GE's CEO Immelt's Arrogance in CNBC Interview

Here is a link to a video clip of yesterday's CNBC interview by Erin Burnett of her boss, GE CEO Jeff Immelt. While it is the fourth part of a longer interview played on the network throughout Friday, the juicy parts of this segment begin about midway through the clip.

Let me state what I feel is the problem with Immelt's attitude in the interview segment. As I wrote here, last March, Immelt has already been paid roughly $15MM in cash salary and bonuses. This does not even counting his deferred and retirement compensation, which, according to Forbes, as of 2005, was already totaling some $53MM. In the latter part of this interview segment, he casually dismisses discussion of his pay, insisting he is not in it for the money. Yet Immelt has failed to even keep GE's total return on a par with the S&P500 Index during his 5+ years at the helm of the firm. Taken in total, the interview depicts him as effectively ignoring his lavish overcompensation, and his underperformance, and, instead, focusing on how much fun he's having just meeting folks, facilitating the work of GE staff everywhere, and having a swell time.

Well, of course he's not in it for the money. Not now. I guarantee you, he was sure fixated on the money six years ago, when he took over the reins from Jack Welch.

How arrogant for Immelt to have failed to even keep pace with the S&P500 Index for over five years, as depicted in the Yahoo-sourced chart on the left (please click on the chart to view an enlarged version), and be lavishly compensated. Then airily wave off any thoughts that he should be criticized for his pay level.



To see GE's stock price over Immelt's entire tenure, here's a longer-term view of GE and the S&P500. As can be seen from late 2001 onward, the index ended the period up, while GE is down. Need one say more?

I won't try to quote his alleged motivations for running GE- you can hear them yourself in the video clip. Suffice to say, they are all of the motherhood and apple-pie variety. It's sickening. Having grabbed the gold, if not platinum, ring, Immelt now deflects any suggestion that he's overpaid. In fact, when Erin Burnett brings the subject up, Immelt sort of bridled at 'defending' or 'justifying' his pay, saying something like,

'If I have to spend a third of my time justifying my compensation, I'll quit and go do something else.'

That's not the exact quote, but it's close. And this, on the heels of his recounting what a merry, fun-loving, joy-producing time he's having as he reduces the value of GE's shareholder's equity.

On the subject of Bob Nardelli's exit package from Home Depot, Immelt wisely kept silent. You can see where he's going with that. If he says Nardelli deserves all of the money, Immelt looks like the arrogant, insensitive, greedy CEO that he is. If, on the other hand, he says Nardelli should give some of the package back, he needs to offer a reason. And then he's on record with the comment, would definitely be used against him, should he finally be shown the door by GE's board for continual failure to earn shareholders the market rate of total return over six years.

Honestly, I think Immelt is preparing for a quick, painless exit. It's almost as if he is saying,

"C'mon, I dare you. Pester me. So I can look noble and harried, and then get the hell out of Dodge while the gettin's good."

Sort of the B'rer Rabbit approach. Please don't hound me into quitting, 'cause I will. I really will. I'll take my total compensation that's north of $50MM since I became CEO and skulk off.

Puuullllleezzzzzz!!!!

Such drama. He's probably secretly envious of Nardelli. That stiff got off lucky. He was handed a headache known as Home Depot, screwed it up some more, and got paid to leave. Poor Jeff has to stay and try to clean up his mess! His old pal Bobby is out on the playground, being looked over by the Private Equity Gang for possible membership.

On this point, Burnett coyly hinted that maybe Jeff could duck the entire Congressional witch hunt on executive compensation that is coming, and simply join the private equity world, where, she solemnly intoned, he'd probably be paid hundreds of millions of dollars. Immelt could barely contain his grin at that point. But he pretended not to know or care what he'd be "worth." Question is, though, given Nardelli's and Immelt's failures to even match the S&P as CEOs, who'd actually pay them to underperform in the private equity world?

I suspect the only way those two will actually get jobs in that sector is to pay to play. You know, put their sizable compensation kitties up as a stake, to be allowed into any deals. Nobody has actually saying they could do better elsewhere than their miserable records running publicly-held companies.

Meanwhile, Jeff has to try to get GE running in some semblance of mediocrity, if not better. Sadly, given how forgiving and supine the company's board has been, mediocrity would probably be sufficient for that group.

It is truly a sad day for publicly-held firms. No wonder private equity is hunting with such abandon. With guys like Immelt sporting such an arrogant attitude while mismanaging GE, can you blame the private equity guys for offering low-ball premiums to victimized shareholders? Not to mention the media, especially Immelt's own captive network, CNBC, lobbing softballs at him, and joining him in denial about how he's overpaid for failing to deliver even average market value to his shareholders for over more than half a decade now.

Productivity vs. Wage Levels & Manufacturing Jobs

A week or more ago, CNBC featured one of their occasional guests, Dr. John Rutledge. Rutledge is a man of impressive credentials as an economist, academic, and businessman.

Amidst a debate with other economists, Rutledge reminded everyone of reminder of an old conundrum. To wit, wage growth moderation translates into productivity, which fosters economic growth. Thus, if you measure an economy via value growth, and productivity, not the level or growth of one input's incomes, i.e., wages paid to labor, then you put inputs in their proper perspective.

However, if your first, and primary measure of economic health is simply wage levels and growth, you will probably miss the big picture of productivity growth and overall healthy economic growth.

This echos discussions I had years ago with a then-partner about consumer benefits of productivity vs. their effects on incomes. Lower wage growth, via higher productivity, means less-expensive goods and services, and, thus, effectively higher productivity-adjusted incomes.

Then there is the question of compensation packages. The old method of measuring bi-weekly paychecks to estimate national incomes is surely outdated. How does a Wall Street bonus get counted? Or equity participation by workers in the profits of the firm?

Lastly, there's the question of type of business to which an economy allocates its resources. Do we really want our economy putting hefty resource allocations into rather plain, undifferentiated jobs which are low-skill assembly-line or metal-bashing?

Yesterday's exchange, on this point, between Fed Chairman Ben Bernanke and Vermont Socialist Senator Bernie Sanders was priceless. Sanders tried his best to maneuver Bernanke into agreeing that we need to preserve old-line, low-paying manufacturing jobs, at the expense of a growing, productive economy. Ben didn't bite, and, instead, tossed Sanders a couple of curve balls.

