Posts filed under ‘Market’
Can You Spell “Vindication”?
I was just reviewing one of my predictions about the Wireless space from some months ago. I took a lot of flack from some readers at Seeking Alpha for my suggestion that Clearwire (NASDAQ: CLWR) had issues, and that Dragonwave (NASDAQ: DRWI) had risen a bit too fast.
Yet over that period, the S&P has dropped about 8%, while CLWR has fallen more than double that amount.
Moreover, there were those that scoffed at my idea of a pair trade on the equipment suppliers: buy Ceragon Networks (NASDAQ: CRNT) and sell Dragonwave. It’s pleasing to note, however, that had any of them done so, there would have been a nice little pot of gold at the end of the rainbow.
Ceragon has lost 32% over the period, but that pales in comparison to DRWI’s drop of 47%.
Each time I’ve suggested Ceragon is a solid company with a bright future in a growing space, people have pooh-poohed the suggestion–for one reason or another.
I may be wrong someday but I’m still waiting. In the meantime, vindication sure feels good.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Alpha Bits
Alan Reynolds has an op-ed out this morning in the Wall Street Journal chastising those who believe poor job growth is driving us into a double dip recession–the so-called “W” pattern. It seems Reynolds would have us believe that our economy is more like a “U” (or, dare I suggest, a “V”?). And that as a result Keynesian efforts to keep supporting the economy are not needed.
It’s well researched and well written, and argues persuasively that–properly interpreted–recent jobs numbers aren’t all that bad, amounting to a net gain this year of roughly 100,000 private sector jobs per month. (It’s about double that if you add in government jobs, some of which are temporary). I even agree we need to be careful with the fiscal magic wand, at least absent a long-term strategy for handling the deficit, as Bernanke suggested yesterday.
However, for all his hair-splitting, Reynolds seems to miss the point.
Recent estimates indicate more than 8 million jobs were lost during the panic and Great Recession. In a nice, steady expansion (3-5% annual GDP growth), let’s say the economy adds maybe 300-350,000 jobs per month. At that rate it will take 24 months just to get back to where we were beforehand, employment-wise. And at only 100,000 jobs per month this year, we haven’t really started the clock yet.
Imagine. Two years just to catch up.
Even worse, we’re not counting the growth in the labor force since 2008 (young people coming of age minus those retiring). Plus fewer than expected can afford to retire now, given how their savings have been decimated in recent years.
Then there’s the economy. Yes, there have been impressive gains over the last year or so. Always stated breathlessly by the popular and financial press, in terms of double-digit percentage growth. Little mention of the drastically low base that growth is from. In fact, frightfully few actual numbers at all. Just growth percentages. No indication of how far we still are from the level of economic prosperity we enjoyed in 2006 or 2007.
[Some of that growth, by the way, has come from temporary fixes--namely government stimulus. The rest has been due to industry overproducing to rebuild inventories, after running the pipeline dry when few were buying. In the old days we called that stuffing the channel. Now we refer to it as a rebounding economy.]
Further, there are all the references to growing corporate profits. Sure, if you lay off lots of people and lower costs, then even with falling sales you can engineer rising profits. But that can’t last without an increase in demand. And that requires workers with salaries, as well as currently employed people with rising incomes.
What we’ve seen so far has been more akin to a relief rally in sales than a true demand increase. People who had been holding their breath finally buying that refrigerator or car once they realize they won’t be losing their job. But flooding the economy with cheap money, as the government has done, is ineffective in an environment of low demand and fear over jobs and savings.
It’s like pushing a rope.
Until there is unequivocal evidence that people feel confident enough to really start buying again, small businesses–the engine of job creation–won’t hire. Nor will banks lend to them. It doesn’t matter how cheap money is, no one will risk lending to a business that can’t demonstrate demand. Despite the rise in the market over the last year, banks aren’t lending, which shows you what they really think.
Bottom line, with vastly lower employment, lower (and slowly rising) housing prices, a drop in equity wealth, a rise in the savings rate, and massive consumer deleveraging, its difficult to conceive of a way we can get our economy back to pre 2008 levels in anything less than 4 or 5 years, perhaps more. If we do, it will only be because consumers are going into debt again, simply postponing the inevitable. Or as I’ve discussed before, re-inflating the bubble.
