Intel's Bid For McAfee

Intel made a big splash with its offer yesterday for McAfee, the computer security/anti-virus firm.

The $7.7B deal merited two separate articles in this morning's Wall Street Journal Marketplace section, as well as the lead front-page story.


The Journal reports that the deal sports a 60% premium to McAfee's stock price. And it's Intel's largest acquisition ever.


Let's review the usual checklist governing the advisability of an acquisition like this.

First, the odds of such a combination working, knowing nothing more about the acquisition than that it is occurring, is, I believe, no more than 1 in 5.


Second, Intel is in a rather special business, with a unique culture. I've known a long-time, retired Intel multi-millionairess in the past, and her stories conveyed a most unusual business culture. It would be very surprising to me if the 'Intel way' worked with or at McAfee.


Between semiconductor boom and bust periods, heavy investment requirements, and sprawling manufacturing and design centers, Intel's core business has very different dynamics and attributes than I expect does McAfee's.


Then there's my favorite aspect of critiquing such a deal: what does owning the target provide the new owner that a close marketing or joint venture tie-up would not? This is especially relevant for firms which serve a common product/market, but aren't actually in the same product/market themselves. In this case, the intersecting product market is the personal computer/digital device. But what Intel and McAfee do is so different.


For example, consumers and, for that matter, corporate buyers, don't actually choose Intel. It's an embedded component of a larger device. But end users do often choose between McAfee and Symantec. So the focus of the two companies is very different in terms of serving users who may, or may not, choose their product.


Why couldn't Intel dedicate a business unit to working closely with McAfee, which could do the same, in order to technically knit their products and service together as closely as if they were the same firm? Even perhaps, if justified, mutually capitalize a separate entity to contract with each firm to design, manufacture and market separate, integrated products using the two parent firms' technologies?



It's one thing for Intel to allocate capital to such an effort, or just building a "McAfee Inside" line of chips. It's quite a different matter for Intel to allocate $7.7B to buy and then be responsible for managing a firm which is in a very different product space than is Intel. And managing it to achieve consistently superior total returns.


One Journal article reports,

" 'Is there a lot of downside' Probably not,' a Wall Street analyst said of the deal. 'But is there enough upside to justify the premium?' "


Just so. And a look at the nearby 5-year price chart for Intel, McAfee and the S&P500 Index shows that McAfee has been out-performing Intel and the Index for the past year, and over five years. Intel isn't even beating the Index.


So how's a firm that can't manage to be more attractive than the S&P500 going to continue McAfee's better-than-average performance? Is Paul Otellini going to suddenly become smarter in the area of anti-virus product management?


I don't think so. So there actually is some non-zero downside risk, if only because McAfee's operations could deteriorate, relatively, under Intel's new supervision.


Don't kid yourself. No operating firm spends $7.7B to keep its hands off its new toy. Maybe Warren Buffett or other portfolio investors do, but operating companies typically do not behave in that manner.

In contrast, I recently had a discussion with a retired senior oil industry executive. He pointed to the successful merger of his company and a competitor, which facilitated greater access to capital to develop the former's assets, while cutting costs. By all measures, the meger, now years old, has succeeded. But the cultures, businesses and operations were very similar, unlike the situation involving Intel and McAfee.


The Journal's in-depth piece on the deal cites Otellini as saying that McAfee will be run separately and that he's received commitments from the anti-virus firm's senior management to stay in place "for many years."


Intel shareholders should be worried about this, and this morning's drop in the firm's share price shows they well may be. It's a "damned if you do, damned if you don't" situation.


If Otellini tries to manage McAfee, he may ruin it. If he doesn't, why'd he pay a 60% premium?

See why joint ventures or very deep and close marketing relationships, in such circumstances, are less risky, but can deliver the same, or perhaps even more benefits, with less downside risk to shareholders?


Intel hasn't appeared in my equity strategy's portfolio for well over a decade. Its performance has mitigated against that. I don't think the McAfee deal will put it on a path back to consistently superior performance anytime soon.

Confusion Over GM's Imminent IPO

As I continue to catch up on Wall Street Journals from my absence two weeks ago, I have come across two nicely contrasting pieces on August 2 and 4 by, respectively, my old friend Paul Ingrassia, and Holman Jenkins, Jr.

Paul's column lauds the current administration for its part in rescuing GM, but pointedly entitled his piece Two Cheers for the Detroit Bailout. Not three.

Paul wrote,

"Others understandably feared that General Motors would become Government Motors.

But what alternative, really, did Mr. Obama have? Had GM and Chrysler collapsed and been liquidated, investors would have picked up some of the pieces. That would have taken years. Meanwhile, the parts makers that supply GM and Chrysler would have collapsed too. Those same parts makers also supply Ford, Honda, Toyota and others, whose U.S. factories would have faced havoc.

The impact on the broad U.S. economy- including the car dealers in all 50 states, advertising agencies, accounting firms, etc.- would have been somewhere between difficult and disastrous. Nobody really knows. The Detroit bailout was like changing a diaper: a dirty job that had to be done because the consequences were worse."

Really? I think not.

Back in June of last year, I wrote this post, in which I noted,

"Even my one-time friend, Paul Ingrassia, seemed to soft-pedal his opinion about the eventual outcome of the government takeover of GM. The most he would say was, in reply to a direct question, that he would not now buy the firm's equity.

