Archive for 2009

  • After 84 Years, GM is Booted from the Dow
    , June 1st, 2009 at 9:37 am

    GM (GM) and Citigroup (C) are out, Travelers (TRV) and Cisco (CSCO) are in.

  • GM Goes Bust
    , June 1st, 2009 at 9:03 am

    What used to be the largest corporation in the world is now bankrupt.
    This isn’t exactly a surprise. Here’s what I wrote in 2006:

    Whither GM?

    In 1979, the British economy was in free fall. Inflation was spiraling out of control. The unions were demanding commensurate pay increases, and when they didn’t get them, they struck. The country that had stood up to the Luftwaffe was failing apart. The garbage men went on strike and soon piles of “rubbish” dotted the countryside. Even the gravediggers went on strike and corpses were gruesomely left unburied.
    The winter of 1978-79 was called the Winter of Discontent, echoing the opening lines of Richard III. The situation was so bad that Her Majesty’s government had to apply for a loan from the IMF. This was back in the days when that had some sense of shame to it. You were even expected to pay it back.
    A reporter asked the Prime Minister, James, Callaghan, his opinion of the “the mounting chaos in the country.” Callaghan said: “Well, that’s a judgment that you are making. I promise you that if you look at it from outside, and perhaps you’re taking rather a parochial view at the moment, I don’t think that other people in the world would share the view that there is mounting chaos.”
    That was it. British socialism died right there. The commanding heights were nothing more than a literal heap of trash. The next day, The Sun’s headline read: “Crisis? What Crisis?”
    I can’t help but think of the similarities between British socialism and General Motors (GM). Once upon a time, GM ruled the world. Today, it’s an embarrassment. What’s good for GM, is largely irrelevant to America.
    For reasons unclear, billionaire Kirk Kerkorian sunk a good part of his fortune in GM’s stock. His investment has been a disaster. Now’s he’s sent his aide, another son of York, Jerome York to be exact, to Detroit to tell the automaker everything they’re doing wrong. The New York Times quotes York as saying: “The time has come to go into crisis mode and act accordingly.”
    No, the time to go into crisis mode has long since past. GM is a fiscal black hole. The company burns through $24 million a day. That’s more than the Yankees. Yet the company still pays out $566 million a year in its dividend. Crisis? What Crisis?
    Talk about unburied corpses. I honestly don’t think GM will survive this decade. Even if it does, it will hardly be recognizable. Any future GM will merely be a Commonwealth living in the shadow of a by-gone Empire. York’s plan is to get rid of the dividend and reduce the pay of senior management. Well…that’s a nice start, but I think GM will have to go a lot further; perhaps ditching some of its key brands like Hummer.
    The New York Times quoted Frederick A. Henderson, GM’s new CFO:

    “To be honest, I am in crisis mode. So I agree with him,” Mr. Henderson said. In December, he succeeded John M. Devine, now a G.M. vice chairman, who accompanied him to Mr. York’s speech. Like Mr. Devine, Mr. Henderson watched impassively while Mr. York spoke.

    Impassively? Ha! I bet they were ready to toss him out the window. I’d actually feel much better if GM were really in crisis mode. They’re not. They’re sleepwalking. Perhaps now, they’re sleeprunning. This is a company that plainly refuses to see reality. They’d be plenty happy to go on ignoring the mess they’ve made, but high oil prices forced the issue. The long-run was much shorter than any of us expected.
    The idea that GM can discount its way home is a foolish illusion. The facts are clear. Every GM car carries about $1,500 in health care costs. The employees’ health care trust has over $20 billion, and GM had to tap it twice recently. For $1 billion each time. Retirees outnumber current U.S. employees 2.5 to 1. The company has stopped providing earnings guidance.
    GM’s problem isn’t cars or legacy costs. Companies can deal with those. What GM has is a leadership crisis. They need to make major changes soon. If not, the Winter of Discontent will last a very long time..

  • Very Cool Interactive Map of GM Fallout
    , May 31st, 2009 at 11:54 pm

    Check it out.
    (HT: ZH)

  • GQ quotes Nassim Nicholas Taleb as saying that in the falling market he “made $20 billion for our clients, half a billion for the Black Swan fund.” Yeah…about that.
    , May 31st, 2009 at 10:45 pm

    Janet Tavakoli does some great legwork:

    A recent GQ article quoted Nassim Nicholas Taleb as saying that in the falling market he “made $20 billion for our clients, half a billion for the Black Swan fund.”
    I checked with Nassim Taleb regarding the $20 billion in gains and asked if he were misquoted. He responded via email: “The quote is inaccurate. THe [sic] 20 billion might correspond to the face value of positions.” This response is both vague and different in character from the mythical $20 billion in gains inaccurately quoted in GQ’s article. The total gains could be a tiny fraction of what Taleb loosely describes as “face value.”
    Why is GQ’s mistake important? In my opinion, public claims of enormous private hedge fund gains require credible back up, and one would think that GQ would have known that before it inaccurately quoted Taleb as having made a bell ringing gain of $20 billion for clients. Presumably, the error referred to outside clients, not the black swan fund itself, but it could have the side effect of attracting investors to the black swan fund, similar to advertising or salesmanship.
    The black swan fund’s strategy is purportedly to buy out-of-the-money put options on stocks and broad market indices and hedge tail risk for clients. The strategy may produce long periods of mediocre—or even negative—returns followed by a large gain and vice versa. No one can tell you for certain exactly when (or for how long) large gains are possible. Initial success in a newly created fund may not be replicated in the future, and there is always the problem of scaling. Scaling refers to the fact that an individual fund may make a high return on an initial investment, say 100% on $100 million, but lose 10% on $1 billion.

    Read the whole thing.

