Posts tagged ‘CEO’

Obama Meets With James Taggert and Oren Boyle

Amanda Carey via the Daily Caller:

On Wednesday, President Obama met with a group of about 20 CEOs in a five-hour long summit, reportedly in an attempt to soothe the souring relationship between big business and big government. From almost all accounts, the "charm offensive" was successful.

By the end, Boeing CEO John McNerney is reported to have said, "We all wanted to move beyond the talk that made this confrontational environment. We made our apologies." Honeywell International CEO David Cote said after the meeting, "Government is the enabler of business"¦Government and business need to work together."

What Cote did not mention is that his company has already been working closely with the Obama Administration, and was a major beneficiary of the Recovery Act "” as were many of the other companies represented. According toRecovery.gov, Honeywell received over $44 million in grants from the Department of Energy (DOE) for renewable energy initiatives. Honeywell also raked in more than $24 million in a variety of different government contracts from agencies like the National Aeronautics and Space Administration (NASA) and the Department of Defense.

Can the Aviation Equalization of Opportunity Act be far behind?  The meeting of 19 CEO's and a leading VC (who feeds noisily at the green energy trough) sounds like the corporate state round-table.

So What?

Via Glen Reynolds, from Keith Jurow at Business Insider

There is a far-reaching change occurring now which threatens housing markets around the country. A survey conducted by Harris Interactive for the National Apartment Association in May 2010 found that 76% of those surveyed now believe that renting is a better option than buying in the current real estate market, up from 71% in 2008.  Especially sobering was the fact that 78% of those surveyed were homeowners.

David Neithercut, CEO of Equity Residential, the nation's largest multi-family landlord, believes that there is a "psychology change" in the mind of consumers.  In a June address to an industry conference, he declared that there is "a change in one's thought process about the benefits or wisdom of owning a single-family home."

When an author uses the word "threatens" to describe a trend, you know he doesn't like it.  While a home may be  a good place to put excess cash for some people, as a leveraged investment it is insane.  It is a dead asset, producing no cash flow or future value.  While the land under it may be a scarce asset, particularly in some areas with strict growth limits and zoning laws, the house itself is a depreciating asset as much as your car is (trust me, I just replaced an air conditioner and spent weeks repairing dry wall cracks).

Renting pays a lot of benefits, not the least of which is the mobility it adds to the labor market.  Individuals with leases are less tied to a certain spot, so have more flexibility to leave a given area to seek better opportunities elsewhere  (this actually triggers a thought I had not had before -- I wonder if government promotion of home ownership, particularly at the state and local level -- can be seen as a modern form of serfdom, with politicians attempting to tie people to the land so they cannot move and take their tax money elsewhere).

So home ownership is a fine option for many (I own a home and prefer that status in my present circumstances) but there is no law that says it has to be the norm or the default.  Many people have switched from whole life to term, from buying individual stocks to mutual funds, from defined benefit pensions to 401k's.  The way we achieve goals evolve over time, and there should be nothing surprising about a change in how people wish to access housing.  And certainly nothing in this trend which should occasion government intervention to prevent.

All My Business Problems Diagnosed

As explained by Steven Pearlstein, who presumably has created so much economic value in his lifetime that he can cast stones from the high ground

And some of it, to be quite frank, Robert, is an appalling lack of imagination and guts on the part of these same CEOs who are complaining and pointing the finger at every else. You know, these guys are very good at cutting. They're very good at blaming others. They're a little less good at coming up with creative new products and services, and they've got a little flabby in that regard in the last few years where the focus has been on surviving and cutting, as it should had been. But they're not the gutsiest group of people in the world.

And by the way, they get into this group think which you - you know, the fact that they all say it, it's sort of like a notion that starts in the country club locker room, and everyone is nodding, and then the one passes it on to the other. And now, you know, this similarity of the comments betrays this sort of group think that is almost self-fulfilling at this point.

Mr. Pearlstein is absolutely right.  As CEO of my company, I am out of creativity.  I will give you an example.  The new health care law appears (the implementation is still hazy) to impose a $2000 penalty per employee for not having a corporate health care plan (all my employees are retired, so they already have health care plans, but that does not affect the penalty).  With a bit over 400 employees, that makes the penalty something north of $800,000 a year.  This is larger than my annual net income.  And Mr. Pearlstein is correct -- I am absolutely at a loss as to how to deal with this, which just proves his point that all we CEO's have an appalling lack of creativity.

Mr. Pearlstein seems to be holding an image of the Fortune 25 in his head, but in fact most job creation is by smaller companies.  I wrote a while back on Forbes.com why CEO's of smaller companies have be having their creativity diverted.

Postscript: On January 10, 2008, our company actually, shockingly, had a creative idea.  Instead of refueling our boats at a lake in Ventura County, CA using zillions of 5 gallon gas carriers, lets put in a small double wall gas tank.  It would save a ton of useless labor, it would greatly reduce fuel spills on the lake (the nozzle, unlike the 5 gallon cans, has overflow protection), it would save lots of trips into town to fill gas tanks -- a winner all the way around.  Granted this was a pretty small idea, but sometimes success in small business is a lot of bunts and singles.

After hundreds of manhours of effort, numerous checks written to the County and the state, and I don't know how many forms filled out, on July 1, 2010, exactly 901 days after we got the creative idea, Ventura County gave us the last permit we needed to go forward.

Beware the Thin Edge of the Wedge

As someone who once spent nearly a hundred hours to defeat a $20 Department of Labor claim, mainly to fight the precedent, I can sympathize 100% with Wal-Mart spending millions to fight a $7,000 OSHA claim.  Note that despite all the OSHA wailing about not understanding why Wal-Mart is fighting so hard and causing them so much trouble, they admit at the end that they are trying to set a precedent for future actions.

