Tim Oren's Due Diligence

The Consumer and Recovery: This Time It's Different

An excellent analytic piece on consumer credit and spending at Zero Hedge.

Good reading for anyone investing in consumer sector stocks, or consumer-facing startups. Not only is it a tough analysis of what lies ahead, but it assumes a recovery started in Q3. If, like myself, you see that less than one percent GDP growth as a self-serving number put out by a government that has largely p***ed away the stimulus money in unsustainable and unproductive directions, you may need to slide everything right by a few quarters as well.

Caught in the Crossfire

"I sat on TV, while my hero Tommy Smothers yelled in my face how pissed off he was at me for appearing on Glenn Beck. It broke my heart. "

(Via Vanderleun.)

I find this clip incredibly poignant. A man who believes we can still talk about it meets one who's drawn battle lines. In many ways, an archetypal representation of our society in this final year of the 'aughts'.

Zombies Identified

Because only zombie companies would put up with this. And like movie zombies, these - Bank of America, American International Group, Citigroup, General Motors, GMAC, Chrysler and Chrysler Financial - will soon, if not already, be shambling around groaning for "braaaiiinnnsss!!1!1!" because the few left there will be gone. But at least now you know some of the companies you don't want to do business with, in spite of the administration's efforts to conceal the extent of damage under the TARP.

And here I was taught in school that 'progressives' were in favor of breaking up trusts and big companies. Now being 'too big to fail' is a ticket to becoming a taxpayer-subsidized arm of the government. Somewhere, the meaning of 'progressive' changed a bit. Just like movie zombies, the best thing to do with these is to blow them to bits, and give those a decent burial.

Update: Nearly half the top execs at the Zombie Seven have already left since June. Good luck with getting decent people to back fill. If it isn't clear from above, I regard the Original Sin as being the bailouts. That extra-legal deviation from standard bankruptcy proceedings not only diminished investor confidence in every sector touched, but is the direct cause and excuse for this abrogation of contracts. Obama's (and Bush's) shillings come dearly, and we'll be paying for them in taxes, inflation, and reduced trust in the market for years to come.

The Price of Government Cheese

It appears I'm not the only one boycotting Government Motors. GM sales are down 45% YOY in September, Chrysler's 42%. Meanwhile Ford, which did not take a bailout, is only down 5%, gaining market share at its rivals' expense.

It appears the type of folks who formerly bought GM and Chrysler products don't appreciate being forced to support them, and the Prius crowd aren't interested in changing their buying habits to rescue the UAW. Who knew? While it's a shame to watch even more taxpayer dollars go down the rat hole as the auto bailouts fail, it's probably worth the cost as an object lesson to those who want to substitute rent-seeking for actually serving customers well.

The Roving Eye: eReaders and Sony Decay, Comparative Disadvantage, One Part of the Economy Is Booming

Color me still skeptical. Jeff Nolan has a thoughtful post on the competitors in the electronic book market. Kindle and its like have definitely broken into the early adopter market, but I'm still cautious. Recall the kerfuffle around Amazon's pullback of 1984 copies, and then contemplate what's going to happen when some of those competitors go belly up or otherwise withdraw from the market. People aren't used to having their books disappear, and the combination of hair-brained DRM schemes and obsolescence is not going to be a pretty one. An open format is going to be necessary for this market to go truly mainstream. Jeff's discussion of Sony's fading fortunes in eReaders drew the following comment:

"Sony's ineptitude at digital services is truly mind boggling. Their never-ending quest to dominate with proprietary technology is a remarkable anti-pattern that is worthy of a business textbook: Beta, MiniDisk, UMD, MemoryStick, ATRAC, and 1001 sony cables, plugs, adapters, etc. "

Sad, but true. I bought my Sony alpha DSLR because it could use all my old Minolta glass, but I knew darn well there would be a proprietary battery and at least one proprietary cable in the package. I was not disappointed. Why can't they quit trying to lock customers in, and just go back to making exceptional products? And so a once-great brand decays.

Update: Verrry interesting. The next time I looked at my RSS reader after posting, this pops up. Is Sony getting a clue, or is this just a last ditch effort to save a failing product line?

Michigan hits bottom, keeps digging. One of my former residences is in long term decline, and has the highest unemployment in the nation. It's not enough that union domination and Federal interference in local automative and related industries systematically discourages investment. Now the state is proposing the country's highest minimum wage, mandating company paid health care, and forcing utilities to cut rates 20%. This isn't some fringe notion, it's the head of the state's Democrat party. That'll sure encourage small business and startup ventures to fill the gap left by the industrial sector, you betcha! And I'm watching for the proposal that'll mandate 20% reduced costs for service providers; what about margins don't these idiots understand? Even if this stupidity doesn't pass, the fact that it's seriously considered speaks volumes about the state's continuing cluelessness, and will and should discourage capital formation there. Picking up 100 politically allocated Government Motors jobs building parts for a model that may be DOA due to price and performance isn't going to fix this kind of damage.

