Michael Lewis on Greenspan’s Ink

Writing with his Bloomberg columnist hat on head, Michael Lewis has two interesting takes on the controversial book “The Price of Loyalty”.

Take 1: George Bush Jr., is thoroughly uncomfortable with not running conversations. He is “a man terrified of complicated social interaction”.

Take 2: Alan Greenspan is much more complicit in the book than people have figured out. “We all know that Paul O’Neill just sent his old friend Dick Cheney a nasty message. It’s interesting to think that Alan Greenspan co-signed it, even if he did so in disappearing ink.”

Getting Fired by Trump — For Real

Of all the entries in this Newsday story of people fired by Donald Trump in real life, my favorite is that of Chef Bernard Goupy. He labored for Trump for six months at Trump’s Mar-a-Lago club in Florida, and so he wasn’t fired in a sumptuous boardroom. Goupy tells of his kitchen encounter with the Donald this way [to be read with a strong French accent]:

“He came in the kitchen swearing like a truck driver. Completely berserk. He said, ‘What is this Caesar salad?'” Trump picked up a bowl and threw in some Romaine lettuce and cheese. “He said, ‘The way I want it is this way. That is the Caesar salad I want.'”

The next day Goupy was gone. How does Trump repond to Goupy’s story? In classic The Donald fashion: “I think he’s a terrible chef, but he seemed like a nice guy.”

Encounters with Martha, Part II

According to the Wall Street Journal, the following two emails are from ex-Merrill Lynch broker Douglas Faneuil to a friend about his pre-ImClone-debacle phone conversations with Martha Stewart. As you can tell, she wasn’t always particularly demure. Of course, the defense plans to use these emails as evidence Faneuil had it in for Stewart:

  1. Oct. 23, 2001:
    Subj: I just spoke to MARTHA!
    I have never, ever been treated so rudely by a stranger on the telephone. She actually hung up on me! And she had the nerve — the NERVE — the (sic) mention the layoffs in her anger. She said, “Do you know who the hell is answering your phones? You call and you know what he sounds like? He says this …” and then she made the most ridiculous sound I’ve heard coming from an adult in quite some time, kind of like a lion roaring underwater. I laughed; I thought she was joking. And then she yelled, “This is not a joke!!! … ‘Merrill Lynch is laying off ten thousand employees because of people like that idiot!’ And then she hung up.
  2. Oct. 26, 2001:
    Martha yelled at me again today, but I snapped in her face and she actually backed down! Baby put Ms. Martha in her place!!!

I love Martha’s consideration. Can’t Faneuil tell she was just trying to help out with customer service at Merrill Lynch?

Tower Records’ Troubles

In what is likely the beginning of many such bankruptcy restructurings, word tonight is that Tower Records is (again) on the verge of filing for Chapter 11 protection. The company, which pioneered the music megastore concept, is in deep trouble.

The cause? Explanations vary, from the bite taken out by Borders et al., to troubles competing with companies like Wal-mart. All of that is likely true, but the most compelling explanation is the most obvious one: digital downloads. Towers is getting pounded by people downloading music, rather than buying it in stores.

My local Towers used to be a fairly convivial place, with benches for reading and a laid-back atmosphere. No longer. The benches are all gone, and the place is now half-full of DVDs instead of music. The trouble is DVD retail volumes are nowhere near the volume of music CDs in their heyday, so the clock began ticking with the changeover.

As a side note, the store beside Tower Records here is Good Guys, and it is a mortuary lately. Sales people are drifting about listlessly, and customers are scarce on the ground. It could be the location, but I have a feeling that web sites like Pricegrabber are taking a chunk out of bricks-and-mortar electronics retailers.

Encounters with Martha, Part I

Here, from Doug Faneuil’s testimony today, is the crux of the case the prosecution is trying to bring against Martha Stewart in the current “insider trading” case:

SCENE — Doug Faneuil’s office. Merrill Lynch. The phone ring.

Douglas Faneuil: “Hello?”

Martha Stewart: “Hi, this is Martha. What’s going on with Sam [Waksal, CEO of ImClone]?”’

Faneuil: “Peter [Bacanovic, Martha’s broker] thought you might like to act on the information that Sam is trying to sell all his shares.”

Stewart: “All of his shares?”’

Faneuil: “Yes.”

Stewart: “I want to sell all of my shares.”

Martha did precisely what she should have done. Having been told that ImClone’s CEO is selling all of his shares — and not being an insider in the legal sense — she immediately decided to sell all of her shares. Assuming Faneuil’s testimony is any sort of facsimile of what happened, and there is a good chance it is at least part of the truth, the SEC thinks Stewart should have hung onto her InClone position — despite knowing that Waksal wasn’t. That is absolutely unhinged.

