Where The Fed Has Led Us

Yesterday's Wall Street Journal's lead editorial on the Opinion page consisted of a number of economists' ruminations on what the Fed should do next.

First, let me note how refreshing it is to see real economists polled, rather, as often is the case, see the co-anchors on CNBC ask everybody who troops onto their set whether we'll see a double dip economy, or not?

The likes of John B. Taylor, of the famous Taylor Rule for monetary policy, Richard Fisher (Dallas Fed President), Frederic Mishkin ((former Fed Governor), Ron McKinnon, Vincent Reinhart and Alan Meltzer are an impressive group from which to read comments on the topic.

But what struck me more than any single comment from these accredited economic sages is simply the horrifying situation in which Helicopter Ben and his predecessor, Alan Greenspan, have placed the US economy.

As an adult, I lived through the Volcker years. As a very aware teen, I recall William Martin's and Arthur Burns' inept accommodations to LBJ and Nixon, then G. William Miller's hamhanded attempts at running the Fed, mercifully for only a little more than a year.

After Volcker's superb, calm reign in the wake of his bungling predecessors, you'd think we'd permanently learned some lessons about monetary policy, wouldn't you?

But, no, we haven't.

So we are now in the bizarre situation of nearly repeating the 1930s: low rates and a flat economy.

Isn't anyone besides these economist worried about the repeat of the last few years, in which banks funded lousy investments due to the absurdly low cost of capital? Didn't we learn anything from Greenspan's pumping the housing sector with ultra-low rates?

And what about the ridiculously large Fed balance sheet at a time when we're funding our government debt overseas? How's that not fungible? The Fed doesn't create money out of thin air, you know. Right now, it's monetizing bad loans like crazy. The net result is our government, whether through the Fed or Treasury, is issuing fully-valued debt overseas to buy over-valued instruments domestically.

Borrow to buy high.....sound smart to you? Me neither.

Looking beyond the trees of individual economists' advice on whither next for Ben & Co., it's scary to see that forest.

A sluggish, slowly, if at all, recovering economy, too-low rates, too large Fed balance sheet, huge Federal debt, spending and deficits, with a politically-intimidated private sector scared by encroaching regulatory and legislative actions and uncertainty.

Whatever the Fed does next probably won't be sufficient, on its own, to lead us back to healthier interest rate levels in a vibrant, growing, low-inflation economy.

Those Pesky Bank-Held Mortgages

Andy Kessler, a periodically-published editorialist in the Wall Street Journal and former hedge fund manager, wrote a piece at the end of August entitled TARP and the Continuing Problem of Toxic Assets.

Leaving aside recent better-than-expected housing data, and Kessler's own wacky, unworkable ideas for handling the problem assets, he did a service by reminding readers that the problem remains with us.

In his editorial, he wrote,


"Home sales dropped 27% from a year ago July to a 3.83 million annual rate, which was blamed on the May expiration of the $8,000 home buyer's tax credit. Dig deeper and its even scarier. Existing home inventory (the number of homes for sale) now stands at four million units- that's a 12.5-month supply versus the average 6.2-month supply since 1999. As late as 2005, home inventory was just 2.5 million. Using that as a baseline or normal number, there are now around 1.5 million "extra" homes on the market that are not selling and either empty or soon to be foreclosed.


And those toxic mortgage assets? As far as I can tell, most are still there, valued at "mark to wish" since the Financial Accounting Standards Board's relaxation of "mark to market" accounting rules. Who knows what they're really worth? The stock market is guessing not much, sending finance stocks like Bank of America, Wells Fargo and even J.P.Morgan down close to 52-week lows.


...without a housing turnaround, jobs in construction, decoration, mortgage banking, auto sales and finance will stay in the doldrums. Delinquency rates, which are a leading indicator of foreclosures, are on the rise. According to the latest Mortgage Bankers Association survey, in the second quarter, prime adjustable-rate mortgage (ARM) delinquency rates rose to 9.3%, with prime fixed-rate mortgages seeing delinquencies up 4.75%. On the subprime side, ARM delinquencies hit 30.9% with fixed at 22.5%.