Why gloss over the obvious, and ask pointless questions? Here are the facts:GM mismanaged itself into failure. Between bad political moves, inept handling of its main union, the UAW, and poor product development and pricing, it mishandled every major "stakeholder." As Ingrassia noted, GM essentially managed itself for the UAW's benefit ever since an historic strike at two Flint factories some years ago.

The management team that led GM into this mess is largely intact and in place. According to the UAW's chief, Ron Gettelfinger, his active union members have lost nothing in this bankruptcy. Thus, GM's wage costs continue to be, although lower than before, probably too high to be competitive with other, US-based auto makers in the southern US."

A few months earlier, in April, I wrote this post, in which I contended,

"By propping up GM and refusing to allow it, if necessary, to enter Chapter 11 proceedings, our government- both Congress and the administration- is merely delaying the inevitable market-clearing dissolution of failing and failed companies, the recycling of their resources a la Schumpeter's observations of eighty years ago, and the freeing up of labor to be employed in new ventures.

Government isn't the right institution to select our economy's winners and losers. For that, we have a process which we have trusted for most of our country's life- our freely-operating, private capital and consumer markets. "

Despite Paul Ingrassia's fervent defense of the federal government's actions regarding GM, there's simply no evidence that using conventional bankruptcy would have triggered a depression. People, including Paul, often confuse filing for Chapter 11 with actual liquidation.

As I wrote in at least one prior post, there was ample opportunity for Rick Wagoner or Fritz Henderson to have done so, sold off the good parts of GM to other firms, and then liquidate the remainder. If, as Paul contends, other auto makers so needed the parts makers, then I guess they'd have kept the latter in business. At no cost to taxpayers.

And taxpayers would not have been forced to coerce GM bondholders to hand over 17% of the company to the UAW in lieu of pension and other payments.

But, all this notwithstanding, as I read Holman Jenkins' piece published two days later, I felt reassured in my belief that GM, like Chrysler after Iacocca, is simply marking time before plunging into disaster once again.

First, let's be clear about what isn't happening this fall. You, the taxpayer, are not being made whole on the GM bailout. No, what's happening is that the firm is doing an IPO, reclaiming its old ticker symbol, and allowing the creation of equity for Treasury to begin selling. But it's nowhere near enough equity yet to repay the government bailout. What I believe I read this week is that the firm owes the feds about $50B, and the IPO will provide about $17B.

What's all the celebration about? Why don't we wait for the end of this dubious process, instead of cheering the opening orchestra music?

Jenkins went on to analyze VW's return to the American car market. It's going to the non-union south, of course. Bent on a low-price, high-volume strategy to add heft to its globe-girding size.

Just what GM needs, eh? Another source of excess auto production capacity on US soil, run by managers intent on gaining market share through low prices.

Jenkins wrote,

"The relentless pressure of over-capacity is not cured. The UAW monopoly remains a unique disadvantage to GM, Ford and Chrysler that doesn't apply to foreign-born competitors."

Meaning?

Don't expect a lot of bag-holding investors to queue up for GM shares down the road. Maybe some will appear patriotic and buy the IPO shares. But I don't see GM prospering anytime soon, if ever.

As I noted in a prior post, Chrysler has this image of having been successfully turned around by Lee Iacocca. But that's not true. The firm had a brief stay of execution, then, under Bob Eaton, was forced into Daimler-Benz' arms in 1999. It's been downhill again ever since.

Why should GM be any different, government bailout notwithstanding?

Bill Gross' Self-Serving Advice On Fannie & Freddie

Yesterday's business news was filled with various reports concerning the federal government's big Fannie/Freddie conference.

Perhaps the most misrepresented and self-serving of all the comments on the event belonged to PIMCO senior executive Bill Gross.

Appearing on CNBC in the afternoon, after apparently making his views known at/to the conference, Gross, almost alone among financial market participants and pundits, declared that the feds must do more in mortgage finance through Fannie and Freddie, not less.

At least Susan Wachter, whom I remember from my days at Wharton, acknowledged that a GSE-free mortgage market was preferable. But she simply contended it was, for at least the next half-decade, simply no longer feasible.

But Gross went much, much further.

As the guy who is primarily responsible for PIMCO's reportedly huge inventory of GSE paper, he went all in to protect his career and investors, insisting that government guarantees of Fannie and Freddie paper be ironclad, continuing and even more generous in the future.

The amazing part is how reverentially CNBC's anchors treated Gross during his appearance. They lobbed softballs at him, carefully avoiding mention of how he is simply lobbying to protect his book, nevermind the overall health of the financial markets. Instead of exposing this bias, they treat Gross as some sort of expert pundit on the matter.

Why? Probably access. If anyone on CNBC ever really challenged Gross' comments and positions for being as self-serving as they are, he'd likely never return. Then CNBC would be shut out of interviews with the most senior guy at what is arguably the largest, or one of the largest, fixed-income holders of all institutional investors.

So, to retain access, CNBC's on air staff turn a blind eye to Gross' obvious biases when he comments on the structure of the US residential finance sector.

Same vs. Different: Mort Zuckerman In The WSJ

Mort Zuckerman's editorial in yesterday's Wall Street Journal concerning the loss of optimism in America reinforced what, to me, is the overriding basis of differing views on the current state and near-term prospects for the US economy. That is, do you believe it's the same as it ever was, or, like David Rosenberg, do you believe things are very different this time?

