The Last Journeyman

The good old days

In boom times, managers feel entitled to their costly perks- and if this leaves any cash over for the shareholders, all the better.

One favorite and beloved perk is business travel. Though managers may moan that foreign trips are an unavoidable scourge and a destroyer of family life, many secretly delight at the opportunity to fly to foreign climes on the company’s dime.

The advantages are numerous. For a start, it’s an excellent excuse to escape the spouse that weighs on your soul like an albatross. It also provides respite from the beloved but incessantly demanding rugrats you begat.

Travel is also a status symbol, your business-class ticket a potent signal to the underlings in the foreign office that you are not one to be trifled with. And if the masseuses at the luxurious foreign hotel you are booked into are particularly delectable, well, it is a fair recompense for the hard slog of corporate life.

Alas, no more. Corporate travel is set to contract severely this year. Regional managers whose job consists of quarterly trips to field offices to make Powerpoint presentations, are being asked to stay at home and find some real work to do.

British Airways, a favorite of the exec on the go, is desperately slashing prices to keep planes full. Land transport too, is adjusting to the penny-pinching reality. When even Rolls Royce starts selling bargain-price limousines to the not-quite millionaire class, things are serious indeed.

Leadership: The Long and Short of It

Lucky Devil

How tall is your CEO? Most likely, taller than you.

He’s also more likely to be happier than you, better-paid, and to be thought more intelligent. This is because, as humans, we have mental shortcuts- heuristics- that enable us to make decisions quickly based on limited information. And one heuristic is, tall equals smart and competent.

The root of this particular heuristic is not hard to fathom: in the old days, the taller men in the tribe were more likely to outrun the pursuing sabre-tooth tiger, and so less likely to die before being able to nurture offspring to maturity. So women loved them.

Being bigger than average, they were also more likely to prevail in hand-to-hand combat during tribal warfare. And since tribal warfare was both necessary for survival and as much fun to prehistoric man as football hooliganism is today, men loved the tall guys too.

Now, being so popular amongst both genders, a chap who was both a fearsome warrior and a lady-killer was naturally going to become a leader in the tribe. And we attribute all manner of positive qualities to the leader of the tribe. They quite suddenly, on ascending the throne or moving into the C-suite, seem more wise, sagacious and altogether more splendid than before.

That’s why taller people are more successful and happier than average. The rest of us, by thinking like prehistoric cave-dwellers, spoil them rotten.

Yahoo! and Microsoft: Kissing Cousins

Signing the prenup.

What business is Yahoo in? No-one seems to be sure, least of all Yahoo.

After Carol Bartz took the helm at Yahoo last January, she soon realised that she too had no clue what business she was in.

Yahoo publishes news, offers e-mail, streams video, advertises jobs, provides web hosting, hosts photos, operates a search engine and a finance portal, and does basically everything including the kitchen sink.

However, Yahoo is not the best at anything, and suffers terrible internal cross-subsidies.  It lacks strategic focus. It makes the bulk of its profits from displaying adverts to users of its sites, but vastly lags the more focused Google.

So Bartz followed the new CEO rulebook. She first moved the deck chairs around to seem busy and entrench her power. She then slashed the payroll. But cost cutting can only take you so far in the face of falling revenues. More was needed, so Yahoo revamped its home page. A deafening silence ensued.

So today, Yahoo announced that it will outsource its search advertising business to Microsoft. Yahoo saves the cost of running a search business, Microsoft gets search market share that brings it closer to Google and they split the revenue. The market was not impressed and the stock price fell by 12%. 

With all the obvious ploys exhausted, Mrs. Bartz must now face the harder task of streamlining Yahoo’s disparate businesses, excelling in something and growing revenues. The clock is slowly ticking.

Loansharks On the Prowl

Loan shark implements high APR.

In straitened times like these, low-income families are particularly troubled by cash problems. Rent becomes due, bills have to be paid, children clothed.

When friends and neighbours are equally pressed, and banks disdain your poor credit profile, the only source of a welcome loan to tide over is often the neighborhood doorstep lender. Or, as they’re more colorfully called, the local loan shark.

These last recourse lenders are regularly excoriated for preying on ‘vulnerable’ families whom they ruthlessly ‘target’. The condemnation usually comes in concert from both concerned do-gooders and the nanny state.

