Tuesday's Wall Street Journal featured a wonderful article on the radical new pricing policies initiated by the new CEO of Parker Hannifin.
It's sort of a good news/bad news story.
The bad news is, PH had actually hard-coded a fixed markup percentage into their pricing management software. Talk about inflexible, stupid, and being insensitive to the uses to which your products are put. I can see using a fixed minimum markup percentage, but not a fixed universal markup.
The good news is that the new CEO, Don Washkewicz, has brought an end to this practice, and instituted a 'willingness to pay' style, application-sensitive approach to markups. The customer's applications of PH's seals is now a paramount input into pricing. Thus, the company's marketing and product people focus more, not less, on customers, and their applications of PH's products. PH added $200MM of revenue and income to its P&L in four years, bringing it up to its current $673MM.
Two interesting things were mentioned in this story. First, how inept external consultants advocated PH develop a greater customer service focus, but neglect to accompany that with segmentation, product differentiation, and pricing strategies to pay for it. Second, PH had a total insensitivity to how its products were used by its customers. They knew next to nothing about the real customer problems, applications, and options for which PH's seals were alternative solutions.
In short, a lack of fundamental marketing skills existed at Parker Hannifin prior to Washkewicz's elevation to CEO. Now, PH has such a focus, and I hope it makes an appearance in my equity portfolios soon.
Saturday, March 31, 2007
A Kindred View on "Shareholder Democracy"
As I wrote in this post recently, all I really want "shareholder democracy" to mean is that I can buy or sell equity shares, cheaply, into a liquid market, whenever I wish.
Now, according to Wednesday's op-ed piece by Holman Jenkins in the Wall Street Journal, I am not alone. While beginning with the Conrad Black case, Jenkins moves to the general topic of shareholder democracy and corporate governance about 3/4 of the way through his piece.
He wrote,
"Alas, corporate governance has become a new favorite cause of society's forces of self-righteousness. They flog the unanalytical ideal of "shareholder democracy." Democracy is a four-syllable word for "good" in these mouths, but does it really apply in this case of companies whose shares trade on a stock exchange?
Investors, after all, have thousands of companies to choose from, with ease of entry and exit afforded through the stock market....You are equally free to buy buy shares in a company in which control remains with a dominant shareholder whose interests may not be synonymous with your own."
Thus, Jenkins agrees with me on the key point that what is essential is the easy entry to, and exit from, equity positions. Voting on various proxy issues is, he agrees, tangential, because you can, in fact, select from numerous equities in which to invest. Jenkins goes further than I did, pointing out that there are markets for each type of company/corporate governance model.
It's a valid and good, nuanced point. As I have written elsewhere in a prior post, if one is Eddie Lampert, voting is moot. You just tender for the company's shares and own the problem. Short of that, I'm not sure what shareholder voting gets you, but, as Jenkins notes, to each his own. You can find almost any model/structure you wish among various listed equities.
As in the case of Warren Buffett echoing my thoughts on the attractiveness, or lack thereof, of certain sectors, it's also nice to be joined by someone like published columnist Holman Jenkins of the Wall Street Journal in seeing the "shareholder democracy" fad for what it is, and focusing instead on the basics- the freedom to buy and sell shares easily and inexpensively.
Now, according to Wednesday's op-ed piece by Holman Jenkins in the Wall Street Journal, I am not alone. While beginning with the Conrad Black case, Jenkins moves to the general topic of shareholder democracy and corporate governance about 3/4 of the way through his piece.
He wrote,
"Alas, corporate governance has become a new favorite cause of society's forces of self-righteousness. They flog the unanalytical ideal of "shareholder democracy." Democracy is a four-syllable word for "good" in these mouths, but does it really apply in this case of companies whose shares trade on a stock exchange?
Investors, after all, have thousands of companies to choose from, with ease of entry and exit afforded through the stock market....You are equally free to buy buy shares in a company in which control remains with a dominant shareholder whose interests may not be synonymous with your own."
Thus, Jenkins agrees with me on the key point that what is essential is the easy entry to, and exit from, equity positions. Voting on various proxy issues is, he agrees, tangential, because you can, in fact, select from numerous equities in which to invest. Jenkins goes further than I did, pointing out that there are markets for each type of company/corporate governance model.
It's a valid and good, nuanced point. As I have written elsewhere in a prior post, if one is Eddie Lampert, voting is moot. You just tender for the company's shares and own the problem. Short of that, I'm not sure what shareholder voting gets you, but, as Jenkins notes, to each his own. You can find almost any model/structure you wish among various listed equities.
As in the case of Warren Buffett echoing my thoughts on the attractiveness, or lack thereof, of certain sectors, it's also nice to be joined by someone like published columnist Holman Jenkins of the Wall Street Journal in seeing the "shareholder democracy" fad for what it is, and focusing instead on the basics- the freedom to buy and sell shares easily and inexpensively.
Friday, March 30, 2007
The Blackstone IPO : Taking Advantage of the Mediocre
Schwarzman must have been planning the Blackstone IPO for some months. Given how quickly it proceeded after the leak a few weeks ago, it was clearly in the works for some time.
Like my recent post about being 'wrong' now, and 'right' later, when the broad, mediocre middle rushes after you, Blackstone/Schwarzman are ahead of the average investor in realizing the end of private equity as we knew it. Or, if not the end, certainly a peak price for private equity firms.
Schwarzman, Blackstone's CEO, is a very bright guy, and no doubt understands Schumpeterian dynamics all too well. After only 22 years, Schwarzman is not so emotionally attached to Blackstone that he is trying to restructure it as its major market sector undergoes radical change. Instead, he's taking the big payday and acknowledging market forces greater than he can control.
Initially, in my three prior posts, here, here and here, I mistakenly believed that the Blackstone IPO would be for common shares of a listed company on an exchange such as the NYSE. Instead, as I read last weekend in the Wall Street Journal, Blackstone is becoming a master-limited partnership, which is, in a sense, very much like the structure of a hedge fund. Limited partners have no say in the operation of the firm, and, after fees and expenses, share in the income of the organization. Apparently, the Blackstone partnership shares would be tradeable.
Thus, my earlier comments regarding Blackstone's inability to continue to do private equity transactions were in error. However, I believe that those transactions will continue to be less lucrative, as the prices rise.
What I find amazing, however, is that investors are lining up to buy shares of an entity in which they can't even measure risk levels. Essentially, they are buying income 'participation shares,' much like I advocated last year in this post regarding corporate governance and takeovers. But, rather than retaining interest in a previously-public firm, they are buying the equivalent of a blind pool.
In a very real sense, Schwarzman has created the best of both worlds- retaining total control and privacy of operations, while establishing a value for the firm, and cashing out while doing it.
Honestly, I have even more respect for him now than I did before. Not that I would be on the other end of an equity transaction from him. And, correspondingly, I have less respect for the investors who buy the Blackstone IPO shares.
Like my recent post about being 'wrong' now, and 'right' later, when the broad, mediocre middle rushes after you, Blackstone/Schwarzman are ahead of the average investor in realizing the end of private equity as we knew it. Or, if not the end, certainly a peak price for private equity firms.
Schwarzman, Blackstone's CEO, is a very bright guy, and no doubt understands Schumpeterian dynamics all too well. After only 22 years, Schwarzman is not so emotionally attached to Blackstone that he is trying to restructure it as its major market sector undergoes radical change. Instead, he's taking the big payday and acknowledging market forces greater than he can control.
Initially, in my three prior posts, here, here and here, I mistakenly believed that the Blackstone IPO would be for common shares of a listed company on an exchange such as the NYSE. Instead, as I read last weekend in the Wall Street Journal, Blackstone is becoming a master-limited partnership, which is, in a sense, very much like the structure of a hedge fund. Limited partners have no say in the operation of the firm, and, after fees and expenses, share in the income of the organization. Apparently, the Blackstone partnership shares would be tradeable.
Thus, my earlier comments regarding Blackstone's inability to continue to do private equity transactions were in error. However, I believe that those transactions will continue to be less lucrative, as the prices rise.
What I find amazing, however, is that investors are lining up to buy shares of an entity in which they can't even measure risk levels. Essentially, they are buying income 'participation shares,' much like I advocated last year in this post regarding corporate governance and takeovers. But, rather than retaining interest in a previously-public firm, they are buying the equivalent of a blind pool.
In a very real sense, Schwarzman has created the best of both worlds- retaining total control and privacy of operations, while establishing a value for the firm, and cashing out while doing it.
Honestly, I have even more respect for him now than I did before. Not that I would be on the other end of an equity transaction from him. And, correspondingly, I have less respect for the investors who buy the Blackstone IPO shares.
Monday, March 26, 2007
Jim Cramer's Confession On The Street.Com TV
My partner emailed me this YouTube video clip from The Street.com TV's interview with Jim Cramer. Judging by the comments in the beginning of the clip, it took place sometime in December, before the MacWorld announcements of the iPhone and AppleTV.
I think Cramer speaks quite clearly about both his view of, and actions in support of that view of equity markets. According to him, you really need to be wary of any sort of very short term, especially intra-day, stock price trends.
Cramer dismisses various analysts, Wall Street Journal writers, and CNBC's Bob Pisani as mere pawns who will immediately broadcast whatever lies, rumors or tips they are fed by hedge fund managers like Cramer used to be. According to Cramer's view of equity markets, short-term prices are more likely to be manipulated by large hedge funds with the willingness to create false information and the money to create momentum in their desired direction than to be a function of simple supply and demand forces.
After viewing this clip, I think even less of on-air, real-time "reporting" of breaking stories on CNBC. Far from being only entertainment, they may, instead, be a part of a carefully orchestrated market manipulation.
The manner in which Cramer candidly and off-handedly discusses market manipulation, via false rumors and price manipulations, makes me wonder how anyone else can make money day trading, or even trading with timeframes as long as only a week or two. If Cramer is even remotely correct in his description of how the daily equity markets in the US trade, it's ample reason to have a much longer holding period, such as several months. Like the six-month holding period my equity portfolio management strategy uses. Over such a long timeframe, it's unlikely that an equity's total return will be totally a function of market manipulation.
I think Cramer speaks quite clearly about both his view of, and actions in support of that view of equity markets. According to him, you really need to be wary of any sort of very short term, especially intra-day, stock price trends.