Zuckerman made it clear that this unusually weak economic recovery is different.

This morning, on CNBC, one of the morning program's contributors from Chicago, Kevin Ferry, contended that so many corporations are tapping capital markets for low-priced debt that this simply must result in robust economic growth down the road a bit.

Really? How about the idea that these CFOs are simply lowering their long term total financing costs while they can. Period. Or that growth will occur in more robust markets, i.e., overseas? Including the concomitant job growth?

My business partner and I have been discussing for months the inevitable weakness of this economic so-called recovery. Thus, we've been amazed at the brief periods of equity market bullishness.

But the recent week's tumble of the S&P from 1127 down to 1079, and longer term drop from 1206 to the latter figure, have produced a high volatility which makes banking on a full-fledged recovery questionable.

Zuckerman's repetition of some frightful labor statistics reinforces my own belief that this time, it is different,

"1.4 million of them have been jobless for more than 99 weeks, 6.5 million have been jobless for over 27 weeks. This is a stunning reflection of the longer-term unemployment we are coping with."

Her also cites a similar statistic to one offered by Rosenberg which I mentioned in the prior, linked post,

"The relationship of household debt to income has proven unsustainable. The ratio is normally established somewhere below 100%, but in 2007, the debt ratio hit 131% of income. It has now fallen to 122%, but at this pace it would take another five years to bring it under 100%. The pre-bubble norm was 70%. To get to this ratio again, debt would have to be reduced by about $6 trillion."

Just so. Private sector deleveraging.

Rosenberg noticed it. So does Zuckerman. It's been a constant theme since late 2008. Despite Fed policies and ill-conceived stimulus spending which adds to the US deficit, deleveraging would seem to be a strong, undeniable force as it reverts to the mean.

Hardly a prescription for near-term healthy US economic growth, including jobs, is it?

Disingenuous Economic Reporting In The WSJ

Before I took a brief sabbatical from writing this blog earlier this month, I had saved a Wall Street Journal front page article on which to comment. The column, from July 27, was entitled Next Step on Economy Hinges on Debate Over Stimulus.

I found the piece entirely disingenuous in that it gave significantly more weight to the pro-stimulus argument, despite absolutely no credible economic research or other evidence that such actions have ever worked in a large, modern economy.

Consider this quote from the article,

"But today, neither side can say with certainty whether the latest stimulus worked, because nobody knows what would have happened in its absence."

Never mind that we know from Amity Schlaes,' and others research, that the gigantic 1930s FDR-led stimulus programs failed. Or that the current programs have failed to meet the few objectives voiced for them.

Some people will continue to apologize for and excuse any and all manner of stimulus spending.

A more recent Journal piece by Alan Meltzer, as well as a statement attributed in the July column by Carmen Reinhart, both focus on modern consumers behaving differently, by expecting higher future taxes, when government deficit spending rises. This was never even imagined by Keynes and his minions.

Another misleading aspect of the article is that it fails to note that, when the US embarked on its failed stimulus programs of the 1930s, the national debt was far smaller, on several measures, than it currently is. And the nation hadn't run an almost constant annual budget deficit, along with legislating ever-greater future social spending promises, for nearly 80 years!

Thus, now, global investors are much better informed about the continual propensity of the US to spend money it doesn't have. Sooner or later, even high T-bill rates won't adjust for the risks of the US simply failing to generate sufficient tax revenues to pay debt interest.

The WSJ is a serious national daily business newspaper. If it can't manage to publish realistic, credible lead stories on its front page, who are we to trust to tell consumers and investors the truth about the recent macroeconomic mistakes of the US federal government?

Equity Market & Economic Analyses This Morning On CNBC

There was a fascinating series of exchanges on CNBC this morning concerning reading current economic tea leaves. Initially, former Merrill Lynch economist David Rosenberg faced off against Mellon Bank's Dick Hoey (with whom I had some contact early in my career at EF Hutton). Later, British ad exec Sir Martin Sorrell appeared briefly as a guest and addressed the same issue.

The exchanges put me in mind of this post from last November, which I reread due to a reader comment.

I won't go into a blow-by-blow account of the Rosenberg-Hoey interchanges. Suffice to say, they divide along this fault line: are we in an atypical political-economic era, relative to post-WWII experience, or not?

Hoey, several of the panel of guest commenters on the exchange with Rosenberg, and Cooperman, in the linked post, all essentially say "no."

Rosenberg and Sorrell say "definitely yes."

Hoey et al simply observe corporate balance sheets and various prior recession/recovery statistics and forecast an inevitable return to normalcy for the US economy.

Rosenberg focuses on consumer debt/net worth levels now and on average. Citing mean-reversion, he insists that the prior high for that measure of 23, now fallen to 20, will continue downward, non-monotonically, toward the long run average of 12.3.

Thus, Rosenberg sees continuing economic slowing due to deleveraging. Something with which I agree.

Rosenberg and Sorrell, the latter more explicitly, decried current federal government interventions, which have increased uncertainty, halted job creation, increased deficits and debt, and prevented a natural economic cycle in which the recession would hit a natural bottom and rebound.

One of the two, probably Rosenberg, contended that the government cut the bottoming process short, thus leading to an anemic, deficit-spending fueled temporary, but unsustainable 'pop' in economic activity. But he thinks it will lead to economic slowing for quite some time.

Where Hoey & Co. saw corporate cash as ready to fuel an expansion, Rosenberg and Sorrell see it as evidence of fear and uncertainty.