This is not good for banks that still own toxic assets of any type of mortgage, subprime or not. If home prices fall further, and I can't see too many scenarios where they won't, these toxic assets are all set to drop in value. At some point, buyers of bank debt will get nervous. If this toxic sludge were sitting on a shelf at the Treasury or Fed, it really wouldn't matter. But, instead, even a small uptick in foreclosures could take down the banking system- again."

Let's recall that major banks halted foreclosures in early 2009 due to coercion by the incoming administration. Having been forced to take TARP funds only months earlier, all the major money center banks were pretty much vulnerable to such intimidation.

That doesn't mean they don't still hold the toxic stuff, as Kessler reminds us. And that, with a continuing weak housing market, the toxic mortgages remain impaired, and could easily become worse.

At this point, I don't really think there are any better solutions than forcing banks back to "mark to market" valuations. None of Kessler's various sleight-of-hand suggestions for fixing the problem seem reasonable or feasible.

To me, this all leads back to employment. Not the construction- and housing-related employment to which Kessler referred, but the simple notion that, without an imminent, healthy expansion of non-government, non-stimulus-sourced, genuine private sector jobs, the housing sector, and toxic mortgages, will continue to ail, then grow worse.

Eventually, if that happens, it's going to affect equity values- again.

There's no long term substitute for letting asset values find their own, real, un-manipulated value. Nearly two years' worth of government subsidies, coercion and other actions to try to wave a magic wand over housing prices and related mortgage values have all failed to fix anything. For that, we'll finally have to just let housing values and their associated mortgages find real, market-based values. Until then, nobody will really believe current 'values' anyway. Certainly not as a basis for long term investments.

New Revelations On Lehman's Funding Tactics

Yesterday's Wall Street Journal contained an article by Peter Eavis in the Heard On The Street column entitled Lehman's Flighty Funding Lesson.

If true, what Eavis contends is that Lehman was misleading lenders and regulators for months prior to its collapse. In fact, apparently as early as February of that year, just prior to Bear Stearns' demise. Among its moves were securitizing junk collateral to pass it off as better-quality for loans from Chase, as well as the Treasury's Primary Dealer Credit Facility.

A Chase executive pointedly alleged that Lehman knew it substantially overstated the value of the illiquid, underlying instruments in the collateral securities.

The Journal article quotes from a June, 2008 email written by then-New York Fed senior official William Dudley,

"I think without the PDCF, Lehman might have experienced a full-blown liquidity crisis."

Eavis notes that the recently-passed 'Dodd-Frank' financial regulatory bill is largely silent or vague on the use of repo markets by large, highly-leveraged financial institutions.

This is particularly disturbing, since so much of what occurred in 2007 and 2008 ultimately depended upon excessive leverage in the form of short-term financing.

I've written elsewhere, for years, that the modern broker/dealer is, for all intents and purposes, merely an extension of the broker/dealer lending desk of its creditors, which are typically money center banks.

As such, since said banks all have investment banking units, the separate broker/dealers, when they still existed, were necessarily competing with lower-cost rivals who also funded them. And used less leverage, plus had access to the Fed window and insured consumer deposits.

There aren't any large independent broker/dealers anymore. In part, they failed because, to compete with their lenders, they had to take more risk, which ultimately proved lethal.

But, as Eavis notes, you'd expect the recently-passed regulatory laws to address this. They don't. They essentially allow regulators latitude in how and when to apply limits on various funding sources.

It seems almost comically narrow-minded that the FCIC is just now discovering the essentially fraudulent means by which Lehman managed to survive for its last 6-7 months, but new financial sector regulatory laws were passed months ago. And clearly missed focusing on what we are now learning were key practices which aggravated and worsened the 2007-08 financial markets crisis.

Apple TV Returns

Last Thursday's Wall Street Journal articles discussing Apple's return to television left me with the sense that the company is now too late with too little to make a difference as it typically does in its other specialized digital processing hardware.

When I read that the new Apple TV offering includes Netflix streaming video access, it told me that Apple is accepting the latter's dominance in television-delivered internet-based video content.