For several years I worked for Emerson Electric, which among its many divisions owned a ladder manufacturer.  If there ever was a product that simply is what it is, totally WYSIWYG, it's a ladder.  But it turns out in this age of personal responsibility that anyone who ever gets hurt using a ladder, usually doing something stupid, will sue the ladder manufacturer for his or her injury.  Emerson fought every one, all the way to trial and sometimes appeal.  Lawyers said they were crazy, that in any given case, it would be cheaper (considering legal fees) to just settle.  But Chuck Knight (Emerson CEO) knew that these were not individual cases, they were multiple events in an ongoing "game," and game theory gives a different answer.  Fight enough of these, and tort lawyers looking for a quick buck with little work and cost will choose to spend their time elsewhere.

Germany's Ban on Short-Selling

It is pretty much a law of nature that issuers of securities hate short-selling.  They have tried for years to paint it as somehow unethical or at least unseemly, though it has always befuddled me as to why short-selling is any different than taking a long position on a security.  In both cases one is making a bet on future prices of the underlying asset, the only difference is in the direction.

But issuers of securities, whether they be corporate equities or government bonds, generally have strong personal incentives to see asset prices go up, or at least remain flat.  No CEO thinks short-selling is justified, but in fact the ability to sell short is critical to having quality pricing signals (see below for a discussion of how short-selling helps limit bubbles).

Of course, Corporate CEO's may gripe about short sellers, but they basically have to just live with them.  But governments are different.  They can actually ban what they don't like and have done so now in Germany.  What's next, a law saying that once you have bought a government security you are never allowed to sell it?

Postscript: Here is an example of how short selling reduces volatility.  First, some background

Chester Spatt, who was chief economist at the U.S. Securities and Exchange Commission from 2004 to 2007, said that Germany's short-selling ban would probably end up causing more market turbulence and not less.

"Like many types of well-intentioned regulation, this is likely to misfire," he said in an interview. "During our financial crisis in 2008, there was a ban on short-sales for about three weeks .... That ban was very counterproductive. It didn't help stabilize asset prices at all."

Here is an example of why this happens, as I discussed in an earlier post during that temporary US ban:

At the start of the bubble, a particular asset (be it an equity or a commodity like oil) is owned by a mix of people who have different expectations about future price movements.  For whatever reasons, in a bubble, a subset of the market develops rapidly rising expectations about the value of the asset.  They start buying the asset, and the price starts rising.  As the price rises, and these bulls buy in, folks who owned the asset previously and are less bullish about the future will sell to the new buyers.  The very fact of the rising price of the asset from this buying reinforces the bulls' feeling that the sky is the limit for prices, and bulls buy in even more.

Let's fast forward to a point where the price has risen to some stratospheric levels vs. the previous pricing as well as historical norms or ratios.  The ownership base for the asset is now disproportionately made up of those sky-is-the-limit bulls, while everyone who thought these guys were overly optimistic and a bit wonky have sold out. 99.9% of the world now thinks the asset is grossly overvalued.  But how does it come to earth?  After all, the only way the price can drop is if some owners sell [remember, we are discussing a world where naked shorting is banned], and all the owners are super-bulls who are unlikely to do so.  As a result, the bubble might continue and grow long after most of the world has seen the insanity of it.

Thus, we have short-selling.  Short-selling allows the other 99.9% who are not owners to sell part of the asset anyway, casting their financial vote for the value of the company.  Short-selling shortens bubbles, hastens the reckoning, and in the process generally reduces the wreckage on the back end.

Without short-selling, the only folks involved in the price-discovery process are those who have self-selected as being more bullish than average.  Short-selling vastly broadens the number of people, and thus the perspectives and information, involved in the pricing process.

I think "cargo cult" is a great moniker for this kind of regulation.  The price of European bonds are declining as lots of people sell?  Then lets ban selling, that will take care of the problem.   Just ignore that large government deficit behind the curtain.

I Need Some Help on Alternative Energy Subsidies

Next week I am on a panel talking about alternative energy.  These guys have already told me they don't want to re-fight the global warming science battle at this venue, and my guess is that there will be a lot of pragmatist corporate types who won't really care about individual liberty or role-of-government issues  -- they will only care if there is money to be made, even if it is by rent-seeking.  My best bet, I think, will be to discuss why alternative energy is a bad investment.  My sense is that it is a bubble investment, like goofy Internet stocks in the 1990's or housing in the 2000's.  Already, I think we see the crash in the corn ethanol business.

My two assumptions are

  • I can't think of any industries that were initially heavily subsidized that eventually found their way to competing successfully and growing without subsidies.
  • With the exception of agriculture, the public's tolerance for growing subsidies to a single industry eventually wanes.

I would love for commenters or emailers to send me contra-examples if they have them to either of these assumptions.  In particular, can you think of an industry that could not have grown initially without subsidies eventually prospering without subsidies.

To the second point, I looked at the numbers two ways.

  1. In Germany, which is often held up as the model, feed-in tariff subsidies are between $0.06 (wind) and $0.50 (solar) a Kwh.  If the US reached a goal of 20% of its production in wind and solar (total production today is about 4000 billion KWh) then the subsidy would be between $50 billion and $400 billion a year.  It is hard to imagine these remaining popular for any period of time.  (lots of German numbers here and in the linked PDF)
  2. Venture capitalists and investors are expecting the growth stocks they invest in to grow at, say, 30% a year.   Let's assume alternative energy companies grow at 30% a year and the number of companies, attracted to the growth and subsidies, doubles every two years.  In this scenario, assuming unrealistically that the supply curve for alternative energy is flat rather than upward sloping, the amount of subsidies to support this growth would have to nearly double every year.  They would increase 21-fold in five years and 440-fold in 10 years.   In fact, given the shape of real supply curves, new more expensive capacity at the margin is replacing cheaper and cheaper alternatives, resulting in the need to grow subsidies even faster to keep up.   Never has happened, never will.  Once the industry outgrows the government's willingness to grow subsidies, the whole thing crashes.

(PS - the subsidy could also be in the form of taxes that increase the cost of alternatives, or production and/or import restrictions on the alternatives).

Any help along these lines in the comments is appreciated.

