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In this last post about Yahoo, written in February, I suggested,
"
Even the typically-competent Bartz can't seem to do more than get a few dollars for using Bing and doing an ad deal with Microsoft. But Yahoo isn't lighting the world on fire with free content anymore, and missed its chance, long ago, to be a profitable, earlier version of Facebook.
To have seen its stock price fall from over $100 to under $18 in 11 years makes me wonder just who still owns this turkey?
Where to now? With no clear mission for the firm going forward, what would a current investor do? I'd say sell. The risks of further erosion are probably at least as great, if not moreso, than Bartz magically getting a higher value now for selling the firm to someone who would, by some stretch, need whatever it is of value that Yahoo still offers.
There seems to be no solo act for Bartz at Yahoo which will do shareholders any good. Continuing to operate the firm will probably just result in a declining share price. Shutting it down would destroy value. I suppose, at some price above zero, some other tech firm will see some kind of value in the firm's assets, if only its internet traffic.
It's truly been sad watching the firm manage to evade natural exit strategies over the past few years, now to languish behind even the moribund Microsoft, watching upstart Facebook move on without even noticing Yahoo in the same general product/market space."
With its earnings report once again portraying decline, it's clear even Carol Bartz can't change the end of this story. Revenues were down 24%, while profit fell 28%, as Google had another growth quarter.
The Wall Street Journal article on Yahoo's quarterly results contained lots of excuses by Bartz, and various non-financial measures claiming to herald a brighter future.
Look at that chart of Yahoo's price since going public, compared to the S&P500 Index. The company's price is down since 2000, while the S&P was only flat. Even in the past two years, Bartz hasn't been able to lift the firm's fortunes.
I still can't figure out who would continue to hold this. Isn't it time for the CEO and board of Yahoo to stop wasting shareholder capital and sell the firm?
Wednesday's Wall Street Journal contained an article disclosing that finally, after nearly ten years as inept CEO of GE, Jeff Immelt's incentive compensation is being tied to GE's performance relative to the S&P500.
In this post from early 2009, I discussed Immelt's compensation,
"As the Journal reported recently,
"In addition to not receiving a bonus for 2008, Mr. Immelt also suggested -- and the board agreed -- that he forgo a special three-year, long-term incentive payout that would have totaled $11.7 million.
Mr. Immelt, 53 years old, earned $3.3 million in salary in 2008 and hasn't received a raise since 2005. He's also receiving a $2 million equity award.
That's a 61% decline from his compensation in 2007 of $13.81 million, which included salary, the $5.8 million bonus and equity award."
Boo hoo. A 61% decline from his 2007 compensation. If you read my prior posts concerning Immelt's total compensation as GE CEO to date, you will see that he could do with a few years of no pay, and still be overly-compensated for the immense damage he's caused his shareholders.
It's truly staggering to think, based on that second chart, that the GE board could give Immelt any sort of 'award,' not to mention the gross overpayment of $3.3MM...."
I've argued for years that CEOs such as Immelt should have incentive compensation tied to beating the S&P500 total return over several trailing years.
Thus, even the newly-announced $7.4MM of GE options being conditionally granted to Immelt are, again, favoring the CEO to the detriment of the firm's long-victimized shareholders.
For instance, the Wall Street Journal reported,
"Under the new terms, 50% of the options will vest only if the company pulls in cumulative industrial cash flow from operating activities of at least $55 billion between the start of 2011 and the end of 2014.
The other half will vest only if GE's total shareholder return is equal to or better than that of the S&P500 over the same period."
Hilariously, the Journal stated,
"Mr. Immelt, who saw GE through a rocky patch during the recession, received his first bonus in three years in 2010."
Rocky patch? Immelt's firm had to be bailed out by the federal govenment, for God's sake! Look at the nearby chart comparing GE and the S&P500 Index for the past five years. Even from 2007, GE has underperformed the index.
How can the firm's board justify giving this failing CEO anything over his base salary for such poor performance?
The new options contain overly-generous terms, especially for a CEO who has, as you can read in this post from 2006,
"So that makes a total of roughly $23MM in cash Immelt has now managed to loot from his employer since late 2001, when he began his reign as a failing CEO at GE. If the firm meets certain (fairly low-ball, as I recall from earlier articles) revenue, earnings and cash generation targets, and meets some stock price performance relative to the S&P, Immelt will receive as much as $18.6MM in 2007."
Why have a cash flow-oriented bonus condition? All Immelt needs do for that is make some acquisitions which boost this measure. And only equalling the S&P's return is not sufficient for a single company's CEO to be rewarded. The S&P is a broadly-diversified index, while GE is just one firm, leading to more risk for holding it rather than an index. At a minimum, Immelt's total return hurdle ought to be risk-adjusted for the variance of its total return. An easy way to do this is to set an average total return divided the standard deviation of that return over the time period equal to or better than that of the S&P for the same period.
Once again, we see that the GE board is behaving like a bunch of shareholder-looting cronies. Even when they pretend to make Immelt's incentive compensation conditional, it's on terms which are too forgiving. For such a large industrial firm, you'd think they could manage some theoretically-sound terms which reflect a basic understanding of finance.
There are really only two free choices for business television channels on cable of which I am aware- CNBC and Bloomberg. Fox Business News seems to be among a premium channel group on my service, or simply unavailable. After this morning's fiasco on CNBC, I'm viewing Bloomberg as potential alternate or main viewing choice in the morning.
With Becky Quick and Joe Kernen away for several days, the morning CNBC on-air team was basically non-existent, as far as business acumen and understanding goes. Carlos Whathisname is on Squawkbox for minority color. He asks softball questions, looks incredulous at every answer, and tries hard to swing most conversations to liberal viewpoints.
