialized digital device firm with linking content management via iTunes.
Other than that, no technology firms, to my knowledge, have succeeded in two radically disparate businesses.
There's absolutely no reason to believe Google would have, had Schmidt, or anyone else at the firm, spotted the opportunity prior to Facebook's rise. To think it would have seems rather arrogant on Schmidt's part.
On the contrary, I find myself in agreement with a guest who appeared on Bloomberg yesterday. I can't recall his name, but he was a youngish man with a rather hip manner who apparently founded some social-networking-related consulting or other type of firm. He opined that the attributes and skill set which made Google what is is- search algorithms, advertising and some competitive inroads in the area of basic business application software- made it an unlikely candidate to either originate or successful develop social networking businesses.
It's an astute and, I believe, correct assessment. The co-founders of Google were geeks. They recruited Schmidt, after his lost battles with Microsoft while at Novell, to be the adult in charge at Google.
The Bloomberg guest even noted the somewhat disdainful manner in which Schmidt referred to "the friends thing" to describe Facebook's core business focus. If any firm could have pre-empted Facebook, it was, as I have written in prior posts, Yahoo. Yahoo had both information and facilities to set up accounts and connect with people years ago. But Jerry Wang and Terry Semel botched that aspect of the firm's business, leaving the door open for what humbly began as a college picture book migrated to the online world.
If Google had driven heavily into the social networking product/market, it probably would have caused distractions, created a sort of split-personality among the company's business groups, and perhaps have caused more overall harm than good for Google's financial performance.
It's a rare firm that can do more than one major thing, perhaps with affiliated minor things, well. Apple has sort of done it, but not really. Jobs' Apple has become a specialized digital device firm with linking content management via iTunes.
Other than that, no technology firms, to my knowledge, have succeeded in two radically disparate businesses.
There's absolutely no reason to believe Google would have, had Schmidt, or anyone else at the firm, spotted the opportunity prior to Facebook's rise. To think it would have seems rather arrogant on Schmidt's part.
Wednesday, June 01, 2011
Talking A Fixed-Income Book
This past weekend's Wall Street Journal contained an article by Dave Kansas concerning Pimco's recent government bond sell-off and the subsequent fall in rates and corresponding rise in bond prices.
Pimco's Bill Gross apparently believed that the time is right, or nearly so, for inflation to begin to erode the value of fixed income instruments.
Of course, many forces affect US Treasuries. Phenomenon like a flight to quality from the Euro sector, or weak corporate sector performances or war can send their prices higher despite poor longer-term monetary or inflationary outlooks.
Kansas cited two bond enthusiasts, Albert Edwards of Societe Generale and Jeffrey Gundlach of DoubleLine, an investment firm, as being bullish on sluggish economic growth and a QE3 program.
Kansas closed his piece with this,
"It should be pointed out that Messrs. Edwards and Gundlach are "talking their book."....But at least they have put their money is where their mouths are."
I think Kansas has it backwards. It's not that the two investors "put their money...where their mouths are," but that they put their mouths where their money has already been placed.
It's a calculated risk that the two take as they loudly proclaim economic events which will play to their positions' advantages. We know that Fed-administered rates aren't rising any time soon. So they are unlikely to be blind-sided.
With the public finance problems in Greece, Portugal and other countries, a sluggish US economy and reported softening in China, odds are probably higher of global economic weakness rather than strength.
That suggests, unwise though it is, more central bank easing.
As to Bill Gross? He probably has the biggest bully pulpit in the fixed income world after Ben Bernanke. It's probably unwise to discount either his moves or his words. Especially when he so prominently speaks out about the former.
Pimco's Bill Gross apparently believed that the time is right, or nearly so, for inflation to begin to erode the value of fixed income instruments.
Of course, many forces affect US Treasuries. Phenomenon like a flight to quality from the Euro sector, or weak corporate sector performances or war can send their prices higher despite poor longer-term monetary or inflationary outlooks.
Kansas cited two bond enthusiasts, Albert Edwards of Societe Generale and Jeffrey Gundlach of DoubleLine, an investment firm, as being bullish on sluggish economic growth and a QE3 program.
Kansas closed his piece with this,
"It should be pointed out that Messrs. Edwards and Gundlach are "talking their book."....But at least they have put their money is where their mouths are."
I think Kansas has it backwards. It's not that the two investors "put their money...where their mouths are," but that they put their mouths where their money has already been placed.
It's a calculated risk that the two take as they loudly proclaim economic events which will play to their positions' advantages. We know that Fed-administered rates aren't rising any time soon. So they are unlikely to be blind-sided.
With the public finance problems in Greece, Portugal and other countries, a sluggish US economy and reported softening in China, odds are probably higher of global economic weakness rather than strength.
That suggests, unwise though it is, more central bank easing.
As to Bill Gross? He probably has the biggest bully pulpit in the fixed income world after Ben Bernanke. It's probably unwise to discount either his moves or his words. Especially when he so prominently speaks out about the former.
Tuesday, May 31, 2011
A Private Sector Diagnosis Of The Global Financial System
I happened to catch a clip of Templeton investment management veteran Mark Mobius this morning on Bloomberg. There's something refreshing about an experienced private sector investor who talks sense without talking his book in detail.
To paraphrase Mobius,
'We haven't seen the last of financial crises. There's going to be higher volatility, more crises. Why?
We haven't solved the things that caused the first crisis.
Are the too-big-to-fail banks even larger than last time? Yes.
Have derivatives been regulated? No.
Are derivatives growing again? Yes.
Meanwhile, Greece is seeing more riots, with this morning's Wall Street Journal stating "default appears more imminent" with a "contagion" to follow.
And more observers of US debt rates are sanguinely noting that the Treasuries market is currently hopelessly queered by the Fed's monetizing Treasury's borrowing. Claiming that global investors aren't worried because rates are still low ignores the fact that the Fed has had a stabilizing bid under the market.
To paraphrase Mobius,
'We haven't seen the last of financial crises. There's going to be higher volatility, more crises. Why?
We haven't solved the things that caused the first crisis.
Are the too-big-to-fail banks even larger than last time? Yes.
Have derivatives been regulated? No.
Are derivatives growing again? Yes.
Meanwhile, Greece is seeing more riots, with this morning's Wall Street Journal stating "default appears more imminent" with a "contagion" to follow.
And more observers of US debt rates are sanguinely noting that the Treasuries market is currently hopelessly queered by the Fed's monetizing Treasury's borrowing. Claiming that global investors aren't worried because rates are still low ignores the fact that the Fed has had a stabilizing bid under the market.
Friday, May 27, 2011
David Einhorn Echoes My Position On Ballmer & Microsoft
I noticed that David Einhorn took time out from his purchase of a minority interest in the New York Mets to echo my long-held contentions, expressed in prior numerous posts (under labels Microsoft and/or Steve Ballmer), that Bill Gates' successor as CEO should be fired.
According to Bloomberg on Thursday, Einhorn's Greenlight Capital's 8th largest position is Microsoft.
What??
First things first. Does noted wealthy hedge fund investor Einhorn's agreement with my long-held call for Ballmer's departure mean I am now correct? Or was I correct all along? Does it matter that someone with billions to invest decides on publicly stating the same sentiments I've written for a few years?
In some ways, it does matter. For instance, I don't hold Microsoft, and, even if I did, I wouldn't own as much as Einhorn's fund probably does. So I wouldn't have the investor influence that Einhorn does.
But, then again, Einhorn's fund owns Microsoft. Wouldn't his statements be expected, in the days ahead, to drive the price of the firm's shares down? Does Einhorn want to accumulate more shares, at cheaper prices, the better to insinuate himself into the firm's management?
That is, after all, Einhorn's modus operandi, is it not? To invest in firms with challenges, hoping to affect a resolution, and thereby see gains from his pre-existing positions in the firm?
But by criticizing Ballmer and Microsoft, while owning the share, Einhorn would seem to be taking some risk, seeing the value of the firm's shares potentially drop for a while, before possibly rising again. Perhaps on Ballmer's exit or Einhorn's securing some role in influencing the firm's strategic direction.
But, in another way, it doesn't matter that Einhorn has now agreed with a position I've held for years. The facts of the case should be based on their merits, not simply on who is voicing them. In fact, sometimes you should assign more credibility to someone who is objective. Someone like me who doesn't own Microsoft shares, but simply observes real performance and comments thereon.
Of course, another reality is that I can write about Microsoft's, Ballmer's and Gates' failure over the past decade all I want, and I'm not going to get the coverage on CNBC, Bloomberg and in the Wall Street Journal that a wealthy hedge fund manager like Einhorn will receive for pithier comments at a much later date.
Is it gratifying for me to see business media embrace Einhorn's views on Microsoft and Ballmer, which are, essentially, my own for years? Yes.
Is it frustrating to know that I can write the same conclusions as Einhorn, for years, and garner no media attention? No. I'm sanguine about having one of millions of blogs. Mine is neither famous nor, on a traffic basis, very heavily read.
However, that said, a series of equally-candid posts about GE earned me an appearance on the most-watched cable news program, O'Reilly's Factor on Fox News, a little over three years ago. And that appearance got the attention of GE's headquarters staff.
Years ago, when the Wall Street Journal featured blogs which discussed topics appearing in the paper, I routinely saw my blog posts featured, driving readership of my blog up over 100 daily visits. Even now, I have about as many daily RSS feed readers as I average in direct readership. And it's fairly common for me to see IP addresses from companies like Goldman Sachs, Lehman and other well-known firms, as well as the US Senate, House and other government entities and universities visiting my blog.
The truth, however, is that I write the blog for two reasons that have nothing to do with other people. The first is to provide myself with ongoing anecdotal reinforcement of the key proprietary research findings which drive my equity strategy. The second is to compile a library of my own thoughts and observations, the better to use to build upon those prior recorded impressions and advance my own ideas about business, finance and economics.
Whether those thoughts and observations are widely-read or bring a significant revenue stream was never the primary purpose of the blog.
All that expressed, however, I do take some measure of satisfaction that someone like David Einhorn took years to arrive at the same conclusions I reached much earlier. And that, thanks to his obsessive attention to mentions of himself in online venues ( grist for another post based upon a brief email exchange he and I had a few years ago), he'll probably read this post and my observations about his being so late to an obvious story.
According to Bloomberg on Thursday, Einhorn's Greenlight Capital's 8th largest position is Microsoft.
What??
First things first. Does noted wealthy hedge fund investor Einhorn's agreement with my long-held call for Ballmer's departure mean I am now correct? Or was I correct all along? Does it matter that someone with billions to invest decides on publicly stating the same sentiments I've written for a few years?
In some ways, it does matter. For instance, I don't hold Microsoft, and, even if I did, I wouldn't own as much as Einhorn's fund probably does. So I wouldn't have the investor influence that Einhorn does.
But, then again, Einhorn's fund owns Microsoft. Wouldn't his statements be expected, in the days ahead, to drive the price of the firm's shares down? Does Einhorn want to accumulate more shares, at cheaper prices, the better to insinuate himself into the firm's management?
