The Ponderings of Woodrow

Yippee! At Least We're Not the Worst!

The markets are up. The media is happy. Economists are patting themselves on the back saying the "worst is over." And certainly in many respects it FEELS that way, doesn't it? And happily, as an investor, times are better than they were a year ago, that's for certain.

But I'm noticing a pervasive change in the American psyche. Perhaps it extends to other nations (in fact, I suspect it does), but I'm approaching this from my perspective; which is to say that of an American citizen.

When did we replace our strive to be the best

with contentment that we're not the worst off?

Let me back up a little and explain the catalyst that prompted this blog entry.

My wife and I have three young children, two of which are elementary school age. We're in the fortunate financial position to have flexibility in terms of education. If need be, private schools are an option. I fully realize that for many people reading this, that's not even a viable alternative. With that said, we're both big advocates of supporting the public school system and made a conscious choice to move to an area where the public school system was top notch. We went in with eyes wide open that, in choosing such as school district, and living in New Jersey, we would pay what many would consider exorbitant property taxes.

That was a choice we were all too happy to make, and continue to stand by that decision.

But our state, along with many others, is under significant financial duress. That means tough decisions at every turn, not the least of which are school budgets. This past week, our town laid out the plan for this year's school budget. Without boring you with all the specifics, we're looking at the losses of some great teachers, major cut backs in new PCs, enrichment programs, etc...and yet our property taxes are still going to increase by a not-insignificant margin. And yet, we live in a town where 89% of educational costs are funded locally. We only suck on the State and Federal teets for 11% of our educational costs. As compared to 49% for the average NJ district.

At a dinner party the other night, the school budget issues arose and nearly everyone was focusing on the minutiae of what was getting cut, yet no one seemed to consider that it's not the funding that's the issue, but HOW THE MONEY IS ALLOCATED. So I politely asked one of the other parents, "Don't you think the fact that we, on average, spend $$ [insert tax number here], should be enough for our children to not have to worry about what programs are going to be cut each and every year?"

Her response? "Well, if you lived in [NJ Town 1], [NJ Town 2], or [NJ Town 3], you would be paying even more property tax for a lesser educational system."

I was incredulous.

So is that what we've become as a society? Are we now happy that we're not the worst? That we have it RELATIVELY better than the next guy? Really? Maybe I'm just getting older and am longing for a bygone time, but I grew up thinking that the American spirit was personified by striving to BE THE BEST. I was taught, "it's OK if you're not the best, so long as you try to be."

I was so taken aback by her victory lap of relativism, that it codified just how pervasive that line of thinking has become.

Sovereign nations proudly declaring that their problems aren't as bad as their neighbors abroad
Governors and state legislators pointing at how their state may be bad off, but nowhere close to the mess that a handful of other states are
Bank CEOs proudly touting the fact they're the best house on a bad block
Car manufacturers gloating that their sales may suck, but at least their brake systems work
Retailers saying that sales may be down, but at least they're not facing bankruptcy
Fund managers being happy not to be in the bottom quintile

Take a step back for a minute and think how often you hear someone say, "Hey, at least we don't have it as bad as that guy/company/state/country?" Somewhere along the way we became a people just happy to not be the worst off and stopped trying to be the best we could possibly be.

Do I strive to be the best parent possible, or should I be content not to be the worst dad?
Do I strive to be a great husband, or sit content knowing I'm not an awful one?
Do I strive to generate the best returns for my partners, or stand on the fact that they could do worse?
Do I take pride in my health and appearance, or smile because I know I'm not a complete mess?

Is our societal shift to pride of relativism permanent? Is it a function of a maturing hegemony? Can we reverse course? If so, how do we take the first step back?