First, he directly contradicted Sanders, and stated that, on balance, despite some marginal job losses, the overall economy benefits from free trade. Second, he asserted that our trade deficit is caused, not by our trade policies, but by our savings and investment policies. That is, we attract capital by not providing sufficient resources ourselves, thus, creating a deficit, not by just buying too much as imports.

For a discussion of why this is not, however, all bad, see my post here, from January 1st, on the recent WSJ article by Edward Prescott.

What was troubling, however, was Bernanke's agreement with other Senators, that our overall deficit, which has actually been shrinking, and our 'savings rate,' are worrisome.

These are important points, because flawed governmental tampering with our macroeconomic framework could derail the productive, profitable use of our capital to drive economic growth with low inflation. If the economic framework becomes distorted, it will be all the more difficult for our publicly-held, private enterprises to create the value our society needs, as capital, to continue investing, creating innovation, and providing for retirement assets for the aging members of our society.

Paradoxically, as Prescott points out, we need more debt and capital, if necessary, from abroad, not less, to feed the unique, premier value-creation engine that is our US capitalistic economy.

Apple & Microsoft: Recent Developments

Much has been made of the recent surge in Apple's stock price since the unveiling of the iPhone and AppleTV last week. Similarly, pundits are now noting Microsoft's recent stock price resurgence of the past six months.

For my own portfolio, Apple did not make the list for January's selections. Thus, I sold my position the day before the MacWorld announcements regarding the new products.

Is either Apple or Microsoft now a "buy?" Has either company altered its long-term fortunes recently?

For comparison, I've downloaded four Yahoo-sourced charts (larger versions may be seen by clicking on each chart) displaying stock prices for Microsoft, Apple, and the S&P500 Index level for the past six months, one, two and five years.

Surprising as it may be, over the last six months, Apple is actually the best performer. Both companies easily beat the S&P, but Apple also handily beat Microsoft.

Apple's price increase reflected, in part, its resurgence from a horrible drop in the first half of 2006, illustrated in the next chart.

Notice, too, how both companies' stock prices fell at about the time in the spring when economic pundits wrongly believed that the US economy was heading for a recession.

Looking at the past two years, we see that Apple again significantly outperforms Microsoft, which is essentially tied with the S&P. The latter two barely eked out a gain, while Apple rose handsomely.

The last chart, below, shows the five year price histories. Once again, the magnitude of Apple's outperformance, relative to Microsoft and the index, are apparent. It's not even remotely close.

My point is, when viewed over any period substantially longer than just the last six months, Microsoft is really not looking all that remarkable. My proprietary research shows that it takes at least three years to really sort out the merely temporarily lucky firms from the truly consistently excellent ones. Apple has done this, but Microsoft is very far from doing so.

This makes Microsoft essentially a timing stock. It may continue rising. Then again, it may not. How many people do you think actually bought Microsoft last July, expecting a 50% rise? Probably not too many.

Of course, some analysts argue that the XBox is for Microsoft what the iPod was for Apple. That it will transform the software titan. Well, it is, but with one important difference. The iPod saved and dramatically reconfigured Apple. Microsoft is so much larger, with so much more mass in its computer software operations, that the XBox's effect on the company can't be as large as the iPod's was on Apple. So, it's unlikely that Microsoft has sufficient arrows in its quiver right now to continue anything resembling its recent stock price run up. So, in the long run, I doubt that the XBox can 'save' or 'turnaround' Microsoft. To do that, it would have to be spun out, off, or out to shareholders. Then, of course, it wouldn't 'save' Microsoft, but simply benefit the shareholders who paid for XBox's development.

Why did my portfolio selection process not include Apple, after holding it these past six months? Well, the one-year price chart explains why. Over the past year, Apple's return was not all that much better than the index's. And that simply doesn't provide enough margin for error in my selection process. It's quite possible that Apple may be selected again in the coming months. But for now, it's just not quite 'superior' enough, recently, to merit inclusion.

For what it's worth, I saw Steve Ballmer mock and insult the iPhone this week in a CNBC interview. He was, I believe, appearing with Verizon personnel to attempt to demonstrate Microsoft's presence in the corporate communications market. While many of Ballmer's comments are probably correct regarding the iPhone, his company hardly has a presence on its own, and the existing phone-based services are not all that good. But what was very revealing was Ballmer alleging that he really doesn't focus that much on his company's stock price. No kidding. When you are now independently wealthy, why should you? Your best friend is chairman, and you are financially secure.

Of course, it's not Steve Ballmer's company, or Bill Gates' company. It's the woefully-under-represented shareholders' company. And it performs like one, doesn't it?

So, my expectation for the coming months is: no 'buy' signal from my selection process for Microsoft, but maybe for Apple.

Apple Corp: Devil or Angel?

My partner sent me a recent article from the New York Times written by Randall Stross, entitled, "Want an iPhone? Beware the iHandcuffs."

The essence of the article is that Apple (Computer) Corporation has behaved insensitively and arrogantly in its design of the iPod product line, and its iTunes online music store. At issue is the management of copyrights, use of purchased music by the user, and the copying of music tracks.

Within days, ironically, Alan Murray, managing editor of the Wall Street Journal, weighed in, both on CNBC and in print, on the personal arrogance of Apple's CEO, Steve Jobs.

My partner went so far as to suggest, as we discussed the article, and this post, that Apple is guilty of a Robinson-Patman and/or Clayton Act violation on the basis of "tying."

I may be in the minority here, but I don't really believe Apple has: a) done anything illegal; b) done anything inherently wrong, and/or; c) behaved in some 'evil' manner.

My contention is that those who would substantially innovate existing products, or bring to market large-scale new products, of necessity, must make provisions for entire systems of products and services. As such, in order to even offer the products or services, they must design and be responsible for, at least initially, the provision of all the components for the system. In order to make this profitable, the innovating company will appear to be overly-concerned with control of the components of the system, and will also appear to not care about its interoperability with other systems, without which, the innovative system may function effectively.

Let me mention a few other examples of this phenomenon: Edison's electric power system, Westinghouse's competing alternating current electrical power system, General David Sarnoff's RCA Corporation television broadcasting and viewing system, and Phillips' audio cassette technology.

In all of these prior examples, an innovative company had to provide for a complete system in order to offer a sensible value proposition to multiple user classes.