That is, after all, Einhorn's modus operandi, is it not? To invest in firms with challenges, hoping to affect a resolution, and thereby see gains from his pre-existing positions in the firm?
But by criticizing Ballmer and Microsoft, while owning the share, Einhorn would seem to be taking some risk, seeing the value of the firm's shares potentially drop for a while, before possibly rising again. Perhaps on Ballmer's exit or Einhorn's securing some role in influencing the firm's strategic direction.
But, in another way, it doesn't matter that Einhorn has now agreed with a position I've held for years. The facts of the case should be based on their merits, not simply on who is voicing them. In fact, sometimes you should assign more credibility to someone who is objective. Someone like me who doesn't own Microsoft shares, but simply observes real performance and comments thereon.
Of course, another reality is that I can write about Microsoft's, Ballmer's and Gates' failure over the past decade all I want, and I'm not going to get the coverage on CNBC, Bloomberg and in the Wall Street Journal that a wealthy hedge fund manager like Einhorn will receive for pithier comments at a much later date.
Is it gratifying for me to see business media embrace Einhorn's views on Microsoft and Ballmer, which are, essentially, my own for years? Yes.
Is it frustrating to know that I can write the same conclusions as Einhorn, for years, and garner no media attention? No. I'm sanguine about having one of millions of blogs. Mine is neither famous nor, on a traffic basis, very heavily read.
However, that said, a series of equally-candid posts about GE earned me an appearance on the most-watched cable news program, O'Reilly's Factor on Fox News, a little over three years ago. And that appearance got the attention of GE's headquarters staff.
Years ago, when the Wall Street Journal featured blogs which discussed topics appearing in the paper, I routinely saw my blog posts featured, driving readership of my blog up over 100 daily visits. Even now, I have about as many daily RSS feed readers as I average in direct readership. And it's fairly common for me to see IP addresses from companies like Goldman Sachs, Lehman and other well-known firms, as well as the US Senate, House and other government entities and universities visiting my blog.
The truth, however, is that I write the blog for two reasons that have nothing to do with other people. The first is to provide myself with ongoing anecdotal reinforcement of the key proprietary research findings which drive my equity strategy. The second is to compile a library of my own thoughts and observations, the better to use to build upon those prior recorded impressions and advance my own ideas about business, finance and economics.
Whether those thoughts and observations are widely-read or bring a significant revenue stream was never the primary purpose of the blog.
All that expressed, however, I do take some measure of satisfaction that someone like David Einhorn took years to arrive at the same conclusions I reached much earlier. And that, thanks to his obsessive attention to mentions of himself in online venues ( grist for another post based upon a brief email exchange he and I had a few years ago), he'll probably read this post and my observations about his being so late to an obvious story.
Is There A Social Networking Business Bubble Forming?
What to make of the uproar over LinkedIn's IPO valuation? I haven't kept abreast of all the details, but I'm aware that the value of the IPO soared, then fell.
The nearby chart displays the first few days of the firm's equity prices. Suffice to say, overall, lucky buyers of the issue have enjoyed a handsome return in just the first five days.
Of course, there are all manner of opinions on LinkedIn's prospects.
For example, some co-anchors on Bloomberg did the math and contended that the newly-public firm would need to grow at a rate of some 50% per year for the next two years to justify its price/sales ratio.
Others have noted how slim the actual base of publicly-offered shares is, how dilutitive employees' options will be, and how much volume could be dumped by underwriters at the first chance to do so.
Regardless, the feeding frenzy by other social networking-based companies is now afoot. Zynga has plans to go public in June. Margaret Brennan of Bloomberg quizzed an analyst about how serious one should take Zynga's revenues, where real money is spent to buy cyber items in virtual worlds.
Point taken.
Take a big step back and ask yourself, just what is the nature of these firms? What are they selling, and how competitively defensible is it?
LinkedIn sells recruiters and HR people access to business professionals. I believe there is some other membership upgrade, as well as the ubiquitous online advertising play. So LinkedIn actually has something to sell, but as for how much growth there is, well, it's not exactly Facebook.
Zynga seems to be mostly an online gaming site. It's unclear how much long term value that site really has. Thus, I suppose, the great dispatch with which the founder is planning an IPO.
One of the social networking site founder wunderkinds was on one of the business cable channels expounding on how all sites wishing to gain or retain allure need to add a group or social aspect to their offerings. That is precisely the sort of sentiment that got the original internet-based technology bubble off to its start.
Recall, if you will, that suddenly clicks outshone bricks, and online companies marketing everything from business supplies to pet items soared.
Let's assume their is some value in social networking aspects of some online behavior. How much of it is truly defensible from a business sense? As I wrote in this post concerning Groupon, the barriers to entry in some of these product/markets are much lower than you might initially believe.
A while later, I wrote this post reinforcing my earlier impressions,
"Groupon and its ilk just aren't businesses which I see as capable of delivering long term consistently superior shareholder returns, when they are public. There seem too few barriers to entry, too little in the way of proprietary, defensible competitive advantages, and an evolving sense by many customers, i.e., retail merchants, that what these services provide is, in the end, not really all that different than conventional couponing, and not necessarily loyal, full-price customers, either."
I've yet to actually see a firm which has begun with a social networking application, other than Facebook, a first-mover, which doesn't seem to be fairly defenseless and vunerable. On the other hand, it's much easier for an Amazon or Apple to add social networking, links to Facebook, or what have you, to their existing, robust business model. In that sense, my equity strategy process is thus already in a position to own social networking assets with relatively lower risk than chasing after Zynga or LinkedIn.
It's hard not to see a bubble forming in this online social networking space. The fundamentals are pretty much in place- hot user acceptance, more eager retail investors than companies and shares to buy, and a still-recovering IPO market.
But, investment bubbles being what they are, we'll probably be observing this one in hindsight sometime next year, or the year after.
Of course, there are all manner of opinions on LinkedIn's prospects.
For example, some co-anchors on Bloomberg did the math and contended that the newly-public firm would need to grow at a rate of some 50% per year for the next two years to justify its price/sales ratio.
Others have noted how slim the actual base of publicly-offered shares is, how dilutitive employees' options will be, and how much volume could be dumped by underwriters at the first chance to do so.
Regardless, the feeding frenzy by other social networking-based companies is now afoot. Zynga has plans to go public in June. Margaret Brennan of Bloomberg quizzed an analyst about how serious one should take Zynga's revenues, where real money is spent to buy cyber items in virtual worlds.
Point taken.
Take a big step back and ask yourself, just what is the nature of these firms? What are they selling, and how competitively defensible is it?
LinkedIn sells recruiters and HR people access to business professionals. I believe there is some other membership upgrade, as well as the ubiquitous online advertising play. So LinkedIn actually has something to sell, but as for how much growth there is, well, it's not exactly Facebook.
Zynga seems to be mostly an online gaming site. It's unclear how much long term value that site really has. Thus, I suppose, the great dispatch with which the founder is planning an IPO.
One of the social networking site founder wunderkinds was on one of the business cable channels expounding on how all sites wishing to gain or retain allure need to add a group or social aspect to their offerings. That is precisely the sort of sentiment that got the original internet-based technology bubble off to its start.
Recall, if you will, that suddenly clicks outshone bricks, and online companies marketing everything from business supplies to pet items soared.
Let's assume their is some value in social networking aspects of some online behavior. How much of it is truly defensible from a business sense? As I wrote in this post concerning Groupon, the barriers to entry in some of these product/markets are much lower than you might initially believe.
A while later, I wrote this post reinforcing my earlier impressions,
"Groupon and its ilk just aren't businesses which I see as capable of delivering long term consistently superior shareholder returns, when they are public. There seem too few barriers to entry, too little in the way of proprietary, defensible competitive advantages, and an evolving sense by many customers, i.e., retail merchants, that what these services provide is, in the end, not really all that different than conventional couponing, and not necessarily loyal, full-price customers, either."
I've yet to actually see a firm which has begun with a social networking application, other than Facebook, a first-mover, which doesn't seem to be fairly defenseless and vunerable. On the other hand, it's much easier for an Amazon or Apple to add social networking, links to Facebook, or what have you, to their existing, robust business model. In that sense, my equity strategy process is thus already in a position to own social networking assets with relatively lower risk than chasing after Zynga or LinkedIn.
It's hard not to see a bubble forming in this online social networking space. The fundamentals are pretty much in place- hot user acceptance, more eager retail investors than companies and shares to buy, and a still-recovering IPO market.
But, investment bubbles being what they are, we'll probably be observing this one in hindsight sometime next year, or the year after.
Thursday, May 26, 2011
Re Mark Haines, RIP
I wasn't going to write a post about the recent death of Mark Haines, CNBC anchor. But the network's relentless self-promotion, with large doses of hype, lies and selective memory tossed in for good measure, have become so stomach-turning that they have driven me to it.
There are really two topics in this post. The first is Haines himself.
Like many other viewers, I found Mark Haines to be, to use the already-overused terms, gruff, likable, direct, contentious, and objective. There were times when I'd had enough and muted the program, but, for the most part, I found him to be refreshingly honest and candid, unlike most of his colleagues.
Even Tom Keene, on Bloomberg, gave an eloquent eulogy to Haines yesterday as the signoff of his noontime hour program. From all the personal anecdotes from the many reporters and pundits who knew him, Haines appears to have been a genuinely kind, interesting, good person.
I found, just randomly Googling Haines this morning, this webpage which included these passages,
"Haines was known for his sharp tongue and contentious tone. “He was the first business journalist ever to ask a C.E.O. a hard question,” CNBC host Jim Cramer told The New York Times in an e-mail statement.
Haines, however, told The Chicago Tribune in 1998 that his style made for good television. “If we don’t get people who watch, we’re out of business…At the same time, you have to have a core of people who understand business,” he said."
Leave it to blowhard Cramer to engage in hyperbole. Was Haines truly "the first business journalist to ever ask a CEO a hard question?" Probably not. But this morning's Wall Street Journal obit noted his relentless dogging of former Kodak CEO George Fisher for lying to Haines in an interview. According to the Journal piece, Fisher misled Haines regarding a rumored imminent price cut, so when the action occurred a few days later, Haines began replaying Fisher's on air lie frequently. In that regard, he was unique.
However, to me, the second passage reveals Haines' true sensibility. He was in the business of working to "get people to watch." Because his job was to sell those eyeballs to advertisers.
Haines could be irascible, but, on balance, he was largely objectively sceptical and truth-seeking. Whereas other anchors would tiptoe around an obvious falsehood- Becky Quick and Carlos Whathisname continue to be timid even today- Haines was not.
That said, the other topic of this post is CNBC's shameless use of Haines' death to promote phenomena that either never were, or never should have occurred. That was the stomach-turning part of the past day-plus' CNBC coverage of his passing.
I'm speaking of this morning's continued use of Haines' memory for CNBC's anchors and reporters to flog its own image as ground-breaking, crucially important to financial markets, and the very beacon of all that is right, just and true in financial news coverage.
To hear, for example, from Maria Bartiromo this morning, that her reporting from the floor of the NYSE was somehow instrumental in capitalism's growth and importance. Sundry pundits and CNBC persona solemnly note how Haines & Co. provided "the viewers" with such valuable insights and calls, the better to assist them in leveling the playing field with Wall Streeters.
