Friday, February 24, 2006

A few comments on current events and recent reading

With no particular insights or inspiration for some rant, here are a few comments on current events and recent reading:

---the bombing of the Askariya Shrine and subsequent events in Iraq is a disaster. It is beyond comment.

---the port facility operations issue is amazing because it is hard to fathom how the cosmetically sensitive Bush administration could have misread this so badly. Much has been written, but two columns in today's NY Times(2/24), one by Thomas Friedman and one by Paul Krugman, outline the debate. Both columnists are no big fans of the Bush Administration, but Friedman details the issue with his somewhat less political, more global perspective while Krugman continues with his well documented negative views on virtually everything related to Bush. Friedman says "the president is wrong on politics but right on ports"(he has absolutely no sympathy for Bush's political problem here), while Krugman's view is that "the administration has become a victim of its own campaign of fearmongering and insinuation". Even Krugman says, however, "Mr. Bush shouldn't really be losing his credibility as a terrorism fighter over the ports deal, which, after careful examination(which hasn't happened yet), may turn out to be ok".

---On a totally different note, John Updike's short story, "My Father's Tears", in this week's New Yorker(2/27) was a highlight of my reading in recent days.

Saturday, February 18, 2006

Googling "Economist"

The 2/18 Economist copies the Barron's title of "Gurgle" with an article on Google. Whatever the merit of their comment, as is sometimes the case the Economist's writing is entertaining, as in their first paragraph:

"Serving fine wines to chief executives and global leaders too drunk to appreciate it made Google's party the talk of last month's World Economic Forum in Davos. Its generosity with 1959 clarets and 1990 Krug champagne seemed, at the time, only to confirm the firm's greatness. Yet, three weeks on, Google's pristine reputation has been damaged by its willingness to collaborate with the Chinese government's censorship requirements, its shares have tumbled, and the Davos party is in danger of resembling the Great Gatsby's glorious last hurrah."

Well, whatever.

The rest of the article is meaninglessly balanced. I don't know, of course, where Google's stock price is going, but Google as a concept and an operation appears to be unique. It has technology and it has real aspirations. It may be the most American style optimistic company out there today.

Just another way to destroy shareholder value--the latest at Time Warner

In my nascent blog in December(on 12/16), I made some comments in two parts about Time Warner and the immense value in the company that wasn't being managed, but could be by the company itself and not by outsider influence. Events now are such a disappointment. The players have been:

Carl Icahn---a wart on Adam Smith's invisible hand; long time corporate raider--- don't get me wrong, there is nothing wrong with leveraged buy outs. They can throw out entrenched self serving management, incent workers for performance, and revive a dying company--- and then there's Icahn, who goes in like a leech, takes everything he can, and leaves a company, community, and workers to, at best, follow their newly charted Darwinian path(the revival of this approach at private equity firms today is very troubling). His lack of visibility in the late 80's and first half of the 90's was( just my very opinionated guess) a result of his successful effort to avoid a Boesky like downfall. At 70, now he can try to look like a corporate statesman. And it seems as if it's working, as the NY Times even treated us to a description of this person's 70th birthday.

Bruce Wasserstein---a top investment banker; unfortunately that distinction includes people who will do virtually anything for money, power and prestige-- they can manipulate the facts and analysis, and if it works, well that's business for you. Hearsay is that Wasserstein is razor sharp, arrogant, and demanding. It will ultimately not be good for him to link himself so publicly with someone like Icahn. He's presumably better than that.

Dick Parsons---CEO of Time Warner; a master of compromise who was able to move toward ending the long standing dysfunction created by the mergers of Time, Warner Communications, and AOL(yeah it goes back that far). He has been a positive force. But he is also, it seems, a CEO who is not capable of taking the next step. Time Warner now needs a heavy charismatic hand at the top to integrate related businesses, sell unrelated businesses, manage costs, stop cross subsidies, and attack the fiefdoms that still definitely exist.

The Outcome of the Fight---lots of legal expenses, communications expenses, management focus etc. for shareholders to pick up; a commitment to more share buybacks and more expense reduction by Time Warner(not as tangible at any company as the publicists would have you think); lots of publicity for the egos of Icahn and Wasserstein, who are both so wealthy that this is perhaps the biggest reward; and no changes of substance.

