Friday, July 30, 2010

Headline in today's Wall Street Journal

"Hungary Investors May Lose Appetite"

Thursday, July 29, 2010

Swedish gloom goes global

Cursory reading of recent reviews suggests that Henning Mankell's latest novel, "The Man From Beijing", is a disappointment to fans of his long running Wallander series, especially here in the U.S. Reviews in England, Germany , and Scandanavia seem more open to Mankell's latest effort.

"The Man From Beijing" is a stand alone book and the tight and focused crime procedural of the Wallander series is interrupted by travel, geo-politics, and the rise of China. Don't worry, there is still the mystery to be solved, the perverse behavior, the gory crime scenes, and the corruption of old values, just not always happening while overlooking a fertile corn field or a misty fjord or a village in long term decline. Along the way Menkel delivers polemics on global politics, the schism among Chinese leaders, the righteousness of Mugabe of Zimbabwe, and the coming new exploitation of Africa. Without being required to buy into all of the thoughts that Menkel forces on his the reader, the diversions could be seen to make what could have been a standard crime novel more interesting. It's an ambitious but at times stilted effort, but why not go beyond just "Who done it".

One Boston reviewer wrote about an observation that nagged at me as well, without the knowledge here to have an opinion. He suggested that the translation from Swedish to English is flawed, that the English version does not do justice to Mankell's writing style and deft handling of interior nuance. The number of completely American colloquialisms that show up did make me wonder.

Going global is a sign of the times that Menkel wanted to embrace. The usual themes, the dark brooding, and the usual crimes remain on this broader canvas.

"The Man From Beijing" was published in Sweden in 2008 and the English translation arrived in 2010.

Wednesday, July 28, 2010

An analogy that I would like to see

Suddenly surface oil in the Gulf of Mexico related to the BP disaster is vanishing. The danger of more oil hitting shorelines or marshland and killing more wildlife is rapidly diminishing. How did this happen. Was it expected. We know, or I think we know, that there are significant long term problems that remain below the surface, that the extent of contamination in fishing areas is unknown and may still be extensive, and that contamination that has hit marshland may have already caused permanent damage. So far, however, there seem to be no reports of oil settling on the Gulf floor.

This all of a sudden seems better than possibly could have been expected no more than a few days ago if one listened to anything the media or the government had to say. Just keep that darn thing plugged...

The analogy that would be welcome is the same kind of sea change in our economy and financial markets. We know that there's still significant short term stress and unquantifiable longer term damage, and that structural change is needed. What if, however, on the surface positive change suddenly began to take shape. What if the media hyperbole, pundit gloom, and government angst was met with the a resurgence of growth, innovation, and optimism that was completely unexpected. Wouldn't that be wonderful.

One can dream.

Tuesday, July 27, 2010

Consumers not buying the recovery

According to the Conference Board's consumer confidence survey released today, the U.S. consumer's outlook for economic opportunity, income growth, and jobs is on the decline. Consumers in the aggregate are not convinced that this recovery will positively impact their lives. They're not buying the recovery, retail investors are not buying stocks, and with consumer credit not expanding and incentives for home buyers and car buyers waning, the prospects for a decline in consumer spending in the coming months is seen by some as almost a certainty.

How does this correlate with rising corporate profits, huge stashes of cash at many companies, higher productivity in many industrial and service firms, and this volatile but recovering stock market. In fact, the two seemingly opposite trends may be consistent with expected patterns, as follows:
---Equity markets look ahead, not at today. Retail investors are often either wary of "bets" on the future or unable to take the risk of looking forward. Institutional investors have both the mandate and depth of resources to do so.
---After the financial crisis, or are we still in it, large corporations are at this point exceedingly cautious about new hiring and investing, and about making new commitments to expansion and research. The M&A market is just beginning to percolate. That in the aggregate large corporates have the ability to invest and grow without significant reliance on the credit markets is a significant positive, but for now the use of those resources will be like my elementary backstroke and lame breaststroke as I swim laps, and nowhere near a dive into the pool head first and clearing the first lap underwater, yet.
---Many large cap and midcap stocks have global business exposure that gives them opportunities that the U.S. consumer either can't see or sees as a threat.
---What is hard to see and maybe irrelevant on the much discussed "Main Street" today is that the U.S. is certainly one of the world's least dysfunctional economies despite the many issues that are faced. This augurs well for eventual growth, as the world turns(a nod to CNBC coverage).

