Chase Bank Veers Into Government Charity Work Again- At Its Peril

Coincidentally, I saw a Wall Street Journal piece noting Chase Bank's role in providing cash to California to back the state's IOUs on the same day that Glenn Beck revealed Chase CEO's special relationship with Wonderboy.



In both cases, I believe we are witnessing a return to the bad old days of Chase Manhattan, when then-CEO David Rockefeller, along with Citibank CEO Walter Wriston, unwisely became the conduits for recycling petrodollars into sovereign loans to South America, without adequately charging a premium for said sovereign lending.



It was a lesson that came home to roost decades later, during my tenure at Chase Manhattan. In the end, Citibank wrote off, if memory serves, $3B in sovereign loans, while Chase chipped in $1B. It may have been one hundred times those amounts. With the passage of some twenty years, I confess to no longer recalling the exact number of zeros. But it was likely the former numbers.



Now, Jamie Dimon is entering similar waters by lending to deadbeat, broke California. Sovereign lending is always special because your counterparty has the power to simply nullify your loan contract and repudiate the debt. And prevent you from suing to recover in the domicile.



Sure, Chase is getting some underwriting business now. But in time, one has to wonder if an out-of-state bank will continue to receive favorable treatment, when Wells Fargo is headquartered in California.

Then we come to another key link between Chase and a governmental entity.

Glenn Beck revealed that Chase has a special "midwestern director" on its board. None other than Chicago mayor Richard Daley's brother and veteran Democratic political operative, Bill Daley. No chance that Daley is somehow in contact with Wonderboy, is there?

No not much. Hah!

Beck apparently discovered that Dimon has a literal direct phone line to the White House, and noted that Wonderboy has publicly referred to Dimon as a model banker.

Then Beck went further, reaching far back into the bank's past, to describe how, under Rockefeller, Chase bent over backwards for ACORN and/or its forerunners to basically pay financial bribes in order to avoid being victimized by the organization.

Whenever companies stoop to this sort of tactic to ingratiate themselves with government, it usually ends badly. Governments change, and, when in trouble, governments have a nasty habit of turning on any and all businesses whose interests then conflict with their own.

If you thought Dimon's Chase was a safe or smart investment, think again. Dimon is playing with fire by courting various governmental entities and not charging for the risk inherent in that game.

It's likely to come back to haunt him and the bank, just as it did in the 1980s, after Rockefeller's dubious sovereign lending binge of the 1970s.

When Biased Reporting Goes Too Far And Misinforms

Over the past few weeks, I've noticed something in CNBC's coverage of the health care legislation that constitutes not just sloppy reporting, but genuine misinformation.

Carl Q, the hispanic co-anchor of the network's morning Squawkbox program, now exhibits a rather strange behavior for a news program anchor. Either he is really stupid, and I don't mean that lightly nor euphemistically, or he's been given orders to ignore certain realities.

Here are just two examples, out of several I've seen this month, of what I mean.

A few weeks ago, Carl Q interviewed Virginia Republican Representative Eric Cantor on health care. After Cantor laboriously catalogued several Republican ideas, presented for inclusion in a health care bill, Carlos asked Cantor,

'So, if you defeat this bill, do you declare victory Congressman?'

Anyone watching the interview just saw Cantor say that Republicans know that things must improve in the health care sector, and that he had just ticked off a number of ideas for introducing substantially more competition without government involvement as a provider.

Carl the Q simply ignored these, and, instead, attempted to paint Cantor and his colleagues as purely negative and only wishing to halt any health care reform.

You have to wonder, if Carl were not given instructions to do this, how he can be allowed to remain in his job when he's so obviously mentally impaired. He cannot process statements by his interview subject and respond to them contextually.

Then, just this week, South Carolina Republican Senator Jim DeMint was interviewed by the very same Carl the Q. Once again, the Senator rattled off several ideas which Republicans had offered for health care reform. Once again, Carl the Q responded by totally ignoring DeMint's remarks, saying, to paraphrase,

'So, Senator, is there any possibility Republicans will compromise on cooperatives instead of a single-payer model in the health care bill?'

It's apparently a reflexive response that Carl can't hear his Republican Congressional interview subjects' answers about solutions to health care costs, etc.

A wide range of Republicans now routinely offer a coherent, sensible set of solutions, including:

-medical tort law reform
-interstate insurance competition, ending state-bound regulation and marketing, to increase competition
-relaxing/removing mandates so that consumers may purchase exactly what they choose
-tax-based credits or other treatment to place all consumers on a level field in terms of before- or after-tax basis for health insurance expenses
-a government-funded credit for pre-existing conditions insurance, distinct from that offered by for-profit entities

Why CNBC can't manage to acknowledge these truths is beyond me. Unless, of course, you assume the network, as a matter of policy, simple chooses to tilt the news this dramatically.

Otherwise, one is left to conclude Carl Q is totally unable to do his job, and should be fired for incompetence.

After all, if a news anchor can't reliably and correctly report news and interview newsmakers, of what use is he?

The Coming Bernanke Inflation

A little less than a month ago, Fed Chairman Ben Bernanke took the unusual step of penning an editorial in the Wall Street Journal, on which I wrote this post, entitled, "The Fed's Exit Strategy."