Take television, for example. To market television, RCA had to design, produce, test and manage the input devices- cameras, amplifiers, processors, broadcasting equipment- network equipment, and receiving devices- televisions. The company had to design, sell and operate a standardized system of equipment, in order for television stations and viewers to be assured that their products would work correctly as part of the heretofore nonexistent system.

Apple did something similar for music some six years ago. Prior to iPods, we bought music at $14-18/disc, as an entire album. If you wanted one or two songs on an album, tough luck. You had to buy the whole thing, to buy it legally.

Then along came Apple's iPod and iTunes online music store. Mind you, prior to that, nobody could figure out how to shake the music industry out of its lethargy, as technology seemed poised to illegally 'solve' the music purchase problem that users had- how to buy individual tracks of music.

Do Apple's products use a different, proprietary encoding process for its iTunes music? Yes. Are Apple's products the only choices for playing digitally-encoded music? No.

Microsoft, Sandisk, and several other vendors also offer MP3 digital music players. And, hey, you can always dust off your CD player. Nobody's putting a gun to anyone's head to force them to buy an iPod. Or use iTunes.

Even when you buy an iPod, there is no "tying" arrangement which forces you to buy anything on iTunes. Unlike the original "TBA" (for tires, batteries and accessories) tying cases, for which the Clayton Act was used to halt the practice, Apple requires no purchase from or of one product, in order to use another. iTunes may be used to buy music, by the song, and play it on your PC. Or to record it onto a CD. You needn't have an iPod to use iTunes. Similarly, you may rip your existing CDs, using iTunes, into tracks to store on your iPod. But no 'purchase' is required to do this, aside from the original iPod purchase.

This system has been so successful that Microsoft, RealNetworks, and eMusic all now compete to offer online music. The consumer has choices.

In fact, the closing paragraph of Mr. Stross' article reads thusly,

"Pointing to South Korea, where copy protection has disappeared, Mr. Goldberg invoked the pithy aphorism attributed to the author William Gibson: “The future is here; it’s just not widely distributed yet.” "

I contend that, without its closed system, Apple would have had little economic reason to innovate with its iPod/iTunes system in the first place. Is it really bad for innovation to be restrictive and controlled at first, if, without such restrictions, the innovation never occurs?

This is the central argument in patent policy and law. How much protection is sufficient to produce innovation and growth, societal advancement, and how much is too much, which strangles emerging technologies.

Closed systems initially assure revenue and profit for the innovator. In time, if the innovation is useful, but deemed too restrictive, others will typically get around the technology issues.

Or, if the technological barriers are too heavily relied upon, they may be simply leapfrogged. Landline telephony's stranglehold on the communications network was eventually supplanted by wireless technology, resulting in the value of those landline telephone companies plummeting far more rapidly than was imagined. The entire anti-trust efforts against the industry during the 1980s and 1990s has all been for naught, as AT&T has now been reassembled, albeit with far less monopoly power than it had twenty years ago.

Music and entertainment is far less concentrated, as an industry sector. Already, other product solutions for listening to music are available which do not involve Apple's products. Therefore, for people to continue to complain about Apple's product strategy, vis a vis its copy management aspects, suggests that Apple's offerings still retain certain unique features, but these complainers do not wish to accept the terms of purchase and use of an iPod or iTunes.

Maybe it's me, but I simply see nothing illegal in Apple's actions. It's smart product management policy. They have constructed a legal, technological barrier which provides them with price maintenance benefits, but stops far short of being an illegal monopoly.

It may be argued that iPod profits funded the iPhone and AppleTV. Both are likely to influence and affect, respectively, communications and video entertainment. Does anyone think that an iPhone will only call other iPhones?

Over the long term, closed systems either prove their worth, or become susceptible to competition. Even when the first option seems to occur, as in telephony, over a sufficiently long term, even it becomes an example of the second option.

EBay and StubHub

An article in last week's Wall Street Journal detailed the acquisition of StubHub by EBay. I wrote about StubHub in a post here, last September.

In my earlier piece, I asked why TicketMaster and its clients didn't accept the responsibility for doing a poor job of ticket pricing, in order to get guaranteed, although lower, upfront revenues across their many venues.

In this piece, discussing the upstart's acquisition by the online auction giant, the focus is missed opportunities. Doesn't EBay's purchase of the ticket reseller sort of indict their own business development model? StubHub is only six years old. If this doesn't demonstrate EBay's paucity of ideas now, what does?

As an online resale venture, EBay should have owned this market. Instead, it had to cough up $310MM for it. And we're not talking about buying a corporate titan. StubHub is a shoestring operation, compared to either TicketMaster or EBay.

As with many other businesses which have outgrown their initial, value-adding concept, EBay now seems to have to grow revenues at much lower margins than in the past. In this case, paying upfront to secure access to a business they missed starting themselves earlier in this decade.

Dell, Home Depot, Wal-Mart, Microsoft.....these are all companies whose core value-adding breakthrough eventually exhausted itself. As the Yahoo-sourced chart on the left demonstrates (please click on the chart to view the enlarged version), now EBay is joining them. The firm outperformed the S&P500 during 2002-04, and then began to slide. Since 2004, it has actually declined in value, while the index has continued its steady, gentle rise. So, while EBay has outperformed the S&P over the entire period, it has not consistently, nor recently, outperformed it.

It's not wrong, per se, for EBay to be buying StubHub. However, I think it's a sign that you won't be seeing the firm return to earning consistently superior total returns for its shareholders anytime soon. If they can't grow profitably and organically in their own product/market space, what do they possess with which to add superior value for their customers and, thus, indirectly, their shareholders?

More Business Holiday Wal-Mart Bashing on CNBC

Today is a Federal holiday, so the equity markets are closed. There is no Wall Street Journal. And CNBC has 'alternative' programming running.

As it so typically does on days like this, CNBC trotted out its apparently award-winning video piece, by on-air analyst and commentator David Faber, which spotlights Wal-Mart.

I admit to never having sat throught the whole production at one go. I've seen quite a bit of it in segments, though. It's fair to say that it highlights both good, and bad, facets of the company, and features extensive interview footage with the current CEO, Lee Scott, as well as some time with retired CEO David Glass.

However, my point in this brief post is to suggest that maybe CNBC is stoking the anti-Wal-Mart fires merely by running this thing every business holiday. I swear that this is at least the third time in twelve months that they have done this.