Sure, she should have ‘fessed up immediately to having done the only sensible thing in the face of what she had been told. But falling on one’s own sword for illogical and indefensible reasons is, at best, a learned skill.

Martin Wolf Growls in FT

Calling it believing in “four impossible things before breakfast”, the ever-interesting Financial Times columnist Martin Wolf today tries to debunk the idea that the bear market is over. Coming alongside a front-page piece in today’s Wall Street Journal about the rising excesses of financial services sorts — Ferrari buying, jet leasing, and expensive ski trips are all on the increase — it seems particularly timely.

Premised on, in effect, a species of mean reversion argument, he uses higher multiples and the cyclicality of profits as a percentage of GDP to argue as follows:

  • Stocks are expensive in historical terms

  • Profitable sectors, like financials, are going to be badly damaged by rising short-term rates
  • It is unlikely that falling equity risk premium is going to save anyone, given an implicit long-run cyclically-adjusted implicit real rate of return of 4%
  • A higher equity market implies a low cost of equity capital, but expectations about high future earnings growth means a high return on corporate capital — the two have to converge, which means lower equity markets

Presidential Cycles and Stock Returns

To the old adage “don’t fight the Fed” we should add “don’t fight the U.S. election cycle”. Consider the following chart, courtesy of the estimable Jeremy Grantham of Grantham Mayo:

Fascinating, non? Historically speaking, the excess returns on the S&P 500 compared to long-run averages have come entirely in the third year of presidential cycles. In other words, last year’s outperformance was no outlier. It does augur a fairly flat year for this year, of course.

Back to Blodget Emails

I had occasion this morning to re-read an old email from former Merrill Lynch analyst Henry Blodget concerning InfoSpace, a once-hot Internet stock. Back when this case was being prosecuted people made much of the following comment from Blodget concerning the stock:

While that is certainly damning, and the phrases I have highlighted are particularly so, no-one ever talks about the email to which Blodget was responding so angrily. Here it is:

Let’s get this straight: A salesperson at Merrill Lynch (and a former lawyer) actually thinks that the annual report of a publicly-traded company was handwritten. And you wondered why Henry was sounding so put out — the salespeople had driven him around the bend.

Tenure & Parasitism at Harvard Business School

Well, another business academic has joined the “something’s funky about business schools” club. This time it is Michael Watkins, a Harvard Business School professor who was recently denied tenure and is now musing about how HBS is failing its students and its mission.

I can see Watkins’ point. If you scan his CV, it is suitably ample and right in line with the sort of thing that has gotten people tenure at Harvard in the not-too-distant past. (I don’t mean to suggest anything untoward about Harvard; it’s just that historically Harvard Business School has been more tolerant of academics who published in less typically academic outlets.) This is a borderline case, at worst, and certainly not an outright rejection.

Nevertheless, here, in his words, is Watkins’ epiphany:

I think my case raises some issues about the future of HBS and of business schools in general. In particular, I have been wondering for some time:

  • To what extent are business schools producing insights of use to practicing managers?

  • Is the investment that they are making in research justified in terms of results?
  • Is the HBS brand at risk?

I believe that the answers to these questions are, respectively, little, no, and very much so. I further believe that this is the result of the “capture” of business schools (including unfortunately and increasingly HBS) by discipline-oriented academics who consume more value from their institutions than they create for them.

He calls the latter group parasites, and I don’t disagree with Watkins’ characterization. More broadly, however, it is interesting how many business academics have been slow to realize what is happening inside their own institutions: economics-envy has taken hold. Business schools have, of course, been heading down the self-refuting path of rigor over relevance since at least the Ford Foundation’s “new look” report of the 1950s. Sadly, Watkin’s tale shows that things are demonstrably getting sillier, not more sane.

There is, of course, a bright side. The market works, even for storied business schools. Annoy enough customers by having mufti economists teach too much sterile twaddle at $33,650 per year and you too can mess up a wildly profitable business.

Tips on Company Valuation

I ordinarily have relatively little tolerance for Guy Kawasaki’s musings, but I have had three different venture capital folks trot out his company valuation “rule” lately. It is Guy’s cynical heuristic for concocting a pre-money number — what your company is worth before you put in outside money — for an early-stage company in 2004:

Kawasaki’s Law of Pre-Money Valuation: For every full-time engineer, add $500,000; for every full-time M.B.A., subtract $250,000.