Don't believe a word of it.
Haines understood that his job wasn't to help viewers invest, but to sell advertising through watchable, entertaining business and finance coverage on cable television.
Perhaps that is why several of Haines' colleagues noted that he got his game on for the camera but, before and after, dressed down and essentially moved on to other, more personally-fulfilling topics, such as, we were told, the Mets, gardening and tomatoes. Apparently, Haines' viewed his on-air time as, well, theater, not his real life.
Bartiromo, as expected, used Haines' death to bolster her own ego and self-image this morning. Sanctimonious to a fault, she centered her comments on her own early career, invoking time after time how she did it all for "the viewers" as investors. Never mind that the NYSE floor was never where most of the buy and sell orders originated. Or that the very emptiness of the trading floor is a testament to how inefficient and rife with front-running the old specialist-dominated NYSE was. That's why it's in the process of selling itself to Deutsch Borse.
Bartiromo is the most assertive of a history that never was, perhaps because, in that false past, her role as "the first woman to report from the floor of the NYSE" has some meaning or value.
As if.
How is it that all these colleagues of the late, appropriately honored Haines, celebrate his dogged, candid pursuit of the truth from his interviewees with hardball questions and tactics, yet almost none of them do the same?
How is it that Bartiromo tears up when remembering Haines' style, only to have become her network's biggest embarrassment as an interviewer, lobbing softball after softball at her guests, often revealing her own ignorance by her misunderstanding their responses? How does a network that supported Haines' brand of tenacious truth-finding tolerate Bartiromo's and so many other reporters' and anchors' ineptnesses and lack of courage with their guests?
How can a network which celebrates Vanguard group founder John Bogle, of buy-and-hold index fame, at the same time regale viewers with tales of how CNBC has done so much for the individual investor who trades individual equities?
Perhaps the best way in which CNBC could honor Haines would be to finally clean house of its mealy-mouthed, poorly-informed and inadequate reporters and anchors. That would be a lasting testament to the man's memory. Not just using his voice over to announce the beginning of the 9am CNBC program.
I didn't watch Haines for 22 straight years, so I can't say I know Haines' exact views on retail investor trading. But I would guess, from the 15 years or so during which I did watch SquawkBox with varying degress of frequency, that Haines was rather sanguine about the fact that there's never been a level playing field between the retail investor and the financial communities' investment, trading and institutional investment houses. And there's never going to be one.
That retail investors were foolish to believe watching a network like CNBC would magically mint them profits by trading equities and other instruments at retail brokerage fees.
It's a shame that CNBC is using Haines' death to glorify itself and push the falsehood that watching its programs is good for retail investors.
The entire raison d'etre of the CNBC network is to sell gullible retail viewership to advertisers. That's it. End of story.
Here's something to consider. Haines was at CNBC and/or its predecessors since 1989. That's 22 years. In all that time, have you ever seen a CNBC study which took a randomly-selected group of its viewers with a certain minimum investment amount and tracked their total returns over the time they regularly watched CNBC, versus a control group of similar investors who did not watch CNBC?
No, you haven't. Neither have I. Because the results wouldn't be pretty.
I'd love to hear Mark Haines' thoughts on that topic.
That said, I sincerely do hope Mark Haines rests in peace, and I empathize with the family members whom he has left behind.
There are really two topics in this post. The first is Haines himself.
Like many other viewers, I found Mark Haines to be, to use the already-overused terms, gruff, likable, direct, contentious, and objective. There were times when I'd had enough and muted the program, but, for the most part, I found him to be refreshingly honest and candid, unlike most of his colleagues.
Even Tom Keene, on Bloomberg, gave an eloquent eulogy to Haines yesterday as the signoff of his noontime hour program. From all the personal anecdotes from the many reporters and pundits who knew him, Haines appears to have been a genuinely kind, interesting, good person.
I found, just randomly Googling Haines this morning, this webpage which included these passages,
"Haines was known for his sharp tongue and contentious tone. “He was the first business journalist ever to ask a C.E.O. a hard question,” CNBC host Jim Cramer told The New York Times in an e-mail statement.
Haines, however, told The Chicago Tribune in 1998 that his style made for good television. “If we don’t get people who watch, we’re out of business…At the same time, you have to have a core of people who understand business,” he said."
Leave it to blowhard Cramer to engage in hyperbole. Was Haines truly "the first business journalist to ever ask a CEO a hard question?" Probably not. But this morning's Wall Street Journal obit noted his relentless dogging of former Kodak CEO George Fisher for lying to Haines in an interview. According to the Journal piece, Fisher misled Haines regarding a rumored imminent price cut, so when the action occurred a few days later, Haines began replaying Fisher's on air lie frequently. In that regard, he was unique.
However, to me, the second passage reveals Haines' true sensibility. He was in the business of working to "get people to watch." Because his job was to sell those eyeballs to advertisers.
Haines could be irascible, but, on balance, he was largely objectively sceptical and truth-seeking. Whereas other anchors would tiptoe around an obvious falsehood- Becky Quick and Carlos Whathisname continue to be timid even today- Haines was not.
That said, the other topic of this post is CNBC's shameless use of Haines' death to promote phenomena that either never were, or never should have occurred. That was the stomach-turning part of the past day-plus' CNBC coverage of his passing.
I'm speaking of this morning's continued use of Haines' memory for CNBC's anchors and reporters to flog its own image as ground-breaking, crucially important to financial markets, and the very beacon of all that is right, just and true in financial news coverage.
To hear, for example, from Maria Bartiromo this morning, that her reporting from the floor of the NYSE was somehow instrumental in capitalism's growth and importance. Sundry pundits and CNBC persona solemnly note how Haines & Co. provided "the viewers" with such valuable insights and calls, the better to assist them in leveling the playing field with Wall Streeters.
Don't believe a word of it.
Haines understood that his job wasn't to help viewers invest, but to sell advertising through watchable, entertaining business and finance coverage on cable television.
Perhaps that is why several of Haines' colleagues noted that he got his game on for the camera but, before and after, dressed down and essentially moved on to other, more personally-fulfilling topics, such as, we were told, the Mets, gardening and tomatoes. Apparently, Haines' viewed his on-air time as, well, theater, not his real life.
Bartiromo, as expected, used Haines' death to bolster her own ego and self-image this morning. Sanctimonious to a fault, she centered her comments on her own early career, invoking time after time how she did it all for "the viewers" as investors. Never mind that the NYSE floor was never where most of the buy and sell orders originated. Or that the very emptiness of the trading floor is a testament to how inefficient and rife with front-running the old specialist-dominated NYSE was. That's why it's in the process of selling itself to Deutsch Borse.
Bartiromo is the most assertive of a history that never was, perhaps because, in that false past, her role as "the first woman to report from the floor of the NYSE" has some meaning or value.
As if.
How is it that all these colleagues of the late, appropriately honored Haines, celebrate his dogged, candid pursuit of the truth from his interviewees with hardball questions and tactics, yet almost none of them do the same?
How is it that Bartiromo tears up when remembering Haines' style, only to have become her network's biggest embarrassment as an interviewer, lobbing softball after softball at her guests, often revealing her own ignorance by her misunderstanding their responses? How does a network that supported Haines' brand of tenacious truth-finding tolerate Bartiromo's and so many other reporters' and anchors' ineptnesses and lack of courage with their guests?
How can a network which celebrates Vanguard group founder John Bogle, of buy-and-hold index fame, at the same time regale viewers with tales of how CNBC has done so much for the individual investor who trades individual equities?
Perhaps the best way in which CNBC could honor Haines would be to finally clean house of its mealy-mouthed, poorly-informed and inadequate reporters and anchors. That would be a lasting testament to the man's memory. Not just using his voice over to announce the beginning of the 9am CNBC program.
I didn't watch Haines for 22 straight years, so I can't say I know Haines' exact views on retail investor trading. But I would guess, from the 15 years or so during which I did watch SquawkBox with varying degress of frequency, that Haines was rather sanguine about the fact that there's never been a level playing field between the retail investor and the financial communities' investment, trading and institutional investment houses. And there's never going to be one.
That retail investors were foolish to believe watching a network like CNBC would magically mint them profits by trading equities and other instruments at retail brokerage fees.
It's a shame that CNBC is using Haines' death to glorify itself and push the falsehood that watching its programs is good for retail investors.
The entire raison d'etre of the CNBC network is to sell gullible retail viewership to advertisers. That's it. End of story.
Here's something to consider. Haines was at CNBC and/or its predecessors since 1989. That's 22 years. In all that time, have you ever seen a CNBC study which took a randomly-selected group of its viewers with a certain minimum investment amount and tracked their total returns over the time they regularly watched CNBC, versus a control group of similar investors who did not watch CNBC?
No, you haven't. Neither have I. Because the results wouldn't be pretty.
I'd love to hear Mark Haines' thoughts on that topic.
That said, I sincerely do hope Mark Haines rests in peace, and I empathize with the family members whom he has left behind.
Private Equity & Dunkin' Donuts' Impending IPO
Several months ago I wrote this post describing some awful customer experiences I suffered at a few Dunkin' Donuts franchise locations. The events involved a bungled new product introduction which DD's corporate unit, currently a private equity property, had poorly executed.
Some weeks later, I was informed of this post/comment on a franchise-oriented blog. A bit later, I was directed to this post on the same blog, in which the role of private equity firms, such as Bain, in franchiser buyouts such as Dunkin' Donuts, was discussed. An additional example of private equity behavior in buyouts of restaurant businesses was forwarded to me, as well, in the form of the filing of a suit involving a private equity firm and one of its acquisitions.
I"m not focusing on the detailed dynamics of franchising in this post, nor the particular details described (far better) in that second linked post from the franchising blog.
But what does seem reasonable to assume in the matter of private equity deals is that the private equity group(s) take fees and special dividends out of the acquisitions, further leveraging them up beyond what leverage they already had.
It doesn't take a genius to consider what this sort of cash siphoning by the private equity firm can do to the long term viability of the acquisition, once it has been prepared for an IPO.
Which brings me to Dunkin' Donuts.
In recent weeks, business media have begun to anticipate the return of DD, the franchiser, to public capital markets via an IPO.
Prior to the information I received regarding my post's reference in the franchise blog, I didn't really give much thought to any connection between DD's product launch issues and its franchiser's private equity status.
Since then, I have. Specifically, what the risks are to franchisees of buying into a system, the franchiser of which is vulnerable to takeover by a private equity firm.
Just a few days ago, in the Wall Street Journal, there was a positive article regarding McDonalds commencement of a physical overhaul of up to half of its franchised stores. Being as large and reasonably well-managed as it is, McDonalds seems to be in no danger of being taken private, so its franchisees are pretty safe from uncontrollable damage being inflicted by a new owner.
However, I've learned that this was far from true in the Dunkin' Donuts case. For example, DD, upon going private, engaged in a practice by which they receive extra fees by exercising clauses in franchisees' agreements to essentially take units from current owners and resell them, for more money, to other parties.