If you search this blog for the term "Wal-Mart," you'll recover 20 articles which mention the company. If you read this column regularly, then you know I am not exactly a fan of Wal-Mart's CEO, management team, or performance. But I bear absolutely no animosity toward the firm, per se. It's a matter of poor performance, not a personal grudge.

With CNBC, I am beginning to wonder if they simply want to hurt Wal-Mart as much as possible, until, I don't know....the company fires Lee Scott? Closes its last American store?

With so many thousands of hours of video footage, why must CNBC resort so frequently to just one, long video production about one harried company, nearly each business/Federal holiday?

Validation and Echoes of My Video Distribution Prediction

The Wall Street Journal ran a piece detailing some of the new deals being cut to mainstream video content straight onto Internet TV. The Journal's article concludes, as I did last fall, here, and here, that these deals

"could undercut the role of cable and satellite companies."

Apparently, we now have Starz and Showtime distributing their content to the web for TV viewing. Nickelodeon is doing the same. Vehicles such as the Microsoft XBox 360 can be the terminus for the program, from which it will be fed to the user's television.

a Forrester Research source pronounced that,

"if you're a cable operator, this is very disturbing."

Indeed, it is. While, as the article points out, the move may not occur overnight, the die is definitely cast.

In a related article in the Journal, two days later, CBS is reported to be plunging headlong into this model, under the aegis of Leslie Moonves. As the owner of old media 'assets,' such as network television, print publishers, and outdoor media, CBS was more or less left holding the bag, when Sumner Redstone split Viacom from CBS.

Although Moonves denied that recent ratings softness was related to the also-recent, bold moves into the digital world, one cannot be so naive as to believe this. Moonves just saw his boss fire Tom Freston, at Viacom, for being too slow to move his businesses to the internet.

In fact, the title of the Journal piece about CBS is "CBS Ties Its Future to Internet Efforts."

Despite the reluctance of many, including my consulting friend, S, to believe that a video content disintermediation from network, via the internet, to television, could be so soon in coming, apparently I am not the only one who sees things this way. Not only are others seeing the implications, but major old-media companies are already throwing in the towel and heading for what they hope are choice pieces of 'real estate' in the new, online content world.

With Apple's recently-announced 'AppleTV' initiative, and Microsoft's XBox360, the wireless links from PC to TV accessory are now in place. All that remains is for prices to begin to slide, and consumers will be capable of controlling the when, from where, and how of their video content consumption, via the internet.

Look for broadcast networks to offer less new or premium content, and, as I wrote in some of the above-linked pieces, producers to vend their content directly from their own websites to consumers, completely bypassing anything but the iTunes "general store," or similar content aggregation websites.

Innovation, Commoditization, and Steve Jobs

Thursday's Wall Street Journal yielded an interesting piece on innovation. The second section of the newspaper has a new feature, entitled "The Informed Reader."

Under the subtitle, "Strategy," we are told that Columbia Business School's Bruce Greenwald once stated,

"In the long run, everything is a toaster."

This piece of idiocy was meant to warn that any product is ultimately and eventually reduced to a commodity.

Whoever thinks this is true must not be a marketer, or not have studied marketing.

The article goes on to cite MIT's Media Lab researcher Michael Schrage as finding that "innovation has a continued role, even in such staid objects as toasters and vacuum cleaners."

Schrage cites Hoover in vacuum cleaners, and GE in toasters, to highlight how even seemingly-mundane products can be revitalized, technologically repositioned, and become a source of significant new revenue growth.

Yes, you worry because anyone can produce what you do, but not everyone can emulate the design of what you do, when you do it.

And this puts a premium, of course, on continuous innovation. Or, as I see the output, consistently superior revenue growth. The successful future of a company lies in innovating any or all of the 'four Ps' of marketing- product, place, price and promotion- in order to better serve customer needs. Surrendering to price competition is the first step along the road to commoditization.

Which brings me to Steve Jobs. Jobs has proven to be a genius in his later career. But this was not always the case. Recall his serious stumble in, first, mismanaging the early successes of Apple Computer, and then recruiting John Sculley to succeed him.

In retrospect, I believe this simply demonstrated that Jobs is at his worst in a slugging match of equals, i.e., commodities. When he attempted to go toe to toe with the other personal computer makers, and Microsoft, he ended up frustrated, bored, and out of a job.

Recall, if you will, that he took a few trusted aids and started Next, which was ultimately bought back by Apple, for its object-oriented code assets.

Jobs' attempt at pushing forward a little on communications needs resulted in the failure Apple called "Newton."

In contrast, Jobs hit grand slams with his work at Pixar, and the iPod line. He is clearly at his best inventing the future, far out in front of current solutions.

In this respect, is he not rather like Thomas Edison? Like Edison, Jobs is often hustling and marketing just as fast as he's developing product. Like Edison, Jobs is egotistical, a reportedly demanding taskmaster, and short on giving named credit for much of what comes out of his development teams.

However, if anyone needs a clear example of how innovation can effect companies, look no further than Apple. With an impressario at the helm, someone who seems to simply love what he is doing, the firm has simply left Microsoft and Bill Gates in the dust when it comes to leading his firm into new, growth markets.

Yes, innovation is crucial for long-term growth in equities. One must not confuse the ability of virtually any product or service to be replicable, given time. The key is to realize that it does take time, and, in that time, the innovator can be, once again, steps ahead of the mere copiers.

For me, Frank Perdue's branding of chickens and chicken parts opened my eyes to this as a young marketing student in graduate school.

Looking back to the beginning of this piece, and the Greenwald quote, one wonders how a business school professor could be so short-sighted as to reduce innovation and marketing to a zero-sum game, confusing replication with innovative designs and solutions for customer needs.

Forecasting Economic Health with One Indicator: The Yield Curve

Monday's Wall Street Journal's Money and Investing section featured a piece on the analytical import of the prolonged yield curve inversion.

By now, everybody, even those who have not studied economics, knows that inverted yield curves have, historically, frequently been associated with recessions. The trouble is, the indicator sometimes gives false positives.

Then there is the criticism that, if forecasting a recession was that easy, why aren't these economists shorting equities already?

Those doubting the indicator allege that 'this time, it's different.' They point to global demands for a safe haven for cash. Or that 'markets have changed.'

I suppose this debate will continue until either a recession does, incontrovertibly, arrive, or the economy continues its low-inflationary growth phase for another year or so.

Perhaps the moral is that you need to use multiple forecasting methods, not just the inverted yield curve, to predict recessions. Any one tool is prone to being misled. A suite of tools, providing a sort of 'information theory' approach to the task, would be better.

