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For the past few weeks, CNBC has been playing trailers of its new reality business consulting program starring ex-GE CEO Jack Welch and his latest wife, Suzy. Today's trailer and, evidently, the current 'client,' if one may use the term, is Domino's Pizza.
My first reaction was to remember an old Greek aphorism which says, to paraphrase,
'You cannot give what you do not have.'
What, precisely, does anyone think Jack Welch has, or ever had, in the way of demonstrating consistently superior management leading to similar total return performance? Let's dispense with his current wife, Suzy, who once was, I believe, editor of the Harvard Business Review. I haven't heard HBR cited as a valued business literature resource for over a decade. And Suzy was only an editor when she met and subsequently had the affair with Welch which contributed to ending his then-current marriage. Which is to say Suzy Welch's involvement seems to be exclusively the result of her current marriage.
Welch was CEO of GE from 1981-2001. Yahoo's stock price chart function isn't allowing comparisons now (or perhaps anymore), but this prior post contains the chart I want to display and, conveniently, is also one of the topics on which I'll remark shortly.
The chart from that post, reproduced nearby, doesn't include dividends, which would affect both series. But what it still illustrates is how closely GE tracked the S&P500 for most of the first decade of Welch's tenure as CEO.
I had the occasion to meet with him in the mid-1990s when I was with Andersen Consulting, now known as Accenture. Back then I was using the DowJones price series, rather than the more appropriate S&P. However, even with the S&P the point I made to Welch which got him scribbling on his copy of my presentation, exclaiming,
"Nobody's ever shown me this before,"
is still evident. If you look carefully at the blue curve around 1982-3, you'll see a near-vertical rise which lifted the then-ailing conglomerate's performance up above the S&P's, and was retained for nearly eight more years.
I contended to Welch that this was the initial benefit to GE's total return which his triage among the inflationary climate and GE's moribund businesses left to him by Reg Jones produced. At the time, amidst unreliable GAAP numbers due to rocketing inflation, Welch resorted to managing by market share and its growth. This was unquestionably an astute and, ultimately, successful approach. Though it earned him the moniker Neutron Jack for cutting GE's workforce, it produced excellent performance for years. But after that, for the remainder of the decade, GE largely tracked the equity indices without significant, lasting outperformance. This was what had shocked Welch as he stared at the simple but powerful graphic I had presented to him.
By the time I met with Welch, GE had become a lopsided giant, with a fast-growing, risky financial services arm outstripping the slow-growing industrial units.
Ultimately, GE's total returns of the late 1990s were produced from two sources- analysts' belief in Jack Welch and his consistent production of dividends, and a ballooning finance business which benefited from the overall halo effect on such businesses. On both an absolute basis, and relative to the S&P, GE has never again reached the heights it attained in Welch's last year.
Upon taking over as CEO at GE, Jeff Immelt was immediately assailed for the same accounting practices in units such as power generation for which pundits had given Welch a pass. GE Capital, which had lost Gary Wendt, the architect of its expansion, a few years earlier, no longer powered the conglomerate's growth.
Thus, it's unclear exactly what Welch left of enduring value at GE, given that, within months of his departure, the company's total returns fell off a cliff.
Since Welch constantly preached about good management, one would think that choosing an able replacement and handing off GE in decent shape would be key to Welch's being judged a success.
But that's not what happened. Immelt proved incapable of handling GE, which has, under his misleadership, managed to squander all of the performance margin it had accreted since 1962. Not to mention that little matter of requiring a federal government bailout under TARP to avoid insolvency in 2008-09.
Elsewhere, Welch's spawn did little better. Bob Nardelli had to be chased out of his CEO position at Home Depot, while Jim McNerney's 3M and Boeing both have struggled.
Then there is the question of Welch's major acquisitions, which I would suggest were RCA and Kidder Peabody. The latter was the subject of a huge scandal literally the week during which I met with Welch in the mid-1990s. The linked post referenced earlier in this piece discussed the RCA acquisition, ending with these observations,
"1986 was a long time ago. Many analysts from that era are retired, and the tenor of those times is long forgotten. But revisiting the event of GE's acquisition of NBC is important, if only in fulfillment of the time-honored saying reminding us that those who don't learn from history are doomed to repeat it.
From a sufficiently long perspective of time, it is clear that NBC was never the magical acquisition Welch imagined. If it was the reason for a spurt of market outperformance in Welch's latter years, then it should have been spun off or sold at its peak, rather than be ridden down in value to its current situation.
Either the acquisition, or its management and disposal, were flawed. And there's no telling how much management distraction NBC caused during its years in the GE corporate portfolio.
I think that, by all accounts, GE's acquisition of NBC was a mistake at the outset, was a drain on GE's management, and was ill-managed in terms of timing the firm's exit from the unit as its value deteriorated in the rapidly-changing media environment of the internet and digital era."
In line with my continuing theme regarding GE, Welch made the firm an even more unnecessarily-diversified firm in an era in which the raison d'etre for such diversified conglomerates had long-since disappeared. If anything, Welch should have been spinning the major units of GE into separate businesses and dissolving the firm that he had run for two decades.