Update: This seems relevant:

First Solar shares skidded 8% Friday to close at $116 after the company issued a murky business outlook beyond June. Until then, however, "orders look very strong," First Solar CEO Robert Gillette said in a post-earnings conference call.

This commentary, along with price pressure and expected subsidy cuts solar panel makers get from the German government is making investors a bit more wary of First Solar, whose shares have been on a bumpy ride the past 18 months....

First Solar, helped by government tax credits extended to businesses for using solar power, has rewarded its investors since going public in November 2006 at $20 a share. The stock peaked at $317 in May 2008. But the shares have been skittish ever since.

Germany, the world's biggest solar market, is weighing a 15% cut on so-called solar feed-in-tariffs. This could make solar installations less attractive.

First Solar projects 60% of its 2010 sales from German-related contracts, according to Wedbush Securities analyst Christine Hersey.

Remember from above, the German feed-in tariff for solar is around $0.58 per KwH, or fully $0.50 above the price paid for the fossil fuel base load.  At this subsidy level, the US would be paying $400 billion a year in subsidies and/or higher prices.

First Solar has grown at over 150% per year for the last 3 years so the 30% assumption above is conservative, as is the assumption about the number of competitors doubling every two years.

Another interesting note - First Solar makes a pre-tax margin around 33% of sales, which is over 6x larger than health insurance companies make (and are excoriated for).  Is it any wonder Germany no longer wants to keep subsidizing First Solar's bottom line to levels far above most equipment manufacturing companies.

Wherein It Turns Out I Am Not Loyal to the US

Unfortunately don't have the time to comment much on this absurd comment, but I am not sure it is even deserving of comment

Andy Stern, president of one of the nations biggest labor unions, said today that America is failing, and many entrepreneurs arent loyal to the U.S.

I think the country is in a mess, Stern, president of the 2.1 million-member Service Employees International Union, said at the Wall Street Journal CEO Council, a conference in Washington. I think America is failing.

Stern, the most frequent guest to the White House this year, said the U.S. economy has created a system in which the entrepreneurial class is not loyal to America. Its not wrong for the government to distribute wealth to people who need it, and labor unions can help the country do that, Stern said.

The Corporate State, Illustrated

Couldn't have illustrated the new corporate state that Obama is building better than this -- at state where large corporations, unions, and government officials conspire to use government power to enrich their contituencies to the detriment of smaller businesses, consumers, and taxpayers.  WSJ via Tad DeHaven:

The government has taken on a giant role in the U.S. economy over the past year, penetrating further into the private sector than anytime since the 1930s. Some companies are treating the government's growing reach "” and ample purse "” as a giant opportunity, and are tailoring their strategies accordingly. For GE, once a symbol of boom-time capitalism, the changed landscape has left it trawling for government dollars on four continents.

"˜The government has moved in next door, and it ain't leaving,' Mr. [GE CEO Jeffrey] Immelt said at the International Economic Forum of the Americas in Montreal in June. "You could fight it if you want, but society wants change. And government is not going away.'

A close look at GE's campaign to harvest stimulus money shows Mr. Immelt to be its driving force"¦ Inside GE, he pushed his managers hard to devise plans for capturing government money.

By January, Mr. Immelt had become a leading corporate voice in favor of the $787 billion stimulus bill, supporting it in op-ed pieces and speeches. Reporters who called the Obama administration for information on renewable-energy provisions in the legislation were directed to GE.

When the stimulus package was rolled out, Mr. Immelt instructed executives leading the company's major business units "to put together swat teams to get stimulus money, and [identify] who to fire if they don't get the money," says a person who heard him issue the instructions.

In February, a few days after President Obama signed the stimulus plan, GE lawyers, lobbyists and executives crowded into a conference room at GE's Washington office to figure out how to parlay billions of dollars in spending provisions into GE contracts. Staffers from coal, renewable-energy, health-care and other business units broke into small groups to figure out "how to help companies" "” its customers, in particular "” "get those funds," according to one person who attended.

From Henry Payne, in an article on the auto industry:

The Left likes having Big Industry straw men to bash whenever their socialist plans run aground, but the fact is, Big Industry is embracing the U.S.'s leftward lurch. Better to secure your place at the Rentseekers Roundtable, to lock out new competition and guarantee a never-ending stream of government welfare.

Yeah, That's Me All Right

I was a consultant for McKinsey & Co. for about 5 years in Dallas.  This was NOT me:

Through conversations with several staffers who have endured the McKinsey interviews, we've assembled a portrait of the typical consultant. First, they're quite young! Despite the early perception that they'd look like pasty lawyers wielding big-wheeled suitcases, they're apparently a plucky, charming bunch.

"They're kind of hot," said one source.

Crisp shirts, no jackets, freshly pressed pants"”not unlike the fresh-faced boys who posed for the Harvard fashion shoot in the Styles pages of The Times this past weekend. They jot notes down on legal pads and in marble notebooks.

Though I will say, much to my kids' ever-lasting amusement, McKinsey did send me to a sort of executive charm school when I started managing teams, because I was such a hopeless geek.  Actually, my main problem was that I was adult-ADD, and couldn't sit still in a meeting.  It's fine roaming around the room in hyperactive fashion when its your own company (ala Steve Jobs) but it is not OK when you are a 25-year-old consultant to the CEO of a Fortune 50 company.

My personal style didn't work any better in any of the other companies I worked for.  Aerospace was probably the biggest mis-match.  There is just no place for a hyperactive marketing guy in a business that takes 10 years to close a sale.  So I now run my own company, and there is no one above me to complain.

Open Letter to Whole Foods Boycotters

It is good to see that you have found a tangible way to respond to the editorial written by the Whole Foods CEO.  Your ability to pursue such a boycott is one of the great things about a free market. There are literally hundreds of food shopping choices in a large city, with a variety of value propositions from the low-cost but ambiance-challenged Wal-Mart or Target to the farmers market. Its great to see folks exercising their choice in the free market to take their business elsewhere.

