Mullaneblog

There is no better way to find out what is going on in America than go for a walk through a small town in New Jersey.

This morning I dropped my car off for repairs and took a mile walk to catch a bus into New York City.  AnyTown has a population of 10,000.

The local auto repair place still seems to do well. I think he owns the land and building and can ride out the ups and downs of the economy. The shop has been handed down a generation or two.

Down the street there is a building leased by a printer for decades. Now there is a For Rent sign out front – no doubt a victim of the Internet.

A nice, and a relatively new, cafe continues to stay afloat. It’s a pretty shop started by a young women. It should be a good spot to learn the business and hopefully move into a bigger place sometime down the road. But she can’t be making too much money. I am sure she is living with her parents.

Next to the cafe sits a store with a Gyro sign on top. On the window is pasted a For Rent sign.

The music instrument store continues to survive. We rented equipment for our kids there years ago. He may be OK as long as a big-box retailer does not enter the market. One tried a few years ago, but failed. Chalk one up to the small town business owner.

Further down the road, stands a successful Italian deli, which took over the lease of a fresh produce shop next door. He decided to pack it in and go back to being just a deli. The extra space has a For Rent sign out front. Next store, a restaurant, a success for decades, has a sign on the door, “Fire in kitchen, closed.”

A walk past a bunch of condos, developed during the real estate boom and shoddily built. There were a number of For Sale signs on the properties. My guess is that all the condos will sell considerably below the $600,000 asking price when they first went on the market.

Continuing, a lot of land subdivided for sale to a developer sits unpurchased. The land is being sold by a son of a successful local businessman. The son didn’t inherit much business talent, but he can put away a bottle of booze.

A walk is different than a ride in a car, when you are moving 30 or 35 miles per hour. The grass looks greener and most of the houses appear full. For Rent signs get smaller the faster you go.

There are many reasons why it is tough to be successful as a small town business owner. One is the baby boom generation is becoming savers versus spenders.

But there are other reasons as well. The amount of indebtedness is a main reason. We are leaving our kids with too much student loan debt and their incomes aren’t high enough to pay these debts off.

The young are supposed to be buying these homes and spending at many of these stores. They are the fuel to grow the economy.

But they are unable to spend.  Instead, they pay interest on their debts. By the way, they also pay 14% or 16% of their salary to retirees.  And most of the federal income tax they pay goes to Medicare and the military. None of the government money goes to help
them.

The government says we have no money, but we will lend you all the money you want.  Now we are all paying for it, with few able to buy our homes or visit the shops we own.

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With Facebook’s filing last night, there were few positive comments on the outlook for the social media company. Its valuation is too high. The click through rates for ads too low. If the company prices at $100bn market cap, how fast can the $1bn in earnings grow to support, or, more importantly, increase its valuation. Young folks are using twitter and other platforms. Games have already penetrated the Facebook market and may not offer much growth.

On the hyper-valuation side, there are news reports that Facebook is best positioned to monopolize gambling when legislation goes its way. One report said net income could equal $100bn.

An impressive stat is Facebook’s share of the display business is 3x that of Yahoo’s. I know Yahoo is Yahoo but that is a pretty good number.

Also, while users have failed to garner a massive number of ad click throughs, what Facebook is all about is having you click through its site – click to post comments, click through to look at pictures, click through to find friends from grammar school, high school, college, work, clubs, etc, etc. The point is is that Facebook knows how to get you to click through.

Last week, Andrew Ross Sorkin asked Russian investor Yuri Milner if we are in a technology bubble. Milner responded negatively, noting that many of the recent tech IPOs are selling below their initial offering price. For this to be a tech bubble, I think one IPO needs to appreciate. My hunch is that it may be Facebook.

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The bankruptcy of American Airlines begs the question: how
can an industry so important to the economy be such a financial mess?

Every major airline has now gone through Chapter 11, except
for Southwest. Ironically, Southwest doesn’t fly to where most people live:  major cities. Their motto has long been: if you fly where everyone lives, you can’t make money. Go figure!

The ascent of consumer acceptance of flying began in earnest
with deregulation in the late 1970s. Prices dropped, demand picked up and new airlines entered the market. All-in-all, deregulation worked for the flyer.

But for equity investors and many employees, deregulation
proved to be a disaster. Equity holders lost fortunes, jobs were lost, salaries
slashed and serious questions were raised about the qualifications of the newer
pilots and whether they were making livable wages.