It’s a recurring pattern: in 2004, a do-gooder consumer group raised the alarm. In 2006, the nanny state was likewise having none of it. Much political mileage and pious good feeling is achieved by casting the poor as victims, and money men as predators.

Today, right on cue, another do-gooder is deeply concerned. Do the ‘vulnerable’ families involved feel they are being exploited, or are they happy to pay the high interest rates that are the lender’s compensation for higher-risk loans? No-one remembered to ask them.

More fundamentally, no-one asked what these families would do if this source of relief was withdrawn. Breathe a sigh of relief? Beg? Steal? Or just queue up for more handouts from the nanny state?

It’s a sad market, yes- but a working one. It should be left alone. At least until next year.

The Health Question: Who Cares?

Value for Money?

America is embroiled in a debate over healthcare reform. It is framed in typically ideological terms: capitalists who trust the free market, versus socialists who want government-run care.

This time, we’re with the socialists.

The free market is undoubtedly the most efficient mechanism for allocating capital and maximizing overall utility, because everybody gets the product they can afford. Rich people ride Ferraris, poor people take the bus, and those in the middle get a Toyota. Best of all, Ferrari, the bus company and Toyota all make a profit.

In a free market for healthcare, the same thing would happen- and that’s the problem. The healthcare you demand (unlike the car you buy) has nothing to do with your income or tastes. You don’t choose to get cancer to impress your neighbors.

In a free medical market, rich people would get Harvard-trained doctors, and poor people would get the Latvian herbalist around the corner. And if you’re a bus driver with brain cancer or one of those rare (and expensive) ailments known only to Discovery Channel, things could get worrisome.

Your optimum recourse would be care paid out of a central pool. If everybody pays into that pool, and withdraws from it when needed, that’s similar to insurance. But health insurance in the US is inherently ineffective, because the amount of coverage is limited by the premiums paid, and insurers have an incentive to reduce payouts. Warts and all, the NHS has it right.

Hollywood's Economic Migrants

Return on Capital Employed

What do Kate Winslet, Hugh Laurie, Sacha Baron Cohen and Dame Hellen Mirren have in common? More to the point, what do they have to do with a business blog?

The answer to the first is, they’re all talented British thespians who had to go to Hollywood to earn global fame and fortune. They’re also economic beings- human capital- who moved to the market where they would earn the highest financial return on their talent.

But why is the UK not the most profitable market for their talent capital? The Times today wrote this article, lamenting the fact that the UK film industry is addicted to government subsidy. Astonishingly, it then concludes with the alarming assertion that the solution to the industry’s woes is for the government to finance a movie production sector.

We would like to gently point out to the Times that there’s no government-financed movie sector in Hollywood. We’d also gently suggest that this is precisely why it nurtures a more succesful and profitable fim industry than the UK.

The European intinct to look to the Great Government Benefactor is again evident. Subsidising the BBC with mandatory TV licences or propping up all manner of theatrical companies that produce material so atrocious no-one would pay to watch it, just prevents the market from uprooting the weeds and nourishing the blossoms.

Any movie that can coax the price of a ticket from a citizen’s wallet will also coax a pound from an investor’s coffers.

How to make two billion in nine months

The Old Master's still got it

It must be downright embarrassing, if you’re a strapping trader in the prime of youth, MBA in hand, to be trounced by a 78 year-old man.

This is what precisely Warren Buffett has again done to Wall Street’s finest. Every time cynical pundits like Nassim Taleb argue that the old master investor is merely lucky, the hoary fox proves again that his market-beating returns have less to do with luck than balls of burnished brass.

“Be fearful when others are greedy, and greedy when others are fearful” is his simple mantra. This approach to investing gives the lie to the popular notion that the best investors are somehow ‘smarter’ than average.

Back in the heady, lunatic days of the dotcom bubble, Warren Buffett shunned the mad buying of stocks with no hope of generating profit. The word was, the old fuddy-duddy didn’t get this Internet thing. He’d lost his touch. We know how that ended.

They said the same thing when he struck a deal, at the depth of the financial crises, to purchase cheap warrants for Goldman Sachs’ undervalued stock. Others could have made the same bet, but amid the panic, following the herd felt safer.