  • Jack Welch’s Challenge
    , May 31st, 2009 at 12:23 pm

    Dealbook:

    It was Jack Welch’s night to reign supreme once more.
    That’s the assessment of Vanity Fair magazine, which along with Bloomberg News staged a panel discussion in Manhattan on Thursday evening on how the economy got into its current mess and how to get out of it. Vanity Fair said Mr. Welch, the former longtime chief executive of General Electric, was the audience favorite as he gave what it called “an unapologetic defense of old-school capitalism in a room teeming with past and future Masters of the Universe.”
    Mr. Welch went head to head with the other panelists and the moderator, DealBook’s Andrew Ross Sorkin. At one point, he challenged the Nobel Prize-winning economist Joseph Stiglitz on the role of unions, saying, “Give me a highly successful, unionized American industry.”

    Hollywood.
    Want another? Pro Sports.

  • Corporate Dividends Are Drying Up According to Bankrupt Newspaper
    , May 31st, 2009 at 12:13 pm

    The Minneapolis Star Tribune reports:

    In February, General Electric Co. — the classic widows-and-orphans stock — cut its dividend for the first time since 1938, a move that will save the company about $9 billion a year.
    The January to March period marked the first quarter since Standard & Poor’s started recording dividend data in 1955 that the number of dividend cuts was greater than the number of dividend increases. A record low 283 companies announced dividend increases in the first quarter of 2009.
    “While the number of dividend decreases is at a record high, the number of increases has set a new record low,” said S&P senior index analyst Howard Silverblatt in April. “Since 1955, the average has been 15 increases for every decrease. Now its three increases for every four decreases.”

  • Barron’s Punches Hole in Green Mountain Coffee (GMCR)
    , May 30th, 2009 at 3:30 pm

    Bill Alpert looks at one of the hottest stocks around, Green Mountain Coffee Roasters (GMCR), and isn’t impressed:

    At almost 60-times the earnings forecast for the current fiscal year ending Sept. 2009, Green Mountain’s valuation warrants a closer examination of the business. That’s more than it seems to have gotten from sell-side bulls — none of whom said much about why March earnings beat analysts’ forecasts by 40% when sales beat forecasts by only 8%. Powering those earnings was an 85% jump in the royalties Green Mountain gets from other companies selling coffee in its K-Cup single-serve pods. As it turns out, a significant portion of those royalty generating sales were to Green Mountain itself, which sells both its own coffee pods, and those of other brands. By boosting its wholesale purchases from K-Cup licensees, Green Mountain can trigger royalty payments that directly boost its profits. Indeed, Green Mountain nearly tripled its March-quarter purchases from one licensee — the publicly-held Diedrich Coffee (DDRX) — thereby generating royalties that we estimate were almost 10% of the $21 million in pre-tax profits that Green Mountain reported in the quarter. As the bottom-right chart shows, Green Mountain has benefited from these transactions for many quarters; Diedrich is just one of a number of K-Cup licensees from whom it has made royalty-triggering purchases. In March, Green Mountain bought the wholesale business of a struggling licensee — the Tully’s unit of TC Global — whose sales to Green Mountain had been rising like Diedrich’s.

  • Western Civilization Peaks
    , May 30th, 2009 at 3:04 pm

  • First Sanjaya, Now This
    , May 30th, 2009 at 2:31 pm

    Here are seven portfolios larger than yours. Oh, did I mention they’re cats and dogs.
    I’m serious.

    1. Gunther IV, the German Shepherd: This dog actually received his inheritance from his father, Gunther III, a German Shepherd who received an inheritance from Karlotta Liebenstein, a German countess. Gunther IV has bought a Miami villa from Madonna and won a rare white truffle in an auction. Learn more about Gunther IV on a Web site devoted to him and those he hangs out with. He’s worth about $372 million right now, thanks to his growing trust fund.
    2. Oprah’s dogs: Oprah Winfrey has several animals, including some dogs. She wants to make sure that her dogs are cared for when she is gone. Her will specifies that that her dogs receive $30 million for their care. (Just a drop in the bucket when you look at the billions Oprah is worth.) True, that money will be split amongst all dogs that she has, but even so, each and every one is probably richer than you are. They’re definitely richer than I am.

    Read the rest here.

  • Harvard MBAs Promise to Be Ethical
    , May 30th, 2009 at 12:11 am

    The New York Times reports that 20% of the graduating MBA class at Harvard has signed a pledge to be ethical. Oh boy. Have far have we fallen that you sign a pledge to be a decent human being?
    Here’s the MBA Oath (the short version).

    As a manager, my purpose is to serve the greater good by bringing people and resources together to create value that no single individual can create alone. Therefore I will seek a course that enhances the value my enterprise can create for society over the long term. I recognize my decisions can have far-reaching consequences that affect the well-being of individuals inside and outside my enterprise, today and in the future. As I reconcile the interests of different constituencies, I will face choices that are not easy for me and others.
    Therefore I promise:
    * I will act with utmost integrity and pursue my work in an ethical manner.
    * I will safeguard the interests of my shareholders, co-workers, customers and the society in which we operate.
    * I will manage my enterprise in good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves.
    * I will understand and uphold, both in letter and in spirit, the laws and contracts governing my own conduct and that of my enterprise.
    * I will take responsibility for my actions, and I will represent the performance and risks of my enterprise accurately and honestly.
    * I will develop both myself and other managers under my supervision so that the profession continues to grow and contribute to the well-being of society.
    * I will strive to create sustainable economic, social, and environmental prosperity worldwide.
    * I will be accountable to my peers and they will be accountable to me for living by this oath.
    This oath I make freely, and upon my honor.

    Two quick points:
    When reading an ethical oath, should it be perfectly obvious how the authors voted?
    Isn’t pride also a sin?