As Former AMR CEO Bob Crandall pointed out on CNBC, since
deregulation the industry never earned its cost of capital. Ergo, sooner or
later, virtually all the airlines were destined to wind up as financial
failures.

One of the first big movers in deregulation was Frank  Lorenzo. He went after a company called Eastern Airlines, then headed up by Frank Borman. Borman was an astronaut and rightly carried  hero status as  one of the few to have orbited the moon. Lorenzo was a man of the eighties, he knew numbers and how to borrow huge sums of debt. I am pretty sure he was never tested if he had the ‘right stuff’ as a fighter pilot in the deserts out west like Borman.

Lorenzo built an airline empire on the premise that as he built scale, his cost would drop and he could then pay down the heavy debt load his companies accumulated. That never happened. Everything he touched wound up in bankruptcy court. A bunch of years later, I was in a room with American CEO Gerald Arpey and when asked about the odds of Jet Blue succeeding, he said the airline industry is unique:  your cost go up, not down, as you become bigger. Whiz kid Lorenzo was slow to grasp that very important point.

Do airlines going bankrupt really matter? On the surface, it  doesn’t seem to. When airlines go into bankruptcy, the planes still fly. For  that matter, as long as the planes fly, no one seems to care. Crashing planes is like serving spoiled food: not good for business so companies try to avoid
it.

But, below the surface, the filings will likely mean  something at some point in time. The crash-and-burn of unfettered capitalism caused prices to drop way below the cost to deliver one passenger to somewhere around the world at a profit. While there is always plenty of blame in hindsight, was everyone in the industry that incompetent? Properly not.

When every company in a sector files for bankruptcy – and the one company that has not, will not fly to where all the people are – then maybe its time for someone to say,”Hey, something is not working here.” Maybe there is a role for some better government regulation in the flying business.

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What is going on with US soccer? The national team’s first friendly versus the Czech Republic, a team that will not be in the 2010 World Cup, was a demonstration of how not to play soccer. The US lost 4-2.

The defense looked like a bunch of amateurs: the proverbial men versus boys. The US (needless to say, but I will say it anyway) were the boys.

In its second exhibition, the US’s performance was, once again, the lowest level of amateur. This time they battled against Turkey. The Turks are no push over; they were semi-finalist in the 2006 World Cup. They failed to qualify this time around.

In yesterday’s friendly, the US started off being dominated by the Turks, with the US dropping the first goal. What was most upsetting is how the US lacked the basics skills of futbol – trapping, turning and shielding were non-existent. How could a country with 300 million people where soccer is the number one participation sport produce so few good soccer players? It simply does not make sense.

The performance was so poor that it begged the question: Is the US soccer program wrought with corruption?

There is no way that after a 30-year rise in participation with so many kids playing from grammar school programs through high school through clubs through college to professional that we can be that bad.

Well, if not corruption, something else must be going on. Conventional wisdom might be the problem: the belief that shipping as many players as possible over to Europe to play will benefit the national team. But this piece of wisdom does not seem to be working.

In game after game, US broadcasters pontificate about the merits of playing abroad. Joze Altidore and Clint Dempsey play in the EPL, and the list goes on and on, league after league.

But what is not said is the level of teams they play for and how well they do. Altidore, a real gem of a young talent, after being shipped to Spain and now England, has stopped developing as a player. Dempsey, who has had good success in Fulham, has had an impact but no where near that of fellow US player Brian McBride. The development of Dempsey’s skill level has to be questioned. Eddie Johnson, a former young gem, has been shipped to so many different teams that nobody knows where he is anymore.

In reality, many US players spend a lot of time on the bench or play for second-rate leagues. The combination of little playing time, playing out of position or getting injuries, begs the question are US player better off staying at home and playing in the MSL?

In the second half of yesterday’s game, the tide changed. The US dominated the Turks and scored two goals to win the game. It was by far the best half of futbol for the team. What led to the change? Taking out many of the players who play abroad and inserting MSL players. Maybe this is a lesson for those who make the decisions in the US: those who play in the US are better off than those who sit on the bench in Europe.

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In Lexington, Kentucky there sits a printer manufacturer called Lexmark, spun off from IBM a number of years ago, that has done a quality job competing against industry powerhouse HP.

However, the company, like so many others, has spent a fortune buying back its shares over the last bunch of years. Lexmark has ponied up over $3.0 billion on share purchases as its stock collapsed to USD $32 in recent trading after peaking at $92 in 2004. This means it lost and wasted a lot of money.

