I manage a large-cap equity portfolio strategy with a selection emphasis on consistently superior growth and performance. The past 8 weeks have been anything but calm. Let’s just say I wasn’t used to seeing so many days on which my portfolio rose or fell by more than 1%.
What is comforting to me, however, is that by persevering with my positions throughout the post-hurricane rise and fall of the market, my return for the year is almost back to its peak at the end of September. At that time, its gross return was roughly 12.5%, while the S&P500 Index was at roughly 1.2%. At the trough during October, my portfolio had lost about 10%. It subsequently recovered to only a –5.4% return for the month. At yesterday’s market close, my portfolio had a year-to-date return of 11%, versus roughly .5% for the index. So sticking with my positions throughout the October sell-off was handsomely rewarded.
It would seem that, since the hurricanes hit the US Gulf Coast, economic growth was not that badly damaged, and energy prices and availability are not going to cripple demand after all. Listening to a wide variety of pundits and analysts, I was struck by how many sell-side analysts overlooked the macroeconomic forces at work to drive demand for energy. Thus, as energy companies began to be valued as if they were simply oil tank farms or natural gas tanks, rather than producing enterprises, I felt they had become undervalued and would recover. I did not sell my positions. They now have recovered.
Last week’s third-quarter GDP number, combined with this week’s retail sales results, indicate that all the hand-wringing over an economic slowdown was simply wrong. Oh, well. At least the brokerages made money by facilitating investors’ moves out of, then back into, the retail and energy sectors.
It brings to mind a favorite quote I read a few weeks ago by John Bogle, erstwhile head of the Vanguard Group. In an interview in the Philadelphia Inquirer, he opined that in most situations, an investor’s best guide in the face of volatility and uncertainty is, “don’t do something, just sit there!” I have, and it’s worked. Again.
Friday, November 04, 2005
Tuesday, November 01, 2005
On "Customer Advocacy"
It was with great dismay that I read a recent blurb in an alumni magazine I received from the University of Pennsylvania’s Wharton School regarding their brand new business press’ recent publication of Glen Urban’s Don’t Just Relate- Advocate.
Dr. Urban, an MIT decision science/operations research professor, has allegedly pioneered a new form of customer relationship. It involves not merely understanding and meeting customer needs, which has typically been the province of marketing. Rather, he now espouses “advocating” for your customers, within your organization.
Sounds great, doesn’t it? Let’s review the list of companies the review in the alumni magazine provides as apparently shining examples of this method’s success:
-GM (wow- can you believe this one? Someone would actually list GM as a paragon of anything but failure in marketing?)
-Qwest (another paragon of clear-sighted marketing. Their very future is now in question after losing out in the bidding for MCI)
-Intel (great chip manufacturer, but not a great producer of consistently superior shareholder wealth)
-John Deere (again, a famous name, but hardly a consistently superior producer of shareholder wealth)
Maybe I’d rather see the list of companies who refused to pay Dr. Urban’s firm, Experion, for consultation on this important new customer management philosophy.
I recall reading Dr. Urban’s work as a graduate student in marketing some years ago. My belief then, as now, is that many operations researchers have much less understanding of the marketing discipline they seek to influence than they realize. Thank goodness.
For instance, I read in the book’s review in the aforementioned alumni magazine, “He draws on new case studies to show how to align culture, metrics, incentives, and organization, driving effective advocacy throughout entire organizations.” Now, that is a chilling concept indeed. Are we to understand that GM’s current situation is a showcase of this method writ large and successfully? Or did GM not fully embrace it yet, “throughout (the) entire organization(s),” and, if not, why not?
The concept of this being totally diffused throughout an organization leaves me with one thought- who’s minding the mint? Doesn’t at least one senior executive need to be left weighing the satisfaction of customer needs by new and existing products and services with the company’s long-term profitability and return to shareholders?
I confess to being embarrassed that one of my alma maters has become so myopic. What does it matter if a company profits, and fails to provide shareholders with an attractive, competitive return? At least I’m comfortable knowing there are very few hardcore OR types in the pantheon of academic marketing gods.
No need to take advantage of my alumni discount on this soon-to-be-classic volume.
Dr. Urban, an MIT decision science/operations research professor, has allegedly pioneered a new form of customer relationship. It involves not merely understanding and meeting customer needs, which has typically been the province of marketing. Rather, he now espouses “advocating” for your customers, within your organization.
Sounds great, doesn’t it? Let’s review the list of companies the review in the alumni magazine provides as apparently shining examples of this method’s success:
-GM (wow- can you believe this one? Someone would actually list GM as a paragon of anything but failure in marketing?)
-Qwest (another paragon of clear-sighted marketing. Their very future is now in question after losing out in the bidding for MCI)
-Intel (great chip manufacturer, but not a great producer of consistently superior shareholder wealth)
-John Deere (again, a famous name, but hardly a consistently superior producer of shareholder wealth)
Maybe I’d rather see the list of companies who refused to pay Dr. Urban’s firm, Experion, for consultation on this important new customer management philosophy.
I recall reading Dr. Urban’s work as a graduate student in marketing some years ago. My belief then, as now, is that many operations researchers have much less understanding of the marketing discipline they seek to influence than they realize. Thank goodness.
For instance, I read in the book’s review in the aforementioned alumni magazine, “He draws on new case studies to show how to align culture, metrics, incentives, and organization, driving effective advocacy throughout entire organizations.” Now, that is a chilling concept indeed. Are we to understand that GM’s current situation is a showcase of this method writ large and successfully? Or did GM not fully embrace it yet, “throughout (the) entire organization(s),” and, if not, why not?
The concept of this being totally diffused throughout an organization leaves me with one thought- who’s minding the mint? Doesn’t at least one senior executive need to be left weighing the satisfaction of customer needs by new and existing products and services with the company’s long-term profitability and return to shareholders?
I confess to being embarrassed that one of my alma maters has become so myopic. What does it matter if a company profits, and fails to provide shareholders with an attractive, competitive return? At least I’m comfortable knowing there are very few hardcore OR types in the pantheon of academic marketing gods.
No need to take advantage of my alumni discount on this soon-to-be-classic volume.
What's Up At Google?
Two things about Google interest me. The first is their stock price, and to what is that price vulnerable over time? The second is their recent, highly-visible fight with the publishing industry over Google’s plans to scan, without payment of royalties, large numbers of books into a searchable database. What is really afoot with this project?
I think that the two guys who founded google are very smart. They built a better search engine, but they realize the next great search engine is likely to surpass them, just as they dethroned Alta Vista. Yes, there actually were search engines prior to Google. A friend mentioned to me a few months ago for how little Alta Vista was ultimately purchased by some European company. It was pathetic.
I believe that the owners- excuse me, senior executives now- of Google realize that their best hope for continued consistent value, and thus wealth, creation is to become so entangled in the online habits of their customers that Google is no longer perceived as a search engine. Otherwise, they face the ever present threat of rapid decline.
Consider this. The two founders of Google probably don’t spend as much time creating new and better search procedures as they once did. Further, current students at better engineering schools across the country now have something at which to aim. By virtue of its current dominance, Google probably can’t take advantage of the next smart search engine designer’s new twist. And, to be honest, using a new search engine is ultimately as simple as going to a new website.
Thus, the rapid expansion by Google into, well, just about anything online that can tie your behavior into their brand, rather than their search engine, per se. For example, email services, instant messaging programs, a whispered foray into the remains of AOL, wifi rollouts in San Francisco, and, now, a voluminous database of searchable literary content. They must be really worried. Because very little of these enterprises, by themselves, require integrated consumer behavior. Rather, a single company offering all of them hopes they can bend consumer behavior to their version of service packaging.
Not likely in this internet and information age, is that?
As to the book scanning effort, that is perhaps the most intriguing of Google’s current projects. It is disingenuously portrayed as a simple case of Google spending it’s money, and lots of it, I would guess, to provide, for free, a database of searchable texts. What could possibly be avaricious about that?
True, their promise to provide only the undefined “snippet” of any search result is itself a loophole. And their explicit attempt to avoid securing permission to copy in a manner which, for anyone else, would require a copyright owner’s permission is worrisome. One gets the sense that they realize they have no chance of affordably tracking down the owner of every book they may scan. So, instead, they appear to be generous, allowing publishers to “opt out” on the copyright owners’ behalfs. How accommodating of Google.
But all this, I think, misses the real sizzle of this business concept. While maintaining the searchable text database as free in perpetuity, the mere ownership of this valuable trove provides for many as-yet-unspecified uniquely profitable opportunities. This is the sort of dream situation the authors of the Clayton Antitrust Act had in mind- one product is inexpensive, but is tied to another that is monopolistically controlled.
In the case of Google’s searchable database, the other, monopolistically controlled products, or services, may include: links to book sellers; extensive bibliographies of authors; access to information derived from Google’s ability to search the database in ways that are different than those it provides to free users.
The underlying opportunity in all these examples is some unspecified value-added product or service which is not the database, but is derived from ownership of the database. Particularly important, I am sure, is Google’s ownership of, and control of access to, that database. For instance, you don’t see Google, at this time, offering to share funding and control with, say, Yahoo, Amazon and Microsoft. No, they, or some of them, are now purported to be in their own discussions with publishers, to accomplish similar ends to that of Google.
As a closing note, this is now reminding me of two other investment “opportunities” of the last 150 years. Those are, American railroads of the late 19th century, and airlines in this century. British investors lost tons of money buying equity in fledgling US railroads during the late 1800s. The net cumulative cashflow of the airline sector, from birth to now, I have read, is negative. Which is to say, just because seemingly smart, well-heeled corporations and people throw wads of money at a concept doesn’t actually mean it will profit them. You and I may well enjoy a phenomenal benefit of online text search and procurement in the years ahead, at absolutely no cost to ourselves. And several seemingly invincible, or at least pretty powerful, technology titans will be poorer for our pleasure.
I think that the two guys who founded google are very smart. They built a better search engine, but they realize the next great search engine is likely to surpass them, just as they dethroned Alta Vista. Yes, there actually were search engines prior to Google. A friend mentioned to me a few months ago for how little Alta Vista was ultimately purchased by some European company. It was pathetic.
I believe that the owners- excuse me, senior executives now- of Google realize that their best hope for continued consistent value, and thus wealth, creation is to become so entangled in the online habits of their customers that Google is no longer perceived as a search engine. Otherwise, they face the ever present threat of rapid decline.
Consider this. The two founders of Google probably don’t spend as much time creating new and better search procedures as they once did. Further, current students at better engineering schools across the country now have something at which to aim. By virtue of its current dominance, Google probably can’t take advantage of the next smart search engine designer’s new twist. And, to be honest, using a new search engine is ultimately as simple as going to a new website.