Besides, if nothing else, it provides the majority of us entertainment value as we enjoy the irony of people exercising their free choice shopping in the highly competitive and diverse grocery marketplace to boycott someone who advocated maintaining choice and a diversity of options in the health care market. Hope all of you have great success boycotting the single payer medical system you long for when you don't like something it does, and I hope the single one-size-fits-all insurance option you have happens to match your individual preferences.

Anyway, I give you an A for political activism but an F for marketing if you believe Whole Foods customer base is all liberal or progressive. It may be so in downtown SF or Seattle. But most of Whole Foods stores are in places like Scottsdale, and Houston, and Dallas. For a large portion of Whole Foods customers, it is not some progressive statement, but it is simply a premium-priced grocery store selling premium quality foods. Though I suppose the Scottsdale country club mom in her new Jag gets some psychic boost from shopping there, kind of like buying a carbon offset.

Seriously -- I bet that most of Whole Food's most profitable customers just don't care about this progressive stuff. They don't go looking for fair trade coffee, or whatever. They don't care Whole Foods buys all wind power (in Texas, where the market allows this). They don't know how the employees are treated and paid. I shop there and I had no clue as to their HR policies until this week when they have been in the news.

Whole Foods does this stuff because Mackey and most of his team really believe in it. They are truly passionate about it, not like some company like Kraft who creates an organic cheese SKU because the consultants said there was a market niche for it. Really, are there 5 other corporate CEO's in the Fortune 500 whose beliefs and the way they manage more closely match what progressives would want to see? Is there even one? But this is the guy y'all are choosing to go after, this one company out of all the Fortune 500, because he disagreed with the progressive orthodoxy on a single piece of legislation? Jeez, this is like conservatives boycotting Fox News because they put a single liberal pundit on from 2-2:30AM.

Boycotting Whole Foods

I don't tend to shop at Whole Foods because they offer a value proposition that does not appeal to me.  Their prices are too high for products that generally don't seem noticeably better than ones I can get in other stores.  To some extent the placebo effect of having "all natural" on the package does not really work for me, though I do buy most of my fish and meat there  (and not just because I like the irony of buying only meat products from a store populated by vegans).

That said, I like having the choice in stores.  I even drop by a farmers market once in a while, though generally the hassle is not worth it for me.  The same is true in beers -- I am seldom in the mood for something as dark and rich as a Belhaven, I love the explosion of choices in beer we have seen since the dark days of the late 70's/early 80's.  Other people will make different choices.  Cool.

Which makes it all the more ironic that those who benefit from the explosion in retail choice in the free marketplace are using that choice to protest the CEO of Whole Foods for advocating similar levels of choice in health care.  Anyway, I would write more but Radley Balko did a much better job here.

You see, he shared his ideas on health care reform, thinking that you, being so famously open-minded and all, might take to a few of them, or that it at least might start a conversation. I guess he felt he'd built up some cache with you, and wanted to introduce you to some new ideas. His mistake wasn't in intentionally offending his customers. He's a businessman who has built a huge company up from the ground. I'm sure he knows you don't deliberately offend your customers. His mistake was assuming you all were open-minded enough consider these ideas without taking offense"”that you wouldn't throw a tantrum merely because he suggested some reforms that didn't fall in direct line with those endorsed by your exalted Democratic leaders in Washington. In retrospect? Yeah, it was a bad move. Turns out that many of you weren't nearly mature enough to handle it.

Its hard even to understate the how absolutely nuts self-styled "progressives" have gone over this pretty tame and sober editorial in the IBD.  Here is just one example -- this is a mainstream green blogger and not some weird comment to a Kos post.  I honestly thought this was satire at first:

I agree with CEO John Mackey that it's okay to make money by making your green business big. But Mackey crossed the line with an op-ed in the Wall Street Journal this weekend, whose very publication put him in the company of the lunatic right-wing fringe who edit the paper's opinion section.

The op-ed reads like a page from the Republican playbook, touting individual responsibility for one's health. What a load of unorganic crap!

Holy brothers-keeper Batman - He's advocating individual responsibility!!  Here, since I have not reproduced it before, are the "lunatic" ideas of Mr. Mackey:

"¢"‰Remove the legal obstacles that slow the creation of high-deductible health insurance plans and health savings accounts (HSAs).

"¢"‰Equalize the tax laws so that employer-provided health insurance and individually owned health insurance have the same tax benefits.

"¢"‰Repeal all state laws which prevent insurance companies from competing across state lines.

"¢"‰Repeal government mandates regarding what insurance companies must cover.

"¢"‰Enact tort reform to end the ruinous lawsuits that force doctors to pay insurance costs of hundreds of thousands of dollars per year.

"¢"‰Make costs transparent so that consumers understand what health-care treatments cost.

"¢"‰Enact Medicare reform.

"¢"‰Finally, revise tax forms to make it easier for individuals to make a voluntary, tax-deductible donation to help the millions of people who have no insurance and aren't covered by Medicare, Medicaid or the State Children's Health Insurance Program.

The tort reform area is one where Obama is particularly disingenuous. It is just amazing that anyone could write about the cost of medicine being driven by too many useless procedures without once mentioning the words malpractice or defensive medicine.  I wonder if this might explain Obama's silence on tort reform (via maggies farm)

legal

What, Was Ralph Nader Busy?

Per Overlawyered:

Mothers Against Drunk Driving is anything but an uncontroversial organization, as the Washington Times, Radley Balko, and our own archives make clear. Among the bad, sometimes awful ideas with which it has been identified are a reduction of the blood alcohol limit to 0.4 (meaning that for some adults a single drink could result in arrest), blanket police roadblocks and pullovers, the 55 mph speed limit, traffic-cams, and the imprisonment of parents who knowingly permit teen party drinking, to name but a few. Of particular interest when it comes to the policies of the National Highway Traffic Safety Administration (NHTSA), it has backed proposed legislation demanding that costly breathalyzer-ignition interlock systems be foisted on all new cars, whether or not their drivers have ever committed a DUI offense; it's also lined up with the plaintiff's bar on various dubious efforts to expand liability.