Cramer dismisses various analysts, Wall Street Journal writers, and CNBC's Bob Pisani as mere pawns who will immediately broadcast whatever lies, rumors or tips they are fed by hedge fund managers like Cramer used to be. According to Cramer's view of equity markets, short-term prices are more likely to be manipulated by large hedge funds with the willingness to create false information and the money to create momentum in their desired direction than to be a function of simple supply and demand forces.
After viewing this clip, I think even less of on-air, real-time "reporting" of breaking stories on CNBC. Far from being only entertainment, they may, instead, be a part of a carefully orchestrated market manipulation.
The manner in which Cramer candidly and off-handedly discusses market manipulation, via false rumors and price manipulations, makes me wonder how anyone else can make money day trading, or even trading with timeframes as long as only a week or two. If Cramer is even remotely correct in his description of how the daily equity markets in the US trade, it's ample reason to have a much longer holding period, such as several months. Like the six-month holding period my equity portfolio management strategy uses. Over such a long timeframe, it's unlikely that an equity's total return will be totally a function of market manipulation.
Friday, March 23, 2007
The Fed's Language & Pundits, Analysts and Investors
This week's Fed meeting had a noted and unexpected effect on the US equity markets. Due only to a change in language, not a rate change, the equity markets rose 1.71% on Wednesday.
The logic here is interesting. Essentially, the Fed has indicated that, although it does not currently feel the economy requires a rate cut to help avoid a recession, it is now leaning more toward a rate cut as its next move, than a rate hike.
Since equity market investors react to lower rates rationally, by bidding up prices, the market rose. This is fairly direct, simple economics, with a lot of historical evidence to back it up.
That day, CNBC aired some discussions of the Fed language and rate inaction among various pundits whom they frequently feature. One of those people is Doug Kass, a prominent, bearish hedge fund manager and senior partner at SeaBreeze partners. Kass argued that the rate cut bias now means the economic is in trouble, so equities should begin to experience price declines.
I wrote this post last June, discussing economists, analysts and pundits as they criticize Ben Bernanke and the Fed. It seems very relevant again now. There's only one Ben Bernanke, and one Board of Fed Governors. Doug Kass is not on that board.
Kass' comments provide a view to a strange sort of economic analysis and commentary that seems to be quite common these days. Secondary meanings and tortured behavioral implications gain credibility over the simpler, more direct analyses of various business and economic information.
In this case, the direct analysis is that the Fed is not overly worried about a recession. It simply indicated that it is prepared to move to reduce the probabilities of such an economic development. Rick Santelli, CNBC's excellent Chicago correspondent for interest rate products, noted, correctly, that the Fed will act when it needs to. Otherwise, its words are just that.
On the other side is Kass, and another, lesser CNBC light, economics correspondent Steve Leisman. They both contend that the secondary implication of the Fed's language is that there will be a recession, and the Fed will cut rates, and equity market indices will fall soon. Notice that this interpretation requires the assumption that the Fed cuts rate, but fails to prevent a recession. Two rather significant assumptions, indeed. From second-rate, non-Fed sources.
To many investors, all these opinions may be confusing, and seem equally probable. However, the net effect of investors' behaviors this week demonstrate that they are able to understand the primary implications of the Fed's language and inaction, and believe those.
For now, this is gratifying. With so many more B-team pundits and analysts than A-team counterparts, it's amazing the primary message can sometimes make it through all the noise at all.
The logic here is interesting. Essentially, the Fed has indicated that, although it does not currently feel the economy requires a rate cut to help avoid a recession, it is now leaning more toward a rate cut as its next move, than a rate hike.
Since equity market investors react to lower rates rationally, by bidding up prices, the market rose. This is fairly direct, simple economics, with a lot of historical evidence to back it up.
That day, CNBC aired some discussions of the Fed language and rate inaction among various pundits whom they frequently feature. One of those people is Doug Kass, a prominent, bearish hedge fund manager and senior partner at SeaBreeze partners. Kass argued that the rate cut bias now means the economic is in trouble, so equities should begin to experience price declines.
I wrote this post last June, discussing economists, analysts and pundits as they criticize Ben Bernanke and the Fed. It seems very relevant again now. There's only one Ben Bernanke, and one Board of Fed Governors. Doug Kass is not on that board.
Kass' comments provide a view to a strange sort of economic analysis and commentary that seems to be quite common these days. Secondary meanings and tortured behavioral implications gain credibility over the simpler, more direct analyses of various business and economic information.
In this case, the direct analysis is that the Fed is not overly worried about a recession. It simply indicated that it is prepared to move to reduce the probabilities of such an economic development. Rick Santelli, CNBC's excellent Chicago correspondent for interest rate products, noted, correctly, that the Fed will act when it needs to. Otherwise, its words are just that.
On the other side is Kass, and another, lesser CNBC light, economics correspondent Steve Leisman. They both contend that the secondary implication of the Fed's language is that there will be a recession, and the Fed will cut rates, and equity market indices will fall soon. Notice that this interpretation requires the assumption that the Fed cuts rate, but fails to prevent a recession. Two rather significant assumptions, indeed. From second-rate, non-Fed sources.
To many investors, all these opinions may be confusing, and seem equally probable. However, the net effect of investors' behaviors this week demonstrate that they are able to understand the primary implications of the Fed's language and inaction, and believe those.
For now, this is gratifying. With so many more B-team pundits and analysts than A-team counterparts, it's amazing the primary message can sometimes make it through all the noise at all.
Thursday, March 22, 2007
Continuing Changes in Consumer Media Consumption Behaviors
Today's Wall Street Journal carried two rather complementary articles.
One of the three page-one columns featured an in-depth look at the decline in music CD sales. The mainstay physical delivery vehicle of the music industry has suffered a decline of between 15% and 20% over the past three years.
In referring to the article this morning on CNBC, on-air co-anchor Joe Kernen repeated NBC-Universal's executive, Bob Wright's, comment, to paraphrase, 'losing analog dollars for digital nickels.'
The rise of Apple's iTunes, as well as illegal file sharing services, beginning with Napster, have finally sapped music sales to the point of actually shrinking physical unit and dollar sales.
The moral of this story, of course, is that, when better alternatives arrive, consumers will migrate to completely new delivery models, if the benefits are compelling. And in music, they are.
The second story also features Apple. Walt Mossberg reviewed, very favorably, the new AppleTV device. Without repeating his review, let me just note that he found it very easy and effective to use.
Mossberg commented on Apple's current software as crippling the streaming of video from your PC to your TV, via AppleTV, except for content already stored on your PC, i.e., legitimately bought and stored as resident files. However, he also intimated that it's just a matter of time, and legality, before Apple pushes software upgrades down the 'net to provide for a wider selection of streaming video.
Think, for example, playing streaming video, bought directly from a content producer's site, through your PC, right onto your TV, via AppleTV.
Now, my consulting friend S believes this is going to be a long, hard slog. That it will be many years before a sufficiently large segment of Americans, or other global citizens, forsake their cable subscriptions and broadcast TV, to access video content in this manner.
Take another look at the first part of this post. I've posted on this topic so often, I probably can't find all the cites myself. If you search the blog for keywords like 'appletv,' 'itv,' 'cable,' etc., you will doubtless find many of them. It has taken just three years for the iTunes model to shove physical music delivery downhill so fast, that all the major retail music chains are gone, the current electronics stores are shrinking retail space devoted to music, and the labels themselves are getting worried about survivability.
Now consider how much more immediate and important video is to many consumers. I just watched my younger daughter spend hours this evening watching Disney channel television program reruns on a wireless laptop connection in this hotel in the middle of the Northeast woods.
I don't think it's going to be long at all before a variety of video content producers collaborate with Apple to allow their directly-purchased content to stream down the path I mentioned earlier, hopping from the PC to the TV.
If physical CDs could be toppled in so short a time, how much less time will it take for video to do likewise to broadcast video and cable networks, once the requisite hardware and software are available?
One of the three page-one columns featured an in-depth look at the decline in music CD sales. The mainstay physical delivery vehicle of the music industry has suffered a decline of between 15% and 20% over the past three years.
In referring to the article this morning on CNBC, on-air co-anchor Joe Kernen repeated NBC-Universal's executive, Bob Wright's, comment, to paraphrase, 'losing analog dollars for digital nickels.'
The rise of Apple's iTunes, as well as illegal file sharing services, beginning with Napster, have finally sapped music sales to the point of actually shrinking physical unit and dollar sales.
The moral of this story, of course, is that, when better alternatives arrive, consumers will migrate to completely new delivery models, if the benefits are compelling. And in music, they are.
The second story also features Apple. Walt Mossberg reviewed, very favorably, the new AppleTV device. Without repeating his review, let me just note that he found it very easy and effective to use.
Mossberg commented on Apple's current software as crippling the streaming of video from your PC to your TV, via AppleTV, except for content already stored on your PC, i.e., legitimately bought and stored as resident files. However, he also intimated that it's just a matter of time, and legality, before Apple pushes software upgrades down the 'net to provide for a wider selection of streaming video.
Think, for example, playing streaming video, bought directly from a content producer's site, through your PC, right onto your TV, via AppleTV.
Now, my consulting friend S believes this is going to be a long, hard slog. That it will be many years before a sufficiently large segment of Americans, or other global citizens, forsake their cable subscriptions and broadcast TV, to access video content in this manner.
Take another look at the first part of this post. I've posted on this topic so often, I probably can't find all the cites myself. If you search the blog for keywords like 'appletv,' 'itv,' 'cable,' etc., you will doubtless find many of them. It has taken just three years for the iTunes model to shove physical music delivery downhill so fast, that all the major retail music chains are gone, the current electronics stores are shrinking retail space devoted to music, and the labels themselves are getting worried about survivability.
Now consider how much more immediate and important video is to many consumers. I just watched my younger daughter spend hours this evening watching Disney channel television program reruns on a wireless laptop connection in this hotel in the middle of the Northeast woods.
I don't think it's going to be long at all before a variety of video content producers collaborate with Apple to allow their directly-purchased content to stream down the path I mentioned earlier, hopping from the PC to the TV.
If physical CDs could be toppled in so short a time, how much less time will it take for video to do likewise to broadcast video and cable networks, once the requisite hardware and software are available?