That wouldn't seem to bode well for Apple TV's ability to differentiate from other similar video content purchase/storage systems.

Perhaps it's more of a niche-filling strategy, so that the firm offers something in this increasingly hot space.

However, as I noted in this post late last month, Tivo has finally marketed a relatively inexpensive keyboard remote. This will allow viewing of virtually any website through Tivo, which also streams Netflix.

Doesn't this make Apple very late with nothing particularly unique in this product/market space?

I think it does.

California's Unsustainable Pension Burden

To get some idea of what sort of stealth government deficits are looming, it's worth reading California governor Arnold Schwarzenegger's August 27th Wall Street Journal editorial.

Arnold presented a bar chart showing California's past and projected annual retirement costs for public employees rising from roughly $5B in 2007, to $10B in 2013, and more than 20B by 2018.

Reading the list of actions by the state's government favoring public pension gives you a headache.

Meanwhile, the governor presents another graphic showing private sector job losses in the state totally 1.2MM since 2008, while public sector jobs have only barely budged, losing perhaps 10K.

It's difficult to understand how US equity markets can be expected to soar while lurking public sector deficits and excessive spending provide an offsetting drain on economic resources.

If California, once the prized growth engine of the US economy, has fallen into this unsustainable situation, how many other states are in similar straits? Where will the resources come from to provide for these unpaid public sector pension promises?

Federalizing them won't cure anything. It will only encourage more unaffordable pension promises.

It's articles like Arnold's which makes me sceptical that recent equity market rises are also sustainable for more than a few weeks at a time.

Whither The Equity Markets- Again?

How to interpret the recent roller coaster ride that has been the S&P500 Index?

Yesterday, the index rose over 40 points, to 1080.29. Yet, only four sessions earlier, the S&P closed at 1047.22. Back on June 30, the index closed just under 1031. Then up to nearly 1128 on August 9th.

By our proprietary volatility measure, the index regained in just yesterday all the volatility it had managed to shed since August 12th.

To me, the very fact that volatility has been, well, so volatile, suggests a lack of sufficient confidence in equities at present to underpin belief in a long, steady rise in values.

Plus, if you have followed the various apparent reasons for the equity index's recent lurchings between highs and lows, you, like I, know that the reasons for the declines, i.e., global economic weakness and lingering high US unemployment, are no closer to resolution than they've been for months. By contrast, the market rises seem to be short, sharp and a product of seemingly-myopic fixation on the rise in a few isolated economic indicators.

It's tough to know just when to go short, but the market dynamics, and our signals, suggest that this is the next likely direction for equity prices.

Gary Kaminsky On Stock Buybacks

Earlier this week, in his co-hosting role on CNBC's noontime program, Gary Kaminsky made a very coherent little presentation which reinforces an aspect of the proprietary equity research on which my equity portfolio selection and management strategy is based.



Kaminsky displayed price charts for Intel and Microsoft for the past few years. In each case, he demonstrated that, since each firm's substantial stock buyback programs, their prices had flattened.

I don't recall the exact dates for each equity, but the nearby Yahoo-sourced price chart for INTC, MSFT and the S&P500Index makes the case for the last five year period, within which has been each firm's buyback activity.

All three series are down for the period, with both companies below the S&P, meaning, adjusting for risk of lack of diversification, they've both done significantly worse than the index.

Kaminsky only said that he believes corporate senior managers lack the touch for timing their stock buybacks.

I'll go much, much further, based on my own research.

In a statistically significant sense, stock buybacks shrink capital. Capital growth is related to consistently superior total returns. So are some other fundamental measures, both inputs and performance, which accompany the growth of capital.

Shrinking production inputs is going to get you a low- or no-growth company. Which is why I have not considered either Intel or Microsoft to be a growth company for at least a decade.

That's what's really behind Kaminsky's charts and contention.

More power to him for reminding investors that companies which can't do any better than to shrink shareholder capital aren't going to be succeeding in highly-competitive, growth-oriented product/markets.

The SEC's New Board Nomination Rules

Yesterday's lead staff editorial in the Wall Street Journal trumpeted the victory of Saul Alinsky's tactics via the SEC's new, easier rules for union pension funds to force companies to place their board nominees on proxy ballots.