No matter how you slice it, even with the most optimistic bend, the repurchase was a disaster. With over 13,000 employees, if the money was divvied evenly, employees could have walked away with over $230,000 a piece.

That’s not chump change! How many employees do you think would have preferred the cash versus stock options? I think a lot.

Let’s put that into some perspective. Tuition at the University of Kentucky, its home state, is about $17,000, per year. A family with three kids, assuming no tuition increases (very unlikely), would cost $204,000 for four-year degrees. That cash could have been used to finance their kids’ educations.

Instead, where did that family of three find the money? Where else! The equity in their home.

This is a massive swing in a family’s household net worth. Rather than having cash-in-hand to pay for their children’s education, they were forced to borrow. There is likely no data that follows this trend: how consumers would have been better off if corporations spent that money paying their employees instead of buying back shares.

Most major consumer purchases in the early and middle part of this decade were financed with borrowings, rather than higher incomes. Now demand is dead and consumers are stuck with too much debt and public corporations wonder why revenue is stagnant.

Want to see the US economy take off? Have Congress pass a law outlawing share repurchases. This would give labor more power to demand higher wages, versus the false hope that stock options would some day make up for lower wages today – higher wages; more demand.

By the way, Lexmark is one example of hundreds. Returning capital to shareholders via share buybacks has created no return for shareholders. It is time to listen to the market which is telling us that this strategy does not work.

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A few weeks ago headlines were abound with news of General Motors and Chrysler slashing the size of its dealership network, but a little known company called YRC Worldwide, swallowing any sense of pride and asking the federal government for financial support, could prove to be the most enduring news of all.

It could be the biggest development since the collapse of Lehman, which drove global financial markets into a tailspin.

What is YRC and why should we care? YRC is the US’s largest trucking company; formally called Yellow Corp (although it paints its trucks orange) whose fleet covers highways across America. The reason why you should care is that YRC is considered one of the best managed companies in the US – if not the world. When troubled companies seek out top management talent, where do they turn? GE? No. They go to YRC.  The turnaround at Waste Management a number of years back was successfully launched by former trucking executive Maury Myers. Corporate America is littered with YRC talent.

If highly respected CEO Bill Zollars’ cannot manage his company through this downturn, it is highly unlikely many others will either. YRC Worldwide is seeking $1 billion in bailout money from the Troubled Asset Relief Program (TARP) to help cover retirement obligations. The company has $2 billion in retirement costs it has to fund over the next four years.

The request essentially confirms that the current US pension structure of working for 30 years and then paying retirement and health-care benefits for almost equally as long does not work – a complete miss match for when work is completed to when employees get paid. But unlike the auto industry, where such pension and health-care funding shortfalls were viewed popularly as the result of decades of poor management
decisions, this cannot be said of YRC.

By the way, these concerns are not isolated to a non-household-name like YRC, but also companies like AT&T and GE. Further, virtually every city and state in the country is suffering from the same affliction. California Treasurer Bill Lockyer has asked Tim Geithner to provide assistance under the TARP, warning of a hit to public services and infrastructure if relief is not soon provided.

With problems so pervasive you would think Americans would begin to change their tune and start supporting some form of government intervention to help find a solution to this issue, such as the government performing a thorough analysis on what can realistically be expected to be paid out by corporations, cities and states. Accordingly, this should be followed by an adjustment to these contracts.

However, there seems to be no such will on the part of the American people. Following the YRC announcement, editorials galore exploded saying this was another corrupt, poorly run company that is justly receiving its comeuppance. Response to these op-eds supported government staying out of the situation.

The call for federal help is a clear sign of how bad the US economy is doing. YRC represents everything that is good in a free capitalist system, aspiring to: excellent management, well-trained employees, a passion and desire to be the best they can be, and a continual drive to become a more efficient company. Also, morally, it is one of the most upstanding and ethical companies in the country.  If YRC cannot make it, few will be able to. This is why the request by this little known company might be more systemic than many currently believe.

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As Barack Obama and his newly appointed financial team attempt to salvage the US and global economy from falling into the depths of a depression, what should the leader of the free world do?

When all is said and done, the problem facing the US during the past eight years, and for many others the past thirty years, is the average net worth of our citizenry has not increased. And, most likely, has gotten materially worse.

To understand what is happening, do not look to the past but let’s look at the present. It is not unusual for a recent college graduate to be leaving school with over $100,000 in debt. And what does the recently hired student make? Maybe one-third of their debt level. Take a $36,000 starting salary, or about $3,000 per month, and subtract out taxes, take out rent of $800 per month (that could be conservative), the $1,000 per month of interest expense for the loans and the newly graduated student will have to steal for food. Or, more likely, depend upon his or her parents for support.