So is the economy headed for a double dip (“W”)? Perhaps, but not likely. Frankly, I suspect it’s more like a “square root” symbol–sharp fall, then a small rise, then flat. But no matter which you believe, what is clear, and most relevant, is that the recovery is not a “V” or even a “U”.
Yet that’s exactly what the market has priced in over the last year.
There’s no doubt we’ve had an impressive bull run in the market since March 2009. However, the cracks are showing. It’s been clear to me for some time that the market has gotten ahead of itself, and that this is one of those times where the market and economy have become disassociated. Until recently, the pundits have all been saying that we can’t be at a market top, because there’s still too much money on the sidelines, and we don’t have a top until all that money rushes in.
They underestimate the uncertainty that still grips many on Main Street. People have been keeping a lot of their funds in cash or safe bonds because they no longer trust the market.
Really, what I think was happening up until the “flash crash” is that money managers have been talking their book. Waiting for the suckers to come in at the last minute so they could sell at the top. Except the suckers didn’t come, and with all the new fear and volatility introduced by Europe’s problems, they aren’t going to. Which is why there’s been so much selling lately, and why I believe this is more than a simple correction in a continuing bull market.
We’ve been in a secular (long-term) bear market since 2000, and there’s no sign we’ll be out of it soon. Not until we get the economy back to prior levels–which as we’ve seen will take awhile. We may be at the end of the cyclical bull market that began last March, and could experience one or more short-term bears and bulls before we finally pull out of all this.
In fact, in hindsight it appears as if the rapid rise in the market from March 2009 to July 2009 was the “relief rally” that compensated for the panic of late ’08, while the rise since last July was the real “bull” market. If so, there’s even a small chance we’ll be revisiting those July lows before we see another sustained rise.
In any case, the part of the alphabet we assign to the economy isn’t the real issue right now. It’s the “W” in the stock market that we ought to be worrying about.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Yes, We Have No Bananas
Did you ever wonder if the game is rigged?
Sure, lots of recent sentiment seems to indicate that the worst is over. Banks are declaring profits , the market is up, there are “green shoots” poking up through the dead leaves of the economy. Real estate activity is picking up in moribund regions like Sacramento and Las Vegas. Maybe we’re nearing bottom.
On the other hand, pundits can’t agree on whether we’re headed for massive inflation, or slip-sliding away down the deflationary toilet bowl. Consensus seems to be that the bank “stress tests” are a sham, using unrealistically favorable assumptions.
Just yesterday we hear the government believes Bank of America (NYSE: BAC) will need to raise another $35B. Does anyone really believe that will be the end?
Finally, there’s Fed Chairman Bernanke’s repeated assertion that none of the banks undergoing stress tests will be allowed to fail. For all the talk about how we’re too smart to repeat the mistakes of either the Great Depression, or (more to the point) Japan’s “lost decade”, we seem well on the road to creating “zombie banks”. Colorful shells made up of window dressing and government infusions, surrounding a soft, chewy middle of bad assets.
How many licks does it take to get to the center of a bad bank, anyway?
The real problem, I believe, is a collusion of sorts between the government and an oligarchy of “too big to fail” banks. Both the government and Main Street are continually reminded of the dangers inherent in letting banks fail, in restricting pay, in interfering with the operations of the big banks–in fact, of any change at all to the status quo. And, for the most part, we’re buying it.
Monday’s Wall Street Journal spoke of how Stephen Friedman, the NY Fed Chairman, has benefited from his ties to Goldman Sachs (NYSE: GS)–yet another way investment bank elites have been influencing and then benefiting from policy. There remains a revolving door between Wall Street executive suites and the Treasury. And a recent Economist essay wonders why the Fed is perpetuating an oligarchy of “big three” ratings agencies, when they contributed to causing this mess in the first place.
This is not the behavior of the financial pillar of the world. It’s the behavior of a banana republic after a bubble pops.
I’ve been sharing an excellent article with friends recently, by Simon Johnson, former chief economist of the International Monetary Fund. Johnson makes an elegant and persuasive case that we are no different than emerging market economies such as Argentina, Malaysia, or Russia at key crisis points.
For me, the key takeaways from that article:
- What we’re going through now is not–in the final analysis–all that rare.
- Yes, it can happen to the U.S.
- It’s a little surprising (and perhaps encouraging) that it hasn’t happened here more often.
