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Monday, May 28, 2007


GE's Long Dormant Stock Price

Like the bulk of stocks, GE lost about half its value when the stock bubble popped in 2000. It has recovered about 28% since then but has basically been flat for the past five years, and many holders have either no gain or a losing position in the stock depending on their entry point. GE holders have endured years of frustration, but the fact is that during the bubble, GE traded at a ludicrous 5 or 6 times book, owing to the perception that they had the best CEO, Jack Welch, and were the best managed company in the US, and possibly the world. Back then, Jack talked about GE's valuation as if it were merely deserved, calling it "the premium for being GE." (Full disclosure - I was employed by a GE subsidiary).

GE built its great management reputation in the sixties and seventies, refining the conglomerate organization to an art form, built around the concept of the Strategic Business Unit. This enabled it to exploit its management depth, allowing its business leaders to hone their skills in relatively independent business units, but under rigorous corporate discipline and a very well defined management toolkit. Jack's insight that GE should focus its resources and capital on the businesses where it had a leadership position (either #1 or#2) was the finishing touch to GE's successful multi-business strategy. It added efficient use of capital and strategic focus to an already solid foundation.

In the 1990's, Jack discovered the Quality regimen Six Sigma. He was so impressed by the improvements and new products/processes achieved by Master Black Belts and their teams in GE's industrial business, that he decreed that Six Sigma should be imported to all of GE's businesses, including the Finance and Services businesses that by then, were providing most of the Company's profits. Though these businesses could learn some things from the Quality gurus, much of the Six Sigma discipline proved to be irrelevant to those businesses, if not downright dysfunctional. The Six Sigma goal of reducing error rates in industrial functions led to some very silly goals and statistical measurement projects when translated to the service businesses. Project teams trying to identify defect opportunities in service businesses became hilarious exercises in trying to squeeze square pegs into round holes. Worse, the GE Quality Bureaucracy decreed that all projects would follow one or the other of the two Six Sigma project methodologies. Gone was the systems development methodology, and any semblance of strategic marketing and product development. Instead, marketing and sales staffs were forced to work through the endless brainstorming and voting procedures in the Six Sigma Multi Generational Product Plan. Never mind that people experienced in the business knew that at least 80% of the ideas thrown up on the board were useless blind alleys. No criticism in brainstorming sessions was allowed. "Go slow to go fast" is what Black Belts reminded marketing leaders as they made their frustrations and impatience obvious. Then it's voting time, with folks who knew nothing about the business or its marketing realities getting an equal vote with experienced marketing leaders. The votes determined the black box result. Want to have a real no-holds barred debate about competitor strategy? Forget it. The Master Black Belts were well trained to avoid any semblance of conflict and debate in favor of facilitation.

GE had always believed in rotating young managers, feeling that a good manager could lead any business. They were quick studies in terms of getting up to speed in individual businesses. Translating this model to the finance areas might have been OK except that these managers were also graded on their ability to promote Six Sigma techniques. GE, always a little weaker on the marketing and sales side, became even worse as business leaders were recruited from the Master Black Belt ranks, (joining the financial types), whose career path typically went from Quality to Operations to Leader. Pretty soon, the best marketing and sales people were easily recruited elsewhere since they had no real chance to advance in the financially and operationally driven GE. The result was that Marketing and Sales became even weaker, and GE's management leaders, now dominated by 30 and 40 something general managers with no meaningful experience in customer issues, were now another weak link.

I don't think Jack ever realized that this was happening to his company, since the malaise hadn't yet set in on his watch. Poor Jeff Immelt has had to endure it and its effects, though he has moved as quickly as possible to return the Company to its industrial roots in some very interesting new areas, though its akin to turning an aircraft carrier.. That will be a better fit for GE's current culture. In the meantime, the stock's price to book ratio has retreated to a more realistic three times, still overvalued but only about a third as badly as in 2000. We are getting closer to where GE will be a good value again but GE holders may yet have to show quite a bit of patience before this stock makes any kind of big move. When you see GE at 2-2.5 times book, that is probably when it's compelling to buy. At the moment, the stock is acting better, so I could understand taking a position (and I still have a position, though I sold some shares quite a while ago). There's just no urgency to get in, in my opinion.


On 5/23, I sold 200 CNRD out of the taxable account at 12.85, originally purchased on 11/2/04 for 1.95. Who doesn't love those six timers? I know I have sold a lot of these shares at lower prices, but there is no way I am kicking myself over this. Could I picture holding all those shares until now trying to call a top? Have we reached the top yet? No and maybe, so I'm not changing my formula.