Thus, the rapid expansion by Google into, well, just about anything online that can tie your behavior into their brand, rather than their search engine, per se. For example, email services, instant messaging programs, a whispered foray into the remains of AOL, wifi rollouts in San Francisco, and, now, a voluminous database of searchable literary content. They must be really worried. Because very little of these enterprises, by themselves, require integrated consumer behavior. Rather, a single company offering all of them hopes they can bend consumer behavior to their version of service packaging.
Not likely in this internet and information age, is that?
As to the book scanning effort, that is perhaps the most intriguing of Google’s current projects. It is disingenuously portrayed as a simple case of Google spending it’s money, and lots of it, I would guess, to provide, for free, a database of searchable texts. What could possibly be avaricious about that?
True, their promise to provide only the undefined “snippet” of any search result is itself a loophole. And their explicit attempt to avoid securing permission to copy in a manner which, for anyone else, would require a copyright owner’s permission is worrisome. One gets the sense that they realize they have no chance of affordably tracking down the owner of every book they may scan. So, instead, they appear to be generous, allowing publishers to “opt out” on the copyright owners’ behalfs. How accommodating of Google.
But all this, I think, misses the real sizzle of this business concept. While maintaining the searchable text database as free in perpetuity, the mere ownership of this valuable trove provides for many as-yet-unspecified uniquely profitable opportunities. This is the sort of dream situation the authors of the Clayton Antitrust Act had in mind- one product is inexpensive, but is tied to another that is monopolistically controlled.
In the case of Google’s searchable database, the other, monopolistically controlled products, or services, may include: links to book sellers; extensive bibliographies of authors; access to information derived from Google’s ability to search the database in ways that are different than those it provides to free users.
The underlying opportunity in all these examples is some unspecified value-added product or service which is not the database, but is derived from ownership of the database. Particularly important, I am sure, is Google’s ownership of, and control of access to, that database. For instance, you don’t see Google, at this time, offering to share funding and control with, say, Yahoo, Amazon and Microsoft. No, they, or some of them, are now purported to be in their own discussions with publishers, to accomplish similar ends to that of Google.
As a closing note, this is now reminding me of two other investment “opportunities” of the last 150 years. Those are, American railroads of the late 19th century, and airlines in this century. British investors lost tons of money buying equity in fledgling US railroads during the late 1800s. The net cumulative cashflow of the airline sector, from birth to now, I have read, is negative. Which is to say, just because seemingly smart, well-heeled corporations and people throw wads of money at a concept doesn’t actually mean it will profit them. You and I may well enjoy a phenomenal benefit of online text search and procurement in the years ahead, at absolutely no cost to ourselves. And several seemingly invincible, or at least pretty powerful, technology titans will be poorer for our pleasure.
Monday, October 24, 2005
Cendant: Object Lessons In Scale and Creativity
I am truly amazed that Henry Silverman now proposes to spin off the parts of Cendant which he integrated several years ago, and remain the CEO of one of its parts as a reward for this failure.
Where is Carl Icahn when you need him? Too busy over at Blockbuster, I guess.
I recall Silverman articulating the wonderful opportunities for cross-selling among the various travel, subscription, buying club and other businesses he assembled through acquisitions and mergers. So much for that puffery.
Perhaps the object lessons to learn here involve leadership, creativity and scale.
First, it’s really difficult to lead a diverse group of businesses into some sort of group-think that spontaneously generates successful cross-selling the way a producer wants to market it. All too often, as with Time Warner and AOL, or diversified financial services, the cross-selling is in the mind of the producer, not the consumer.
Neither Sandy Weill at Citicorp, nor Henry Silverman at Cendant, could force consumers to behave in ways which provided the predicted integrated revenue and profit growth from their respective acquisition empires.
Second, creative marketing management doesn’t seem to lend itself to scale. Innovative product development and marketing positioning seem to be fleeting instances of genius. It’s not clear you can “best practice” it across a business, let alone across businesses. Empirical evidence on the lethargic total return behavior of most conglomerates seems to bear this out.
If anything, the recent decades of technological advances in computing and communications have lowered the effective size for successful creative management, not raised it.
Finally, this leads to scale. Grandiose visions of imagined consumer buying behaviors changed by conglomerating products and services usually fail to account for the sheer difficulty of managing scale.
One of the oft-missed effects of conglomeration is probably the loss of many of the most talented employees. From my own experiences at AT&T, then the largest private employer on the planet, Chase Manhattan Bank, and Andersen Consulting (NOT Arthur Andersen, thank you very much!), I can vouch for this. Large scale organizations inevitably have to be run by a middle class of talent at most, if not all levels. Innovation is hard to tolerate in a firm of large size. Management is typically routinized into a definable culture, so that the firm is more efficiently run.
When you put all these effects together, you get disasters like Cendant.
I’ll leave you with this little gem. Today, in an interview on CNBC, Silverman solemnly intoned something to the effect that his conglomeration was, ‘an artistic success, but a commercial failure.’ How nice of him to tell his shareholders now that all this time, he was dabbling in art, not commerce.
Where is Carl Icahn when you need him? Too busy over at Blockbuster, I guess.
I recall Silverman articulating the wonderful opportunities for cross-selling among the various travel, subscription, buying club and other businesses he assembled through acquisitions and mergers. So much for that puffery.
Perhaps the object lessons to learn here involve leadership, creativity and scale.
First, it’s really difficult to lead a diverse group of businesses into some sort of group-think that spontaneously generates successful cross-selling the way a producer wants to market it. All too often, as with Time Warner and AOL, or diversified financial services, the cross-selling is in the mind of the producer, not the consumer.
Neither Sandy Weill at Citicorp, nor Henry Silverman at Cendant, could force consumers to behave in ways which provided the predicted integrated revenue and profit growth from their respective acquisition empires.
Second, creative marketing management doesn’t seem to lend itself to scale. Innovative product development and marketing positioning seem to be fleeting instances of genius. It’s not clear you can “best practice” it across a business, let alone across businesses. Empirical evidence on the lethargic total return behavior of most conglomerates seems to bear this out.
If anything, the recent decades of technological advances in computing and communications have lowered the effective size for successful creative management, not raised it.
Finally, this leads to scale. Grandiose visions of imagined consumer buying behaviors changed by conglomerating products and services usually fail to account for the sheer difficulty of managing scale.
One of the oft-missed effects of conglomeration is probably the loss of many of the most talented employees. From my own experiences at AT&T, then the largest private employer on the planet, Chase Manhattan Bank, and Andersen Consulting (NOT Arthur Andersen, thank you very much!), I can vouch for this. Large scale organizations inevitably have to be run by a middle class of talent at most, if not all levels. Innovation is hard to tolerate in a firm of large size. Management is typically routinized into a definable culture, so that the firm is more efficiently run.
When you put all these effects together, you get disasters like Cendant.
I’ll leave you with this little gem. Today, in an interview on CNBC, Silverman solemnly intoned something to the effect that his conglomeration was, ‘an artistic success, but a commercial failure.’ How nice of him to tell his shareholders now that all this time, he was dabbling in art, not commerce.
The Scramble to Cannibalize AOL
The recent interest by Google, Yahoo and Microsoft in Time Warner’s AOL unit seems to be confusing quite a few analysts and other observers. I do not agree that AOL is suddenly “valuable” again, as it was when it merged with Time Warner in the ‘90s.
Rather, these other companies see a possible opportunity to scavenge some of AOL’s parts on the way to changing the terms of competition in the larger arena in which AOL once played a dominant role. None of the three suitors would likely care about the dial-up access business, nor, for its own sake, the content portion of AOL. What they all want is AOL’s customer base to which to market their own collection of internet-oriented services.
Their very interests in the remains of AOL’s customer base signal that their strategies have devalued this older business model. AOL is a faded brand in a growth industry. Further, the industry has changed so much that companies with concepts still in their infancy in AOL’s heyday are now dominating it.
Google creates its value in other ways, and is perhaps looking to deny a piece of AOL to a competitor. The same is true of Yahoo. The combination of Yahoo’s and MSN’s messaging services further devalues AOL AIM system, because all of these are free.
The current competitive situation in this arena finds AOL still in possession of a customer base which sizable and somewhat unique. Before that is no longer true, these newer entrants, and one old one, Microsoft, are hoping to capitalize on the value of that base. The incidental businesses which originally attracted the customer base are probably not all that valuable to anyone now. If they were, AOL wouldn’t be in the trouble it’s in today.
Rather, these other companies see a possible opportunity to scavenge some of AOL’s parts on the way to changing the terms of competition in the larger arena in which AOL once played a dominant role. None of the three suitors would likely care about the dial-up access business, nor, for its own sake, the content portion of AOL. What they all want is AOL’s customer base to which to market their own collection of internet-oriented services.
Their very interests in the remains of AOL’s customer base signal that their strategies have devalued this older business model. AOL is a faded brand in a growth industry. Further, the industry has changed so much that companies with concepts still in their infancy in AOL’s heyday are now dominating it.
Google creates its value in other ways, and is perhaps looking to deny a piece of AOL to a competitor. The same is true of Yahoo. The combination of Yahoo’s and MSN’s messaging services further devalues AOL AIM system, because all of these are free.
The current competitive situation in this arena finds AOL still in possession of a customer base which sizable and somewhat unique. Before that is no longer true, these newer entrants, and one old one, Microsoft, are hoping to capitalize on the value of that base. The incidental businesses which originally attracted the customer base are probably not all that valuable to anyone now. If they were, AOL wouldn’t be in the trouble it’s in today.
Wednesday, October 19, 2005
Where is Ross Perot Now that GM Needs Him?
A friend reminded me the other day of a time when GM might have avoided its now-imminent demise. In 1984, GM bought Ross Perot’s EDS, bringing Perot onto its board. Frequent quarreling with GM chairman Roger Smith over the company's leadership and culture led GM, at Smith's behest, to buy Perot’s stock for $700MM and force Perot to leave the board in 1986.
Perot was vocal about the poor quality of GM’s cars and its lack of decisiveness. How prophetic and right he was. I think it is fair to say that GM’s failure 20 years ago to heed his warnings marked possibly the last time it had a significant opportunity to avoid the fate that now awaits it - loss of independence and/or existence.
Lest you think that Lee Iacocca’s Chrysler experience demonstrates that a Big 3 automaker can save itself, let me remind you that it ultimately was acquired by Daimler-Benz. Iacocca didn’t save Chrysler, he merely delayed its day of reckoning by a decade or so. After his exit, the inertia of Chrysler’s Big 3 culture drove it once again to the brink of ruin, and forced it again to depend on the kindness of strangers.
I continue to believe that GM cannot save itself because its current leaders, beginning with Rick Waggoner, are products of the existing culture of 40+ years. It is not capable of creating lasting, profitable change for the long term, within two years, in how it designs, builds and markets vehicles. It may be acquired, or “merge,” to avoid an actual bankruptcy. But I still maintain that it will not be independent within two to three years from now.
