Wednesday, December 31, 2014

US Postal Service Reform: A Dead Letter in 2014

Throughout 2014, we read warnings about yet another crisis at the US Postal Service.  Aspects of Congressional regulation regarding prefunding of employee healthcare do have the effect of showing paper losses, and the postal union suggests that removing the prefunding requirement by itself would put the USPS in a healthy condition.

Unfortunately, this isn't the case. Meanwhile, as Congressional bills like Carper(D)/Coburn(R) languish without coming to the floor for a vote, it is clear to anyone who uses the Post Office that delivery times from Minneapolis to New York, for example, which used to be 2-3 days for First Class mail are now 5-7 days, while rates have gone up.

There are too many small post offices, too little self service, and the delivery fleet itself is outdated and antiquated.

The Postmaster-General admitted that its commercial bulk rates were not competitive enough to win share from online retailers like Amazon.  The USPS recently cut rates for holiday shipping by large shippers, and it did take share from FedEx and UPS, much to their chagrin.

Delivering groceries with the current expensive workforce, work rules, and antiquated fleet seems ridiculous. Handling returns for online retailers should help fixed cost coverage and make some money.

However, without dramatically reforming employee heath and welfare benefits, this is all the usual posturing with no real reform.  Carper/Coburn makes noises about bringing these programs in line with other Federal agencies and about enrolling some beneficiaries in Medicare, but why should this be done solely for USPS, when Congress itself and the Federal government are all on gold-plated plans?

The bill also suggests that these proposed reforms are all subject to bargaining.  Goodbye to any meaningful reform.  Look for continued decline in the speed and quality of service ordinary consumers enjoy, and look also for more glum faces and surly workers at the post office.

Monday, December 15, 2014

Telecoms Start Racing to the Bottom

We wrote a while back about Masayoshi Son's potential impact on US retail cellular phone users, particularly because he wants to become number one in his markets.

Predictably, his first efforts at taking over T-Mobile met federal regulatory veto.

T-Mobile has forced some innovation on the industry by making it easier for consumers to get phone upgrades and by doing away with contracts. Their subscriber growth turned around.

Meanwhile, however, spectrum auctions are indicating that others perhaps have a better economic model and can pay more for spectrum that ATT, Verizon, T-Mobile, and Sprint.

So, the major carriers have put forward their "race to the bottom" business model of promising to cut monthly bills in half while offering unlimited data and phone service.  Clearly, this is not sustainable, as we have noted for years.  With spectrum prices rising, the cost of building out different network or adding other services is becoming prohibitive.

So, the WSJ notes,
"What difference does a month make? In telecom, the answer is about $45 billion.
That’s how much market value Verizon Communications Inc., AT&T Inc., Sprint Corp. and T-Mobile US Inc. have lost collectively since mid-November amid a fast-moving reassessment of the industry’s value by investors. The lost value is greater than the current market capitalization of Sprint and T-Mobile combined, and it reflects concern that cellphone service will be costlier to deliver and less lucrative to sell."
The carriers also got dinged on behalf of consumers by the Feds because although they promised "unlimited text and data" to all customers, heavier users faced slower download speeds, of course a form of rationing and making the whales pay for their consumption. If the fines levied are paid, then they either have to adopt some kind of utility pricing which is transparent, or face growing losses because their business models don't create value. 

Thursday, December 11, 2014

Economic Winter in Ukraine:Western Allies Distracted and Silent

Politicians are the same the world over.  Dealing with real issues in a principled and economically rational way just leads to attacks from noisy, vested minority interests, or 'activists.'  Their self-interest lies only in their narrow agendas: the pols get instant support and the majority either doesn't know or doesn't care.  What could be better or safer?

So, Europe is worried about climate goals and ECB pronouncements, while in the U.S. we are also worried about climate pacts and yet another government funding impasse. Russian President Putin continues turning the screws in Ukraine, maintaining his currency with his nationalist supporters.

With signs of a better business climate in the U.S., a favorable Ukrainian exchange rate, an idled Ukrainian export capacity in sectors like agriculture and heavy machinery, and an avowed desire to open European markets to exports, this should be a time of optimism for Ukraine.

Instead, we still have the self-proclaimed Donetsk People's Republic in place.  Gas has flowed to Ukraine, the first shipments since June, but these have been prepaid, further draining currency reserves which must be dangerously low.

As an exportable machinery manufacturer in Ukraine tells the Journal: why worry about exporting machinery when I don't know how to find a customs official?

Germany, which seems to have become even more inward looking than the U.S., should be taking the lead, but after reported talks with President Putin weeks ago, Chancellor Merkel is probably off to holiday parties.

Ukraine deserves better from the U.S. and the European Union.

Wednesday, December 10, 2014

HP in Barcelona Discover 2014

If like me you weren't able to attend the HP techfest in Barcelona, you can watch most of the speaker presentations on video.

As we said back in 2012, IT buyers needed a provider like HP that could deliver them solutions for their systems issues--legacy systems, burgeoning data, mobile applications, and higher hurdles for system security and compliance to name a few.  CEO Meg Whitman's accomplishments include convincing them that HP was such a partner.  Barcelona drives the same messages given consistently throughout 2014 with updates on new products and services, along with customer participation. 

A staple menu item in all the presentations is "Big Data," a term which clearly causes audiences to either cringe, yawn or glaze their eyes over.  