Tuesday, May 22, 2007


Spring Clearance Items

Item - GE sells Plastics business - The world has certainly changed since that memorable career advice given to Dustin Hoffman's character in "The Graduate." GE's plastics business could no longer meet the company's return on capital hurdles, and the business is now considered such low tech that no one uttered a peep concerning the Middle Eastern buyer of the business.

CEO Immelt then announced that there would be no major acquisitions or divestitures for awhile. Instead, GE would start to return money to shareholders in the form of stock buybacks and higher dividends. Redwavemusings readers already know my dim view of buybacks, and though I look more kindly upon dividends, it says something about the failure of GE's long vaunted management that they can't find better uses for their excess cash.

I'll have a lot more to say about the Six Sigma management style in a future post, and I'm still a shareholder of GE, expecting it to finally do better when it is no longer trading at a ridiculous multiple of book value (it's getting close to fair value) but for now, let's just say that this company's reputation for outstanding management continued long after those management disciplines were abandoned.


Item - Sly Stallone convicted of steroid importation. I guess I can understand a real professional athlete being tempted to use illegal substances to improve performance, but for the life of me, why is this necessary for a pretend athlete? Actors on the cream!? If he could win an Oscar, would Sly have to return it?


Item - Wolfowitz ousted at World Bank - When he was hired, Wolfowitz asked the Bank's Board to allow him to recuse himself from personnel decisions involving his girlfriend, then a long time Bank employee. For some reason, he was told to handle the situation himself. He found her a job at the State Department, and that was OK, or would have been if he didn't also secure for her a big promotion and outsize increase in pay. Naturally, when this came out, it gave his enemies all the ammunition they needed to force his departure. And he had already made plenty of enemies, since he was busily unwinding the corrupt deals his Euro Board members were making in the name of "fighting poverty."

The US funds about 16% of the World Bank's budget, and that's why we get to name the CEO. So the Bush Administration, when they finally gave up the ghost trying to save Wolfowitz, announced they would quickly install a new CEO. Mistake. A better plan would have been to tell the Euro's that we were pulling out and they could either run the Bank themselves or crash it. We could take the same money and put it in our foreign aid budget where it would do some good.

Actually, the UN is equally corrupt, and I would pretty much tell them the same thing.


Item - Tony Blair makes way for his partner Gordon Brown to take over as Prime Minister. Generally, I would not be a big fan of a Labour Government, but since 9/11, the US' most loyal friend has been the UK and in particular, Mr. Blair. He has steadfastly, and at great personal political cost, stood by us in the fight against terrorists. He sees clearly what it seems the majority of the world sees through rose colored glasses. His record as PM was pretty good, all-in-all. Though the UK economy shows some weakness now, it has performed superbly for most of his tenure, and he has achieved steady incremental improvements in government services. He leaves a government not without problems, but arguably one that has outperformed most of its peers.

Here's Tony on terrorism: "This terrorism, in my view, will not be defeated until we confront not just the methods of the extremists but also their ideas. I don't mean just telling them that terrorist activity is wrong. I mean telling them that their attitude to America is absurd, that their concept of governance is pre-feudal, that their positions on women and other faiths are reactionary. We must reject not just their barbaric acts, but their presumed and false sense of grievance against the West, their attempt to persuade us that it is we and not they who are responsible for their violence."

Let's hope that after a little rest to recharge, Mr. Blair will resume his service to the world in some important capacity.


Speaking of folks who made important contributions, we should all thank Pennsylvania voters for lending us the talents of Rick Santorum for 16 years (4 in the House, 12 in the Senate). Of course, we should also give them a big slap in the butts for denying us those services last November. I say this without casting aspersions on PA's junior Senator, who is far from the worst replacement they could have provided. However, Santorum was one of those sharp and relentlessly honest guys that we never have enough of in Congress and that we really miss now. Hopefully, he will also get another chance to serve in the future.


On 5/16, I bought 100 shares of BMTC for the taxable account at 23.60. Yesterday, I bought 200 shares of PBCT at 19.90 for the IRA. Good thing the market is not heeding the demons I have been concerned about, as stocks climb the proverbial wall of worry to new highs. Luckily, I don't pay any attention to my own predictions about the market either, content to just follow the action and let my asset allocation formula dictate buys and sells. Of course, if the bottom falls out, I won't be any better off than the investors who had no idea it was coming.

Tuesday, May 15, 2007


Murdoch and the WSJ

What if Rupert Murdoch and News Corp. take over the WSJ? Well, that would be a back door way of owning stock in my favorite paper, since I am already a NWS stockholder. I have looked at possibly opening a position in Dow Jones many times but it never seemed to be so attractive as an investment. However, that is really beside the point. The question from the standpoint of someone who reads the WSJ cover to cover 6 days a week is what would the impact on the Journal's product be under News Corp ownership. Many readers have written letters expressing their virtual panic on the subject. The Bancroft family also appears to be instinctively opposed to the deal, regardless of the economics.