At the dawn of Welch's tenure, diversified conglomerates were already dinosaurs, due to falling brokerage rates. With the appearance of large discount retail brokers like Charles Schwab, there was no purpose, other than employing a bunch of headquarters staff, Welch and his CFO, for GE's existence in the form Welch had inherited.
Welch's decade of superior performance at GE was apparently more the result of luck and the bounce-back from his adroit initial handling of the mess Jones bequeathed to him. My old boss and mentor at Chase, Gerry Weiss, who had been the senior corporate planning officer at GE before being recruited by David Rockefeller, always contended that Welch should have been handsomely compensated for handling the mess he inherited, and dispatched by the end of the 1980s. His long-term growth efforts resulted in disaster for the firm.
Moreover, Welch never ran a retail business. He was a chemistry PhD who rose to run the plastics business and, from there, GE. GE, for that matter, has never been a retail presence, either.
So, if you're the CEO of Dominos, and you know all this, what is it that you think Jack Welch can do for your company? Do you want what happened to GE after Welch's magic touch to happen to your pizza delivery firm?
So just what would Welch uniquely bring to the pizza chain, if his accomplishments at GE melted away so quickly? He doesn't have a track record as a successful consultant to numerous companies in various industries.
What's the point of Welch's CNBC program if he can't provide what he never had in the first place?
CEOs of large US banks have raised an alarm recently due to the recommendations by several regulators, including members of the Fed and FDIC, for higher capital requirements. Some have suggested an extra 3%, bringing the large-bank level to around 10% of risk assets, while others have mentioned 14%.
Predictably, the CEO of at least one large bank, Chase, has warned that higher capital levels will result in higher lending rates and overall operating costs, as well as lower profit levels. These comments are meant to scare regulators away from imposing higher risk capital levels.
However, Chase' Jamie Dimon, aside from having an obvious interest in lower capital requirements, also lacks perspective. He spent the bulk of his career assisting his one-time mentor, Sandy Weill, in the brokerage industry. The sorts of retail brokers at which Dimon cut his teeth didn't engage in much risk-taking activity, so they were highly-levered.
But a more appropriate perspective on the current debate involving large US commercial bank capital levels should take us back to the 1920s. The events of the 1930s, in which then-integrated commercial and investment banks, such as the forerunners of today's Citi and Chase, improperly sold questionable investments from one side of their bank to customers on the commercial side of the bank, resulted in the Glass-Steagal Act. The Act broke up banking into its investment and commercial pieces.
Up until the 1970s, commercial banks, the retail deposits of which were FDIC-insured, didn't typically engage in much risky activity outside of conventional lending. Even that resulted in the occasional large regional bank failure, such as First Pennsylvania, Seattle First and the like.
However, with the complete removal of Glass-Steagal, commercial banks were allowed to function as investment banks, but retained federal deposit insurance. This oversight effectively resulted in the federal government subsidizing, via deposit insurance, the risky activities of trading and underwriting in the investment banking side of these newly-integrated large US banks.
Earlier this week, I saw an analysis on Bloomberg predicting that as commercial banks divested or closed newly-prohibited trading businesses, their profits would fall, bringing down equity indices of which they comprise something in the neighborhood of 20%. This sort of statistic, combined with the specter of higher capital levels and resulting lower profits, is being trumpeted as the reason to reject such calls for more bank capital.
However, I believe this is incorrect reasoning. What I believe is correct is to ask why equity indices such as the S&P500 allocate so much weight to financials. As integrated, risky companies, financials may well have merited such weight.
But now, the large US commercial banks are more properly viewed as financial utilities. As such, they don't merit a large presence in the S&P, nor should they be expected to be engines of high and consistent total return delivery for their shareholders.
This may not be to the liking of Jamie Dimon and the CEOs of Citi, Wells Fargo or BofA. But it's reality.
After the tremendous cost to taxpayers of the financial crisis of 2007-08, in which large US commercial banks with insured deposits played a corresponding major part, even if they didn't initiate the crisis, it's understandable that capital requirements would be increased and risky activities prohibited.
As I have written in prior posts, the basic business of lending and safekeeping money, plus some ancillary trust and processing businesses, are the core of what large US financial utilities, a/k/a large commercial banks, perform. Those aren't a huge part of the American economy, nor should they be. Such businesses aren't high growth businesses, either.
Regarding interest rate levels, who's to say they should not be higher? Large bank profits rise with interest rates- why didn't Dimon mention that? Further, we didn't have a crisis three years ago because rates were too high- it was because they were too low. And still are.
Cries of 'foul' by large bank CEOs and analysts stem from a refusal to acknowledge reality- both recent past, current and future. The days in which banks such as Citi, Chase, Wells Fargo and BofA may be expected to rival Google or Apple as consistently high total return performers are over. They are now meant to be fairly safe, unexciting basic financial services firms which don't engage in overly-risky activities.
That's the reality of the new financial landscape. And it's consistent with such an environment that those large banks should carry more capital, the better to avoid needing taxpayer funds to rescue them from insolvency in the future.