To fill in for the missing persons, the networks clueless economics reporter, Steve Liesman, and retired mutual fund manager Gary Kaminsky were pinch hitting. I had some comments on a recent post chiding me for criticizing Liesman as being a moron and an idiot. What I'm about to relate should satisfy that reader, Lisa, and others, that my choice of terms regarding Liesman was neither accidental nor wrong.
This morning's discussion on CNBC disappointingly returned, over and over, to a 'debate' between Kaminsky and Liesman regarding companies which both grow income, buy back shares, and pay healthy and/or increasing dividends.
Kaminsky was a well-regarded fund manager at Neuberger Berman for several decades, and, we learned a few months ago, did not come to the field by accident. His father was also a fund manager, which probably helps explain the son's ability to vault into a large-scale management capacity. Kaminsky co-hosts a noontime program with David Faber, on which he largely makes sensible comments. Though he's not immune to occasionally narrow-minded pursuits of questionable points. Unlike more general business analysts, fund managers tend to adopt a style which can limit their ability to consider alternative viewpoints.
Thus, Kaminsky lauded Travelers posting good earnings, buying back its shares, and paying dividends. The typically wrong-headed Liesman began bleating that if he invested in a firm, he wouldn't want his money back. A fair paraphrasing of Liesman's rant is,
'When I invest in a company, I'm giving my money to the CEO. I trust him. I want him to invest that money, not give it back to me.'
After perhaps the third round of pointless discussion on this point, which both parties mentioned they were continuing off-camera on commercial breaks, Kaminsky inadvertently displayed his ignorance, saying to Liesman,
'You're an economist,' rather than having a business background.
But Liesman is not an economist. He's a journalist who likes to believe and pretend he is an economist. With former Fed board member Rick Mishkin as a guest host this morning, Liesman tried to shout down and over the Columbia professor during another discussion. Liesman literally would not shut up, obviously believing his uneducated, ill-informed views were more important than those of a former Fed senior official.
Kaminsky and the CNBC economics reporter must have wasted about ten minutes of air time on a conversation that wouldn't merit mention in most undergraduate finance courses.
For the record, empirically, Kaminsky, while not completely correct, is much closer to the truth than Liesman.
If one wishes to own equities with consistently superior total returns for at least a year, income growth fueled by revenue growth is desirable. Whether that is dividended or not is not too material if the company is growing. Share buy backs, however, tend not to be associated with long term equity market outperformance.
Kaminsky's beliefs notwithstanding, a company that shrinks its capital base isn't a good candidate for long term profitable growth.
As an investor, you don't want your investments misspent by corporations once they've saturated their primary product/markets. Thus, dividend growth and/or share buy backs signal the beginning of the end of consistent, reliable profitable growth.
But Liesman is wrong to decry dividends, per se. When I have owned a consistently-superior performing equity that paid dividends, I viewed those cash payments as providing more funds for subsequent portfolio expansion. Anyone so stupid as to think that dividends from a growing company constitute an unwanted problem has no business being on a business-oriented cable news network in the first place.
After listening to this pointless discussion on CNBC for far too long this morning, I thought about how badly managed the morning lineup is, that they can't manage to sustain the loss of two anchors without degenerating into meaningless babble.
Bloomberg isn't sounding so bad right now....I may miss Rick Santelli......
Intel's earnings report after the market's close on Tuesday evidently surprised analysts. As I write this before Wednesday's market open, the firm's equity price has risen some 7% in after-hours trading.
Intel CEO Paul Otellini hurried onto CNBC's morning program to stump for his firm and its future prospects. No real surprise there.
Way back in 1997, when I bought my first live portfolio based upon my equity strategy, Intel was one of the selections. That was the only time it was a holding.
The first chart compares Intel's equity price to the S&P500 Index's for the past five years. For all the risk you'd assume in holding the single issue, Intel, you would have had a return virtually identical to that of the broadly-diversified index.
But what about Intel's fundamental performance? After all, Otellini was crowing about their revenue growth.
So I reviewed the firm's relative revenue growth for the past five years from the analysis my quantitative selection process performs each month. As I expected, on a multi-year basis, Intel's revenue growth rates have been either inconsistent, or below-average during the past several years. It's never been above-average on anything approaching a long term basis.
This means that, to capture gains in Intel's share price, which are inconsistent, you have to be a market-timer. That's a very risky strategy, as most professional investors will tell you.
If, instead, you prefer to hold Intel for the long term, well, look at the second chart comparing it's price with the S&P500 since the mid-1980s. Even as a meteoric growth issue back in the early years of the timeframe, it was not a smoothly-rising curve. Then the late-1990s technology sector bubble broke the back of the stock's growth character.
Despite what some pundit on CNBC blustered about Intel having revenue growth that now makes it, well, a growth stock....it's not. A quarter here, a quarter there...does not a growth issue make.
Has Intel suddenly recaptured the magic of its old, 30 years ago self? Doubtful. Last time I checked, they hadn't entered a radically new business. Yes, they bought McAfee. But it's not like they've suddenly entered online social networking or online couponing. Neither of which would probably help them at this point.
No, I think all we're seeing is an unexpectedly strong quarter of revenue growth for Intel. If anything, its being unexpected is probably a greater testament to shoddy sell-side analysis than anything else.
But unless you believe Intel has magically entered a new era with its same old business mix, you'd probably be better-advised to observe the equity's performance from the sidelines, rather than risk your own capital on the rollercoaster that is Intel's equity over time.