True, there are differences, such as the dollar’s prominence in world financial affairs, and the trust the world has in U.S. Treasuries. And there are encouraging signs in some of Obama’s and Geitner’s initiatives.
[As an aside, I'm still amazed at the schizophrenic approach the Treasury and Congress have taken to date. They keep pumping (our) money into banks, but then turn around and hamstring their ability to be successful by imposing compensation restrictions, demanding lower lending rates and fees, and restructuring mortgages--reducing the value of those "bad assets". Are we trying to buttress the banks or chop them off at the knees? Can't we just pick one?]
The conclusion, however, is inescapable.
The key roadblock to rescuing our financial system lies in breaking the oligarchy of large Wall Street banks and the influence they have over the Fed and Treasury.
When you ask him anything, he never answers “no”.
He just “yes”es you to death, and as he takes your dough
He tells you, “Yes, we have no bananas
We have-a no bananas today.”
Just because we’re not primarily a tropical fruit exporter doesn’t mean we’re acting any better than those corrupt banana republics we so disdain.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Rent to Own
Today’s Wall Street Journal reports on GM offering a majority stake to the U.S. Government. Taxpayers will own a bit of Chrysler as well, although the United Auto Workers will get the lion’s share.
Of course, the government also now has stakes in many of the large banks, e.g. Citigroup (NYSE: C) and Bank of America (NYSE: BAC). Not to mention AIG (NYSE: AIG). Or Fannie and Freddie (NYSE: FNM, FRE). Who’s next, I wonder? What company or industry in dire straits will turn to the government for aid, in return for preferred stock or something similar?
Somehow I don’t think this is what they meant by the “Ownership Society.”
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
That Was Quick
On the front page of today’s Wall Street Journal:
Well, it could have been worse. The sign could have said “Mission Accomplished”.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Close to the Edge
With the New Year upon us, and a possible rally (well, sometime this year we hope), it may be time to think about dipping your toes back into the market. But how to put your money to work?
For technology stocks, I think it’s important to have an “edge”.
Over the past few years, I’ve been following a trend that–while not new–still has plenty of legs. Particularly coming out of this bear market. It’s not a stock screen, but it helps me see which technologies could be viable investment candidates, and which might instead require swimming against the current.
Things like control, intelligence, and value creation have long been shifting away from the center. Moving from large, centralized bodies towards the edge. The edge of markets, networks, locales. There are exceptions, of course, but this movement is still happening.
So I always check first to see whether any new technology–or its market–supports this trend towards decentralization and democratization.
“Uh, gee Scott, that’s great. I have no idea what the hell you’re getting at.” Fair enough. Let’s look at a few examples.
Healthcare
Lots of innovation here. Doctors interacting with patients and each other at a distance. Sending X-Rays to specialists abroad for review. Doctor-patient consultations over videophone instead of in the office. Glucose testers and home dialysis kits let measurements occur at home, not the hospital. Portable ultrasound machines and defibrillators allow diagnosis and treatment in remote areas.
Consumers are rating doctors, sharing treatment experiences, and finding health information via social networks and the Internet. Doctors themselves are forming “expert” networks to vet new research and treatments according to the wisdom of crowds thesis.
All of this is related to distributing power or value creation away from traditional central facilities and control.
Companies such as Sonosite (NASDAQ: SONO), HealthGrades (NASDAQ: HGRD), WebMD (NASDAQ: WBMD), Vital Images (NASDAQ: VTAL), and American Well (private) are among many in this space.
Manufacturing
Here’s a favorite.
Computer Aided Design (CAD) made it easier for companies to decentralize or even outsource much of their product design. But now they’re actually outsourcing the fabrication, and in some cases the end product manufacture can be done outside of a factory.
3D Printing (often more formally termed Rapid Prototyping or Rapid Manufacturing) has come of age, with machines that can take computer files and fabricate plastic or metal objects from nothing more than raw material and software. Before, even simple prototypes had to be fabricated over the course of weeks. Now, companies can turn a design into a marketing concept model within hours, and make needed changes much quicker, shortening design cycles. They also can avoid expensive tooling, since short-run items can be “printed” instead of made with traditional manufacturing processes.
Companies like Stratasys (NASDAQ: SSYS) and 3D Systems (NASDAQ: TDSC) make large industrial grade fabricators, as well as less expensive versions suitable for office use. Soon, they (and others like Desktop Factory–private) will make consumer versions cost effective.
