1-2 Knockout

1-2 Knockout's CEO of the Decade Award: Alcatel-Lucent's Patricia Russo

Over the past decade the global economy has been fundamentally transformed by the increasing pace of globalization and technology, leaving many former high-flyers in the dust.  It has also created unprecedented opportunities for those visionary Executives with the chutzpah to navigate their firms through treacherous seas to reach new pinnacles of success.  It is with this in mind that we would like to be the first to recognize the tremendous achievements of Alcatel-Lucent CEO, Patricia Russo.

Since becoming the CEO of predecessor telecom giant Lucent in January, 2002, the company's stock gained an unheard of minus 50%, until the dwindling company was bought merged with French competitor Alcatel in December, 2006.

After the merger Russo continued as CEO of the combined company with the same vigor and zeal she had exhibited during her time at Lucent.  Over the course of the past 2+ years, the company’s stock has handsomly rewarded shareholders, clobbering the broader equity indicies with an equally impressive, minus 45% return.

Some market participants may take issue with Russo as our selection.  They argue, "Hey! dozens of other CEOs have destroyed FAR more shareholder value in FAR less time!  What gives?!?!"  To those critics, we say, "true".  However, none of the other Executives evaluated by our crack research team were able to retain their post for as long as Russo, who, despite the seemingly insurmountable evidence against her, has held onto the top post with an iron grip. 

To the left, Alcatel-Lucent's performance over the past 3 years, you'll see in the run-up to the merger the stock gained, however, upon consumation (and Russo's appointment as CEO), the stock has dwindled from its highs of > $16.

For her stunning resolve, and apparent excellence in her "extracurricular" pursuits, we had no choice but to chose Russo for this prestigious Award. 

For our loyal readers, we will also be awarding 2nd, and 3rd place trophies for the runners-up, so make sure to submit your candidate in the comments below!

Best Editorial of the Weekend: Misogynist Liberals

No idea what I think about this brief piece ($$), but the logical progression, while maybe fallacious and incorrect, is none the less amusing.  An excerpt:

This fact (if it be a fact) reveals a hitherto unknown, ugly truth about the Democratic Party. The alleged bastion of modern liberalism, toleration and diversity is full of (to use Mrs. Clinton's own phrase) "people who are nothing but misogynists." Large numbers of Democratic voters are sexists. Who knew?

But here's another revelation. If Mrs. Clinton is correct that she is more likely than Barack Obama to defeat John McCain in November, that implies Republicans and independents are less sexist than Democrats.

Read the whole thing and enjoy.

NYT: Land for the Rich to Roam a National Crisis

So, over the weekend I resolved to be more positive and not turn all my posts into rants deriding others' failed poli-economic principles.  Then I came across this piece of hogwash in the NYT Monday:

For years, officials in New Jersey have talked about the need for more affordable housing and then done almost nothing. The need is pressing, and the state may finally be ready to move. Unfortunately, this newfound resolve carries serious risks. Unless the state changes its current plan, some of the new housing will be built on the few parcels of undeveloped land that still remain. That must not be allowed to happen.

The conflict between two competing and legitimate needs — low- and moderate-income housing and breathing room — is a national problem. Anyone who drives into rural areas of Pennsylvania, New York and other northeastern states is struck by the number of houses mushrooming on what just a few years ago were huge stretches of farmland...

...Under New Jersey’s plan, which could take effect in October, one unit of affordable housing would have to be built for every five units of market-rate housing. The current required ratio is one for every eight. Commercial developers, meanwhile, would be required to provide one new affordable housing unit for every 16 jobs generated by commercial development. Both requirements could go a long way toward meeting the state’s need for at least 115,000 new affordable housing units...

...The plan [to assign "obligations" to small communities mandating non-market priced housing] will also make it difficult for remote communities to shift their obligations to cities and suburbs that want more housing and can also provide jobs.