I observed, in my piece,

"Here's the one thing Ben never mentions in his editorial. All of the methods he described involve raising interest rates.

You know what rising interest rates tend to do? Yes, that's right. Choke off recoveries and slow economic growth."

Back about a week before Bernanke's piece, occasional Journal editorialist Andy Kessler wrote a column in which he observed,

"At the end of the day, only one thing has worked- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear."

I don't usually find Kessler's financial sector insights very good, but this time was an exception. I think he's right on the money, as it were. Pun intended.

Then Journal staffer and editorialist Kim Strassel chimed in last week, noting that Bernanke has a big job on his hands trying to get renominated and reconfirmed for his job. She observed Congress' rough handling of the Fed Chairman at hearings, wherein he was vaguely accused of perjury for 'forgetting' key conversations with Ken Lewis and then-Treasury Secretary Hank Paulson.

Strassel shrewdly concluded,

"The once hard line between the "independent" Fed and the rest of official Washington has been blurred. Mr. Bernanke's problems are now the Obama team's."

Personally, I am betting on Larry Summers' getting Ben's job. But that won't keep Ben from trying.

And that, unfortunately, means the Fed Chairman won't tighten until after he is sure he is either renominated, or not. And if not, then why bother?

Either way, here's the thing. We are in for easy money for the rest of the year. And when the US economy gets addicted to cheap, or, in this case, nearly no-cost money, watch out.

There is no safe exit to this monetary policy mess that will leave the US economy in healthy shape.

The monetary-based equity rally of the past few months isn't about a recovery. It's about hope for a recovery with low interest rates.

Whether it's tightening or inflation, there's no obvious safe, easy path out of this mess which includes a healthy, growing US economy in the next year.

Dinner With The Colonel: A Lesson In Inept Management & Marketing

I had the occasion to visit a KFC outlet last night. My interest was to try the chain's new


grilled chicken menu item. It had been praised by a friend earlier this summer. Since the only local store was only slightly out of my way home from my fitness club, I decided to try it last night.


I've been to that store in the past, and always find the gaudy, crowded menu difficult to understand. I don't think it's just me. When I visit a Burger King or McDonalds, the choices are pretty obvious and clear.





Not so at KFC.





The menu board is busy and confusing. There must be upwards of 30 ways of getting chicken, and none are really very clear. They have fried, extra crispy, now grilled, with or without sides, in varying quantities. But pricing isn't clear, nor is exactly what combinations are on offer.





By the way, is it Colonel Sander's Fried Chicken? Kentucky Fried Chicken? KFC? Or Colonel Sander's Kentucky Grilled Chicken?



References to the Colonel still appear, but the chain went from its longer name to KFC years ago. Of course, fried food went out of style for a time, thus the name change. But using the Colonel evokes the chain's roots and one signature product- fried chicken.





Curious.






The service was just horrendous. I stood looking at the menu for over a minute while the counter attendant busily cleaned in front of me on the customer side of the counter. She didn't even acknowledge my presence until she returned to her side to wait for my order.





Being, as I noted above, confused by the poorly-designed menu, I just asked what quantities of grilled chicken were available, and for what prices. After some thrust and parries to get the information I desired, I settled on buying just a half of a grilled chicken and a drink.





It was, thus, somewhat insulting to have a plastic plate with two legs and two thighs shoved my way by the indolent counter attendant.





I asked if their usual half chicken came all dark, and she replied it did not. She then made a point of slowly searching high and low for a breast and wing.





When I went to fill my standard-chain-store-issue drink cup, there was no ice. I remarked on this, and the manager- no less- had to manually pour a fresh bucket of ice into the dispenser.





Then I had to ask for cutlery, as none is in view. Again, a sigh and a slow, laborious movement by the attendant brought the requested dining tools.





When I finally got to taste the new grilled chicken, it was superb. A little pricey, in my opinion, at $10 for rather smallish pieces of grilled chicken. But the flavor was really very good.





My mixed experience brought forth this post.





The KFC branding is schizophrenic. The "Colonel" is still mentioned, but he's really a relic of a bygone era.



It's KFC, but the hot new non-fried menu offering is great. Trying to order it is a challenge.





Then I looked at the nearby five-year price chart of YUM Brands and the S&P500 Index. To my great surprise, YUM has handsomely outperformed the index for nearly three years. It did a bit better consistently from 2005, and really held its own beginning with the recession late in 2007, while the S&P cratered.





Of course, YUM is the combination of KFC, Pizza Hut, Taco Bell, Long John Silver's, and A&W All-American Food Restaurants brands, so you can't deduce that KFC is actually driving YUM's good performance. Personally, I have had more and better experiences at the firm's A&W and Pizza Hut units.

I included McDonalds and BurgerKing in that chart above for comparison. As I expected, YUM looks a lot like BKC, while both trail McDonalds. It once again goes to show what product and brand leadership do for you in tough times. McDonalds just eased ahead of both of its competitors, although, as I may write in an upcoming post, they have their own occasional store issues, too.