My blog is one of at least thousands which presume to observe and comment on business matters. Its followers number less than 10, and I don't believe it's permanently linked to any large, famous blogs.
On an average day, it probably draws 50-70 readers. Most, I know from Sitemeter, find a specific post due to a search. Sometimes a post about a company is linked on some major stock information site and draws above-average traffic.
Occasionally, one of my posts, such as a prescient one about unfundable municipal pensions, over a year ago, become a lightning rod and draw a few hundred visitors. That post was linked on the main page of some national government workers union's website, accounting for the stampeded of readers eager to learn, before the topic was so mainstream, that, and why, they may never receive their pensions.
Yesterday, however, saw a very new, yet commonplace combination of new media occurrences drive readership of my blog over the 1,000 mark for the first time. It took a little digging into Sitemeter's referral data to learn why.
Apparently, sometime yesterday afternoon, Dave Ramsey twittered about this post I wrote last year, prior to the elections last year. I know of Ramsey from his weekly appearances on Neil Cavuto's Fox News program at 4PM, but I have never listened to his radio program.
What surprises me is that my post is over six months old. It was written about a piece that Art Laffer wrote in the Wall Street Journal concerning Bill Gates, Sr.'s funding of a campaign to initiate a personal income tax in Washington state. Laffer presented some empirical work which clearly demonstrated that US states with higher tax rates experienced less economic growth than states with lower rates. No real surprise there, but some people refuse to acknowledge natural human economic behavior.
So, perhaps since it's tax season, or because Congressional Democrats and our president want to raise tax rates again, Ramsey somehow found my post and twittered Laffer's conclusion, with a URL for my post. I'm sure Ramsey has a ton of followers- he's a very popular radio personality. Next thing I know, by mid-evening yesterday, I had over 300 visitors, mostly from Twitter or iPhone apps.
Clearly, mobile and social networking access, combined with Twitter, catapulted my brief, derivative, dated blog post into brief popularity. There are still visitors coming on today based on the same twitter link. Apparently Facebook is also involved, as quite a few referring URLs are that site's exit page. Perhaps Ramsey's Facebook page has his Twitter link.
In any case, it's a testament to the unpredictability of the effect of current communications technologies.
Who would have guessed that, on some random day, a well-known radio personality's brief comment about the effect of state tax rates, as discovered by Art Laffer, in a major daily paper without free access to archived material, then observed by me, in a public venue, months ago, would result in a torrent of mobile traffic to my blog?
If you need some evidence of why we don't want excessive FCC regulation, this anecdote is a good one.
The Wall Street Journal's Heard On The Street column in last weekend's edition dealt with the recently-public Zipcar. What struck me was the poor quality of Rolfe Winkler's thought process by comparing Zipcar to Netflix.
According to Winkler, Zipcar has decent profitability in what he characterizes as four mature markets for the firm- Boston, New York, San Francisco and Washington. He then observes that Hertz' Connect service is already challenging Zipcar, and provides a one-way rental and drop off that the former does not.
So far, so good. Having been aware of Zipcar for a few years, it always impressed me as the sort of business model which can prosper in niches, but has little or no competitive advantage to protect itself from larger rental car companies, should its growth see it become a threat to the latter.
Winkler suggested that Zipcar "can pull a Netflix." Which is odd, considering the radically different nature of the businesses. Netflix has been around for a long time, originally offering convenience and fixed pricing over Blockbuster's legendary stock outages. Aside from some warehouses and disc inventories, Netflix wasn't a particularly capital-intensive business.
Zipcar, on the other hand, rents cars. Cars that must be, I presume, cleaned, maintained, and frequently inspected for possible repairs. Further, the risks of damage to cars would seem to be financially larger and probably more frequent than the risks of damages to DVDs.
So I don't really see much of a similarity in the two business models at all. The fact that Blockbuster failed to effectively copy Netflix's approach had, I believe, less to do with, as Winkler contends, Netflix being a "sexier rival," and much more to do with Blockbuster's already declining fortunes and poor reputation for service. Because Netflix easily became a national brand and service without locations, while Blockbuster tended to be associated with local neighborhoods, it was tough for the latter to provide a compelling value proposition when it finally got around to emulating the former's business model.
Zipcar reminds me, instead, of Minnetonka's original Softsoap product in the 1980s. While it offered a valuable new feature for handsoap, the company's product was never likely to become a market share leader for long without provoking lethal competitive response from the major soap makers. Another example might be People's Express, which also competed in a capital-intensive business. It grew profitably until it saturated smaller markets and routes. When it moved into larger markets and created route- and seat-management challenges which outstripped its primitive systems, it quickly lost momentum and money. Bankruptcy followed.
I suspect Zipcar will have similar segmentation saturation issues, even as it has identified "100 metro areas and and hundreds of colleges." Without knowing the exact numbers, I don't believe the major rental car companies will cede that much share before moving to blunt Zipcar's growth with similar services, as Hertz evidently has already begun to do.
Sometimes you can understand why business people have such fear of government. This morning's incredibly myopic comments and narrow minded recollection of history by former New York Insurance Commissioner Eric Dinallo and Treasury Secretary Tim Geithner gave clear examples of grounds for this fear.
First Dinallo crowed about how effective his and Geithner's illegal taking of AIG by declaring it insolvent had been. It was truly scary to listen to Dinallo self-absorbed remarks, never allowing for the possibility, as several observers described at the time, that AIG's troubled financial products unit could have been separated from the solvent insurance operations, and separately taken through a Chapter 11 process, with all derivatives creditors taking proportional haircuts to resolve the unit's problems.