Known as "refranchising," this allowed the franchiser, DD, to selectively break up smaller, multiple-unit franchisees who were profitable, but whose stores would be more valuable to slightly larger franchisee groups.
Further, as some of these franchisees who were being, in effect, driven out of business, litigated these moves, resulting fees from the resale of the units became income to the franchiser, or private equity group. Through a process that is rather murky to those of us not in the business, the private equity groups were able to fund such a program from the franchisees' own marketing expenditures, but keep the gains for the corporate unit.
The larger point of all of this is that what has been transpiring at DD under private equity ownership may well be considered activities which aren't exactly "business as usual." Thanks to the magic of IPO accounting, the imminent spinning of DD, the franchiser, back into public hands, seems, well, rather like a pig in a poke.
Given the remarks in one of the franchise blog posts regarding extra leverage being applied to DD during its private equity ownership period, one wonders how capable the newly-independent corporate franchiser will be to fully service its franchisees, its announced expansion into India, and, generally, growth activity, if its laboring under a large debt load.
It's an interesting story for me, as it started with a simple observation of a product launch gone wrong, and ended with my learning more about the mechanics of private equity management of franchisers, just as Dunkin' Donuts is about to go public again.
My own equity portfolio selection process would not see DD as a candidate for some time, if ever. But I wonder how much the average investor, even on the institutional side, really comprehend about what may have been done to and with DD, the franchiser, during its tenure as a private equity-owned acquisition.
Some weeks later, I was informed of this post/comment on a franchise-oriented blog. A bit later, I was directed to this post on the same blog, in which the role of private equity firms, such as Bain, in franchiser buyouts such as Dunkin' Donuts, was discussed. An additional example of private equity behavior in buyouts of restaurant businesses was forwarded to me, as well, in the form of the filing of a suit involving a private equity firm and one of its acquisitions.
I"m not focusing on the detailed dynamics of franchising in this post, nor the particular details described (far better) in that second linked post from the franchising blog.
But what does seem reasonable to assume in the matter of private equity deals is that the private equity group(s) take fees and special dividends out of the acquisitions, further leveraging them up beyond what leverage they already had.
It doesn't take a genius to consider what this sort of cash siphoning by the private equity firm can do to the long term viability of the acquisition, once it has been prepared for an IPO.
Which brings me to Dunkin' Donuts.
In recent weeks, business media have begun to anticipate the return of DD, the franchiser, to public capital markets via an IPO.
Prior to the information I received regarding my post's reference in the franchise blog, I didn't really give much thought to any connection between DD's product launch issues and its franchiser's private equity status.
Since then, I have. Specifically, what the risks are to franchisees of buying into a system, the franchiser of which is vulnerable to takeover by a private equity firm.
Just a few days ago, in the Wall Street Journal, there was a positive article regarding McDonalds commencement of a physical overhaul of up to half of its franchised stores. Being as large and reasonably well-managed as it is, McDonalds seems to be in no danger of being taken private, so its franchisees are pretty safe from uncontrollable damage being inflicted by a new owner.
However, I've learned that this was far from true in the Dunkin' Donuts case. For example, DD, upon going private, engaged in a practice by which they receive extra fees by exercising clauses in franchisees' agreements to essentially take units from current owners and resell them, for more money, to other parties.
Known as "refranchising," this allowed the franchiser, DD, to selectively break up smaller, multiple-unit franchisees who were profitable, but whose stores would be more valuable to slightly larger franchisee groups.
Further, as some of these franchisees who were being, in effect, driven out of business, litigated these moves, resulting fees from the resale of the units became income to the franchiser, or private equity group. Through a process that is rather murky to those of us not in the business, the private equity groups were able to fund such a program from the franchisees' own marketing expenditures, but keep the gains for the corporate unit.
The larger point of all of this is that what has been transpiring at DD under private equity ownership may well be considered activities which aren't exactly "business as usual." Thanks to the magic of IPO accounting, the imminent spinning of DD, the franchiser, back into public hands, seems, well, rather like a pig in a poke.
Given the remarks in one of the franchise blog posts regarding extra leverage being applied to DD during its private equity ownership period, one wonders how capable the newly-independent corporate franchiser will be to fully service its franchisees, its announced expansion into India, and, generally, growth activity, if its laboring under a large debt load.
It's an interesting story for me, as it started with a simple observation of a product launch gone wrong, and ended with my learning more about the mechanics of private equity management of franchisers, just as Dunkin' Donuts is about to go public again.
My own equity portfolio selection process would not see DD as a candidate for some time, if ever. But I wonder how much the average investor, even on the institutional side, really comprehend about what may have been done to and with DD, the franchiser, during its tenure as a private equity-owned acquisition.
Wednesday, May 25, 2011
Horrific Housing Data Predicts Continued Economic Sluggishness
It's no secret that the housing sector has been a drag on the US economic recovery. But different pundits are putting different spins on the recent data showing flat April home sales at, to quote Kelly Evans from the Wall Street Journal, "a seasonally adjusted annual pace of 300,000."
Evans compared current sales to the past with this chilling passage,
"Unless sales pick up materially this year, 2011 will mark a sixth year in a row of new-home-sales declines and the fewest sales since records began being kept in 1963. One statistic tells the story: The 323,000 new homes sold in 2010 was less than 60% of the number of new homes sold in 1963, even though the population today is nearly two-thirds bigger."
According to Evans, "housing is the business cycle." She concludes her Ahead of the Tape column by contending,
"We are stuck today, as in the 1930s, in a household recession triggered by excessive debt levels. These, unfortunately, can take many years- not months- to fix."
It's now almost ten full years since 9/11, when Alan Greenspan lowered rates and kicked off the post-technology equity bubble mortgage finance orgy. What is so troubling is that it apparently never occurred to Greenspan, nor his successor, current Fed chairman Bernanke, that allowing the housing sector to create its own asset bubble would be such a crippling, lasting mistake.
Whereas the technology company bubble involved much intangible value which rapidly grew, then shrank, in web-based business, the housing sector bubble left real physical assets that have overhung the market in ways not seen for literally decades in the US economy's recession-expansion dynamic.
Reading Evans' column gives one pause to wonder how, if the last two Fed chairman could make such a huge, fundamental mistake with their gross mismanagement of the money supply and associated interest rates, just why are we so afraid of significant change at the Fed. Perhaps in the direction of Friedman's automated monetary policy ideas?
Surely before 2000, the Fed contained at least a few capable staff economists who knew of the historic role a vibrant, growing housing sector had in driving the US economy. Were they really completely blind to how the easy money policies of Greenspan were building a large pool of unaffordable housing? Even during the bubble, the Wall Street Journal and CNBC regularly featured pundits who pointed to unaffordable ratios of mean income/mean home price and their changes.
Now that we're saddled with the outcome of the housing-fueled financial mess and its effect on the economy, as Evans notes, we have both physical housing assets and excessive household debt related to it. Plus the continuing depressive effects of soon-to-be-foreclosed houses on the values of currently-occupied homes on which mortgages are still being paid.
While some pundits have suggested literally plowing unoccupied housing under, to magically reduce their affect on the value of existing homes, some entities will have to record those permanent losses. Equity will be destroyed.
Is that really a cure for what ails the US economy now? Is it really intelligent to simply zero out even more housing value on bank balance sheets? Or transfer the losses to government balance sheets?
Meanwhile, recent housing news is abuzz with forecasts of more price declines, perhaps fueling even more foreclosures. At this rate, who in their right mind would borrow- or lend- to build a new home?
I can't help but think that most of this mess, including the cocaine-like effects of QE2, are just more symptoms of our inability to let market forces work on problems like the housing bubble.
Michael Steinhardt opined as much in a March, 2009 appearance on CNBC. I wrote at the time of Steinhardt's observations, including these two,
"The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive.
-What is meant by a "depression" in our current environment? Due to automatic stabilizers, i.e., transfer payment mechanisms, Steinhardt believes that an unemployment rate as low as 12% will trigger consumer behaviors and public sentiment generally associated with much higher 'depression' unemployment levels."
Kelly Evans' focus on the horrific current housing statistics seem to reinforce Steinhardt's thoughts of over two years ago. Unemployment and housing sector activity are certainly related. So continued severe weakness in the latter is continuing to have an impact on the former. And there seems, as Evans contends, to be no simple nor quick resolution.
Evans compared current sales to the past with this chilling passage,
"Unless sales pick up materially this year, 2011 will mark a sixth year in a row of new-home-sales declines and the fewest sales since records began being kept in 1963. One statistic tells the story: The 323,000 new homes sold in 2010 was less than 60% of the number of new homes sold in 1963, even though the population today is nearly two-thirds bigger."
According to Evans, "housing is the business cycle." She concludes her Ahead of the Tape column by contending,
"We are stuck today, as in the 1930s, in a household recession triggered by excessive debt levels. These, unfortunately, can take many years- not months- to fix."
It's now almost ten full years since 9/11, when Alan Greenspan lowered rates and kicked off the post-technology equity bubble mortgage finance orgy. What is so troubling is that it apparently never occurred to Greenspan, nor his successor, current Fed chairman Bernanke, that allowing the housing sector to create its own asset bubble would be such a crippling, lasting mistake.
Whereas the technology company bubble involved much intangible value which rapidly grew, then shrank, in web-based business, the housing sector bubble left real physical assets that have overhung the market in ways not seen for literally decades in the US economy's recession-expansion dynamic.
Reading Evans' column gives one pause to wonder how, if the last two Fed chairman could make such a huge, fundamental mistake with their gross mismanagement of the money supply and associated interest rates, just why are we so afraid of significant change at the Fed. Perhaps in the direction of Friedman's automated monetary policy ideas?
Surely before 2000, the Fed contained at least a few capable staff economists who knew of the historic role a vibrant, growing housing sector had in driving the US economy. Were they really completely blind to how the easy money policies of Greenspan were building a large pool of unaffordable housing? Even during the bubble, the Wall Street Journal and CNBC regularly featured pundits who pointed to unaffordable ratios of mean income/mean home price and their changes.
Now that we're saddled with the outcome of the housing-fueled financial mess and its effect on the economy, as Evans notes, we have both physical housing assets and excessive household debt related to it. Plus the continuing depressive effects of soon-to-be-foreclosed houses on the values of currently-occupied homes on which mortgages are still being paid.
While some pundits have suggested literally plowing unoccupied housing under, to magically reduce their affect on the value of existing homes, some entities will have to record those permanent losses. Equity will be destroyed.
Is that really a cure for what ails the US economy now? Is it really intelligent to simply zero out even more housing value on bank balance sheets? Or transfer the losses to government balance sheets?
Meanwhile, recent housing news is abuzz with forecasts of more price declines, perhaps fueling even more foreclosures. At this rate, who in their right mind would borrow- or lend- to build a new home?
I can't help but think that most of this mess, including the cocaine-like effects of QE2, are just more symptoms of our inability to let market forces work on problems like the housing bubble.
Michael Steinhardt opined as much in a March, 2009 appearance on CNBC. I wrote at the time of Steinhardt's observations, including these two,
"The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive.