It was a very stark contrast in views. Hoey, as did Cooperman in November, merely projects various trends mechanically according to prior recession/recovery patterns.

Rosenberg explicitly rejected any comparisons with other post-WWII recoveries, noting the atypical secular deleveraging and record unemployment levels. He sees continued economic weakness, and worse, with continued federal attempts to 'help' the economy.

As I noted earlier in the post, upon hearing (and reading) the cases from both camps, I lean distinctly toward Rosenberg's view, and away from Hoey's.

Ed Whitacre's Surprise Resignation Announcement

Yesterday's big news was GM Chairman Ed Whitacre's announcement that he'll be retiring in less than a month.

Timed to be on the day of GM's big earnings announcement, the best in years, I'm sure Whitacre is trying to continue his smoke-and-mirrors act of a few months ago, on which Paul Ingrassia, the Wall Street Journal's legendary auto sector reporter/executive, also commented at the time.

If you ask me, Whitacre knows this latest earnings pop is the best GM's going to see for a while. And Ed should know.

Having arranged the faux-debt repayment stunt in April, and seemingly presided over this past quarter's recent record earnings, Ed can make a quick exit, stage left, a la SnagglePuss, leaving his replacement holding a very large, public bag.

This was the subject of a couple of hot and heavy debates on CNBC yesterday morning and afternoon. The network trotted out its biased new contributor, Bob Lutz, who promptly gushed over everything Whitacre has done or said. Ironically, Lutz gave accolades to Whitacre for being a telephone guy, but turning around the failed auto maker, when auto execs could not.

Pardon me, Bob, but, uh, weren't YOU one of those inept auto execs? After all, you worked at every one of the Big Three.

This set Lutz up to crow about Whitacre's replacement being a non-car guy. In fact, he's another telephone veteran. No surprise there. And he's a former US Navy nuclear submarine officer. Lutz is a former fighter pilot, so he stressed the military connection. I'm not saying it's not something that is often helpful. But surely there have been inept corporate executives who were in the service.

Tom Labrecque of Chase Manhattan Bank comes to mind...... what a loser. See my point?

Anyway, Jeff Sonnenfeld of Yale's Management School concurred that Ed is running off the field and into the clubhouse before the game is over and the clock has run out.

As I surmised earlier in this post, one has to ask why a chairman would do this? Certainly not because things are about to get better. No, it's more likely that this is a lucky confluence of events.

If Art Laffer is right about the US economy collapsing next January, Whitacre's exit is nearly perfectly timed. By the way, unemployment claims were up by a surprising amount this morning.

GM isn't fixed. It's not an attractive investment. It's still an aged, ailing auto designer and assembler which was forced by the government to hand over large amounts of asset value to its unions. There's no way it's an attractive investment in an attractive sector.

I neither like nor respect Ed Whitacre. But give him credit for having a good sense of timing. Watch him prepare for the next act in his career.

The "it was doing fine when I left" phase.

Economic Observations From The Road

In prior years, I've written posts describing economic activity and summer holiday traffic in Pennsylvania, Maryland and West Virginia. This year, I traveled north to Georgian Bay, about two hours north of Toronto.

We drove up a few Sundays ago on New York's Taconic Parkway amidst almost no cars. At the time, I thought little of it. Even after we exited to the NY Thruway and points north, traffic on a summer Sunday afternoon was fairly light. So were the roads through the Adirondacks the next day, as we headed west, then north, again, to cross the border at Thousand Islands bridge.

But the real shock was our return this past Tuesday. Traffic between Toronto and the border at Niagara Falls was, as usual, heavy on a weekday morning. But as soon as we entered the NY Thruway heading east, things changed dramatically.

Stopping at the Pembroke service center, we were stunned by the lack of cars at 12:30PM on an August weekday. The food kiosks inside, as well as the tables, were deserted. This was typically prime lunch time, when such a service center would be crammed with people using all the building's services.

The traffic on 90 East for the remainder of the afternoon was very light. There may well have been as many trucks as cars. These were both true for the oncoming direction, as well. It was painfully obvious that, this August, Americans were staying home in numbers.

As the afternoon wore on into evening, we turned south in continued sparse traffic. Once again taking the Taconic south from Albany to Connecticut, we drove among very few cars, and noticed equally few in the oncoming direction.

I've driven the Interstate portions of this trip for many summers, but I cannot recall ever seeing so few vacationers or such ultra-light traffic. Traffic so sparse as to make you think you are driving at 6AM on a weekend morning.

Add to other macroeconomic signals of US economic condition this empirical, anecdotal evidence that US consumer vacation travel and, thus, spending, is extremely weak this summer, adding further to already weak discretionary spending and the revenues of vendors serving those needs.

Sabbatical

I'll be taking a break from posting until mid-next week.

....And Amazon Has Its Own Problems

In today's prior post, I excoriated Barnes & Noble for not being able to deliver on its business model's implicit promise of having books in stock.


As I promised the B&N help desk staffer, I went to Amazon to complete my birthday gift purchase when I returned home that afternoon.


Even there, however, I was met with confusion and, frankly, gross misrepresentation.


I found the book easily enough. And, for once, was actually grateful for the one-day shipping option. Costly though it was (more than the value of the book), I selected it, then proceeded to the payment screen.