The big discreet issues for consumers are JOBS and CREDIT. If the points above are credible JOBS have a reasonable chance of stabilizing and then slowly recovering but at this point getting to 8% unemployment by 2013 might be seen as a victory in the financial markets but as an ongoing problem for the chronically unemployed, the displaced industrial worker, the young, or the underemployed. Consumer and small business CREDIT has been drastically curtailed and that will continue for the foreseable future due to regulatory changes and the almost complete disappearance of the securitization markets. Originators are conservative about any extensions of credit, rating agencies are afraid to rate, investment banks are loathe to package any but the safest consumer credit securities, and investors will only take credits of pristine quality. The financial reform bill is still being parsed for understanding, the new consumer credit oversight agency is just being organized, and trial lawyers are sharpening their knives to go after any financial institution that hits a regulatory chalk line that still hasn't been drawn.

That consumer confidence is weakening should not really be a surprise. TODAY is not so good. What that really means for FUTURE economic health is unclear, but it is not necessarily bad.

Monday, July 26, 2010

No Obits

Every morning one of my regular website checks is, the locus of the Danville RegisterBee, the newspaper of my hometown Danville, Virginia, or should I be grandiose and say Metro Danville, since the newspaper's coverage includes Eden, Milton, Yanceyville, and Reidsville, NC, and Chatham and Gretna VA, among other towns or stoplights within a 30 mile radius. Over the last three days there has been a curious occurance. In a coverage area of maybe 70,000 people and an aging demographic there have been no new obituaries.

Maybe it's just too hot to die.

Saturday, July 24, 2010

"The Great Reset", Richard Florida

"The Great Reset" is the sociologist and urban studies writer Richard Florida's take on recovering from today's so-called Great Recession. Briefly summuarized, this is a hopeful look at periods of economic turmoil and recovery, with the Long Depression of the 1870's and the Great Depression of the 1930's being case studies, as incubators for technological and management creativity and as facilitators of necessary transformational changes in economic structure. The book is accessible, easy, and for the most part compelling reading, occasionally provocative, it's an interesting source of factoids, and as a generalized broad history of recovery from the bottoms of economic cycles it's a useful template. The book is tinged with an underlying idealism that at times is worthy of a hustling consultant or spirited motivational speaker. While not having read any of Florida's previous books, reviews and references previously read lead me to see "The Great Reset" as the latest extension of his ongoing thesis and academic exploration, that of looking at the demographic patterns of the "creative class" and extrapolating future trends and urban developments.

Florida's view is one of long term optimism and new opportunities, but for the medium term it does not whitewash any of the challenges. Looking at those challenges he writes, "Results, however, take time. If the past is any guide, they are complex processes that unfold over two or three generations". So as optimistic and hopeful as his overall view is, for many today, such as the 45 year old laid off manufacturing worker, 18 year old high school graduate ready to work hard, 22 year old college graduate ready to engage with the world, or 65 year old retirees hoping that their assets will grow to match their later needs, his thesis for the most part provides limited hope for the type of positive outcome that would have been reasonably assumed in the prior three decades. The gap between the bottom of the cycle and his regenerative and robust future will have many victims. Bluntly put, he says "You don't need to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming, underproducing American empire".

With discussions of economic megaregions, the demise of the "old suburban way of life", retraining of workers, the need for worker mobility and extensive relocation unencumbered by underwater homes, and infrastructure necessities like a commitment to high speed rail, Florida relentlessly looks forward. He writes "The whole approach of throwing billions of public dollars at the old economy is shortsighted, aimed at restoring the collective comfort level. Government spending can't be the solution long term". Those are sound observations that even knee jerk conservatives might like to hear, but at the same time Florida confronts our division of wealth societal challenge as he says, "Cheap mortgages, cheap car leases, and the use of homes as veritable ATMs created fictitious living standards for the middle class and the bulk of the population at a time of low productivity and paltry growth in income, when the bulk of the gains in wealth was scooped up by the top fraction of households". He quotes "Financial Times" writer Ben Funnell's description of this, "Excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of the elite". That hypothesis gives an impression that someone was actually in control of what happened, which is questionable as the great American marketing machine and financial oligopolies just steamrolled with enthusiastic blindness through the last two decades. That, however, does not detract from the validity of his to the point observation.