I guess my overall takeaway- no pun intended- from my KFC visit is how my experience of a really good, fresh, well-prepared fast food item can be ruined by inept, slow and uninspired service.





Did I mention, by the way, that as I sat eating, at 8:45PM, over an hour before the store's 10PM close, the same counter attendant found it important to sweep the floor and rearrange chairs and tables near me in an otherwise nearly-empty restaurant. Yeah, that'll have me running back there, too.





So much of running a really consistently superior business is execution. In this case, I've always found KFC's menu items to deliver well on their promises. The fried chicken is good, as is the new grilled version.





But the service and setting always bring me down. There's a lesson there.

More Reflections On The Economy, Growth & The Fed

Today's US equity market sell-off seems to be following my expectations, as expressed in these recent posts here, here and here.

Allegedly following foreign equity markets' reactions to Friday's dismal consumer confidence survey report, the S&P has fallen 2.3% as I write this just before the market close.

Suddenly, the fall swoon of which I had written could be nigh.

Or not. As one pundit on the floor of the NYSE put it today, it depends on volume. And I agree with that. But Lowe's tepid earnings report, coming after various analyses explaining why it should have been good, will probably go a long way to dampen investor expectations now.

Never mind last year's comparable quarter results. I think investors are smart enough to not dwell on that metric.

The real key seems to be the trajectory of the US economy. It's not enough to sustain a recovery rally that Bernanke thinks the economy is 'leveling.'

Printing money, borrowing it and having government spending it will do a lot in the short term, or could do so. But for long term equity gains, the private sector has to resume growth. And there's currently nothing presaging that.

I keep returning to the inventory situation. So many pundits simply assume inventories will be rebuilt, resulting in manufacturing activity, chain reactions among suppliers, higher payrolls, and, voila, growth and recovery!

So if that doesn't happen, what then?

Rely on some 'shovel ready' road projects? Not enough.

It's not clear that today's sell-off is the beginning of the next 'big one.' But it's having some observable, significant effects on our equity options signals already. Certainly altering their prior trends.

I wouldn't be betting on a much higher S&P very soon. The CNBC pundits who predicted such a market gain by later this year seem to be naively optimistic, in my opinion.

Slender Shoots Indeed

I marvel at what passes for business and economic news that drives up equity markets these days.

Last Friday, if what I read is correct, a smaller than expected job loss number, due, in part, to job seekers simply dropping out of the group actually looking for work, drove the S&P500 up 1.34%.

This week, a slight rise in the index was attributed to Toll Brothers' registering the first year-over-year rise in new home orders in four years. An anemic 3% growth rate was cheered.

The Fed announced yesterday that the economy is 'leveling out.'

If you ask me, these are slender 'green' shoots, indeed. None sustainable.

Let me be clear in explaining that I understand the difference between what drives the economy, and what drives equity markets.

Right now, due to the precipitous decline of the S&P since September, followed by a sharp rally, investors believe they are piling into low-priced equities in the equity markets. Various pundits and government cheerleaders have pumped up sentiments in investors.

Equity markets being what they are, sentiment counts for a lot.

The real economy, however, is quite a different story. Unemployment continues to grow. Inventories are depleted and, as yet, are unreplenished. Growth is evident in higher-productivity sectors, rather than those which tend to account for a lot of hiring.

Meanwhile, even the housing numbers seem suspect. It's common knowledge that banks are holding foreclosed houses off of the market right now. The recent price stabilization is considered vulnerable to more supply flooding markets.

As my partner and I currently manage an options investment strategy, we are keenly interested in getting investor sentiment right. But that doesn't mean we ignore the real economy.

I think it's just a matter of months before real economic and business earnings news dampens the current positive sentiment of investors.

When more home foreclosures pressure bank asset values and earnings, what will the Fed do this time? What if inventories are not replenished at the rate that many pundits expect?

If you take a step back from the current economic news, and view things from a longer, broader perspective, it's not such a rosy picture. And just one quarter's mediocre news, or a Fed rate hike, and equities will be back in the tank.

I'd be very surprised if equities do not experience a sharp and deep sell-off by the end of October.

About US Job Growth

My partner emailed me a New York Times piece by Floyd Norris which appeared in the paper last Friday. The essential points Norris made can be summed up in these passages from his article,

"For the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring.

For the decade, there was a net gain of 121,000 private sector jobs, according to the survey of employers conducted each month by the Bureau of Labor Statistics. In an economy with 109 million such jobs, that indicated an annual growth rate for the 10 years of 0.01 percent.

Until the current downturn, the long-term annual growth rate for private sector jobs had not dipped below 1 percent since the early 1960s. Most often, the rate was well above that.

Health care jobs continued to grow, particularly jobs that involve caring for the elderly. Home health care employment rose at an annual rate of 5 percent, a rate that indicates a total gain of more than 60 percent. On an annual basis, that was twice the overall rate for health care of 2.4 percent a year.

There were also job gains in education and in a host of service industries, including lawyers (0.7 percent a year), accountants (0.9 percent) and computer systems designers (2.4 percent). The field of management and technical consulting leaped at an annual rate of 5 percent.