In the meantime, I suppose everyone will continue to watch the yield curve and the GDP's quarterly growth numbers for the next six months with heightened 'interest,' as it were.

GM's Bulging Inventory of 2006's "Hot" Cars

Monday's Wall Street Journal reported that GM's unsold finished goods inventories of cars have become enormous.

The article states that, at the end of December, GM

"had more than one million vehicles in stock in the U.S. That's equivalent to about 41,000 vehicles for every point of its 24.6% U.S. market share. By contrast, Toyota..., one of the world's most profitable auto makers, carried about 16,000 vehicles of inventory per point of its 15.4% market share.

Among the unsold vehicles, the piece later explains, are some of the models that GM's management felt were "hot" models for last year- the Chevrolet HHR, the Buick Lucerne, and the Saturn Aura. Some of these cars now have a 90+ day supply sitting on lots across America.

Apparently, we have yet to see the much-vaunted, newly-creative GM emerge. Because the products they evidently pinned much of their 2006 sales hopes on are sitting, unsold, in storage around the country.

GM finds itself in a vise of its own device, in that it must, on one hand, cut costs, such as inventory financing, and, yet, maintain production in order to generate cash flow to assist its 'turnaround.'

Failure to keep production levels up starves it of cash to pay its mountain of fixed liabilities relating to healthcare and pensions, but unsold inventory ties up much-needed liquidity, as well as spurs price cuts via low-interest rate sales programs.

Interestingly, GM's haphazard pricing tactics have contributed to its woes. With much car shopping initially done online now, the company's reliance on relatively higher sticker prices, coupled with the expectation of dealing on financing, causes many buyers to exclude the company's products from consideration.

Of the dilemma, GM's CFO, Fred Henderson was quoted as saying,

"This is the area where we have a lot of work to do in the future."

No kidding.

Having been in the auto business for, oh, nearly a century, with, at one time, the overwhelming market share in the American auto market, you would think GM's management would, by now, have its customers' buying behaviors down pretty well, wouldn't you?

Evidently not.

Yet another firm for which 2007 is starting out with a thud.

China's Dependence on Tobacco and Smoking

Last week, the Wall Street Journal ran a piece on China's dependence on tobacco as a centerpiece of its economic development.

The article focused initially on the province of Kunming, which has based much of its economic growth on the product. However, as the piece began to broaden to encompass all of China, the information began to look truly scary.

The Chinese death number is expected to double by 2005.

"One third of all Chinese men now age 29 or younger will die prematurely from tobacco-related diseases."

Allegedly, more Chinese people smoke than are in the US. One estimate of the cost to China last year from smoking was $5B, in medical expenses and lost productivity.

There are many details about the Chinese tobacco industry in the article, but I'm not really interested in recounting or commenting on them in this piece.

Rather, I have two major questions, as a result of reading the Journal piece.

First, can a country afford to either kill off its productive assets, i.e., its citizens, prematurely, and/or foot the immense medical costs for their smoking-related illnesses? Second, could tobacco become the achilles heel of the Chinese economy, in much the same way that a lack of focus on profitability and, then, borrowing in a foreign currency, were to the Japanese economy in the 1970s?

On the matter of the first question, I suggested to some friends that the Chinese economy would have to absorb a massive amount of healthcare-related costs, much as America's automakers have had to do for their retirees. My cynical friends opined that, 'no,' the Chinese would not be so burdened, because the Chinese government will simply let its smoking-induced ill citizens die without much medical care.

If that's true, then let's simply examine the consequences of that. How much premature loss of trained economic assets, in the form of a society's people, as workers, can a country sustain, before its productivity is affected? The ultra-low-wage jobs will soon migrate elsewhere, so, like all other developing economies, China will have to sustain its economic development upon creativity and productivity. How can it do that if it only gets 20-25 good years, on average, per worker, before they become ill? I don't know the exact life-expectancy loss from the Chinese smoking habit, but you get my point. It's surely a drag on the Chinese economy, if only as a simple ratio of reduced lifetime economic output per trained worker.

Thus, my second question. Could this seemingly incidental facet of Chinese society eventually torpedo its plans to dominate global economics? I guess, on one hand, premature deaths from smoking will lower the average age of the population, and reduce the pension cost problems. However, more seriously, is it possible that a significant loss of economic capacity, productivity, and skill, from premature worker deaths, could hamper China's ability to compete with healthier society's?

Will the health and producitivy penalties of tobacco in the long run offset its near-term boost to the Chinese economy? I recall that, in the late 1970s and early 1980s, the American business media was fixated on the coming economic domination of Japan. The country seemed unstoppable. Until, that is, its obsession with market share and growth, to the exclusion of profits, hollowed out its financial strength. Then, its dollar-denominated debt proved a crushing burden, because they had to service it with their own yen.

After all the loss of productivity, via healthcare and legal costs, that America has suffered from asbestos and tobacco, one would think the Chinese could build upon such lessons and avoid the same fate. Evidently, as a society, they aren't yet that smart.

Finally, for the moralists among readers of this blog, what, if anything, can other societies do, as they watch the Chinese promote the early death of their own people? Is there any appropriate action other societies can take? Or would that constitute unwanted, baseless interference in the civil affairs of another society?

McDonalds Resurgence

Last weekend's Wall Street Journal ran an article on McDonalds, the fastfood titan. Now that it's in my portfolio, the story caught my eye.

As the nearby Yahoo-sourced price chart indicates (please click on the chart to see a larger version), the company really has turned around in the last five years, and outperformed the S&P over the period.

The firm's CEO, Jim Skinner, was a part of the management team that began to improve McDonald's four years ago. He moved up to his current job when one CEO died suddenly, and the next resigned to wage a battle with cancer.

What I liked about Skinner's responses in the interview was how clear-thinking and sensible he is. For instance, he said,

"....we proved that we were getting bigger but not better. And we have to be better. Your experience today at McDonald's has to be a better experience than it was yesterday. People have limited time today. They don't want to get up and go, "Gee, I don't know. Do I think I can go to McDonald's?" "

Skinner has a clear focus on his customers' behaviors, which is always heartening in a CEO, especially in a retail business, where there are so many individual purchase decisions each day.