Wednesday, March 21, 2007
The Blackstone IPO : Part 3 of 3- Private Equity Going Forward
In my prior two posts, here, and here, I discussed how the expected Blackstone IPO raised issues of motivation and valuation for private equity firms, as well as how the IPO affects the rationale for the existence of private equity firms in the first place.
In this post, I'd like to consider how Blackstone and its still-private competitors may now operate.
Regarding Blackstone, what will now become of its unrelated parts? In a world where the firm frequently was seen as a sort of intensive care ward of the corporate world, hidden from view, how does its imminent new role as a public company affect this portfolio? Can Blackstone still confidently bid on turnaround candidates, or "misunderstood" companies, and patiently hold them among other, unrelated companies and active financial service divisions, such as asset management and M&A advisory? If its former cloak of privacy gave it the wherewithal to do so, is that now no longer possible?
Doesn't Blackstone become just another public corporation bidding on assets of other companies?
If so, does this leave other private equity shops with less competition? But with all the existing private shops, and the liquidity among them, could they perhaps put an end to Blackstone's successful bidding for new assets? Doesn't the still-private nature of the sector's remaining titans, such as KKR and TPG, mean that they can reliably and consistently outbid the public Blackstone for assets, just like Blackstone did in the past?
If a handful of other large, private equity shops, such as, e.g., KKR, TPG, and/or SilverLake Partners, all decided to exit the private equity sector, would that mark the end of the era of such firms and activities? Could it be that they all will aim to cash in their "magic dust" premiums, apparently ascribed to the larger, more successful private equity firms? After all, what is so different, or special, about Blackstone's portfolio of assets and operating units, that makes it unique among private equity firms to contemplate throwing in the towel on their business model?
Could we be seeing a situation in which greed for monetizing current value ironically removes a fear of many investors, regulators, and legislators, i.e., that there will be too few quality public companies in which to directly invest?
Simply put, when one of the best-managed firms in a sector plans to leave that sector, it makes you wonder: a) why others won't do so, too, and; b) whether any decent firms will remain in the sector?
The more I consider these questions, the more I'm coming to the conclusion that Schwarzman and his management team see a confluence of important trends. Premiums for private equity buyouts, due to heightened awareness on the part of boards of targets, are rising, while the expected multiples on the exit end are unchanged, shrinking the expected returns to the sector. Too much liquidity is adding to this return pressure. Thus, excess capacity should be drained from the sector.
Seeing all of this, I think Blackstone's managers see the opportunity to cash in first on their perceived value, while most sellers and investors are unable to yet appreciate that, having done so, the Blackstone they will now own can't create the value of the firm that just went public.
This being the case, we should see a few larger shops follow Blackstone into the public markets, while the remaining private equity firms continue to ply their trade in a somewhat more profitable, if smaller, sector.
Like so many other economic challenges, this one seems destined to be worked out in the free capital markets of its own accord, long before any legislation can affect the sector, its constituents, or the eager investors waiting to pay up to own a share of the newly-public, former private equity giants.
In this post, I'd like to consider how Blackstone and its still-private competitors may now operate.
Regarding Blackstone, what will now become of its unrelated parts? In a world where the firm frequently was seen as a sort of intensive care ward of the corporate world, hidden from view, how does its imminent new role as a public company affect this portfolio? Can Blackstone still confidently bid on turnaround candidates, or "misunderstood" companies, and patiently hold them among other, unrelated companies and active financial service divisions, such as asset management and M&A advisory? If its former cloak of privacy gave it the wherewithal to do so, is that now no longer possible?
Doesn't Blackstone become just another public corporation bidding on assets of other companies?
If so, does this leave other private equity shops with less competition? But with all the existing private shops, and the liquidity among them, could they perhaps put an end to Blackstone's successful bidding for new assets? Doesn't the still-private nature of the sector's remaining titans, such as KKR and TPG, mean that they can reliably and consistently outbid the public Blackstone for assets, just like Blackstone did in the past?
If a handful of other large, private equity shops, such as, e.g., KKR, TPG, and/or SilverLake Partners, all decided to exit the private equity sector, would that mark the end of the era of such firms and activities? Could it be that they all will aim to cash in their "magic dust" premiums, apparently ascribed to the larger, more successful private equity firms? After all, what is so different, or special, about Blackstone's portfolio of assets and operating units, that makes it unique among private equity firms to contemplate throwing in the towel on their business model?
Could we be seeing a situation in which greed for monetizing current value ironically removes a fear of many investors, regulators, and legislators, i.e., that there will be too few quality public companies in which to directly invest?
Simply put, when one of the best-managed firms in a sector plans to leave that sector, it makes you wonder: a) why others won't do so, too, and; b) whether any decent firms will remain in the sector?
The more I consider these questions, the more I'm coming to the conclusion that Schwarzman and his management team see a confluence of important trends. Premiums for private equity buyouts, due to heightened awareness on the part of boards of targets, are rising, while the expected multiples on the exit end are unchanged, shrinking the expected returns to the sector. Too much liquidity is adding to this return pressure. Thus, excess capacity should be drained from the sector.
Seeing all of this, I think Blackstone's managers see the opportunity to cash in first on their perceived value, while most sellers and investors are unable to yet appreciate that, having done so, the Blackstone they will now own can't create the value of the firm that just went public.
This being the case, we should see a few larger shops follow Blackstone into the public markets, while the remaining private equity firms continue to ply their trade in a somewhat more profitable, if smaller, sector.
Like so many other economic challenges, this one seems destined to be worked out in the free capital markets of its own accord, long before any legislation can affect the sector, its constituents, or the eager investors waiting to pay up to own a share of the newly-public, former private equity giants.
Tuesday, March 20, 2007
The Blackstone IPO : Part 2 of 3- The New Private Equity Philosophy
This morning, I read through the Wall Street Journal's Monday article concerning the potential Blackstone IPO. Most of the piece seemed to dwell on how many other parties will be upset with Blackstone or Schwarzman over the IPO. There were comments about how investors would react to the large payouts to management and partners. Plus a lot of ink about existing public investment banks getting upset at the rather more brazen competition from the newly-public private equity giant.
However, all that notwithstanding, I am interested in the second of my two topics on this IPO- the new meaning of private equity's philosophy, in light of Blackstone's IPO.
Everyone reading this blog is likely to be very conversant with the world of private equity, and Blackstone, as well as have read several stories by now in various business publications, if not seen endless stories about it on CNBC and CNN. So I won't restate what it is that Blackstone and its ilk do to create the value that they do.
What mystifies me, to be blunt, is how the Blackstone management team will "create" value when their central raison d'etre is gone. When they have to file quarterly reports, be valued as a conglomeration of wildly different businesses, and become hostage to public investors, and their expectations, how will they maintain their 'patient money' credibility and capability?
What, precisely, will the new Blackstone offer managements to buy them, since they can't be 'taking them private' anymore? And what does Blackstone hope to do for a prospective acquisition, since it is now just another public bidder. Does it believe it possesses a superior turnaround staff? Because if the turnaround is in the hands of existing management, then what does Blackstone add to the firm's efforts?
After so many years of ostensibly creating value in a sheltered, patient manner, the firm is throwing all that away in one go. How, then, will it continue to create comparable value going forward? With its complicated mix of financial service and operating parts, how will it be properly seen and understood for value maximization? Won't Blackstone have to slowly, but surely, unravel itself, in order to "unlock" the values of each constituent element, just like the firms from which it has made its money by buying those parts?
If it cannot, or does not, continue to create value through all of these efforts, then is not the investing public buying the prior value creation model, but holding the current/future model? Is this not a classic case of paying for prior accomplishments, while the very environment which allowed those achievements, those returns, is eradicated?
Given that other private equity firms will continue to exist, perhaps Blackstone will have a diminishing share of that activity. Perhaps this is Schwarzman's way of assuring that he and his partners are not the last ones holding the bag of overly-competitive private equity competitors, while the value of the model decreases with time.
If the Blackstone IPO is, in reality, the first significant removal of capacity from the private equity sector, then Schwarzman will probably win again, by attaining a high value for his business, before the true state of the sector becomes generally known.
However, all that notwithstanding, I am interested in the second of my two topics on this IPO- the new meaning of private equity's philosophy, in light of Blackstone's IPO.
Everyone reading this blog is likely to be very conversant with the world of private equity, and Blackstone, as well as have read several stories by now in various business publications, if not seen endless stories about it on CNBC and CNN. So I won't restate what it is that Blackstone and its ilk do to create the value that they do.
What mystifies me, to be blunt, is how the Blackstone management team will "create" value when their central raison d'etre is gone. When they have to file quarterly reports, be valued as a conglomeration of wildly different businesses, and become hostage to public investors, and their expectations, how will they maintain their 'patient money' credibility and capability?
What, precisely, will the new Blackstone offer managements to buy them, since they can't be 'taking them private' anymore? And what does Blackstone hope to do for a prospective acquisition, since it is now just another public bidder. Does it believe it possesses a superior turnaround staff? Because if the turnaround is in the hands of existing management, then what does Blackstone add to the firm's efforts?
After so many years of ostensibly creating value in a sheltered, patient manner, the firm is throwing all that away in one go. How, then, will it continue to create comparable value going forward? With its complicated mix of financial service and operating parts, how will it be properly seen and understood for value maximization? Won't Blackstone have to slowly, but surely, unravel itself, in order to "unlock" the values of each constituent element, just like the firms from which it has made its money by buying those parts?
If it cannot, or does not, continue to create value through all of these efforts, then is not the investing public buying the prior value creation model, but holding the current/future model? Is this not a classic case of paying for prior accomplishments, while the very environment which allowed those achievements, those returns, is eradicated?
Given that other private equity firms will continue to exist, perhaps Blackstone will have a diminishing share of that activity. Perhaps this is Schwarzman's way of assuring that he and his partners are not the last ones holding the bag of overly-competitive private equity competitors, while the value of the model decreases with time.
If the Blackstone IPO is, in reality, the first significant removal of capacity from the private equity sector, then Schwarzman will probably win again, by attaining a high value for his business, before the true state of the sector becomes generally known.
Monday, March 19, 2007
The Blackstone IPO : Part 1 of 3
The Blackstone IPO that was announced last week has certainly created a wealth of topics on which to comment. There are probably at least three posts in this announcement.
First, there are the questions of motivation and valuation. Second, that of philosophy of the private equity management style. Third, the ramifications of this IPO for the future of buyouts and the now-about-to-be-public private equity firms.