The total picture is of an economy that has changed in substantial ways over the decade. After the recession ends, job growth is likely to resume. But there is no indication that the secular trend toward a more service-oriented economy will reverse. "

As you would expect, an accompanying chart displays the -6% job losses in the automotive sector, and job loss rates in the -4% range for other manufacturing-oriented US economic sectors. Due to productivity gains and the increasingly-complex nature of high value-added US manufacturing, job losses in the sector continue while the value of output has remained relatively constant at 22% of US GDP.

Retailers have also lost jobs, which may surprise some. However, as Norris' last paragraph notes, the nature of our economy has changed substantially, and garden-variety retail has been hit hard over the past decade. Between eBay, online shopping and the continued revolving door of various brands of apparel, general merchandise stores have been punished.

Overall, however, my colleague expressed shock at Norris' topline statement that a decade of US economic activity has yielded no significant private job growth.

I'm not really surprised. Twenty-eight years ago today, IBM unveiled it's first personal computer, with Microsoft's MS/DOS operating system. In some thirty years' time, IT, including massive doses of PC-based applications, have raised US productivity to new heights. Newer businesses have been designed with totally different processes that just don't require much dumb, manual labor. Value-added chains of new businesses can look radically different than the average US business of one or two decades ago.

When you combine dying, low barriers-to-entry sectors like autos and other metal-bending sectors, with high growth in services and knowledge-oriented businesses, it should come as no surprise that employment growth might have been lighter up until two years ago than in prior decade-long periods.

Toss in the current recession's 12+ months of hundreds of thousands of lost jobs, and you can easily get Norris' results. After all, his analysis ends in a trough, whereas 1999 was still a booming growth year.

Thus, Norris' implication is probably incorrect. By avoiding a peak-to-peak or trough-to-trough comparison, he's overemphasized a gloomy jobs growth picture in the US.

But he does identify an important, continuing, decades-long trend, i.e., the decisive move of US business value creation out of older, simpler manufacturing, assembling or extraction sectors. Even if numbers of jobs lost there were offset in services, the latter jobs require higher education.

Rather than worry about 'saving' these old, lost jobs with their relatively less skill and knowledge requirements, shouldn't the US government and industries be focusing on creating more high-value, highly-skilled and -knowledge-oriented jobs which may stick around longer?

The Misleading US Housing "Recovery"

Last Wednesday's Wall Street Journal carried a prominent lead article trumpeting the recent news concerning increases in housing starts and home prices "across U.S." Home prices were described as having "first gain in three years."

Yet, details in the long article were somewhat contradictory to this headline's implications, if not its limited scope.

No less an authority than Yale housing economist Robert Shiller was cited as saying,

"The change in momentum here is very significant."

Yet, the article also noted of Shiller,

"He said he expects home prices to remain near current levels for the next five years."

Elsewhere in the Journal piece, the ability of housing prices to rise was credited to banks delaying the remarketing of foreclosed homes. This deliberate constriction of supply tends to, of course, firm up prices.

Ivy Zelman, CEO of Zelman & Associates, a housing-research concern, was quoted as saying,

"We think (the sales index) will look like a "W," where prices go up until the foreclosures at the higher end translate into another leg lower."

The article also noted that larger down-payments are being required on buyers trading up to larger, more expensive houses, while jumbo mortgages typically carry higher rates. Both these factors will tend to retard housing sales.

These comments put an entirely different spin on the recent, small and brief upward blip in housing prices and sales.

Seen from 2005, both measures are still very low. And now we learn this positive news might be so only because an undetermined stock of foreclosed homes has yet to reach the market, thus further depressing housing prices, and, probably, new home starts.

Hardly what you'd use to underpin your hopes for a widespread US economic recovery, is it?

More Boeing Dreamliner Headaches

Last Thursday's Wall Street Journal reported Boeing's latest troubles with its Dreamliner 787 airplane program.

Now running over two years behind schedule, the plane is running into sagging demand and affordability issues by customers.

In these two posts last year, here and here, I commented on Boeing CEO James McNerney's continuing inability to manage the Dreamliner problem. Essentially, Boeing's board bet that a guy who ran the unit that built engines for airplanes could...run an airplane company.

So far, that's not working out too well. As the nearby 5-year price chart for Boeing and the S&P500 Index shows, the airplane company hasn't outperformed the index over the period.

Figure that you need some extra return from a single issue to adjust for risk, and Boeing's actually behind the index's performance.

What, exactly, has McNerney done for the company? Right now, shareholders would have been no worse off by simply holding the index.

Meanwhile, the gaffes which have become public in Boeing's Dreamliner program would make one ask just how competent the company has been with its vaunted new production and assembly concepts?

Somebody has to take responsibility for Boeing's lackluster total return performance and the Dreamliner's continual launch date. It would seem, after about four years, McNerney would be that person.

Kodak: How The Mighty Have Fallen

Friday's Wall Street Journal reported on Kodak's recent quarterly performance.

It wasn't pretty. The headline for the article proclaims "sales fall 29%." The firm lost $189MM in the quarter.

There were all sorts of the usual verbiage from the company's earnings report explaining expense cuts, revenue declines, etc. Kodak announced that it expects this year's total revenue to fall by 12-18% from the prior year's $9.42B.