There are a few weaknesses to the book that, while not especially damaging, marginally undercut the impact of the book. For one, Florida is definitely not a finance guy. His financial insight is limited to generally accepted wisdom, or at times cliches, of the causes of the financial debacle. For a book that aims to tackle head on big economic issues, it's unfortunate that it contains some misconceptions, annoying generalizations, and a few outright inaccurucies about what transpired. As previously suggested, some of the langauge is vague and idealistic with jumbles of high sounding buzz words put together into meaningless paragraphs as in, "Today's shrinking cities advocates... recognize how globalization and market forces work against some older communities and sensibly suggest that such places would be better served by proactively managing the process of transformation and adjustment and by devising strategies to enable those communities to improve their quality of life and realign with the new economic and fiscal realities". Walk down Main Street past the many abandoned storefronts in my hometown Danville, Virginia and try saying that mouthful with much conviction.

Florida's hopes are huge and his intentions good. When he writes that "My greatest hope is that the current Reset can help us fashion a new commitment to work and enable every single person to do work that he or she enjoys, that pays well, and is truly motivating", his idealism is on full display. Who would not want that goal, however much beyond our reach. The preface to Edward Bellamy's "Looking Backward", the classic 1887 utopian novel, begins with an excerpt from a Robert Browning poem:

"We ask to put forth just our strength, our human strength,
All starting fairly, all equipped alike...
But when full roused, each giant limb awake,
Each sinew strong, the great heart pulsing fast,
He shall start up and stand on his own earth,
Then shall his long triumphant march begin,
Thence shall his being date."

Practical suggestions, useful observations, historical insight, and a paean to human creativity aside, Florida's longer term vision is in that tradition.

Thursday, July 22, 2010

2300 or 800

In President Obama's comments yesterday after signing the Financial Reform Bill, he said, "in this 800 page bill...". That was interesting. Every description of the bill to date has been of a bill of around 2300 pages. What a relief, it's only 800 pages, now that simplifies things.

Whether it's political leaders, corporate executives, or the President, it's a fact that these folks spend an inordinate amount of time on optics, as in how things appear, and as opposed to actually spending time on policy, as in how it affects reality. Obama's casual reference is indicative of this. The 2300 pages must have been bugging him, or his staff, so the thought was something like "let's get the 800 out there and show how our detractors are universally exaggerating". Is the 800 the Executive Summary and the other 1500 pages supporting facts, an index, or some such necessary but ancillary information. In the greater scheme of things it's trivial, but to Obama yesterday it was obviously important.

Whether it's the February jobs bill, the health care bill, the existing tax code, the disclosures about the Homeland Security bureacratic morass, or this financial reform bill, COMPLEXITY is the overriding theme. Since real understanding of the majority of this is not remotely accessible to the understanding of the public, myself included, in our democratic society, it requires either an act of faith or an embrace of alienation to come to terms with our governing system today.

Without strong leadership and a belief in the integrity of the legislative process, "just trust us" could be a losing proposition that is easily exploited.

Wednesday, July 21, 2010

"Trader's market" says Finney

Having last seen Kizziah Finney four weeks ago when we bumped into each other in Soho, it seemed to be the right time in this volatile market to give the loquacious fund manager a call. He picked up on the first ring, the man himself unprotected by administrative protocol. He somehow just continued the conversation where we left off last as I expressed surprise at the immediate connection.

"It's this new operation, such as it is. Here I am tucked away in an office in a hedge fund hotel with its pooled administrative and trading services. It's a nice set-up for a start up, which is what I am. On the door it says Avenue B Capital LLC, yeah I went with it anyway, that's my "lane" so why not. No problem with anyone else having a similar name for sure and since investors attracted to me couldn't care less about the name, just the results, it works. It's the least of my worries. The money is coming in from long time acquaintances but the really big chunks will come only after a track record gets going."

I asked for Finney's perspective on the market now in what he last characterized as the hazy lazy crazy days of summer.

"What I said a month ago was spot on, if I don't say so myself. The big difference today is that we have evolved into a trader's market. There are no investors to be seen. Every news item is taken at the most superficial level and, positive or negative, the market just heads blindly and abruptly in the indicated direction. Any volume of consequence is in the large caps and larger mid caps, names that have the liquidity to play with. Small caps are starved for volume and at best holding steady, but often looking like they're a tire with a slow leak. Without investors willing to take positions and with the new legislation weighing on banks, the small cap world lanquishes. At times I think that's true for the market as a whole. The whole tax regime for capital gains, dividends, personal income, offshore investing, and carried interest is up in the air. The new financial regs are really just a blank slate for interpretation. Europe's challenges are still unfolding. And on and on and on. It's not only summer, a summer that's too hot to think, the fact is that the summer is an excuse for investors to sit on their hands. There is no market leadership. I need to catch my breath."