The logical fallacies (as well as insane assumptions) contained in the op-ed are egregious:

• The NYT (implicitly) admits that land-use restrictions drive up the cost of housing.  A cursery review of any economics textbook (or, for a better description see Thomas Sowell's Applied Economics) clearly shows that by limiting the supply of housing (in the name of "necessary space" or "green laws") you will drive up the price.  Study after study (below) shows that home prices are highest in the areas with the most stringent "open space" regulations.  These are the same restrictions--those that "protect" our "breathing room"--that are helping drive energy prices higher, and are being met with similar responses from politicians attempting to mandate market prices.  "Open space" laws protect the status quo, who used to be called "landed", and raise prices for the low-income people the NYT claims to protect.  This is simple economics.  You can restrict building, or you can encourage low prices by increasing supply, but you can't have it both ways.  Anyone who tells you differently is selling you their votes and hoping you're too dumb to notice.
  • Seattle Times: Between 1989 and 2006, the median inflation-adjusted price of a Seattle house rose from $221,000 to $447,800. Fully $200,000 of that increase was the result of land-use regulations, says Theo Eicher — twice the financial impact that regulation has had on other major U.S. cities....A key regulation is the state's Growth Management Act, enacted in 1990 in response to widespread public concern that sprawl could destroy the area's unique character. To preserve it, the act promoted restrictions on where housing can be built. The result is artificial density that has driven up home prices by limiting supply, Eicher says.
  • SFGate: Most people know that the San Francisco Bay Area has one of the most expensive housing markets in the nation. However, not everyone realizes that, as recently as 1970, Bay Area housing was as affordable as housing in many other parts of the country...What happened in the 1970s to make Bay Area housing so unaffordable? In a nutshell: land-use planning. During the 1970s, Bay Area cities and counties imposed a variety of land-use restrictions intended to make the region more livable.
  • Cato: Under the mantra of "stopping sprawl," urban planners have crammed nearly 95 percent of Californians into just 5.1 percent of the state's land area. The nation's three densest urban areas, and 11 of the 20 densest urban areas, are all in California. Thanks to urban-growth boundaries, greenbelts and other planning restrictions, the average California urbanite lives in communities that are 80 percent denser than in the rest of the country.

• The very idea that "breathing room" is a "national problem" is, in and of itself, insane.  America  ranks 180th in population density (out of 240 countries listed).  Now, and this is the crux, the NYT doesn't want that land.  They want the pretty land.  They want the scenic land.  They want their views to be unobstructed so that the land they currently own is worth more.  Putting their central argument into contra-form, the NYT editorial board "doesn't want poor people to live in pretty places".   As they so eloquently put it: "Anyone who drives into rural areas of Pennsylvania, New York and other northeastern states is struck by the number of houses mushrooming on what just a few years ago were huge stretches of farmland".  The fallacy is that there shouldn't be houses on that land, and there should be farms.  Farms are pretty, new tracts of suburbia aren't.  If the pretty land is developed the value of their "farm houses" decreases--and we can't stand for that.  If land is most valuable as used for housing, then it should be housing, not farming or "preservation".  But, being limousine liberals, they then must call for "low cost" non-market based housing without ever suggesting where it goes.

• Even the NJ legislature has been drinking the Jaeger Bombs (click the link, trust me).  By mandating that 1/5 or 1/8 houses be built for sale at non-market rates they are raising the cost for all non-low income housing.  Unlike Wal-Mart's low prices through efficiency, legistlating low-prices raises the price for everyone not pre-ordained worthy by the politicos.  This has a negative feedback loop effect: housing restrictions are enacted => housing divided into "low cost" and "market rate" units => low-cost unit prices kept at artificially low prices => market-based units rise in price in response to inefficient capital flow and underinvestment => more people "priced out" of homes => legislature demands more low-cost housing be built with higher income ceiling for the pre-ordained =>  cycle repeats.