Why have a replacement part for that lawn mower or kitchen mixer shipped from the factory, when you could simply download the file and print it at home?
Municipal Networks
While many think this is an idea that went bust, there’s still a huge demand for municipal networks. FCC statistics on broadband penetration are quite misleading, and plenty of Americans have either pokey DSL-like speeds, or no broadband at all. Towns and public utilities, often in partnership with private enterprise, are filling the gap.
True, many of these projects have not fared well–but that was usually due to faulty business models, not the underlying tech. Many ideas have been tried, and people are getting much smarter. There are many thriving wireless and Fiber-to-the-Home projects.
Instead of one giant centralized “mother of all” (Ma) Bell owning your phone or Internet connection, the end piece is owned locally. And its often faster, with more capacity, than many parts of the Internet. This is recapitulating what happened years ago to television in underserved areas, as Community Antenna Television (CATV) gave birth to today’s cable networks.
And it’s happening with energy generation too.
Others
Here’s a partial list of other innovations that are benefiting from “the edge”:
So how do we wrap our minds around this explosion of innovation? I think of this trend as occurring in 3 distinct ways:
Decentralization–moving utility to the edge
The basis for this first one is hardware, and typically some kind of disintermediation. It’s driven by things like the availability of leading-edge technology, shrinking hardware sizes, falling costs, and the Internet.
Examples–3D printing, TiVo, municipal networks, distributed energy generation
Authoring–tapping users to create
Here the basis is centered more around software, the demand for mass customization, and hobbyists. You know, that class of people with time, passion, interest, and the willingness to work for nothing but recognition and/or personal satisfaction. The availability of software tools, Broadband, and the Long Tail (everyone’s a hobbyist in something) are drivers.
Examples–Blogs, mashups, personalized ad streams, podcasts, YouTube
Emergent Systems–enabling collective/cooperative effort
This last is typically facilitated by an enabling service. Often with the existence of an intermediary to provide a control or filtering function. But while the result mimics a more centralized function, the value is created on the edges–a true “whole is greater than sum of parts”. Here the driver is simply networks of people in easy, rapid communication. I think they call that the Internet. 
Examples–Wikipedia, open-source software, eBay, prediction markets, grid computing
Then according to the man who showed his outstretched arm to space,
He turned around and pointed, revealing all the human race.
I shook my head and smiled a whisper, knowing all about the place.
Yes, “Close to the Edge”
Of course, like all classification systems, the answer you get will depend on which consultant you talk to. The concept is pretty general, and sometimes unwieldy. Regardless, I find the edge idea to have a lot of merit, and hope you do too.
The key is to find companies that create, use, and benefit from the technologies that are fostering these trends. Or the markets that they enable. It might be tool, a marketplace, an ad platform, a device, a network, whatever. Then do your research.
Once you get down to individual companies, it’s caveat emptor. Picking stocks based on trends alone is what cost people so much money investing in the likes of Webvan (another “edge” play) or Pets.com.
I have done research on some companies that are emblematic of this trend–including a few mentioned here–to a greater or lesser extent, some more recent than others. In fact many I covered as an analyst fell into this mold–and not by coincidence. But do your own due diligence before investing, or hire someone to do it for you.
Let me know if you think of other ways this idea might be manifesting in technology markets.
Disclosure: I currently hold no positions, either long or short, in any stocks mentioned here. However, I do consult with companies in some of the markets discussed.
Pump, Baby, Pump
Speaking of today’s NY Times, Paul Krugman’s op-ed just begs for a comment.
[Actually, I haven't spoken of the NY Times, because the article where I mention it hasn't been written yet. But you've already read that article that I haven't written, because postings on blogs are displayed in reverse chronological order, so that article appears before this one. Wait, I'm getting dizzy. I'd better sit down.]
Anyway, the piece concerns Krugman’s belief that Obama’s proposed stimulus package is a good start, but is woefully short of what’s needed by the economy. I think what he’s really saying is we have to reinflate the bubble.
I read Paul Krugman even though many times I don’t agree with him. He’s an eminent economist, his writing is lucid, and I usually learn something new every time I read his stuff. I do wish he’d stick with economics and avoid the purely political rants.
And I get impatient if he has too many columns in a row where he just whines without offering a specific solution. But none of those problems arose today.