Great time to start out on your own I commented, and he laughed.

"It's ok. This will pass and without some gigantic fund I can fly under the radar with complete access to liquid markets and easily find bargains in the coming months because almost everything's being cooked in the same pot today. It is a perfect time to start."

With that Finney wished me well, and I him, and broke to take another call.

"It might be money, must take it, sorry. Come down to my neck of the woods and have dinner some night so we can be less serious. Bar-bo-né at 11th and B is a wonderful Italian place with a terrace deck on the back under real trees, an oasis as long as the birds above behave. Soon I hope."

Monday, July 19, 2010

More similar commentary

There are only so many ways to look at an existing market scenario and a limited amount of familiar words to describe it. Yet it seems somewhat eerie when commentary here shows up in similar form elsewhere. Yesterday it was Barron's and Google and today its Ed Yardeni's morning briefing. To quote Yardeni this morning, "Investors are in a foul mood. They seem to accentuate the negative and ignore the positives... It seems to be much easier these days to plant pessimistic ideas in most brains than optimistic ones". That sort of reminds me of yesterday's post.

It's good to have company I guess.

Sunday, July 18, 2010

Barron's leads with Google --- is that positive

This weekend's Barron's has made Google its cover story. The Saturday publication followed posts here on Tuesday and Friday touting Google's potential after several years of disappointing stock price performance. Barron's cites, in significantly more detail than here, reasons for the expectation of better market receptivity to Google and quotes analysts looking for 35% price appreciation by the end of 2011.

That's great I guess or maybe it isn't. Barron's is certainly a useful publication but its record at being a lead steer in stock picking is fairly abysmal. It makes me worry.

Friday's market accentuated the negative, didn't mess with Mr. In-Between

On market days like Friday all of the negatives come into clear perspective. On significant positive days in 2010 the reasons for the pop seem less tangible, as in the market was oversold. Is this simply some experience embedded 21st century mental trait that avoids the risk of positive constructs for fear of being seen as a fool, or is it a uniquely American embrace of a country's decline.

Whatever the thought process that drives this, dissecting Friday's market fall does not seem complicated. The bond market is leading the way. On April 1 the 10 year treasury was yielding 4.01% after a spate of optimism about reviving economic growth. On Friday the yield on the 10 year was 2.92%, a phenomenal drop in a three and a half month period. The bond market is pricing in significantly slower growth based on recent economic data including disappointment in top line growth at some major corporates and CPI "growth" of negative .1% in June. Economists are now forecasting, on average, inflation of just 1% for full year 2010 raising both the prospect of slow economic growth and the question of whether economists ever get sick, have kids in college, or shop at Whole Foods. They deal in aggregates and not in real lives.

With the bond market emphatically saying no confidence, 489 of the S&P 500 declined on Friday. That about as broad based as you can get. The major reason discussed during the day was revenue shortfalls at BofA, Citi, and GE. Just beneath the surface was the troubled digestion of the finally passed and comprehensively vague Financial Reform bill, signaling that the search for any clarity of regulation and enforcement is just beginning. Barney Frank then weighed in with ideas for more regulatory bills already being considered, some punitive and some overdue such as addressing the status and management of the political hot potatoes Fannie and Freddie.

Two other issues are apparent here. First, despite some modest federal stimulus, infrastructure spending is dropping like a stone. Valmont Industries has been a high performing manufacturer of poles and towers for street lighting, traffic lights, cell phone towers, and other construction projects. Sales of these utility structures were down 48% from the year over year quarter and, if memory serves correct, the middle of 2009 was not remotely a robust period. Governments, federal, state, and local, are cutting back on infrastructure spending. That's a worry for near term earnings, employment, and investment in future growth. Second, small cap and mid cap companies are rolling over existing debt at more demanding terms as lenders are able to demand increased security and pricing due to less competition and a heightened conservative approach as new regulations create uncertainty. That new credit availability is constrained is well documented but the fact that rolling over existing credit extensions is more dicey for companies and their shareholders is less well known.

The market is by any measure again reaching oversold territory, but psychology has taken a turn for the worse. In these days of extreme volatility predictions are a challenge but it's obvious that the market needs a positive catalyst near term to overcome Friday's action. Maybe the heat will abate and the Rapture will come, forcing vacationing head traders back from the east end to buy, buy, buy.