Later in the interview, he is quoted as saying, regarding the four-year old turnaround strategy,

"We had contributed $4B or $5B to capital expenditures and building new stores over four years, and yet we didn't have any corresponding incremental operating-income growth. So we decided to focus on our existing restaurants. Those of us that were hardcore restaurant people, which I was at the time, were saying, "Look, we've got to do a better job of delivering what we called quality, service and cleanliness on a daily basis in our restaurants." And value. Because value proposition's very important."

Skinner's remarks show how sharp this company's management team is. He related later that a considerable amount of time and effort of every senior manager is spent identifying and grooming their upcoming talent. He attributes the company's ability to 'accelerate our momentum' to 'selecting the high-potential people.'

When asked what his biggest remaining challenge is, Skinner replied,

"I worry about complacency. We're not satisfied. We have a lot of work to do."

That's what I love to read about from CEOs whose company's shares I own. Toyota's CEO says the same thing, whereas his faltering rival, Rick Wagoner of GM, feels he's on track.

I loved the things I read about Jim Skinner, and McDonald's, in the Journal piece. It impressed me so much, that, having just bought some of its shares, I had lunch there yesterday, on the way back from a midday errand.

It was everything Skinner contended. The food was well-prepared, and less expensive than I expected. The store was very clean. Though after the noon-time rush, one employee did nothing but circulate among the tables, wiping off food remnants and spraying, then wiping them clean with a disinfectant. My visit was fast, clean, and delivered familiar food. The menu even seemed simplified and easier to use than I recalled on my last visit to a McDonalds some years ago.

Needless to say, I hope the company continues to do well. At least for the next six months of my portfolio investment. Based upon Jim Skinner's interview in the Wall Street Journal, I'm confident that it will do so.

Wal-Mart's First Gaffe of 2007: Scheduling Part-Time Workers

It's 2007- a new year. Within only three days, we have the first significant Wal-Mart gaffe of the year.

Last week, the Wall Street Journal carried an article discussing Wal-Mart's latest productivity improvement approach. They are employing new, dynamic labor-scheduling software which more closely matches store staffing to customer volume, as well as observes various constraints, such as employee hours worked, overtime, etc.

These guys just don't get it, do they?

Sure, labor scheduling software can be a good thing, within limits. But in their zeal to become the most efficient retailer, Wal-Mart risks total alienation of even the few capitalists who can still defend them.

This is the type of corporate behavior that brought us unions in the first place. It's just not wise. Why would you want to go after your own employees' qualities of lives and abilities to earn reasonable livings?

To me, this is just an open invitation to be pilloried again by a now-Democratic House and Senate.

Do you wonder, as I do, if Lee Scott has any common sense at all? Perhaps these continuing gaffes are, in fact, emblematic of the core competencies, or incompetencies, of the company?

On the heels of last year's many problems- the mistaken upscale repositioning, the race-based store segmentation, the reversal on selection on an ad agency, and public relations "ambassador" Andrew Young's invectives against other minorities- we now have the world's largest retailer improving productivity seemingly on the backs of its workers.

I'm all for efficiency, but, in reality, there are advisable limits within which a company should stay, in order to not invite regulation and excess scrutiny from government. I think Wal-Mart is off to a phenomenally bad start to this new year.

Private Equity & Home Depot

Earlier this week, on Wednesday, the Wall Street Journal published an interview with Henry Kravis.

I've written posts about private equity before, here, here, and here. Rather than restate all my thinking and points, you may read them there. Suffice to say, the last six months have not changed my findings regarding this topic.

Now, however, the media is all abuzz about Bob Nardelli, a reputed "operations guy," coming back for Home Depot as the CEO of a buyout group. Was Home Depot simply under leveraged? Would financial engineering have done the job? Certainly, one alternative was simply to dividend back to shareholders the cash that wasn't earning adequate returns at the firm.

What if all the mismanaged companies go private. What if all the good managers go private to run companies more simply? Would we not expect, if this happens, to see S&P average returns fall, as companies with promise leave the index? Or would they rise, because most private equity targets are actually performing below average. That's why they are targets.


Doesn't private equity get its big payday by taking these companies public again? So, isn't this private equity shift the on-shore effect of SarbOx, similar to the fewer IPOs on the American exchanges?

Is it not a sort of return to the 1890-1930s model of corporate chieftains who knew their boards, actually knew how to run companies? A few, wealthy, proficient owners who were largely unfettered by distractions like large numbers of small-scale shareholders? Then, when the juice is squeezed out of the company, the private equity groups will return their prize to the market.......at a premium, of course, to the price at which they took it private.

Let's suppose this does accelerate. Maybe that is the only way corporate boards will wake up and demand better performance, for appropriate compensation, from sitting CEOs. Might not CEOs, a la my post citing the example of VNU, demand higher buyout prices from the private equity groups, as they realize the 2x multiples the latter are reaping?

It should , in time, be self-correcting, should it not? Perhaps a new type of employee/group will arise: the "rental CEO & Co." Imagine a capable, smallish group of corporate troubleshooters willing to 'fix' a troubled company, letting shareholders remain in possession. Suppose they only ask for $20-40MM in fixed compensation for a 2-3 year period- enough to cover their operating risk. Then, they could agree to a fairly high valuation target which, if achieved, would compensate them lavishly, but still for far less opportunity cost than if shareholders had sold out to a private equity group at, effectively, the bottom.

In time, perhaps shareholders will demand that boards get the same performance out of their assets as private equity groups expect to realize after their overhaul of the same assets.

As for Nardelli, I'm not so sure, as I've read more pieces about his management style, that he's really going to fit into the collegial, results-oriented world of private equity. Many media pundits allege that Bob 'got the job done' at Home Depot, but simply failed to be recognized for it. I disagree. By several "operating" measures, such as sales and NIAT growth, he lagged his major competitor, Lowes. Plus, somebody has to be responsible for total return. Perhaps senior functional executives may be measured according to internal financials, or market share goals, but the CEO is paid lavishly to consistently earn superior total returns for the firm's investors. All else is superfluous.

Dennis Kneale's Views on Nardelli, Fiorina, et al

Dennis Kneale, Forbes Magazine's managing editor, appeared as a guest host on CNBC this morning. He believes that Carly Fiorina and Bob Nardelli fixed, respectively, Hewlett-Packard and Home Depot, and then were fired, after which their successors have or will get the credit.

Don't you believe it.

Kneale's argument, taken to its extreme, is to return to allowing CEOs to escape accountability for their firms' total returns, unless, that is, the returns are healthy and rising. This will simply become another excuse for lack of board performance and vigilance.