To hear Dinallo tell it, he crafted the best of all possible solutions, irrespective of the capricious nature of the seizing, or the general sense that, due to former NY AG Eliot Spitzer's animus toward AIG's former CEO, Hank Greenberg, the giant insurer was in for some truly 'special' treatment at the hands of New York and the feds.
Sadly, the co-anchors on the set let Dinallo spin his fairy tale of the soundness of the AIG seizure without a single probing question.
Then Tim Geithner appeared from Washington to easily hit some softball questions from the networks hapless senior economic reporter. Once again, the government official was allowed to go on and on without any interruptions for probing questions or serious challenges to his fairy tale.
In Geithner's case, the fairy tale is that yesterday's S&P warning on US debt is misplaced. That we haven't created too much debt which will be bequeathed to our children, and that extra spending on infrastructure and education is perfectly fine. Yes, the debt needs to be reduced, but certainly not at the cost of reining in special spending. Make sense? Not to me, either.
Both Dinallo's and Geithner's nearly robotic, surreal views that ignore reality ought to put fear into business people throughout the US. This is the attitude that causes investment to remain on the sidelines and hiring to be delayed. With government officials like these two inventing their own reality to justify power grabs and fiscal imprudence, there's no telling what overreach could come next from Washington or your own state capital.
At this point, in the interest of truth in packaging, CNBC should just relabel itself as a government public relations agency.
It isn't always portfolio managers with long positions who take the opportunity to cause a stampede in their favor by talking their book on CNBC.
Last week, Jim Chanos appeared on the network's morning program to discuss a range of topics. Asked for information on his current positions, he concisely explained why his fund is short First Solar Energy (FSLR).
Chanos cited the departure of several senior managers in the past year and the CEO and other senior officers unloaded much of their own positions in the company's equity, as well. Taken together, he said, these were very bad signs..
The stock was down about 2.3% by mid-afternoon.
As it happens, FSLR was a minor-weighted selection in one of my recent portfolios. At the time, I thought it interesting that an alternative energy issue had exhibited sufficiently good and lengthy performance to be selected by my quantitative process. But it only appeared in one portfolio, and, then, with a relatively light weight.
Every equity manager, every selection process, makes mistakes, and this would evidently be one in mine. The good news is that the solo appearance of FSLR suggests that my process is rigorous enough to limit such damage. A similar phenomenon occurred last year with the inclusion of McAfee and Intuitive Surgical, neither of which proved to be a stellar performer. Fortunately, Priceline was included heavily in a series of portfolios, and it was stellar selection.
Thus proving that portfolio management is, in the end, about the collective performance of the selections, not how much was lost by the worst one, or gained by the best.
It's earnings season, and already two of the nation's largest money center banks- Chase and BofA- have reported disappointing results.
It's also just a little over two years since the post-financial crisis market bottom of March 2009.
So how have the largest US commercial banks- Chase, Citi, BofA, Wells Fargo- performed, relative to the broad US equity market, as represented by the S&P500 Index?
Not so well. The first three have underperformed the index on an absolute basis. Wells has done a bit better, but not sufficiently so for the relative risk of a single equity to the broader index.
I had lunch with a long time business colleague on Tuesday of last week. Neither Chase nor BofA had, at that point, reported earnings. Still, we laughed at how many pundits had recommended bank stocks over the past few years. While I can't cite specific dates, I'm pretty sure both Jim Cramer and Dick Bove have gushed over Chase or Citi in the past two years.
Despite the many years which have passed since my friend and I both worked at Chase, the basic character of each of the nation's largest banks has not changed materially.
Citigroup's risky business strategies should have resulted in its dissolution, except for the general financial crisis in which it luckily happened to occur. Once upon a time, long ago, I suggested to colleagues that the way for Chase to have been better-valued was for the whole sector to become as mediocre as our bank was. Citi took the idea to new lows, and survived.
BofA continues to labor, as the nation's bank with the largest consumer business, under the burden of being more or less tied to that sector's fortunes. With high unemployment, stagnant wages and rising prices for ordinary consumer purchases, being the country's largest consumer banker is no picnic, as last week's BofA earnings report proved.
Chase remains the sluggish, less-well-defined bank which just never seems to either soar, or crash. As my friend reminded me, it was Chase's genetic inability to do anything quickly which allowed Jamie Dimon to avoid the worst of the mortgage-related disasters and therefore be relatively better positioned to scoop up some failed large commercial banks, such as Washington Mutual, as well as a government-insured bid to takeover failing Bear Stearns.
Wells Fargo continues to be a bit nimbler and better-managed than its eastern counterparts, but its attempts to bulk up have ensnared it in continuing mortgage problems. By swallowing Wachovia, which had purchased California's Golden West S&L, Wells inadvertently exposed itself to more losses and trouble than it probably expected.
It's been years since a commercial bank was selected by for one of my equity portfolios, and the appearances, even then, were few and brief.
I can't see anyone who seeks to consistently outperform the S&P500 using large US commercial banks to do so- now, or anytime soon.
I really wish there was an effective competitor to CNBC in the field of business and financial news.
As it is, while viewing/listening to the network for news, I am forced to hear a lot of nonsense which the producers evidently feel passes as 'debate.'
For example, for the past 5-10 minutes, I've listened to a largely meaningless exchange among a few minor economists, an anchor, and one moron.
The moron, of course, is the network's senior economic idiot, Steve Liesman. Just how many compromising pictures of how many CNBC executives does that guy have? How else could he continue to do such a horrific job and remain employed there?