Friday, July 16, 2010

Google's cash

This may not be the day to follow up on the July 12th comment on Google and other firms. With Google trading like a quarterly earnings slacker rather than a long term growth and innovation story, why would investors pick their heads up and look beyond today. They should, and today offers a lower cost opportunity to look out three to five years for those who have any optimism, or faith, concerning global prosperity.

Google has a balance sheet with $43 billion of assets supported by $38 billion of stockholders equity and no long term debt. That's rich. Richer still is the $27 billion of cash and short term investments that in effect represents undeployed equity. Of that $27 billion it's fair to say that perhaps, rough numbers, $7 billion is useful as a liquidity reserve to reassure vendors, partners, clients, the rating agencies, and regulators across multiple jurisdictions. That leaves $20 billion not invested in the business. If that $20 billion is subtracted from shareholders equity for determination of operating performance, Google's reported ROE rises from 20% to around 50%. That 50% could be said to be the true measure of the performance of Google's operating business model. That's one powerful return.

That doesn't change the fact that the cash is there. Could it be used to initiate a dividend, to buy back stock, further invest in the business, or to make a major acquisition. The reaction to yesterday's earnings announcement is indicative of the accounting mentality of the market. Revenue growth was strong, clicks were up significantly, and even pricing improved, but since Google continued to invest heavily in its business the reported net income was below analyst expectations. In market terms, in trader terms, it was a miss. Taking off the myopia inducing spectacles of the accounting and analyst profession, Google has the money to invest and what better time to do so than when they have opportuninities that other firms don't in this continued strained environment.

In a prior era the significant analytical work needed to understand Google would have been done and marketed by a major securities firm or by a niche analytical specialist like the formerly independent Sanford Bernstein. Today the investment in that kind of work no longer pays the bills or fits the regulatory framework. What detailed work that exists is within the confines of some major hedge funds and major asset managers. When the stock gets cheap enough their day will come.

Wednesday, July 14, 2010


This Sundance award winning documentary is currently in limited release and will open more broadly in the coming weeks. The film followed a platoon of soldiers manning a remote outpost in Afghanistan's Konegal Valley for one year. It is moving, sad, painful, profound, and demands attention. It follows only the soldiers and gives the viewer the freedom to add perspective.

Given that this is the valley that the U.S. finally chose to abandon in April of this year as a hopeless exercise in a strategically compromised location makes it diffcult if not impossible to view this as anything but a pointless part of the war effort. The filmed meetings with the elders of the village would be laughable if they weren't such a serious part of the misperception. To hear the captain saying in a slow emphatic voice, for translation, that what we are doing will bring you money and jobs demonstrates the futility of the effort just as much as the isolation of the young soldiers in the beautiful but harsh environment of the valley battle zone with its firefights.

The personal charm, boyish behavior, and discipline of the soldiers is both engaging and heartbreaking to watch. Overall, it's troubling.

Tuesday, July 13, 2010

Tea Party Taxi

Today I left the city and took a train to the Mineola social security office to attend to some unfinished estate business. That task accomplished (I hope this time, finally) I jumped into a cab at the station stand for the twenty minute ride home and within seconds knew that it would not be a quiet one. The radio was booming with some commentator and the young driver immediately began doing an overlay on the conversation, all having something to do with the Democrats using blacks to advance their cause of government control of the totality of our lives and the formation of a globally conspired system of oppression, all because they want to control our salt intake. "Some people like salt, I don't like bland food, the government has no role in my salt, I don't care what they do."

Me --- "Who's that on the radio?"

"That's Rush Limbaugh."

"Oh, that's Rush Limbaugh.

"Yeah, some people don't like him."

"That's where I fit in."

Without a comment the driver turned the radio down and kept talking. He was intense, young, white, soul patch, powerful looking, loud but polite, and I'm not sure when he had a chance to breathe, opinions coming on all subjects. It was passionate opinion chaos in the cab. Joe Biden's gaffes were somehow turned into insults to the tax paying citizens of this country, Michelle Obama's garden was obviously a tangible threat to our eating habits, Mayor Bloomberg's willingness to allow a mosque in downtown Manhattan was heresy, Communists were still allowed here for sure, it was a libertarian rant on behalf of his view of the real oppressed of this country while at the same time a shrill demand to control or kick out people with different opinions or backgrounds. "I know the other side. I grew up in a poor neighborhood and sometimes the blacks at my school had names for me like evil whitey, I got into fights, and my family didn't even come to this country until the late 1800's. We had nothing to do with slavery, nothing to do with the Civil War. I know the other side but it's the blacks that are always the victims, the Democrats want it that way."