-What is meant by a "depression" in our current environment? Due to automatic stabilizers, i.e., transfer payment mechanisms, Steinhardt believes that an unemployment rate as low as 12% will trigger consumer behaviors and public sentiment generally associated with much higher 'depression' unemployment levels."
Kelly Evans' focus on the horrific current housing statistics seem to reinforce Steinhardt's thoughts of over two years ago. Unemployment and housing sector activity are certainly related. So continued severe weakness in the latter is continuing to have an impact on the former. And there seems, as Evans contends, to be no simple nor quick resolution.
Tuesday, May 24, 2011
Holman Jenkins, Jr. On The Missing Rajaratnam Fallout
The Wall Street Journal's Holman Jenkins, Jr. wrote a recent column concerning the Rajaratnam trial and verdict.
Leaving aside the allegations of Jenkins and others that Rajaratnam's crimes were more or less victimless, he rightly expressed outrage that, so far, the real crimes unveiled have gone unpunished.
Specifically, a McKinsey consultant leaking client information, Intel being betrayed by one of its executives and Goldman board meetings being compromised.
Whether or not these are prosecuted, they seem to have paled besides what remains problematic insider trading rules. And how those rules seem to run counter to the principle of wanting as much information represented in stock prices as possible.
It's pretty clear that Rajaratnam knew he was almost certainly violating SEC rules and existing law. It remains unclear whether those laws do much more than occasionally make people feel better by seeing someone prosecuted for violating laws that have dubious value in the first place.
But knowing that these other business people fed Rajaratnam information which was clearly wrongly disclosed is distressing.
As Jenkins noted, those, at least, are the real crimes we can all agree should be wrongful behavior and prosecuted.
Leaving aside the allegations of Jenkins and others that Rajaratnam's crimes were more or less victimless, he rightly expressed outrage that, so far, the real crimes unveiled have gone unpunished.
Specifically, a McKinsey consultant leaking client information, Intel being betrayed by one of its executives and Goldman board meetings being compromised.
Whether or not these are prosecuted, they seem to have paled besides what remains problematic insider trading rules. And how those rules seem to run counter to the principle of wanting as much information represented in stock prices as possible.
It's pretty clear that Rajaratnam knew he was almost certainly violating SEC rules and existing law. It remains unclear whether those laws do much more than occasionally make people feel better by seeing someone prosecuted for violating laws that have dubious value in the first place.
But knowing that these other business people fed Rajaratnam information which was clearly wrongly disclosed is distressing.
As Jenkins noted, those, at least, are the real crimes we can all agree should be wrongful behavior and prosecuted.
The Non-Fallout From Facebook's Dirty PR Tricks
It's been a few weeks since Facebook admitted that it hired Burson-Marsteller to smear Google via placed media pieces. The facts seem not to be in dispute, i.e., Facebook retained the public relations firm to solicit media pieces critical of Google. Burson-Marsteller admitted having violated its own policies by not disclosing Facebook's identity while it solicited the articles.
I'm rather shocked by the lack of outcry among Facebook's users and the technology community in general. To those of us old enough to remember, this smacks of Tricky Dicky Nixon's infamous enemies lists and his campaign staff's dirty tricks.
For a company which doesn't seem to really do much of anything, and has had some issues of its own with misusing its members privacy at time, you'd think there would be a much greater reaction in the sector or the media.
Instead, it's been rather quiet. No pillorying of Zuckerberg in the public media.
How'd he get off so lightly?
I'm rather shocked by the lack of outcry among Facebook's users and the technology community in general. To those of us old enough to remember, this smacks of Tricky Dicky Nixon's infamous enemies lists and his campaign staff's dirty tricks.
For a company which doesn't seem to really do much of anything, and has had some issues of its own with misusing its members privacy at time, you'd think there would be a much greater reaction in the sector or the media.
Instead, it's been rather quiet. No pillorying of Zuckerberg in the public media.
How'd he get off so lightly?
Monday, May 23, 2011
Job Market Context Statistics
Edward Lazear, former Council of Economic Advisers chairman for President George W Bush, wrote an informative editorial a week ago in the Wall Street Journal.
With all the hoopla surrounding changes of a few tens of thousands of newly-employed in recent monthly BLS numbers, Lazear provided some useful background to these series.
First, Lazear reminded readers that changes in employment are a function of lack of layoffs and new hires- not just the latter- among some 150MM "workers or job seekers."
Recently, net positive monthly employment numbers have been the result of "a decline in the number of layoffs, not from increased hiring."
He notes that,
"In a healthy labor market like the one that prevailed in 2006 and early 2007, American firms hire about 5.5 million workers per month." Meaning that there is tremendous monthly churn in the overall employment base.
Lazear wrote his editorial to argue for lower taxes, less regulatory burden and such to foster more investment that would lead to more hiring.
That all may be true. But my reason for discussing his piece is how it calls into question so much micro-concentration on the series that is the net of hiring and layoffs, rather than paying attention to the current monthly employment base, hires and separations.
Against a 150 million-person workforce, monthly net gains of some 200,000, or .00133%, seems insignificant. By dwelling on the mean and variance of the net series, we miss how woefully inadequate the mean is when set against the overall labor market.
No more 'new jobs created' scenario as the government would like us to believe, but, rather, simply a recognition of less need to shed existing workers.
To now learn that the past two years of net gains have been almost totally accounted for by layoffs ebbing, rather than all new hires, paints a much different picture, doesn't it?
With all the hoopla surrounding changes of a few tens of thousands of newly-employed in recent monthly BLS numbers, Lazear provided some useful background to these series.
First, Lazear reminded readers that changes in employment are a function of lack of layoffs and new hires- not just the latter- among some 150MM "workers or job seekers."
Recently, net positive monthly employment numbers have been the result of "a decline in the number of layoffs, not from increased hiring."
He notes that,
"In a healthy labor market like the one that prevailed in 2006 and early 2007, American firms hire about 5.5 million workers per month." Meaning that there is tremendous monthly churn in the overall employment base.
Lazear wrote his editorial to argue for lower taxes, less regulatory burden and such to foster more investment that would lead to more hiring.
That all may be true. But my reason for discussing his piece is how it calls into question so much micro-concentration on the series that is the net of hiring and layoffs, rather than paying attention to the current monthly employment base, hires and separations.
Against a 150 million-person workforce, monthly net gains of some 200,000, or .00133%, seems insignificant. By dwelling on the mean and variance of the net series, we miss how woefully inadequate the mean is when set against the overall labor market.
No more 'new jobs created' scenario as the government would like us to believe, but, rather, simply a recognition of less need to shed existing workers.
To now learn that the past two years of net gains have been almost totally accounted for by layoffs ebbing, rather than all new hires, paints a much different picture, doesn't it?
Saturday, May 21, 2011
Discipline: The Difference Between Amateur Investing & Professional Portfolio Management
I was recently reminded of a key difference between amateur investors and professional portfolio managers.
Several months ago, a former business partner who had failed to perform according to his obligations, obtained equity selection information for last November. Being information, I could not unsend it, and, with his continued failure to perform, I wasn't going to manage his equity investments for free.
As it happened, he had asked me to accept trading authorization for an equity account, which placed me on the firm's list for duplicate confirms and statements. Thus, I was able to observe his attempts at using the November information.
Despite his having been familiar with my portfolio management approach and discipline for over four years, as an amateur, he stumbled badly in his attempt to emulate my management of his portfolio.
First, he dithered for nearly four months before deciding to buy the equities which my process selected in November. Since each portfolio has a six-month duration, this was a significant mistake on his part. But he compounded that error by investing in some, but not all of the equities in the portfolio.
As I reviewed his holdings at the end of April, when the November portfolio would be traded to conform to May's selections, I noted that his account's performance was roughly 10%, or less than half of my November's portfolio's full term gross performance.
Significantly, one of the equities he failed to buy had the second-highest total return in the portfolio. Omitting that equity not only denied its excellent return, but, due to weighting effects, caused him to buy more of the lower-return equities in the portfolio. Only two of the other issues underperformed the S&P, and not by much, whereas the rest of the portfolio widely-outperformed the index since November, resulting in a gross total return nearly twice that of the S&P500 for the period.
I have taken heed of James O'Shaughnessy's advice to quantitatively-oriented portfolio investors that they should adhere to their model, not second-guess it. My former partner and I had discussed this important point often. Thus, I thought he understood the importance of disciplined investing.
But, in the final analysis, his amateur nature was displayed by his inability to practice the discipline of investing according to an approach which he knew would, when followed faithfully, significantly outperform the S&P.
Several months ago, a former business partner who had failed to perform according to his obligations, obtained equity selection information for last November. Being information, I could not unsend it, and, with his continued failure to perform, I wasn't going to manage his equity investments for free.
As it happened, he had asked me to accept trading authorization for an equity account, which placed me on the firm's list for duplicate confirms and statements. Thus, I was able to observe his attempts at using the November information.
Despite his having been familiar with my portfolio management approach and discipline for over four years, as an amateur, he stumbled badly in his attempt to emulate my management of his portfolio.
First, he dithered for nearly four months before deciding to buy the equities which my process selected in November. Since each portfolio has a six-month duration, this was a significant mistake on his part. But he compounded that error by investing in some, but not all of the equities in the portfolio.
As I reviewed his holdings at the end of April, when the November portfolio would be traded to conform to May's selections, I noted that his account's performance was roughly 10%, or less than half of my November's portfolio's full term gross performance.
Significantly, one of the equities he failed to buy had the second-highest total return in the portfolio. Omitting that equity not only denied its excellent return, but, due to weighting effects, caused him to buy more of the lower-return equities in the portfolio. Only two of the other issues underperformed the S&P, and not by much, whereas the rest of the portfolio widely-outperformed the index since November, resulting in a gross total return nearly twice that of the S&P500 for the period.
I have taken heed of James O'Shaughnessy's advice to quantitatively-oriented portfolio investors that they should adhere to their model, not second-guess it. My former partner and I had discussed this important point often. Thus, I thought he understood the importance of disciplined investing.
But, in the final analysis, his amateur nature was displayed by his inability to practice the discipline of investing according to an approach which he knew would, when followed faithfully, significantly outperform the S&P.
Friday, May 20, 2011
More Idiocy From Jamie Dimon
I heard Bloomberg report this morning that Chase's CEO, Jamie Dimon, was excoriating Congress for taking the national debt limit seriously.
In a commencement speech in Colorado, Dimon castigated Congress for risking default and all that he believes will follow.
But, as I noted in this recent post discussing Stanley Druckenmiller's interview in the Wall Street Journal last weekend, real bond traders have a different view.
Last I looked, Dimon's formative years were spent carrying Sandy Weill's bags for a living. I don't believe Dimon was ever celebrated for running a successful government bond trading operation.
Druckenmiller, on the other hand, is known for successfully trading government debt. And he disagrees completely with Dimon's opinions, dispensed, such as they are, from 20,000 feet.
Ever since I worked closely with the CEO and Chairman at Chase Manhattan Bank, thanks to my mentor, Gerry Weiss, and with his helpful explanations, I learned how often such executives become pompous and self-important, pronouncing on topics about which they actually know little, or nothing, simply because of the title behind their names.