There's little doubt that the mechanics and dynamics of the US equity markets changed as of late April and early May. The latter timeframe saw volatility begin to rise, while the S&P peaked on May 2nd, falling nearly 9% since then.
At times like these, I consider how different equity portfolio management styles react and perform under such conditions.
As I've written in prior posts, the framework and structure of a quantitative approach to equity portfolio management gives me confidence in relying on my tools, signals and consistent management methods. I can't fathom how a qualitative manager responds to such rises in volatility and a plunging index.
For example, my signaling tools for long/short allocation are still, despite the recent market decline, displaying values associated with long positions. Thus far, June's S&P total return is nearly -7%. A few more months like this and the signal will turn to short allocations. But it's quite likely that the next few months will see the indicator remain long. It's September and after that appears to be the worrisome period. However, while I simulate its behavior, I don't forecast the indicator- I use its contemporaneous output. That's one of the benefits of having time-tested, non-forecasted, quantitative components of a quantitative equity management system.
Thus, I was mildly surprised by the reaction I recently received from someone presented to me as a formerly-successful hedge fund manager. This recent post concerning a networking situation gone wrong due to a friend's inept and lying contact. The same contact made much of connecting me with the alleged hedge fund manager whom I'll call L.
The initial feedback was that L was seriously interested in learning more about my portfolio management approach and performance. But after a few days had passed, I grew sceptical. I requested L's email and sent him my one-page description, along with an invitation to discuss my approach at our mutual convenience. Several days passed with no reply. Not knowing L, nor having spoken with him, and seeing his non-response as possibly a change of mind, or, more likely, wrong information in the first place regarding his interest level, I forwarded my initial email with another suggestion that we talk or meet. Later that holiday weekend, L sent me a reply which read, in part,
"I personally have no need for a black box. I had a partner that left me 20 years ago to work on his algorithmic program. I am aware of all the success stories and I'm sure your is as prudent as the rest. I've seen some very sophisticated programs but in the end nothing that has held up to the tests."
I had to laugh when I read L's response, as it contained such a mix of naivete, bad thinking and errors of logic.
First, why would someone being approached to invest in or back an equity management process believe he will remain 'in the dark' regarding said process? While I've never relinquished control or shared possession of my software code, I've explained how my quantitative process works in detail to former partners. Only an idiot would believe that the process would remain a 'black box' to him.
By the way, even a fundamentals-based analytical type of manager who pores over 10Ks is a quantitative manager. Quantitative means numeric, and probably algorithmic, but not necessarily advanced physics or calculus.
Second, it seems that a long-ago slight by L's former partner has left him biased against all quantitative equity management processes.
Finally, the assertion that "nothing...has held up to the tests" suggests some pretty faulty logic circuits in L's brain. For example, just that week, one of the world's larger hedge funds announced that it was creating a new quantitatively-managed fund.
Several of the best-known and -performing hedge funds, including Jim Simons' Renaissance, are quantitative. So I guess they have passed "the tests."
Precisely which "tests" L is referring to is a mystery to me, and I've been involved in equity management since 1997.
Then, again, considering the wild goose chase on which I was led with the contact's first allegedly valuable network connection, I have my doubts that L had, in fact, developed, built and sold a successful equity management business. Or that he even has substantial funds to invest in one now, either.
There are varying preferences for returns, consistency, etc., over varying periods of time by individual investors or backers of hedge funds and equity management ventures. But, to my knowledge, there is no single set of "tests."
What I wondered, in contrast, was, if L doesn't like quantitative, disciplined, rigorous approaches to equity management which at least have the advantage of being able to be backtested, what does he prefer- totally subjective managers with no ability to retroactively model their selections and performance? If he's worried about "black boxes," does it get any blacker and more impenetrable than an individual manager's undocumented mental meanderings?
Equity markets like those of the past few months and, probably, the next several, always lead me to wonder why anyone would risk their investments on pure, inexplicable subjective hunches without any sort of objective guidelines or rules.
Last week the Wall Street Journal featured Illinois' recent tax hikes in its lead staff editorial. Normally, a topic like this would be more appropriate on my companion political blog. But I think this merits treatment here, instead.
For several years now, as I've written in prior posts, more of my business blog writing has been devoted to government actions, primarily because, since 2008, so much of the so-called private sector has been either infringed upon, taken over by or otherwise heavily influenced and affected by government activity to overwhelming extents.
In the case of this topic, the situation was set up by years of profligate state spending and giveaways to unions in the form of pensions and compensation for government employees. As an attempt to fill state budget gaps, Illinois' Democratically-controlled legislature and its Democratic governor enacted tax increases which effectively raised personal rates 67% and corporate rates to a 9.5% level, which the Journal reports as "fourth highest in the nation."
Predictably, many large Illinois corporations promptly let it be publicly known that they were considering relocating out of the state, due to the sudden rise in tax bills.
Caterpillar, Motorola Mobility, Sears, Navistar Continental Tire, U.S. Cellular, Chrysler and even Groupon all used the ploy to extract tax givebacks of varying sizes from the state. The governor, Pat Quinn, used these occasions to claim he was working hard to keep business in the state.