Me --- "You are saying so many things that I may disagree with you or sympathize with you from one sentence to the next. I know that you are upset with our government and our country but what are you for, who are you for? You know that where we are today is the result of many years of government participated in by both parties and not something that's all happened in the last year and a half, don't you."

Driver manchild didn't miss a beat, agreed with me, and then went into needing an independents, independents in general, to run the country, get all of the people that have been in out, out of the way. And then he said something that was so right it startled me. "But you know back in the thirties many Germans felt the same way and look what they ended up with, Hitler. It all went wrong."

We arrived at my neighborhood and focusing on the twists and turns was necessary. He thanked me for the civil "conversation" saying, "some people curse me, can't have a conversation where they disagree and behave in a good way. They just yell."

Me --- "It's a good thing that you have such an interest in everything. Be for something, not just against."

"Thanks for the tip."

Monday, July 12, 2010

Google, Apple, and Microsoft

The question that motivates this comment is "what's going on with Google's valuation". The stock is trading at roughly the same level as it was at the beginning of 2007. It's a revolutionary company that was once assumed to be heading to the stars and now the stock is lagging, up just 12% in the last 52 weeks. Not being able to look at one stock in isolation and make any judgement led to a glance at Apple and Microsoft as well. Here goes.

Apple --- From a stock price perspective AAPL is obviously the market darling of the group. The stock is up 165% since January '07 and 88% in the last 52 weeks. It has year over year revenue growth of 49%, an ROE of 34%, and no debt. Going direct to the consumer with its unmistakeable stores and its record of innovation has moved AAPL's products from a brand for afficionados to a high end mass market "must have" with significant room for growth despite top tier pricing. Loved by its shareholders and its product owners, the only questions are how much all possible future growth is already priced into the stock and the perhaps moot Steve Jobs health question. Would someone buy AAPL now and at what level. The story has legs but it's not close to being a value story with its 16% forward P/E in this market, or does its growth potential still make this a steal.

Google --- As mentioned GOOG's stock has lagged in recent years, a befuddling turn of events for the many who view the company as an amazing institution of research and innovation. Like AAPL, GOOG is debt free and pays no dividend. Unlike AAPL its revenue growth has slowed in the last year to 23%, with the advertising slowdown of the recession and its aftermath having hit even this dominant company. The real questions about GOOG revolve around whether they actually care about earnings and shareholders as much as they care about competing on every new technology front to create this overwhelming integrated information service platform to serve the world and make it a better place as well as to satisfy their competitive ambitions. Can this model be funded by new revenues fast enough to justify its 15% forward P/E. It's 21% ROE over the last 12 months raises the question, but it remains a must own stock for institutions. It seems far too early for this stock to stall out and be viewed as a far reaching but amorphous giant. The guess here is that with any sustained moderate growth in the global economy GOOG stock will begin make an upward move and if Android begins to catch fire the stock will be up 50% or more in 12 months. That's just a guess. Android is a small part of the overall Google systems but, as a direct consumer link, it would have outsized stock market power.

Microsoft --- The first technology titan competes on many fronts with Google and Apple but its long term success has led it into a mature company mode despite its still market leading office and p/c software products. MSFT as a stock is down 20% since January '07 and is up just 7% in the last 52 weeks. The big big deal is that its revenue growth is just 6% over the last 12 months, understandable given its base but now in value stock territory. Despite that, with minimal debt, a 42% ROE, and only a regional bank like 10.2% forward ROE how can investors not take a hard look at MSFT right now. The glamour seems to be gone, but this management desperately cares about stock price and it's still without question a powerful company. Is the fear that MSFT is so intent upon competing head to head with GOOG and AAPL on all fronts that they are doing so at the expense of exploiting their core leadership positions to the fullest.

The question here is which of the three is the stock to buy now if one had the inclination to make a choice. Each has its attractions, but the answer may be to sit tight for the moment and buy the one that offers an attractive buy in at some point. It could be said that both GOOG and MSFT are already there No answer here, but with my reading finished too soon and no interest in television at this hour, why not write about it. I hope that there's time to fix any typos in the morning.

Saturday, July 10, 2010

The Big Unknown --- a market commentary

It seemed right to qualify the title. This is about the stock market and not about the universal existential dilemma. The Big Unknown here refers to that attribute of the stock market that makes it unpredictable even to the writers at Barrons, not that The Big Unknown is even necessary for them to recommend topped out stocks.

