Monthly Archives: August 2009

Defending the Squid

The Blogotariat is up in arms on the subject of Goldmans latest evilness-itude. Goldman Sachs, apparently, blatantly favours clients that pay them more money. Baruch is shocked. And so we should all be. The tone of the original article on the subject in the WSJ is strongly disapproving; here the tagline:

Critics say Goldman Sachs gives key trading tips only to its own traders and favored clients, hurting others who aren’t given the opportunity to profit from the information.

Apparently, GS analysts go into “huddles” with their salesguys, come up with short term stock ideas that may or may not totally chime with their formal ratings on the stocks. They may, in the case of Janus as cited in the article, sort of front-run ratings changes when the analyst says something like, “I like it more now” or “it may go up into numbers” or something. This stuff gets sent out in calls to high rolling punters like the big hedgies. According to a lot of bloggers (none of whom I note actually run any money, unlike Baruch) and those holier than thou twerps, the CFA brigade, this is a Bad Thing.

One can perform a reductio ad absurdiam on the more disapproving of the reactions: clearly Goldman Squid should be sending out every twinge every analyst feels on every stock under coverage all the time to everyone who pays GS any amount of money at all as well as those who don’t. This would mean everyone would be able to make lots of money all the time, in a completely fair and transparent way. Wouldn’t it.

Of course not. Actually, what GS is doing here really makes very little difference at all. Continue reading

Kaupthinking

Mildly tragic promotional video from Kaupthing Bank, back when Iceland was in the process of leveraging itself into, well, whatever it is now. Forget Lehmans and Bear Stearns, Kaupthing was the real poster child for the debt bubble of the mid Noughties. On Acid.

Baruch has many thoughts about this video. One concerns the regrettable prevalence of infantile thinking in business discourse: “You can. If you Think You Can.” Well, no. Half the time, you probably shouldn’t.

The other idea Baruch has is how smart we think we are (“Thinking Beyond”) at times of great success, when oftentimes all we are doing is cruising for a massively spectacular bruising. Kaupthing was living a charmed life surfing on a wave of debt (“We thought we could grow our balance sheet. And we did. By 500% in 3 years”), confusing audacity and financial nous with reckless growth and easy credit. I met a couple of Kaupthing dudes a  few times. What struck me most was their sense of achievement; they were really proud of being involved in something special. The thought it could end so badly, and basically result in the ruin their country, could never have crossed their minds.

Baruch is having a fine run at the moment, as are the markets. This makes him stop and worry: is he Kaupthinking? Are we Kaupthinking now? I don’t think so; one guesses Kaupthinking properly comes at the end of periods of persistent prosperity, not after periods of existential crisis. That said, the only time we can be sure we are not Kaupthinking is when we are not actually doing very well. This should be a source of comfort, one supposes.

“Kaupthinking is beyond normal thinking”. It should be, but is it really?

HT Lara Hanna Einarsdottir, queen of the Icelandic blogosphere, apparently. And my mate Konrad.

Cisco earnings wildly overstated: management milks shareholders for fun and profit

The nexus between US share options and share buybacks is one where great evil lurks, dear readers. I’ve banged on about it before and got very little reaction, but even after all that Baruch got very cross indeed this week, when he finally took the time to get round to looking at Cisco’s fiscal 4th quarter results (belatedly it is true). Wankers! he yelled when he had a look at the guidance on share count.

Basically, Cisco bought $600m worth of its own stock in the quarter. This is a lot of money, obviously, about 30% of the net profit for Q4. The average number of shares out didn’t decline from Q3, which is odd, but potentially explainable if Cisco bought back all those shares towars the end of the Q. Except they also guided to a  flat share count next Q. What the fucking hell did they do with that $600m then? Answer: the management used that money, shareholders money, to enrich themselves and their colleagues and hoped we wouldn’t notice. By and large, we haven’t.

Prof Lazonick of UMass sort of has, in a recent article for Business Week (HT Abnormal), but at the same time he misses the true perniciousness of share buybacks.  He thinks they are merely a waste of money, which could be used for something more wholesome than merely enriching shareholders.  The Prof points out that in the past few years IBM bought back lots of shares as it replaced good old American workers with Indians (apparently that is a Bad Thing because Americans are Better People). Drug companies buy back shares wastefully, yet argue that they are strapped for cash enough that it would be a Bad Thing to regulate drug prices. Now-bankrupt or government-supported companies like GM and the banks wasted loads of money that could have staved off ruin by buying shares. From the perspective of class warfare then, which is where Prof Lazonick seems to be coming from, share buybacks are a weapon for use by fat cat capitalists to screw the workers and should therefore be banned. If only they did enrich shareholders.