So, who would you believe? Druckenmiller, who's made a career in investing in governments, or Dimon, who's made a career as a financial services apparatchik and bureaucrat?
In a commencement speech in Colorado, Dimon castigated Congress for risking default and all that he believes will follow.
But, as I noted in this recent post discussing Stanley Druckenmiller's interview in the Wall Street Journal last weekend, real bond traders have a different view.
Last I looked, Dimon's formative years were spent carrying Sandy Weill's bags for a living. I don't believe Dimon was ever celebrated for running a successful government bond trading operation.
Druckenmiller, on the other hand, is known for successfully trading government debt. And he disagrees completely with Dimon's opinions, dispensed, such as they are, from 20,000 feet.
Ever since I worked closely with the CEO and Chairman at Chase Manhattan Bank, thanks to my mentor, Gerry Weiss, and with his helpful explanations, I learned how often such executives become pompous and self-important, pronouncing on topics about which they actually know little, or nothing, simply because of the title behind their names.
So, who would you believe? Druckenmiller, who's made a career in investing in governments, or Dimon, who's made a career as a financial services apparatchik and bureaucrat?
Citigroup's Board's Appalling Reward of Pandit
Color me stunned as I opened yesterday's Wall Street Journal to learn that Citigroup's board actually awarded its inept CEO, Vikram Pandit, a potentially lush compensation package worth as much as $23MM, so he won't leave!
I actually heard Dick Parsons, Citi's board chairman, say this with a straight face in a noontime interview on CNBC.
Before I go further, take a look at the nearby price chart of several large US financial firms, Citi and the S&P500 Index for the past five years.
Citi is by far the absolute worst performer. There is absolutely no surviving firm which did as poorly, although Morgan Stanley (Pandit's old firm) and BofA were in the running.
Chase, Goldman and Wells Fargo tracked the S&P, ending the period more or less flat.
Missing, of course, are Bear Stearns, Wachovia, WaMu and Merrill Lynch, all of which either failed or were bought as they became insolvent.
Citigroup should have been in this group, with or without Pandit. Since he was CEO when the financial panic hit in the fall of 2008, his naivete, inexperience and general cluelessness were all good reasons to simply put Citi into court-protected reorganization. Deep-pocketed competitors would have gladly scooped up various pieces of the firm, so it's not like it would have literally disappeared, or that all its employees would have been suddenly jobless.
In fact, by letting more experienced, surviving, better-heeled firms buy the remnants of a failed Citigroup, Schumpeterian dynamics would have been playing out along its natural lines.
Instead, we now have sanctimonious Citi chairman Parsons claiming that Pandit did a great job and the board is concerned with his retention. This despite the fact that Pandit and his team haven't yet been able to give the board a clear, firm picture of Citi's normal expected business performance and income statement in the years ahead.
Mike Mayo, a longtime bank analyst, echoed my thoughts when quoted in the Journal article casting doubt on,
"rewarding a CEO whose company's stock has significantly underperformed other large banks during his tenure, and who got an enormous payday with the acquisition of his hedge fund."
It's unclear, besides lots of platitudes, that Pandit has any idea what he's doing. The same goes for Parsons and his board. How can they, in good conscience, squander their shareholders' money like this? Either Parsons is a fool, delusional, or was just plain lying when he spun his fairy tale version of Citi's recent performance on CNBC yesterday afternoon. It's not like there are any firms left stupid enough to try to hire Pandit if he actually left Citicorp.
The Journal piece details that one of the elements of Pandit's compensation is participation in a profit-sharing plan which is cleverly based only on the "core banking unit, without counting the losses at Citi Holdings, the entity holding the assets earmarked for sale. The profit-sharing payments kick in once the core Citicorp banking unit tops $12 billion in pretax profit over the years 2011 and 2012- less than half the level recorded for 2010." That was $20B.
So Parsons' contention that Pandit 'has to perform' is disingenuous. He and his board cronies set the bar so low that a monkey could be in Pandit's job and Citi would still beat the profit-sharing targets. And the bananas would be much cheaper than what Pandit's going to receive for a bank that is essentially on autopilot.
Parsons also hastily put the past behind, probably because he doesn't want anyone to remember that Pandit was paid several hundred million dollars for a hedge fund that subsequently performed so badly that it had to be closed. Even with various stock options and lockups, it's pretty clear that Pandit made tens of millions free and clear from the deal.
From seeing Parsons' performance on CNBC and reading of Pandit's new compensation package, I can't imagine anyone other than market-timing institutional professional investors going near Citi's equity anytime soon.
I actually heard Dick Parsons, Citi's board chairman, say this with a straight face in a noontime interview on CNBC.
Before I go further, take a look at the nearby price chart of several large US financial firms, Citi and the S&P500 Index for the past five years.
Chase, Goldman and Wells Fargo tracked the S&P, ending the period more or less flat.
Missing, of course, are Bear Stearns, Wachovia, WaMu and Merrill Lynch, all of which either failed or were bought as they became insolvent.
Citigroup should have been in this group, with or without Pandit. Since he was CEO when the financial panic hit in the fall of 2008, his naivete, inexperience and general cluelessness were all good reasons to simply put Citi into court-protected reorganization. Deep-pocketed competitors would have gladly scooped up various pieces of the firm, so it's not like it would have literally disappeared, or that all its employees would have been suddenly jobless.
In fact, by letting more experienced, surviving, better-heeled firms buy the remnants of a failed Citigroup, Schumpeterian dynamics would have been playing out along its natural lines.
Instead, we now have sanctimonious Citi chairman Parsons claiming that Pandit did a great job and the board is concerned with his retention. This despite the fact that Pandit and his team haven't yet been able to give the board a clear, firm picture of Citi's normal expected business performance and income statement in the years ahead.
Mike Mayo, a longtime bank analyst, echoed my thoughts when quoted in the Journal article casting doubt on,
"rewarding a CEO whose company's stock has significantly underperformed other large banks during his tenure, and who got an enormous payday with the acquisition of his hedge fund."
It's unclear, besides lots of platitudes, that Pandit has any idea what he's doing. The same goes for Parsons and his board. How can they, in good conscience, squander their shareholders' money like this? Either Parsons is a fool, delusional, or was just plain lying when he spun his fairy tale version of Citi's recent performance on CNBC yesterday afternoon. It's not like there are any firms left stupid enough to try to hire Pandit if he actually left Citicorp.
The Journal piece details that one of the elements of Pandit's compensation is participation in a profit-sharing plan which is cleverly based only on the "core banking unit, without counting the losses at Citi Holdings, the entity holding the assets earmarked for sale. The profit-sharing payments kick in once the core Citicorp banking unit tops $12 billion in pretax profit over the years 2011 and 2012- less than half the level recorded for 2010." That was $20B.
So Parsons' contention that Pandit 'has to perform' is disingenuous. He and his board cronies set the bar so low that a monkey could be in Pandit's job and Citi would still beat the profit-sharing targets. And the bananas would be much cheaper than what Pandit's going to receive for a bank that is essentially on autopilot.
Parsons also hastily put the past behind, probably because he doesn't want anyone to remember that Pandit was paid several hundred million dollars for a hedge fund that subsequently performed so badly that it had to be closed. Even with various stock options and lockups, it's pretty clear that Pandit made tens of millions free and clear from the deal.
From seeing Parsons' performance on CNBC and reading of Pandit's new compensation package, I can't imagine anyone other than market-timing institutional professional investors going near Citi's equity anytime soon.
Thursday, May 19, 2011
The Fading Fortunes of PC Firms
Hewlett-Packard's warning this week as it announced quarterly earnings threw Tuesday's equity markets into the tank at the market's open.
Predictably, a stream of analysts, portfolio managers and other pundits weighed in on HP, how it was different than Dell, whether it had major challenges ahead of it, etc.
I heard various analyses of HP's businesses, including focusing on corporate services.
To me, however, it simply boils down to HP, like Dell and Microsoft, being a company with the bulk of its fortune still tied to personal computers.
This is clear from inspection of the nearby price chart for HP, Dell, Microsoft, Apple and the S&P500 Index from 1990 to the present. The first three firms, which have relied more heavily on conventional personal or business computing for their revenues and profits, have had their stock prices languish or fall over the past decade.
In contrast, Apple, which transformed itself from a mere computer maker to a special-purpose digital device company early in the decade, has significantly outperformed the other three firms.
That is why, in my opinion, unless you are hoping for a near-term timing play on Dell or HP, or even Microsoft, for that matter, you will be disappointed if you buy or hold those equities anymore. They are obviously no longer the firms they once were, either fundamentally or in terms of market appreciation of their performances.
Apple is a very rare firm in its having arisen from near-disaster during the Scully era and been transformed by Jobs upon his return. Dell, HP and Microsoft are unlikely to duplicate that feat. They are, for the most part, firms, the fortunes of which rose meteorically, then plateaued, with the fortunes of the personal computer.
As iPods, iPads and enhanced smartphones increasingly cannibalize functions and activities PCs once dominated, the firms which remain largely defined by the latter are destined to continue to decline. Even having the largest share of the global PC market does HP little good when it has become a commodity business with a comparatively slow growth rate.
I heard various analyses of HP's businesses, including focusing on corporate services.
To me, however, it simply boils down to HP, like Dell and Microsoft, being a company with the bulk of its fortune still tied to personal computers.
This is clear from inspection of the nearby price chart for HP, Dell, Microsoft, Apple and the S&P500 Index from 1990 to the present. The first three firms, which have relied more heavily on conventional personal or business computing for their revenues and profits, have had their stock prices languish or fall over the past decade.
In contrast, Apple, which transformed itself from a mere computer maker to a special-purpose digital device company early in the decade, has significantly outperformed the other three firms.
That is why, in my opinion, unless you are hoping for a near-term timing play on Dell or HP, or even Microsoft, for that matter, you will be disappointed if you buy or hold those equities anymore. They are obviously no longer the firms they once were, either fundamentally or in terms of market appreciation of their performances.
Apple is a very rare firm in its having arisen from near-disaster during the Scully era and been transformed by Jobs upon his return. Dell, HP and Microsoft are unlikely to duplicate that feat. They are, for the most part, firms, the fortunes of which rose meteorically, then plateaued, with the fortunes of the personal computer.
As iPods, iPads and enhanced smartphones increasingly cannibalize functions and activities PCs once dominated, the firms which remain largely defined by the latter are destined to continue to decline. Even having the largest share of the global PC market does HP little good when it has become a commodity business with a comparatively slow growth rate.
Wednesday, May 18, 2011
Jason Zweig's Questionable Home Mortgage Hedging Column
In this past weekend's edition of the Wall Street Journal, Jason Zweig wrote in his The Intelligent Investor column about hedging your home mortgage. I think it may be time for him to change the name of that column.
First, this is hardly a new idea. I've thought about it for decades, as I'm sure have many other intelligent, educated people who've worked in the financial sector. Why would you not consider how to hedge the value of what, for most people, is their largest asset purchase, when it reaches a lofty value?
My own ideas have included simply selling it to someone while simultaneously leasing it back. Zweig's column mentions a few firms that purport to offer value insurance for about 1.5% of value.