For starters, Steve Schwarzman's decision to reverse course on Blackstone's organizational form is clearly linked to the firm's apparent ability to cash in on its imputed value. The numbers being tossed about value Schwarzman's stake in the neighborhood of at least $800MM.
The weekend Wall Street Journal piece rather caustically contrasted Schwarzman's extolling of the benefits of private equity with the world into which he is about to plunge Blackstone.
The truth is, though, that such amazement is appropriate. I'm not against greed or opportunism. But I don't like inconsistency. Especially not in personal principles.
To me, Schwarzman's entire raison d'etre is now suspect. The party line on why private equity is good for managers, companies, the economy, etc., is now a sham. The 'magic dust' that firms like Blackstone sprinkle on otherwise-normal firms is about to become suspect.
The greed Schwarzman has now displayed will pass, I think, without criticism from the business community, because that community understands power and taking advantage of it when you have the opportunity.
However, that done, what is Blackstone? Isn't it, in aggregate, as messy and undirected as, say, that other financial mess, Citigroup? Or Chase? Only worse
It has trading, asset management, M&A advisory- all the cream financial service businesses- plus a slew of operating companies.
Whatever mythical valuation all of this has when private should, one can be forgiven for supposing, that valuation should shrink as soon as the lot is merely part of a publicly-held, routinely-reporting entity.
It would seem to be the business equivalent of the physics debate about the nature of light- wave, or photon? Blackstone cannot be both preferentially-valued private takeover, rehab and financial services shop, and a public entity as well.
To preserve access in this very small world, it's even possible that media personnel and analysts alike will give Schwarzman and Blackstone a pass for a few months, to a year, before the private equity 'magic dust' begins to evaporate.
I think it's highly likely that Schwarzman sees the rising tide of combative public boards, and takeover prices rising, returns falling, and the eventual compression of his overall business returns.
What better time to move, and cash in, than before the other side becomes fully aware of this sea change?
On one hand, Schwarzman is striking opportunistically and 'fairly,' but, in the same moment, he is transmuting that which he is selling, for a higher value, into something generally conceded to be worth much less and, usually, nightmarish to operate for consistently superior returns.
First, there are the questions of motivation and valuation. Second, that of philosophy of the private equity management style. Third, the ramifications of this IPO for the future of buyouts and the now-about-to-be-public private equity firms.
For starters, Steve Schwarzman's decision to reverse course on Blackstone's organizational form is clearly linked to the firm's apparent ability to cash in on its imputed value. The numbers being tossed about value Schwarzman's stake in the neighborhood of at least $800MM.
The weekend Wall Street Journal piece rather caustically contrasted Schwarzman's extolling of the benefits of private equity with the world into which he is about to plunge Blackstone.
The truth is, though, that such amazement is appropriate. I'm not against greed or opportunism. But I don't like inconsistency. Especially not in personal principles.
To me, Schwarzman's entire raison d'etre is now suspect. The party line on why private equity is good for managers, companies, the economy, etc., is now a sham. The 'magic dust' that firms like Blackstone sprinkle on otherwise-normal firms is about to become suspect.
The greed Schwarzman has now displayed will pass, I think, without criticism from the business community, because that community understands power and taking advantage of it when you have the opportunity.
However, that done, what is Blackstone? Isn't it, in aggregate, as messy and undirected as, say, that other financial mess, Citigroup? Or Chase? Only worse
It has trading, asset management, M&A advisory- all the cream financial service businesses- plus a slew of operating companies.
Whatever mythical valuation all of this has when private should, one can be forgiven for supposing, that valuation should shrink as soon as the lot is merely part of a publicly-held, routinely-reporting entity.
It would seem to be the business equivalent of the physics debate about the nature of light- wave, or photon? Blackstone cannot be both preferentially-valued private takeover, rehab and financial services shop, and a public entity as well.
To preserve access in this very small world, it's even possible that media personnel and analysts alike will give Schwarzman and Blackstone a pass for a few months, to a year, before the private equity 'magic dust' begins to evaporate.
I think it's highly likely that Schwarzman sees the rising tide of combative public boards, and takeover prices rising, returns falling, and the eventual compression of his overall business returns.
What better time to move, and cash in, than before the other side becomes fully aware of this sea change?
On one hand, Schwarzman is striking opportunistically and 'fairly,' but, in the same moment, he is transmuting that which he is selling, for a higher value, into something generally conceded to be worth much less and, usually, nightmarish to operate for consistently superior returns.
Friday, March 16, 2007
Fast Money, Stupid Money
I have noticed an increasing presence of CNBC's Dylan Ratigan's pals, who co-star on his "Fast Money" program, doing short video pieces which are spliced into the daily business news coverage on the network.
Specifically, individuals from Ratigan's program make short videos advising viewers on how to "invest," although "trading" is really the more appropriate word.
The other day, I saw what I think may be the height of idiocy. Ratigan's colleague on his evening CNBC program, the bald guy, Jeff Macke, was featured in a clip about investment ideas.
Macke actually counseled people to consider investing in things with which they are familiar- like their Blackberry or Palm Pilot, cellphone, etc. In short, exhorting all CNBC's viewers to be their own Peter Lynch.
Macke conveniently skipped any notions of: risk, valuation, the rational expectations of other investors, etc. I found this to be truly scary, and rather irresponsible of CNBC.
For that matter, Ratigan's program's entire premise seems to be, 'trade, don't invest.' Yet nearly every one of the network's talking heads who were in attendance for their on-air wake, in honor of Lou Rukeyser's passing last year, solemnly intoned how important Lou's message of investing for long term gains was.
If you had any lingering doubts about CNBC's major role being entertainment, not news, I think the recent promotion of Ratigan's progam, and his panel, are all you need to see to be convinced.
Specifically, individuals from Ratigan's program make short videos advising viewers on how to "invest," although "trading" is really the more appropriate word.
The other day, I saw what I think may be the height of idiocy. Ratigan's colleague on his evening CNBC program, the bald guy, Jeff Macke, was featured in a clip about investment ideas.
Macke actually counseled people to consider investing in things with which they are familiar- like their Blackberry or Palm Pilot, cellphone, etc. In short, exhorting all CNBC's viewers to be their own Peter Lynch.
Macke conveniently skipped any notions of: risk, valuation, the rational expectations of other investors, etc. I found this to be truly scary, and rather irresponsible of CNBC.
For that matter, Ratigan's program's entire premise seems to be, 'trade, don't invest.' Yet nearly every one of the network's talking heads who were in attendance for their on-air wake, in honor of Lou Rukeyser's passing last year, solemnly intoned how important Lou's message of investing for long term gains was.
If you had any lingering doubts about CNBC's major role being entertainment, not news, I think the recent promotion of Ratigan's progam, and his panel, are all you need to see to be convinced.
Thursday, March 15, 2007
Viacom v. Google Re: YouTube
Tuesday's announcement of Viacom's $1B suit against Google/YouTube moves the new media challenge to a new plane.
The initial news story in the Wall Street Journal covered the expected terrain. It represented each side's views and legal position. Viacom owns the copyrights, while Google claims fair use doctrine.
Dauman, Redstone's returning lieutenant, has clearly shaken up the sluggish maneuvering between the two giants on this issue.
My consulting friend, S, believes this is simply Viacom's bid to force some sort of fee-based arrangement, and that it will never go to court. Perhaps so.
However, after reading CNBC analyst Paul Kedrosky's excellent editorial this morning in The Wall Street Journal, I am reconsidering my view on that.
Kedrosky feels that this suit is a misguided attempt by Viacom to attempt to stop the onrush of consumer demand to access and buy short clips of the video it wants. He likens it to the original Napster, and eventual legalization of single-song purchases on iTunes.
While S has maintained, and Kedrosky echos, that YouTube's airing of old Viacom material can only be a boon to the latter, the material does belong to Viacom. If they wanted YouTube doing this, they'd have asked.
To me, the reasonable and economic solution is for Viacom to realize two things. First, what most consumers want is an 'honest broker,' independent location on which to view any potential video material. Just as no single record company has ever successfully established a music website, I don't think any video content owner will do so, either.
To realize why, consider what has made Amazon, though profitless, so central to ordering printed media. You can find anything there. I believe the same will hold true for video. Thus, Viacom's best shot is to distribute through YouTube.
Second, all Viacom needs to do is demand a small slice of ad revenues from the pages on which its videos play, plus arrange for an instant, 'push-button purchase' option. Simply locate a "buy this video now" button that takes the viewer to a Viacom or YouTube checkout, and pay YouTube a percentage of the sales price.
Nobody wants to sit in front of a PC viewing endless video clips to approximate a season of any television program. YouTube's clips are for instant gratification, not long-term enjoyment.
Viacom is missing the point here with their lawsuit. As Kedrosky points out, Viacom may well win, if it goes to court, simply on the basis of their undisputed ownership of the material.
But Viacom will lose the war. Google/YouTube will remain a nexus for all sorts of professional and amateur video. But Viacom will have cut off its nose to spite its face, if it boycotts YouTube in the future, after reaping the one-time billion dollar damages.
The initial news story in the Wall Street Journal covered the expected terrain. It represented each side's views and legal position. Viacom owns the copyrights, while Google claims fair use doctrine.
Dauman, Redstone's returning lieutenant, has clearly shaken up the sluggish maneuvering between the two giants on this issue.
My consulting friend, S, believes this is simply Viacom's bid to force some sort of fee-based arrangement, and that it will never go to court. Perhaps so.
However, after reading CNBC analyst Paul Kedrosky's excellent editorial this morning in The Wall Street Journal, I am reconsidering my view on that.
Kedrosky feels that this suit is a misguided attempt by Viacom to attempt to stop the onrush of consumer demand to access and buy short clips of the video it wants. He likens it to the original Napster, and eventual legalization of single-song purchases on iTunes.
While S has maintained, and Kedrosky echos, that YouTube's airing of old Viacom material can only be a boon to the latter, the material does belong to Viacom. If they wanted YouTube doing this, they'd have asked.
To me, the reasonable and economic solution is for Viacom to realize two things. First, what most consumers want is an 'honest broker,' independent location on which to view any potential video material. Just as no single record company has ever successfully established a music website, I don't think any video content owner will do so, either.