My proprietary research shows that, when company performance is consistently superior, the market will contemporaneously reward the company and, thus, the CEO, with higher stock prices. Correspondingly, the market 'rewards' other performance patterns appropriately. Investors reward what they value, period.

If Fiorina and Nardelli chose the wrong strategies, and failed to deliver what the market wanted, then they failed their shareholders. Period.

It's not appropriate, nor consistent, to let CEOs pick and choose which investor behaviors to consider 'right.'

For instance, later this afternoon, CNBC replayed a tape of an interview Nardelli gave to one of its reporters, in which he admitted to having changed the bases on which he and his "leadership team" were compensated. Originally, upon being recruited to Home Depot, he was to be rewarded for increasing the stock price. After some three years as CEO, the basis was changed to various fundamental, internal operating measures, such as earnings, sales and margin growth, relative to other retail firms. He alleged that it was thought better to move to bases which were more 'controllable' by the "leadership team."

That Home Depot's board consented to this seems, to me, to be outrageous and pathetic. For the compensation Nardelli earned as CEO of Home Depot, he certainly should have been responsible for knowing what performance to effect in order to improve shareholders' wealth. Whether every member of his team was also responsible may be another matter. But someone in the firm has to take responsibility for operating the firm in a manner calculated to increase shareholder wealth, not to mention at a rate which makes owning the shares of the firm preferable to those of an S&P500 index fund.

Otherwise, the firm's senior management will happily focus on internal financial or market share performance, oblivious to whether or not any of these affect the total returns to shareholders.

It reminds me of something I saw years ago, in my managerial youth, at the Chase Manhattan Bank. My partner and I were conducting an assessment of the productivity and profitability of the various functions which composed the firm's Securities Trading group. The business head of the unit took credit for the profitable years' performance, but lamented that 'unavoidable market conditions' had led to some years of losses.

How convenient. The SVP in question got a bonus for the profitable years, but he didn't have to return any of it in the losing years. I suggested that we could replace him with a monkey and save the then-average compensation of a bank SVP, about $350K. With a monkey, his subordinates would probably still perform in a manner correlated with the market, but we'd only have to buy bananas for the 'new' SVP of Securities Trading.

Nardelli and his ilk need to take care that they do not become eligible for replacement by lower primates. Shirking responsibility for producing consistently superior total returns for shareholders essentially relegates a CEO to the status of chief apologist, rather than Chief Executive. Someone has to be responsible for steering the corporation in the direction of presumably higher total returns.

In exchange for several million dollars of annual compensation and a hefty severance package in excess of $200MM at Home Depot, it had better have been Bob Nardelli.

Bob Nardelli's Resignation as CEO at Home Depot

This morning's breaking news regarding Bob Nardelli's resignation as CEO of Home Depot, effectively immediately, is welcome news to me. Hopefully, it will be, as well, for investors at large.

As I have written recently here, and this summer, here, and here, I think it is past due.

Nardelli's poor performance and imperial attitude, most explicitly apparent in the 'boardless' May, 2006 annual meeting in Delaware, finally outlasted their welcome with Home Depot's overly-patient board.

I am gratified for several reasons. First, it is good to see a board finally wake up and discipline its CEO for failure. Second, it reinforces my belief in my proprietary research-based view of business dynamics. Where others purportedly saw opportunity and "powerful numbers...powerful performance," I saw inadequate operational performance, and appropriate lackluster market price performance, as well.

As various analysts and pundits on CNBC babbled about Nardelli's arrogance as CEO and Chairman of Home Depot, they also tended to assert that this was not the major cause of his departure. I would agree. To me, style doesn't count anywhere near as much as performance. And Nardelli's performance during his tenure at the company was miserable.

Similarly to my recent post concerning CitiGroup CEO Chuck Prince's extraordinary good fortune, here, I think Nardelli received several years' grace time from his board, as well. Would any of his subordinates receive such forgiving treatment?

Perhaps it's a fitting start to the new year, that an atrociously underperforming CEO gets the boot.

Happy New Year!

ATT: Forbes "Company of the Year" for 2006?

Forbes has chosen AT&T "company of the year" for 2006. The firm's chairman, Ed Whitacre, stares out from the magazines current cover edition.

Perhaps I'm in the minority here, but I don't see it. Posted on the left is the company's five-year stock price chart, courtesy of Yahoo, along with the S&P500 (please click on the chart to see a larger version).

It's probably a moot point to attempt to interpret revenue growth for the firm now, since it been affected by acquisitions. The annual sales growth rates are, for 2004-6, 0%, 1%, and 37%. There is by no means, yet, a clear record of sustained revenue growth in the combined firm.

NIAT is also a giant hockey stick, still negative in 2005, at -23%.

Regarding total returns, the company now known as "AT&T" has a total return which has only exceeded that of the S&P500 index twice in the past seven years: 2000, and 2006.

None of this indicates to me that AT&T is now a smoothly-functioning, world-class firm. In fact, unless I am mistaken, I am now, once again, a customer of their wireless business. I've had AT&T, then Cingular, and now, evidently, AT&T once again. So much for brand building. My usage of their long distance is now de minimis. The wireless business is apparently hoping for ad revenues to save them.

I confess to being a sceptic on this one. More power to Forbes if this is the "company of the year" for 2006- or any future year.

"Five Macroeconomic Myths"

This being New Year's day, and a slow last few business days, I want to discuss a "filler" topic which I've hung onto since mid-December.

In the December 11th Wall Street Journal, Edward C. Prescott, 2004 Nobel Prize-winner for economics, senior monetary advisor at the Minneapolis Fed, and professor of economics at University of Arizona Cary School of Business, wrote a piece thusly entitled.

The first thing I'd like to note is that I don't think I had heard of Mr. Prescott, or could identify him in unaided recall, prior to reading this incredibly lucid and important piece. I see a constant parade of lesser economic lights troop through the CNBC studios each day, but not Mr. Prescott. As I wrote in this post, here, on June 11th of last year, there are a lot of economists who think they know more than, or as much as, Ben Bernanke. I begged to differ. However, Mr. Prescott is precisely the sort of economist to which I referred when I noted that the Fed staffs would probably be a better source of economic thought than some 'chief economist' of a second-rate US bank or brokerage firm.