Now President Obama has named MADD CEO Chuck Hurley to head NHTSA. Drivers, car buyers, and the American public had better brace themselves for a season of neo-Prohibitionist rhetoric, nannyist initiatives, and efforts to criminalize now-lawful conduct. It won't be pretty.

Olson has tons of history linked on his site.

A Peak Inside the Boiler Room

I got another boiler room broker call today, so I guess the recent downturn has not flushed out all the cockroaches.  A while back I discussed the frequent calls I get from boiler room stock promoters.  The approach they use with me is this:

So the other day, I accidentally let one of them go further than I usually allow.  He said he was from Olympia Asset Management.  (There is an Olympia Asset Management web page, but I don't know if it is the same company and the web page has not been updated for several years.)  I let him run for a bit because a friend of mine runs a very well-respected financial planning firm with a different name but also with Olympia in the title, and for a moment I thought it might have been one of his folks.

Anyway, he proceeds to try to convince me that we have talked before and discussed a certain security.  "Remember me, we talked six months ago about ____".  Of course, I had never heard of the guy.  At this point I usually hang up, because I have heard this crap before -- it is a common pitch.

Its pretty clear to me now that this is what he is doing:

  1. Trying to imply that we have some kind of relationship we actually don't have.  Or worse...
  2. Trying to convince me that he touted stock A six months ago, so now he can tell me stock A has gone up in price.  Many reputable brokers built their reputation by cold calling people and saying:  Watch these 3 stocks and see how they do and I will call you back in 6 months.  That way, you can evaluate their stock picking without risk.  The modern sleazy approach is to pick a stock that has gone up a lot in the last 6 months, and then call some harried business person and pretend you called them with that pick 6 months ago, hoping that they will give you the benefit of the doubt.

The call just went downhill from there.  I hung up after his discussion of throwing Molotov cocktails into the cars of people he doesn't like.  That was right after I asked him if Tony Soprano was standing beside him listening in on the call.

Anyway, beware.  The guy today called me and asked me if I remembered him calling 6 months ago predicting the downturn in the mortgage market and the crash of the financial stocks.  You are not crazy - no matter how certain the guy seems, you really did not talk to him 6 months ago.

By the way, I am not the only one getting this pitch.  Ed Moed got the same pitch from the same script from the same company.  Many of his commenters share similar experiences.

Update: Wow, they sure do like Mitt Romney over at Olympia Asset Management.  I'm sure there was no arm-twisting here, when every single employee of the company seems to have given the max donation to the same candidate, with no breaking of ranks.

Update #2: Mike Murphy, CEO of Olympia Asset Management, was "a member of the [Hoffstra's] elite football team."  Wow.  Remember that time Hoffstra ripped through all those SEC teams?  Yeah, neither do I.  Anyway, this achievement does not hold a candle to the fact that I was once captain of Princeton Tower Club's elite intramural coed field hockey team.

Critique of the Bailout, From A Banker

From John Allison, CEO of BB&T  (via TJIC).  Here is a taste:

Allison

Download bailout_critique.pdf

 

Thinking about Jeff Skilling

I was thinking a bit about Jeff Skilling (former Enron CEO) today.  What must he be thinking as a series of large firms that were supposedly far more stable than Enron go down one after the other to liquidity crises much like that of Enron?  Bear Stearns and Lehman, two firms that should have been rock solid, go down in the blink of an eye in a credit crunch, and all we hear from the media is how the firms fell victim to larger forces beyond their control.  At least at Enron they were up-front with the market about their taking on large risks.  Now, the government is running around in the background trying to match-make these failing companies and helping to save at least a squidge of shareholder equity.  The only thing the government did in the Enron collapse was hound Skilling and others into jail.   

Sure, Skilling may have made some overly optimistic statements about his company as he was trying to stave off the crunch, but no more so that the happy-face statements issuing from Bear or Lehman in their final days.  Executives who find themselves in a credit crunch are in a nearly impossible position.  The best way they can serve equity holders is to downplay or even bury bad news to head off the looming crisis of confidence.  But if they do so, they face presecution for making false statements about the company, ironically under laws meant to protect equity holders.

Trough Leader

Holman Jenkins argues that despite the fact that GM's all-electric car the Volt will likely lose money on every sale, GM knows exactly what it is doing with this program.  The main customer, apparently, is not the end consumer, but the government.  GM is betting that an Obama, beholden in his new presidency to unions and environmentalists, will be open to a massive government subsidy of the US auto industry.  The Volt program may be part of a plan to buff up GM's attractiveness at the government trough:

GM executives are not nuts. They justify the costs and
risks of the Volt as a way of changing GM's image in the minds of
consumers and politicians. To commit a pun, the Volt is GM's vehicle
for making a bailout of GM politically acceptable.

The company has already started signaling it expects
Washington to provide a whopping $7,000 tax credit to Volt purchasers.
In Europe and the U.S., under whatever fuel economy and emissions
regulations prevail, GM also expects special favoritism for the Volt.
The goal is to re-enact the flex-fuel hoax, in which GM receives extra
credit for making cars that can burn 85% ethanol, even if they never
see a drop of such fuel.

CEO Rick Wagoner last week laid out the case to Barack
Obama personally for turning GM into a ward of the state, by way of
direct and indirect subsidies to support a transition to "alternative"
fuel vehicles. GM has done yeoman's work getting its structural costs
(i.e., labor) in line, but shareholders should note that a big part of
the company's turnaround gamble consists also of eliciting favor once
again from Washington after a period in which the domestic auto makers
were nothing but whipping boys on Capitol Hill.

Who the Hell Cares?

Apparently another interest group is claiming that Arizona is "missing out" on jobs in some critical growth industry, and therefore (wait for it) that industry must be subsidized to come to Arizona.

Arizona is getting its "clock cleaned" in the competition among
Western states to land solar-panel manufacturing companies within their
borders, according to the economic-development group that is losing the
fight.