Imagine my surprise when the concluding screen informed me that I'd been charged for one-day shipping, but the expected delivery date was six days later!


I next went to a very useful feature on the website, where I was able to type in a phone number and be called instantly by an Amazon help desk employee.


After a heated exchange following the third unique personal identification question, the staffer went offline briefly, then returned to explain the seemingly-contradictory information on shipping of the gift.


She contended that the fulfillment vendor on this book wouldn't have it in stock until five days from now, at which time it would be shipped in one day.


I was, to say the least, not at all happy about this. I told her bluntly that this was grossly and deliberately misleading.


To, on one hand, charge me a huge premium for 'one-day shipping,' and contend that is what it is, then, on the other hand, inform me this means 'one day after the book is in stock,' is just wrong.


What customer orders and pays a premium for next-business day shipping, thinking it means anything else but just that- next day?


Given the option on Amazon's website, I modified the order and replaced the premium shipping with standard delivery. Why double the order's price for no benefit?



I was frankly very surprised at Amazon's obvious attempt to bait and switch on shipping charges. There wasn't any specific warning on the out-of-stock condition when I chose the premium shipping option. Instead, I had to dig further and spend about ten more minutes on help screens and the telephone to arrive at the truth.


However, as the accompanying five-year price chart for Amazon and the S&P500Index indicates, the company has been nicely outperforming the latter for most of the past five years. It's even made the short list of my strategy's equity portfolio recently.

The borderline-fraudulent delivery option pricing/performance is a minor problem, when compared to Barnes & Noble's more glaring issues.

Still, Amazon's recent price cuts on its Kindle give one pause. I wrote in that recent post,

"You have to wonder, with Amazon having so much less control over its Kindle development than Apple does over the iPad, if that difference will have ramifications for its content sales in the years to come.

One thing is sure. The Kindle is in a direct fight with the Nook and other e-reader-only devices, while Apple's iPad floats above them, offering a different set of features which clearly differentiates it and commands the typical premium Apple price."

After my Barnes & Noble experience, I drove to my nearby fitness club to work out. Ironically, as I was moving between weight lifting stations, I heard/saw an interview by the hapless CNBC anchor, Maria Bartiromo, she of the annoying speech impediment, with a senior exec from Amazon.

Maria was tossing softball questions to the Amazon VP who was showing off the company's latest version of the Kindle, priced at an all-time low.

With the company's recent revenue miss only a week ago, and the resulting swoon in the equity's price, you'd think Bartiromo would be well-positioned to grill the VP about the seeming weakness in Amazon's strategy. It is quite obvious, by now, that the company is cutting price on the Kindle to maintain share, while charging less for ebooks (than physical ones), which are forecast by Jeff Bezos to become more than 50% of the retailer's book sales by next year. The recent revenue miss suggests Amazon's margins are being squeezed and its investments in the Kindle will be yielding less than in the past.

A competent business media interviewer would have used these pieces of information to create a much more interesting and potentially revealing interview than the one Bartiromo held with the Amazon senior executive.

But just because Bartiromo failed, typically, to highlight Amazon's problems, doesn't mean they don't exist.

It seems both physical and electronic book retailing have become overly challenging for the vendors engaged in both endeavors.

Barnes & Noble Fails As Brick & Mortar Book Retailer

I had been ruminating on a suitable business topic for today's post, and was considering a macroeconomic topic.

Then I went to buy two books for a friend's birthday, and the topic presented itself. Poor retail bookselling.

I'll begin with this post concerning Barnes & Noble. You can see from nearby the five-year price chart of B&N and the S&P500Index that the former has been in free fall for the period. It now stands down more than 60% from five years ago.

Perhaps my experience is a partial explanation.

With little time before the birthday in question, and a recent Wall Street Journal review of two books by an author in hand, I figured B&N could supply me with the books instantly, due to its physical inventory, whereas Amazon might not come through in time (more on that in the next post).

The staff at the B&N help desk was polite, but couldn't make up for the store's deficiency. They had, he said, a single copy of the recently-reviewed volume, and none of the earlier work by the same author.

When I finally located the minuscule 'Nature' section, it took me more time than it should have to locate the book in question. I'm still not sure how the section was organized, but it didn't seem to be by title, as usual. In any case, in typical inventory management system fashion, there were three copies on the shelf, not the one predicted.

I took a copy and proceeded to the checkout counter to pay for it. Upon being asked for an affinity card, I handed my expired one to the clerk, who confirmed that it was no longer active.

But he didn't bother to ask if I wanted to renew it. Amazing! A $35 (if my memory is correct) add-on fee, and the guy didn't even try to resell me on the value of the card.

So much for choosing to give my custom to Barnes & Noble due to their physical inventory of books. Nowadays, the most visible display kiosk, upon entering the store, is the chain's Nook e-reader. Forget relying on them for an actual broad inventory of reasonably topical and popular books.

Not to mention sales skills.

Microsoft, Ballmer & Holman Jenkins, Jr.

Yesterday's editorial in the Wall Street Journal by Holman Jenkins, Jr., finally echoed my series of posts castigating Bill Gates, Steve Ballmer and the overall management of Microsoft.

I won't bother to provide all the links. Just search under any of three labels- Microsoft, Steve Ballmer or Bill Gates.

While Jenkins didn't touch the topic of self-breakup, he did note that Ballmer had held himself to the task of creating a third major business, besides operating systems and applications, at which he has notably and miserably failed.