The irony, of course, is priceless. The state raises tax rates, then trumpets its efforts to offset the loss of economic activity as businesses respond to the higher rates. But the underlying process of funding the state government has been corrupted, as the Journal editorial describes,
"The victims are the thousands of businesses that don't get the favors, and an overall state economy that is less attractive for employers. That's one reason Illinois has ranked 47th of the 50 states in job creation in the last decade, and has lost more private jobs (360,000) than the entire private work force of Delaware...
Illinois is proving what bookshelves full of studies have found: Handing out special favors one business at a time is politically corrupting and an ineffective economic development strategy. A sounder way to create jobs is to provide a welcome tax and regulatory climate for all businesses. Some states, such as Arizona, constitutionally prohibit politicians from granting special favors to a business or citizen."
Today's Journal has a second part to the editorial, reporting that financial market giant CME Group is now threatening to leave the state if it, too, does not receive some special tax relief.
According to the Journal, Illinois' increased tax rate is expected to capture around $6B, of which something like a quarter of a billion dollars is now being forgiven as political favors from the governor.
Is this any way to run a state? Or a country? Because we all know that Congress does exactly the same thing with the federal tax code. Special exemptions are created by Senators and Representatives for businesses which fit suspiciously complicated descriptions which- surprise surprise- result in a company in their state or district enjoying some tax break.
When are citizens, at taxpayers and voters, going to catch on to this bi-partisan scam which saps national economic activity while fostering tens of millions of dollars in economically unproductive lobbying for tax relief?
The net result is to transform what could be simpler, lower-rate tax systems for state and federal governments alike into complicated traps, partial escapes from which are granted by elected politicians in return for various favors- campaign donations, jobs for friends, or public relations events showcasing how the official 'saved' jobs by giving a company a special tax break.
If the tax break was a good economic move, why was the tax rate raised in the first place?
By the way, since it's topical in a political sense this week, Rick Perry's Texas has created more jobs in the past decade than any other state.
It has no state income tax- and, thus, no tax rates from which companies need to spend money to escape. And less political corruption.
To read Bob Lutz' version of Detroit's decline, he personally knew better than everyone else at Chrysler, Ford and GM how to run a car company.
So how is it two went into bankruptcy and he's not running the third which is doing better?
Lutz recently had his book published, so he's on the talk show tour as the Wall Street Journal released two excerpts of the book in recent editions.
Let's just say I'm completely underwhelmed with Lutz' tale. Where to start?
Well, my first reaction, after only about half of the first Journal excerpt, was that I believe objective auto sector journalist, Pulitzer Prize winner and former Journal executive and one-time squash partner Paul Ingrassia did this all better and earlier. You can still see Paul periodically on CNBC and read his pieces in the Journal. I think he was easily two decades ahead of Lutz in recognizing the same defects at the Big Three.
My second reaction is to distrust anyone who was a senior executive with real power at failed companies who claims he knew better, but it was the culture and everyone around him who were the problems.
Lutz clearly has no shortage of ego. He constantly describes himself as a 'car guy' who knew better than everyone else at Chrysler and GM. He portrays himself as patiently teaching design teams how to do their jobs. Ruminating on whether he was really able to impart enough of his personal values about cars to the teams. Did any of it take? Was it really just Bob doing all the work after all?
Frankly, most of what Lutz revealed was, as I noted above, either already disclosed by Ingrassia years ago, or are things which most business observers with a brain had already figured out.
For example, back in the 1970s, my late father, a senior engineer and marketing executive at an American mining equipment company, remarked on how badly designed and made the expensive Chrysler New Yorker was. How you could run your finger along the hood and cut it on the raw, unfinished edge of the sheet metal.
As I'm writing this, Lutz is hamming it up on CNBC, enjoying the adulation and on-air time as he goes on and on about no-longer shocking practices at the failed US auto makers. His remarks about debates at GM regarding incentives and margins is, again, old news.
For a retired senior executive at not one, but two failed companies and a nearly-failed third one, Lutz seems to feel compelled to tell 'his' story, regardless of the fact that it's no longer newsworthy.
From what I read in the Journal pieces, it's not enough of a personal career story to be unique in that way. All Lutz' comments on air and published passages attempt to paint himself as the one enlightened guy in a car company full of 'bean counters.'
In one passage in the first Journal excerpt, Lutz dated his epiphany on some issue to fairly late in his career, which leads one to conclude that much of what Lutz claims as insight was actually, well, hindsight.
His story just doesn't ring true. Either he was an early seer who failed to lead and manage, or came late to these realizations, and, therefore, like most of those three companies' managements, was naive and dull-witted during their declines.
Which was Bob Lutz' true path? We'll probably never know. But we know which path it wasn't- enlightened and talented manager rises through embracing the truth and leads company to success.
Given that, I can't imagine spending any money to read Lutz' self-inflating stories of his days at Chrysler, GM and Ford, or his views about them now.
Last week I found myself in a discussion with another member of my fitness club after I finished my morning's mile swim. We had apparently spoken before, perhaps last summer, so he felt sufficiently uninhibited to inquire about my use of a heart rate monitor.