Here’s where I fall off the wagon:
Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.
And the Obama plan is nowhere near big enough to fill this “output gap.”
Yet by his own admission, Krugman believes that the economy that we had a year or two ago was an unsustainable balloon. To quote:
The fact is that the U.S. economy’s growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.
So our national output rose to meet a demand that is unnatural. Our ability to produce has outstripped our natural ability to consume. Why, then, is he suggesting we try and ramp demand up to that pre-crisis level?
Our problem isn’t that the pump needs to be bigger. It’s that the balloon we’re trying to reinflate is too large. You don’t grow the economy to a level that’s an aberration without suffering contraction as things revert to the mean. There’s no pain-free recession.
Now maybe I’m missing something. If so, somebody explain. Maybe that $15 trillion/year figure was less than our pre-crisis demand, and so Krugman’s large suggested figure is OK. But it still seems to me that his remedy would simply set us up for some rather painful oscillations somewhere down the road.
And that assumes at least a modicum of fiscal stimulus is a good idea. Others disagree. For me, the jury’s out on Keynes. But as I said recently in “Tiny Bubbles“, to try and pump that balloon all the way up again is a recipe for disaster.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Tiny Bubbles
My vote for 2008 word of the year is bubble. (With Ponzi scheme being a close second only because it’s top of mind right now.)
We’ve seen so many bubbles come and go, many bursting in the last year. Housing bubble, stock market bubble, CDO bubble, Wall Street salary bubble, debt bubble, and now a divorce bubble. Kind of makes you nostalgic for the Internet bubble, doesn’t it?
We’ve even had a labor bubble. In the auto industry, most of today’s at-risk workers should have been laid off years ago as Detroit rationalized its businesses. Instead, GM et al hung on for dear life and the labor force remained too large while the air went out of the market. Now we’re facing all of those job losses at the same time.
Like a tub full of soap suds, these bubbles have decayed into a single, giant, “mother-of-all” bubble. Which, naturally, has popped in turn. And as Paul Krugman wrote recently in a New York Times op-ed, there aren’t any more bubbles left. No wonder we’re in such a mess.
It’s not for lack of trying, though. We want things to go back to the way they were before. Despite what they might be saying, the Treasury, the Fed, Congress, and others are all essentially trying to re-inflate the world. Refinance mortgages! Force banks to issue more debt! Buy distressed assets! Stop foreclosures! Loosen credit and people will spend money! Get house prices back up!
(Isn’t this what got us into trouble in the first place? Do we really believe that easing credit will get people to buy cars when they’re worried about whether they’ll have a job?)
But the rips in the fabric are too large, and our sources of air are far too small. Using TARP and other Fed/Treasury funds to re-expand the “mother bubble” is like trying to fill a hot-air balloon with a bicycle pump.
Worse yet, every one is now lining up for their bowl of gruel–finance firms that want to be bank holding companies, auto executives trying to build cars no one will buy, mall owners who can’t pay their mortgages, etc. Who’s next, I wonder?
Please sir, I want some more.
Despite the comic relief I got watching auto execs jump through hoops for doggie treats (or this gem of a parody here), that way lies madness.
Even if we could find a big enough pump, prices have to reach a bottom eventually, so markets will clear. There is no pain-free recession. The alternative is wide speculative swings and an oscillating market.
Prices drop through the floor (too low), then rebound to new heights (too high). Lather, rinse, repeat. We’ve seen this before when the Internet bubble was followed by a bull market fueled by debt and mortgage speculation.
Already, many believe housing in some areas is severely underpriced, as is the stock market. CDOs and other “toxic paper” brought us to this tipping point because prices sank to artificially low levels, driven down by mark-to-illiquid-market accounting.
We’ll see this in the job market soon also. Companies shed consultants and temp workers to minimize employee pain, then lay off full-timers as things worsen. But soon they’re hiring back the same consultants because they can’t get the work done without them (yet still can’t afford full-time employees). And so on.
Oscillation is dangerous. Not only paralyzing, but confidence sapping. And that keeps markets from working efficiently. Even if we’re successful at finding another bubble (or reinflating this one), it’ll just lead to another downfall a few years from now.
We can shed light on this phenomenon by looking to the lessons of classical mechanics. We need some damping in the system. [Yes, I'm a recovering engineer. "Hi, my name is Scott." "Hello Scott!" "It's been 237 days since my last Fourier Transform..."]