Perot was vocal about the poor quality of GM’s cars and its lack of decisiveness. How prophetic and right he was. I think it is fair to say that GM’s failure 20 years ago to heed his warnings marked possibly the last time it had a significant opportunity to avoid the fate that now awaits it - loss of independence and/or existence.
Lest you think that Lee Iacocca’s Chrysler experience demonstrates that a Big 3 automaker can save itself, let me remind you that it ultimately was acquired by Daimler-Benz. Iacocca didn’t save Chrysler, he merely delayed its day of reckoning by a decade or so. After his exit, the inertia of Chrysler’s Big 3 culture drove it once again to the brink of ruin, and forced it again to depend on the kindness of strangers.
I continue to believe that GM cannot save itself because its current leaders, beginning with Rick Waggoner, are products of the existing culture of 40+ years. It is not capable of creating lasting, profitable change for the long term, within two years, in how it designs, builds and markets vehicles. It may be acquired, or “merge,” to avoid an actual bankruptcy. But I still maintain that it will not be independent within two to three years from now.
Tuesday, October 18, 2005
Jim Cramer’s Definition of “Buy”
Did anyone else happen to see the bizarre segment of Jim Cramer’s “Mad Money” program last Thursday evening? Taking the theme of his show from the Jewish holiday of Yom Kippur on that day, he began to repent for quite a few of his recent “buy” recommendations.
But that wasn’t the bizarre part. He then went on to explain that when he screams “buy,” he does not, in fact, mean “buy.” He said that all he really means is that viewers must ‘do their homework,’ going on to detail just what that meant. Hours Googling company names, reading “every” article written about them, and buying transcripts of conference calls with analysts. He added that he was not any viewer’s ‘personal financial advisor.’
Wow! You could have fooled me! With that take no prisoners attitude toward buy and sell recommendations, Cramer sure seems to believe he is advising his viewing audience. Especially on those occasions when he promises to guide them in and out of specific stocks on a day-by-day basis, due to some unique market dynamics.
What I wonder now, though, is whether somebody has sued Cramer, and/or his producers, and the show, over some of his recommendations. Was this his attempt at some type of on-air disclaimer?
He makes a point of having run a hedge fund in prior years. How did that venture end up? Other "former" hedge fund managers who come to mind are Julian Robertson, Michael Steinhardt, and, more recently, Alberto Vilas. Unless I’m mistaken, none of them voluntarily retired until they had lost so much money for their customers that they had to close their funds. It doesn’t seem to be a business which many managers leave on account of too much success on their customers’ behalfs.
But, back to Mr. Cramer’s comments on Thursday evening. What came to mind upon hearing his sudden change in attitude was one of his programs a few months back. He was castigating some newspaper writers for criticizing his stock picks this summer. They alleged that his recommendations had performed poorly. Cramer, on the air, countered that the writers in question had missed the programs wherein he, Cramer, had recommended selling the positions.
And that is what piques my interest. If Mr. Cramer on one hand offered his program’s record of his buy and sell recommendation as a basis on which to judge his selections, how can he now allege that when he says “buy,” or, presumably, “sell,” on his program, he does not really mean that at all?
Not that I take him seriously. I am an equity portfolio manager with a completely different style than Cramer’s. When I tune in, it’s for entertainment. And perhaps to keep an ear open for the opinions of someone with whom I typically disagree, just to test my own reasoning.
His description of what he means by “buy,” the other night, however, reminded me that there is a big difference between making “lightning” fast recommendations on the air to viewers who call in, and actually managing a real portfolio with real positions. One seems to be for entertainment and ratings. The other is to make real money.
Watching Mr. Cramer last week brought back a memory from long ago. Does know what ever happened to a short-lived market guru from long ago- Joe Granville?
But that wasn’t the bizarre part. He then went on to explain that when he screams “buy,” he does not, in fact, mean “buy.” He said that all he really means is that viewers must ‘do their homework,’ going on to detail just what that meant. Hours Googling company names, reading “every” article written about them, and buying transcripts of conference calls with analysts. He added that he was not any viewer’s ‘personal financial advisor.’
Wow! You could have fooled me! With that take no prisoners attitude toward buy and sell recommendations, Cramer sure seems to believe he is advising his viewing audience. Especially on those occasions when he promises to guide them in and out of specific stocks on a day-by-day basis, due to some unique market dynamics.
What I wonder now, though, is whether somebody has sued Cramer, and/or his producers, and the show, over some of his recommendations. Was this his attempt at some type of on-air disclaimer?
He makes a point of having run a hedge fund in prior years. How did that venture end up? Other "former" hedge fund managers who come to mind are Julian Robertson, Michael Steinhardt, and, more recently, Alberto Vilas. Unless I’m mistaken, none of them voluntarily retired until they had lost so much money for their customers that they had to close their funds. It doesn’t seem to be a business which many managers leave on account of too much success on their customers’ behalfs.
But, back to Mr. Cramer’s comments on Thursday evening. What came to mind upon hearing his sudden change in attitude was one of his programs a few months back. He was castigating some newspaper writers for criticizing his stock picks this summer. They alleged that his recommendations had performed poorly. Cramer, on the air, countered that the writers in question had missed the programs wherein he, Cramer, had recommended selling the positions.
And that is what piques my interest. If Mr. Cramer on one hand offered his program’s record of his buy and sell recommendation as a basis on which to judge his selections, how can he now allege that when he says “buy,” or, presumably, “sell,” on his program, he does not really mean that at all?
Not that I take him seriously. I am an equity portfolio manager with a completely different style than Cramer’s. When I tune in, it’s for entertainment. And perhaps to keep an ear open for the opinions of someone with whom I typically disagree, just to test my own reasoning.
His description of what he means by “buy,” the other night, however, reminded me that there is a big difference between making “lightning” fast recommendations on the air to viewers who call in, and actually managing a real portfolio with real positions. One seems to be for entertainment and ratings. The other is to make real money.
Watching Mr. Cramer last week brought back a memory from long ago. Does know what ever happened to a short-lived market guru from long ago- Joe Granville?
Speaking Truth to Power- the GM Situation
I’ve been following the GM/Delphi saga with much interest this past week. It’s not that I await their outcomes, expectantly on the edge of my seat. Rather, I marvel at the kid glove treatment both firms seem to be receiving in the press.
What has occurred to me regarding GM, though, is that this fallen automotive giant is still considered sufficiently potent, when it comes to spending money, that nobody will speak the truth to its power. Perhaps the best example of this was the reaction to today’s agreement between GM and the UAW which will lower benefit expenses for the latter.
Truly, as I have written in a prior post, this is simply not the company’s salient problem. GM cannot and does not design and produce vehicles which sufficient numbers of people will buy at prices which will sustain the company’s financial health. Period. It’s beyond me how lowering the cost structure of an inept designer and marketer of cars and trucks will suddenly create better designs.
You would not know any of this, to judge from the press’ reaction to the agreement. Or Wall Street’s reaction, for that matter.
I now wonder if GM, even in its last acts as a sustainably profitable enterprise, wields enough financial leverage to silence any significant, honest appraisal of its situation.
Do analysts worry that they will be shut out of conference calls if they point to GM’s revenue problems as insoluble? Do the bankers worry that they won’t get invited to participate in any subsequent last-ditch financings? Do the various media outlets worry that they will have seen the last GM ads in/on their medium, should they report candidly about the company’s prospects? Perhaps fund managers are concerned that candid remarks will lose them possible business with GM's pension funds or treasury functions.
It’s now beginning to seem to me that all these parties, “stakeholders,” if you will, literally have more to gain from a fatally bleeding GM than they do from a merged/acquired/failed GM.
What has occurred to me regarding GM, though, is that this fallen automotive giant is still considered sufficiently potent, when it comes to spending money, that nobody will speak the truth to its power. Perhaps the best example of this was the reaction to today’s agreement between GM and the UAW which will lower benefit expenses for the latter.
Truly, as I have written in a prior post, this is simply not the company’s salient problem. GM cannot and does not design and produce vehicles which sufficient numbers of people will buy at prices which will sustain the company’s financial health. Period. It’s beyond me how lowering the cost structure of an inept designer and marketer of cars and trucks will suddenly create better designs.
You would not know any of this, to judge from the press’ reaction to the agreement. Or Wall Street’s reaction, for that matter.
I now wonder if GM, even in its last acts as a sustainably profitable enterprise, wields enough financial leverage to silence any significant, honest appraisal of its situation.
Do analysts worry that they will be shut out of conference calls if they point to GM’s revenue problems as insoluble? Do the bankers worry that they won’t get invited to participate in any subsequent last-ditch financings? Do the various media outlets worry that they will have seen the last GM ads in/on their medium, should they report candidly about the company’s prospects? Perhaps fund managers are concerned that candid remarks will lose them possible business with GM's pension funds or treasury functions.
It’s now beginning to seem to me that all these parties, “stakeholders,” if you will, literally have more to gain from a fatally bleeding GM than they do from a merged/acquired/failed GM.
Wednesday, October 12, 2005
Relax... It’s Not Just Chaos...It’s Schumpeterian Dynamics
As I sat composing this post in my mind this morning over a cup of coffee, I was gratified to learn I am in good company. Before I could reduce my thoughts to writing, I heard both Alan Greenspan and Mario Gabelli refer to recent events in the US business world using Joseph Schumpeter’s famous phrase, “creative destruction.” I guess that puts me in good company regarding the framework with which I observe and interpret the current foment in US economic activity of many types these days.
This week, we see the markets digesting:
-Delphi’s Chapter 11 filing
-GM’s fallout from the Delphi filing
-Fed rate increases affecting home building
-Energy prices affecting retail spending and inflation
-Conventional telephony providers being potentially upended within a few years by VOIP from cable providers using wifi distribution
-Cable providers being potentially upended within a few years by dsl-based video services from telephony providers
-Airlines continuing to struggle with mismatches of cost structures and customer demand
-Yahoo, Google, eBay, TimeWarner and Microsoft all reaching outside of their main lines of business to either form alliances or enter new business lines
Is this unbridled chaos we see in both the US equity markets and corporate operating environment? Yes, and that’s a good thing. This is what full-on Schumpterian dynamics, of which creative destruction is only an initial part, are about.
My own equity portfolio strategy is based in part upon Schumpeter’s theories. In particular, he expressed some valuable insights in several papers which he wrote during the 1920s. These views shaped much of my approach to large-cap equity portfolio selection and management. Creative destruction is actually a very small part of his overall theory, despite it being the best-known part.