We had a lengthy conversation about training regimens, diet, the protein reduction to cut fat, and related topics.
He asked me several times which current model of Polar HRM I would recommend, and I reiterated what I last recall seeing as their lowest-level product with calorie burn estimation capabilities, noting that his local Sports Authority was sure to have them.
Being older than me, he astonished me by dismissively snorting,
'Oh, forget that. I'll just find it on Amazon and buy it there.'
Pretty interesting. He clearly already uses Amazon as his go-to general store, but doesn't believe he's paying much for the privilege.
On one hand, that's good for Amazon. On the other, though, the online retailing giant is one of those Schumpeterian forces that prospers by slitting the economic throat and gutting the profit model of existing 'bricks' retailers.
Growth has been and remains the key for Amazon. It took some time for the company to get its model right and profitable. Since then, it's latched onto some key growth categories- ebooks, DVD rentals, and, now cloud computing.
But a bit over ten years on from the first great internet binge, it's clear that online shopping has taken hold in a lasting manner. Thus, for many product categories, finally answering the 'clicks vs. bricks' argument decidedly in favor of the former.
Despite recent anemic GDP and net job growth, the administration uses terms like "bump in the road" and "a blip" to describe the continuing lack of robust performance of the US economy.
I found the president's remarks concerning the economy while at a press conference with German PM Andrea Merkel to be particularly galling and condescending.
For a guy with little background in any productive line of work, to use the term very loosely, and absolutely no knowledge of economics, he's hardly one to set expectations or characterize the failure of his 2 1/2 years of expensive, failed Keynesian policies.
Then, yesterday, Robert Schiller warned that average housing prices could fall by another 25% in the next 4-5 years.
I don't think "bump in the road" or "blip" describes what the effects of that prediction coming true will be.
There must be some new wave of thought and/or practice sweeping over the business blog environment regarding use of them for free publicity.
A few weeks ago, I wrote this post concerning David Einhorn echoing my long-held position on the need for Steve Ballmer to be kicked out of the helm at Microsoft. Regarding Einhorn's fame and my comparative anonymity, I wrote,
"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, 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."
These days, my average direct readership is about 70 readers, with about 40 more reading via RSS feed. As I noted above, a fairly modest, unassuming little business blog.
So imagine my surprise to receive two emails in the last two days from other business people pitching me on topics.
One evidently represents new media approaches to book publishing. Here's what the email contained,
"Can we interest you in a feature story, a review or an interview with the authors of ___________________? Two of the nation’s top financial experts are available to make financial statements easier to understand and more powerful to use than ever before.
If you’d like to see their book, please verify your best street address and let us know how we can help you.
Paul Krupin, Publicist for William S. _______, Ph.D. and John _______, MBA"
Note the funny block character in the email. Very impressive. And these two guys, of whom I never heard before, are apparently "two of the nation's top financial experts." Wow! If they want me to review their book, does that make me "one of the nation's top financial experts," as well?
I had no idea.
I skimmed through the rest of the email and found it to be completely uninspiring. But it says something if this guy Krupin felt it was worthwhile to find, contact and offer me an apparently(?) free review copy of his clients' book.
Then there was the email I received the prior day from some guy out near Santa Barbara. He felt compelled to inform me personally of his views on Netflix and Cisco, despite my own considerable posting about both. Then he directed me to what apparently is the URL of an audio of a radio program he hosts on which he recently discussed some forgettable energy company out west.
He has a website which links to writing he does for SeekingAlpha. I investigated that site years ago, when my erstwhile partner suggested I write for them. Trouble is, SeekingAlpha is one of those idea-of-the-day sites. Hardly appropriate for a buy-and-hold-for-awhile style of equity management. But apparently right up this other guy's alley.
Finally, yesterday, after I'd finished composing this post, I received yet another unsolicited, unwanted, pain-in-the-ass email regarding somebody's report or newsletter. A guy named Eric Mangan wrote a canned email with absolutely no reference to my blog, extolling the benefits of his clients report on commercial real estate.
Did I write a series of posts suggesting an interest in this sector? I did not. Not content with one unwanted email cluttering my inbox, Mangan sent another on the pretext of correcting some trivial item in the first. I replied in no uncertain terms describing my disdain for his unwanted invasion of my privacy and his client's report, explaining that if I received one more communication from him which failed to cite specific posts from my blog, he'd be blocked. All of the sudden, Mangan assumed a puppy-dog demeanor, replying that my attitude wasn't appreciated and all I had needed do was politely ask to not be contacted.
I beg to differ, and did, in my email reply to Mangan. If nobody objects to this tide of eflotsam from purveyors like him, they'll continue their noxious, unsolicited and unwanted communications. Evidently some blunt words get their attention. Point delivered, if unacknowledged.
Again, why am I so blessed with this unwanted attention?
Mangan's exchange, besides being the last straw of the week for me on this topic, also suggested in more detail the new media approach. Basically, survey anyone with a business blog, get their email, and sell it for direct email prospecting to people publicizing books, reports, what have you. These emailers exhibit a shocking lack of personalization, with salutations like, 'Mr. Neul, Blogger.'