Oscillations are minimized by introducing some mechanism to slow down the wild swings. Ideally, you want things to be critically damped (the diagram on the right, above). That means a smooth movement to an equilibrium state, with no oscillations. Think of the way a door closer works in your office building–smooth and easy–vs. the way saloon doors swing back and forth.
Economists, of course, call this a soft landing.
If we don’t critically dampen the system, we’ll have punishingly wild oscillations. True, we can’t banish economic cycles. But we should put in place safeguards that minimize the swings with only a small amount of undershoot. (Blue line to the right).
In order to do that, we’ll need to find a way to “resegment” our large, sagging balloon, and use our available tools to reinflate a few of these markets, but on a much smaller scale. Call them tiny bubbles.
A few ideas:
- Admit that owning a house isn’t a good move for everyone.
- As Robert Shiller suggests, create jobs.
- Refinance at new rates but not new prices. Let housing find its level.
- Reinstitute the uptick rule.
- Let some banks and businesses fail, but not whole industries.
- Make banks lend, but only to credit-worthy clients.
- Don’t bail out speculators.
- Create public markets for CDOs.
- Stop (temporarily?) marking illiquid assets to market.
- Force higher capital requirements on banks when times are flush, and loosen them when the inevitable downcycle hits.
What we don’t want at the bottom of this long fall is a trampoline. Rocketing us back up again simply creates oscillations, prolongs the fear and anguish, and delays finding a bottom in each market. Besides, there’s nothing to look forward to there but another long fall.
What we need instead of a trampoline is an air bag. Something to cushion the impact. Or better yet, that material they wrap packages in to keep the contents from getting crushed.
You know, the stuff with the tiny bubbles.
Disclosure: I hold no position in any stocks mentioned here.
Salutation: Happy New Year!
Up And Down Vote
The Wall Street Journal had an article out yesterday that has created a real firestorm of controversy. It’s about how some of the large Internet players (such as GOOG, MSFT, and AMZN) are backpedaling on their previous Net Neutrality stances.
Moreover, they’re variously negotiating with telecablecos to gain “favored nation” or preferred treatment status on their networks.
Holy Turnaround, Batman!
Some writers quickly noted–here, and here–that Google at least is simply caching content closer to customers, just like Akamai (NASDAQ: AKAM) and other CDNs do. And that much of the Journal article reflects the kind of sensationalism many feared would appear once Rupert Murdoch (NYSE: NWS) bought the paper.
[As an aside, when I was doing research a year or two ago on Akamai, top management there vehemently denied my suggestions that they would ever be in competition with Google. Heh.]
If any of this is true, it’s a sad development, but hardly unexpected. As competition heats up for everything from ad serving to video downloads to cloud computing, everybody wants an edge. And they’re willing to pay for it.
Those that can afford to will get better services, better access, better distribution. Which means the little guys get shafted again. If you want to buy from Amazon, you get speedy page refreshes (not to mention faster access to things like S3). Google apps will work faster than, say, Zoho.
The rich do, indeed, get richer.
This plays right into telecableco hands. It’s what they’ve been lobbying for, after all. (I can almost see the big, fat, spider sitting there in the middle of its web inviting them all in. ) The result will be a vertical model, with only a few players controlling the entire value chain, up and down.
If this was just about commerce, I’d be less concerned. But it’s also about access to information. And about control of content. Ultimately, it’s about exclusion and higher costs for everyone. As well as a loss of the kind of innovation that has made this country successful.
Imagine if TV stations were free to broadcast good signals from those advertisers (or news programs) that spent more. Everyone else, they deliver fuzzy pictures with the sound continually dropping out. Pay to play. Eventually, everyone gets their news and entertainment from a few large companies. Welcome to the 50′s. There’s progress for you.
Critics argue: “But as businesses they should be allowed to offer different levels of service”. If there was true competition at the last mile level, I’d be inclined to agree. However, most of the large telecablecos built their networks–and their competitive advantage–on the revenue streams from exclusive franchises and government mandated monopolies.
You and I paid for their broadband networks through our monthly TV and telephone bills, mostly at a time where we had no choices. Or they used the proceeds from bonds whose attractive terms were based on the existence of those same “guaranteed” payment streams, which is basically the same.