First, this “gale of creative destruction,” to use Schumpeter’s own phrase, is a good thing for large-cap equity strategists like me. In change there is growth. The ‘90s, a period of sustained low inflation and favorable economic policies for change, and thus, growth, enabled my strategy to perform up to its potential, both absolutely and relative to the market index I watch, the S&P500. Rather than worry about ailing giants, my strategy’s focus is purely on sustained superior business performance. I have never been invested in GM or Delphi. Microsoft has been out of the portfolio for all of this decade. eBay is no longer in it, either.
Second, the existence of such strong gales of economic creative destruction mean, ironically, that focusing on each immediate event is a mistake. When there is great variability and foment on the economic landscape, that is precisely when it’s better to take longer-term positions, then batten down and ride out the daily storms. No doubt brokerage firms are making a bundle amidst the uncertainty over GM, the airlines, and energy prices. Meanwhile, my own portfolio has remained well-performing, without trading since mid-summer. An earlier post addressed the “addiction” to trading some managers and their customers have, and my thoughts about that addiction.
Seeing the looming demise of one or two airlines, an auto maker or two, and at least one of their parts suppliers, gives me hope for new business models. For growth to be sprouting in other areas which is currently overshadowed by all the hand-wringing over these antiquated companies and their now-outdated approaches to markets and suppliers.
What lessons may be gleaned from all this recent chaotic activity? First, you can’t control these events, so don’t worry about them. Second, look on the bright side- for every “problem,” someone sees an opportunity, and there’s a potential for investment in that opportunity. Don’t confuse the two, and focus on the second lesson.
Tuesday, October 11, 2005
In Further Praise of Sell-Side Analysts
How could I overlook this week’s gyrations in GM’s stock price as a result of the Delphi Chapter 11 filing on Saturday? A great topic for today’s musings. I won't even belabor my own comments within the past week regarding how long Detroit would be without one less free-standing auto manufacturer.
I guess I don’t understand our brilliant Wall Street analyst corps.
GM and Delphi are two of the largest US firms in a very prominent economic sector. Delphi’s spinoff from GM is recent and very public. Both companies’ economic woes have been well-covered in the press, never mind by analysts, for months.
So how can it be that Delphi’s filing could cause a 10% drop on the open of GM’s stock by today’s market close? Isn’t the analyst’s job to divine these things a priori, by dint of her/his superior knowledge, skill and familiarity with the companies and situation at hand? Could the bankruptcy filing really have been that much of a surprise? Even CNBC’s “Squawk Box” reported that Steve Miller, head of Delphi, had explicitly warned of filing for Chapter 11 protection several times recently. This, they noted, was not something he had ever done when leading the turnaround at Waste Management.
It seems to me that this situation, the linked and troubled fortunes of GM and its one-time subsidiary, Delphi, illustrates how poorly the analyst community typically performs. I don’t see analysts as any better at covering this developing situation than the business media, such as CNBC or the Wall Street Journal. It reminds me of the oft-repeated quote attributed to Thomas Jefferson regarding a choice between government with no free press, or a free press with no government.
Give me the media every time.
I guess I don’t understand our brilliant Wall Street analyst corps.
GM and Delphi are two of the largest US firms in a very prominent economic sector. Delphi’s spinoff from GM is recent and very public. Both companies’ economic woes have been well-covered in the press, never mind by analysts, for months.
So how can it be that Delphi’s filing could cause a 10% drop on the open of GM’s stock by today’s market close? Isn’t the analyst’s job to divine these things a priori, by dint of her/his superior knowledge, skill and familiarity with the companies and situation at hand? Could the bankruptcy filing really have been that much of a surprise? Even CNBC’s “Squawk Box” reported that Steve Miller, head of Delphi, had explicitly warned of filing for Chapter 11 protection several times recently. This, they noted, was not something he had ever done when leading the turnaround at Waste Management.
It seems to me that this situation, the linked and troubled fortunes of GM and its one-time subsidiary, Delphi, illustrates how poorly the analyst community typically performs. I don’t see analysts as any better at covering this developing situation than the business media, such as CNBC or the Wall Street Journal. It reminds me of the oft-repeated quote attributed to Thomas Jefferson regarding a choice between government with no free press, or a free press with no government.
Give me the media every time.
Sunday, October 09, 2005
Mediocrity Isn’t What It Used To Be
I’ve been reflecting on the immense volatility in the equity markets of late. Volatility of this magnitude suggests that the market isn’t totally efficient. For instance, last week didn’t seem to provide that much “news” on which to base the large moves in the major indices. And throughout these last few months, our portfolio strategy has enjoyed significant out-performance of the S&P500, suggesting market inefficiency.
Why isn’t the market totally efficient? The topic, and the related, “is the market efficient,” have been the subject of numerous written opinions.
I’ve come to a tentative conclusion this week that one major reason for market inefficiency, contrary to longstanding theory, is that all market participants are not equal in their ability to use, or process, information. Some are simply mediocre, and they generate so much ill-conceived action that it swamps the volumes generated by their more-skilled colleagues.
While I’ve studied statistics for roughly 30 years, it is only recently that this aspect of efficient markets theory occurred to me. It’s as if the theory’s developers forgot one important assumption: not only must information be available to all in order to be correctly and rapidly priced into the market, it must be used with equivalent skill by all participants.
I suspect that much market activity is dominated by the broad class of average, that is to say, mediocre, analysts, money managers and fund allocators. Thus the apparent reason why some investors out-perform the market over time, while most cannot.
The same idea, of course, applies to the companies whose equities many of us trade. It has much to do with why my own approach works.
And, as educational standards in the US have slipped during my own lifetime, it’s reasonable to assume that mediocrity isn’t what it used to be. It’s probably getting even, well, more mediocre.
To be continued……………
Why isn’t the market totally efficient? The topic, and the related, “is the market efficient,” have been the subject of numerous written opinions.
I’ve come to a tentative conclusion this week that one major reason for market inefficiency, contrary to longstanding theory, is that all market participants are not equal in their ability to use, or process, information. Some are simply mediocre, and they generate so much ill-conceived action that it swamps the volumes generated by their more-skilled colleagues.
While I’ve studied statistics for roughly 30 years, it is only recently that this aspect of efficient markets theory occurred to me. It’s as if the theory’s developers forgot one important assumption: not only must information be available to all in order to be correctly and rapidly priced into the market, it must be used with equivalent skill by all participants.
I suspect that much market activity is dominated by the broad class of average, that is to say, mediocre, analysts, money managers and fund allocators. Thus the apparent reason why some investors out-perform the market over time, while most cannot.
The same idea, of course, applies to the companies whose equities many of us trade. It has much to do with why my own approach works.
And, as educational standards in the US have slipped during my own lifetime, it’s reasonable to assume that mediocrity isn’t what it used to be. It’s probably getting even, well, more mediocre.
To be continued……………
Thursday, October 06, 2005
Queens of Denial
This week started with the spotlight in Detroit. GM and Ford were once again whining about healthcare costs related to building their products. If I hear this nonsense again, I’m going to be sick.
GM’s and Ford’s managements got themselves into the mess they are in, over time, all by themselves. And the mess didn’t start with healthcare costs, legacy or otherwise. It started with building cars for which people won’t pay the manufacturer’s list price in sufficient number to result in profitable operations.
So long as Rick Waggoner and Bill Ford continue to be in denial about this issue, their companies’ fortunes will continue to decline. Using smoke and mirrors to blame the UAW for their respective woes may seem clever. But big labor doesn’t design the cars at GM and Ford. Management does. And management also freely entered into the contracts which have saddled them with fringe benefits they now feel are unaffordable.
I’ve done quite a bit of research on drivers of consistently superior company performances, looking over long timeframes among many large-cap companies. The very best companies consistently grow revenues at high rates. This typically involves both repurchases by customers, as well as an ability to sustain price levels. This type of customer behavior, repurchasing and paying full price, is usually seen when a company adapts its offerings to evolving customer needs over time in a competitively-advantaged manner.
GM and Ford don’t appear to be able to do either one. That’s their real problem. Failure to solve this problem will overwhelm the resolution of any of their other apparent problems, including those involving workforce healthcare. Even if they did get resolution on the latter issue, they still are stuck with a management that continues to churn out unwanted cars that are unable to sustain their sticker prices.
It stems from losing their way with product design. Detroit just doesn’t seem to be able to develop very many new vehicles for which the market clamors in large numbers. And now, it’s ironic that the one class of vehicle for which they can get list, in large numbers, is suddenly losing value faster than you can say “SUV.” With current energy prices, this product class is going to be out of favor for a while.
Judging from where GM and Ford appear to be putting much of their energies these days, I’d say we’re going to be shy at least one major US-based car manufacturer before the decade is out. It may involve a merger among onshore rivals, if Congress is afraid to let so many UAW workers lose their jobs at once through a total financial failure of GM or Ford. But I'm willing to bet there will be one less automotive CEO in Detroit when 2010 dawns.
GM’s and Ford’s managements got themselves into the mess they are in, over time, all by themselves. And the mess didn’t start with healthcare costs, legacy or otherwise. It started with building cars for which people won’t pay the manufacturer’s list price in sufficient number to result in profitable operations.
So long as Rick Waggoner and Bill Ford continue to be in denial about this issue, their companies’ fortunes will continue to decline. Using smoke and mirrors to blame the UAW for their respective woes may seem clever. But big labor doesn’t design the cars at GM and Ford. Management does. And management also freely entered into the contracts which have saddled them with fringe benefits they now feel are unaffordable.
I’ve done quite a bit of research on drivers of consistently superior company performances, looking over long timeframes among many large-cap companies. The very best companies consistently grow revenues at high rates. This typically involves both repurchases by customers, as well as an ability to sustain price levels. This type of customer behavior, repurchasing and paying full price, is usually seen when a company adapts its offerings to evolving customer needs over time in a competitively-advantaged manner.
GM and Ford don’t appear to be able to do either one. That’s their real problem. Failure to solve this problem will overwhelm the resolution of any of their other apparent problems, including those involving workforce healthcare. Even if they did get resolution on the latter issue, they still are stuck with a management that continues to churn out unwanted cars that are unable to sustain their sticker prices.
It stems from losing their way with product design. Detroit just doesn’t seem to be able to develop very many new vehicles for which the market clamors in large numbers. And now, it’s ironic that the one class of vehicle for which they can get list, in large numbers, is suddenly losing value faster than you can say “SUV.” With current energy prices, this product class is going to be out of favor for a while.
Judging from where GM and Ford appear to be putting much of their energies these days, I’d say we’re going to be shy at least one major US-based car manufacturer before the decade is out. It may involve a merger among onshore rivals, if Congress is afraid to let so many UAW workers lose their jobs at once through a total financial failure of GM or Ford. But I'm willing to bet there will be one less automotive CEO in Detroit when 2010 dawns.