Without going into laborious (pun intended) detail, left-leaning SEC chief Mary Schapiro rammed through criteria owning only 3% of a company's equity for only 3 years in order to nominate up to 25% of a board's membership. The key difference is that, in the past, union pension funds would have had to pay for campaigns and mailings to achieve the same effect. Alinsky was on record as calling the 1960s proxy campaign against Kodak a watershed event.

However, on the same day as the editorial appeared, there was a discussion among some guests on CNBC involving the near-total extinction of institutional buy-and-hold equity strategies.

For better or worse, almost no professional money managers really sit on equity assets for years anymore. It's simply too risky in today's equity market environment.

That would imply that anyone taking advantage of this new SEC ruling is a rather backward, antiquated equity manager.

The Journal editorial alleges that this rule would make companies vulnerable to union coercion to do things like resign membership in the Chamber of Commerce, or explicitly back a government policy or favored administration legislation, regardless of the action's benefit for the company.

First, I think the editorial is a bit over the top on the coercion angle. I think it's legitimate to expect such coercion, but I think it's wrong to believe that companies will simply fold on the issues, or that the union pension nominees will automatically be elected, or, being elected, will be able to force the board and company to do their bidding.

But the SEC's rule, in the context of today's equity management approaches, seems, itself, antiquated.

If very few managers, perhaps even including those managing money for union pension funds, hold that much equity for that long, is the rule even going to be able to be invoked very often?

I've argued in prior posts, found under the "shareholder democracy" and "corporate governance" labels, that the former term is a myth, as currently used.

The only "shareholder democracy" in which I'm interested is one that assures me instant, liquid markets for buying or selling equities. My equity strategy doesn't include corporate actions or board composition in its factors for selections. It actually prohibits me from owning an equity for as long as 3 years in any significant concentration.

So, if most institutional investors hold for significantly less than 3 years, constantly seeking the best potential returns in the equity markets, is the SEC's new proxy rule going to affect those investors and their behaviors?

Supposing that the Journal editorial's implication is correct, and those companies in the crosshairs of union pension funds suffer worse performance and returns, then investors will have already moved out of those companies' equities before the real damage occurs. And, if this happened, in a recurring fashion, won't the union pension fund board nominees begin to be defeated, as their elections are publicly shown to damage shareholder wealth?

In fact, the reality of shorter institutional holding periods, and greater turnover of holdings, pretty much makes slower-moving SEC rules moot, don't they? Investors are buying and selling on a much shorter cycle than the SEC's proxy rules take to change boards.

Maybe this is much ado about nothing.

Talking His Book This Morning On CNBC: Bob Doll

BlackRock's equity chief Boll Doll is on CNBC this morning talking his generic book- again.

This time, I happened to hear Doll contend 'I don't think we've actually ever seen a double dip recession.'

Now, I've heard quite a handful of eminent economists, Nouriel Roubini included, appear on CNBC last week to weigh in on the US economy. Many feel that growth has faltered, a full-blown recovery is not underway, and there is a fairly good chance that US economic activity will decline again shortly.

Call it what you will, these economists, with less at stake in the equity markets than Doll, seem quite a bit more sanguine.

Doll, by contrast, seems to be cheerleading in every CNBC appearance. He never sees a falling market, only one requiring patience, or preservation of cash for subsequent buying. It's like BlackRock has decided as a matter of policy that they will never call a down market or a market crash.

Bad for business. Especially when you are mostly long and don't want your CNBC morning forecast to destroy your own equity positions by the time the opening bell rings at 9:30AM.

Which reinforces my tendency to take the views of very prominent equity managers like Doll, with substantial publicly-accessible funds, with a great amount of scepticism. They simply have too much at stake in the market to speak candidly.

Operational Failure & Loss Of Consumer Trust

I periodically buy groceries at a local, smallish chain called Kings. It was, some years ago, acquired by Marks & Spencer of the UK, then sold again, to whom I don't recall. The chain is known for good-quality produce and an upscale selection of merchandise, as well as very good and pleasant service.