Now that the moats around them have been fortified, we shouldn’t think that they’re entitled to operate as normal businesses. Monopolies (or even duopolies) don’t get the same rights as firms in a free marketplace. It’s not that I believe Network Neutrality should be regulated. (I agree about the principle but not the solution.) It’s last mile competition where the natural monopoly lies, and that’s what should be regulated. Until it’s no longer a monopoly, or until the telecablecos no longer have insurmountable market power.
Or until there’s structural separation.
Many thinkers (at least the ones whose salaries don’t depend on the success of telecablecos), have long recognized the most efficient market structure is to go horizontal–one company does the infrastructure, one does the content. Each competes within its own level, but not up and down the stack.
The PC industry helped this country thrive with the same model. Some companies built chips, some sold computers, some provided software. This drove innovation and helped keep costs low and falling. (Even the emergence of intra-level monopolies like Microsoft couldn’t halt the effect–some argue the standardization even helped.)
But now the big players are changing the game, in order to become even bigger. The Internet guys want to differentiate on performance, because they’re finally getting into each others businesses, and have to compete–some for the first time. The pipes guys want a piece of the content pie, because as network usage grows their costs go up, and they face resistance in trying to charge consumers more money for Internet access, especially as they’ve been billing flat rates for so long. But we will pay, one way or another.
Not everywhere, thankfully. Much of the rest of the world actually has competition in the last mile. They’ve created a more horizontal model, with providers competing “across” levels. If we fail to adopt this kind of structural separation in the U.S., we can watch our innovative spark and competitive advantages slowly drain away.
And just as many around the world laughed at us for voting to re-elect George Bush, they’ll laugh at us again, for voting to go “up and down”.
Disclosure: I hold no position in any of the stocks mentioned here.
Ganders and Geese
Whether or not you believe the government should be “bailing out” Wall Street banks, I think it’s fair to say that the financial system itself is critical to the functioning of our economy. If it wasn’t, we wouldn’t see our current problems growing so quickly and pervasively.
The automobile industry is another issue. It’s certainly a smaller part of our economy, even after the shrinkage of investment bank market caps. And there’s no way I’d ever call it essential. Fundamentally, people aren’t buying cars, so what does anyone expect to happen? Why should the auto industry be different than any other industry that’s facing a deep recession? And do you notice none of the foreign-owned manufacturers are crying? All of them operate plants here, why aren’t they in dire straits?
All of which makes talk of a bailout of Detroit significantly more contentious, notwithstanding the recent pilgrimage of auto and union execs to genuflect before the newly vitamin-fortified Democratic leadership in Congress.
But OK, I’ll bite. The failure of any of Detroit’s Big Three would have a large impact on jobs, at least in the short term. And it would propagate to the auto parts industry, and probably a few service industries, as well as financial services (think GMAC). So let’s suppose that a bailout of some sort makes sense, and Congress decides to pump some of that rapidly vanishing $700M into GM, Ford, and Chrysler.
What are they going to do with it? How do we know they’re going to use it to solve their problems? Even more important, what sort of return should America expect from this “investment”? Are we just bailing out a bunch of fat-cat executives who flubbed their corporate strategy? I mean seriously, these incompetents have been lining their pockets with big bonuses, and now they want us to bail them out? WTF?
I have this strange feeling of deja vu.
Seems to me the same politicians in Washington that have been screaming for oversight of the financial services industry, and influence on how any bailout money is used, ought to be making the same kind of noises here. After all, what’s good for the goose is good for the gander. But so far, not a peep. Or a honk.
Here’s what I’d like to see:
- The Chief Executive of any auto company taking government bailout money should be fired.
- Suspend executive bonuses for the rest of the top management ranks
- No dividends of any kind to be paid out to shareholders of the auto makers (sorry, Cerberus Capital Management, no quick exit here.)
- Only two permissible uses for the money: reducing carmakers’ onerous pension obligations to a more manageable level, or retooling plants inside the U.S., to produce more fuel efficient and/or otherwise competitive cars
Think any of this is going to happen? Nah, neither do I. My bet is that the money will go out with only token strings attached to it.
And in 5 years or so, the Big Three–whichever ones are left–will still be limping around getting their butts handed to them by foreign manufacturers who are making better cars in U.S. plants for less money and selling more of them.
I think our goose is cooked.
Disclosure: I hold no position in any of the stocks mentioned here.
by Michael Mauboussin