While we can disagree on the class warfare thing, however, he and Baruch are each others’ running dog; both our conclusions are the same, which is that Something Should be Done about shitty buybacks. And Prof L. gets close to the heart of the matter when he says:

It is the executives themselves who frequently benefit from price boosts generated by repurchases—by selling their personal shares after exercising stock options

Close, but not quite the banana, however. Continue reading

The Worm in the Apple

 The blogosphere is buzzing with reaction to Jason Calacanis’s epic post on Apple’s uncompetitive practices. Basically, as concerns iPod, iTunes, switching off apps it doesn’t like or who it thinks are a competitive threat, Calcanis thinks that Apple is acting like a monopolist and should probably be investigated by the DoJ. His most telling points come in the comparison between the current behaviour of Apple and the ex-great monopolist Microsoft:

On iTunes:

Think for a moment about what your reaction would be if Microsoft made the Zune the only MP3 player compatible with Windows. There would be 4chan riots, denial of service attacks and Digg’s front page would be plastered with pundit editorials claiming Bill Gates and Steve Ballmer were Borg.

On Apple’s draconian apps policy for iPhone:

Imagine for a moment if every application on Windows Mobile or Windows XP had to be approved by Microsoft–how would you react? Exactly.

On banning other browsers on the iPhone

Apple was more than willing to pile on after Microsoft’s disasterous inclusion of Internet Explorer with Windows. In fact, what Apple is doing is 100x worse than what Microsoft did. You see, Microsoft simply included their browser in Windows, still allowing other browsers to be installed. In Apple’s case, they are not only bundling their browser with the iPhone, but they are BLOCKING other browsers from being installed.

The standard Apple response to all this is that the restrictions Apple places on its products are necessary to ensure the quality of the user experience, that Apple deserves to be paid for the innovations it has brought to the marketplace and the consumer freedom it has enabled to use things like the mobile internet, to make online music easy and fun to use etc. But these remain the classic arguments of all monopolists, and are identical to the ones Microsoft used back in the days it was being investigated.

Baruch has often thought of what would have happened had Apple actually won the market share wars of the early 1990s; its instincts are much more controlling than Microsoft’s. Would we really have had an open-source internet? Would we really have had all the innovation spawned by cheap and ubiquitous computing?

Needless to say, this is not being well received by the hordes of Apple aficionados, the self-confessed fanboys. Baruch is constantly amazed at the level of brand loyalty Apple has managed to instil in its punters. I certainly don’t feel the same way about my crappy old Toshiba (although I would be cross with anyone who disparaged my Subaru).

Count me firmly in the Calcanis camp on this. As every reader knows, I make no secret of my dislike of the company, for very much the same reasons Calcanis does. Reader Verec, in the comments attached to the last post, accuses me of “anti AAPL bias.” But “bias” is a loaded word. Is a well thought out position against something, a consistently held position, bias? For those utterly convinced of the righteousness of the other, the pro, side, it may appear so. And that is probably why it is generally very hard to have a proper conversation about Apple on the interblogs.

At the risk of throwing lighter fluid on the flames, I blogged this on Apple, almost 2 years ago:

. . . I do so very strongly dislike Apple as a company. They sell high quality hardware it is true, but so overpriced; you pay a premium to be unable to use 90% of the world’s software without running some other complex program to do so. I hate the cutsie-coo operating system and the self satisfied “pop” when you close a window. I find the advertising unbelievably irritating, with its “Think Different” slogan, which when you think about it is a pean to its lack of market share; if they had managed to sell more Macs than PCs would they be telling us to “Carry on Thinking the Same” to make us buy more Macs? More than that, I pity the ponytailed, smug, pseudo-individualist, and above all gullible Apple fanboys, who all believe they are part of some greater social movement representing god knows what but who are in fact the victims of some corporate succubus which cares not a jot for them except how much more they can milk them. And the fanboy’s anger at the Wintel axis ignores the fact that the only thing which kept the company afloat during the dark times was Microsoft’s charity; that and the need to pretend that Windows was not in fact a monopoly.

No, Apple is the antithesis of what a Spinozist technology company should look like: closed, not open systems; overly pleased with itself and arrogant; and its advertising and brand values appeal to the grossest of the Passions: envy, pride, confusion and fear. In their defence, the flip side of their arrogance is a certain appealing audacity. The company from time to time (but not as often as we think) creates attractive and innovative products. But net net they have to go in the Stupid Cartesian bucket.

It’s nice to finally have company. And now we have that out of our system, let’s hope that ‘s the last blogpost about Apple here for a while.