Meanwhile, back in Sacramento. Could there be signs of sanity? Supposedly a state financial commission chartered by the Governator is going to recommend a flat tax alternative to the state's current highly 'progressive' income tax. Someone has finally noticed that taking half the taxes from 144,000 of the 38 million residents leads to highly cyclical revenue, and encourages those targets to move elsewhere. Who knew? Mind you, I've full confidence that our politically correct, economically ignorant legislature is capable of ignoring any such troglodyte recommendations.

Business is booming! If, that is, you want a gig packing townhalls and other public venues in favor of ObamaCare. One of the best sources of market and competitive intelligence has always been employment ads, they're a 'data exhaust' that's impossible to hide. And so with leftist astroturf, as some sleuths datamine craigslist to find out where those people are coming from, and who's paying for them. Meanwhile, Cobb profiles these would-be American apparatchiki. Update: Even the MSM is taking notice.

On The Road: No TARP Wanted Here

The rest of the country seems to be taking a different attitude towards bailouts than the coastal political class. Unfortunately for Obama and Tim Geithner, TARP is something to market... against. The following was spotted in Pocatello, ID:

(Right down the street from Portneuf Valley Brewing's brewpub, which I can recommend.)

I also spotted a large billboard ad for a Toyota dealer near Ogden, Utah - proclaiming "No Taxpayer Subsidies Here" as a come-on. (I didn't get a photo of that one, as a nasty cross-wind meant two hands on the wheel or else.)

The Roving Eye: Ember the Mini-Bot, P. J. O'Rourke Nails It, Newspapers On Notice

How much? Thats my question about iRobot's new mini-warbot, developed for DARPA. Not only is it cute, but equip it with open hardware interfaces and/or programming environment and it should have serious potential for the hobbyist market, as well as repurposing to other applications.

The truth about suburbs. I've been a P.J. O'Rourke fan since his National Lampoon days. In a WSJ piece nominally about cars, he unloads this:

We’re way the heck out here in Valley Bottom Heights and Trout Antler Estates because we were at war with the cities. We fought rotten public schools, idiot municipal bureaucracies, corrupt political machines, rampant criminality and the pointy-headed busybodies. Cars gave us our dragoons and hussars, lent us speed and mobility, let us scout the terrain and probe the enemy’s lines. And thanks to our cars, when we lost the cities we weren’t forced to surrender, we were able to retreat.

Yes. He's defined part of the the battle-line of today's political cold war. Those 'futurists' who think that increasing fuel prices will bring suburbanites back to live in central city tenements are out in la-la-land. Instead the jobs may just follow the productive; Detroit gives a preview of that outcome.

A failed state. California's state expenditures have increased 35% since the 'tax cutting' Governator took office in 2003. As Matt Welch asks:

What, exactly, has been the return on this added investment? If spending under Gov. Arnold Schwarzenegger increased 6.75 percent a year during mostly good times, surely there must be, say, a 3 percent increase in the quantity or quality of...something? Crickets.

If we had back that 35% increase, the California budget would be in surplus. Instead of considering rolling back the spending, we're asked for more taxes and budget gimmicks. When the electorate wisely refuses them, the political class once again threatens to shoot their hostages - public safety and parks - while protecting the public employees' unions. What is there about layoffs and salary and benefit cuts that they don't understand? The private sector gets to deal with this in every downturn, while our betters in the political class skate through. Needless to say, this contributes greatly to the business climate in California.

A relic of the 20th century. Just what the newspapers need, more advertisers headed for the exits. Local fish-wrappers have long been the vehicles for required public notices of events such as mortgage foreclosures, public meetings and business name registrations, which creates an effective subsidy to their businesses. This requirement dates back to when the town rag was in fact read by most of those who would need notice of such events. With the readership shrinking, that's no longer a good bet, and some government entities are starting to take notice. It's pretty hard to argue that publication on dead trees is more useful than a combination of appropriate RSS feeds and a searchable archive would be. As the linked article points out, there are issues regarding reliable and trusted implementation, but it shouldn't be hard to beat the status quo. A business opportunity out there for someone - Google? Iron Mountain? Maybe even archive.org, if they'd like an actual revenue stream.

The Roving Eye: The Grin Test, Buh-bye Pontiac, Red State CA

Sovereign Risk. Everyone who's pitched knows about the 'grin test' - where you get to take your best shot in front of the executive staff/board/investment committee/limited partners, and then have to smile - and mean it. Just now a lot of hedge fund managers are thinking about that test as it regards investing in unionized companies in politically charged industries. Wonder what that means for the unionized, leveraged, leftist newspaper industry?

I learned to drive on my father's 1967 Pontiac Catalina station wagon. Big honkin' V8, 3-speed manual shifter on the column, as long as my current F-150 and probably weighed more. It was a pig, and even more fun when towing a trailer. It was years later when someone informed me that I'd taught myself double clutching to keep it (and my later VW bus) from ripping out the clutch. Here's some other memories of Pontiac for those who date. Good bye, GM, you're dead to me.

Bankrupt in Sacramento. The electorate paints the state red as the Democrat and RINO taxes and budget fiddles fail big time. Except the proposition to cut legislators pay when there's a deficit. Let's see: no deficit, no new taxes, and no budget chicanery. Just what part of stop spending can't the political class understand? Under the Democrat legislature and Schwarzenegger, the annual budget has increased $41 billion in five years - nearly 40% - while businesses and citizens flee the state. Meanwhile, Ahnuld is in DC, hoping for a bailout. How pathetic is this?