To realize why, consider what has made Amazon, though profitless, so central to ordering printed media. You can find anything there. I believe the same will hold true for video. Thus, Viacom's best shot is to distribute through YouTube.
Second, all Viacom needs to do is demand a small slice of ad revenues from the pages on which its videos play, plus arrange for an instant, 'push-button purchase' option. Simply locate a "buy this video now" button that takes the viewer to a Viacom or YouTube checkout, and pay YouTube a percentage of the sales price.
Nobody wants to sit in front of a PC viewing endless video clips to approximate a season of any television program. YouTube's clips are for instant gratification, not long-term enjoyment.
Viacom is missing the point here with their lawsuit. As Kedrosky points out, Viacom may well win, if it goes to court, simply on the basis of their undisputed ownership of the material.
But Viacom will lose the war. Google/YouTube will remain a nexus for all sorts of professional and amateur video. But Viacom will have cut off its nose to spite its face, if it boycotts YouTube in the future, after reaping the one-time billion dollar damages.
Wednesday, March 14, 2007
Savvy Investors Lead, Mediocre Investors Panic, Then Follow
In the past, my business partner and I have discussed the implication of periods in which our portfolio's total return trails the S&P500's. We have concluded that it is indicative of situations in which our portfolio selections are 'out in front' of the market, and other investors will eventually come around to our view, and, thus, drive up the value of our selections with their similar, albeit delayed, investment behaviors.
This month, we are seeing this in spades. Witness Goldman Sachs publicly mulling over a plunge into the sub-prime mortgage "meltdown," before the heat has even dissipated. Goldman is no slouch equity investor. It's even in our portfolio right now.
More than usual, I am confident in this view of the market, as described in the title of this post.
I have written before of mediocre investors and the normal curve. Some investors are positioned for future market and company equity returns, despite the views of many other, mediocre investors, to the contrary.
Equity markets are a unique place, in that each buyer or seller of a share has an equal impact, per share, with their action. However, some investors are much smarter, more effective, than others. And as with most normal distributions, there are more inept investors, by number, than there are superior investors. However, we don't know the exact distribution of equity assets among the variously superior, mediocre, or even inferior investors.
Over the long term, we would expect the superior investors to amass equity asset values at a greater rate than the the rest of the distribution of investors.
More to the point, while mediocre and inferior investors might outnumber the superior investors, the key is not just the broad market participation, but the particular equities in which each is invested.
For instance, over the past weeks, some investors have headed to the sidelines. My guess is these would be primarily mediocre and inferior investors. So, in this period, superior investors would perhaps be both different, in remaining invested, and, per Goldman Sach's potential moves, focused on specific sectors from which less-skilled investors are withdrawing.
The bottom line to all of this is that, when an investor is well-positioned to earn superior returns over the next several months, his positions may appear to be losing during periods of volatility over those months. Periods such as the past few weeks can easily contain more noise than signal, penalizing many who attempt to trade through such periods of upheaval.
The bulk of the assets in the equity markets are held by lesser-skilled investors. When they move due to shock, as in the case of the last few weeks, their buying and selling can distort longer-term values. In the moment, who is right? The fleeing crowd, whose selling depress prices, or the patient, unmoving few savvy investors, who are still invested when the market unexpectedly swings back to a positive direction?
This month, we are seeing this in spades. Witness Goldman Sachs publicly mulling over a plunge into the sub-prime mortgage "meltdown," before the heat has even dissipated. Goldman is no slouch equity investor. It's even in our portfolio right now.
More than usual, I am confident in this view of the market, as described in the title of this post.
I have written before of mediocre investors and the normal curve. Some investors are positioned for future market and company equity returns, despite the views of many other, mediocre investors, to the contrary.
Equity markets are a unique place, in that each buyer or seller of a share has an equal impact, per share, with their action. However, some investors are much smarter, more effective, than others. And as with most normal distributions, there are more inept investors, by number, than there are superior investors. However, we don't know the exact distribution of equity assets among the variously superior, mediocre, or even inferior investors.
Over the long term, we would expect the superior investors to amass equity asset values at a greater rate than the the rest of the distribution of investors.
More to the point, while mediocre and inferior investors might outnumber the superior investors, the key is not just the broad market participation, but the particular equities in which each is invested.
For instance, over the past weeks, some investors have headed to the sidelines. My guess is these would be primarily mediocre and inferior investors. So, in this period, superior investors would perhaps be both different, in remaining invested, and, per Goldman Sach's potential moves, focused on specific sectors from which less-skilled investors are withdrawing.
The bottom line to all of this is that, when an investor is well-positioned to earn superior returns over the next several months, his positions may appear to be losing during periods of volatility over those months. Periods such as the past few weeks can easily contain more noise than signal, penalizing many who attempt to trade through such periods of upheaval.
The bulk of the assets in the equity markets are held by lesser-skilled investors. When they move due to shock, as in the case of the last few weeks, their buying and selling can distort longer-term values. In the moment, who is right? The fleeing crowd, whose selling depress prices, or the patient, unmoving few savvy investors, who are still invested when the market unexpectedly swings back to a positive direction?
Tuesday, March 13, 2007
Halo Effects & US Corporate "Leadership"
This morning, as I write this, one of the more air-headed co-anchors of CNBC, Liz Claman, is breathlessly interviewing Warren Buffett, amidst more breathless and incredulous reports on the statements made by various corporate luminaries at Treasury Secretary Hank Paulsen's Georgetown University offsite conference on securities markets regulation.
The Paulsen conference is a good idea. It is pretty obvious to any intelligent business and markets observer that the ill-considered Sarbanes-Oxley regulation has significantly contributed to recent phenomena such as; increasing percentages of IPOs are listed on overseas exchanges, and the increasing involvement of large-cap senior management in the private-equity-backed buyouts of their companies.
However, it's hard for me to understand what, aside from appearances, Paulsen gains by having such corporate "leaders" as Jeff Immelt, CEO of GE, or Jamie Dimon, CEO of Chase, add their two cents worth. Or, for that matter, even Warren Buffett. John Thain, the NYSE CEO, would seem to be the most relevant contributor of the bunch. Of course, if he only talked with Thain, then Paulsen would be accused of simply running a reconstituted Goldman Sachs cabal in the public sector.
All joking aside, really, what can Immelt or Dimon add? Immelt's been an overpaid, non-performing CEO going on six years now. Dimon is essentially an untested, itinerant cost-cutter who now heads up one of several faceless, nearly-identical, mediocre US financial services utilities. He has yet to demonstrate the ability, at any company, to do more than cut costs.
Why does anyone care what those two executives think about Sarbanes-Oxley, or regulation in general?
And then Buffett. The great "sage of Omaha." Well, here are a few nuggets from the sage's own background to ponder. He bought into Salomon Brothers years ago, then had to go rescue it when the boys on the Treasuries desk engaged in collusive bid-rigging. Ooops!
Then there was the disastrous foray into airline equities.
Finally, back in 2000, I vividly recall sitting in my then-father-in-law's home, reading a Fortune (or Forbes) piece featuring Buffett's predictions for index returns for the coming decade. Now, as a little background, the long-run return to the S&P500 is roughly 11%. A recent 50th anniversary editorial in the Wall Street Journal by Jeremy Siegel noted that the S&P's return since its inception has been..... 11%. So, most people would predict to the mean for any longish term estimate of the index.
Buffett predicted a decade of S&P returns averaging in the 5-8% range. So far this decade, with the market collapse of 2001-02, the actual annual average return through the end of 2006 is 2%. Just a little forecasting error, there, Warren. Of, oh....about 300% of the actual value, and nearly 33% off of his own mean value.
So why does anyone want to hear Buffett's opinions on things other than his two key business strengths- investing cash as an institutional portfolio investor, and buying businesses for Berkshire Hathaway's portfolio of operating units?
And, similarly, why do we care about the opinions of CEOs of the more staid, anemically-performing large-cap companies? What is the source of this halo effect? That, having demonstrated no ability to actually create consistently superior returns for their shareholders, they are the preferred group from which to hear opinions about government regulations?
If they don't object to too much regulation, you should suspect them of simply showing a compliant face to Washington, in order to preserve their image for subsequent political maneuvering. If they do complain, it's going to be suspect as blaming government regulation for their own failings.
It seems to me that the guys Paulsen should be talking with, on the record, are Henry Kravis and his ilk. The guys who run Silverlake Partners, Blackrock, TexasPacific, et. al. It's the heads of the private equity firms who can really shed light for Paulsen on what has driven the volume of deals involving public firms willingly going private. Or the top-performing large-cap companies by total return over the past five years. These CEOs would have no need to use regulation to excuse their own performances. I'd be more interested to hear what those guys have to say about Sarbanes-Oxley than I would a bunch of mediocre CEOs.
Of course, you won't hear this on CNBC. That's because they assign Liz Claman, a mere talking head, to cover Paulsen's conference, rather than invite someone with sharp business mind and a knack for asking the unasked question, like Herb Greenberg, Joe Kernen, or Erin Burnett. And that's a shame.
Another wasted opportunity for excellent business news coverage by CNBC. Let's hope Roger Ailes, of Fox News, is watching this and taking notes.
The Paulsen conference is a good idea. It is pretty obvious to any intelligent business and markets observer that the ill-considered Sarbanes-Oxley regulation has significantly contributed to recent phenomena such as; increasing percentages of IPOs are listed on overseas exchanges, and the increasing involvement of large-cap senior management in the private-equity-backed buyouts of their companies.
However, it's hard for me to understand what, aside from appearances, Paulsen gains by having such corporate "leaders" as Jeff Immelt, CEO of GE, or Jamie Dimon, CEO of Chase, add their two cents worth. Or, for that matter, even Warren Buffett. John Thain, the NYSE CEO, would seem to be the most relevant contributor of the bunch. Of course, if he only talked with Thain, then Paulsen would be accused of simply running a reconstituted Goldman Sachs cabal in the public sector.
All joking aside, really, what can Immelt or Dimon add? Immelt's been an overpaid, non-performing CEO going on six years now. Dimon is essentially an untested, itinerant cost-cutter who now heads up one of several faceless, nearly-identical, mediocre US financial services utilities. He has yet to demonstrate the ability, at any company, to do more than cut costs.
Why does anyone care what those two executives think about Sarbanes-Oxley, or regulation in general?