Like me, Jenkins noted,

"At bottom, this is a corporate governance problem."

I've also discussed the retreads and nobodys on the firm's board, the better to kowtow to the CEO.

His solution is one I can second, if the firm won't break itself up. Jenkins suggests they raise the ordinary dividend so high as to require the creation of a successful new business, in order to fund it.

Forced repatriation of shareholder wealth via cash dividends- I like it.

CNBC's Jim Goldman Departs & A Look At His Gaffe Involving Apple's Steve Jobs

I noticed last week that CNBC's long time technology reporter, Jim Goldman, was missing in action. A quick Google search revealed that he had left the network recently for a VP job at public relationships firm Burston Marstellar.

In the process of that search, I discovered this webpage containing the video of Goldman, Dennis Kneale and 'Fake Steve Jobs,' a/k/a Dan Lyons of Newsweek.

It's priceless.

After viewing it, I began to wonder whether Goldman had become damaged goods. I reflected on his interviews over the years, and have to admit, he mostly tossed softballs. Once he mistakenly took on Carol Bartz without solid facts, and she ripped him a new one, as well.

However, in a larger sense, Dan Lyons' revelations of Goldman's complete and consensual digestion and public regurgitation of the Apple party line concerning Jobs' health issues in 2009 may have reduced, if not eliminated his credibility.

Makes you wonder about other CNBC reporters, doesn't it? Because it fits nicely with the network's tendency to softball interview CEOs and generally say nothing that might affect interview access to and/or advertising from large corporations and financial sector personalities.

Rating Agencies Go On Strike

Yesterday's Wall Street Journal contained an informative article in the Money & Investing Section by staff writer Dennis Berman entitled Note to Credit Raters: Evolve or Die.

It was only by reading Berman's well-reasoned piece that I even knew that the major agencies had refused to rate a batch of securities which required those rating in order to go to market. This temporarily froze the issuance of the securities, and spurred a similarly temporary SEC ruling to allow such issuance sans ratings.

But the gauntlet has been thrown down. Stung by the recent FINREG bill, the major ratings agencies tried to scare the markets and Washington into relenting on changing the rules by which they operate. Apparently they will now incur substantial liability for their ratings, instead of the free speech exemption they have historically enjoyed.

I must say that I agree with Berman. The agencies' action was all bark and no, or very little, bite.

While I in no way agree with almost any of the basic premises of and changes made by FINREG, I do share the view that there has been a mindless tyranny of rating agencies.

In today's world, it's unclear that the agencies still contribute sufficient economic value for their work. Further, so many institutional investors foolishly relied solely on ratings from S&P, Moodys and/or Fitch that it helped bring about the financial sector meltdown, primarily involving over-rated securitized mortgages, often passed through Fannie and Freddie.

If only to break the moronic reliance on these ratings, a regulatory change is healthy. Yes, probably even leading to agencies being paid by the consumers of the ratings, not the securities or firms which are the subjects of the ratings.

Berman made a nice case for the agencies trying desperately to scare markets and regulators into submission, lest they realize how potentially antiquated and valueless the agencies have now helped to make themselves.

GM's Shameful Finance Company Purchase

It was big news in the business media last week that GM bought AmeriCredit.

The stated reason from GM's press flacks was that the company is suffering lost sales without a captive finance subsidiary.

This is, of course, a lie.

It would be a trivial thing for GM to select from among many lenders a few which would be granted exclusive access, in exchange for revenue sharing and pre-agreed credit terms for customers.

So it's not about lost sales. It's about GM getting greedy with your tax dollars. After all, the company hasn't repaid the bailout billions it received. True, chairman Ed Whitacre staged a big press show to highlight a partial payment of the money. But it's far from all repaid.

Thus, this purchase is, in fact, the US taxpayer paying for a shiny bauble that Whitacre has convinced his overseers that he has to have.

The reasoning is basically,

'But Mommmmmmmy, all the other kids- Ford and Chrysler- have captive finance units. I want one, too! Or I won't eat my vegetables!'

Oh, did we discuss AmeriCredit's subprime business? That GM wants that segment to sell cars to lower-end consumers?

Hmmm...but wouldn't that be jumping back into the predatory lending pool that everyone agreed caused the 2007-08 financial sector meltdown?

Bob Lutz, one-time senior exec at Ford, GM, and Chrysler, as well, defended GM's acquisition on CNBC the other day. A newly-minted "contributor," he never the less received a decent grilling from, I believe, Melissa Francis. Lutz' replies were disingenuous, poorly-constructed and wholly unconvincing. He, too, pulled the 'Great Depression' card, claiming that letting GM file for bankruptcy would have destroyed the US economy. Ergo, GM must be allowed to buy AmeriCredit.

Flawed, but, then, I guess nobody ever accused Lutz of being logical.

Guess it's safe to go back to subprime auto lending now. And guess you, as a US taxpayer, are the guinea pig in this experiment.

Of course, none of this government favoritism for GM over, say, Ford, and subsidization of bad investments was necessary. And, no, it wouldn't have led to a depression.

All that was required, as I wrote at the time of the GM bailout and faux-bankruptcy, which favored the UAW over secured senior creditors, i.e., bondholders, was to have put GM into Chapter 11 while offering one-time cash payments to workers.

Thus, the shareholders would have lost their money, creditors would have retained standing, Congress could have had its social policy by paying workers- including lower-level managers- and the money-losing parts of GM would have gone away.