This may be boring but some groundwork is needed. For simplicity, I'll cite three aspects of market analysis that are knowable even though interpretation is subjective. The first is economic data and the range of forecasts derived from that data for corporate earnings, government finances, and consumer balance sheets. The second is knowledge of the actions being taken to influence the future by those same constituencies, corporates, governments, and consumer aggregates. The third is a picture of trading dynamics including money flows, diversification imbalances, interest rates, foreign exchange rates, and relative returns. For a securities analyst or economist to get his or her arms around all of that is a daunting task but in a way it's a level playing field. It's a competition to see who can figure it all out and come to the most coherent conclusion.

The Big Unknown is what can't be analyzed except by the lucky or smart few. This is not referring to unexpected cataclysms like Archduke Ferdinand's assassination leading to WWI within a few weeks, 9/11 , environmental disasters, or other seismic events that defy analysis. The Big Unknown here refers to macroeconomic trends that are bigger than any one discipline or set of facts. These trends are not seen by specialists and only through interconnecting multiple trends intuitively and creatively is there a chance that they can be seen. Even after the fact they may not be obvious. What the heck is being discussed here.

As one example, leaders in corporations are judged first and foremost by their results. Having worked in a financial services one for many years(and being opinionated and, I hope, insightful) the influence of big macro trends was possible to see. A mediocre manager with a middling work ethic might be handed responsibility for consumer banking right at the beginning of a long term trend in which funding costs decline and aggregate credit demand picks up. The result, earnings improve substantially and it is "obvious" that this manager is just great, an exceptional strategist. On the other hand a gifted and hard working manager may be given resposibility for an operating services business(transaction processing and trust services) just at the point that the industry begins to change and new technologies need to be invested in and employee costs would significantly rise. The result, costs go up, earnings decline and the manager is "behind the eight ball" and just not tough enough.

The best recent political example is the credit President Clinton, his economics team, and the Democrats get, or take, for balancing the budget by 2000. Stop and think. He took office just as the technology boom began and left just before it crashed. During his second term the salaries, bonuses, capital gains, and stock options exercises related to the technology boom were unbelievably huge and tax receipts soared. With few significant new public initiatives in health care, energy, or infrastructure and their attendant costs passed during the Clinton administration and his refusal address the broken Alternative Minimum Tax burden, costs were controlled. Rubin, Summers, and company did not do anything to get in the way of the party, to their credit or not, and, voila, a balanced budget.

In stock market terms great performance by investment managers is often as little under their control as bad performance. Relative performance is therefore the measure used in the industry and in the short term The Big Unknown is kept in the closet. A few look for it and maybe a few of those actually find it. In 1993 I was with a senior executive at a meeting with investors and he explained in detail his strategy for managing his business, taking great pride in all of the nuances that he could see and the discipline that he would reinforce. When asked about his outlook for performance he was cautiously optimistic.

As we were leaving a young, and casually brilliant, hedge fund manager came up to him laughing and pleasantly said something like, "don't worry, you're going to make money hand over fist, everything's going your way no matter what your plans". The senior executive was befuddled and tried to start explaining his strategy and strengths again, looking to get some kind of affirmation or compliment. The hedge fund guy irreverently said, "You don't even know it. Have a great night." and walked on by.

This is by no means a new concept. It just happens to be on my mind these days.

What's going on in Thailand

It was reported this week that there is such strong demand in Thailand for new compact cars that Nissan has customers on a five month waiting list for its most popular model. By emerging markets standards it's not so cheap, with a cost the equivalent of U.S.$11,600. Auto production by Nissan, Ford, and Toyota is expected to rise 60 percent this year to meet higher demand there and in neighboring countries, and auto production represents more than 10% of the nation's economy.

This is the country that we watched in serious political strife during the spring, strife that ended in what seemed to be an inconclusive way. The finance ministry there has raised its growth forecast for the economy twice in the last three months despite a still flagging tourist sector. Somehow this all seems more robust than could possibly be expected.

In trying to understand the outlook for the country, I have been working with four assumptions. First is that reading western media reports about the situation in Thailand is highly segmented and unreliable, and finding the big picture that gives an overall understanding of the country is close to impossible. Second, the political situation is centered around wealth inequality and, with the exception of a radical fringe that is inconsistent with Thai culture, is not based on any capitalist vs. communist western ideologies. It is a long term problem with the likelihood of more wrenching episodes ahead unless the government can better address the issues of the impovershished in rural areas, both in actuality and perception.