Then there are the occasional requests I get from people to guest-write on my blog. Or to be featured on theirs if I write on topics they prefer.
My head fairly swims with all this new media attention. But, of course, there's no money in any of it. Mostly people wanting favors to access my blog's comparatively light daily traffic. It suggests a surprisingly primitive attempt to emarket to business bloggers with no segmentation or market targeting whatsoever, not to mention a complete failure to comprehend the motivations and mindsets of such bloggers.
The banking community is shocked- shocked!- at the Fed's proposal to add about 3% to required regulatory capital for the 'too big to fail' crowd.
One large bank CEO, Jaime Dimon of Chase, went so far as to try to embarrass Helicopter Ben during the Q&A after his speech in Atlanta yesterday. I just saw Bernanke's reply on CNBC a few minutes ago, after having to endure senior economic idiot Steve Liesman's attempt to restate Dimon's comments. Fortunately, though, there was audio of the native New Yorker's signature accent delivering his diatribe.
Much was made of how great Chase was, how it was a lower-risk bank during the financial crisis, and how important a CEO Dimon is. The implication being that since Jaime asked these questions and pointed out various facts, well, they must be important.
What Dimon asked, to summarize, was why, with SIVs gone, CDOs moribund, some banks gone, and most housing finance excess gone, there was now a need to raise capital requirements on large banks? And did anyone study the potential effects of such increased regulatory capital on interest rates, loan volumes, economic activity and- hold your breath, because Dimon gets positively statesmanlike on this next one- JOB GROWTH!
My God! Raising capital requirements must be un-American!
Well, not quite.
I've written in a post some years ago that banks want to portray themselves as competitive companies in terms of equity values and growth, even though the business in which they are in doesn't lend itself- no pun intended- to such dynamics. And the traditional nosebleed level of regulatory capital/risk assets doesn't really matter once risk becomes loss. Which happens in as little as one or two days, if not overnight. Ask the former executives of Bear Stearns.
Although banks like Chase have been forced to lessen their proprietary equity trading, their business is to hold financial assets, some of which have values which can change rapidly and, at times, in unexpected directions.
Current capital levels don't begin to cover what can occur on a large bank's balance sheet. Never mind, now that Dodd-Frank is law, what the geniuses at the banks will invent next, now that they have a fixed regulatory target around which to maneuver to evade capital requirements and other nettlesome regulations.
Former Goldman banking analyst Bob Albertson was on CNBC as a follow-up to the Bernanke-Dimon exchange to shill for the banks. He sagely intoned that nobody in government knows what the effects of their regulations will be.
True enough. And Dimon's question regarding research into said effects was simply theatrical. Everyone knows that such research wasn't and won't be undertaken. From a statistical sense, it's likely far too complicated, with too many variables for which to control, and too many to study, to ever develop sufficient data to draw conclusions.
But after you get by Dimon's- and Albertson's- smoke and mirrors, remember that this sector ran amok only a few years ago, with the help of Congress, sleepy Fed and FDIC regulators, and Fannie and Freddie buying off overseers and most of Congress. Collectively, the American taxpayer and the economy footed the bill for these excesses, next to which an added 3% of risk assets is a pittance.
Will BofA's equity be diluted nearly 50%? Maybe so. And maybe Tom Brown will have second thoughts.
He was on Bloomberg yesterday morning singing Dimon's praises- no surprise there, eh?
The reality of large bank equities, however, is that they are timing plays. These companies don't typically exhibit consistent behavior. So once you acknowledge that to buy and sell them is to engage in market or sector or even company timing, surprises like added capital requirements are just part of the risk of playing that game.
From a historical perspective, however, it's hard to argue that having large, nearly-unmanageable and uncontrollable financial institutions which are slated to be taken over by the government after their next series of lethal mistakes, hold some added capital, is indefensible.
I've read and collected several recent editorials from the Wall Street Journal which, taken together, provide a clearer picture of how our government is strangling the US economy and perverting energy policy in ways which aren't hitting the front pages of the nation's newspapers, nor the headlines of the conventional broadcast network news programs.
Item One
A Journal staff editorial from the Memorial day weekend contends,
"The regulatory tax on Americans is now larger than the income tax."
It cites two Lafayette College economists, in a study "sponsored by the Small Business Administration" as finding that federal regulatory compliance costs the US $1.7T annually. So much for Cass Sunstein's little piece claiming that regulatory burdens are shrinking.
In one incredible passage, the editorial notes,
"In one case, the (CTFC) lawyers even insisted that the only costs they needed to count were what a company would have to spend to find out if a rule applied to it, but not the costs of actually complying with the rule."
Item Two
Nick Schulz of the American Enterprise Institute reviewed the book Great Again by Henry R. Nothhaft.
Schulz writes,
"Nothhaft is not one of those professional declinists.....a veteran Silicon Valley entrepreneur who is the CEO of.....Tessera."
The review describes one California company being forced to pay a state 'use' tax of $1MM on top of the $10MM it paid for the German production equipment.
Nothhaft recounts how a prior startup which he took public spent $3MM on Sarbanes-Oxley compliance, far in excess of the bill's average estimated $91K.