As it happened, I saw a Kodak infommercial the next day for one of its printers. All I could think of was,

"Has it really come to this? Kodak is hawking printers with an ex-sitcom co-star on weekend cable television? Complete with the requisite "studio audience" and cutesy comments from the faux-production personnel?"

Yes, it has.

Schumpeterian dynamics have struck, and struck hard, at Kodak. Image capture, distribution, storage and, if you want, printing, in the digital world are finally nearly free, and very easy.

Long gone are the days, when I was a teen-ager, of buying film, taking it to the local drug store for developing, and then hiding the pictures in their bags for decades.

As Schumpeter correctly described, expensive products like film photography spurred radical technological replacements that, first, erode, then just eviscerate revenues and profits of the old-line producers. So low are the new prices that old competitors are crushed and their business models simply disintegrate to mere fractions of the old revenues and profits.

That's basically Kodak today. There really isn't enough of a business left to sustain an entire company with consistently superior profitability. What does still make money at Kodak could be just a copier or printer division at Dell, HP, Ricoh, Canon or Lexmark.

If you had a few billion dollars today, and Kodak's technologies, you probably would not waste the money to found the firm in its current incarnation. What you now see is a snapshot of a firm in the process of dissolving, apparently at an accelerating pace.

As the nearby 5- and 1-year price charts for Kodak and the S&P500 Index display, the company has not experienced prolonged positive returns in five years. It's had roughly -80% price drops over both the 5- and 1- year periods, suggesting it's on a sort of constant rate of decline on an ever-shrinking base, far underperforming the S&P over both periods.

I can't imagine who would still be an owner, besides those unfortunate enough to work at Kodak and have it in their 401Ks. Who wouldn't just dump this company's stock as it plummets toward no value at all, having lost almost any uniquely advantageous business attributes with which to stave off death by digital imaging?

Carol Bartz Finally Ties Yahoo Up With Microsoft

The big news in the technology sector this week was Yahoo's deal with Microsoft. Ever since the latter launched its semi-hostile takeover bid for the former, some sort of alliance has been talked about.

With Carol Bartz' recent assumption of the CEO position at Yahoo, investors' hopes brightened. Yet, after reading the reports on the actual deal, and various pundits' reactions to it, it seems many of those investors headed out of Yahoo positions, causing a one-day 12% drop in its stock price after the Microsoft deal was announced.

Meanwhile, an article in the Wall Street Journal this week extolled Microsoft's Ballmer for finally getting a few things right, e.g., Windows 7, improved XBox revenues, and the Yahoo deal.

As the nearby two-year stock price chart for Microsoft, Yahoo and the S&P500 Index shows, there wasn't a huge difference between the three. Certainly, after applying some risk premium for the two companies, they would both have underperformed the index.

The second chart, a five-year view, reinforces that conclusion.

I don't think Ballmer is by any means out of the woods yet.Microsoft has not convincingly outperformed the S&P for years, and I don't really think it's about to start now.

As for Bartz and Yahoo, I'm inclined to be a little less critical than most published pundits.

Unless you think she simply lost her mind last week and got snookered by Ballmer, the odds are that, despite her upbeat remarks to the media since she took over the helm at Yahoo, Bartz found things much, much worse than she feared.

To have gone from forecasting a 'boatload of cash' to come Yahoo's way from Microsoft for any tie-up, to getting very little, clearly disappointed a lot of shareholders. Even Ballmer chimed in with helpful comments like, 'people don't understand how good this deal is for Yahoo,' or some similar quote.

I think Bartz got the best deal she could for a firm, the very existence of which, prior to her arrival, was in doubt. She managed to outsource development for search, keep a lot of ad revenue, and get breathing room to pursue her objective of pumping up Yahoo's content.

If you revisit Bartz' remarks about the future she envisions for Yahoo, it's all about content, not search. She has managed to narrow the management focus of the firm and get continued search technology for free.

Not too bad. My guess is Bartz saw things as much worse than outsiders, and just couldn't drive a bargain that would effectively pay Yahoo up front for the Microsoft deal. But she still got what she wanted, and probably the best result among several not so stellar ones available.

While I would be unlikely to own Yahoo anymore, and don't forsee it entering our equity portfolio anytime soon, Bartz seems to have done a lot in a short time to begin reversing the damage done over many years by Terry Semel and Jerry Yang. Investors who want to own Yahoo should at least be thankful for that.

The Myth of "High Paying Manufacturing Jobs"

Earlier this week, I saw a surrealistic debate on CNBC between an SEIU representative and Wharton's Professor Jeremy Siegel.


Siegel cited economic theory that advanced economies typically lose lower-paying jobs, including simpler manufacturing, to lesser-developed, lower-wage countries. He cited, over the past several decades, the loss of comparatively few US manufacturing jobs, in the tens of thousands, in comparison to the addition of millions of service jobs. Siegel also asked the SEIU rep if he truly wanted his union members to be paid wages on a par with those of lesser-skilled Asians?

Somehow, all of this was lost on the SEIU guy, including the irony of Siegel pointing out how his own sector benefited.