Those two assumptions are "why am I bothering to read this" obvious. The next two are guesses from afar by one with no experience in the country. The third is that the protestors may well have found out that their efforts were not necessarily well received as they returned to their provinces. Many parts of the country, not just Bangkok and coastal resorts, benefit from tourism up and down the economic spectrum. Cutting this off must have been painful to many despite their political beliefs. Shutting down auto production, with the data above considered, was almost certainly a look at the possible abyss for the rising lower middle class. Rising standards of living in emerging economies lead to rising awareness of inequalities as well, but seeing a threat to wealth accumulation, tangibly experienced, leads to pragmatism. Is this off base in relation to Thailand? The fourth assumption is that what seems to be the complete absense of any martyrdom of the "renegade general" that was killed by either the government or rival protestors is positive. It underscores his role as an opportunist and one that was likely supported and maybe funded by the exile Thaksin.

It has been said by some that despite all of his corruption and double dealing that the Thaksin government era was the most enlightened and balanced that Thailand has ever experienced. I have no idea whether that is correct or not, but Thaksin as an exile seems to be completely self dealing and toxic for the country. With all of this said, comments to enlighten would be welcome. What's going on in Thailand?

Thursday, July 08, 2010

Thanks for the visit sports fans

For those of you who hit "HEAT", yesterday's post, hoping to find a prescient comment about Lebron's upcoming choice, thanks for your nanasecond visits. Come back again anytime for the prophetic insights that the eyes have not seen.

Wednesday, July 07, 2010


It's been hot, staying hot too it seems. That's not just in New York of course. The Northeast, mid-Atlantic, the southeast, Texas, lots of areas are getting their 100 plus degree days. This comment is about New York where it is always a shock to go through a period like this, the memories have receded because they can't seem to be replaced by the actual experience.

This heat is mind numbing. As one who really enjoys a mile and a half walk to the local library to browse, read a few magazines, say hello to someone perhaps, and use a different computer, in recent days that outing has been out. The walk now leaves me drenched in sweat, then walking into artic air conditioning and sneezing, and the return walk is uphill that is more of the same except for final the semi-vertical climb up the street to our house that leaves my hair looking as if I've just taken a shower, my legs feeling rubbery like they've just been through major exercise. It's not worth it, not for the library, the butcher, the diner, the Chinese take-out, or the good pizza shop.

Folks reading this may say what punk is writing this. He could be in 115 degree Phoenix or experiencing the more reasonable 100 to 105 degree tempertures in the 100% humidity of towns like Washington or St. Louis. Well, then I say try Manhattan in this weather where I have reason to be three days this week. Manhattan is always a noisy place, cars, taxis, buses, horns, voices, and subways, and heat like this just seems to accentuate the noise. Manhattan has plenty of stressed our people who work too hard and more who can't work enough or at all. Compared to the 1970's and 1980's the city is a wonderfully civil place but in this heat it's easy to see that temperature gauges on some people are just about to blow, either their minds or their bodies. Hemmed in by buildings and crowds there is not a hint of a breeze or a stray zephyr(I have always wanted to use that word). Yesterday the city was sending out large fire trucks to supplement the EMS force due to the number of elderly, indigent, or others who just fall out on the streets.

And speaking of Phoenix, summer there is so hot that on the worst days walking anywhere forces everyone to bend into the heat waves like they do in the cold of winter snowstorms, but everyone drives everywhere in that city so once they remove the towels from their seats and steering wheel(if they are not garaged) they escape, often from one garage to another. In Manhattan, walking is essential for short to moderate distances or even longer depending on transportation availability, subways platforms are stifling(but today most subway cars are not), and taxis, if they can be found are often configured such that the struggling cars a/c output cannot get beyond the partitions that protect the driver from the passenger. The driver is cool, the passenger is claustrophobic and near a panic attack.

Back I go into Manhattan tomorrow, carrying a small high powered flashlight just in case power is out once again when I return as it was yesterday, and hoping that I don't get to relive 2003 when much of the Northeast power grid blew out and subways and commuter trains and lights all shut down. I'll stay out of elevators.

Just a few more days and we'll be back into the balmy high '80's to low 90's and the market caught a needed run today, I too caught a needed run as we drove to the gym so all could soon be well, or at least for today. For those without air conditioning in their city homes and apartments, however, it must be miserable.