America's tax rates are also excoriated. With reductions in many European national rates and the Chinese competing aggressively with low tax rates, including special low rates for semiconductor manufacturers, one venture capitalist explains that his firm won't even bother trying to start those kind of ventures in the US anymore. They'll choose China instead.
Item Three
Yesterday's lead staff Journal editorial detailed how the current administration is implementing a sort of 'pocket veto' of Alaskan oil exploration, production, and usage of the North Slope pipeline.
What the average American doesn't know is that, once the pipeline no longer pumps oil, it must be dismantled. Well, the original North Slope fields are aged and pumping about a third of their peak production. This results in slow-moving oil that causes damage to the pipeline.
Meanwhile, although the Bush administration auctioned leases for one section of the North Slope expected to contain more oil than the original find, the Obama administration has allowed green anti-oil lawyers to block development of the leases, leading to Shell to shut down said attempts at development. ANWR remains off limits, as does at least one other large block of almost-proven tens of billions of oil reserves.
The net result is to silently shut down Alaska's potential oil production and, in the process, force the owners of the pipeline to dismantle it, making subsequent construction in this age of greater environmental obstructions, nearly impossible.
So much for government's solutions to spending hundreds of billions on Arab oil. And for removing regulatory constraints on the American economy.
It seems that the last of the economics gang that couldn't shoot straight has announced his imminent departure. The administration's chief economics advisor, Austan Goolsbee, fell on his proverbial sword for Friday's poor BLS numbers, the latest in a string of anemic monthly employment reports, and announced his resignation, effective this summer, as head of the Council of Economic Advisors.
It's quite a list of luminaries who've been tarnished by association with this administration's failed economic policies- Larry Summers, Christina Romer, and now Goolsbee. I guess you could also add Jared Bernstein, also recently departed, who had been attached to the hapless Joe Biden.
Goolsbee is returning to the University of Chicago to resume teaching, although it's difficult for me to imagine what credibility he would now retain after speaking so forcefully for so many years on behalf of economic policies which aggravated the consequences of the financial crisis of 2007-08. One would think the same of Romer, whose prior economic research actually contradicted policies she espoused while in the administration.
Perhaps this late in the president's term, we'll get lucky and nobody will fill Goolsbee's post, thus reducing the potential for more economic harm through 2012.
By now the business press and pundits have thoroughly treated the dismal 54,000 net employment increase in May and the rise in unemployment to 9.1%.
The usual suspects claim it's transitory- simply the result of the Japanese earthquake aftermath and Midwest tornadoes. Or that at least it was a positive number.
Get real. An already-anemic average of some 200,000/month for a few months has turned down as the bottom dropped out of housing prices- again.
Housing price declines spark increased probabilities of defaults, as more current homeowners experience negative equity. Such disruption of households bodes ill for consumer spending. Lower consumer spending leads to fewer net jobs created.
What was unexpected, at least to me, was the number of Keynesian pundits who came out of the woodwork, amidst the debt limit standoff and the end of the Fed's QE2, to call for more federal stimulus.
You can't make this stuff up. We've seen 2 1/2 years of wrongheaded economic policy by two administrations fail to simply let the economy naturally bottom out and return to expansion.
Instead, we had about a trillion dollars of wasted stimulus, illegal takings under the guise of auto and insurance company bailouts which did nothing that constitutionally-provided normal bankruptcy wouldn't have accomplished, sans the extra tens of billions of spending, and failed attempts to prop up home prices via foreclosure moratoria and threatened equity write-offs.
As I paraphrased Michael Steinhardt in this post from early 2009,
"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."
He was correct. By most measures of economic activity- housing construction and pricing, job creation, GDP growth- the US economy continues to be troubled.
The Wall Street Journal took the opportunity to make Bob Doll, BlackRock's equity investments chief, its weekend interview. The piece noted that BlackRock is now the world's largest investor.
Hhhmmmm.....I wonder what Bob was going to say amidst all the gloomy data.
'It's time to sell?'
Hardly. Bob Doll's number one job right now is to talk BlackRock's book, in order to let the firm reposition without calling attention to any sales it may be conducting. The very last thing you would expect to see- and he didn't disappoint this weekend- is Doll yelling to head for the exits, causing a stampede of retail and other institutional investors that would destroy the valuations in BlackRock's own funds.
At times like these, the last people you want to listen to are those with the most to lose by publicly admitting how bad current economic statistics are.
That said, my own signals don't indicate an immediate need to go short. And Doll's taking a longer term perspective is not necessarily bad, either. But being a Pollyanna isn't believable, either.
Perhaps the most interesting thing Doll said was an almost throwaway comment about technology having raised the unemployment level associated with full employment from 3% thirty years ago to something north of 6% now. He blithely said,
"And that has political and social consequences that I don't think we even know what to do with yet."
Indeed. And what a time to realize this, eh? When the housing sector, traditionally an important driver of the US economy, is dormant, housing prices continue to weaken, and net job creation is nowhere near the necessary rate to attain full employment for years.
As expected, the announcement of Groupon's IPO has provided cable business channels with plenty of grist for their programming. And it's put more young social networking pundits on air, too.