The chain used to encourage customers to use the chain's affinity card, but that stopped some months ago. Recently, perhaps to challenge Stop 'N Shop's policy of giving a 2 cent credit for each bag brought by the customer, Kings announced that, henceforth, they would give a 4 cent/bag credit.

Stop 'N Shop has self-checkout of two varieties, about one of which I wrote in that linked post. Thus, it's easy for the customer to enter the number of bags they have brought, and receive the credit.

Kings has no self-checkout. Only human cashiers.

Thus, it's been my experience over the past few months, that perhaps as often as 4 times in 10, the cashier won't remember to ring up the 4 cent bag credit. Typically, it's a teen-aged employee who neglects to do this, despite my prominent display of one of the chain's own distinctive mesh plastic bags upon checking out.

This has caused an interesting reaction in me. While realizing that we're only talking about 4 cents, I never the less find myself annoyed when the cashier fails to notice my bag and deduct the paltry amount.

In the past six months, my attitude toward the chain has gone from one of respect and overall positive image, to one of increasing annoyance at their inability to execute on their own bag credit policy.

Better, in my opinion, that they simply drop it, or assume you have a bag and just show a deduction, than cause minor disappointment by failing to implement a policy they chose to rather publicly trumpet.

Now, I feel like I'm being lied to by the chain, since the odds of the cashier correctly implementing the policy is not different than a coin toss, unless I start selecting older cashiers for a 4 cent payoff.

Hardly worth the effort.

But Kings' management has now, well, managed to make me believe they are becoming as inept as Stop 'N Shop's own management team. Only the latter is much larger, headquartered in another state, and more understandably incapable of sensible behavior.

Kings isn't.

It's clear that Kings' managers aren't making the bag credit policy important to cashiers, because they don't seem to pay much attention to whether a customer has a bag, or not. So it's a failure of training, monitoring and rewards for competent cashier behavior.

I wonder how many other customers are beginning to slowly, subtly change their opinions of the chain from this small but very noticeable failure?

Tivo Finally Breaks Through To The Web With New Remote Unit

It's been more than a year in coming, as I predicted in this post from February of last year. But Tivo has finally provided a means of accessing the broader internet.

In that earlier post, I wrote,

"Thus, it would seem only a matter of time before TiVo provides a feature on its own website that would let me either type in my preferred websites, or simply import my web browser bookmarks, so that I can access this menu on my television screen via TiVo's content menu.

So there you have it. Just about two and a half years after my post regarding the necessary hardware and software for television viewing of internet web content, it's basically here. One software tweak by TiVo, and it's done. I'll have TiVo for access to online weekly programming, including news programs, either free or paid, and Netflix for my movie content. "

This week, I read in the Wall Street Journal that Tivo has released a remote, priced at $90, which features a slide-out keyboard and navigational buttons. In effect, what has been needed to make Tivo a gateway for television screen-based internet surfing.

At this price, as a remote, it's far simpler than another set-top box. And it comes from an established vendor.

I'm one step closer to cutting my monthly Comcast bill in half by dropping the cable television portion!

Straight Talk On Effects of Government Policy From Dallas Fed's Richard Fisher

George Melloan wrote a good editorial in Tuesday's Wall Street Journal entitled The Fed Can Create Money, Not Confidence.

While I enjoyed his piece, and found it eminently sensible, what really got my attention was this quote from Richard Fisher, President of the Dallas Fed, speaking of business leaders with whom he'd recently met,

"the politicians and officials who craft and enforce the rules are doing so in a capricious manner that makes long-term planning difficult, if not impossible. They are increasingly distressed by the lack of consistent direction coming from Washington....So they are calling time-outs and heading for the sidelines while they wait for the referees to settle the rules of the game."


Melloan then wrote,


"He added that no amount of further monetary accommodation can offset the retarding effect of heightened uncertainty. Indeed, it would make matters even worse if the private sector concludes hat the Fed has become "politically pliable and is prone to substitute such accommodation for fiscal discipline." "

I think it should give pause that a highly respected Fed bank president is so candid about Washington's negative influence on business activity. Fisher is a very non-partisan in his remarks.