As a small shareholder, one of many, I received a letter from Time Warner dated 2/7 related to the then current situation. It was full of platitudes and the usual corporate PR BS that seems to be required. But it talked about growth and it talked about huge buybacks of stock. Is that consistent? If there are growth opportunities, invest in them. If not, buy back stock and cut costs dramatically. Sell businesses, stop treating top and middle management as if attendance at work is a sinecure for large salaries, and run this company like a business, not the regal country of Time Warner. And to the Board, do it yourself. Don't wait for more prodding from the outside that will destroy more shareholder value. Just quit your board seats if you are not going to do anything but fly in the corporate jets and eat at the extraordinarily expensive restaurants on the fourth floor of Time Warner center.

Friday, February 17, 2006

Good News---U.S. consumer spends?

Watch Out. Here comes another impressionistic market commentary, unadorned by research and not hampered by accountability.

Tuesday's news that U.S. consumer spending rose 2.3% in January despite higher fuel costs, higher interest rates, and a leveling of home prices was widely viewed as big news, big good news. Is this really good news?
Where is the spending coming from? Tax cuts have helped over the last few years, but with the focus on the deficit in Congress now, there will be no more money from that spigot. At this point it's not news at all that the home as a giant ATM is running out of cash. People could be saving less, but with aggregate consumer savings at 0, that would be negative savings, often referred to as debt. There is currently some aggregate job growth and wage growth, but what kind of jobs and what kind of wage distribution?

Could it be that consumer spending is reflecting an ingrained and seemingly necessary habit unrelated to the consumer balance sheet? Children do need a lot of stuff, everybody needs to drive and needs heat, and simple pleasures like going out to eat a few nights a week and going to the mall or Walmart to get a few things on sale are a part of life(fyi, while aggregate consumer spending in January was up 2.3%, spending in the restaurant and bars segment for January was up 3.2%).

Here are a few more possible facts in this consumer equation. In 2004 37% of all consumer mortgage financing was adjustable rate and of that 88% of the lower credit score segment was adjustable. With predominantly two and three year resets, these adjustable rate mortgages will increase by at least 1.5% in 2006 and 2007. On large numbers, that will be a large increase.

So what's my point, as my daughter would say. Credit cycles always come around. It's been awhile. They always result from excess. It may be months and may be a year or more, but it's hard to see how significant consumer credit defaults in credit cards and mortgages are not in the cards, or those cards, already. If that thinking is by any chance correct, the longer things are "good", the harder the fall.

But that the numbers overall look good seems to be the consensus. That view concerns me because the numbers are aggregate numbers. What is the distribution within those numbers? Just completely hypothetically, if the aggregate numbers stay fine but at some point 20% of the sample gets to the end of their rope on their mortgages and credit cards, could that be a crisis in the aggregate economy.

What's the good news on the credit front. Corporate balance sheets are overall in good shape. Commercial real estate financing is generally speaking as sound as its been in decades. But the linkage between this good business news and the consumer is not as strong as it was even a decade ago. The business sector is now generally more global, investor focused, and service oriented. The consumer sector is national and has multiple labor and wealth characteristics.

So why the heck do I write all of this if I'm not offering a solution, and I'm not. Well, awareness and discussion is a good thing. I can selfishly get this thought off my mind and come up with something more upbeat to think about. And I can move to a more optimistic point of view that the U.S. often has an uncanny ability to adjust as the trends become clear. Business Week's 2/13 issue has a cover article entitled "Unmasking the Economy---why it's much stronger than you think". It's not my favorite magazine, but there are some interesting thoughts there.

Well, enough of this. The sun just came out.

