Julie Alexandria of the always-clever WallStrip explains how speculators became the latest business villains of the moment. Enjoy.
"It’s all your fault"
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Category Archives: Business – General
The Waiting Game
Moira Hodgson’s W$J review of waiter/blogger Steve Dublanica’s new book — Waiter Rant: Thanks for the Tip–Confessions of a Cynical Waiter — is a rollicking good time. Check out Hodgson’s analysis of the merits of Dublanica’s background for waiting tables:
Considering some of the customers he has to deal with, Mr. Dublanica’s background was the perfect training for his job: four years in a seminary studying to be a priest followed by work at rehab centers and homes for the mentally retarded. He says that 80% of the people he serves at The Bistro are perfectly nice; the rest are socially maladjusted psychopaths. He also has to contend with servers on drugs and an irritable, jumpy boss: "Like a soldier home from war, his eyes are always scanning the horizon for threats."
By the way, be careful about sending that food back to the kitchen:
The third time a woman sends back her de-caf coffee, saying it’s not hot enough, he dumps regular coffee into her cup, places it in a 400-degree oven, takes it out with a pair of tongs and delivers it to her table. But that story pales beside Mr. Dublanica’s account of a waiter who plays floor hockey in the kitchen with a returned hamburger patty before hosing it off and taking it back to the table.
Houston-based God, Inc.
Karl Taro Greenfeld of Portfolio.com examines the money-making machine that is Houston’s Joel Osteen and Lakewood Church (prior posts here):
Last year, Lakewood generated $76 million in revenue, which amounts to just over $1,600 for every member of its congregation. Its take includes $44 million donated directly by congregants, who are asked to give 10 percent of their gross income; $10 million in product sales and sermon tapes; and $13 million brought in through direct-mail solicitations, up from about $6 million two years ago. The church’s greatest expense is the TV airtime it buys: $22 million last year to broadcast the show in more than 100 markets, a 10 percent annual increase in spending that is easy to justify. “Cutting back on airtime would be like saying we won’t be sending any trucks to deliver our product,” [Osteen brother-in-law Kevin] Comes says [Comes is Lakewood’s chief operating officer]. An additional $13 million goes to administrative costs and salaries, and $9 million a year is spent on facilities and maintenance. [. . .]
Being backstage at a Joel Osteen worship event is remarkably similar to being at an N.B.A. game or a rock concert. Beefy security guards tell you where you can and can’t go. Crew members chow down on a buffet laid out by a local caterer and bark into walkie-talkies between bites. At some point, black Town Cars head down the long, curving driveway into the belly of the arena and drop off the pastors and performers, who retreat into private suites.
The night is a celebration of music, state-of-the-art visual effects, and, of course, Christ. Lakewood spends a great deal of money attracting top gospel and Christian talent, and music minister Cindy Cruse-Ratcliff leads a team of Grammy Award winners, including gospel singer Israel Houghton. It’s a thumping occasion, with people dancing in the aisles and even the security guards singing along to “Come Just as You Are” and “We Have Overcome.” Osteen’s entire family is in the act. His mother, wife, and children often play parts in the service.
But it’s Osteen himself we have come to see. He wins the crowd over with wholesome jokes and inspires with his sweet-voiced message. The sermon today is based on the notion of “hitting the DELETE button when you have those negative thoughts.” He urges us to banish that voice telling us, “I’ll never get that great job. I’ll never meet that special someone. I’ll never get married.” Hit the delete button, he urges, and reprogram your mind. “Just one inferior thought can keep you off balance and away from your God-given destiny.”
Read the entire article here. But hit the DELETE button to rid yourself of any negative thoughts first.
Fannie and Freddie fallout
Gosh, I thought the political coalition that supports inefficient light rail systems was formidable. But that coalition can’t hold a candle to the one that the W$J’s Paul Gigot says (non-gated version here) protected the dubious quasi-public structure of Freddie Mac and Fannie Mae:
The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans. Even now, after all of their dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever. Campaigning to spare taxpayers from that result would represent genuine "change," not that either presidential candidate seems interested.
Meanwhile, Cato’s Gerald O’Donnell points out that the proposed bailout represents "casino capitalism" for taxpayers:
Treasury Secretary Henry Paulson’s bailout plan for mortgage giants Fannie Mae and Freddie Mac . . . prompted Sen. Jim Bunning (R-Ky.) to remark that he thought he’d woken up in France. Yes, socialism is alive and well in America – thanks to a Republican Treasury secretary.
Absent from Paulson’s plan is any protection for taxpayers. They’ll fund the downside if losses mount at the two mortgage giants. But if Fannie and Freddie recover, stockholders and management gain. Call it "casino capitalism" – taxpayers bankrolling management high rollers.