Monday, October 03, 2005
Another Cinderella Story? Disney Under Iger
I read the Saturday Wall Street Journal’s piece on Bob Iger, Disney’s new CEO. After seeing some lackluster interviews with him on CNBC in the past year, I was pleasantly surprised to read that he actually has some very novel ideas.
Then again, the interviews were given while Eisner was still in power. Iger was probably justifiably wary of going the way of many next-in-line or newly-minted CEOs who radically change their predecessor’s game plans while the old boss is still too close for comfort.
Iger is doing some much-needed and laudable thinking about tearing up his business model before it is decimated by forces outside his control. It reminds me very much, by contrast, of my first post-grad school employer, AT&T. The latter never really seriously reacted to its business model’s many threats until it was far too late. From my own internal experience in telecom with AT&T, I can vouch for Iger’s instincts. It’s much better to gut your own business first, your way, losing a portion of your revenues, than to see it siphoned off to competitors and lose far more revenues and customers.
It also reminds me of one aspect of the primary research which led me to create my knowledge base of the operating characteristics of consistently superior companies. Applied for both consulting and equity portfolio management, it provides quantitative descriptions of how consistently superior firms, in terms of fundamental operating characteristics and stock price performance, differ from lesser-performing companies.
My initial inquiry dealt with how long a large-cap company could remain consistently superior. Without divulging proprietary findings, I can say that it’s less than a decade. And at a certain point, the odds of maintaining consistently superior performance dwindle quite suddenly. Which means, in the case of Disney, that Eisner’s value to the company ended long, long ago. Thus, the need for such a radical shake-up now by Iger.
One can examine several US large-cap success stories back over time, and typically find some CEO who stayed too long at the party. Sears, GE (twice), IBM, GM. They all required significant changes after one CEO's business model grew decrepit.
I’m looking forward to watching Iger’s next few years. Maybe Disney will be in my portfolio before long after all.
Then again, the interviews were given while Eisner was still in power. Iger was probably justifiably wary of going the way of many next-in-line or newly-minted CEOs who radically change their predecessor’s game plans while the old boss is still too close for comfort.
Iger is doing some much-needed and laudable thinking about tearing up his business model before it is decimated by forces outside his control. It reminds me very much, by contrast, of my first post-grad school employer, AT&T. The latter never really seriously reacted to its business model’s many threats until it was far too late. From my own internal experience in telecom with AT&T, I can vouch for Iger’s instincts. It’s much better to gut your own business first, your way, losing a portion of your revenues, than to see it siphoned off to competitors and lose far more revenues and customers.
It also reminds me of one aspect of the primary research which led me to create my knowledge base of the operating characteristics of consistently superior companies. Applied for both consulting and equity portfolio management, it provides quantitative descriptions of how consistently superior firms, in terms of fundamental operating characteristics and stock price performance, differ from lesser-performing companies.
My initial inquiry dealt with how long a large-cap company could remain consistently superior. Without divulging proprietary findings, I can say that it’s less than a decade. And at a certain point, the odds of maintaining consistently superior performance dwindle quite suddenly. Which means, in the case of Disney, that Eisner’s value to the company ended long, long ago. Thus, the need for such a radical shake-up now by Iger.
One can examine several US large-cap success stories back over time, and typically find some CEO who stayed too long at the party. Sears, GE (twice), IBM, GM. They all required significant changes after one CEO's business model grew decrepit.
I’m looking forward to watching Iger’s next few years. Maybe Disney will be in my portfolio before long after all.
Thursday, September 29, 2005
Time Warner & Microsoft- Strange Bedfellows Indeed
Yesterday's piece by Lee Gomes in the Wall Street Journal regarding technology company M&A activity was quite good. The title of this post borrows part of Mr. Gomes' title, referring to how some strange hookups have come to pass in the sector, to the regret of all but the investment bankers, who were paid regardless of the deals' outcomes.
However, the reason I'm writing this piece is that Mr. Gomes mentioned the current TimeWarner-Microsoft talks regarding sharing control and ownership of AOL.
Can you imagine Bill Gates and Steve Ballmer settling for less than controlling interest in AOL? Do you believe Dick Parsons wants those two controlling one of his major assets? The one which most seriously derailed his company over the past five years? Why are these two companies even considering trying to share control of AOL? TW has mismanaged it since the merger, yet won't spin it off. Would Microsoft seriously pay billions to run AOL without control? This strikes me as a recipe for further disaster for all involved.
However, the reason I'm writing this piece is that Mr. Gomes mentioned the current TimeWarner-Microsoft talks regarding sharing control and ownership of AOL.
Can you imagine Bill Gates and Steve Ballmer settling for less than controlling interest in AOL? Do you believe Dick Parsons wants those two controlling one of his major assets? The one which most seriously derailed his company over the past five years? Why are these two companies even considering trying to share control of AOL? TW has mismanaged it since the merger, yet won't spin it off. Would Microsoft seriously pay billions to run AOL without control? This strikes me as a recipe for further disaster for all involved.
I find the whole idea of these two aged titans, TimeWarner and Microsoft, struggling over control of a faded name in the internet product/market space, to be demonstrative of mediocre management. Both Microsoft and AOL were in my equity portfolio of consistently superior-performing large-cap companies in the late '90s. But neither has returned to that level of performance in this decade. Microsoft became predictable and less dynamic. AOL chose its peak market value, based on consistently superior performance, to unload itself to TimeWarner for a share of the latter's more tangible assets, at least on paper.
Gomes is right to point out that rarely do a combination of lesser-ranked competitors in technology sectors ever dethrone a market leader. That is because second-best tech companies are just that, and no amount of critical mass of their products will make them better than the leaders in terms of features, performance, etc.
It didn't happen in mainframes (Sperry, Univac, Honeywell, et.al.). Nor mini-computers. Nor PCs (how could we forget Carly Fiorina already? Compaq/Dec and HP). Nor software. It is unlikely to happen in online networks.
The prospect should make for some entertaining business news and corporate comedy in the months to come. But I doubt it will create any business which has a chance of attaining the sort of consistently excellent performance we look for in our equity portfolio holdings.
In Everyone’s Backyard
Is anyone in this country who votes and has a college education surprised at all with the Tom DeLay mess? And am I the only one who wonders how Texans have time for this nonsense right now? I thought they are supposed to be busy trying to convince the rest of us Americans, except for those next door in Louisiana, how badly they need help, a/k/a federal money, from the other states to recover from hurricane Rita? C’mon guys, get your scripts straight and stay on point!
All Politics is Local
First, let’s admit that US Representatives are about the most “normal” national-level politicians of the lot. They have to convince you every two years to let them go back to that hellish job they said they wanted, “representing” you in our lower Congressional house. Sort of like paying to be allowed into a kindergarten free-for-all every two years.
In the pecking order of Presidents, Senators, and Supreme Court Justices, these Representatives are most definitely the least polished, most unvarnished of the political breed. Everybody knows the seamy stories about US Reps from their district. All politics “is” local, and the same “constituent servicing” goes on in every district in every state in the country.
So What Else is New?
So I was bemused to learn that Tom DeLay allegedly was explicit in trading his support of a colleague’s son for a House seat, in exchange for the colleague’s vote on the medicare prescription drug benefit. This was evidently only one of a handful of times that the House “ethics,” and I use the word very loosely, committee has spoken out on Mr. DeLay’s actions.
I’m reminded that Texas has been most generous in delivering this type of political comedy to the nation. Remember Jim Wright’s heavily accented, “I will comply” with the House’s ethics committee’s demand that he come clean on his infamous book-buying-cum-campaign-financing scandal? Or Bobby Baker’s vegetable oil hoax?
By now, I'm old enough to consider the phrase "House Ethics Committee" an oxymoron. Who are they kidding? It's a political club with which to bash the other party's most effective leader.
We Get What We Deserve
Seriously, though, I think the true lesson in the Tom DeLay affair is the continuing stupidity in Washington with respect to campaign finance “reform” and regulation. When will we voters learn that these guys and gals we elect are just using our money to try to hamstring each other with so-called “campaign finance reforms” as they attempt to remain in office forever?
Let’s just admit that money is fungible. What DeLay and his colleagues evidently did seems perfectly sane and reasonable, given funding regulations. They took donations which were apparently illegal in Texas, sent them to their National Committee, and received funds back from said Committee. It may be laundering, but I can’t see how you could possibly write legislation that would make all and only such transactions illegal. If the people we elect to the House and Senate weren’t this clever, would we even want them there in the first place?
A Better Idea
You and I, as taxpayers, would be far better off if the pols we send to Washington would rescind all the current campaign finance laws and replace them with one. It’s a great idea which I read in the editorial pages of the Wall Street Journal during the Clinton years. Simply require that any funds donated to a campaign must be publicly reported, both at an electronic/internet site, and in a paper-based document, within 24 hours. The information required would be the amount, the donor, and the donor’s contact information. Then let the press have at it. I frankly don’t care if the head of the Chinese army donates money to Bill Clinton (wasn’t that rumored during his campaigns?), Tom DeLay or John Kerry. I just want to know about it. It would say far more about the candidate than many of his or her words and actions ever could.
All Politics is Local
First, let’s admit that US Representatives are about the most “normal” national-level politicians of the lot. They have to convince you every two years to let them go back to that hellish job they said they wanted, “representing” you in our lower Congressional house. Sort of like paying to be allowed into a kindergarten free-for-all every two years.
In the pecking order of Presidents, Senators, and Supreme Court Justices, these Representatives are most definitely the least polished, most unvarnished of the political breed. Everybody knows the seamy stories about US Reps from their district. All politics “is” local, and the same “constituent servicing” goes on in every district in every state in the country.
So What Else is New?
So I was bemused to learn that Tom DeLay allegedly was explicit in trading his support of a colleague’s son for a House seat, in exchange for the colleague’s vote on the medicare prescription drug benefit. This was evidently only one of a handful of times that the House “ethics,” and I use the word very loosely, committee has spoken out on Mr. DeLay’s actions.
I’m reminded that Texas has been most generous in delivering this type of political comedy to the nation. Remember Jim Wright’s heavily accented, “I will comply” with the House’s ethics committee’s demand that he come clean on his infamous book-buying-cum-campaign-financing scandal? Or Bobby Baker’s vegetable oil hoax?
By now, I'm old enough to consider the phrase "House Ethics Committee" an oxymoron. Who are they kidding? It's a political club with which to bash the other party's most effective leader.
We Get What We Deserve
Seriously, though, I think the true lesson in the Tom DeLay affair is the continuing stupidity in Washington with respect to campaign finance “reform” and regulation. When will we voters learn that these guys and gals we elect are just using our money to try to hamstring each other with so-called “campaign finance reforms” as they attempt to remain in office forever?
