Monday, July 31, 2006

First and second Americans

The broad trends and industries I analyze in my investment newsletter, The Cohan Letter, paint a clear picture of two Americas: one that was wealthy in 2001 and is even wealthier today and another that has seen its income stagnate while its costs have climbed.

For a while, lower interest rates made it possible for the Second America to cope with rising housing costs and all the rest by making cheap the debt needed to stay afloat. Over the last several years, this second America has used the equity from a steroid-injected housing market to finance its survival.

The first America – which represents a fraction of the top 1% in income -- meanwhile has been feasting at a banquet table of tax cuts and corporate welfare that it has been dreaming about since the FDR took away the punch bowl.

The Cohan Letter's industry analysis section shows that private equity firms and M&A bankers have secured their place in the wealthy firmament of economic superstars.

Regrettably, there has been no trickle down effect. Unlike the 1990s which enriched venture capitalists, startup company employees and executives, and the average shareholder; this decade has impoverished the average shareholder.

Since January 2001, the S&P 500 has lost 4% of its value. And the future for the majority of Second Americans will become worse as interest rates rise along with prices even as housing values tumble. Meanwhile with the $363 million average earnings of the top 100 hedge fund managers, the future for the First Americans continues to burn brightly.

Sunday, July 16, 2006

Winning in November

If the Democrats wish to win in November, they need a compelling message. Today's Washington Post suggests a way to win -- show pictures of people filling up their gas tanks panning to an image of the prices they're paying.

This article focused on the political uses to which 9/11 images have been used. The Washington Post hired Stanford University professor Shanto Iyengar. His research suggests that showing pictures of smoke plumes off of the Twin Towers is good for Bush while images of high gas prices are good for Democrats.

Specifically, images of the Twin Towers under attack were shown to 2,925 adults. According to the article, 53% of Democrats who saw the video said Islamic extremism was extremely important in causing terrorism, compared with 40% of Democrats in a control group, who saw no video. This tends to favor Bush and the Republicans.

When showing economic images, however, the tables turned towards Democrats. Here's the key passage:

Economic images, however, demonstrated considerable power -- greater than the video of the Twin Towers, but strictly limited to attitudes about the state of the national economy and personal finances. Different groups were shown images either of bad news (rising gasoline prices) or good news (jobs growth). Among those who saw the reports of gas prices, 42 percent said their family is worse off than a year ago, compared with 29 percent of those who saw the good news video. The spread was even greater among independents. Those who saw the gas prices video also were more pessimistic about the national economy.

There appears to be a linkage between the Iraq adventure -- which has spurred global instability -- and the rising price of oil. It is not enough to describe the problem though. To win, Democrats must propose a solution.

Thus Democrats aspiring to victory could show images of the high gas prices and argue that a program of US energy independence from Middle Eastern oil could be the solution. Since Republicans are so dependent on oil companies for campaign contributions, they are not likely to be able to credibly copy this strategy without damaging their interests.

Saturday, July 15, 2006

Wagoner and Ghosn at center court

GM CEO Rick Wagoner loves to boast about his basketball career. Based on his relatively weak management of GM, it looks like the better performing Nissan/Renault’s Carlos Ghosn should win when the two face-off at center court over the next 90 days. GM needs a turnaround general manager like Ghosn, not a finance expert like Wagoner.

Their respective track records suggest that Ghosn will win hands down. Since taking over Nissan in 1999, Ghosn has overseen a 7.6% compound annual increase in sales to $79.8 billion, a turnaround from a loss of $216 million to a profit of $4.8 billion, and a 156% rise in stock price to $20.45. By contrast, since Wagoner took over in 2000, GM’s sales have risen at compound annual rate of 1% to $199 billion, it’s gone from a $4 billion profit to a $9 billion net loss, and its stock has lost 64% of its value tumbling to a current $29.79.

How did Ghosn do it? According to
BusinessWeek, Ghosn is great at cutting costs, developing new product lines, working with dealers, and listening to employees. He sets out specific plans and overcomes resistance to change that comes with the territory when a Lebanese-Brazilian-French executive tried to make headway in a Japanese company with proud traditions. Moreover, he demonstrated a skill at identifying where in the world core activities – such as manufacturing, design, and purchasing – are best performed to achieve optimal outcomes.

As part of his "Nissan revival plan", Ghosn closed five factories, reduced the workforce by 21,000, sold non-core assets, paid down debt and redesigned the cars. More importantly, he set specific targets and not only met but surpassed them – winning over even his most vocal critics.

Why has GM faltered? According to BusinessWeek, under Wagoner, GM’s relative costs remained high, its SUV and truck-laden product line generated profit when gas prices were low and then failed to adapt when gas tripled and steel prices climbed. Moreover, Wagoner’s background in GM’s highly profitable finance arm has not helped him figure out an effective strategy to fix the car business.

Kirk Kerkorian is clearly forcing the center court face-off between Ghosn and Wagoner. With his investment in GM just about at breakeven, he would be better off with Ghosn in charge. Turning around a moribund global automobile company is a task for a general manager like Ghosn, not a finance guy like Wagoner.

Wagoner should be able to realize this intellectually. The challenge for him will be overcoming his understandable desire to keep his job.

But for GM shareholders’ sake, the 6’ 4” Wagoner should let the diminutive Ghosn get the ball.

Wednesday, July 12, 2006

US venture capital goes abroad

I found quite useful a May 19. 2006 report from American Venture Magazine, "US Based Venture Capital Firms that Invest Abroad."

Since I am working on analyzing the impact of global capital investment on entrepreneurship, I have been seeking information about how US venture capital firms are investing overseas. This report lists 102 US venture firms -- 53% are venture capital firms, 45% are private equity firms and 3% are investment banks. For each firm, the report provides contact information -- including a lead partner, the location of its offices worldwide -- and a list of the primary industries in which it invests.

This information is a useful starting point for my research which will attempt to supplement the information in this report with details about the amount of capital each firm invests in the US and in the countries where it has located its international offices.