BBC America runs a funny series of commercials about how British accents elevate the receptivity of the audience to a character, and their good example is Patrick Stewart as Captain Picard on Star Trek. I definitely would take him more seriously than Captain Kirk!
I was in a Minneapolis restroom looking to dry my hands, and I came upon a new hand dryer that was different from the ubiquitous down spouted, hot air blowers we've all seen. This one was made of a familiar grey plastic, and was dubbed an "Air Blade" dryer or some such name. It was made by Dyson, the company that has made a fortune selling bagless vacuum cleaners that "never lose their suction." More on this later.
The Dyson dryer was said to be more efficient at drying and more sanitary than wiping your hands. You put your hands together, fingers pointing down, into a slit-type opening and air dries your hands. I couldn't see the difference compared to the old, Edsel-style dryers. Dyson's great advertisements feature its very studious, well coiffed founder speaking in a great British accent. The first time I heard him, I ran out and bought the first Dyson vacuum cleaner. After all, he was an engineer, an innovative problem solver, and he personally hated vacuums that lost their suction, just as I did! What could be better? He had my implicit trust, and the accent was key.
This wasn't David Orek, who sounds like a carnival side showman, lifting bowling balls with his little vacuum cleaner. Dyson had size, design, plastic, and style.
Where am I going with this? One of Dyson's messages is that it solves the important problems, like unsanitary conditions from poor hand washing and vacuum cleaners that clog and lose suction. A recent Mayo Clinic study looked at hand washing in public facilities and found no relation between the use of towels versus the use of air dryers and better sanitation. The important variable in reducing germs and improving sanitation was technique in washing and time spent drying. Spend the right amount of time, and good old, brown paper towels are just fine. So, Dyson didn't solve a problem that was specific to the drying medium (towels), but it might have fed our own laziness that we'd rather have blown air than our own muscle power to dry our hands. Not to mention that lower waste from towels is offset to some extent by the constant repair and replacement of the air units, in addition to their energy costs. To paraphrase Alexander Graham Bell, "What have we (sic) wrought?"
Finally, as I sit here cleaning out my Dyson vacuum , I can come clean. Yes, the vacuum cleaner has no bag, and therefore it cannot lose suction from a full bag or a blocked filter. However, it does lose suction, often and unpredictably. There are some vents in the cyclone housing that clog up easily with lint or dust. Once these are blocked, the Dyson, cyclonic moving air mechanism comes to a halt and nothing is picked up. Yes, they got rid of the bag problem, but they substituted another problem, which is really the same issue. I really wanted to believe Jim Dyson, I really did, but he wasn't honest with me or millions of other consumers.
He really does make the best commercials though, and he has that great accent.
Thursday, September 30, 2010
Thursday, September 23, 2010
GE CEO on Energy Policy
GE CEO Jeff Immelt is quoted at the Gridwise Global Forum, "This is a great country. But, you know, we have to have an energy policy. This is just stupid what we have today." I hope that he doesn't apologize later for his remarks, and I also hope that his refreshing candor stimulates some response from his fellow CEO's who either produce or use energy, which is pretty much every company.
In talking about clean energy and reduced greenhouse gas emissions, it is difficult to conceive of meeting any environmental goals without having a place for nuclear energy. In this respect, it is curious that we always cling to European examples when we bemoan our own health care industry. Yet, we ignore the European model when it comes to nuclear energy. Almost 80% of French electricity is generated by nuclear power. Wind and ethanol won't make a meaningful difference to the total energy demand in the U.S. for the foreseeable future. While coal is abundant, the problems with cleaning the coal and then sequestering CO2 byproducts are expensive, technologically challenging and potentially very harmful to the environment. Granted that GE is talking its book to some extent, given its leadership in nuclear power, but we applaud Mr. Immelt's taking the discussion to the public forum in a decisive fashion.
He did say something that might be confusing for GE shareholders, and that is that he no longer sees GE as being exclusively a purveyor of high end, expensive products in its market segments. Rather, in the future, he wants to have "the value product all the way up to the high end product" in every segment, to keep out the Indian and Chinese competition. I think this is both bad strategy and bad economics. If Indian and Chinese companies can, for example, produce low price, low margin, low tech consumer appliances for their own markets, then why not let them? This is the law of comparative advantage. If GE can bring to bear innovation, technology, and high quality manufacturing for demanding customers in any country, why not focus on this? Over time, it will be interesting to learn what he meant by this remark.