Pundits like this chap speculated that Buffett had lost his touch, as Goldman’s share price fell further after the deal. They’re not saying that now. After record profits announced last week, Buffett has pocketed a cool $2 billion or 44% return on the warrants- excluding the guaranteed 10% preferred dividend. Fortune, indeed, favours the bold.

Earnings Season: Winners and Losers

The Korean Won: LG kicks Nokia's whatsit

Here at Amusis, we make business a spectator sport. We particularly enjoy front row seats during Earnings Season.

This quarter is particularly riveting, due to the sheer volume of red ink on display. All sports fans know that the most satisfying moments involve disaster: the ski jump that send the skier sprawling head-first into a snow bank; the cage fight knockout that results in a particularly gruesome blood spatter.

There is similar joy in witnessing monumental business losses. Former banking titan Morgan Stanley floods Wall Street with blood (or is that red ink?) for the third straight quarter. By contrast, high-scorer Goldman Sachs struts victoriously across the field, throwing bailout money back in the government’s face.

But not only business behemoths suffer disaster. Here in the UK, 52 pubs are closing every week, suggesting the unbelievable possibility that Britons are actually drinking less. But the balance of news was favorable today, as most corporations defended margins against falling revenues by laying-off staff.

Boeing for example, reported profits up by 17%, and Wells Fargo showed that not all banks are in the business of losing money. But the most delightful smack-downs were in Technology, where Apple demonstrated why high margin products targeted at price-insensitive buyers is a winning formula.

LG similarly demonstrated the power of branding. Its sexy smart-phones with names like Prada, Chocolate and Cookie took a big bite out of Nokia’s boring lineup of grandma phones. Who said business was dull?

Movin' On Up to the C-Suite

With the right education, you can wear a costume like this

The British love the amorphous but strongly-held notion of  ‘fairness’, which though a noble sentiment, usually comes down to taking from the rich and giving to the poor.

But in market economies, people earn based on the value of their capital. That’s why it’s called capitalism. If you own real estate, you earn rent. If you own the intellectual capital of a brain surgeon, you earn a high salary.

This is fine and fair. But alas in reality, the fairness of the perfect market is impaired by the human tendency to preferentially pay for the capital of people we like- which is usually people who are ‘like us’.

We’d rather rent from a landlord of our social class, or employ someone from our alma mater. Today’s ‘alumni networks’ are just the modern version of yesterday’s ‘old-boy networks’.

This means returns to capital are not fairly allocated- the less smart lawyer who attended Eton is more likely to be elevated to the Bench than the smarter chap who went to Barrowboy High.

The reason of course is, the existing elite in business and public service are from a certain social and educational background, and being the gatekeepers, are admitting people like themselves. This is the reason for the current fretting about social mobility- 75% of judges attended private schools.

Solutions like ‘inspiring children to dream big’ are clearly off-mark. As long as humans are human, elitist cliques will exist. Not fair, but sadly, fact.

Profit or Loss? The Earnings Nailbiter

Oh, no- It's a negative earnings surprise!

It’s that season again: people are imbued with a lustrous lightness of being, and with the dark days of winter behind, are looking forward to green shoots and flowering signs of earthly renewal.

No, we don’t mean spring and summer: we’re talking about earnings season. With the books for Q2 closed, a tidal wave of earnings releases is surging as we speak and will deluge us soon enough.

This season is particularly fraught with significance, because to the nail-biting nervous wrecks on Wall Street and in the City, it is the litmus test of the economy’s true health and prospects.

Over the past few weeks, global stock markets have exhibited a pronounced whiplash action, as sentiment veered sharply between bladder-loosening panic and sphincter-tightening greed. General Electric lost 47% of its profits, but glorious Goldman Sachs reinforced their position as the world’s most splendid capitalists.

With many more results to come, the markets have chosen to celebrate early. And not content with declaring obscene profits, Goldman Sachs is stoking the exuberant mood by predicting a 15% rise in the market by year end.

How soon we forget. Yes, the index of leading indicators may be pointing up slightly, and even gloomy Cassandras like Nouriel Roubini are saying the recession might end this year. But in the small print of his remarks was the fact that governments will have to raise both interest rates and taxes, to cover their monumental deficits. Happy days are not quite here again.