Today, the subject was this morning's inflation measures. The predictable wrangling involved the Fed's preference for a measure which ignores food and fuel price changes.
Michelle Girard, a senior or chief economist at a second-tier bank, was largely confused. I checked her bio, and noticed that she has no PhD in the field. You would think, with all of the economics PhD minted from decent programs, large banks could at least manage to have one of those on staff.
Besides Girard's meandering coments, it was pretty clear from the content of some of her remarks that she doesn't fully comprehend the manner in which the phenomenon of commodity price rises can suddenly effect the US economy. I recall living through the Ford-Carter inflation era. I think Girard only read about it and, thus, has an incomplete appreciation for how quickly the nation's economy can be mismanaged into misery indices well above the mid-teens.
Liesman continued his Fed ass-kissing from the morning's debate with Rick Santelli. Displaying his usual lack of intelligence, the economic moron confused Santelli's point about excluding food and energy with the different concept of replacing items in an index to ostensibly capture higher values in more modern goods or services. But, whether misunderstanding someone else's point, or making an illogical one of his own, Liesman steadfastly defended whatever the Fed does. It doesn't take a genius to figure out why. This guy has become the Fed's notional outside publicity hack. He seems to be on a non-stop tour of Fed banks, interviewing chairmen with softball questions. Thus, any comments from him that seem out of step with Fedspeak might cut off his access.
Sadly, the result of the multi-person exchange a few minutes ago was more heat than light. And nothing in the way of conclusive points.
Too bad some real heavyweights like John Taylor, David Malpas or Brian Westbury couldn't be assembled for a really interesting discussion of this topic.
Thus the irony that one of the co-anchors thanked all involved for such a productive 'debate.'
It never fails to astonish and amuse me when Keynesians claim that cutting federal spending will send the US economy into a nosedive. Specifically, now, with our economic recovery still fragile, is not the time to contemplate serious federal budget cuts.
No, if anything, taxes must be raised in order to allow more spending without unduly increasing the deficit.
What nonsense.
But this is what you heard from Byron Wien on CNBC Wednesday morning. Wien was, at Morgan Stanley, a perennial investment bear. Almost as gloomy as the legendary Salomon Brothers chief economist, Henry Kaufman.
After hearing Wien spout this widely-heard nonsense, I checked his biography to see where his PhD in economics was from. Apparently, he doesn't have one. I found him credited only with a BA and MBA from Harvard.
Later in the morning, CNBC gave North Dakota Democratic Senator Kent Conrad its platform to repeat Wien's concerns. Conrad, too, has no advanced economics degree that I could find among his bios.
As I've written in prior posts, it seems that many pundits and, certainly, free-spending members of Congress, cannot acknowledge that economies have naturally-occurring cycles. That money not appropriated by or borrowed in the name of taxpayers, to be spent by Congress, will still exist on private balance sheets.
Government spending doesn't create long term employment, nor, per se, businesses. The same money, in private hands, does.
I understand why Conrad can't comprehend this, being a conventional tax-and-spend liberal Senator. But Wien, with his long tenure at Morgan Stanley, should know better. Much better.
If anything, recent economic research has shown a clear dampening effect on private consumption when federal spending is seen as increasing taxes via interest on debt.
The notion that federal spending can't be replaced by private sector spending, or that, if the money is saved by the private sector, rather than spent, it is a mistake, is just bad economics.
But it seems that many of the carefully-screened pundits you'll see on CNBC don't know this, and, basically, could care less.
Today's Wall Street Journal's Heard On The Street column took Chase CEO Jamie Dimon to task for talking up a one-time loan loss reserve reduction while presiding over anemic revenue growth.
Specifically regarding revenues, the article states,
"Finally, a big portion of the outperformance came from stronger-than-expected fixed-income revenue in the investment bank, but these can be lumpy. Shareholders want recurring revenue growth. And on this point, J.P.Morgan remains a show-me story."
So true. This has been a subject on which I've written before. Chase gets credit by pundits for performance it doesn't actually exhibit.
Just to be sure, I went to my Compustat data and looked at the annual total revenues as of March, from 2005-2011. They rose from $64B to $115B, for a 10% annualized growth rate. But the annual revenue growth rates, at March of each year, were actually:
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
30.9% 26.3% 7.3% -8.2% 12.0% -1.2%
Several things become clear from this data.
First, the pre-recession revenue growth rates of healthy double-digits is gone. For the last two years, the best the bank could manage was 12% in 2010. Revenue actually declined at Dimon's Chase in the past twelve months.
Second, as is typical with commercial banks, revenue growth has been volatile.
Third, if Dimon has any special skills, it sure isn't in revenue growth management. More likely, as I've always contended, what he learned from his mentor, Sandy Weill, is how to slash expenses.
Thus, we don't see long term, consistent revenue growth which would underpin consistently superior total returns. And the nearby chart of Chase's and the S&P500 Index's price series for the past five years so indicates.
Chase has barely outpaced the index. Certainly not to an extent necessary to offset the risk of a single equity in comparison to the S&P.
Once again, Dimon's so-called leadership comes up short when you actually examine the data.
Kelly Evans wrote on Tuesday, in her Wall Street Journal Ahead Of The Tape column, about M2's relatively slower growth in February. Her point was that, from Friedman's perspective ("inflation is always and everywhere a monetary phenomenon"), we aren't actually experiencing rampant inflation.
I've written in prior posts about the confusion between concepts such as that embodied in the misnamed CPI and monetarily-defined inflation. There's no question that the broadly-defined price indices are measuring a rise in the prices of commodities such as food and energy. But this isn't Friedman's view of 'inflation.'