Let’s just admit that money is fungible. What DeLay and his colleagues evidently did seems perfectly sane and reasonable, given funding regulations. They took donations which were apparently illegal in Texas, sent them to their National Committee, and received funds back from said Committee. It may be laundering, but I can’t see how you could possibly write legislation that would make all and only such transactions illegal. If the people we elect to the House and Senate weren’t this clever, would we even want them there in the first place?
A Better Idea
You and I, as taxpayers, would be far better off if the pols we send to Washington would rescind all the current campaign finance laws and replace them with one. It’s a great idea which I read in the editorial pages of the Wall Street Journal during the Clinton years. Simply require that any funds donated to a campaign must be publicly reported, both at an electronic/internet site, and in a paper-based document, within 24 hours. The information required would be the amount, the donor, and the donor’s contact information. Then let the press have at it. I frankly don’t care if the head of the Chinese army donates money to Bill Clinton (wasn’t that rumored during his campaigns?), Tom DeLay or John Kerry. I just want to know about it. It would say far more about the candidate than many of his or her words and actions ever could.
Wednesday, September 28, 2005
The Hurricane Zone
A friend of mine and I were watching the news last week as coverage focused on hurricane Rita. The news story focused on the Galveston seawall, and how it would probably not be adequate to prevent flooding of the town, should Rita come ashore there.
This in a city famous for having been leveled in 1900 by a severe hurricane.
What is it about the Carolinas, Florida and the Gulf Coast? Living in a hurricane belt, you would think that the business owners and residents of the region would have shown more foresight regarding the potential damage from these storms when they build their facilities, homes and cities.
Take oil refineries, for example. I saw an interview with Lee Raymond of ExxonMobil on CNBC this week. He opined how until the past few weeks, he had never known how many experts on oil refineries there were in the US. That’s a pretty funny remark, until you let it sink in a bit.
You don’t have to be an expert at building or operating an oil refinery to realize that concentrating so much evidently unprotected, vulnerable capacity in a hurricane zone seems like inept business planning. The oil industry executives bemoan over-zealous environmental regulations, but the net effect of their decisions on refining capacity and locations over the years is to be unable to keep pace with the growth of their customers’ demands for refined petroleum products.
It’s easy to get lost in the thickets of how hard it is to build new refineries, pipelines, etc, thanks to various regulatory barriers. But from my perspective, it seems that the energy sector’s major mistake has simply been to underestimate demand, leaving them with barely adequate capacity at present, before the hurricanes affected the 25% or so of oil and gas production and refining that we are told are located in the Gulf region.
It’s not some evil conspiracy to drive up prices. Many, though not all, of these executives missed the boat on how Chinese and Indian demand would affect the global balance of supply and demand for carbon-based energy. I doubt they are happy to have unmet demand in this country right now.
As with many other business snafus, the real issue seems to be a simple deficit of capable business strategy and execution which take into account the realities of factors affecting supply and demand.
I’ll be touching on this subject again soon- how mediocrity in business management touches us all in unrealized ways.
This in a city famous for having been leveled in 1900 by a severe hurricane.
What is it about the Carolinas, Florida and the Gulf Coast? Living in a hurricane belt, you would think that the business owners and residents of the region would have shown more foresight regarding the potential damage from these storms when they build their facilities, homes and cities.
Take oil refineries, for example. I saw an interview with Lee Raymond of ExxonMobil on CNBC this week. He opined how until the past few weeks, he had never known how many experts on oil refineries there were in the US. That’s a pretty funny remark, until you let it sink in a bit.
You don’t have to be an expert at building or operating an oil refinery to realize that concentrating so much evidently unprotected, vulnerable capacity in a hurricane zone seems like inept business planning. The oil industry executives bemoan over-zealous environmental regulations, but the net effect of their decisions on refining capacity and locations over the years is to be unable to keep pace with the growth of their customers’ demands for refined petroleum products.
It’s easy to get lost in the thickets of how hard it is to build new refineries, pipelines, etc, thanks to various regulatory barriers. But from my perspective, it seems that the energy sector’s major mistake has simply been to underestimate demand, leaving them with barely adequate capacity at present, before the hurricanes affected the 25% or so of oil and gas production and refining that we are told are located in the Gulf region.
It’s not some evil conspiracy to drive up prices. Many, though not all, of these executives missed the boat on how Chinese and Indian demand would affect the global balance of supply and demand for carbon-based energy. I doubt they are happy to have unmet demand in this country right now.
As with many other business snafus, the real issue seems to be a simple deficit of capable business strategy and execution which take into account the realities of factors affecting supply and demand.
I’ll be touching on this subject again soon- how mediocrity in business management touches us all in unrealized ways.
Wednesday, September 21, 2005
Trading is an Addiction & Your Broker is the Pusher
What Is Active Management ?
A recent article in the Wall Street Journal caused me to consider what it means to actively manage an equity portfolio strategy in an environment in which brokerage analysts constantly vie to create “new information.”
Our strategy, Pathfinder, trades less often than many equity portfolios and funds. If new money is invested, it will be used to buy the most recent equity selections for that month. Otherwise, the strategy holds investments for approximately six months.
The more active part of our management is our constant monitoring of equity market performance in order to position ourselves long or short to the desired degree.
This approach results from rigorous analysis and a desire to employ an approach which combines both fundamental and technical information about the universe of S&P 500 stocks. To trade more frequently than quarterly would be to overweight technical information, as financial reports are released on a quarterly basis.
Another Source of “Information”
There is another source of fundamental “information.” It is the sell side analyst community. By the way, that reference, “sell side analyst,” tells you pretty much all you need to know regarding motivation. The article referred to earlier in this piece appeared in the August 29th issue of that newspaper, in section C- the financial news section. The essence of the article is that some homebuilder sector analysts have been releasing more than one report per day. In one case, an analyst actually published five reports in one day.
Isn’t that thoughtful of them? Otherwise, the major fundamental news would be a company’s quarterly report, or perhaps a sector-wide report issued periodically by some rather more objective institute. Or the monthly new and existing home sales figures. With this onslaught of reports, however, these institutional sell-side analysts are implicitly arguing that what they write is “new information,” necessitating reactions, in the form of trades, from their clients and prospects, the institutional fund managers. Isn’t it convenient that these analysts work for brokerage firms which just happen to have trading desks?
And let us not forget the ever-changing “ratings” activities. Accompanying the many written reports are the solemnly announced ratings of companies by sell-side brokerage analysts. These can vary from the simple “buy/sell/hold” variety to any of countless other categorization schemes. In a manner similar to report publishing, these ratings changes are intended to trigger a stampede of orders from institutional managers in response to the presumably objective changes. In reality, though, any change is beneficial to the analyst’s brokerage firm. It might be said, to use a familiar quote, “the more things change, the more they remain the same.” What “remains the same,” in this case, is the brokers’ revenue streams, in the face of institutional trading triggered by the ratings “changes.”
Mind you, we aren’t even talking about the M&A-related suspect research of the late ‘90s that triggered the Spitzer probes. In fact, in this case, the last thing these analysts want to do is make one large, unidirectional call. It’s far more profitable for a brokerage operation if the analysts activities cause frequent changes in direction, causing more trading as the “new information” flows from them.
The brokerages never directly charge the customers for this research. Instead, it is built into the cost of the trading desks which deliver the resulting trades. Since trading is capital intensive, volume increases due to analysts-driven trading yield the payoff to funding the analysts groups. The institutional customers pay indirectly, even at fractions of cents on the dollar per share traded, or in the bid/ask spread.
An Overlooked Effect
There is another, often overlooked second-order effect from this over-reporting of sector “information.” It is the conditioning of institutional managers, and fund-of-fund managers, to take it as an article of faith that actively managed funds or strategies need to be reacting to all this “information” flowing from the analysts. It is a timeless effect. Somewhere, analysts are pumping out “new information” for the sector du jour of interest. Yesterday it may have been home building. Today it might be energy. Tomorrow- who knows? But rest assured, some sector is always ripe for over-reporting and a steady flow of information on which trades are therefore expected to be made in reaction. If you aren’t trading on constantly-flowing analysts’ reports, you’re just not an “active” portfolio manager.
Where’s the Beef?
What is missing, though, is an objective analysis of whether all this type of “new information” actually constitutes value which can be used to change portfolio positions profitably. There are no studies of which we are aware showing that frequent trading, trimming positions with every jot and tittle of some analyst’s pen, will actually improve fund returns. In fact, the blizzard of analyst reports looks very self-serving for the brokerage firms which employ them. By addicting institutional investors to the steady flow of “research” and “ratings changes,” the analysts help assure a steady flow in the other direction of trades by institutional customers in reaction to the apparent “new information.”
For example, during the week of October 7, 2004, an analyst at one fairly well-known brokerage trashed the entire homebuilding sector. Pulte’s return for the period, from July, plunged from 18% to –3% in a week. It further deepened to –6% the following week. After quarterly results were released later that month, Pulte rocketed back 16% return points in two days. First on news of Toll Brothers blowout quarterly results, and then the next day on Pulte’s own quarterly report. By December 17th, it was back up to a 22% return for the holding period, where it finished the year. Golden West also recovered to a period-near-high of 17%.
So the analyst caused a temporary plunge with ‘new’ information which turned out to be wrong. The market corrected back to its original valuation. How much trading occurred in the interim to drive the prices down, then up? Who gained from that? Well, regardless of the timing of the institutional buys and sells, we know the brokerage firms profited from this little episode. No doubt it is repeated many times each quarter throughout many sectors.
When you think about it, being right isn’t actually all that good for an analyst’s employer. Better, from a trading volume perspective, to cause a change in price in both directions of a stock, rather than correctly signal only one move.
Effective “Active” Management
What puzzles me is why, in the absence of published evidence that frequent, sell-side-analyst-caused trading increases net returns to portfolio managers, more institutional fund allocators and managers don’t frown upon such “active” management.
Why is holding positions for more than a month seen as being a “passive” manager? In the case of Pathfinder, it is a conscious, empirically-research based choice to pursue the accumulation of returns and lower trading expenses. Trading more frequently than quarterly drives a strategy to become technically-based, i.e., defined purely by market price moves. This is where the analysts’ reports come in. By creating a constant flow of “information” with which to affect stock prices, the analysts create trading revenues for their institutional equity desks, while also creating a climate in which managers and investors expect frequent rebalancing and trading as the norm, rather than the exception.
At Performance Research Associates we eschew this frequent-trading approach. Instead, we base our selections and holding periods on longer-time-framed signals and measures. Actively managing Pathfinder means we continually monitor the market for long/short allocation signals to drive that decision, because it is a particularly important and value-laden one. We also monitor positions on a daily basis in order to better understand how economic and company-specific news affects our portfolio selections. However, within existing long/short allocations, we remain confident in our selections, daily ‘new’ analyst-provided information notwithstanding.