Tuesday, February 14, 2006

The New Yorker--The anniversary issue--2/13 and 2/20

Either the current issue of the New Yorker is unusually full of great reading or I was so relieved to be inside and not shoveling any more snow on Sunday afternoon and Monday morning that I just paid more attention than usual. Anyway, there's a lot to read in this issue, including:

---A personal history of cookbooks by Nora Ephron
---an essay by Malcolm Gladwell on the likely fact that whether it's homelessness, police brutality, or auto emissions, the real chronic issue is an extremely small segment of each population, and what that suggests for solutions.
---James Stewart on the fall of the mutual fund manager and philanthropist Alberto Vilar, which has already been chronicled in some detail in the NY Times over the last year, but this adds more.
---A report by Steve Coll on the relationship between Pakistan, India and the U.S. relating primarily to the tensions in late 2001 and the nuclear wild card that is represented by the opposing sides, and by the question of Pakistan's actual control of its weapons. The detail here is a little tedious at times but the issue is important enough to plow through it.
---Very importantly, there's a three page comic strip by Aline and R. Crumb that's priceless.
---A wonderful short exchange between Mark Singer and Donald Trump in the Talk of the Town that shows Trump as the callous lout that he is.

And I have not taken the time yet to read the short fiction by Haruki Murakami, which I expect to do soon. The only sour note so far is the consistently uninspiring Financial Page by James Suroweiki. He writes about the issue of CEO pay which is ok, but he almost never has anything insightful to say and just repeats what has already been written in other publications, week after week, not up to New Yorker standards it seems to me.

Thursday, February 09, 2006

"the Onion" scoops again

Once again "the Onion" leads with a story not covered by the mainstream press. The headline is "President Creates Cabinet Level Position to Coordinate Scandals". Of note in the article is "the centerpiece of Bush's plan is the Department of Corruption, Bribery, and Incompetence, which will centralize duties now dispersed throughout the entire D.C. area political establishment". Importantly, the department will "eliminate redundant payoffs and bribes", which should lead to a more efficient Congress.

Tuesday, February 07, 2006

Enron prosecution hits IR man

It's tough for me to read about the first witness for the prosecution in the Enron trial. He's the former head of Investor Relations for Enron, and he's been was on the stand for three days. In August 2004 he made his guilty plea and now faces from zero(yes 0) to ten years in prison depending on how he handles himself. He has a wife and three children. This kind of prosecutorial leverage should taint the proceedings from the outset.

But let me talk about the job of this first premier witness. The head of Investor Relations for most corporations has the primary responsibility of communicating the company's message and results to the investment community, following SEC rules, and receiving the opinions of investors and analysts and making sure that management is kept well informed. Additionally, Investor Relations has administrative responsibility for arranging for analysts and investors to meet with management, arranging conferences with investors, and arranging road trips to go out and talk to major shareholders and prospective shareholders. It's generally a big communications and admin job.

But let me get to the heart of the matter. My guess is that if 5% of Investor Relations officers have a seat at the table when important strategic decisions are being made that would be a very high number; if 10% are observers when really important financial decisions are being made that would be a very high number; and I would be surprised if 20% of Investor Relations officers across all industries had any but the most cursory corporate finance and accounting background.

It seems to be easy to tell from press reports that Mark Koenig, the Enron IR guy, had no role in corporate strategy. It's also clear that he wasn't at the table when important financial decisions were made. And as far as an accounting and finance background, it doesn't seem like he's aces there either, because he does not seem to be able to explain anything that happened other than "one day the number was this, the next day it was that".

Some of his commentary is damaging to the defense and has merit, if not coerced. Those comments relate to the underperforming non-trading units and Enron's decisions to obfuscate, at best, the reality of those businesses. What he says makes sense, and reflects an understanding of what investors will pay for---they want real businesses with growing predictable returns and not just a big possibly volatile trading business. So Enron apparently made sure to emphasize those businesses that were non-trading businesses, at the same time that trading may have represented 100% plus of earnings(and of course that's why Enron collapsed so quickly. Pull liquidity from a trading business and it can't trade).

My point here, however, is that the prosecution is making a spectacle of a man who had no strategic input, no meaningful accounting background, no input on significant financial decisions, and who they have by the cojones. Just the pictures of this man in the newspaper are painful to see.

For what it's worth I see Skilling, along with Fastow, as the person that needs focus, Lay as a secondary character, and I watch the prosecution lay the groundwork with a person that is way in over his head. Regardless of the merit of the prosecution or defense, the prosecution, in my opinion, has made a mistake. Everyone can see that Mark Koenig is the wrong man to destroy.