• Since when did commercial developers become responsible for housing potential lease-holders' employees?

• In the closing paragraph the NYT makes a classic static-phase mistake.  They assume that the "jobs" are in cities, and that low income people are being forced into rural areas (which the NYT doesn't like).  Well, as the bank robber said when asked why he chose banks to pillage, "because that's where the money is", so too will employers venture out into the rural areas if there is a workforce there ready to work at below-city rates (because the cost of living is lower).  To say that cities "want more housing" is equally infuriating.  Sure they want more housing, but, well, there's a city there!  It costs more money to build where there are already buildings, and cities have higher costs of living for numerous reasons: one of which is open-land restrictions in cities like SF.   

All in all this whole editorial infuriates me.  To say that we need low cost housing, but only where it's not economical to build (existing cities) or not where we think it's "pretty" is heretical for a paper espousing to be populist.  Of course, we could just let the over-supplied housing market push prices lower. That would make sense. But we also have remember to "protect current homeowners" by adding artificial floors, to the detriment of poor potential home buyers. 

As long as our home prices have floors and ceilings you can guarantee that the poor won't.

Deutsche Banks Been Drinking the Kool Aid, er, Bud Light Lime

We're especially skeptical of the various beer-girlydrink-whatever hybrid libations that have been pushed onto the market in recent years by brewers looking to fill gaps in their product portfolios (see earlier BUD rant).  Thus, the following news item stuck out to us as, oh, how do you say it, crazy?

3:33 (Dow Jones) "We believe it will be Bud Light Lime, and not an Inbev take-out that will give the shares a needed shot in the arm by restoring core portfolio growth," Deutsche Bank says on Anheuser-Busch (BUD). Firm adds a buck to target, to $56. "Bud Light Lime's late April launch is on track to be very successful," Deutsche says. "Retail penetration is 70-80% in less than 4 weeks, consumer response is excellent, and it shows some ability to capture 'non beer drinkers'," firm says. InBev deal's possible, but post-merger cost savings not enough to justify required premium to nab BUD, Deutsche adds.

Yes, yes, that makes sense, Bud Light Lime is obviously the growth engine that will add 10%+ to BUD's market cap, singlehandedly none-the-less.  How could I have been so stupid as to miss this?  Duh, right?

WRONG.

As our previous post pointed out (excuse the alliteration), BUD is essentially flat over the past few years.  Now, the rocket scientists at Douche Deutsche Bank claim that a specialty, lime-infused beer is going to be the profit machine that has evaded the company for the past 1/2 decade?  Challenge.

As I pointed out in the previous BUD post, their other home run efforts to diversify away from their traditional bread & butter (read; BEER) reads like it sunk with the rest of the Failboat:

Michelob ULTRA Lime Cactus, Michelob ULTRA Tuscan Orange Grapefruit, and Michelob ULTRA Pomegranate Raspberry, Michelob Pale Ale and Michelob Porter, Michelob Marzen, Michelob Bavarian-Style Wheat, Michelob Honey Lager, and Michelob Golden Draft and Michelob Golden Draft Light, O’Doul’s and O’Doul’s Amber (ed: who the hell drinks non-alcoholic beer???), BACARDI Silver Watermelon, BACARDI Silver Strawberry, BACARDI Silver Raz, BACARDI Silver Mojito BACARDI Silver Mojito Pomegranate and Tilt, BACARDI Silver O³ and Tequiza, BACARDI Silver Peach, Tilt Green, Intensitea Lemon, Intensitea Raspberry and Intensitea Peach and Wild Blue.

On top of the nonsensical notion that one single product is going to "save' the company, Reuters is reporting that InBev is offering to buy the company for as high as $65 per share, and that  JPMorgan and Santander have already arranged a $50 Billion financing package.  Again, pardon me while I CHALLENGE.