We believe the results of equity portfolio management are what count, not the frequency of the trading or investing which produces those results.
A recent article in the Wall Street Journal caused me to consider what it means to actively manage an equity portfolio strategy in an environment in which brokerage analysts constantly vie to create “new information.”
Our strategy, Pathfinder, trades less often than many equity portfolios and funds. If new money is invested, it will be used to buy the most recent equity selections for that month. Otherwise, the strategy holds investments for approximately six months.
The more active part of our management is our constant monitoring of equity market performance in order to position ourselves long or short to the desired degree.
This approach results from rigorous analysis and a desire to employ an approach which combines both fundamental and technical information about the universe of S&P 500 stocks. To trade more frequently than quarterly would be to overweight technical information, as financial reports are released on a quarterly basis.
Another Source of “Information”
There is another source of fundamental “information.” It is the sell side analyst community. By the way, that reference, “sell side analyst,” tells you pretty much all you need to know regarding motivation. The article referred to earlier in this piece appeared in the August 29th issue of that newspaper, in section C- the financial news section. The essence of the article is that some homebuilder sector analysts have been releasing more than one report per day. In one case, an analyst actually published five reports in one day.
Isn’t that thoughtful of them? Otherwise, the major fundamental news would be a company’s quarterly report, or perhaps a sector-wide report issued periodically by some rather more objective institute. Or the monthly new and existing home sales figures. With this onslaught of reports, however, these institutional sell-side analysts are implicitly arguing that what they write is “new information,” necessitating reactions, in the form of trades, from their clients and prospects, the institutional fund managers. Isn’t it convenient that these analysts work for brokerage firms which just happen to have trading desks?
And let us not forget the ever-changing “ratings” activities. Accompanying the many written reports are the solemnly announced ratings of companies by sell-side brokerage analysts. These can vary from the simple “buy/sell/hold” variety to any of countless other categorization schemes. In a manner similar to report publishing, these ratings changes are intended to trigger a stampede of orders from institutional managers in response to the presumably objective changes. In reality, though, any change is beneficial to the analyst’s brokerage firm. It might be said, to use a familiar quote, “the more things change, the more they remain the same.” What “remains the same,” in this case, is the brokers’ revenue streams, in the face of institutional trading triggered by the ratings “changes.”
Mind you, we aren’t even talking about the M&A-related suspect research of the late ‘90s that triggered the Spitzer probes. In fact, in this case, the last thing these analysts want to do is make one large, unidirectional call. It’s far more profitable for a brokerage operation if the analysts activities cause frequent changes in direction, causing more trading as the “new information” flows from them.
The brokerages never directly charge the customers for this research. Instead, it is built into the cost of the trading desks which deliver the resulting trades. Since trading is capital intensive, volume increases due to analysts-driven trading yield the payoff to funding the analysts groups. The institutional customers pay indirectly, even at fractions of cents on the dollar per share traded, or in the bid/ask spread.
An Overlooked Effect
There is another, often overlooked second-order effect from this over-reporting of sector “information.” It is the conditioning of institutional managers, and fund-of-fund managers, to take it as an article of faith that actively managed funds or strategies need to be reacting to all this “information” flowing from the analysts. It is a timeless effect. Somewhere, analysts are pumping out “new information” for the sector du jour of interest. Yesterday it may have been home building. Today it might be energy. Tomorrow- who knows? But rest assured, some sector is always ripe for over-reporting and a steady flow of information on which trades are therefore expected to be made in reaction. If you aren’t trading on constantly-flowing analysts’ reports, you’re just not an “active” portfolio manager.
Where’s the Beef?
What is missing, though, is an objective analysis of whether all this type of “new information” actually constitutes value which can be used to change portfolio positions profitably. There are no studies of which we are aware showing that frequent trading, trimming positions with every jot and tittle of some analyst’s pen, will actually improve fund returns. In fact, the blizzard of analyst reports looks very self-serving for the brokerage firms which employ them. By addicting institutional investors to the steady flow of “research” and “ratings changes,” the analysts help assure a steady flow in the other direction of trades by institutional customers in reaction to the apparent “new information.”
For example, during the week of October 7, 2004, an analyst at one fairly well-known brokerage trashed the entire homebuilding sector. Pulte’s return for the period, from July, plunged from 18% to –3% in a week. It further deepened to –6% the following week. After quarterly results were released later that month, Pulte rocketed back 16% return points in two days. First on news of Toll Brothers blowout quarterly results, and then the next day on Pulte’s own quarterly report. By December 17th, it was back up to a 22% return for the holding period, where it finished the year. Golden West also recovered to a period-near-high of 17%.
So the analyst caused a temporary plunge with ‘new’ information which turned out to be wrong. The market corrected back to its original valuation. How much trading occurred in the interim to drive the prices down, then up? Who gained from that? Well, regardless of the timing of the institutional buys and sells, we know the brokerage firms profited from this little episode. No doubt it is repeated many times each quarter throughout many sectors.
When you think about it, being right isn’t actually all that good for an analyst’s employer. Better, from a trading volume perspective, to cause a change in price in both directions of a stock, rather than correctly signal only one move.
Effective “Active” Management
What puzzles me is why, in the absence of published evidence that frequent, sell-side-analyst-caused trading increases net returns to portfolio managers, more institutional fund allocators and managers don’t frown upon such “active” management.
Why is holding positions for more than a month seen as being a “passive” manager? In the case of Pathfinder, it is a conscious, empirically-research based choice to pursue the accumulation of returns and lower trading expenses. Trading more frequently than quarterly drives a strategy to become technically-based, i.e., defined purely by market price moves. This is where the analysts’ reports come in. By creating a constant flow of “information” with which to affect stock prices, the analysts create trading revenues for their institutional equity desks, while also creating a climate in which managers and investors expect frequent rebalancing and trading as the norm, rather than the exception.
At Performance Research Associates we eschew this frequent-trading approach. Instead, we base our selections and holding periods on longer-time-framed signals and measures. Actively managing Pathfinder means we continually monitor the market for long/short allocation signals to drive that decision, because it is a particularly important and value-laden one. We also monitor positions on a daily basis in order to better understand how economic and company-specific news affects our portfolio selections. However, within existing long/short allocations, we remain confident in our selections, daily ‘new’ analyst-provided information notwithstanding.
We believe the results of equity portfolio management are what count, not the frequency of the trading or investing which produces those results.
Who Should Decide How To Rebuild New Orleans ?
First, let me state that it’s terrible that hurricane Katrina killed people in the Gulf states and caused so much property damage. The loss of life is a tragedy.
Now, the greater than $100B question- who should have the most, or deciding, say in how New Orleans is rebuilt?
If you are reading this, there is a 98% chance that you live in one of the states that is expected to be paying to rebuild New Orleans, but not in Louisiana. And there is a 99.8%, literally, that you don’t, or didn’t, even live in New Orleans. So that means chances are very good that your tax dollars are expected to rebuild a city you don’t directly support in your own state. Illinois has its Chicago, and New York state, its namesake city. Massachusetts supports Boston. I’m sure there are similar examples in other states as well.
But a whole country to support one city?
Does it makes sense that the city of New Orleans, and its state, which together couldn’t manage to keep it safe from reasonably expected hurricane exposure in the first place, are the groups who should have the final say in rebuilding it with other people’s money?
Nevermind that by requesting, or expecting, the rebuilding of the entire city, more or less, on a federal tab, they are already living beyond their means. I guess that’s federalism at work, like it or not.
Personally, I’d have a lot more respect for the government of the city of New Orleans, and the state of Louisiana, if they asked for federal loan guarantees, rather than direct grants and aid. For crying out loud, can't the local and state governments show some pride and initiative in this?
If they want the final say in rebuilding their city, then let them earn it. Ask for help borrowing capital that they will repay with a revitalized port, energy-related commercial zone and tourism areas that are safe and survivable. Rather than issuing demands that the rest of us, through the conduit of the federal government, simply hand over more than $100B to those government entities to spend as they wish. It takes a lot of gall to request/demand $100B to rebuild a city that wasn't safe in the first place, while seeming to stiff-arming the very people from whom they want the money when questioned as to how and why the reconstruction is to take place.
After all we have heard regarding the importance of the area to agricultural transport, energy production and distribution, and other general shipping needs, I don’t understand why the local and state governments can’t borrow against their infrastructure-based revenues to rebuild. I’d prefer to see the funds coming from increased prices paid for goods passing through that region to pay for the new and improved facilities, funded by bonds, than to simply hand over $100B to local and state governmental authorities.
Nobody questions the need and value or rebuilding damaged commercial infrastructure to standards which can better withstand a major hurricane, so long as that cost is economically rational. Either private or public revenue-backed bonds would seem to be feasible. If they can't attract capital, based upon the expected costs and revenues of improved and repaired facilities, then it begs the question of rebuilding commercial facilities there in the first place. What seems to be more in doubt is what kind of residential reconstruction is reasonable. Holman Jenkins wrote an excellent editorial about this in the Wall Street Journal two weeks ago.
I think Dennis Hastert had it right when he questioned whether the United States ought to be reconstructing a city which lies inside a below-water bathtub of levees. In the interest of full disclosure, by the way, I hail from Hastert’s state, Illinois. But that notwithstanding, I admire his comments. As the Speaker of the House of Representatives, the “people’s house” where spending bills originate, he is the ideal elected public official to voice such thoughts. He speaks for the 98% of us, from 49 other states, who wonder why, if we are going to substantially rebuild the city of New Orleans, those of us being asked to pay the tab don’t get to decide how it will be done.
Now, the greater than $100B question- who should have the most, or deciding, say in how New Orleans is rebuilt?
If you are reading this, there is a 98% chance that you live in one of the states that is expected to be paying to rebuild New Orleans, but not in Louisiana. And there is a 99.8%, literally, that you don’t, or didn’t, even live in New Orleans. So that means chances are very good that your tax dollars are expected to rebuild a city you don’t directly support in your own state. Illinois has its Chicago, and New York state, its namesake city. Massachusetts supports Boston. I’m sure there are similar examples in other states as well.
But a whole country to support one city?
Does it makes sense that the city of New Orleans, and its state, which together couldn’t manage to keep it safe from reasonably expected hurricane exposure in the first place, are the groups who should have the final say in rebuilding it with other people’s money?
Nevermind that by requesting, or expecting, the rebuilding of the entire city, more or less, on a federal tab, they are already living beyond their means. I guess that’s federalism at work, like it or not.
Personally, I’d have a lot more respect for the government of the city of New Orleans, and the state of Louisiana, if they asked for federal loan guarantees, rather than direct grants and aid. For crying out loud, can't the local and state governments show some pride and initiative in this?