Sunday, February 05, 2006

Addendum to prior post

Based on some comments that I've received, perhaps I should stick to the markets. Please note that in my prior post I speculated about "their rationale" for the war in Iraq. As I noted, it was speculation, and I wrote it as if I were writing this as a presentation for "their rationale". That rationale is based on many facts, but the magnitude of the threat and the method of acting on the threat is the question. I ended by saying, which I completely believe, that the two simplest explanations are, well, too simple.

Wednesday, February 01, 2006

Why we are in Iraq

Tonight in the State of the Union address, President Bush talked frequently about Iraq. He even used the phrase "weapons of mass destruction" which was not smart as it just reminds everyone that they were not there. Please retire that line. I do presume that the President, the CIA, and others thought they were there, but that was never why we are in Iraq. I wish that he would have just finally told the truth about their rationale, perhaps like this.

"The United States is at war. It is a different type of war, but it is no less important than World War II in Europe. We are fighting this war against a minority of the Middle Eastern Muslim population who fanatically dislike the U.S. and English long term support of Israel, and of exploitive dictatorships in Saudi Arabia and elsewhere. They are fired by a centuries old version of Islam that has no limits on what one should do for their faith, be it mass murder, beheadings, or suicide. They are a danger to not only America but to Europe and the entire Middle East. Left to fester without this intervention they could terrorize the U.S. and Europe with 9/11 type catastrophes, and eventually build a Middle East with no rights for women, brutal suppression of any political dissent, probably some societies with stonings, chopped off hands, beheadings as punishments, and likely the end of Israel.

The United States must have a base of operations from which to fight this war. In World War II in Europe we had England, and since we won and introduced the Marshall Plan we put major bases in Germany to deal with the Soviet threat. We even have a base in Italy. In Asia we had to establish bases for naval operations in the South Pacific and for air force operations in southern China. And guess what, we now have bases in Japan and South Korea. So this is not a new idea. It is essential to be on the ground in the Middle East and not fight from a couple of aircraft carriers and slivers of land borrowed from Saudi Arabia for a limited time frame.

So why did we choose Iraq, because there is very little reason to think Osama bin Laden had any relationship or support there. Well, you know they could have had weapons of mass destruction. But they absolutely did have a brutal dictator who had committed mass murder in the Shiite south and the Kurdish north of the country, who tortured political opponents, who stole billions from the country's oil revenues with the help of international financial sociopaths like Marc Rich, who shot his son in law in the head in front of others, who invaded Kuwait without provocation, who fired missles into Israel, and who even conspired to assassinate my Daddy. Except for some of the Sunnis and the Russian and European firms that built his palaces and infrastructure, no one would miss this guy.

We are in Iraq for the long term. We must have a significant military presense in this region. We want the Iraqi people to have the freedom they did not have under Saddam and a chance for the Kurds and Shiites to have a life free from the fear of detention, torture, or slaughter. So we have two important goals --Establish a long term military presense and eventually help build an Iraq that is an example of Muslim integration and not tribalism.

But this is war, and war is not a good choice, but sometimes a necessary one. War is not predictable when you're in the middle of it. After our success in Afghanistan, we made some mistakes in Iraq about the level of sustained resistance. Inadvertantly, we created a roach hotel for terrorists from Saudi Arabia, Syria, Pakistan and elsewhere. That's made the mission more difficult, but we would have to face them somewhere and in a sense it's better to have them congregate in Iraq than focus elsewhere. They are attracted because they know what our real mission is.

Our soldiers that are fighting this war are heros and are not fighting just because of Saddam, oil, or some manifest destiny. They are fighting to preserve global stability and peace as we know it. They are fighting so that gradual change can come to Iraq, Saudi Arabia, Egypt, Iran and other nations. And they are fighting so that we are on the ground if an international threat develops, as is the seeming case with Iran right now. They have a tough but heroic mission.

I appreciate the support of so many of you in this difficult but essential endeavor. And I urge those of you who have had differing opinions to carefully consider the magnitude of this threat. The United States is at war."

Of course, the above is conjecture. Holes can be punched into the logic by those with a different point of view. But the point here is to speculate about what the real rationale for this war is rather than to think that it's just, "MWD's not there but oh shucks now we're stuck" which is just too simple or "The only reason that we're there is for oil and Halliburton", which is simple, cynical, and ignores events that led to the present situation.