But after reading Evans' column, I began to reflect on how Friedman would view the overall US monetary policy situation today.
The Fed's balance sheet is obscenely bloated. Some pundits are seriously discussing whether there would be a QE3 in light of the still-struggling US economy.
The Fed is monetizing US Treasury debt on a previously unheard of scale.
In this context, is it really sensible to limit the measure of monetary-based inflation to relatively-narrowly-defined concepts such as M2? What is velocity? Surely overall velocity of money and near-money is, on average, higher today, with increased use of electronic fund transfers, than it was in Friedman's prime. What has it been lately- rising, steady or falling?
With the Fed so queering the markets for money with its post-2008 easy money and excessive asset purchase policies, it seems silly to only look at the conventional monetary base growth and pronounce it tame.
Surely, amidst such huge amounts of net external US debt holdings and discussions of raising the debt limit, the notion of possible deflation seems contradictory.
Perhaps it's instructive to consider the past three years. With the US having been in a recession, while the Fed embarked on a program of propping up US financial institutions and the value of many of their assets, it's unlikely that monetary value growth during the period was slower than GDP growth.
While some prices remained fairly tame, due to recession-related lower demand, that seems to have ended, at least for agricultural and energy commodities. Meanwhile, GDP remains tepid.
So it's hard to believe that the net effect of the past several years has been US GDP growth that has outstripped that of US government money and credit creation. This situation does not seem to be changing now, or in the near future. Federal spending continues at levels which are increasing net external debt, while recent GDP growth was just scaled back the other day..
That would seem to me to qualify, from Friedman's perspective, as inflationary.
Just quick confirmation of something that occurred last September. In that post, I wrote of David Tepper's bullish equity market call on CNBC. On the prior day, the S&P500 closed near 1125.
Even with the recent backsliding of the index, as I write this, it's at 1310.
That's a 16.5% gross return in just over six months.
I still wonder, though, whether it was a good call by Tepper, or simply self-fulfilling prophecy because a well-regarded fund manager talked up his book?
Back almost a month ago, the Wall Street Journal published a staff editorial entitled President Warren's Empire. It dealt with the tortured details of Warren's position as head of the newly-created Consumer Financial Protection Bureau.
If you want to understand why job creation and investment are growing so slowly in the US, this story is instructive.
Given the politics of the moment last year, Democrats wrote the unnecessary Dodd-Frank regulatory legislation in such a way as to shield Warren and her agency from possible Republican legislative retribution, should they have, as they did, retake control of the House.
Warren's agency is funded mandatory out of the Fed's budget, and the Fed's chairman can't object. So Congress has no budgetary authority over the agency. And Warren dodged confirmation hearings because she was appointed as a White House staffer.
The overall effect has been for Democrats to organize the agency and treat Warren in such a way as to leave both effectively without any oversight or restraints by Congress.
As the editorial observes at its close,
"This is no way to run a government, especially not one that Madison envisioned. The consumer bureau is essentially a bureaucratic rogue....But at the very least Congress should remove it from the Fed, make it part of the Treasury and subject it to annual appropriations. No one elected- or even nominated' Elizabeth Warren."
Meanwhile, from this bureaucratic tangle, Warren and her fellow appointees have already begun to coerce and shake down banks to forgive mortgage principle, or face further harassment.
Indeed, this was not the sort of federal government the Framers had in mind. With such capricious, deliberately-opaque and unresponsive design of so-called regulatory agencies, you can't blame business managers for withholding investment due to uncertainty of government intervention and coercion, disguised as 'regulation.'
That was the title of a staff editorial in last Thursday's edition of the Wall Street Journal. It's ironic, because every time I've heard some pundit wail about the lack of a US energy policy, I think back to my youth, watching Nixon unveil his "Project Independence," or whatever it was called, which promised US energy independence by, I believe, 1980. Back then, it seemed like a good idea, and 1980 seemed a long way off.
Since this isn't my political blog, I'll leave aside the parts of the editorial dealing with the president's lies involving current energy options.
Rather, it occurred to me that something which eight presidents have promised over more than 40 years may well be something that isn't going to, and shouldn't, happen.
For example, the new, promising, large-scale US energy source is shale oil. In Canada, tar sands oil has made remarkable progress in terms of being affordable and reasonably environmentally friendly.
How would the US Department of Energy have foreseen these developments 40 years ago? Aside from dedicating a substantial amount of what could be food supply for animals or people, and thus driving up food prices, how has ethanol beneficially affected the US?
When you subsidize a specific technology, you'll get a lot more of it, regardless of its standalone economic rationale.
Better, it would seem, for the federal government to simply offer a standing bid for energy on a btu or some other energy-equivalent basis, relative to markets, and declining over time. Thus, any new energy source developer would have maximal knowledge of the size and duration of federal subsidies for its products. If, over some timeframe during which it would qualify for subsidies, it cannot improve the economics of its energy source to make economic sense on its own, it would die.
But the US has never done this. Instead, whole industries have grown up around technology-specific subsidy boondoggles, like wind, solar and ethanol. I learned this weekend that GE actually owns a substantial portion of a Texas wind farm. Somehow, the company has managed to wade into the federal subsidy trough to a degree it has kept hidden from the general public. It doesn't simply sell wind turbines. It seems to be making some more money, or garnering extra subsidies, by dint of its unpublicized ownership position. And, of course, having that position goes a long way to explain GE's large-scale involvement with alternative energy. Nevermind that most of them can't compete without subsidies, meaning that taxpayers are funding uneconomic projects which provide corporate welfare.