In talking about clean energy and reduced greenhouse gas emissions, it is difficult to conceive of meeting any environmental goals without having a place for nuclear energy. In this respect, it is curious that we always cling to European examples when we bemoan our own health care industry. Yet, we ignore the European model when it comes to nuclear energy. Almost 80% of French electricity is generated by nuclear power. Wind and ethanol won't make a meaningful difference to the total energy demand in the U.S. for the foreseeable future. While coal is abundant, the problems with cleaning the coal and then sequestering CO2 byproducts are expensive, technologically challenging and potentially very harmful to the environment. Granted that GE is talking its book to some extent, given its leadership in nuclear power, but we applaud Mr. Immelt's taking the discussion to the public forum in a decisive fashion.
He did say something that might be confusing for GE shareholders, and that is that he no longer sees GE as being exclusively a purveyor of high end, expensive products in its market segments. Rather, in the future, he wants to have "the value product all the way up to the high end product" in every segment, to keep out the Indian and Chinese competition. I think this is both bad strategy and bad economics. If Indian and Chinese companies can, for example, produce low price, low margin, low tech consumer appliances for their own markets, then why not let them? This is the law of comparative advantage. If GE can bring to bear innovation, technology, and high quality manufacturing for demanding customers in any country, why not focus on this? Over time, it will be interesting to learn what he meant by this remark.
Wednesday, September 22, 2010
The Feeling's Mutual
As institutional shareholders have rightly been crying aloud for proxy access to submit their candidates for corporate director positions, the position of those institutional shareholders that are mutual fund management companies needs to be examined.
Wall Street and Main Street intersect in Mutual Fund Square. 90 million Americans are said to hold mutual fund investments, either in individual or retirement plan accounts. Carolyn McPhillips notes that mutual fund ownership is the "primary means by which individual investors participate in the financial markets." Institutional investors control about 70% of the shares traded on exchanges, according to John Bogle. Have you ever read the annual report of your mutual fund(s)? Have you ever looked at your fund's trustees? If I recognize 5% of the trustees, that would be a stretch. Many are attorneys at obscure law firms and it's completely unclear what qualifies them to be a trustee. Hopefully, as with corporate directors, we may see some explanation for why the boards are populated as they are.
Since funds have "unitary boards." which oversee five or more mutual funds in a family, a "nod your head Yes" director affects a large volume of assets. Although the Dodd-Frank bill has paid lip service to proxy access for mutual fund issuers, it will be exceedingly difficult for shareholders to make significant changes. Does this matter? It sure does.
The governance of mutual fund companies, with exceptions such as Vanguard and Dodge & Cox, does not meet the standards of transparency, disclosure, and shareholder friendliness that are being imposed on corporate issuers. If governance were to improve, then over time, one would expect fewer duplicative fund offerings, elimination of multiple share classes, lower fees, and better performance. That would be nice for those 90 million of us who are owners of mutual funds.
Wall Street and Main Street intersect in Mutual Fund Square. 90 million Americans are said to hold mutual fund investments, either in individual or retirement plan accounts. Carolyn McPhillips notes that mutual fund ownership is the "primary means by which individual investors participate in the financial markets." Institutional investors control about 70% of the shares traded on exchanges, according to John Bogle. Have you ever read the annual report of your mutual fund(s)? Have you ever looked at your fund's trustees? If I recognize 5% of the trustees, that would be a stretch. Many are attorneys at obscure law firms and it's completely unclear what qualifies them to be a trustee. Hopefully, as with corporate directors, we may see some explanation for why the boards are populated as they are.
Since funds have "unitary boards." which oversee five or more mutual funds in a family, a "nod your head Yes" director affects a large volume of assets. Although the Dodd-Frank bill has paid lip service to proxy access for mutual fund issuers, it will be exceedingly difficult for shareholders to make significant changes. Does this matter? It sure does.
The governance of mutual fund companies, with exceptions such as Vanguard and Dodge & Cox, does not meet the standards of transparency, disclosure, and shareholder friendliness that are being imposed on corporate issuers. If governance were to improve, then over time, one would expect fewer duplicative fund offerings, elimination of multiple share classes, lower fees, and better performance. That would be nice for those 90 million of us who are owners of mutual funds.
Friday, September 17, 2010
Half Full or Half Empty?