The SEIU rep kept babbling about how we "need to create high-paying manufacturing jobs," as if they are simply devised out of thin air. And, that by saying that phrase, tautologically, such jobs must exist in a long run, profitable US manufacturer.


He then continued by ticking off various guarantees that workers should have- pensions, high pay, health care. Michele Caruso-Cabrera replied that there are no guarantees now, anyway. Unions price their workers out of the market, so continued employment with such lush packages as the SEIU rep listed was often in jeopardy.

Such as at GM and Chrsyler.

The SEIU guy went nuts.


What was evident, though, was his inability to understand Siegel's first, simplest point, i.e., you really don't want US workers being paid Chinese rates for manufacturing.


Missing, too, was an understanding by the union member that advanced manufacture requires education and training. If workers can't cut it, they're destined for lower-paying jobs. Period.


There just are no guarantees with global competition.


Along the way, GE CEO Jeff Immelt's dopey speech calling for more US manufacturing was cited, and Siegel sort of laughed and implied Immelt is an idiot. That's when he began to describe the low-paying type of work that manufacturing now typically is which has been sent overseas. That we are a service and IP giant, not really destined to grow manufacturing in a world with cheaper labor overseas.

It's understandable, sadly, that the SEIU representative continues to believe in the myth of "high paying manufacturing jobs" in the US, with no thought of how they would possibly be globally competitive.

It's totally baffling, at first, why GE's Immelt would be similarly ill-informed. But, then, as readers of this blog know, I have never believed that Immelt has been a worthy successor to Welch, or, for that matter, that the former has shown any ability to merit his current position and compensation.

Housing Starts From A Fresh Perspective

Tuesday's Wall Street Journal had a great little article by staff writer Mark Gongloff, entitled "Pyrrhic Victory in June Housing Data," about the June housing starts. It was tucked away on the back page of the Money & Investing section.

It's fairly short, so I've pasted it below:

Many investors celebrated Monday after June's "surge" in U.S. new-home sales. Alas, it was largely wishful thinking.

True, the Census Bureau reported sales up 11% from May. That is a big number, at first glance justifying Monday's 4.5% leap in the Dow Jones U.S. Home Construction Total Stock Market Index. But it fails a close inspection.

First, home sales quite often jump in June, the height of the spring selling season. When trying to gauge the strength of home sales, then, it makes more sense to compare them with the same month a year ago. That comparison is less kind -- sales were down 21.3% from June of 2008.

Seasonally unadjusted data show a total of 36,000 new homes were sold last month, the lowest June total since 1982, notes Richard Moody, chief economist at Forward Capital.

And the Census Bureau warns against assuming too much precision in these numbers, which are based on a sample survey. Accounting for a 13.2% margin of error -- at a 90% confidence level, suggesting the actual error could be higher -- new-home sales enjoyed somewhere between a 24.2% gain or a 2.2% decline from May.

New-home inventories are falling, an encouraging development. But inventories are still higher than their historical norm, and there remains an avalanche of distressed sales.

Little wonder, then, that June's "surging" sales were driven by heavy discounting. The median new-home price -- not seasonally adjusted -- fell 12% in June from a year ago, to $206,200, the lowest June sales price since 2003. And it was down 5.8% month on month.

To paraphrase Pyrrhus, if sales keep soaring like this, then home builders will be utterly undone.

That sounds more like it. Sales are down, year-over-year. And prices were discounted to get that.

Hardly a housing boom, is it? Or even a 'recovery.'

Yes, inventories of unsold houses are being sold off, but at lower prices. Which is a good thing.

But don't kid yourself that this is going to turn around next quarter....or the one after that.

The Economy: Recovering, Or Ready To Plunge Again?

Alan Blinder's recent editorial in the Wall Street Journal extolled the imminent blast-off for the US economy of Samuelson's accelerator-multiplier effect.

Blinder didn't credit the retired MIT Nobel Economist in his editorial, but he provided the math to explain how housing and autos, having plunged so low, will kick-start the US economy in the next quarter just by being non-negative.

Dick Hoey, whom I knew briefly at EF Hutton many years ago, was saying the same things on CNBC yesterday afternoon.

Then we have a very detailed, persuasive editorial in last Tuesday's Journal, written by Mort Zuckerman. In his piece, the chairman of US News & World Report, and head of Boston Properties, dwells almost exclusively on the under-representative current unemployment rate of 9.5%.

Zuckerman lists 10 separate, but related points, all of which provide evidence that the demand side of the economy, via consumer spending, will almost certainly be much lower in the next few years than most pundits, analysts and economists realize.

Among his points, Zuckerman cites: underemployed, those no longer even looking for work, workers 'employed' but on unpaid leave, part-time workers who were once full-time, shorter work weeks among the employed, a 65% capacity utilization at US factories, and, finally, the longest average length of official unemployment- 24.5 weeks- since this data item has been tracked back in 1948.

For good measure, Zuckerman adds that low consumer confidence and high debt levels have increased the savings rate which will, of course, dampen any subsequent recovery, as the consumer's 'marginal propensity to consume' will be much lower than in recent years. He laments that now, when a truly job-creating, infrastructure-building federal spending bill would help, it's too late. That's because $787B was allocated for what has been, to date, largely increases in Medicare and other state-based transfer payment programs.