Software EVP Robert Youngjohns gave an interesting presentation on the New IT, forged from the fires of Big Data.  HP's approach, he says, distinguishes among three distinct types of Big Data:
  • Business data, coming from traditional sources like the corporate ERP, CRM, BI, and HR systems, for example).
  • Machine data (examples were log files and sensor data, i,e, the Internet of Things)
  • Human data (Email, video, photos)
The first category, which seems to be where the corporate data engine room hits the financials, is growing slowly.  It is the other two categories, particularly the third where the growth is explosive. He went on to say that the HP big data platform distinguishes among each big data category and tailors the offering accordingly.

His presentation brings up my concerns about the vacuity of the term Big Data.  Businesses are still growing, in broad terms, at GDP-like rates, or at the upper end, single digit multiples of the same. Machine and human data are exploding at ridiculous rates.

He quotes another fluff statistic: more photos are being produced each day than in the first 100 years since the invention of the photographic process.  Surely, the obvious conclusion is that the value of machine and human data are fractions of traditional business data, from data about exploration wells to customer purchasing patterns. 

If the value were commensurate, IBM, Exxon and other Big Data producers capable of deploying new systems would be seeing explosive growth in revenue or profit.  However, nothing like this is visible. Bellwether companies like Cisco sometimes see revenue shrinking. 

Youngjohns gives a personal example that raises the same issue.  He is a tech geek at home too.  His home wireless network is very complex. He has the controls for his climate system managed by sensors and a panel.  He has imaging, music, television and other activities on wireless subsystems. He decided to find out why NetFlix was operating very slowly, and so created a reporting system of activity logs which, he said, soon generated a terabyte of data!  

Now, I couldn't hear anyone laughing in the audience, but they should have been. The architecture of this network is clearly faulty, at least the infrastructure and maybe more. Leaving this aside, big data in this case was bad data, and unproductive for its expected benefit, namely to make NetFlix run faster.  The hardware and software costs per unit of data are so low, which merely masks the unproductive nature of the activity. 

Moving on to another presentation on Data Centers and the Cloud, the same issues came up in a different way.  Data centers, we are told, have to provide services for all kinds of devices, like fitbits, videos, and sensors, again the Internet of Things. These apparently create large data streams. 

However, much of this are personal data, surely. Why should a commercial infrastructure expand to support this data demand?  One of the speakers really struggled to come up with examples of supported devices that didn't sound as ridiculous as Fitbits, but he couldn't.  The demands being put on data centers from personal uses like Instagram, SnapChat, Facebook and other social media stem from the BYOD policy that has become the standard in corporate America: it is a policy that requires more resources and which ultimately reduces employee productivity.  

He did cite an example of instrumenting the corporate vehicle fleet, where a large volume of operational data (speeds, routes, mileage, fuel consumption) would create large data center demands. This doesn't sound earth shattering, but just a move up from what's being done currently by operators like UPS.

The Haven platform brings together ArcSight, Autonomy and Vertica for data analytics, while also providing a broader platform and tools for asset and security management. Sounds like things are being put into place for HP.

Of course, now it is going to split into two pieces. Stay tuned. 

Checking in on Intermediate-Term Bond Funds

Year-to-date, according to Alliance Bernstein, U.S. stocks are up 14%, compared to a gain of 4.2% for bonds.  From the local market peak on 9/18 to the trough on 10/15, bonds showed their shock absorbing qualities as they declined by only (-1.4%) versus equities at (-7.4%).

It's unclear what fund managers at intermediate-term bond funds are thinking, as the most recent published disclosures are from 9/30, but much has been made of higher cash levels at many funds. Morningstar data shows overall bond fund cash at over 8% of assets, which is alternatively attributed to bond sales, cash inflows, or raising cash for expected redemptions as equity markets continue to rise.

We lean towards the importance of the last factor, especially in light of the growing uncertainty about when and how the Fed plans to raise interest rates.

If bond funds behaved like equity funds, there's no doubt that they would be taking some money off the table because their winners have had long runs and the relative rewards going forward look less inviting.

Investment Grade Corporates issued by financial institutions had a total return of 2.5% in 2006, 11% in 2012, and 8% in 2013, according to Dodge and Cox portfolio managers whose allocations to IGCs is twice as high as their benchmark index.

If there were to be a flight away from bond funds to equity mutual funds ( a sure sign of a market top looking at retail funds), portfolio managers would be challenged because bond markets are relatively thin and inefficient, something we have noted before.

Financial regulation post-crisis has made the dealer market more risky and less profitable.

The favorite financial company issuers in the IGC sector include: Bank of America, JP Morgan Chase, Goldman Sachs, Morgan Stanley and Wells Fargo.  Bank of America, according to Bloomberg data from April 2014, had 1,295 bonds outstanding, but only 53 of these were liquid enough to included in the Barclays US Corporate Index, a popular benchmark.  But, these 53 issues, 4% of total bonds issued, amount for 46% of the dollar amount of Bank of America's debt outstanding. These bonds are over-owned because of their inclusion in the index, and because of their liquidity; investors who chose from the other 1,242 Bank of America issues will be in real trouble if there is a market traffic jam in a bond exodus.

According to BlackRock, market reform in bonds is long overdue, and aside from proposed regulation on mutual fund bond sales our regulators have not seen the improvement in bond markets themselves as something worthy of their serious interest.