Stock market gurus have noted mutual fund inflows and outflows for the latest quarter, which show continuing outflows from equity mutual funds and large inflows into bond funds, particularly intermediate bond funds. The conclusion, the gurus say, is that the retail investor will continue to be a contrary indicator, getting out of stocks when the risk is low and potential returns high. These are definitely "glass half full" kind of guys.
The confluence of economic and financial data continues to justify skepticism about equity market performance, which is a "glass half empty" perspective that I share.
We know that the last decade was one of the worst on record for average household income, driven by no real wage growth and fattening of the upper tail of the income distribution curve. Today, the Federal Reserve has reported second quarter household net worth falling by 2.8%, the first drop since the beginning of the financial crisis. Permanent income, which is related to wealth, should theoretically be the driver for future consumption, so this is not encouraging news for the consumer's contributing to the recovery, as was always the case in past cycles.
The University of Michigan Consumer Sentiment Index, which has a decent record as a leading indicator of business cycle turns, fell to 66.8 in early September, the lowest level since August 2009. This is after Cash for Clunkers, Dough for Down Payments, Shovel Ready Infrastructure programs, and other useless Federal programs have failed to effect the popular psyche.
Households continued to pare their debt, but this arithmetic happens because consumer credit card balances and some mortgage debt has been written off. Total household debt fell by $77 billion to $13.5 trillion outstanding at the end of the second quarter. Statistics reported by the Journal show that bank write offs in the second quarter were about $70 billion, almost all of the reported decline in household debt outstanding. We also believe that there is more risk in the pool of outstanding mortgages, not subprime, but prime.
Credit card lenders, if you haven't read your mail, are looking for balance transfers and not for raising lines or lowering rates and fees. So, the consumer can't go back to this well to finance consumption in the future. Bank lending for small business expansion is at a stand still. Bank C&I loans fell 1.9% to $91 trillion. So, it's unreasonable to expect small business creation or expansion to lead the recovery.
On the flip side, nonfinancial corporations now have a cash hoard equal to almost 7% of assets, the highest levels since 1963, according to a Journal chart. Other than share repurchases, there are no large uses of cash being trumpeted, with the exception of some large acquisitions by super-giants like J&J. The point is, to use the language of Keynes, there is a distinct lack of "animal appetites" among the corporate sector capitalists, and so the huge expansion of liquidity and credit has become trapped in corporate cash balances. There is little desire to invest in plant and equipment for expanding operations. With the large layoffs, labor force productivity will rise in the short-term because of the higher capital-to-labor ratio.
For the medium-term, it seems really difficult to find an engine that will pull the U.S. economy out of a low growth cycle. The talk of tax increases offset by spending cuts, proposed by David Stockman, seems like the early supply side theory in a mirror. That theory, as formulated by people like Dr. Mike Evans of Chase Econometrics and the University of Pennsylvania, said that taxes should be reduced with a simultaneous, equal dollar amount reduction in Federal spending. In fact, that theory was never tried. Now, we have Stockman's peculiar, toxic reformulation. There is not much clear thinking about tax and fiscal policy either, which has frozen the markets into a trading pattern.
To finish on a positive note, the Minnesota Twins, once neck in neck with the Chicago White Sox for the division lead, have faced down the big city bad boys with Midwest small ball, and failing a meltdown look like a shoo in for the title. A nice way to end the Summer and lead into Fall.
The confluence of economic and financial data continues to justify skepticism about equity market performance, which is a "glass half empty" perspective that I share.
We know that the last decade was one of the worst on record for average household income, driven by no real wage growth and fattening of the upper tail of the income distribution curve. Today, the Federal Reserve has reported second quarter household net worth falling by 2.8%, the first drop since the beginning of the financial crisis. Permanent income, which is related to wealth, should theoretically be the driver for future consumption, so this is not encouraging news for the consumer's contributing to the recovery, as was always the case in past cycles.
The University of Michigan Consumer Sentiment Index, which has a decent record as a leading indicator of business cycle turns, fell to 66.8 in early September, the lowest level since August 2009. This is after Cash for Clunkers, Dough for Down Payments, Shovel Ready Infrastructure programs, and other useless Federal programs have failed to effect the popular psyche.
Households continued to pare their debt, but this arithmetic happens because consumer credit card balances and some mortgage debt has been written off. Total household debt fell by $77 billion to $13.5 trillion outstanding at the end of the second quarter. Statistics reported by the Journal show that bank write offs in the second quarter were about $70 billion, almost all of the reported decline in household debt outstanding. We also believe that there is more risk in the pool of outstanding mortgages, not subprime, but prime.