Meanwhile, the court would have endorsed the trustee's reorganizing GM into either a smaller, manageable going concern, or salable parts.

None of this required law-breaking moves to put the UAW in front of secured lenders, or risk tens of billions of US taxpayer money bailing out a poorly-run private sector firm.

However, having eschewed this route, two administrations have now put taxpayers in the ludicrous position of favoring one car maker over others, and funding its return to subprime lending, as well.

Recessions & Deficits: Then & Now

This morning's Wall Street Journal provided a sobering comparison of the US government's approach to the last two major recessions.

Under Ronald Reagan, the deficits following the Carter-era recessions were:

1982 4%
1983 6%
1984 5%
1985 5%
1986 5%
1987 3%

In contrast, the recent, current and projected deficits for this administration, from OMB sources, are:

2009 10%
2010 10%
2011 9%
2010 6%

Of course, the recent projections for future years are, if history is a reasonable guide, lowball estimates. Thus, the rough average of the current administration's deficits are/will be easily twice that of the Reagan years.

The Journal editorial notes,

"The 1981-82 recession was comparable in severity to the one Mr. Obama inherited and reached similar heights of unemployment. The deficits that resulted from that recession were the source of huge political consternation, with Democrats, the press corps and even some senior Reagan aides insisting that only a huge tax increase could save the country from ruin."

Remember David Stockman's infamous trip to the woodshed?

But Reagan didn't raise taxes, he lowered them. The resulting economic boom, derided by those parties which the editorial described as consternated, fueled US growth and government revenues for the following 15 years.

Now, however, we have much higher tax rates, being increased at the margin and by whole new taxes, accompanied by the largest amounts of federal spending ever seen outside of WWI and WWII.

As the Journal editorial concludes, it's a revealing comparison from the experimental lab of prior and current OMB-sourced deficit scorecards.

WSJ vs. The Joint Committee On Taxation

The issue of federal and, for that matter, state and local tax policy is one as old as the income tax amendment. Ronald Reagan was excoriated for wanting to cut taxes, yet his tax cuts spurred a 20-year US economic expansion.

Thus, a recent battle in the editorial pages of the Wall Street Journal is noteworthy. In answer to an earlier staff editorial, director of the Congressional Joint Committee on Taxation, Thomas Barthold, fired back in a letter published in Wednesday's edition of the paper. The Journal responded with its lead staff editorial that day, in which these passages appeared,

The director of the Joint Committee on Taxation, Thomas Barthold, takes us to task in a nearby letter for exaggerating the revenue impact and economic benefits of the investment tax cuts of 2003. (See "The Obama Tax Trap," July 2.) This is a debate we're delighted to have, and Members of Congress should want to have it too if they ever want to cut taxes again.


In a 2005 paper "Dynamic Scoring: A Back-of-the-Envelope Guide," Harvard economists Greg Mankiw and Matthew Weinzierl looked at the revenue feedback effects of tax cuts. They concluded that in all of the models they considered "the dynamic response of the economy to tax changes is too large to be ignored. In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes." We could cite other evidence that squares with what happened after tax cuts in the 1960s, 1980s and in 2003.

So how well did Joint Tax do when it predicted a giant revenue decline from the 2003 investment tax cuts? Not too well. We compared the combined Congressional Budget Office and Joint Tax estimate of revenues after the 2003 tax cuts were enacted with the actual revenues collected from 2003-2007. (See the nearby table.)


In each year total federal revenues came in substantially higher than Joint Tax predicted—$434 billion higher than forecast over the five years. We readily admit that some of this extra revenue flowed from the housing bubble. When that mania turned to panic and the economy went into recession, revenues collapsed. But the 2003-07 growth spurt wasn't all housing related, any more than the late-1990s stock boom was all phony merely because the dot.com bubble later burst. The last decade saw growth in technology (Google, the iPod), energy, professional services, biotech and even manufacturing.

As for capital gains tax receipts, they nearly tripled from 2003 to 2007, even though the capital gains tax rate fell to 15% from 20%. (See the second table.) Yet the behavioral models that Mr. Barthold celebrates predicted that the capital gains cuts would cost the government just under $10 billion from 2003-07 when the actual capital gains revenues over five years were $221 billion higher than JCT and CBO predicted.

Mr. Barthold also claims it is a "non sequitur" to say that the $786 billion, or 44%, rise in federal revenues from 2003-07 was at least partially a result of the tax rate reductions. Why? Because, he says, "in normal economic times, general economic growth and inflation will lead to an increase in revenues from one year to the next with no changes in tax policy."

True enough, but the revenue growth from 2003-07 was anything but "normal." The 44% increase in revenues compares with a 25% average over the last 30 years. Tax revenues increased by 12% in 2006, the second largest single year gain in revenues in 25 years. The highest was 15% in 2005.


Joint Tax now says that rescinding the Bush investment tax cuts will raise about $500 billion in revenue over the next five years. So on January 1 we will enact one of the largest tax increases in history, coming out of one of the deepest recessions in a century, because computer models that we know are wrong are telling Congress that this will raise far more revenue than the increases will raise in reality.


That last statement from the committee regarding the effects of letting the Bush tax cuts lapse is troubling, isn't it? Does anyone believe economic growth will be enhanced through higher taxes?

As it is, the committee has made horrendous estimation errors, in the wrong direction, on prior tax policy effect on tax revenues.