If they want the final say in rebuilding their city, then let them earn it. Ask for help borrowing capital that they will repay with a revitalized port, energy-related commercial zone and tourism areas that are safe and survivable. Rather than issuing demands that the rest of us, through the conduit of the federal government, simply hand over more than $100B to those government entities to spend as they wish. It takes a lot of gall to request/demand $100B to rebuild a city that wasn't safe in the first place, while seeming to stiff-arming the very people from whom they want the money when questioned as to how and why the reconstruction is to take place.
After all we have heard regarding the importance of the area to agricultural transport, energy production and distribution, and other general shipping needs, I don’t understand why the local and state governments can’t borrow against their infrastructure-based revenues to rebuild. I’d prefer to see the funds coming from increased prices paid for goods passing through that region to pay for the new and improved facilities, funded by bonds, than to simply hand over $100B to local and state governmental authorities.
Nobody questions the need and value or rebuilding damaged commercial infrastructure to standards which can better withstand a major hurricane, so long as that cost is economically rational. Either private or public revenue-backed bonds would seem to be feasible. If they can't attract capital, based upon the expected costs and revenues of improved and repaired facilities, then it begs the question of rebuilding commercial facilities there in the first place. What seems to be more in doubt is what kind of residential reconstruction is reasonable. Holman Jenkins wrote an excellent editorial about this in the Wall Street Journal two weeks ago.
I think Dennis Hastert had it right when he questioned whether the United States ought to be reconstructing a city which lies inside a below-water bathtub of levees. In the interest of full disclosure, by the way, I hail from Hastert’s state, Illinois. But that notwithstanding, I admire his comments. As the Speaker of the House of Representatives, the “people’s house” where spending bills originate, he is the ideal elected public official to voice such thoughts. He speaks for the 98% of us, from 49 other states, who wonder why, if we are going to substantially rebuild the city of New Orleans, those of us being asked to pay the tab don’t get to decide how it will be done.
Tuesday, September 20, 2005
Wal-Mart and the Wheel of Retailing
Did you read the piece about Wal-Mart in the Wall Street Journal’s first weekend issue on Saturday? Am I the only person who doesn’t understand why Wal-Mart thinks it can trade-up from being the nation’s largest purveyor of cheap, bulk provisions to the masses to being a destination for those seeking fashion, style and upscale wares?
Back when I was earning my degrees in Marketing, there was a theory which was taught that went by the name of “the wheel of retailing.” It essentially observed that every so often, a new, low-cost retailer will arise that rips through the existing sector structure like a hot knife through butter, growing at the expense of outmoded, expensive older giants.
In the 1920s in hard goods, it was Sears. In the 1930s, in groceries, it was The Atlantic & Pacific Tea Company, a/k/a A&P. In fact, so virulent was A&P’s impact on the world of small, neighborhood grocers that the Robinson-Patman Act of 1934 was informally known as “the anti-A&P Act.”
That said, the Wal-Mart saga since the 1980s is both remarkable, yet not surprising. What the company did is not all that new. It upended several existing chains of general merchandisers who had grown inefficient, insensitive to consumer needs and wants, and basically moribund. How it did it was with the latest version of what the lowest entrants on the wheel of retailing always use- low-cost supply of large volumes of goods. It looks glitzier now, with integrated IT functions shared among vendors. But if you go back to the architect of Sears’ great transformation, you will find that Robert Wood, the creator of that transformation, learned his supply skills as quartermaster on the Panama Canal, one of the more challenging logistical projects of that era.
What is puzzling me is why there is all this attention paid to the mid-late life growth pangs of a retail success. Retailers who began life at the bottom always try to extend growth, once they saturate the market with stores, by moving up-market. And they nearly always fail in doing so.
So will Wal-Mart. The company appeared briefly as a selection in the large-cap equity portfolio I manage. That was back in the 90s. But it hasn’t performed in a consistently superior fashion in over a decade.
If Wal-Mart really wants to move up-market, they should do what Les Wexner did with The Limited. He employed a strategy of buying different brands to move out of the original retail niche in which The Limited succeeded. Wal-Mart could probably employ its size and legendary logistics acumen to vault some existing fashion brands into the big leagues, and at the same time, bring better financial management to them. And attract the more upscale consumers it now seeks, albeit through doors with other brand names on them.
Whether they do or not, at least they would have a fighting chance with both customer segments- the current Wal-Mart shopper, and the fashion-conscious shoppers who now move up to Target and Kohls. It’s not like Wal-Mart is aiming at uncharted, nor vacant, product/market territory.
Back when I was earning my degrees in Marketing, there was a theory which was taught that went by the name of “the wheel of retailing.” It essentially observed that every so often, a new, low-cost retailer will arise that rips through the existing sector structure like a hot knife through butter, growing at the expense of outmoded, expensive older giants.
In the 1920s in hard goods, it was Sears. In the 1930s, in groceries, it was The Atlantic & Pacific Tea Company, a/k/a A&P. In fact, so virulent was A&P’s impact on the world of small, neighborhood grocers that the Robinson-Patman Act of 1934 was informally known as “the anti-A&P Act.”
That said, the Wal-Mart saga since the 1980s is both remarkable, yet not surprising. What the company did is not all that new. It upended several existing chains of general merchandisers who had grown inefficient, insensitive to consumer needs and wants, and basically moribund. How it did it was with the latest version of what the lowest entrants on the wheel of retailing always use- low-cost supply of large volumes of goods. It looks glitzier now, with integrated IT functions shared among vendors. But if you go back to the architect of Sears’ great transformation, you will find that Robert Wood, the creator of that transformation, learned his supply skills as quartermaster on the Panama Canal, one of the more challenging logistical projects of that era.
What is puzzling me is why there is all this attention paid to the mid-late life growth pangs of a retail success. Retailers who began life at the bottom always try to extend growth, once they saturate the market with stores, by moving up-market. And they nearly always fail in doing so.
So will Wal-Mart. The company appeared briefly as a selection in the large-cap equity portfolio I manage. That was back in the 90s. But it hasn’t performed in a consistently superior fashion in over a decade.
If Wal-Mart really wants to move up-market, they should do what Les Wexner did with The Limited. He employed a strategy of buying different brands to move out of the original retail niche in which The Limited succeeded. Wal-Mart could probably employ its size and legendary logistics acumen to vault some existing fashion brands into the big leagues, and at the same time, bring better financial management to them. And attract the more upscale consumers it now seeks, albeit through doors with other brand names on them.
Whether they do or not, at least they would have a fighting chance with both customer segments- the current Wal-Mart shopper, and the fashion-conscious shoppers who now move up to Target and Kohls. It’s not like Wal-Mart is aiming at uncharted, nor vacant, product/market territory.
Saturday, September 17, 2005
When Analysts Become Useless
Have you noticed the incredible split in the way major energy firms are managing themselves recently? ExxonMobil won't bid for new reserves. It's retiring chairman, the veteran Lee Raymond, opines that the price of a barrel of oil will eventually re-settle near $40, and everyone paying an effective takeover premium above that for reserves is making a major strategic error.
Meanwhile, Valero is buying up more refining assets, and now, even Canadian oil sands. At prices that indicate they believe energy prices are heading upward for a sustained time period.
Who is right? Both companies, and several of their competitors, are run by smart, veteran leaders with a lot of common sense and experience. It's really tough, from the outside, to know who is right. And someone clearly has to be right, or wrong, in this kind of situation.
What I do know, though, is that it makes virtually no sense to rely on any "analysts" in the brokerage community to add one iota of value to the analysis of this situation. Who would you rather listen to for your raw information- leaders of the major players in the sector, or outside observers with no industry experience who are paid for generating uncertainty, and, thus, trading income for their brokerage houses?
Not such a tough call, is it, when you put it that way?
Sure, sources like Daniel Yergin or other veteran managers or non-financial-sector observers are worth hearing out. But the uncertainty in this sector right now is not about abstruse technical analysis of financial asset price movements. Nor about customer behavior. It has more to do with assessments of global demand, the price inelasticities of that demand, the geopolitical dimensions of some of that demand, and the very real and gritty business of finding and producing crude oil and natural gas.
So who really believes any of the Street oil and gas analysts can add any value to what the the guys in the drivers' seats of the big players in this sector are already saying, and doing?
One industry veteran put it this way. Those energy producers who believe prices will fall back to pre-summer levels are behaving according to an implicit belief in the late Julian Simon's theory that commodity prices rise and fall to assure a near-constant time period of supply of any important basic commodity. That was the core of his famous bet with Paul Ehrlich over twenty years ago.
Those energy producers who are betting on higher prices implicitly believe that we have finally reached a peak of production of existing carbon-based energy sources. Ironically, deals like Valero's recent purchase of Canadian oil sands could well be the sort of action that will once again prove the other group of producers, and Julian Simon, correct.
For my money, I'm focusing on the actions of the major sector players, and the global economic demands on their products. Who needs biased brokerage analysts to interpret such clear cut information?
Meanwhile, Valero is buying up more refining assets, and now, even Canadian oil sands. At prices that indicate they believe energy prices are heading upward for a sustained time period.
Who is right? Both companies, and several of their competitors, are run by smart, veteran leaders with a lot of common sense and experience. It's really tough, from the outside, to know who is right. And someone clearly has to be right, or wrong, in this kind of situation.
What I do know, though, is that it makes virtually no sense to rely on any "analysts" in the brokerage community to add one iota of value to the analysis of this situation. Who would you rather listen to for your raw information- leaders of the major players in the sector, or outside observers with no industry experience who are paid for generating uncertainty, and, thus, trading income for their brokerage houses?
Not such a tough call, is it, when you put it that way?
Sure, sources like Daniel Yergin or other veteran managers or non-financial-sector observers are worth hearing out. But the uncertainty in this sector right now is not about abstruse technical analysis of financial asset price movements. Nor about customer behavior. It has more to do with assessments of global demand, the price inelasticities of that demand, the geopolitical dimensions of some of that demand, and the very real and gritty business of finding and producing crude oil and natural gas.
So who really believes any of the Street oil and gas analysts can add any value to what the the guys in the drivers' seats of the big players in this sector are already saying, and doing?
One industry veteran put it this way. Those energy producers who believe prices will fall back to pre-summer levels are behaving according to an implicit belief in the late Julian Simon's theory that commodity prices rise and fall to assure a near-constant time period of supply of any important basic commodity. That was the core of his famous bet with Paul Ehrlich over twenty years ago.
Those energy producers who are betting on higher prices implicitly believe that we have finally reached a peak of production of existing carbon-based energy sources. Ironically, deals like Valero's recent purchase of Canadian oil sands could well be the sort of action that will once again prove the other group of producers, and Julian Simon, correct.
For my money, I'm focusing on the actions of the major sector players, and the global economic demands on their products. Who needs biased brokerage analysts to interpret such clear cut information?
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