Further, he clearly feels that Bernanke's planned, or expected injections of added liquidity, including more QE, will only "make matters worse," as the private sector grows suspicious of the Fed's motives and lack of discipline.

We do seem to be in a new era, where consumers and investors, thanks to ubiquitous, free information, have created a feedback loop of economic behavior neither existing nor envisioned
in Keynes' time.

That new loop is causing negative reactions to the government's excessive deficit spending, higher taxes and injection of uncertainty into the business environment via complex, poorly-considered legislation.

Fisher's highlighting of these phenomena ought to worry all of us. It's hard to foresee a healthy equity market, or economy, while the behaviors Fisher sees exist.

Dick Parsons On David Faber's Program This Noontime

I think David Faber's noontime CNBC program, Strategy Session, hit a new low today. The big guest was Dick Parsons, now non-executive chairman of Citigroup.

Simply seeing Parsons had me scrambling for the remote. Listening to Faber ask Parsons to assess the nation's economic situation had me nearly gagging.

Let's review Parson's sorry record. He was in senior management at TimeWarner for years, most recently as CEO from 2002-2008. Nearby is a chart which provides a look at the company's stock price, versus the S&P500Index, for a long period including that timeframe.

It isn't pretty, is it?.

In fact, TimeWarner's price fell off a cliff shortly after Parsons took over, while the S&P soldiered on. TWX never really recovered, but, inexplicably, Parsons became a sort of Teflon-CEO.

Then there's Citigroup, where he replaced the disgraced Bob Rubin in 2009.

Citi has enjoyed virtual government ownership, and Parsons isn't the CEO. Despite the apparent modest rebound of Citi's share price, it hasn't really moved in a year.

From where, precisely, does Parsons derive such lofty respect and reverence? What is it that I'm missing that he did to earn such near-deification by Faber and CNBC?

Yet another example of what's wrong with business media journalims. Glorifying losers and mediocre CEOs so they can get guests and fill air time. Instead of grilling them on their past or current failures.

New Global Economic Worries Affect Equities

Business and economic news of the past week has sent the US equity market tumbling- again.

In an editorial in the Wall Street Journal on August 16th entitled The Fed Can't Solve Our Economic Woes, Gerald O'Driscoll, Jr., contended exactly that. Which would seem to be germane right now, as many are looking for more Fed quantitative easing to magically rescue the equity markets.

O'Driscoll wrote,

"First, our lingering crisis and economic weakness was brought on not by a Keynesian failure of effective demand, but by a Hayekian asset boom and bust. Second, the textbook case for low interest rates treats the policy as one of benefits without costs. No such policy exists.

In these scenarios, the collapse of demand is a consequence- not the cause- of the bust. Policies to address the crisis must get the cause and effect right.

The financial panic and ensuing great recession was a classic balance-sheet recession. As balance sheets shrank in value, demand collapsed. There was a liquidity crisis as well, centered around Lehman's collapse, but the driving force was collapsing balance sheets, impaired capital values and, for many, insolvencies.

Until balance sheets (corporate and household) are restored, increased spending cannot be sustained.

What is in short supply is not liquidity, but savings. The Fed can supply the former but not the latter. Now there is little further it can do that is beneficial."

If O'Driscoll is correct, then the widespread hope that the Fed will save the markets again is in vain.

As I write this, Jeffrey Sachs, currently a professor at Columbia, is explaining, in an appearance on CNBC, that we are experiencing the result of decades of negative savings by US consumers. He agrees with O'Driscoll.

Whether by the Fed's quantitative easing, or its monetizing of more Treasury borrowing, or the latter's printing of money, it's difficult to see how more liquidity will do anything to alleviate the longer term economic issues. Sure, such measures may give a short term shot to equities, if the money finds its way there.

But, lately, investors have been fleeing to Treasuries, driving rates down. A classic Keynesian liquidity trap. O'Driscoll notes,

"Low interest rates slow the process of restoring balance sheets by keeping asset prices artificially inflated. They also penalize saving, thus prolonging the process of rebuilding balance sheets."