For example, on Friday afternoon, I found myself watching a 20- or 30-something tech blog editor opine on the Groupon IPO. As I listened to his answers to questions from a Bloomberg anchor, I wondered how old this guy was when TimeWarner merged with AOL in the first of the major over-priced internet deals.
And since it made the news on the same day as a disastrous drop in the BLS monthly employment report, the Groupon IPO news provided a rather nice bookend in terms of being a potential valuation and market peak.
CNBC, Bloomberg and the Wall Street Journal were all full of interesting details from the Groupon offering package.
For example, Andrew Mason, his co-founders and some early investors have already siphoned about $800MM out of the firm from prior financings. The annual run rate of losses has been nearly half a billion dollars. The capital structure of the firm will allow class A founders shares to essentially control the firm, with public class B shares apparently being given little more than income and valuation participation.
Then there are the juicy quotes from Mason that the firm will try significant new businesses, one or more of which will be failures.
Several business cable anchors mused whether that is the sort of strategic thinking that investors are going to like hearing.
Probably not. Then, again, there are almost certain to be enough gullible buyers to make the point moot.
Perhaps the most illuminating and useful analogy was whether Groupon will become like Webvan or Amazon? I have yet to hear anything to change what I wrote in this post a little over two months ago. Despite Mason's contentions to the contrary, Groupon doesn't appear to have much in the way of barriers to competition.
A Wall Street Journal article provided anecdotal evidence from actual shopkeepers regarding how much competition already exists among online group couponing services. Add Facebook, Google and any other firm with a large list of email addresses, and Groupon's value sinks even further.
From an end user standpoint, I remain one of those who have become listed with Groupon, but have yet to spend a dime with them. Of the daily offers which stream into my email inbox, I've seen perhaps three in the two months or more that I've received them to which I gave even a second thought. I realize I may not be their primary target segment, but that only means that the ratio of paying users to listed ones is extremely important.
I suppose the most important piece of information regarding Groupon's IPO is the knowledge that it will have cashed its founders and early backers out at obscene profits, while only floating something like 20% of the company's equity. Since Groupon is primarily an online venture, as was AOL, without the physical infrastructure of an Amazon, it somehow smells of a get-rich quick scheme in which there's nothing very tangible about the company to suggest its founders will have long term ties or exposure to making it perform consistently better than the equity market average over the long term. For example, Amazon hasn't really met a viable competitor along its entire product/market space, particularly the online-shopping-to-fulfillment segment. Perhaps that's because of the fairly sophisticated global online general store logistics it has had to create, refine and manage. That took software, warehousing, many vendor relationships, and ongoing maintenance thereof.
Groupon suggests more of an ephemeral online-only presence, with a sales force soliciting vendors. Not tremendously complex or suggesting of lasting commitment to the business. Just much less of a tangible nature to own.
As I wrote that, Priceline came to mind as a firm that's appeared frequently in my equity portfolios in recent months. Originally, when it entered for the first time, I thought it to be somewhat of a joke. But it's been a consistently superior performer, both fundamentally and in total return terms, for years. It has a patented methodology at its core, and attained a first-mover advantage, like Amazon, that has limited subsequent direct competition. Plus it has apparently lasting and effective ties to sources of hotel rooms and flights, so that buyers join and create the ongoing dynamic of filling those excess capacities.
Perhaps several years from now, I'll be writing similar observations about Groupon. But at present, from its self-description, my own experiences, and what I've read about it, I rather doubt that. At its base, Groupon is really just an updated spin on old fashioned marketing by way of couponing. I don't recall that being a widely successful, publicly-owned business model. And I don't believe sticking the social networking aspect onto it will change that.
I happened to catch long time bank analyst, now, a sector portfolio manager, Tom Brown's appearance on Bloomberg television yesterday.
During his interview, Brown disclosed that for the first time in years, his fund has gone long BofA equity.
When questioned on his decision, Brown outlined his view of the bank's near term future under CEO Brian Moynihan. Essentially, Brown sees Moynihan shrinking the bank, which he believes is a good thing.
Running through the sort of micro-analysis that people like Brown do, he rattled off EPS and P/E numbers, claiming that the share price should double sometime in the next 18-24 months.
Wow. That's some performance!
If you look at the nearby price chart of BofA and the S&P500 Index, you can see this would be new territory for the bank's stock price performance.
Over the past two years, it's essentially been flat. Over five years, it's down nearly 80%. Is Tom Brown making a simple timing bet that BofA will eventually regain its valuation at roughly pre-crisis levels? A variant of the old P/E target approach, whereby one treats P/E as a cause, rather than an effect of a company's fundamental performance?
It seems like a pretty tall order to me. Typically, shrinking firms don't perform consistently well for very long. And total returns of 100% over two years seems heroic. Especially when it's supposed to magically result from a change in the firm's direction, rather than something like better execution of a good strategy.
Personally, I would be surprised if my equity strategy selection process even includes a bank anytime soon. I know it certainly wouldn't be including BofA by the time Brown predicts the firm's stunning performance success.
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.
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 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.
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.
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.