At least nine companies that make solar equipment have passed up the
Valley of the Sun in the last year in favor of neighboring states,
according to the Greater Phoenix Economic Council.

From those nine projects alone, Arizona is missing out on more than 3,800 jobs, $2.3 billion in investment and $732 million in state and local revenues during the next decade, GPEC President and CEO Barry Broome said.

I am too tired to do my usual fact-checking on "incremental" state revenue numbers, but suffice it to say that $732 million in state and local tax revenues is a pipe dream.  There are three or four million people in Phoenix -- why is it we need the government to focus on someone employing 3,800 people?

The article's main "logic" is that our sunny climate should attract solar panel manufacturers.  Why?  I know they're customers may be here, but since most panels today come to Arizona from Japan or Germany, I don't think shipping costs are a big deal for panels.

The proposal is for a transferable income tax credit and property tax relief.  The author says the group is opposed to straight cash handouts, though.  Uh, OK.  And explain to me why a "transferable income tax credit" that the author says can be sold to other companies for cash is different than a cash handout?

I sometimes find it hard to identify the consistent element of what makes for a "desirable business"  (ie deserving of such subsidies) vs. one that is not so deserving.  The only consistent element I can find is that my business is always in the latter group, paying our taxes so that someone else's business and job can be subsidized.  It is for this reason that I generally barf when some group cries that they are not recieving equal proection (ala the 14th ammendment).  Take on tax and subsidy policy that takes from one group to fund another more politically connected group, and then talk to me about equal protection.

Postscript:  Here are the favored industries I can remember in the news of late in Arizona for getting special tax treatment:

Rock and Roll themed amusement park
Solar panel manufacturing
Neutriceutical production
New shopping mall parking lot
Spring training baseball parks

Readers are encouraged to add others in the comments.

Another Thought: I would dearly love to see a solar panel technology that can be rolled out of the factory cheaply in sheets like carpet out of Dalton, Georgia.  However, while I am increasingly convinced that someone is going to invent that technology soon, that technology will not be related to traditional silicon fabrication methods.  Therefore, nearly all of the plants that Arizona is desperately trying to subsidize to move here are likely using dead-end technologies, driven in part by bubble economics and subsidies that are not sustainable as the market grows (see ethanol).  Current silicon and germanium panels make no economic sense anywhere, and survive only due to massive (50% subsidies) and a desire to make a token green statement.

I am sure our local paper was cheerleading for ethanol plants in years past, and it is good we did not subsidize many here, because they are failing all over.  And I can't prove it, but I wouldn't be a bit surprised that one of the reasons our local semiconductor manufacturing operations have shrunk is because of this same effect, with subsidies attracting the least, not the most, viable enterprises.

Airplane Crash Lawsuit Dropped, but CEO Subsequently Stoned to Death For Having Female Flight Attendants

Apparently, Blackwater wants to be tried under Sharia law:

I learn that Blackwater has filed a motion in a lawsuit claiming
that since the mishap they're being sued for (a plane crash) happened
in Afghanistan, the lawsuit should be adjudicated via sharia law, not
U.S. law. That's ironic enough on its own merits, but the explanation is even better:

In
April, Blackwater asked a federal judge in Florida to apply Islamic
law, commonly known as Shari'a, to the case. If the judge agreed, the
lawsuit would be dismissed. Shari'a law does not hold a company
responsible for the actions of employees performed within the course of
their work.

LOL, my guess is that they really don't want the precedent set that Blackwater will henceforth be held to Sharia law in Afghanistan.  By the way, don't miss your chance to buy some gear or posters in the Blackwater company store.  I found it randomly checking out their site.  They actually have some really good looking posters, much better looking than the stuff sold in company stores where I have worked.

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Encore!

It is an indicator of the power of the state that most CEO's of public companies feel the need to pay lip service to every politically correct trend that comes along and to engage in outright sycophancy every time they meet with politicians.  The reason, unfortunately, is that morons like Maxine Waters have been granted nearly unlimited powers over commerce.  Some CEOs unfortunately go even further, going beyond just humoring politicians to play the game themselves, engaging in outright rent-seeking for themselves and their shareholders.

So it is in this context that it is nice to see the CEO of Exxon-Mobil continuing in that company's traditions of not rolling over to populist political pressure:

Rex Tillerson, chairman and chief executive of Exxon Mobil Corp.,
the world's largest oil-and-gas company, came out swinging Wednesday
against the environmental movement, arguing the science of climate
change is far from settled and that his company views it as its
"corporate social responsibility" to continue to supply the world with
fossil fuels....

Avoiding the political correctness that many oil executives are now
showing on global warming, Mr. Tillerson called for a continuation of
the debate, rather than acceptance that it is occurring, with the
potential consequence that governments will implement policies that put
world economies at risk.

"My view is that this is so extraordinarily important to people the
world over, that to not have a debate on it is irresponsible," he said.
"To suggest that we know everything we need to know about these issues
is irresponsible.

"And I will take all the criticism that comes with it. Anybody that
tells you that they got this figured out is not being truthful. There
are too many complexities around climate science for anybody to fully
understand all of the causes and effects and consequences of what you
may chose to do to attempt to affect that. We have to let scientists to
continue their investigative work, unencumbered by political
influences. This is too important to be cute with it."

Mr. Tillerson said Exxon Mobil, despite its reputation as a staunch
climate change denier, is in fact close to the issue as the only oil
company that is a member of the United Nations Intergovernmental Panel
on Climate Change.

Exxon Mobil came under repeated attack during the rowdy meeting for
not showing leadership to combat global warming, with some arguing it
is putting shareholders' capital at risk by not moving into greener
energy.

Among the many critics who stood up in the city's Morton H. Meyerson
Symphony Centre, where the meeting was held, was Neva Rockefeller
Goodwin, the great-granddaughtger of John D. Rockefeller, who founded
Exxon's predecessor 125 years ago.