Frankly, that's obviously very cheap if you have had to buy into a housing market that's frothy or even merely tight and probably, at least currently, overvalued.
Of course, your home isn't just another asset. You live in it and it's probably the most ill-liquid asset you'll own. If you get a hedge on it wrong, it could have life-altering consequences beyond those of an IRA gone wrong. Plus, for real estate exposure, there are other ways to invest, if that's what you want.
Perhaps you shouldn't buy into overheated markets, and go long on undervalued ones. Simple and effective, without the major risk I'll get to shortly.
Leaving aside the regulatory hurdles, consider the challenge of making this a truly ubiquitous product. That is, consider it while recalling what happened to AIG due to its financial products unit which sold so many derivatives which were meant to function as hedges.
To me, the primary issue is counterparty risk for something so massive. Sure, it may be feasible for someone to offer home value hedging just for Syracuse, New York, as one firm mentioned in Zweig's article does.
But US home ownership is a large chunk of value. I don't have my fingers on the exact number, but it's very large. So ask yourself this.
What exists as a countervailing asset that can be reliably expected to fund a massive drop in US residential real estate values?
These sorts of bets typically come unglued when reality overwhelms prior expectations, resulting in a "black swan" event that transcends stress tests.
We're not talking about real estate values dropping by 3% or 10%. Let's talk 30% and more.
What other US-based asset class will be likely to remain able to pay off a 50% decline in the value of all US residential real estate?
Long ago, during the first great collateralized mortgage frenzy, when Lew Ranieri ran his famous group at Salomon Brothers, I discussed this issue with my boss, Gerry Weiss, SVP of Corporate Planning & Development. He had sent me to a CMO conference in Manhattan, and wanted to debrief me from my two-day experience.
In short, I said that the repackaging of cashflows into CMOs by the fixed-income wizards, who were suspiciously silent on things like 'negative convexity,' which would affect the duration and value of longer-lived tranches, could not, by themselves, magically eliminate risks of mortgage lending.
In effect, in exchange for a few percentage points of fees to create, sell and service the CMOs, investment banks were simply recutting and spreading existing risk while extracting a fee.
Risk is conserved- it can't be eliminated. It can be hedged, assuming a perfect, reliable counterparty.
Thus, while many unwashed thought the CMO craze made the world safe for mortgage risk, all it really did was pay Wall Street investment banks to allow troubles S&L's to liquefy their damaged mortgage loans while simultaneously allowing investors to more finely select mortgage risks subject to duration and other factors.
So when I read Zweig's piece, the first thing that came to mind was, just who will be a reliable counterparty for a substantial portion of the value of all US residential real estate?
How will that work? What source of asset value will be either unaffected by, or move in opposition to, the value of US residential real estate at a time of huge value reduction of the latter?
Granted, should such a ubiquitous residential real estate hedge become available, it might provide some minor relief for a family which, due to one of the parents' careers, moves every 5-7 years. But that's a steep price for such short-term coverage.
But for the worst case scenario involving residential real estate hedges, beyond holding an instrument that purports to be that hedge, a reliable party with an asset that will perform on that hedge have to both exist amidst an expected turbulent financial and/or economic environment.
It's not the "greatest idea never sold." It's a mirage.
First, this is hardly a new idea. I've thought about it for decades, as I'm sure have many other intelligent, educated people who've worked in the financial sector. Why would you not consider how to hedge the value of what, for most people, is their largest asset purchase, when it reaches a lofty value?
My own ideas have included simply selling it to someone while simultaneously leasing it back. Zweig's column mentions a few firms that purport to offer value insurance for about 1.5% of value.
Frankly, that's obviously very cheap if you have had to buy into a housing market that's frothy or even merely tight and probably, at least currently, overvalued.
Of course, your home isn't just another asset. You live in it and it's probably the most ill-liquid asset you'll own. If you get a hedge on it wrong, it could have life-altering consequences beyond those of an IRA gone wrong. Plus, for real estate exposure, there are other ways to invest, if that's what you want.
Perhaps you shouldn't buy into overheated markets, and go long on undervalued ones. Simple and effective, without the major risk I'll get to shortly.
Leaving aside the regulatory hurdles, consider the challenge of making this a truly ubiquitous product. That is, consider it while recalling what happened to AIG due to its financial products unit which sold so many derivatives which were meant to function as hedges.
To me, the primary issue is counterparty risk for something so massive. Sure, it may be feasible for someone to offer home value hedging just for Syracuse, New York, as one firm mentioned in Zweig's article does.
But US home ownership is a large chunk of value. I don't have my fingers on the exact number, but it's very large. So ask yourself this.
What exists as a countervailing asset that can be reliably expected to fund a massive drop in US residential real estate values?
These sorts of bets typically come unglued when reality overwhelms prior expectations, resulting in a "black swan" event that transcends stress tests.
We're not talking about real estate values dropping by 3% or 10%. Let's talk 30% and more.
What other US-based asset class will be likely to remain able to pay off a 50% decline in the value of all US residential real estate?
Long ago, during the first great collateralized mortgage frenzy, when Lew Ranieri ran his famous group at Salomon Brothers, I discussed this issue with my boss, Gerry Weiss, SVP of Corporate Planning & Development. He had sent me to a CMO conference in Manhattan, and wanted to debrief me from my two-day experience.
In short, I said that the repackaging of cashflows into CMOs by the fixed-income wizards, who were suspiciously silent on things like 'negative convexity,' which would affect the duration and value of longer-lived tranches, could not, by themselves, magically eliminate risks of mortgage lending.
In effect, in exchange for a few percentage points of fees to create, sell and service the CMOs, investment banks were simply recutting and spreading existing risk while extracting a fee.
Risk is conserved- it can't be eliminated. It can be hedged, assuming a perfect, reliable counterparty.
Thus, while many unwashed thought the CMO craze made the world safe for mortgage risk, all it really did was pay Wall Street investment banks to allow troubles S&L's to liquefy their damaged mortgage loans while simultaneously allowing investors to more finely select mortgage risks subject to duration and other factors.
So when I read Zweig's piece, the first thing that came to mind was, just who will be a reliable counterparty for a substantial portion of the value of all US residential real estate?
How will that work? What source of asset value will be either unaffected by, or move in opposition to, the value of US residential real estate at a time of huge value reduction of the latter?
Granted, should such a ubiquitous residential real estate hedge become available, it might provide some minor relief for a family which, due to one of the parents' careers, moves every 5-7 years. But that's a steep price for such short-term coverage.
But for the worst case scenario involving residential real estate hedges, beyond holding an instrument that purports to be that hedge, a reliable party with an asset that will perform on that hedge have to both exist amidst an expected turbulent financial and/or economic environment.
It's not the "greatest idea never sold." It's a mirage.
Tuesday, May 17, 2011
Stanley Druckenmiller's Debt Limit/Default Remarks
It has been frustrating reading and listening to so much misinformation and disinformation from crony capitalists and politicians regarding the soon-to-be-reached federal debt limit and the maneuvering between the House Republicans and the administration regarding it.
So I was elated to read this weekend's interview in the Wall Street Journal. Stanley Druckenmiller, the interview's subject, was candid about the debt limit situation. It seems he shares the viewpoints I've articulated on this subject over on my companion political blog.
Druckenmiller distills his view of the situation in these passages from the interview,
"'A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we're behaving," says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros. Is this another warning from Wall Street that Congress must immediately raise the federal debt limit to prevent the end of civilization?
No—Mr. Druckenmiller has heard enough of such "clamor and hyperbole." The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.
"I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.
"Here are your two options: piece of paper number one—let's just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind that it's not going to pay, but it's going to be delayed. But in exchange for that, let's suppose I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says.
Then there's "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one." "
This has been my view for some time. Merely raising the debt limit is to announce that absolutely nothing has changed. It has to be combined with spending cuts, and a slight delay in a few interest payments, if that even occurs, is a small price to pay for the federal government being forced to begin to aggressively cut its out-of-control spending.
Few things are as convincing as empirical evidence, and on that score, Druckenmiller corrects what passes for that, incorrectly, from the mouths of some pundits and politicians,
"Mr. Druckenmiller had already recognized that the government had embarked on a long-term march to financial ruin. So he publicly opposed the hysterical warnings from financial eminences, similar to those we hear today. He recalls that then-Secretary of the Treasury Robert Rubin warned that if the political stand-off forced the government to delay a debt payment, the Treasury bond market would be impaired for 20 years.
"Excuse me? Russia had a real default and two or three years later they had all-time low interest rates," says Mr. Druckenmiller. In the future, he says, "People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order."
Mr. Druckenmiller is puzzled that so many financial commentators see the possible failure to raise the debt ceiling as more serious than the possibility that the government will accumulate too much debt. "I'm just flabbergasted that we're getting all this commentary about catastrophic consequences, including from the chairman of the Federal Reserve, about this situation but none of these guys bothered to write letters or whatever about the real situation which is we're piling up trillions of dollars of debt."
He's particularly puzzled that Mr. Geithner and others keep arguing that spending shouldn't be cut, and yet the White House has ruled out reform of future entitlement liabilities—the one spending category Mr. Druckenmiller says you can cut without any near-term impact on the economy."
On the subject of current interest rates and the bond market, Druckenmiller is refreshingly candid,
"Some have argued that since investors are still willing to lend to the Treasury at very low rates, the government's financial future can't really be that bad. "Complete nonsense," Mr. Druckenmiller responds. "It's not a free market. It's not a clean market." The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week."
Warming to the topic, he asks, "When do you generally get action from governments? When their bond market blows up." But that isn't happening now, he says, because the Fed is "aiding and abetting" the politicians' "reckless behavior." "
Finally, he echoes my own thoughts on Ryan's budget,
"Mr. Druckenmiller says he's "a registered independent" but says he admires New Jersey Gov. Chris Christie for the way he has explained that the state has to reform its benefit plans if it is going to be able to take care of retired government workers. He argues that the same case needs to be made nationally. "We don't have a choice between Paul Ryan's plan and the current plan, because the current plan is a mirage. . . . That money is not going to be there." "
But so long as politicians and crony capitalists pretend current programs and spending can be sustained, we're going to test the real bond markets at some point. And then the result is unlikely to be pretty or painless.
So I was elated to read this weekend's interview in the Wall Street Journal. Stanley Druckenmiller, the interview's subject, was candid about the debt limit situation. It seems he shares the viewpoints I've articulated on this subject over on my companion political blog.
Druckenmiller distills his view of the situation in these passages from the interview,
"'A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we're behaving," says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros. Is this another warning from Wall Street that Congress must immediately raise the federal debt limit to prevent the end of civilization?
No—Mr. Druckenmiller has heard enough of such "clamor and hyperbole." The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.
"I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.
"Here are your two options: piece of paper number one—let's just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind that it's not going to pay, but it's going to be delayed. But in exchange for that, let's suppose I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says.
Then there's "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one." "
This has been my view for some time. Merely raising the debt limit is to announce that absolutely nothing has changed. It has to be combined with spending cuts, and a slight delay in a few interest payments, if that even occurs, is a small price to pay for the federal government being forced to begin to aggressively cut its out-of-control spending.