Another way to look at this, having graduated from college in 1986, a typical starting salary was $20,000, roughly two times what one year of college tuition cost. And, further, most people graduated without loans to pay off. This also happened to be when the cost of education started spiraling upwardly out of control. In my freshman year, annual tuition was around $8,000, jumping to $12,000 in four years. Today, that college costs $40,000 per year.

Add the pressure of getting master degrees and student could be stuck with $150,000 in loans upon graduation, if not considerably more.

This student then has to pay $50,000 to $70,000 to get married to be socially acceptable, pay for the $500,000 home where he or she will have to find $100,000 down payment since PMI insurance is so onerous (now over $400 per month) as the age of the 10% down mortgage is likely over.

The massive expansion of the use of debt during the past thirty years has led to an environment where the price of what we pay for things is materially higher than what we can afford to pay. This will mean, unless some creative things are done by Obama & Company, prices for mostly everything will be coming down. The recent drop of gas from $4.00 to $2.00 per gallon was nice. However, the recent collapse to $1.50 is almost becoming a bit unsettling.

The most creative thing Obama can do is keep on doing what the country has been doing, but do it more aggressively and more of it. If our citizens are scared to death by the volatility in financial markets and the US ten-year bond yielding just 2.6%, sell as much debt as you can at that interest rate and use the proceeds to buy all the bad mortgages and credit card debt. If people want to get out for debt, buy it and let them. This will quickly improve the net worth of the average American, increase their spending power, up their confidence and get the economy going again. As the economy stabilizes, tax revenue will go up to pay off the debt issued to repurchase the debt.

At the same time, develop new regulations so this mess will not happen again for another seventy years. Deregulation let people borrow at levels that they should not have been able to borrow. Also, continue to have the Federal Reserve flood the US economy with money and the US economy will begin to improve.

But remember Obama: Be aggressive! Be aggressive! Be aggressive!

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First impression of Boston is how tranquil the town is—calm, nice with people being thoughtful. Interestingly, Boston lacks the level of intensity that is perpetually pushing people to the limits of sanity as in New York. The presence of having to attack, having to compete, having to work together, having to be paranoid that is part of New York is devoid in the Bostonian as I walked through Copley Square and Beacon Hill.

What is quite surprising is how much private high-school permeates Boston life. The world of private school in New Jersey is really for those who suffer from a severe case of inferiority. New Jersey invest heavily in its public schools and boasts the best in the nation, with little reason for a family living in a good town to pay the added expense.

However, that is not the case in Boston. A street is called Exeter; another called Dartmouth, a beneficiary of the private schools that dot the states from Connecticut heading northward.

Overtime, one has to question if this pervasiveness is a breakdown between the citizenry and local government that has now gone on for generations–the pride of being from Exeter and heading on to one of the schools that makes up such an important part of Boston life. The preppy clothes–some wearing new and neat, others wearing Polo shirts hanging sloppily around their overly wide waists, a sign of inactivity. And the whiteness, Oh! the whiteness. Not of the clothes, but of the skin. Pale white faces; paler white legs. And the look, Oh! the look. That pale white face with the look of inbreeding. America’s version of the royal family. A person so pale and so soft that a simple look from someone from South Boston or from an area like Bensonhurst would make this soft, fleshy boy in his twenties collapse due to his sheltered, shallow existence having lived a life in walled gardens.

The softness is distant from the lives most Americans and others around the world live. The coarseness that one builds up from watching their parents struggle to makes ends meet–the lack of money for your mom to look as pretty as she wants; the stress dad feels from always having his job threaten in this American system build around business. The white, pale soft skin of the Bostonian, descending from a father that works for the private equity firm that bought the company your dad who used to work for, then fired so they could afford to pay down the debt piled on to purchase it.

The southy driving the tour bus demanding his paying customers to listen: “If you listen, you’ll learn something.” Or, the other southy, owner of a liquor store, forcing the pale college student to dig deep into his pockets to find the final penny to pay his tab. The elder statements of the liquor store with a reddened face followed the pale student, he was not required to dig deep into his pockets to find his last penny.