But her proposal to have Exxon Mobil prepare a report on the impact
of climate change on emerging countries and to embrace greener energy
was backed by only 10.4% of shareholders.

The Exxon shareholder meeting is a zoo.  LIttle serious work gets done.  There are about a zillion people who buy one share of stock so they can show up and flog whatever political hobby horse they have.  I do wish I had been there, though, so that in response to Ms. Goodwin's proposal I could have in turn asked for a report on how alarmist-proposed 80% reductions in fossil fuel consumption would have impacted poverty and progress in developing countries. 

A while back I had observed that Wal-Mart had passed Exxon as the left's #1 Satan.  It is good to see Exxon back on top. 

Where the Subsidies Go

A week or so ago, I discussed federal energy subsidies and hypothesized, without a lot of facts, that a lot of them go to failing alternative energy projects rather than to oil company shareholders.  I asked readers if they had any more information, and the discussion is here.

But ask and ye shall receive, and the WSJ has an article today on federal energy subsidies and where they go.  The answer is:  in bulk dollars, a lot of them go nuclear, hydro, and traditional fossil fuel production.  However, it is interesting to look at them on an output basis:

For electricity generation, the EIA concludes that
solar energy is subsidized to the tune of $24.34 per megawatt hour,
wind $23.37 and "clean coal" $29.81. By contrast, normal coal receives
44 cents, natural gas a mere quarter, hydroelectric about 67 cents and
nuclear power $1.59.

The wind and solar lobbies are currently moaning that
they don't get their fair share of the subsidy pie. They also argue
that subsidies per unit of energy are always higher at an early stage
of development, before innovation makes large-scale production
possible. But wind and solar have been on the subsidy take for years,
and they still account for less than 1% of total net electricity
generation. Would it make any difference if the federal subsidy for
wind were $50 per megawatt hour, or even $100? Almost certainly not
without a technological breakthrough.

By contrast, nuclear power provides 20% of U.S. base
electricity production, yet it is subsidized about 15 times less than
wind. We prefer an energy policy that lets markets determine which
energy source dominates. But if you believe in subsidies, then nuclear
power gets a lot more power for the buck than other "alternatives."

The same study also looked at federal subsidies for
non-electrical energy production, such as for fuel. It found that
ethanol and biofuels receive $5.72 per British thermal unit of energy
produced. That compares to $2.82 for solar and $1.35 for refined coal,
but only three cents per BTU for natural gas and other petroleum
liquids.

I will repeat what I said in my earlier post, just so no one is confused about my position:

I personally don't care where [the subsidies go]. I am all for eliminating all
of this subsidy mess, equally, whether it's for oil exploration or
energy-from-donkey-poop or for CEO salary enhancement.

Question about Energy "Subsidies"

Kevin Drum and Alex Knapp write that there appears to be $20-$50 billion in federal energy subsidies each year going to the oil industry, and that this should be a target for elimination before any windfall profits tax.  I wrote in the comments:

I agree 100%.  Let's cut all the subsidies.

However, before you get too excited, my guess is that most of the
money marked as "oil company subsidies" really in fact goes to non-oil
projects like alternative energy. In the same way that a huge portion
of federal "highway" funds don't go to highways but to silly
politically correct failing transit projects, my guess is that,
similarly, "oil industry" subsidies go for a lot of silly alternative
energy projects.

I personally don't care where it goes. I am all for eliminating all
of this subsidy mess, equally, whether it's for oil exploration or
energy-from-donkey-poop or for CEO salary enhancement. But recognize
before you make this the liberal rallying cry, much of this subsidy
money may well be going to liberal pet projects.

Anyone have any better idea where this money goes that they are referring to?

Highly Leveraged Financial Companies Sometimes Fail

Bear Stearns is being bought for a price that is barely indistinguishable from zero:

Just four days after Bear Stearns Chief Executive Alan Schwartz assured
Wall Street that his company was not in trouble, he was forced on
Sunday to sell the investment bank to competitor JPMorgan Chase for a
bargain-basement price of $2 a share, or $236.2 million.

The stunning last-minute buyout was aimed at averting a Bear Stearns
bankruptcy and a spreading crisis of confidence in the global financial
system sparked by the collapse in the subprime mortgage market. Bear
Stearns was the most exposed to risky bets on the loans; it is now the
first major bank to be undone by that market's collapse.

This is what happens to a highly leveraged company when there is a liquidity crisis.  Fears about the company's health caused most lenders to withhold short term capital, which then in turn brought those fears to reality. 

While I suspect that we may find a lot of stupid blunders (at least in hindsight) and poor decisions, my sense is that this has nothing to do with fraud of any sort.  Which raises some interesting questions about Enron.  Because Enron's demise came in exactly this sort of liquidity crisis, and the situations are nearly entirely parallel, all the way up to and including the CEO telling the world all is well just days before the failure.  But no one understood Enron's business, so its failure seemed "out of the blue" and therefore was attributed by many to fraud, lacking any other ready explanation.   In the case of Bear Stearns, the public was educated in advance as to the problems in their portfolio (with mortgage loans) such that the liquidity crisis was less of a surprise and, having ready source of blame (subprime loans) no one has felt the need to apply the fraud tag.  (It also did not help that Lay and Skilling kept a higher profile than Schwartz at Bear Stearns, so that they were an easier target for vilification. 

I never really had the time to fully understand all the charges against Skilling at Enron (though I do think he deserves a new trial) but I always thought that it was unfair to try to ring either Skilling or Lay up for fraud because they were out trumpeting the health of the company shortly before its collapse.  Because it is clear from the Bear Sterns collapse that liquidity crises have everything to do with confidence, and you could see the Bear Stearns CEO out there in the last few days trying to boost confidence.  Was that fraud?  Or was that his very legitimate duty and obligation given his fiduciary responsibility to shareholders?   Why is Schwartz at Bear Stearns fighting for shareholders when he is trying to build confidence in the company in a liquidity crisis but Lay and Skilling at Enron defrauding shareholders when they were doing exactly the same thing? 