Revolution. Is that a description, or a recommendation?

If I Tried This, I'd Be On My Way To Prison

Negotiated alternatives to bankruptcy, and negotiated bankruptcy settlements that differ from strict seniority rules happen all the time. Particularly when there's the chance that some viable entity or set of assets might emerge from the wreck, the various creditors and equity holders will often dicker and deal towards an outcome that reflects their own sensitivities towards getting back some cash now, versus hoping for a better tomorrow. Terms that include 'carve outs' to offer a return for executives or even staff who agree to stay through the process are also common. It happens all the time in the venture world, just more quietly than the ongoing Chrysler debacle.

But these outcomes are all voluntary. Unless there are specific 'drag along' provisions that were disclosed at the time a financing occurred, any holder can decline to participate in such a work-out agreement, and throw the matter into the hands of the bankruptcy court. Which court is then obliged to respect the interests of the debt and equity holders in strict order by statute and prior contract.

Voluntary means no coercion. If an interested party in the matter threatened retaliation outside the deal for not cooperating in a desired outcome, that would be actionable, and quite likely criminal (a little matter known as blackmail). If I pulled such a stunt as a VC, and got caught, I would expect to be having a chat with my counsel and perhaps the district attorney.

Bringing us to the behavior of the Obama White House and the Treasury Department in respect of the Chrysler bankruptcy. It is now confirmed that Treasury officials threatened retaliation against Chrysler creditors who declined to accept terms proposed by the White House. And further used implied control over TARP banks to intimidate holders who have other business with them. See the second link for some specifics on the administration behavior and relevant bankruptcy law.

I hope the 'speculator' hedge funds stick to their guns, and bring the White House behavior into open court. This administration has been playing fast and loose with the law and Constitution, and is being covered by the Democrat-controlled legislative branch. Time to see if the judicial branch still has any cojones. Meanwhile, I'll just nod agreement with this quote from Finem Respice:

There are three things that are scarier than the actual resort to common thuggery. The ease with which it comes to this administration. The ubiquitous and rank ineptitude that makes a resort to thuggery necessary in the first place- and promises it will become a common tactic in the days to come. And the forgiveness the population regularly affords the administration after one or another of these episodes is, yet again, made public.

Update: Thuggery has consequences. Check out this Roger Kimball column at PJ Media, and scroll down to the open letter from hedge fund manager Clifford Asness. Here's a sample:

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.

Update 2: 'Gangster government', including the full text of Asness' letter.

The Roving Eye: Facebook's Down Round, Print Cartel?, Rants of the Week, Government Or Mob?

Did MSFT get a ratchet? After peddling shares to Microsoft at a $15b valuation, the growing but still money-losing Facebook needs more funding to keep the boilers stoked. Problem is, the best valuation they're being offered is $2 billion.

Party like it's 1978. Newspaper employment of reporters is back down to 1978 levels, another way in which we've returned to the Carter years. (HT: American Digest) Meanwhile, a bunch of the MSM's best and brightest have founded Journalism Online, yet another attempt to wring micro-payments from the Web, this time by getting the press to move all of their content behind one pay wall. As I recall from econ, that's called a cartel, and it's got a few known problems with defections when there's an actual surplus of the commodity in question. OTOH, having publicly called for the extinction of the propagandizing MSM by market forces, I applaud this latest effort. You go!

Tell us what you really think Dept. Presented without further comment: Bill Whittle. Nick Gillespie. And this older rant from Andrew Klavan has become a catchphrase around our household as we've watched the MSM and political class react to the Tea Parties. Shut up!

Chilling effects? And speaking of our beloved media, last week featured CNN 'reporter' Susan Roesgen debating and insulting Tea Party protesters in Chicago, in a performance captured by both the network's own cameras and those of the 'Founding Bloggers' crew. It was of course YouTube'd immediately, and became the subject of derision and embarrassment to both the reporter and the network. Their reply: Shut up! Err, actually it was to to issue DMCA takedown notices against the clips. Having blatantly dropped its pose of 'reporting' on the story, and become part of it, CNN has little grounds to claim that their material is not subject to fair use as part of the debate. Patterico's article challenges CNN to sue him - that could be an interesting case if a reasonable judge doesn't throw it out immediately.

Welcome to the Family. A bit back I suggested that banks repaying TARP money would be a good thing. Not so fast! You have to have a talk with Guido Tim Geithner first. It becomes more and more obvious that this is about government power, not saving the banks. I loved this comment in response to a post I wrote at Wind of Change about what's missing from the Tea Parties:

"...i'd love to see the WF [Wells Fargo] chairman call a press conference and just turn it into a huge check signing ceremony. Thank the government (thanks for nothin) and announce it a big victory on the road to economic recovery. Then make a little aside saying the cynics believe the government might not want the money back and might use audits as a punishment, but he doesn't believe it and will happily keep the public informed of how business is going."

Any bank with the cojones to do that will make me a customer for life.