Further, Barthold's letter of reply was a qualitative, shoot-from-the-hip sort of thing, with none of the sensible basic analysis which appeared in the Journal's staff editorial reply. For example, comparing growth in tax revenues in a certain year or period with the long-run average, to assess whether it was really inevitable, or an extraordinary growth rate.

From the exchange, Barthold appears to be both naive and sloppy. Not to mention simply wrong in his and his staff's lack of understanding of the need for dynamic modeling of consumer and investor reactions to tax rate changes.

Jim Paulsen's Misleading Comparisons of Economic Recovery Statistics On CNBC

Jim Paulsen of Wells Capital Management was a guest on CNBC this morning.

During the 6AM hour, Paulsen aggressively claimed that the economic recovery of recent months has been far stronger than many believe.

Specifically, Paulsen cited the soon-to-be-released quarterly GDP growth, contending that the resulting first 12 months of recovery would post a +3.3% annualized GDP growth, making it "the strongest in 30 years."

For clarity, thirty years from 2010 takes you back to 1980.

But Paulsen only cited the 'jobless' recoveries of 1991 and 2002-03 for comparison, omitting the Reagan recovery. I'm not a degreed economist, but I know I've read plenty of articles from the likes of Art Laffer and Alan Reynolds which have cited that 1980s recovery as being much stronger than any since.

Paulsen also cited jobs growth, claiming that, on the basis of two months of anemic net job creation, each less than 100,000, that this recovery has seen net new job creation at an earlier point than the prior two recoveries. Again, omitting the Reagan recovery.

A couple of questions occurred to me as I listened to Paulsen's market cheerleading:

-Why was he so obviously omitting any reference to the recovery during Reagan's term, which was well within Paulsen's own "30 year" timeframe?

-Is it fair to compare the recent anemic two months of positive job growth, with no adjustment for jobs lost and government tax money spent via borrowing or printing in the so-called 'stimulus' legislation, not to mention unemployment benefits extensions?

-Are the best and most correct metrics by which to judge economic recoveries the earliest point at which GDP and job growth turn positive?

-What if there is a leveling-off of GDP and job growth early-mid 2011? Does that change Paulsen's contentions?

I find Paulsen's off-the-cuff statements about the unique strength of this economic recovery to ring hollow. There seems to be a lack of appropriate adjustments for many variable which would seem to be important.

Is Paulsen just saying whatever he thinks will motivate the herd of mediocre asset managers who watch CNBC to follow his lead and drive his book's value up?

Innovation In Waste Management

I love to see real innovation and great management. Lately, I've had less of those topics, and a lot more than I have desired about government interference with and takeover of the private sector.

So I was pleasantly surprised yesterday to see a commercial for Bagster from Waste Management. It took me about 10 seconds to realize how clever the men and women at WM were to have conceived and implemented this product/service.

Bagster is essentially a do-it-yourself dumpster that you can buy at, according to WM's Bagster website, "your local home improvement retailer."

Home Depot is the retailer currently mentioned on the website.

The website and commercial advertise a 3,300 pound payload for the product. It's basically a huge, near-dumpster-sized heavy-duty plastic bag with giant handles.

When you've finished filling it, you call WM and they arrive to remove your filled Bagster single-use dumpster.

Cool, eh?

What a clever extension of WM's waste removal skills. Unlike Bloomberg's attempted expansion into online legal search, which requires attacking an existing business with strongly-entrenched competitors, WM is opening up a new product/market.

At present, you need to either rent a dumpster, hire someone with a truck, or make endless trips to your local dump, it you have one, to dispose of your renovation debris and waste.

I absolutely love this story. And, as the nearby five-year price chart for Waste Management and the S&P500 Index illustrates, the company has done a good job outpacing the index over that period, though it seems to have fallen to parity in the past year.

Over the past few years, Waste Management has evidently done much work on its internal processes, including their trumpeting of co-generation of energy from the waste disposal which they manage. Their green trucks have led the public to identify them with a sense of recycling, no matter how appropriate that actually may be.

But, in a business that wouldn't seem to contain all that much innovative potential directed at customers, WM has shown there is room for Schumpeterian dynamics even in the retail waste removal segment.

Confusion About FINREG's Effect On The Finance Sector & The US Economy

Obama, in pre-released remarks yesterday, was quoted as saying that the FINREG bill will be 'good for consumers and good for the economy.'


He couldn't be more wrong- on both counts.


The new financial sector overhaul is going to result in politically-designed credit allocation and shortages. Fannie and Freddie were left completely untouched, while politicians crow about making the new financial world safe for all.

Then there were the lies from our president about 'no more taxpayer-funded bailouts.' Really? Funny, because, if anything, the new legislation gives the FDIC more latitude than ever before to declare insolvencies, while Fannie and Freddie retain their taxpayer-funded, open-ended allowances to run unlimited losses.

How does that square with 'no more taxpayer-funded bailouts?'.


For the economy, there is vastly more uncertainty, which translates into withheld investment and hiring. Thousands of new regulations are yet to be written by agencies, which means continuing uncertainty and expensive lobbying as various affected parties vie to have regulatory details skewed in their favor.


Nice work getting it wrong on two fronts. Messing up a sector in need of clarity and less government interference, while at the same time, injecting so much uncertainty into lending and asset management that investors will stay on the sidelines, rather than commit capital and create jobs.