Having established Mr. Prescott's credentials, let me summarize his five 'myths:'

1. Monetary policy causes booms and busts.
2. GDP growth was extraordinary in the 1990s.
3. Americans don't save.
4. The U.S. government debt is big.
5. Government debt is a burden on our grandchildren.

Suffice to say, Mr. Prescott provides some very illuminating evidence to eviscerate all of these myths.

My favorites are numbers 3-5. First, he assails national income accounting, writing,

"Our traditional measures of savings and investment, the national accounts, do not include savings associated with tangible investments made by businesses and funded by retained earning, government investments (like roads and schools) and business intangible investments."

He focuses on the relationship of wealth to income, and judges the US savings rate to be "the right amount."

Mr. Prescott observes that "privately held interest-bearing debt relative to income" is at levels comparable to those of the 1960s. So he also judges our governmental debt level to not be "too big."

Perhaps the most interesting myth is the fifth one. It's a sort of product of the third and fourth myths, with a little emotional zing tossed in about the next generation's inherited liabilities.

Here, Mr. Prescott refers to some prior research, stating,

"Theory and practice tell us that the optimal amount of public debt that maximizes the welfare of new generations of entrants into the workforce is two times gross national income, or GDP. This assumes 1% population growth, 2% productivity growth, 4% real after-tax return on investments, and that people work to age 63 and live to age 85. Currently, privately held public debt is about .3 times GDP, and if we include our Social Security obligations, it is 1.6 times GDP. In either case, we could argue that we have too little debt."

Mr. Prescott actually make the point, subsequently, that government debt is a necessity if one has a long-lived population that is not growing rapidly. In effect, the more older, non-working people a society has, the more productive assets it needs with which to generate wealth in order to pay for those retired people. It's the reverse of how most economists present this situation.

Rather than hand-wring about debt and retirement, Mr. Prescott implicitly assumes a preference for creating wealth, then assess whether the right debt levels are in place to most efficiently do that in the given context.

What I liked most about his piece is how, at a stroke, he removes most of the bases for those who assert we have a government debt problem, a savings problem, and a looming retirement-affordability problem.

Similarly to other economics topics upon which I have touched recently, he focuses on two things. First, he 'rehabilitates' national income accounting to bring it a point of usefulness in the debate. Second, he provides insightful measures and research in order to effectively debunk myths regarding the allegedly-perilous US economic condition.

After reading Mr. Prescott's article, I feel much better about our current economic productivity, debt and savings levels. Far better than I typically feel after listening, on CNBC, to some third-rate economic "chief" of some little-known financial institution.

Quality matters, and Mr. Prescott is the genuine article.

Alan Mulally's Ford Initiatives

I read the Wall Street Journal's recent piece entitled, "Changing Gears.... Inside Mulally's 'War Room': A Radical Overhaul of Ford."

I am so glad that I have not been a Ford stockholder. It's a good news/bad news sort of thing. The good news is that Mulally is smart, experienced, determined and energetic. I think it's great for Ford that Mulally is so talented. He does seem like a very competent, capable guy.

The bad news is that his boss, Bill Ford, let things get this bad. Tolerated crony pals mismanaging the firm, and that the board let it happen on their watch.

Now they all want Alan Mulally to work magic and fix the mess.

For example, the article mentions that Mark Schulz,

"Ford's 54-year-old head of international operations...would be changing jobs to a different role, with direct business responsibility...Mr. Schulz, a longtime fly-fishing and ice-hockey buddy of Mr. Ford, retired instead....(and) couldn't be reached for comment."

Sounds too precious, doesn't it? You can almost see Schulz mugging it up with Bill Ford over eggnog at the proper Gros Pointe country club holiday parties, wearing pleated slacks festooned with little ice-hockey sticks poking through Christmas wreathes, or fly-fishing rods catching Christmas stockings. This sort of thing drives employee morale into the toilet, I kid you not. Nothing infuriates capable lieutenants more than seeing the Boss socializing off-premises with also-ran managers who clearly curry favor and retain their positions thanks to friendships with the CEO, rather than their own performance or talent.

Meanwhile, Bill Ford let this continue as part of his "management" and "leadership" of his family firm.

In another part of the piece, Mulally is quoted as saying that, when he asked Bill Ford

"why he hadn't integrated the company....every time Ford had considered forcing integration, a new hit product- such as the Explorer, Taurus or F-series truck- would come along and propel profitability without tough changes, explained the fourth-generation Ford leader."

So to cronyism we can add lack of focus and discipline. The board and Bill Ford are hoping to God that Alan Mulally can do the dirty, harsh, odious work of firing loyal, trusting employees, redesigning bloated, dysfunctional corporate processes, and identifying new, hit products. Because for five years, as CEO, and six as a board member, Bill Ford failed to do all of these.

In fact, the Journal article related this exchange between Chairman Bill (Ford, not Gates) and board member John Thornton, former President of Goldman Sachs,

Ford: "Alan's the perfect guy for our situation."

Thornton: "I couldn't agree more. Thank God for that, we don't have a second chance. This is it."

What is it with Detroit auto company CEOs? Must they wait until they teeter on the edge of bankruptcy before shifting gears (pun intended)?

Is there time for Mulally to save Ford? Who knows? Is he doing some right things? Unquestionably. For instance, he drives each model of the firm's product line, the better to give it a personal, objective going-over. His comment about the lack of a standard "feel" for Ford cars is absolutely true. My father was a "Ford man" when I was growing up. In models of similar years, the controls were typically located in the same place. You knew you were in a Ford, not a GM car, just by the layout of the dashboard and knobs.

The WSJ piece lavishes much print on Mulally's rather unremarkable, if very effective, use of colors and graphic displays to track product-management issues in his 'war room.' That this technique, and his insistence on the divulging by managers of complete and true performance data, is more than shocking. It's disgraceful. Consider what it says about the lack of respect these managers have had for Mulally's predecessor.

Oh, wait....that's the sitting chairman......Bill Ford!

Will Mulally's sensible initiatives matter? Truthfully, I doubt they have the time. Still, oddly, I can't but help root for the guy. Maybe in 3-4 years, Ford will make my equity portfolio selection list. Although, my hunch is, not as an independent company. Perhaps as part of an alliance with Nissan. If it merges with GM, I would lower the probabilities of its performing sufficiently well to make my selection list.

Either way, 2007 will be exciting for lots of reasons, and Mulally's activities at Ford are just one.

Happy New Year!