Higher long term US economic growth is dependent upon hiring, which isn't happening in this economic environment. O'Driscoll favors tax cuts and, generally, whatever allows consumers to keep more of their own money to save and invest.

But judging from the Fed's and federal government's recent and expected actions, that's not on the agenda of either entity. Which, if you believe O'Driscoll, bodes ill for near and longer term US economic recovery.

The Emerging Cost of US Oil Drilling Regulations

Back in June, I wrote this post discussing the potential effects of extreme US regulatory policies regarding oil exploration. I noted,

"But what about that liability clause? If a lessee encounters some situation, whether accidental or by poor management, that creates a disaster on the scale of BP's Gulf rig gusher, do we seriously expect to hold that company totally responsible for every penny of expense related to the problem?

The US does not exist in a vacuum. There are deposits of virtually all of our natural resources located in other countries, on other continents. Many other countries offer far less onerous regulatory environments than those which currently exist in the US.

As tempting as it would be for the US to insist on carte blanche, unlimited liability assumption by its natural resource lessees, competitive realities could easily cause such a policy to result in no lessees whatsoever."

As I am finishing reading back issues of the Wall Street Journal from earlier this month, I noticed an August 7-8 editorial entitled The World Drills On.

Sure enough, other countries are acting fast to grab deep-water drilling rigs once operating in the US Gulf Coast region. Among the countries aggressively leasing drilling rights and seeking rigs are New Zealand, Brazil, Australia, Canada and Norway.

The editorial notes that many of the prospective wells will be in water far deeper than the BP Macondo well.

As a retired senior oil executive noted when I sent him the prior linked post, oil exploration is an internationally competitive arena. When one country raises its regulatory and/or environmental standards to unrealistic or uncompetitive levels, other countries will move in to explore and replace that production capacity.

How does sending deep-water drilling rigs overseas, for years, help US self-sufficiency in oil production and the retention of associated jobs?

In June, I wrote with a sense of the hypothetical. The Journal editorial earlier this month indicates my concerns are no longer hypothetical. US oil exploration and production activity is going to be curtailed by the availability of rigs for some time, thanks to an ill-conceived ban on off-shore, deep-water drilling. GDP growth, jobs and even government tax revenue will now all be negatively affected for years to come by this self-inflicted damage to the US economy.

All Tyler Mathisen All The Time On CNBC

To my great disappointment, CNBC resident curmudgeon and crank Tyler Mathisen appeared on the morning program today from 6-9AM.



Earlier this year I described Ol Ty's increasingly bizarre and irrational behavior in posts here and here. In the first post, I wrote,

"The topic that set off the old codger yesterday afternoon was a report on the rise in temporary hiring in the US. As various panel members debated the good or bad implications of such hiring, Mathisen began whining...and I mean whining....that he was so afraid companies would just never hire full-time workers anymore, but only temporary ones, leading to long term lower standards of living of Americans.

Michelle Caruso-Cabrera retorted that with all the government regulatory red tape involving hiring, compensating and firing workers, it's no surprise that many choose to hire temps for as long as possible. Mathisen shot back, with a grimace and angry tone, something like,

'Go ahead and blame the government for everything.....Companies will hire people when they need them, and government regulations won't matter.'"

As I sat watching and listening to Mathisen's annoying commentary this morning and, later, this afternoon, as well, I began to wonder how many network anchors who've been so obviously wrong and misguided on the major economic story of the past two years have been rewarded with more airtime, rather than being yanked off the air entirely.

What I'm saying is that Mathisen has misunderstood the fundamental motivations affecting US corporate hiring in the face of a government which has been introducing substantial uncertainty into the business and economic environments for the past two years.

It is very much the case that corporate executives are hesitant to hire when their liabilities for employee-related costs due to health care and taxes are far from certain.

Yet Mathisen growled self-assuredly that companies will just go ahead and hire people "when they need them."

Now it seems you can't watch CNBC without seeing this economic wrong-way Corrigan, or, should I say, Mathisen, at almost any time of the trading day.

God save us. Can't MSNBC take the guy?

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?