And then Buffett. The great "sage of Omaha." Well, here are a few nuggets from the sage's own background to ponder. He bought into Salomon Brothers years ago, then had to go rescue it when the boys on the Treasuries desk engaged in collusive bid-rigging. Ooops!
Then there was the disastrous foray into airline equities.
Finally, back in 2000, I vividly recall sitting in my then-father-in-law's home, reading a Fortune (or Forbes) piece featuring Buffett's predictions for index returns for the coming decade. Now, as a little background, the long-run return to the S&P500 is roughly 11%. A recent 50th anniversary editorial in the Wall Street Journal by Jeremy Siegel noted that the S&P's return since its inception has been..... 11%. So, most people would predict to the mean for any longish term estimate of the index.
Buffett predicted a decade of S&P returns averaging in the 5-8% range. So far this decade, with the market collapse of 2001-02, the actual annual average return through the end of 2006 is 2%. Just a little forecasting error, there, Warren. Of, oh....about 300% of the actual value, and nearly 33% off of his own mean value.
So why does anyone want to hear Buffett's opinions on things other than his two key business strengths- investing cash as an institutional portfolio investor, and buying businesses for Berkshire Hathaway's portfolio of operating units?
And, similarly, why do we care about the opinions of CEOs of the more staid, anemically-performing large-cap companies? What is the source of this halo effect? That, having demonstrated no ability to actually create consistently superior returns for their shareholders, they are the preferred group from which to hear opinions about government regulations?
If they don't object to too much regulation, you should suspect them of simply showing a compliant face to Washington, in order to preserve their image for subsequent political maneuvering. If they do complain, it's going to be suspect as blaming government regulation for their own failings.
It seems to me that the guys Paulsen should be talking with, on the record, are Henry Kravis and his ilk. The guys who run Silverlake Partners, Blackrock, TexasPacific, et. al. It's the heads of the private equity firms who can really shed light for Paulsen on what has driven the volume of deals involving public firms willingly going private. Or the top-performing large-cap companies by total return over the past five years. These CEOs would have no need to use regulation to excuse their own performances. I'd be more interested to hear what those guys have to say about Sarbanes-Oxley than I would a bunch of mediocre CEOs.
Of course, you won't hear this on CNBC. That's because they assign Liz Claman, a mere talking head, to cover Paulsen's conference, rather than invite someone with sharp business mind and a knack for asking the unasked question, like Herb Greenberg, Joe Kernen, or Erin Burnett. And that's a shame.
Another wasted opportunity for excellent business news coverage by CNBC. Let's hope Roger Ailes, of Fox News, is watching this and taking notes.
Monday, March 12, 2007
After The Drop: Market Returns For The past Two Weeks
Since the US equities market dropped by 3.5% two weeks ago, tomorrow, there has been much punditry on the implications of the sudden decline.
One wonders how many investors headed for the sidelines, concerned over the sudden volatility and confusion among various market commentators on its imminent direction.
If you are curious, here are the daily returns for the S&P500 Index for the last two weeks, beginning with that Tuesday's decline.
-3.47%
0.56
-0.26
-1.14
-0.94
1.55
-0.25
0.71
0.07
The total return, excluding the first Tuesday's drop, ending with this past Friday, is +.30%.
For my own portfolio, here is the daily return series for the same period, again, beginning with the Tuesday loss two weeks ago.
-4.97
1.67
-0.75
-1.93
-1.18
2.63
-0.11
1.43
0.45
Our portfolio's return, following the initial Tuesday loss, is +2.21%.
I believe this reinforces an old adage I learned long ago, when I worked and consulted at Oliver, Wyman & Co. I don't recall the exact statistics, but went something like this: by being out of the market for only the best 10 days over a 10 year period, an investor could miss nearly half of the period's return.
In this case, the market's performance has been net positive for the period after the precipitous decline of that Tuesday. Given the S&P's negative return at this point, the +.30% return is a fairly large component of the year-to-date return.
For our portfolio, the aftermath of the sharp drop has been even better. We regained our year-to-date margin of outperformance over the S&P500, adding 2.2% to our return.
I wonder how many investors, even veteran institutional fund managers, missed out on returns by leaving assets unallocated to equities over the past two weeks? Trying to time the market by dumping shares and running to the sidelines means often missing positive returns in the market that cannot be made up. For most managers, missing only +.30% return in the S&P could well be the margin for underpeforming the index this year.
This recent period reinforces my use of a proprietary market signal for long/short allocation. By avoiding the tendency to bolt out of a market which has experienced a few bad days, my portfolio strategy remained in place and reaped a significant gain.
One wonders how many investors headed for the sidelines, concerned over the sudden volatility and confusion among various market commentators on its imminent direction.
If you are curious, here are the daily returns for the S&P500 Index for the last two weeks, beginning with that Tuesday's decline.
-3.47%
0.56
-0.26
-1.14
-0.94
1.55
-0.25
0.71
0.07
The total return, excluding the first Tuesday's drop, ending with this past Friday, is +.30%.
For my own portfolio, here is the daily return series for the same period, again, beginning with the Tuesday loss two weeks ago.
-4.97
1.67
-0.75
-1.93
-1.18
2.63
-0.11
1.43
0.45
Our portfolio's return, following the initial Tuesday loss, is +2.21%.
I believe this reinforces an old adage I learned long ago, when I worked and consulted at Oliver, Wyman & Co. I don't recall the exact statistics, but went something like this: by being out of the market for only the best 10 days over a 10 year period, an investor could miss nearly half of the period's return.
In this case, the market's performance has been net positive for the period after the precipitous decline of that Tuesday. Given the S&P's negative return at this point, the +.30% return is a fairly large component of the year-to-date return.
For our portfolio, the aftermath of the sharp drop has been even better. We regained our year-to-date margin of outperformance over the S&P500, adding 2.2% to our return.
I wonder how many investors, even veteran institutional fund managers, missed out on returns by leaving assets unallocated to equities over the past two weeks? Trying to time the market by dumping shares and running to the sidelines means often missing positive returns in the market that cannot be made up. For most managers, missing only +.30% return in the S&P could well be the margin for underpeforming the index this year.
This recent period reinforces my use of a proprietary market signal for long/short allocation. By avoiding the tendency to bolt out of a market which has experienced a few bad days, my portfolio strategy remained in place and reaped a significant gain.
Friday, March 09, 2007
A Lesson In Schumpeterian Dynamics: ATT - Yahoo Pact Undergoing Change
The Wall Street Journal reported today on the imminent change in the 2001 joint venture agreement between ATT and Yahoo, which is due to expire next year.
Without substantially reciting the article, the essence is this. For the term of the arrangement, ATT has paid Yahoo $250MM/year to gain access to Yahoo's online information and services, hoping these would tip the scales to provide the original co-signatory, SBC, ATT's predecessor, in its quest to compete with high-speed cable delivery of online services.
However, in recent years, Yahoo's competitor, Google, has been paying its partners in similar situations- up to roughly the same $250MM level. For perspective, Yahoo's current annual revenues are roughly $6.43B, and its NIAC is $751MM. Thus, the ATT payment represents about 4% of Yahoo's current annual revenues, and a third of its net income.
Thus, Yahoo's Terry Semel and his managers must be contemplating not only losing this chunk fo high-margin revenue, but probably adding another $250MM of expenses to continue the relationship, resulting in a potential reduction of 66% of Yahoo's net income available to common.
How did Yahoo manage to wind up in this predicament?
Joseph Schumpeter wrote about this risk as long ago as 1926. His central tenet was that high-growth economies and business sectors made for constantly-changing competitive environments. Therefore, businesses were well-advised to innovate and change their competitive situations for themselves, rather than wait and be eviscerated by another company, or some uncontrolled, external influence.
In Yahoo's case, it looks like, since 2001, they've basically been sitting on their collective asses, counting the annual ATT payment, rather than taking a hard look at their unfocused, vulnerable business model.
As I discussed this with my business partner, it became clear what Yahoo's continuing vulnerability is. He described what he thinks Semel's vision of Yahoo is as 'a place to form groups,' or 'a place users go to find groups and information.' The trouble with this is that it is, for the most part, free. I have never paid a dime for any Yahoo service, although I use their portfolio tracking Finance page for my daily portfolio performance monitoring.
What I think Yahoo should have done, back in 2001, is to have immediately retained a few senior consulting partners from McKinsey and Bain to provide the Yahoo senior managers with anecdotal evidence of how other companies survived and prospered in highly-competitive, technologically-oriented business situations, when they had no clear, salient competitive advantage.
My own opinion is that Yahoo should have begun to take the things it is good at, such as information redistribution, presentation, and online groups management, and offered to private-label them to various companies which need these services, but can't get adequate results from their internal IT departments. Online brokerage services came to mind, as my partner and I discussed this. He and I both deplore Schwab's useless online portfolio performance reporting and "analysis," if you can call it that. Why didn't Yahoo provide them with a portal directly taking the Schwab customer to a Yahoo-provided, but Schwab-labeled customizable portfolio performance site/page? Or provide online retail companies with customer group-management facilities cloned from the very large, successful, but free Yahoo Groups offerings?
Such a strategy would cement Yahoo into corporate marketing and customer service functions, while, for once, actually getting paid by someone for what they do. I maintain that, with its largely free services for consumers, Yahoo continues to be the "used car" of internet information providers. It's got no software, hardware, superior search engine, or actual proprietary information for which to charge fees. Thus, I believe its hold on consumer loyalty is tenuous, at best.
Concerning the ATT-Yahoo pact, I don't actually think either company is destined for greatness, or, consistently superior total return performance in the near future. I think ATT is still going to be stuck vending commodity information distribution, while sinking ever more money into a pointless attempt to offer content, as well. As I've written in prior posts here, down that road has always lain failure.
Yahoo is unlikely to do much better, in my opinion. A la Schumpeter, the time for Yahoo to have begun a radical transformation was as soon as it cashed that first $250MM ATT payment back in 2001. By 2004, they could have been well on the way to forging new business directions and growing new fee-for-services offerings to businesses and consumers. Instead, they are now contemplating a new hole in their income statement, and even the potential loss of the ATT relationship, in its entirety.
Don't be surprised if this is the beginning of the end for Yahoo as a separate, publicly-held entity.
Without substantially reciting the article, the essence is this. For the term of the arrangement, ATT has paid Yahoo $250MM/year to gain access to Yahoo's online information and services, hoping these would tip the scales to provide the original co-signatory, SBC, ATT's predecessor, in its quest to compete with high-speed cable delivery of online services.