In effect, Zuckerman would conclude that people like Bank of New York's Hoey mistakenly believe that there will be sufficient consumer demand to justify rebuilding inventories, building new cars and houses.

Who's right?

Personally, I'd put my money on Zuckerman. Leaving aside that Dick Hoey was a fixed income manager back in the day, and his BONY/Mellon/Dreyfus bio doesn't exactly laud him as an economic Nobel Laureate, I don't think Hoey is sufficiently observant of the real differences in the effects of the recent recession on the US labor force from those of recessions prior to 1992.

That so-called 'jobless recovery' may well have marked a turning point for the US economy which has not yet been captured in various models and adequately observed by pundits-cum-economists like Hoey. Or even Alan Blinder.

Prior to the 1991-92 recession and recovery, you are looking back to 1982-83, the early Reagan years, now very nearly thirty years ago. For perspective, was the 1960 economy different from that of 1930? Very much so. And the 1980 economy was so radically different from that of 1950, thanks to electronics and technological advances in communications as to make forecasting the former with models of the latter seem laughable.

I suspect that's what is happening now. Those analysts and economists harking back to the early 1980s and using conventional models with estimates of consumer spending and labor growth have missed some important transformations in the US economy of 2009.

I don't think Zuckerman is one of them.

Barnes & Noble Enters The Electronic Reader Business

Last Tuesday's Wall Street Journal reported on Barnes & Noble's entry into the electronic book market. In a direct challenge to Amazon and its Kindle e-reader, the bookstore chain is seeking to extend its business into providing e-books across a range of readers. And, the Journal report states, probably enter the e-reader market, as well, with its own proprietary device, to be developed by Plastic Logic.

I find this very exciting.

Up to now, Amazon has had a lock on this market, although nobody knows just how lucrative it has been. Whatever that profitability level has been, watch it shrink.

Credit Barnes & Noble, too, with not waiting around to be cannibalized by a potentially growing market in electronic readers and content.

The nearby, Yahoo-sourced price chart of Barnes & Noble and the S&P500 Index shows that the bookseller has held its own with the market over the past five years, but dipped lower during the turmoil of the past 18 months.

If you think about it, there's little about Amazon's book and e-reader business that B&N can't duplicate. It has a well-known brand, and its website ought to be able to hold its own, as well.

If this boils down to a battle of pricing and features of e-readers, Amazon could be in a lot of trouble. In fact, per classic marketing theory, Amazon could actually end up paying a price for being the 'first mover' in this new publishing area.

Often, early entrants into a new field eventually suffer by becoming the target of later, better-focused and technologically-superior competing products.

Given that neither Amazon, nor B&N are doing in-house development of e-readers, it could well come down to the delivery of content. On that basis, too, B&N should be able to remain competitive.

I wonder if Jeff Bezos is worried. My guess is he should be. Not because B&N could become the market share leader in e-readers and e-books, but because it could slow Amazon's own growth, dragging the online merchant back to parity among other competitors in this new publishing area.

The Myth of Consumer Over-Spending

Last week, I caught a few minutes of CNBC's morning program, Squawkbox, when a market strategist for, I believe, Citibank, Tobias Levkovich, made a clear and succinct statement regarding US consumer debt and spending.

Levkovich unequivocally stated that he had studied data over some longish period, perhaps the past 7-8 years, and concluded that the wealth created among consumers over that time vastly outweighed what had been borrowed against housing equity and on credit cards.

David Malpas, once the chief economist of Bear Stearns, is the only other prominent analyst to have noticed this.

Levkovich then addressed the many who consistently claim that US consumers simply 'used their houses as piggybanks,' and said they are wrong. That this is a myth and it's simply, clearly, wrong.

Ford's Big Quarter

I saw in Friday's Wall Street Journal that Ford finally posted a profitable quarter. Granted, much of it was due to various restructuring-related, non-comparable income statement items. But evidently analysts and investors are whooping it up.

Pardon my lack of interest.

Truth is, Ford is unlikely to ever appear on my equity and option strategy's list of investments.

There are several reasons why Ford's quarterly performance is probably not the beginning of a pattern of consistently superior total returns which would truly reward investors.

For some perspective, observe the nearby 6-month, 2-year and 5-year performances of the price of Ford, compared with the S&P500 Index.

Ford is up 200%, meaning it's price quadrupled in the past six months, but is down 20% over the past two years. Over the past five years, Ford is down about 50%, while the S&P is just below flat.

Much of Ford's recent gains are simply the snap-back after the entire sector was in trouble at the end of last year. Like many other companies, values in the first quarter of this year were often far below longer term values, if the company survived. Thus, the six-month Ford stock price performance isn't really due to operating improvements.

It's not at all clear, and, actually, is pretty unlikely that this phenomenon can continue into the future.

Granted, Ford borrowed heavily while it could, during Mulally's early tenure, and generally cleaned up its balance sheet, thus avoiding GM's need to file for bankruptcy. But it still has the UAW with which to contend, and, now, is competing with two government-assisted auto makers, GM and Chrysler.