Over 40 years after Nixon's first bogus federal energy policy, I not only remain sceptical of such efforts. I'm more jaded and pretty much disbelieve that any of these campaigns will do US consumers and taxpayers any good whatsoever. There's always a corporate boondoggle angle to them. Whenever the public sector, with its ability to coerce via laws, enters into the economic arena, you can bet that favors will be bought and sold. That uneconomic decisions will be made due to graft, corruption and the usual things which occur when government funding are available through hard-to-measure programs.
Just the fact that government departments are choosing wind and ethanol, while casting doubt on natural gas, coal and shale oil, makes me sense that the reverse is probably the way we ought to go. But with as few directed subsidies and laws as possible.
Let's face it. Our best and brightest don't generally work in Washington. Not for long, anyway. And, if and when they do, it's typically to be in a position to be hired afterward for much more money by firms with which they had dealings, and probably dispensed favors, when they were in government.
In that sense, the only energy source I can see always being favored in Washington should be solar, i.e., sunlight , transparency and total public disclosure of energy policy subsidies and deals.
Kelly Evans wrote an unassuming piece in Friday's Wall Street Journal discussing the strength of US corporate earnings, despite anemic job growth.
I won't go into the details of her article, but Evans presented some interesting evidence on capital stock shrinkage in the US, while large US corporations, represented in the S&P500 Index, have moved much investment offshore. Remember, too, the large amounts of cash on balance sheets which remains unrepatriated, due to relatively higher US tax rates.
I believe I wrote about this topic at least once since the recent recession. I know I've discussed it with business colleagues. For some time, I've argued that if one owns the S&P500 Index, or components thereof, you are already globally diversified. But without the risks of local exchanges, timing, and liquidity in various foreign equity markets.
That's essentially at the heart of Evans' contentions. The S&P and/or US equity markets can prosper while the nation's GDP struggles, because owning the S&P is a bet on global markets, not solely the US.
Something to remember as one ruminates over how US economic troubles affect its equity markets. They simply are not identical.
I found it amusing to hear Roger Altman, erstwhile Clinton advisor, sing the praises of Warren Buffett on CNBC yesterday morning, despite the recent Lubrizol/Sokol front running/insider trading flap.
The network, I guess to curry more favor with selected guests, and coincide with a golf tournament, has been plastering the title "Market Master" on all manner of financial oldsters for the past week, regardless of whether they ever managed a live portfolio.
Altman was interviewed yesterday, and, when asked, fairly leaped to the defense of Buffett that characterized him as angelic. The superlatives tripping out of the investment banker's mouth made it crystal clear that, by doing business in circles which intersect with Buffett, Altman was not going to say a single negative thing about him. In a business where contacts are everything, you could see Altman had become a shill.
So charming.
In an unconnected story, Netflix, which entered the S&P500 last December, replacing the New York Times, has finally entered my equity portfolio.
For the past few months, I've been hearing CNBC's Herb Greenberg criticize Netflix's accounting practices and equity price. While not recalling all of the specifics, Greenberg's attacks largely centered on content acquisition costs and cash flows. Here's what he wrote a couple of days ago,
"So far this year, Netflix has committed to spend between $300 million and $400 million on new content, including "Mad Men".
If you just look at their balance sheet and cash flow statements you might say: “Not so bad.”
They have about $350 million in cash and about $230 million in debt.
Even cash flow positive, with reported free cash flow of $82 million.
Here’s the problem: In their 10-K, they disclose $1.3 billion in content obligations spread over a number of years, and that’s before these recent deals.
That gets us to their payables, which have been rising to levels not ever seen: $222.8 million last quarter, up from $92.5 million a year earlier. Another way of looking at it: Payables to revenue are 9.35 percent — the high end of its range; it was 5.2 percent in the fourth quarter of 2009.
Adjust the cash flow to reflect the payables and suddenly cash flow isn’t quite what it appears. Len Brecken of Brecken Capital, who has been short Netflix, says that if 2010 operating cash flow of $276.4 million were adjusted for the ballooning accounts payables it would fall below 2005 levels of $157.5 million.
(And this is before getting into his argument that net income is inflated by artificially low amortization of cash content costs.)
My take: Netflix has done an exceedingly excellent job capturing mind share and market share and building a seemingly unbeatable brand."
With the equity now among my selections, I'm no longer a disinterested observer. But Greenberg's arguments are not time-dimensioned. You don't get a sense of when he believes the stock's price will go into free fall.
Meanwhile, Netflix seems to continue to enjoy wide consumer appeal, thanks to its instant viewing capabilities. Yes, I know Facebook and Amazon are competing with Netflix. But there's still the ability with the latter to obtain physical DVDs for viewing material that isn't on demand anywhere. For a fixed price.
If Netflix had more of an opaque profile in terms of what it sold, and to whom, I would take Greenberg's concerns more seriously. As it is, he and other, like-minded critics have been vocally objecting to Netflix's valuation and accounting for several months. That ought to be sufficient time for investors to have factored these stories into their buy or sell decisions. And the firm's equity price has continued to strengthen.
In the past, my equity selections have included Tyco and a few home builders. In each case, my selection process had exited the equity in question long before its price cratered.
I'm not a long term holder of equities. There's a potential for a portfolio to turn over quite significantly after six months. That doesn't mean an equity won't continue to be selected monthly for some time. But each month's decision to include an equity is different than the prior month's. Just last year, Intuitive Surgical and McAfee proved to be disappointments. But that didn't prevent the strategy from nearly doubling the S&P's gross returns.