A $65 offer price values the equity at a roughly 30% premium to the closing price the previous 30 trading sessions (~$49.70), which is on-par with some crazy LBO take-outs during the height of the credit bubble.  Add to that the purported MASSIVE financing package, and the rumors are starting to look about as solid as the returns of Goldman's Global Alpha Fund (I couldn't help myself).  Lastly, BUD is the biggest player in the U.S. Beer market, with ~50% market share, depending on whose numbers you believe.  Any acquisition would likely need anti-trust approval before the deal could be consummated, potentially by multiple government agencies.  This is further complicated if the deal were to drag on until the end of the year, as the possibility of a capitalism-hating Democratic President could severely hamper the ability to get deals done.

In all, there might be some truth to these rumors.  The global beer industry has undergone a significant wave of consolidation over the past decade, and few observers see the trend coming to a halt in the near future.  However, BUD appears intent on remaining an independent company committed to both organic (haha) and select acquisition-driven growth.  I see BUD's biggest opportunity coming from acquiring targeted European and Asian brands to expand their international presence, where they can leverage their expertise in marketing and distribution, as well as taking advantage of economies of scale.

If InBev is intent on making this happen - which is not outside the realm of possibility - I don't see it working out nearly as well as management's case must be to support doing the deal.

We'll see.  Maybe I'll be the one who ends up drinking the Kool Aid.

Quotes and Commentary: Uncle Sam = Santa Clause

One of Thomas Sowell's Passing Thoughts:

At one time, to call someone "green" was to disparage them as inexperienced or immature. Today, to call someone green is to exalt them as one of the environmentalist saviors of the planet. But it is amazing how many people are green in both senses. Some people who think it is wrong to tell children to believe in Santa Claus nevertheless think it is all right to tell adults to believe that the government can give the whole population things that we cannot afford ourselves. Believing in Santa Claus is apparently bad for children but OK for adults.

1-2 Knockout Presents the "If at First You Don't Succeed..." Award: ESPN Ultimate Remote

For the better part of the decade, ESPN - an otherwise shining subsidiary of Disney - has been trying to figure out how to expand their content delivery platform (reach) beyond the traditional TV, radio, and internet channels.  One such attempt was ESPN Mobile, a MVNO service-provider platform intended to carry the ESPN content machine straight to the user on a whenever/wherever basis.  Unfortunately for the good folks up in Bristol, the best laid plans of mice & men oft' go awry, and ESPN mobile (in its original incarnation) died a relateively quick death after it failed to gain any measurable traction in the marketplace. 

Well, ESPN does not take failure lightly, and, in the face of seemingly insurmountable adversity, has returned to the consumer electronics market with their latest, greatest sure-fire hit: The ESPN ULTIMATE REMOTE!

It slices! It Dices! It..."eradicates coffee table clutter through a single remote control device.  Monday-morning quarterbacks and armchair jocks will have one-touch wireless access to their favorite Gamecasts, ESPN.com fantasy leagues, news, stats, scores and information in the palm of their hand!!!!!!"

I'm not from Connecticut, and I don't know how things work up there, but where I come from, we have things like laptops, blackberries, and normal universal remotes - or just a pile of individual remotes that despite being annoying and duplicative - get the job done just fine.

In parlance of product development, this is a prime example of what we call a technology- or product-push strategy (strangely reminiscent of ESPN Mobile, no?), which historically has only worked well with high-tech products for which their functionality/performance/etc was unmatched by competing/existing products (or services).  Rolled-out years before any major studios pledged support for the standard, BlueRay is a prime example of this strategy.  Few products come to mind when you think of a product that didn't represent a leap forward technologically (i.e. performance, features, etc) that was brought to market in this manner.