Finally, auto making just isn't the sort of business in which a has-been, ailing competitor like Ford is likely to suddenly surge forward and become a consistently superior total-return performer.

Barriers to entry are so low that Chinese cities are building cars. Newer vendors of alternative energy cars, such as electric, stand ready to compete Ford back to the point of merely average profits and growth.

Vehicle production just isn't the sort of business that has characteristics of defensible advantages, low union involvement, and high growth that are so often found in the best companies.

Ford reported one good quarter. Maybe it'll have one or two more. But the probabilities that Ford is going to be a long term bet for consistently beating the S&P500 just aren't very high. And that's as much a function of the sector in which the company competes as it is of the company's particulars.

CNBC's Resident Idiot Strikes Again

Earlier this week, CNBC resident idiot and economic-pretender Steve Liesman demonstrated why he loses so many debates, especially with Rick Santelli.

On the morning in question, Squawkbox had Wisconsin Republican House member Paul Ryan as guest-host.

Ryan, in response to a typical charge that conservatives/Republicans in Congress were simply 'against healthcare reform' and had no ideas of their own, quickly rattled off several bills proposed by Senate or House Republicans, but ignored by Democrats. His own proposal, he noted, covers the poor uninsured by providing a (roughly) $5,000 amount as a credit or rebate to use for health insurance.

When Liesman contended that this would cost Treasury, Ryan corrected him, explaining current treatment, taxes typically paid by these filers, i.e., not much, and the alternative of redesigning our entire healthcare finance system just to cover several million people.

Liesman then stared blankly at Ryan, mouth open, eyes dull, uttering something like,

'I'm sorry, I'm just not getting it, Congressman.'

Even I had understood Ryan's explanation, and I'm sure most viewers did, too.

Ryan smiled and patiently replied that he'd take Liesman back through the numbers- again- after the commercial break.

It was a priceless moment. CNBC's clueless economic reporter didn't have a clue about Ryan's rather straightforward manner of providing healthcare insurance for the poor, and the entire program had to stop until the staff dunce 'got it.'

As if it mattered. Or Liesman would be able to retain the explanation for more than a few minutes.

That's Why We Have Anti-Trust Laws

Holman Jenkins, Jr. wrote a curious editorial in Wednesday's Wall Street Journal.

In the piece, he spent considerable ink asking why Google and Microsoft don't figure out how to collude in staying out of each other's way. By comparing Google's relationship with Apple, on whose board Google CEO Eric Schmidt sits, Jenkins noted the animosity present between the other pair of companies.

Going through various detailed examples, such as Microsoft's new Bing search engine and Google's online office applications, Jenkins contended, probably correctly, that each has less prospect of gaining much revenue from encroaching on the other's turf than they have profit to protect by demonstrating their ability to hurt each other.

Somewhere in the piece, Jenkins noted the likely cross-ownership of Google and Microsoft by many shareholders, reasoning that, because of this, it would be a good thing if the two firms could somehow learn to back off and let each other's businesses alone.

But that is exactly why we have anti-trust laws. Microsoft is already moving to cut prices on Office applications and ready its own free internet version because Google entered the business with its own free online applications.

The two also tangle in search applications.

If Google weren't threatening several of Microsoft's businesses simply by its existence, we'd all be paying higher prices for less productive software from the Redmond giant.

Anti-trust law is a good thing. I don't quite understand Jenkins' contention that if only it were legal, gee whiz, these two large companies could save so much money by not building businesses which antagonize and threaten each other.

If that were so, the entire Schumpeterian dynamics process in the businesses in which Google and Microsoft engage would be slowed to a crawl.

The two firms' mutual pressures on each other to continue to innovate, offer more value for price, and worry about the other's encroachment all serve consumers well.

Why change that?

What Ben Bernanke Didn't Tell You In His Editorial

Fed Chairman Ben Bernanke wrote a long editorial in Tuesday's Wall Street Journal, appearing the morning of his Capitol Hill testimony, entitled "The Fed's Exit Strategy."

You see, many people, including me, doubt that the Fed can effectively avoid rampant inflation caused by its monumental explosion of the US money supply and guarantees.

Ben patiently attempted to reassure readers by listing the many ways he feels the Fed can rein in much of the liquidity it recently created.

Here's the one thing Ben never mentions in his editorial.

All of the methods he described involve raising interest rates.

Whether it's by paying higher interest rates on bank reserve deposits, selling Treasuries, or any of the other approaches he outlined, they all necessarily involve boosting interest rates.

It's fundamental economics. Money supply down, rates up. Pushing securities into investors' hands via sales pushes those prices down, thus raising effective interest rates.

You know what rising interest rates tend to do?

Yes, that's right. Choke off recoveries and slow economic growth.

Granted, rates are basically at zero for now. But they are at zero with much, much more US obligations outstanding than ever before. To move the needle on these massive obligations, interest rates will have to rise.

Oh, yes. That's right, the rate the US pays on its debt will...have to...rise.....too.

Oh, my. Doesn't that raise our cost of government and the deficit?

You betcha!

Thanks for the tutorial, Ben. Next time, maybe be more honest about the effects trying to shrink the money supply will have on the economy's effective interest rates?