I have mixed feelings. I think Fox News has maintained pretty decent integrity while avowedly fulfilling its conservative mission. On the other hand, the New York Post is a pretty awful tabloid, and its news coverage, such as it is, is pretty slanted. The WSJ has been really good about walling off its news division from its editorial pages. (The NY Times once was the model for objective news reporting,but no more. Now its WSJ.) I guess I would be concerned that serious journalists won't want to work for Murdoch, and over time, WSJ would be negatively impacted. So I hope the Bancroft's don't sell, but I wouldn't blame them if they did. Dow Jones is not a real profitable performer and the outlook is worse. And by the way, Barron's is no great shakes as a business weekly as it is.


Loyal redwavemusings readers will recall its series on the looming insolvency of social security and medicare. (If not, you can find those posts in the archives). Our point was that these programs represented unfunded liabilities and demographic trends were frightening. One solution was to eliminate the cap on income subject to social security taxes (as in medicare). Social security taxation is not only not progressive, it is regressive in that higher incomes are subject to lower percentage tax rates. Of course, this is recommended only in conjunction with my flat tax proposal based on the AMT calculation, but with a sharply reduced tax rate. Also, the programs promise more than we can deliver. To return Social Security to its original mission of providing only a basic ground floor pension, all future COLA's should be permanently eliminated.

Anyway, as if I needed corroboration, the May 9 edition of the WSJ included a fine op ed piece by the aptly named Thomas R. Saving called Medicare Meltdown, that made the same point concerning the systems' economic non-viability. Here are some excerpts, in case you missed it (what? you don't read the Journal cover to cover?) :

A recently released report by the program's trustees found that within seven years Medicare taxes will fall short of Medicare expenses by more than 45%...The projected cash flow deficits in these two programs are staggering. For Social Security, the trustees estimate the 75 year burden on general revenues at $6.7 trillion. For Medicare, the comparable burden on general revenues is $24.2 trillion, even after allowing the current transfers to grow with the economy. Until a few years ago, Social Security and Medicare were taking in more than they spent...That situation is now reversed, and last year the combined deficits in the two programs claimed 5.3% of federal income tax revenues... By 2030, these two programs will require almost one out of every two federal income tax dollars... Eventually, the deficits in these two programs will absorb the entire federal budget...


Quite a while ago, I questioned whether our country still has the stomach and patience to succeed on the battlefield as out parents, "the greatest generation," did. Washington's rush to plan an Iraq retreat even before the surge level troops are all in place is a perfect example of what I was questioning. Not that this is unprecedented. Our own generation undermined the Vietnam effort while it was still in progress. Though the strategic rationale in both cases could fairly be questioned, there is no doubt that the very public tactics of both anti-war movements provided aid and comfort to the enemy, causing them to believe (rightly) in the Americans' lack of true commitment to the fight. And no war effort can be successful without total commitment.

If true, this will be a real problem for our foreign policy now and in the future, regardless of which party is in power, since the threat of US force will have no real credibility.

One other thing - I don't know if there really should be rules of engagement in war, but I was always uncomfortable with our objections to chemical warfare given our own use of "yellow rain" in Vietnam. This is especially sad in view of the shortened life expectancies of many veterans who fought that war. We all know Vietnam vets who suffered premature cancers and were delayed victims of that war. It's long past time that we did two things - first apologize for our use of chemical weapons in Vietnam (both to the Vietnamese and to our own veterans) and second, take the gloves off and let our soldiers fight the way you are supposed to in war - with total commitment and no inhibitions, using conventional weapons, and understanding (but without apology) that there will be collateral damage and civilians impacted. And vowing once and for all, that if any future wars are to be fought, that that is the way they will be fought, in fairness to the kids doing the fighting.


On 5/9, I sold 100 shares of TMO out of my IRA for 52.36, originally purchased for 17.00 on 11/23/98. On 5/14, I took advantage of Cardinal Health's offer for VAS to sell my 58 shares at 43.11. These were shares that were spun off to me from TMO, which I just kept though I never expected them to be worth much of anything.

Forget the headlines you are reading about new records for the Dow. This upside market move ended two weeks ago, as anyone who follows the broader averages can tell you. Usually this kind of divergence where the blue chips outperform the broader averages signals the onset of a meaningful correction. Since this is the third year of the Presidential cycle, i expect we'll finish the year up, but that doesn't mean that we won't have some pretty bad months along the way.