The softness at first can be nice. The parents, now empty nesters, together, having wine in an French Bistro on Newbury Street. But, after a few minutes, there is no conversation. She has wine and her crossword puzzle. Always an ideal spot to do a crossword puzzle–a happening bistro in one of the trendiest cities in the country. This couple likely said goodbye to their last child. The husband, to have some conversation, turned to the early twenty-something barmaid. Her ambitions were not to be barmaid—to no one’s surprise—but to help her boyfriend turn his streaming radio station into a success. At least the barmaid still had hope. The wife, suffering the numbness associated with her daily in-take of wine and lack of physical exertion, turned back to her crossword puzzle.

What was not picked up in my first day of Boston was what made Boston great—the intelligence that comes from attracting many of the best minds in the world. The philosophy that helped drive the creation of laws that this nation was built on and the men and women of science who continually come up with the new ways to approach life that allow human beings to move forward. Well, tomorrow is another day.

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US Treasury Secretary Seriously Messes Up

Blaming Friday’s mini crash on the 20th anniversary of the 1987 stock market collapse and a few earnings misses is not even close to being on target.

The blame for Friday’s collapse can be squarely placed on the shoulders of US Treasury Secretary Hank Paulson. Paulson hosted his G-7 contemporaries last week in Washington to discuss exchange rates and other policies, however, while publicly stating the US supports a strong dollar, there did not appear to be much conviction behind his statements. Word has it, the US did little to support a reversal in the weak dollar–particularly against the euro–and this left the other treasury secretaries not very happy. Rather than direct their statements of rejection at the US, they chose to blame China instead with further calls for yuan appreciation. As the news leaked out, the US market began to tank.

Paulson’s move not to support a reversal of the US dollar against the euro follows the formation of the SIV fund to provide financial support for off-balance sheet debt held by the major money-center banks. SIVs are not very different from what Enron did and in certain ways is worse since these institutions have decades of experience at knowing what is and what is not on- or off-balance sheet financing. Paulson still has not clearly detailed the reasoning behind the move.

Mr. Paulson also had few good things to say about housing this week. While many of the seeds for the housing collapse were put in place prior to his tenure at the Treasury, why he felt the need to remind the markets of what it already knows, leaves one to ponder. Paulson was pretty much stating the obvious.

Friday’s stock market mini-crash should be called Paulson’s Crash. He is bailing out his pals on Wall Street with the SIVs fund and he will not help the Europeans get out of their difficult position of too strong of a currency who now have decided to turn their blame for the US’ incompetence to China. Forcing appreciation of the yuan when Chinese officials are working very hard to slowdown their economy and stop their run away stock market is a recipe for disaster and unfair for the Chinese. As the yuan appreciates, this will only bring more money into China and drive an overly inflated stock market even higher.

Paulson falls into a long line of Bush Administration appointees who are charismatic, are excellent at articulating a thought and are willing to express their views to the world. However, there is only one problem–whether it is Cheney, Rumsfeld, Wolfowitz or Paulson–it is that they are always wrong.

Unlike Rubin and Corzine, former Goldman Sachs partners who have demonstrated some serious success after leaving the investment firm, it looks like Paulson is not following the same path.

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Tarzan Meets Bambi

Fox Business Channel, in its long-awaited debut, launched its new post-trading show called Happy Hour.

For those who missed the show, it is set in a New York bar and hosted by Cody Willard, a Wall Street investor with a Johnny Weissmuller haircut but without the physique, and Bambi, a well-endowed actress on loan from a small San Fernando Valley film company. When asked why she took the Fox anchor position, Bambi responded: “It was the first job offer I ever got that did not require taking an AIDS test.”

This blogger has since learned that John Holmes and Tracy Lords will be hosting tomorrow’s show.

Soon after the launching of the show, it was said that the ground above long-time Wall Street Journal editor Robert Bartlett moved as he was rolling over in his grave. This blogger was also informed from a well-connected source at Craigslist that the job-placement website got a record number of hits as jounalists for the Journal sought to find new employment following the shows’ debute.

A lawyer, who negotiated the terms and conditions of Rupert Murdoch’s acquisiton of Dow Jones, said the parties negotiated every possible detail ensuring the editorial integrity of the Journal. Even prohibiting the global-media magnate from posting a Page 3 Girl in the 100-plus-year-old business paper.

However, it has since been learned that Murdoch found an out in the contract that will allow him to post the Page 3 Girl on the cover of the newspaper. It is our understanding that the first girl to grace the cover of the Journal will be Bambi, the host of today’s Happy Hour. And on her breast will be written: “Fox: America’s Business Channel.” And yes, her endowment is such that it will be able to display the entire slogan.

As a final note, the Tarzan & Bambi hour followed an interview with Alan Greenspan.

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