This device does not incorporate any cutting-edge technology, nor does it perform significantly better than existing offerings to compell consumers to make the switch from competing products or combinations thereof.  What is the competitive advantage besides the ESPN branding?  Great, you can "surf" the interwebs on your universal remote, whoohoo!  Because I couldn't switch to ESPN News (or any other ESPN channel), get the scores on my laptop (which is on my lap), cellphone, etc, etc.  At best, the Ultimate Remote is a jack of all trades, master of none, and is a stunning example of a product that should have never been made in the first place.  I'm calling my shot right now, the Ultimate Remote will meet with the same fate as ESPN Mobile, and, may very well get pulled from the market in even less time (>1year) than its older brethren.

NOPEC? Whatabout NOCOW

Yesterday, the House passed NOPEC: No Oil Producing and Exporting Cartels Act of 2007.

It is a laughable piece of legislature, both for its sheer chutzpah and for its blatant disregard of basic economics and international politics, in favor of scapegoating and non-binding legislating.  The entire text of the actual legislation is presented below, with minimal comment.

SEC. 7A. OIL PRODUCING CARTELS.

`(a) In General- It shall be illegal and a violation of this Act for any foreign state, or any instrumentality or agent of any foreign state, to act collectively or in combination with any other foreign state, any instrumentality or agent of any other foreign state, or any other person, whether by cartel or any other association or form of cooperation or joint action--

`(1) to limit the production or distribution of oil, natural gas, or any other petroleum product;

`(2) to set or maintain the price of oil, natural gas, or any petroleum product; or

`(3) to otherwise take any action in restraint of trade for oil, natural gas, or any petroleum product;

when such action, combination, or collective action has a direct, substantial, and reasonably foreseeable effect on the market, supply, price, or distribution of oil, natural gas, or other petroleum product in the United States.

`(b) Sovereign Immunity- A foreign state engaged in conduct in violation of subsection (a) shall not be immune under the doctrine of sovereign immunity from the jurisdiction or judgments of the courts of the United States in any action brought to enforce this section.

`(c) Inapplicability of Act of State Doctrine- No court of the United States shall decline, based on the act of state doctrine, to make a determination on the merits in an action brought under this section.

`(d) Enforcement- The Attorney General of the United States may bring an action to enforce this section in any district court of the United States as provided under the antitrust laws.'.

My favorite line is that no country can attempt "to set or maintain the price of oil, natural gas, or any petroleum product".  Why?  Because Congress also just passed the Farm Bill, which, you guessed, maintains the price of crops and grains for export! Actual passage (shortened for clarity) from the Farm Bill below:

(a) Minimum Price- Notwithstanding any other provision of law, effective October 1, 2007, the minimum price for Class I milk...shall be $15.58 per hundredweight during fiscal year 2008.

Also--and this is why the "law" is really goofy--what is the enforcement mechanism in place on a sovereign nation?  Let's say we sue OPEC, or a member, like Venezuela.  What are we going to do, confiscate profits from sovereign nations?  And when they don't pay?  We cut off their oil from import?  Raising oil prices as supply is constrained?

Ahhh, I love congressional economics.

Merrill Lynch is Focused on the Important Stuff

In the midst of losing oodles of money, raising more money (presumably so that they can lose it all over again), and whatever else it is that gets done at World Financial Center #4 these days, Merrill Lynch is reportedly in talks to relocate its Headquarters.

It wasn't that long ago that Merrill was in talks with Vornado to relocate to the lovely area that is west 34th street (near Penn Station and Madison Square Garden), but when the credit crisis (and I use that term regrettably) shook the markets late last summer/fall, talks ceased, presumably since ML had many bigger, more important things to deal with. 

Key word: "presumably".

I guess we should take this as a sign that ML has totally cleaned up their mess from their forays into LBOs, structured finance, and other fun (read: disasterous) activities, and has returned to a healthy, profitable state.

On the other hand, maybe they're just jealous that Goldman's new building is bigger. 

Ballmer's Eggstatic!

Ok, ok, i know, worse title ever. 

But who knew that Carl would deploy his evil henchment all the way to Budapest?  Desperate times call for desperate measures.

Oil and BJS

Presented without comment.

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