Few things are as convincing as empirical evidence, and on that score, Druckenmiller corrects what passes for that, incorrectly, from the mouths of some pundits and politicians,
"Mr. Druckenmiller had already recognized that the government had embarked on a long-term march to financial ruin. So he publicly opposed the hysterical warnings from financial eminences, similar to those we hear today. He recalls that then-Secretary of the Treasury Robert Rubin warned that if the political stand-off forced the government to delay a debt payment, the Treasury bond market would be impaired for 20 years.
"Excuse me? Russia had a real default and two or three years later they had all-time low interest rates," says Mr. Druckenmiller. In the future, he says, "People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order."
Mr. Druckenmiller is puzzled that so many financial commentators see the possible failure to raise the debt ceiling as more serious than the possibility that the government will accumulate too much debt. "I'm just flabbergasted that we're getting all this commentary about catastrophic consequences, including from the chairman of the Federal Reserve, about this situation but none of these guys bothered to write letters or whatever about the real situation which is we're piling up trillions of dollars of debt."
He's particularly puzzled that Mr. Geithner and others keep arguing that spending shouldn't be cut, and yet the White House has ruled out reform of future entitlement liabilities—the one spending category Mr. Druckenmiller says you can cut without any near-term impact on the economy."
On the subject of current interest rates and the bond market, Druckenmiller is refreshingly candid,
"Some have argued that since investors are still willing to lend to the Treasury at very low rates, the government's financial future can't really be that bad. "Complete nonsense," Mr. Druckenmiller responds. "It's not a free market. It's not a clean market." The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week."
Warming to the topic, he asks, "When do you generally get action from governments? When their bond market blows up." But that isn't happening now, he says, because the Fed is "aiding and abetting" the politicians' "reckless behavior." "
Finally, he echoes my own thoughts on Ryan's budget,
"Mr. Druckenmiller says he's "a registered independent" but says he admires New Jersey Gov. Chris Christie for the way he has explained that the state has to reform its benefit plans if it is going to be able to take care of retired government workers. He argues that the same case needs to be made nationally. "We don't have a choice between Paul Ryan's plan and the current plan, because the current plan is a mirage. . . . That money is not going to be there." "
But so long as politicians and crony capitalists pretend current programs and spending can be sustained, we're going to test the real bond markets at some point. And then the result is unlikely to be pretty or painless.
Monday, May 16, 2011
Yahoo's Latest Problem & The Risks of Investing In China
By now the news regarding Yahoo's latest little problem has circulated for days. It's got to be bad news for Carol Bartz, if only because, in the best case, it would seem that she didn't divulge the information publicly for some weeks.
I won't waste a lot of space on the particulars. Basically, for years, Yahoo has been seen as valuable for its investment stake in Alibaba Group, the China-based online firm. The Wall Street Journal noted, in its Friday piece on this story,
"Hedge-fund manager David Einhorn, of Greenlight Capital, earlier this month disclosed a position in Yahoo while expressing interst in the Internet company's China holdings. He argued Yahoo's stake in Alibaba Group could be "ultimately worth Yahoo's entire current market value." "
In this recent post, I noted Einhorn's investment, and how it might actually represent the best exit opportunity that existing Yahoo shareholders were going to see,
"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. "
Now, it seems that my chance remarks about Lampert's Sears foray and the risks for Einhorn seem eerily prescient.
Stories differ on when Yahoo's board or CEO was informed of the event that is at the heart of the flap. It seems Alibaba sold its Alipay unit, according to the Journal report,
"to an entity controlled by Alibaba founder and Chief Executive Jack Ma in response to rules issued last year by the People's Bank of China, or PBOC, that could potentially bar foreigners from owning controlling stakes in Chinese Internet-payment services."
Alipay has been described as a Chinese version of PayPal. Most analysts and pundits were aghast that the crown jewel of Alibaba, itself the crown jewel of Yahoo, had been purloined by Ma.
Yahoo says it was notified of this on March 31 of this year, but Alibaba contends they informed Yahoo's board "in July 2009 that the "majority shareholding in Alipay had been transferred into Chinese ownership."
Oh dear. If Alibaba is correct, Bartz and her board learned of the Alipay sale only about six months after she took the reins of Yahoo in January of 2009. That would seem to mean that Yahoo's board and, probably, senior management team failed to disclose a material event affecting the firm's prospects and valuation for well over 18 months.
Even if Bartz' and Yahoo's version is true, they've waited about six weeks to disclose the surprise transaction. Regardless, the Journal article reported that yahoo shares fell some 13% on Friday in response to the news.
The nearby six-month chart of Yahoo's price, as compared with the S&P500 Index, is informative. It took the post-Einhorn stake price rise for Yahoo to match the index's performance, only to crater on the Alipay story. Given Yahoo's troubled history, I wonder if the May price rise was a function of investors deciding to join Einhorn in his play to extract more value from the equity. It would make sense.
Mind you, Yahoo's price was in the $16 range to start, so a 10% gain wouldn't even get it to $18. Prices were in the $17.48 range before it fell last week.
I have no idea what Einhorn's average cost is for the stock, but he must be seething to learn that such a key asset, and evidently the main reason for his Yahoo investment, is gone.
One Journal article suggested Bartz' exit may be imminent. I'd think Einhorn would be considering a lawsuit for the board's non-disclosure of such material information.
Never the less, this little episode nicely showcases the risks of turnaround investing, whether by ordinary retail investors or veteran hedge fund operators like Lampert and Einhorn. Not to mention that even an astute guy like Einhorn may have been too clever by a half when he bought into Yahoo by failing to realize that the management gang that got itself into such valuation straits may have also mismanaged their control over the China crown jewel for which so many investors evidently prized the company's equity. Especially, it would seem, Einhorn himself.
There's a reason why Yahoo's fortunes declined so in the past decade. Thus the risk of owning the shares of this mediocre internet has-been, hoping that something it once did might, amidst all its mistakes, turn out to rescue the company's valuation fortunes.
Then there's the provocative passage at the end of this weekend's edition Heard On The Street column concerning the Yahoo debacle,
"If investors thought Google had a problem in China with censorship, Yahoo just made it look trivial. China represents a huge chunk of Yahoo's value. Shareholders' hopes of realizing that are now in doubt."
I've never bought into the belief that investing directly in China is a good idea. The government and its economic and financial activities are simply too opaque and quixotic. Similarly, I've opined that, so long as this is true, the US dollar has comparatively little to fear from investors selling their greenbacks for Chinese yuan.
This is a classic example of how risky any Chinese investments, whether bricks and mortar, or financial as part-ownership of a business entity, remain.
What is a major issue for Yahoo could snowball, depending upon its resolution, into a turning point for global investors, whether they be businesses seeking to open or expand there, or simply viewing China as an financial investment opportunity.
The combination of the PBOC's unilateral rule which brought on the Alipay "taking" by Jack Ma demonstrates how tenuous outside investor possession of what they think they own in China to be.
I won't waste a lot of space on the particulars. Basically, for years, Yahoo has been seen as valuable for its investment stake in Alibaba Group, the China-based online firm. The Wall Street Journal noted, in its Friday piece on this story,
"Hedge-fund manager David Einhorn, of Greenlight Capital, earlier this month disclosed a position in Yahoo while expressing interst in the Internet company's China holdings. He argued Yahoo's stake in Alibaba Group could be "ultimately worth Yahoo's entire current market value." "
In this recent post, I noted Einhorn's investment, and how it might actually represent the best exit opportunity that existing Yahoo shareholders were going to see,
"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. "
Now, it seems that my chance remarks about Lampert's Sears foray and the risks for Einhorn seem eerily prescient.
Stories differ on when Yahoo's board or CEO was informed of the event that is at the heart of the flap. It seems Alibaba sold its Alipay unit, according to the Journal report,
"to an entity controlled by Alibaba founder and Chief Executive Jack Ma in response to rules issued last year by the People's Bank of China, or PBOC, that could potentially bar foreigners from owning controlling stakes in Chinese Internet-payment services."
Alipay has been described as a Chinese version of PayPal. Most analysts and pundits were aghast that the crown jewel of Alibaba, itself the crown jewel of Yahoo, had been purloined by Ma.
Yahoo says it was notified of this on March 31 of this year, but Alibaba contends they informed Yahoo's board "in July 2009 that the "majority shareholding in Alipay had been transferred into Chinese ownership."
Oh dear. If Alibaba is correct, Bartz and her board learned of the Alipay sale only about six months after she took the reins of Yahoo in January of 2009. That would seem to mean that Yahoo's board and, probably, senior management team failed to disclose a material event affecting the firm's prospects and valuation for well over 18 months.
The nearby six-month chart of Yahoo's price, as compared with the S&P500 Index, is informative. It took the post-Einhorn stake price rise for Yahoo to match the index's performance, only to crater on the Alipay story. Given Yahoo's troubled history, I wonder if the May price rise was a function of investors deciding to join Einhorn in his play to extract more value from the equity. It would make sense.
Mind you, Yahoo's price was in the $16 range to start, so a 10% gain wouldn't even get it to $18. Prices were in the $17.48 range before it fell last week.
I have no idea what Einhorn's average cost is for the stock, but he must be seething to learn that such a key asset, and evidently the main reason for his Yahoo investment, is gone.
One Journal article suggested Bartz' exit may be imminent. I'd think Einhorn would be considering a lawsuit for the board's non-disclosure of such material information.
Never the less, this little episode nicely showcases the risks of turnaround investing, whether by ordinary retail investors or veteran hedge fund operators like Lampert and Einhorn. Not to mention that even an astute guy like Einhorn may have been too clever by a half when he bought into Yahoo by failing to realize that the management gang that got itself into such valuation straits may have also mismanaged their control over the China crown jewel for which so many investors evidently prized the company's equity. Especially, it would seem, Einhorn himself.
There's a reason why Yahoo's fortunes declined so in the past decade. Thus the risk of owning the shares of this mediocre internet has-been, hoping that something it once did might, amidst all its mistakes, turn out to rescue the company's valuation fortunes.
Then there's the provocative passage at the end of this weekend's edition Heard On The Street column concerning the Yahoo debacle,
"If investors thought Google had a problem in China with censorship, Yahoo just made it look trivial. China represents a huge chunk of Yahoo's value. Shareholders' hopes of realizing that are now in doubt."
I've never bought into the belief that investing directly in China is a good idea. The government and its economic and financial activities are simply too opaque and quixotic. Similarly, I've opined that, so long as this is true, the US dollar has comparatively little to fear from investors selling their greenbacks for Chinese yuan.
This is a classic example of how risky any Chinese investments, whether bricks and mortar, or financial as part-ownership of a business entity, remain.
What is a major issue for Yahoo could snowball, depending upon its resolution, into a turning point for global investors, whether they be businesses seeking to open or expand there, or simply viewing China as an financial investment opportunity.
The combination of the PBOC's unilateral rule which brought on the Alipay "taking" by Jack Ma demonstrates how tenuous outside investor possession of what they think they own in China to be.
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