Tuesday, May 08, 2007


Back from the Beach

Our annual Myrtle Beach golf vacation was as much fun as ever, though there was no hiding the constant deterioration in my so-called "skills." In recognition, I am adjusting the redwavemusings profile to show a more realistic handicap. Anyway, it was nice to see a part of the country not dominated by "For Sale" signs. The Beach combines a resort and retirement community, and those are growth industries, in an otherwise decelerating economy.

Don't be fooled by the major stock averages, making almost daily new highs. I think the higher prices reflect embedded inflation more than they do increasing value based on real earnings. Not surprisingly, M & A is the major driver here, also recognizing inflated values. The Fed has been monetizing the deficit, under the disguise of a higher federal funds rate. The resulting inflation continues to be reflected by higher commodity prices. Read Steve Forbes' magazine editorials to get a proper perspective on what's actually going on.

The current blue chip rally looks more like the end of a bullish cycle than anything else. When the generals are out in front of the troops, everybody eventually gets killed.

That doesn't mean that I am going to sell everything, since I don't rely on market predictions, even my own. I'll follow the market, like always, and hope it gives me the right signals. Also, markets don't move in straight lines, and the topping process can take a long time.

Another thing I don't like very much is all this option activity preceding takeover announcements, indicating illegal insider trading. You might recall that we had an unhealthy dose of that before the 1987 market break. So, all in all, this is a time to be cautious and look for good value, even though value stocks and smaller stocks seem to have topped already.

By the way, if the dems retain control of Congress for very long, they will surely kill this economy through misguided tax policy. The Bush tax cuts are what set the current prosperity in motion and are solely responsible for keeping it together. Aside from all their horrendous proposals and pay/go philosophy, the dems can pretty much cause a train wreck by doing nothing, letting the tax cuts expire and allowing the entire middle class, especially in high tax states, to be bashed by the AMT next year.

Repeatedly, I have suggested that using the AMT structure as a flat tax approach in lieu of the current system is the way to go. Part of that proposal would be to eliminate all the deductions disallowed by the AMT but increase the income exemption (taking all low earners off the tax rolls) and reduce the AMT rate from 28% to something like 17-20%. The result would be a much simpler tax system, fairer, easier to enforce and understand, generating sufficient revenue, and encouraging productivity. Again, read Steve Forbes' work on this subject. The solution is so elegant and effective, it will never happen. The social engineers in Congress and the special interest lobbies will fight to their last breath to preserve the illusion they are accomplishing something.

It's unfortunate that political debates weigh so heavily in our process, since they are an absurd way to assess a presidential candidate, and give the (liberal) media undeserved spin opportunities. Look at the way the media reacted to Rudy Guiliani's comment about Roe v Wade, which I thought was pretty measured. They thought he blew it since they reviewed it in light of their belief that the Republican base is uniformly pro-life. In reality, most GOP voters consider abortion one of many issues they are concerned about, but relatively minor compared to terrorism, tax policy, overall judicial activism, and economic growth.

I'm not an avid Guiliani fan, but the media continues to ignore the poll numbers and pound the drumbeat that he couldn't possibly be the choice of mainstream republicans. As has been noted here, Guiliani is more popular in red states than he is in New York.


Interesting analysis today by Michael Barone in the Journal concerning the population changes in various regions around the country and how the 2010 census will impact Congressional seats and electoral votes. He made the point that the population is shifting to red states from blue states, but went on to make an error in assuming that those states will vote in accord with their recent patterns. My own take is that population shifts result in the new residents bringing their partisan views with them and probably narrowing the margins in their new states. A good example is Florida, and another is Nevada.


Mariano Rivera has already blown two saves and lost another game, so his aura of invincibility is gone, at least for now, and that happens to all relievers as they get older. It's always a shock, and if you want to see a team lose its confidence and strut, watch what happens when they perceive their closer is unreliable. Mariano is a guaranteed Hall of Famer no matter what happens from here on, but even though the Stinkees' starters have shown signs of life, I don't think this team is going anywhere. They look like a 500 ball club to me. As for Roger Clemens, the Yanks are rolling the dice on a 40+ year old power pitcher who hasn't pitched in months, and no one knows what's left in the tank. He may help if he pitches like he did last year, or he may simply break down. Glad it's not my money.


On 4/23, I sold 100 shares of BRLI at 26. 78. Originally purchased for the taxable account on 5/20/02 for 9.07. On 4/27, I bought 100 shares of PWI at 20.09 for the taxable account. On 4/30, I sold 300 shares of CNRD at 9.75 (purchased for 1.95 on 11/2/04 - gotta love those 5 - timers), and bought 100 shares of BMTC, a new name, at 24.28, all for the taxable account. Finally, on 5/7, I bought 100 shares of PBCTD for the IRA at 20.35.

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