The plan doesn’t ask stockholders or management to suffer for their financial indiscretions. The players who put their companies in jeopardy get to stay in charge – Paulson says he isn’t looking for "scapegoats." Someone should remind him that capitalism without failure is like religion without sin.
The Usual Suspects
Given the recent turmoil in the financial markets, it’s a bit hard to keep up with the morality plays and the villains.
After the Enronesque fall of Bear Stearns, the villains of the moment were the two Bear Stearns executives who were indicted for not throwing in the towel timely.
Then, over the past several weeks, speculators who facilitate markets to hedge energy costs became targets of the demagogues.
And now this week, with the demise of Fannie Mae and Freddie Mac, SEC Chairman Christopher Cox issued an emergency order attempting to curtail naked short-sellers of the stock of the embattled government sponsored entities and also the stocks of Lehman Brothers, Goldman Sachs, Merrill Lynch and Morgan Stanley.
What on earth is Christopher Cox, a supposedly sophisticated securities lawyer, doing issuing orders that hinder the efficient functioning of markets?
Southwest Airlines’ legacy of good news
Gosh, it’s such a drag reading about business and the economy lately. So, what the heck, let’s take a quick look at a perennial source of good news, Clear Thinkers favorite Southwest Airlines.
Southwest’s discount model of operation has kept it profitable in the notoriously unprofitable airline business for 35 straight years. Even during these turbulent times, Southwest’s aggressive hedging program for its fuel costs and efficient operations have allowed the company to accumulate $3.7 billion of cash and generate a market capitalization of $9.9 billion. That market cap is now greater than the combined market value of the six largest legacy U.S. airlines. WallStrip’s Julie Alexandria provides a clever overview on one of Texas’ true treasures:
Be careful, Mr. Wagoner
General Motors CEO Rick Wagoner made some interesting public comments this past week in Dallas regarding the besieged automaker’s bankruptcy prospects:
"Under any scenario we can imagine, our financial position, or cash position, will remain robust through the rest of this year," Mr. Wagoner said Thursday while in Dallas to speak to a business organization. He said the company has plenty of options to shore up its finances beyond 2008, although he declined to outline them.
The comments failed to boost investor sentiment as GM shares fell 6.2% to $9.69 in 4 p.m. New York Stock Exchange composite trading Thursday. The stock has been trading at its lowest levels in more than 50 years as concerns mount about the company’s financial position amid a steep decline in U.S. sales.
GM and other U.S. auto makers are reeling as the slow U.S. economy depresses sales and as high gasoline prices push many would-be buyers to small, more-fuel-efficient vehicles and away from the higher-margin SUVs and trucks. Through June, for instance, GM’s U.S. sales slipped 16%, more than offsetting strength in overseas markets.
GM has about $24 billion in cash but is burning an estimated $3 billion a quarter, prompting talk that it will need a significant cash influx to get to 2010.
"We have no thought of [bankruptcy] whatsoever," Mr. Wagoner said in response to an audience question during the Dallas event.
Now, I am not involved with GM, but I have been involved over the past 30 years in my share of big company reorganizations. Contrary to Wagoner’s statements, GM has almost certainly "thought" of bankruptcy and GM management probably continues to examine whether a reorganization under chapter 11 of the Bankruptcy Code makes sense for the company, which it just might. Frankly, not to examine such alternatives would be egregious mismanagement. Any seasoned investor knows this and the market is clearly pricing that risk by lowering the company’s stock price.
So, despite all that, if GM ends up in bankruptcy, is Wagoner at risk of being indicted for misleading investors regarding the company’s ongoing bankruptcy analysis? Stated another way, will Wagoner be indicted for breaching the obligation to throw in the towel?
Incompetence Masquerading as Demagoguery
University of Houston finance professor Craig Pirrong (blog here) does a nice job in this Wall $treet Journal op-ed on Friday of explaining how speculation in oil and gas markets helps all of us deal with rising energy prices:
Restricting these speculators won’t reduce the price of oil — but they are likely to make consumers and investors worse off. Futures and swap markets facilitate the efficient management of price risks, and speculators are an important part of that process.
For instance, a producer of oil may want to lock in the price at which he sells his oil in the coming months in order to hedge against fluctuations in its price. He can do so by selling a futures contract at the prevailing market price. Similarly, an airline can protect itself against price increases next summer by buying today a futures contract that locks in a purchase price for next July.
Producers and consumers who want to “hedge” in this fashion cannot wave a magic wand to make the price risks they face disappear. The oil producer has to find somebody to sell to, and the airline must find somebody to buy from — and that somebody is often a speculator. Restricting speculation would increase the costs that producers, consumers (such as airlines), and marketers (such as heating-oil dealers) pay to manage their price risks by reducing the number of traders able to absorb the risks they want to shed.