Experience is in the Eye of the Beholder

Via TJIC, on Hillary:

In 1973 she worked for a non profit.

In 1974 she was a government employee.

In 1975 she failed the D.C bar exam, and married Bubba.

In 1976 she joined the Rose Law Firm, and somehow made partner
three years later in 1979, despite rarely appearing in court "¦a
stunningly quick rise!

Oh, and Bubba became the Governor of Alabama in 1976, but that's unrelated.

In 1976 she was made, through political appointment by Jimmy
Carter, head of a government funded non-profit corporation which did
nothing but launch lawsuits.

In 1978 she laundered $100,000 of bribes through cattle
trading contracts. Despite having never engaged in cattle trading
before, she somehow managed to pick the two best times to trade each
day: she bought cattle contracts at the absolute lowest price each day,
and sell them at the absolute highest price. After laundering the
bribes, she quite cattle trading forever.

From 1993 to 2001, Hillary attempted, from her unelected
position, to socialize American health care, and routinely violated
open meetings laws.

In 2000 Hillary carpet-bagged her way into a senatorship.

Women's groups seem to be supporting Hillary's contention that being married to the President counts as presidential experience.  Wow!  If that is the case, the glass ceiling is exploded!  Melinda Gates has 20 years of experience as Microsoft CEO!

I'd like to say that I would love to see someone who has actually tried to run his/her own business running for the White House, but most of the candidates who claim to have business experience seem to have the politically-connected rent-seeking business experience (e.g. GWB) rather than the real try to make a business work against the general headwind of government bureaucratic opposition type of experience.

There's No Shortage, Just A Price You Don't Like

In the absence of government meddling (e.g. price controls) healthy markets seldom create true shortages, meaning situations where one simply cannot obtain a product or service.  One might think there was a shortage, for example, of Superbowl tickets, since there are only a few available and tens of thousands, maybe hundreds of thousands, of people who would like to attend.  But in fact one can Google "Superbowl tickets" and find hundreds available.  You may not like the price ($3500 and up for one ticket), but they are available for sale.

Yesterday, the AZ Republic lamented that there is a shortage of truck drivers nationwide:

Trucking companies across the country are facing a shortage of long-haul drivers....

High driver turnover has traditionally been a problem throughout the
trucking industry. But retirements and growing shipping demand have
made the shortage of long-haul drivers more acute. Fewer drivers means
delayed deliveries and higher delivery costs that could be passed on to
consumers. The
issue is especially crucial for the Phoenix area, which touts itself as
a shipping hub for businesses fed up with the costs and congestion
around Los Angeles-area ports. The Valley also is headquarters to two
of the country's biggest for-hire trucking companies: Swift
Transportation and Knight Transportation....

Trucking experts say the problem goes beyond a labor shortage in the industry. They call it a threat to the economy.

"Our country needs to figure out how to fix this," said Ray Kuntz,
chairman and chief executive of Watkins and Shepard Trucking in Montana
and chairman of American Trucking Associations. "Our economy moves on
trucks."

Here is the key fact:

"¢ Long-haul wages vary by company and are typically based on
experience, safety record and commercial-driver's-license endorsements.
Long-haul drivers with two or more years of experience usually earn at
least $50,000 to $60,000 a year.

"¢ An entry-level driver with no over-the-road experience starts in the high $30,000 range. Team drivers can earn more.

There is no way in a Platonic vacuum to determine if a wage is too high or too low.  But the driver "shortage" gives us a really good hint that maybe these salary levels are no longer sufficient to attract people to the rather unique trucking lifestyle.  I probably could write a similar article about how there is a shortage of Fortune 500 CEO's or airline pilots who will accept a $30,000 starting salary.  The problem then is not shortage, the problem is that wage demands are rising as trucking is out-competed for talent by alternative careers.   In fact, there is not shortage, but a reluctance by trucking firms to accept a new pricing reality in the market for drivers.

By the way, to some extent this "shortage" is indeed an artificial creation of the government.  Under NAFTA, Mexican truckers were long-ago supposed to have been given access to the US market, but overblown safety concerns have been used as a fig-leaf to block the provision as a protection for US truckers and a subsidy to the Teamsters.  If a truck driver "shortage" is really a national economic problem, then let's stop blocking this NAFTA provision.  But my sense is that the trucking companies in this article would freak at this, because they are not really concerned about the national economy but, reasonably, with rising wages hurting their bottom line.  My guess is this article is the front-end of a PR push to get states like Arizona to subsidize ... something.  Maybe truck driver training.  Look for such legislative proposals soon.

 

The Ethanol Follies Continue

Remind me to not cry any tears next time GM complains about government regulation:

In an audacious move Sunday, General
Motors demanded that the federal government step in and create a
national ethanol fuel station infrastructure at the same time the
company announced that it has invested in Coskata, a cellulosic ethanol
startup company.

 

Coming on
the heels of federal legislation that set national mandates for ethanol
production, GM's strategy amounts to federal guarantees for its
investment in the ethanol industry.

 

"We
need to grow E85 (ethanol) stations," said GM CEO Rick Wagoner at a
Detroit Auto Show news conference. "It is time for the U.S. government
to do it through regulation."

The article goes on to document the strong rent-seeking history of Coskata.

One small bit of good news is that the media seems to finally be catching on to the ethanol subsidy farce.


It's great that our politicians have discovered the need for new energy
technologies. But it appears that Washington is determined to put its
money"”our money"”on the wrong horse. Right now, researchers are studying
a host of energy solutions, including hydrogen, high-mileage diesel,
plug-in hybrids, radical reductions in vehicle weight and cellulosic
ethanol (made from cornstalks, switchgrass or other nonfood crops). It
is far too soon to say which of these holds the most promise. But,
instead of promoting experimentation and competition to find the best
solutions, politicians seem ready to declare ethanol the winner. As a
result, our nation could wind up with the worst of both worlds: an
"alternative" energy that is enormously expensive yet barely saves a
gallon of oil.