Credit card lenders, if you haven't read your mail, are looking for balance transfers and not for raising lines or lowering rates and fees. So, the consumer can't go back to this well to finance consumption in the future. Bank lending for small business expansion is at a stand still. Bank C&I loans fell 1.9% to $91 trillion. So, it's unreasonable to expect small business creation or expansion to lead the recovery.
On the flip side, nonfinancial corporations now have a cash hoard equal to almost 7% of assets, the highest levels since 1963, according to a Journal chart. Other than share repurchases, there are no large uses of cash being trumpeted, with the exception of some large acquisitions by super-giants like J&J. The point is, to use the language of Keynes, there is a distinct lack of "animal appetites" among the corporate sector capitalists, and so the huge expansion of liquidity and credit has become trapped in corporate cash balances. There is little desire to invest in plant and equipment for expanding operations. With the large layoffs, labor force productivity will rise in the short-term because of the higher capital-to-labor ratio.
For the medium-term, it seems really difficult to find an engine that will pull the U.S. economy out of a low growth cycle. The talk of tax increases offset by spending cuts, proposed by David Stockman, seems like the early supply side theory in a mirror. That theory, as formulated by people like Dr. Mike Evans of Chase Econometrics and the University of Pennsylvania, said that taxes should be reduced with a simultaneous, equal dollar amount reduction in Federal spending. In fact, that theory was never tried. Now, we have Stockman's peculiar, toxic reformulation. There is not much clear thinking about tax and fiscal policy either, which has frozen the markets into a trading pattern.
To finish on a positive note, the Minnesota Twins, once neck in neck with the Chicago White Sox for the division lead, have faced down the big city bad boys with Midwest small ball, and failing a meltdown look like a shoo in for the title. A nice way to end the Summer and lead into Fall.
Wednesday, September 15, 2010
IBM Writes Rx for HP
IBM CEO Sam Palmisano made some incisive comments about HP's recent public travails. "HP used to be a very inventive company," he is quoted as saying in the Wall Street Journal. This is one of the key issues: it has been living off its printing and consumables franchise for many years now, while failing to innovate around its corporate systems businesses.
While the former HP CEO is rightly criticized for a number of things, I take issue with Palmisano's comment that Hurd "cut out all the research and development." For its most recent fiscal year, HP's R&D spend was $2.8 BILLION, or 2.5% of revenue, versus $3.5 BILLION, or 4% of revenue in the first year of Hurd's tenure. Only someone in the Federal government could call this cutting out all spending. On the face of it, a reasonable investor doesn't have the information to make any sense of this number.
What ongoing projects are in both numbers? What percent is related to new products versus product line extensions versus think tank expenditures? IBM and AT&T grew new businesses from their expenditures at IBM Labs and Bell Labs. Those were headier days of monopolies, bigger margins, and weaker customer power. Shareholders would need explanations if these kinds of projects were being funded to a large extent, which I doubt.
My suspicion is that much of HP's R&D is under managed and unproductive. This is the obvious explanation for the pressure to go out and seek exorbitantly priced acquisitions. Boards, shareholders and analysts should demand to see what's under the covers of numbers like $3 billion in annual R&D.
While the former HP CEO is rightly criticized for a number of things, I take issue with Palmisano's comment that Hurd "cut out all the research and development." For its most recent fiscal year, HP's R&D spend was $2.8 BILLION, or 2.5% of revenue, versus $3.5 BILLION, or 4% of revenue in the first year of Hurd's tenure. Only someone in the Federal government could call this cutting out all spending. On the face of it, a reasonable investor doesn't have the information to make any sense of this number.
What ongoing projects are in both numbers? What percent is related to new products versus product line extensions versus think tank expenditures? IBM and AT&T grew new businesses from their expenditures at IBM Labs and Bell Labs. Those were headier days of monopolies, bigger margins, and weaker customer power. Shareholders would need explanations if these kinds of projects were being funded to a large extent, which I doubt.
My suspicion is that much of HP's R&D is under managed and unproductive. This is the obvious explanation for the pressure to go out and seek exorbitantly priced acquisitions. Boards, shareholders and analysts should demand to see what's under the covers of numbers like $3 billion in annual R&D.
Subscribe to:
Posts (Atom)
Posts