These higher risk management costs would result in higher prices at the pump or the airline ticket counter for consumers, and less investment in new productive capacity — which would keep prices high into the future.Participation in these oil markets by pension funds and other investors . . . is also not a problem.
By adding commodity futures to their portfolios, i.e., by diversifying, these investors can reduce their risks without sacrificing returns, and without impacting physical inventories (or prices). Consumers are the ultimate winners when risks are borne as efficiently as possible in these markets.
The unprecedented run-up in oil prices is painful for consumers around the world. But the focus on speculation is misguided, and represents a convenient distraction from an understanding of the real, underlying causes of high oil prices — most notably continuing demand growth in the face of stagnant production, supply disruptions and the weakening dollar.More restrictions and regulations of energy markets, in the vain belief that such actions will bring price relief, are counterproductive. They will make the energy markets less efficient, rather than more so.
One really need look no further than the most profitable U.S. airline — Southwest — to understand how robust speculation in energy markets benefits a company’s employees, its investors and its customers.
However, apparently the CEO of a far less profitable airline — Craig Steenland of chronically unprofitable Northwest Airlines — has not noticed how beneficial futures markets can be for his company and its customers. He is busy lobbying Congress to enact strict regulations against precisely the type of markets that Southwest Airlines has used to beat Northwest’s performance like a drum over the past five years:
The battered airline industry took its concerns about rising fuel costs to Capitol Hill Monday, urging Congress to address widespread speculation in the energy markets.Making the case for the industry was Northwest Airlines CEO Doug Steenland, who argued that energy market speculators have pushed oil prices to unprecedented levels and harmed the airlines that saw some recovery in 2007.
[. . .]”I cannot overstate the importance to my company and the entire U.S. airline industry of immediate congressional action to halt excessive speculation in oil futures markets,” Steenland said.
Specifically, Steenland sought more regulatory power for the Commodity Futures Trading Commission (CFTC), a prohibition on pension funds from investing in energy commodities and law changes that would remove loopholes and increase oversight of speculators.
Jeff Matthews sums up the absurdity of Steenland’s witch hunt on the energy speculators perfectly:
Remember what I said about Mr. Steenland being named CEO of Northwest in October, 2004?
Northwest Airlines did not start hedging its jet fuel needs until 2008.
That’s right.
Unlike, say, Southwest, which hedged most of its jet fuel needs when prices were low, Northwest didn’t bother until oil had spiked to $100 a barrel. [. . .]
Of course, when a big corporate CEO like Mr. Steenland makes a gross error of judgment like not hedging his single biggest cost of doing business, he naturally takes full responsibility and ask shareholders and customers for forgiveness.
We’re kidding!
He blames speculators instead . . .
Northwest emerged from Chapter 11 in May 2007. Northwest equity holders got nothing. Mr. Steenland got a package worth $26.6 million at the time.
Too bad Northwest didn’t use some of that $26.6 million to hedge itself.
I guess the only thing to do now that it’s too late to do anything useful is…blame speculators.
Yep, that’s the ticket…for an airline that doesn’t know much about hedging, anyway.
I rest my case.
Which Starbucks stores are closing?
When Starbucks announced last week that it is closing 600 stores and laying off 12,000 employees, the company did not disclose which stores would be shuttered (got to get those lease buyouts finalized). However, that hasn’t stopped word from filtering out into the Web on the location of the shuttered stores. The Seattle Times has already generated this Google map containing a large number of the anticipated store closings.
However, the question that is on most Houstonians’ minds has not been answered. Will Lewis Black’s "End of the Universe" cease to exist after Starbucks is finished closing stores?
This clip includes video of the two stores as Black comments on the end of the universe on The Daily Show (H/T Life is a Thrill):
Update: Here is the full list of the stores that will be closing.
The NFL confronts the Mismatch Problem
The pathological way in which National Football League teams annually evaluate college football players has been a common topic on this blog. So, I thoroughly enjoyed this New Yorker video (H/T Guy Kawasaki) of a recent talk by Clear Thinkers favorite Malcolm Gladwell in which he uses the NFL’s new-player evaluation process as an example of a hiring practice that is undermined by the "mismatch problem" — that is, the tendency of an employer to cling to outmoded employee evaluation variables despite the fast-changing nature of the employer’s jobs.
Gladwell’s point is that the nature and demands of jobs in American society are becoming increasingly complex. That complexity, in turn, drives employers to desire more certainty in making the right employment decision. However, in striving for that certainty, many employers continue to measure the wrong variables in evaluating prospects and finalizing their employment decisions. Gladwell is currently studying the mismatch problem and has some initial observations on how employers can minimize its effects. Check out his talk.