However, in recent years, Yahoo's competitor, Google, has been paying its partners in similar situations- up to roughly the same $250MM level. For perspective, Yahoo's current annual revenues are roughly $6.43B, and its NIAC is $751MM. Thus, the ATT payment represents about 4% of Yahoo's current annual revenues, and a third of its net income.
Thus, Yahoo's Terry Semel and his managers must be contemplating not only losing this chunk fo high-margin revenue, but probably adding another $250MM of expenses to continue the relationship, resulting in a potential reduction of 66% of Yahoo's net income available to common.
How did Yahoo manage to wind up in this predicament?
Joseph Schumpeter wrote about this risk as long ago as 1926. His central tenet was that high-growth economies and business sectors made for constantly-changing competitive environments. Therefore, businesses were well-advised to innovate and change their competitive situations for themselves, rather than wait and be eviscerated by another company, or some uncontrolled, external influence.
In Yahoo's case, it looks like, since 2001, they've basically been sitting on their collective asses, counting the annual ATT payment, rather than taking a hard look at their unfocused, vulnerable business model.
As I discussed this with my business partner, it became clear what Yahoo's continuing vulnerability is. He described what he thinks Semel's vision of Yahoo is as 'a place to form groups,' or 'a place users go to find groups and information.' The trouble with this is that it is, for the most part, free. I have never paid a dime for any Yahoo service, although I use their portfolio tracking Finance page for my daily portfolio performance monitoring.
What I think Yahoo should have done, back in 2001, is to have immediately retained a few senior consulting partners from McKinsey and Bain to provide the Yahoo senior managers with anecdotal evidence of how other companies survived and prospered in highly-competitive, technologically-oriented business situations, when they had no clear, salient competitive advantage.
My own opinion is that Yahoo should have begun to take the things it is good at, such as information redistribution, presentation, and online groups management, and offered to private-label them to various companies which need these services, but can't get adequate results from their internal IT departments. Online brokerage services came to mind, as my partner and I discussed this. He and I both deplore Schwab's useless online portfolio performance reporting and "analysis," if you can call it that. Why didn't Yahoo provide them with a portal directly taking the Schwab customer to a Yahoo-provided, but Schwab-labeled customizable portfolio performance site/page? Or provide online retail companies with customer group-management facilities cloned from the very large, successful, but free Yahoo Groups offerings?
Such a strategy would cement Yahoo into corporate marketing and customer service functions, while, for once, actually getting paid by someone for what they do. I maintain that, with its largely free services for consumers, Yahoo continues to be the "used car" of internet information providers. It's got no software, hardware, superior search engine, or actual proprietary information for which to charge fees. Thus, I believe its hold on consumer loyalty is tenuous, at best.
Concerning the ATT-Yahoo pact, I don't actually think either company is destined for greatness, or, consistently superior total return performance in the near future. I think ATT is still going to be stuck vending commodity information distribution, while sinking ever more money into a pointless attempt to offer content, as well. As I've written in prior posts here, down that road has always lain failure.
Yahoo is unlikely to do much better, in my opinion. A la Schumpeter, the time for Yahoo to have begun a radical transformation was as soon as it cashed that first $250MM ATT payment back in 2001. By 2004, they could have been well on the way to forging new business directions and growing new fee-for-services offerings to businesses and consumers. Instead, they are now contemplating a new hole in their income statement, and even the potential loss of the ATT relationship, in its entirety.
Don't be surprised if this is the beginning of the end for Yahoo as a separate, publicly-held entity.
Video Link Replacement
If you read this recent post on Hillary Clinton's capital markets regulation remarks, you may not have been able to view the CNBC video link.
Here is a YouTube link to the same interview, at the end of my post. Sorry for the inconvenience.
Here is a YouTube link to the same interview, at the end of my post. Sorry for the inconvenience.
Thursday, March 08, 2007
The Anatomy of A Shareholder's Response To A Proxy
A few days ago, I received, in one of my email accounts, a message from my broker, containing the electronic link for the proxy to one of the equities I hold, Chicago Mercantile Exchange.
It dawned on me, while discussing this with my partner over lunch today, to describe my reaction to this email. A sort of Proustian reflection on the chain of thoughts and feelings pouring forth from that single stimuli- my own personal Madeleine, as it were.
After a few seconds of consideration, with the email opened, viewing the link to the CME proxy voting site, I hit the 'delete' key.
It was a very assured, firm delete. And I have not gone back to my 'deleted emails' folder to rescue or revisit the email.
What occurred to me in that moment, in nanoseconds, actually, was this chain of reflections.
My disciplined, quantitative, non-subjective equities selection process chose CME, and its portfolio weight. That process is the disciplined implementation and expression of my experience, subjective hypotheses, and proprietary research findings with respect to the outperformance of the market, on a consistent basis, by large-cap equities.
I am buyer of equities like CME. I don't want to manage them. I see the causality of the relationshp between CME and me as one way. CME operates, and I reap the results. My process chose CME because it fits a set of criteria which I have found to have a good probability of outperforming the S&P500 for a six-month holding period. I bought CME in order to enjoy its performance results. As of today, I am. It is clearly and handsomely outperforming the S&P, +6.5% to the index's -.25% for the period.
Why would I want to attempt to reverse the direction of causality with respect to CME? What do I think I, personally, as a portfolio manager, can add to the value-creating capability of CME? My selection process chose CME for its behavior before I owned it. It may even be the case that my proxy vote, like the butterfly's flapping wings in the South American rainforest, will have an indirect, but notable, negative effect on CME's performance.
No, I would like the context of CME's operations to be as similar to the period over which my process analyzed it, as possible. I want to effect no change in CME, nor visit any significant influence on it.
Barney Frank, be damned. He has it wrong. So do the corporate governance and "shareholder democracy" crowd.
The only "democratic" thing this shareholder wants is to know that, when I want to sell my CME shares, I can. At the market. With little brokerage expense. Period.
That's it.
I have absolutely no interest in influencing CME myself. Why would I be so arrogant as to think I could buy shares of CME, and then improve its lot with my proxy vote?
Perhaps some investors, especially institutional investors, buy shares of companies which they believe they can improve. Such as private equity investors.
I am not a private equity mogul. I have no billions with which to assume control of CME.
I just want to share in their next few months of consistently superior total returns. To want more than that is to court disaster, and succumb to hubris. The last thing I would want is to have any effect whatsoever on CME's performance. Thus, I deleted that proxy link email as quickly as possible. Lest some unknown quantuum effect derive from my mere reading of the email, and depress CME's share price. I want no part of CME's operating or governance process. I simply want to make money by owning its shares, passively.
Is this such a hard concept to fathom?
It dawned on me, while discussing this with my partner over lunch today, to describe my reaction to this email. A sort of Proustian reflection on the chain of thoughts and feelings pouring forth from that single stimuli- my own personal Madeleine, as it were.
After a few seconds of consideration, with the email opened, viewing the link to the CME proxy voting site, I hit the 'delete' key.
It was a very assured, firm delete. And I have not gone back to my 'deleted emails' folder to rescue or revisit the email.
What occurred to me in that moment, in nanoseconds, actually, was this chain of reflections.
My disciplined, quantitative, non-subjective equities selection process chose CME, and its portfolio weight. That process is the disciplined implementation and expression of my experience, subjective hypotheses, and proprietary research findings with respect to the outperformance of the market, on a consistent basis, by large-cap equities.
I am buyer of equities like CME. I don't want to manage them. I see the causality of the relationshp between CME and me as one way. CME operates, and I reap the results. My process chose CME because it fits a set of criteria which I have found to have a good probability of outperforming the S&P500 for a six-month holding period. I bought CME in order to enjoy its performance results. As of today, I am. It is clearly and handsomely outperforming the S&P, +6.5% to the index's -.25% for the period.
Why would I want to attempt to reverse the direction of causality with respect to CME? What do I think I, personally, as a portfolio manager, can add to the value-creating capability of CME? My selection process chose CME for its behavior before I owned it. It may even be the case that my proxy vote, like the butterfly's flapping wings in the South American rainforest, will have an indirect, but notable, negative effect on CME's performance.
No, I would like the context of CME's operations to be as similar to the period over which my process analyzed it, as possible. I want to effect no change in CME, nor visit any significant influence on it.
Barney Frank, be damned. He has it wrong. So do the corporate governance and "shareholder democracy" crowd.
The only "democratic" thing this shareholder wants is to know that, when I want to sell my CME shares, I can. At the market. With little brokerage expense. Period.
That's it.
I have absolutely no interest in influencing CME myself. Why would I be so arrogant as to think I could buy shares of CME, and then improve its lot with my proxy vote?
Perhaps some investors, especially institutional investors, buy shares of companies which they believe they can improve. Such as private equity investors.
I am not a private equity mogul. I have no billions with which to assume control of CME.
I just want to share in their next few months of consistently superior total returns. To want more than that is to court disaster, and succumb to hubris. The last thing I would want is to have any effect whatsoever on CME's performance. Thus, I deleted that proxy link email as quickly as possible. Lest some unknown quantuum effect derive from my mere reading of the email, and depress CME's share price. I want no part of CME's operating or governance process. I simply want to make money by owning its shares, passively.
Is this such a hard concept to fathom?
Wednesday, March 07, 2007
BP's New Ad Campaign
I have been watching BP's ad campaign for a few months now. You've probably seen them- interviews with people on the street about what oil companies "should" be doing.
The various staged responses involve big oil firms needing to go green, and find new energy sources to power our world more cleanly.
Then the requisite solemn voice-over announces that BP is already doing all sorts of lovely green things for its customers and the world.
There's just one problem. Oil companies historically have gotten into trouble, and wasted money, when they try to be something besides an oil company.
For example, in the 1980s, Exxon tried to break into the information equipment business. Living near their operations in NJ, I had colleagues who had worked there, and witnessed the rise and fall of the division. It stemmed from the mistaken belief, in the late 1970s, that Exxon's oil business would diminish in a few decades. The Exxon Enterprises unit was created to house a large assortment of various non-oil businesses whose mission was to grow sufficiently to take up the eventual slack of a declining crude oil-driven business.