So while Netflix is now in a portfolio, its weight isn't out sized. And, honestly, I don't care, presently, where its price is in two years. Or even a year, for that matter. It takes a lot of investors with varied valuation models to make a market. Sometimes, despite a firm's flawed long term strategy, you can make money in the meantime.
Last week's BLS employment number for March was 216,000 net non-farm payroll additions.
I was discussing this with a friend over the weekend. She's not a business person or economist, so it was an opportunity for me to explain the overall job loss and recent growth dynamics since 2008.
At this point, I can't find a single reliable number for how many jobs have been lost since the recession began in 2007, but it's certainly at least 6 million. In this post from February, discussing Brad Schiller's outlook for unemployment and job growth. He had written, as I quoted in that post,
"The latest employment reports have not been encouraging. At the rate of 36,000 new jobs a month—the number gained in January—we will never get back to full employment. Even if we keep adding jobs at the December rate of 121,000 new jobs, we wouldn't achieve full employment in this millennium.
At the trend growth rate of 1.2% annually, we get another 1.8 million labor force participants a year, and with them, the need for another 1.8 million new jobs.
To get back to full employment tomorrow, we could get by with another seven million new jobs. To reach full employment by the end of this year, we would need at least nine million new jobs (some 750,000 a month). There's simply no way we will experience that kind of job creation.
Each year brings another two million-plus workers to the labor force (new workers plus the re-entry of discouraged workers). Thus we would need monthly job gains of 460,000 to achieve full employment in time for the 2012 presidential elections.
We created that many jobs one time in the last four years (May 2010)."
So let's use the 9 million number. I looked back at last year's posts on monthly employment numbers, and saw that April's was much like last month's.
So despite all the positive comments last year over a few months of 100,000+ job growth, here it is, a year later, and we're only at 216,000.
If job growth doubled to around 400,000/month, we'd still need 22 months to absorb 9 million new jobs. Obviously, at half that rate, you're talking about 4 years. Writing in the wake of January's anemic number, Schiller's math showed it taking forever, because job growth was being outstripped by new entrants into the labor market. We need at least 150,000 net new jobs/month to soak up the incoming flow to the base of job-seekers each year. Right now, we're at 65,000 more than that, in an economy that has rising inflation, increasing regulation and serious government fiscal and monetary challenges.
Explaining this to my friend, I found myself reacquainted with the truth about the current unemployment situation. That is, while the administration and various pundits are cheering the erratic but mostly rising series of monthly BLS employment numbers, the rate of increase and current levels are just too low to support a serious economic recovery anytime soon.
Schiller's focus on the basic math of the challenge is sobering. And March's employment numbers do not, in the larger picture, really constitute sufficiently good news to celebrate much of anything yet.
Margo Thorning's editorial in an edition of last month's Wall Street Journal, entitled Pull the Plug on Electric Car Subsidies, assembled a useful set of data concerning the economics of electric vehicles.
Going back to 1832, Ms. Thorning noted the invention of the first electric car in Scotland by Robert Anderson. She mentions the first American electric vehicle making its appearance in 1907, then writes,
"Since that time Americans have seen tremendous innovations in everything from air travel to microwaves, yet there has been little progress converting consumers to vehicles powered by rechargeable batteries."
She begins by quoting Consumer Reports reviews which trashed Chevy's Volt as inefficient as both an electric and gasoline car. In terms of cost, she reveals that the Nisan Leaf's battery costs $20,000, yet still only provides an 80-mile range under optimal, which is to say, temperate weather conditions. Drive it in hot or cold weather, and that range shrinks dramatically. The charging unit for such a vehicle varies between $1-2,000. Of course, using an electric vehicle merely transfers energy usage from gasoline to our mostly coal-fired power grid.
Surprisingly, Thorning contends that you'd need $300/bbl oil, along with an electric car battery costing 25% of the current $20,000, to make an electric vehicle cost-competitive.
Thorning then ticks off the various government subsidies to try to sway consumers to buy electrics. There's the $7,500 tax credit, as well as credits for "installing charging stations in homes and businesses and for building battery factories and upgrading the electric grid."
Citing the current administration's goal of one million electric vehicles driven by 2015, she estimates this will result in a $7.5B federal subsidy.
Having read this piece last month, then reading Paul Ryan's editorial in yesterday's Wall Street Journal in support of the House GOP's 2012 budget, I have to wonder whether these subsidies will survive the next two years of federal spending fights.
And, in that environment, with such reliance by Ford, GM, Nissan et.al. on federal largess to market these cars, whether those auto makers are due for a nasty surprise, having sunk so much capital into designing and producing electric vehicles.
I saw Alan Mulally show a new Ford Explorer on CNBC's morning program yesterday. The amount of digital technology in a new car, including various remote cameras and warning systems, certainly distinguishes such a car from one that is just five years old. But those systems are hardly so novel as to be a barrier to competition.
That means all the major car makers will be designing and selling better cars with more useful safety/electronics systems without prices for them rising out of control.
So where will the payoff ultimately come for Ford, GM and the other competitors for electric vehicle design and production that ultimately makes no economic sense? Wages aren't rising, and unemployment is still high. Federal spending is now under more scrutiny than at any time that I can recall in my life.
With Thorning's informative editorial as evidence, does anyone really think the money being poured into electric vehicles is actually going to make an adequate return for these firms any time soon?
Even the typically-competent Bartz can't seem to do more than get a few dollars for using Bing and doing an ad deal with Microsoft. But Yahoo isn't lighting the world on fire with free content anymore, and missed its chance, long ago, to be a profitable, earlier version of Facebook.