It didn't work out that way. Instead, Exxon Enterprises' units had their collective heads handed to them in their respective product/market niches. And it never had the full support of the dominant oil executives, either. If memory serves, a future CEO, Lee Raymond, shut the group down to stem the waste of hundreds of millions of expense dollars.
It seems that utility-like firms have a tendency to wander astray when their sector's outlook is bleak, typically racking up huge losses.
Anybody else recall a little thing called "Penn Central?" When the old railroad tried to become a "transportation" company, and eventually would up in Chapter 11?
So I view these BP commercials with great amusement. I think BP is still suffering from the culture with which outgoing chairman Brown suffused it. It's trying to stray from being a good, well-run oil company, and, instead, apologize for what it is, and try to change into something else.
On the other hand, Rex Tillerson, ExxonMobil's new CEO, was unabashed today on CNBC about being a growing, well-run, profitable oil company. No apologies from him.
Oil companies should seek, find, recover, refine, and distribute oil. That's where their core strengths are. When they try to do radically different things, their shareholders suffer.
Is this really such a difficult concept to grasp?
The various staged responses involve big oil firms needing to go green, and find new energy sources to power our world more cleanly.
Then the requisite solemn voice-over announces that BP is already doing all sorts of lovely green things for its customers and the world.
There's just one problem. Oil companies historically have gotten into trouble, and wasted money, when they try to be something besides an oil company.
For example, in the 1980s, Exxon tried to break into the information equipment business. Living near their operations in NJ, I had colleagues who had worked there, and witnessed the rise and fall of the division. It stemmed from the mistaken belief, in the late 1970s, that Exxon's oil business would diminish in a few decades. The Exxon Enterprises unit was created to house a large assortment of various non-oil businesses whose mission was to grow sufficiently to take up the eventual slack of a declining crude oil-driven business.
It didn't work out that way. Instead, Exxon Enterprises' units had their collective heads handed to them in their respective product/market niches. And it never had the full support of the dominant oil executives, either. If memory serves, a future CEO, Lee Raymond, shut the group down to stem the waste of hundreds of millions of expense dollars.
It seems that utility-like firms have a tendency to wander astray when their sector's outlook is bleak, typically racking up huge losses.
Anybody else recall a little thing called "Penn Central?" When the old railroad tried to become a "transportation" company, and eventually would up in Chapter 11?
So I view these BP commercials with great amusement. I think BP is still suffering from the culture with which outgoing chairman Brown suffused it. It's trying to stray from being a good, well-run oil company, and, instead, apologize for what it is, and try to change into something else.
On the other hand, Rex Tillerson, ExxonMobil's new CEO, was unabashed today on CNBC about being a growing, well-run, profitable oil company. No apologies from him.
Oil companies should seek, find, recover, refine, and distribute oil. That's where their core strengths are. When they try to do radically different things, their shareholders suffer.
Is this really such a difficult concept to grasp?
Tuesday, March 06, 2007
Portfolio Risks and The Mortgage Sector
It occurred to me this week, in the midst of the continuing meltdown of the sub-prime mortgage lending sector, that my portfolio selection process exited the homebuilding and (prime) mortgage sector over six months ago. Happily, we own no mortgage or homebuilding sector stocks anymore.
I recall, however, back in 2005, that the business media was screaming about the sector's imminent collapse. At the time, a prominent fund allocator, with whom I had discussions, in hopes of attracting investments, complained that my strategy was overconcentrated in the homebuilding and mortgage sector. My response was that, to earn returns, you had to choose what was going to do well, and devote resources to those areas, rather than to mindlessly diversify. Rather like Kirk Kerkorian's own philosophy, mentioned in this post,
"Diversification is for people who aren't sure about what they are doing."
Over the time period stretching from mid-2003 to mid-2006, my selection process had selected companies in these sectors which returned a total of 4.8%. By July of last year, however, the process had rinsed mortgage lending and homebuilding out of the portfolio.
Now, everyone is worried about the sub-prime lending sector and, by extension, the homebuilders. The market's damage to the former group is making the pain felt by the conventional home building and lending equities in late 2005 and 2006 look tame by comparison.
This is a fine example of how our equity portfolio strategy and selection process' risk management has performed. As the sector's constituent companies began to underperform, both fundamentally and technically, our process had us exit the sector way before real damage occurred, and we made money on the sector over the time in which we were invested.
I wish I could speak with the analysts from that fund allocator again, now. As it happens, I heard from a friend that they sustained some heavy losses in the past year. I guess their own risk management wasn't quite up to snuff, after all.
I recall, however, back in 2005, that the business media was screaming about the sector's imminent collapse. At the time, a prominent fund allocator, with whom I had discussions, in hopes of attracting investments, complained that my strategy was overconcentrated in the homebuilding and mortgage sector. My response was that, to earn returns, you had to choose what was going to do well, and devote resources to those areas, rather than to mindlessly diversify. Rather like Kirk Kerkorian's own philosophy, mentioned in this post,
"Diversification is for people who aren't sure about what they are doing."
Over the time period stretching from mid-2003 to mid-2006, my selection process had selected companies in these sectors which returned a total of 4.8%. By July of last year, however, the process had rinsed mortgage lending and homebuilding out of the portfolio.
Now, everyone is worried about the sub-prime lending sector and, by extension, the homebuilders. The market's damage to the former group is making the pain felt by the conventional home building and lending equities in late 2005 and 2006 look tame by comparison.
This is a fine example of how our equity portfolio strategy and selection process' risk management has performed. As the sector's constituent companies began to underperform, both fundamentally and technically, our process had us exit the sector way before real damage occurred, and we made money on the sector over the time in which we were invested.
I wish I could speak with the analysts from that fund allocator again, now. As it happens, I heard from a friend that they sustained some heavy losses in the past year. I guess their own risk management wasn't quite up to snuff, after all.
Warren Buffett Seconds My Views on Dell, et. al.
Yesterday, I wrote about Michael Dell's return to lead the company he founded, and the likelihood that he will return it to consistently superior total return performance.
I wrote,
"Both H-P and Dell are, for the most part, engaged in the production and marketing of commodity electronic products- desktop and laptop computers, and printers. These types of firms haven't been on my equity strategy's selection lists since 1998. In the interim, the market for consumer computers has evolved to the point that most buyers can select and take home a perfectly adequate machine from a store at any one of as many as four chains (e.g., BestBuy, CircuitCity, Staples, Costco), with competitive pricing pressure providing similar values across the vendors and products.
In such a market, can we really expect either vendor, H-P or Dell, to somehow add sufficient extra value, and be paid for it, to drive its performance to a level of consistently superior total returns over several years? We're talking about producing some of the most common, nearly-disposable electronic devices you can imagine- personal computers and printers.
The competitive environment for its products, and the behavior of its target consumers, have changed to the extent that I don't think the product/market positioning of the firm will sustain consistently superior total return performance anymore.
Instead, the action seems to have moved on to online information and advertising purveyors- notable Google. This is not really a surprise. Over the years, consistent superiority of performance among technology firms has moved up the "food chain," from Intel and Microsoft, to the box makers, then the specialty applications software firms, to the online access and content providers. Now, it's moved beyond the last group, to simply providing tools to find information.
Although Michael Dell may return his firm to profitability and some revenue growth, relative to recent years, I don't think Dell has much potential to reward shareholders anymore."
Today, my partner emailed me a piece containing excerpts from Warren Buffett's annual shareholder letter. It would seem he and I share the viewpoint which I expressed above.
Here is, in part, what Buffett wrote:
"Not all of our businesses are destined to increase profits. When an industry's underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, "If you want to get a reputation as a good businessman, be sure to get into a good business.") And fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline. The skid will almost certainly continue.
Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed."
I wrote,
"Both H-P and Dell are, for the most part, engaged in the production and marketing of commodity electronic products- desktop and laptop computers, and printers. These types of firms haven't been on my equity strategy's selection lists since 1998. In the interim, the market for consumer computers has evolved to the point that most buyers can select and take home a perfectly adequate machine from a store at any one of as many as four chains (e.g., BestBuy, CircuitCity, Staples, Costco), with competitive pricing pressure providing similar values across the vendors and products.
In such a market, can we really expect either vendor, H-P or Dell, to somehow add sufficient extra value, and be paid for it, to drive its performance to a level of consistently superior total returns over several years? We're talking about producing some of the most common, nearly-disposable electronic devices you can imagine- personal computers and printers.
The competitive environment for its products, and the behavior of its target consumers, have changed to the extent that I don't think the product/market positioning of the firm will sustain consistently superior total return performance anymore.
Instead, the action seems to have moved on to online information and advertising purveyors- notable Google. This is not really a surprise. Over the years, consistent superiority of performance among technology firms has moved up the "food chain," from Intel and Microsoft, to the box makers, then the specialty applications software firms, to the online access and content providers. Now, it's moved beyond the last group, to simply providing tools to find information.
Although Michael Dell may return his firm to profitability and some revenue growth, relative to recent years, I don't think Dell has much potential to reward shareholders anymore."
Today, my partner emailed me a piece containing excerpts from Warren Buffett's annual shareholder letter. It would seem he and I share the viewpoint which I expressed above.
Here is, in part, what Buffett wrote:
"Not all of our businesses are destined to increase profits. When an industry's underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, "If you want to get a reputation as a good businessman, be sure to get into a good business.") And fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline. The skid will almost certainly continue.
Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed."
In this post, last November, I discussed the odds that Maurice Greenberg or Jack Welch can turn around the daily newspapers they are interested in buying and running. Again, Buffett has come to the same conclusion I did, by writing,
"For a local resident, ownership of a city's paper, like ownership of a sports team, still produces instant prominence. With it typically comes power and influence. These are ruboffs that appeal to many people with money. Beyond that, civic-minded, wealthy individuals may feel that local ownership will serve their community well. That's why Peter Kiewit bought the Omaha paper more than 40 years ago.
We are likely therefore to see non-economic individual buyers of newspapers emerge, just as we have seen such buyers acquire major sports franchises. Aspiring press lords should be careful, however: There's no rule that says a newspaper's revenues can't fall below its expenses and that losses can't mushroom. Fixed costs are high in the newspaper business, and that's bad news when unit volume heads south. As the importance of newspapers diminishes, moreover, the "psychic value" of possessing one will wane, whereas owning a sports franchise will likely retain its cachet."
Subscribe to:
Posts (Atom)