I'll end it there. The market is up again, the St. Patrick's Day parade is passing by my office. It's time to go and be happy that my corned beef and cabbage may not be the saltiest or the most savory, but at least it's not the worst! :)

Disclaimer: At the time of writing, neither the author nor the firms affiliated with the author maintained a position, long or short, in the publicly traded companies mentioned or any related instruments. The author and the firm reserve the right to alter their investment positions at any time in the future. The content on this site is provided as general information only and should not be taken as investment advice. Content should not serve in any way as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author. Any action taken as a result of information or analysis on this blog is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

March 17, 2010 in Age of Relativism, American, Drive, Initiative, Patriotism | Permalink | Comments (1) | TrackBack (0)

Bullish Bears and Bearish Bulls

Image by digital_monkey via Flickr

This year has been an exercise in patience in many ways. The market fell to near catastrophic lows in March and many were questioning the very financial underpinnings of our society, and now less than nine months later we've been climbing a wall of worry in the great bull market bounce in history.

As I enter my 2nd decade in the asset management business, this year has been a test of lessons learned. As many of my friends and readers know, I was part of a tech-only fund during the greatest bull market in history, and the subsequent bursting of that bubble. It was, quite literally, the best and worst industry segment to specialize in at the time.

Back then, I told myself that the most important thing to take away from the Great Bull and subsequent burst was that you have to avoid making the same mistakes twice. My partners and I got a lot of things right back then, but we certainly weren't perfect. In retrospect, we should've sold almost everything much sooner than we did (a mistake we shared with seemingly everyone else in the market) and then we should've been more aggressive buying off the lows (again a common mistake, but not as broadly felt).

Fast forward to the last 2+ years. In addition to being a lot more mature and seasoned, I'm also no longer solely focused on one sector. While my background was information technology, and that remains a passion for me, I've been a generalist for almost six years. It's been incredibly rewarding and, frankly, kept my partners and I sane. There are times (like this year) when tech is the place to be, but there are also plenty of times when you want to be exposed to and overweight other sectors.

The last nine months have been a study in discipline. I'm, by nature, a long-term thinker. My partners and I prefer to take long-term views of secular trends, and then find great companies with solid fundamentals that will serve us well over years -- not months, days, minutes or seconds as many of my investor brethren seem to prefer. But having an eye for secular trends is not always the easiest road to travel.

On a SECULAR basis, I'm as bearish as I was a year ago. I share many of the same concerns that friends like Gregor and Roger do. Ballooning sovereign debt levels, runaway printing presses for most currencies, maturing populations, scarce resources and an impossibly difficult push/pull between deflation and hyper inflation are but a few issues looming. But investing strictly on the concerns I have longer term would've been disastrous this year.

You HAVE to keep perspective and understand that cyclical forces can drive powerful returns, even in the midst of a clear-as-day secular crisis. It's never easy, and at some point we'll all have to decide if it's again time to batten down the hatches. But 2009 will be a time when focusing on shorter duration inputs made you money, whereas longer term secular views would've likely crushed you.

December 03, 2009 | Permalink | Comments (0) | TrackBack (0)

Testing out blog integration with Twitter feed

December 03, 2009 | Permalink | Comments (0) | TrackBack (0)

Nightmare on American Streets

Today the markets rose violently in what was assuredly a long overdue relief rally. Whether you've been bearish or bullish, today's move probably did little to change your overall stance, nor should it have surprised you given the massive carnage we've seen year-to-date. It may seem like a truism, but in the last few weeks many forgot that markets don't go down [or up] in a straight line.

Regardless of whether you think today's action portends a sustained rally, it's important to remember that the average American is going to feel worse before he/she feels better.

If you're like me, you've begun to see loved ones falling prey to the economic downdraft. Too many smart, hard-working people are losing their jobs right now, and for the life of me I struggle to see how we're going to recreate these jobs anytime soon. The kinds of companies making these layoffs aren't doing so lightly; to think they're going to reverse course and start hiring again belies logic, at least as far as I can interpret the tea leaves.

On days like today, we start hearing the pundits remind us that "the markets discount the end of recessions months in advance." Great. But does anyone reading this REALLY think we're six months away from brighter days?

If you do, then I'm wondering if you've seen the 2009 MetLife Study of the American Dream?

I hadn't seen the study until my friend Mark [on Twitter] made mention of it today.

I implore you to read through the 38-page survey to understand just how perilously close we are to far harder times. There are a great many data points worth pondering in the survey, but two, in particular, illustrate the severity of this economic environment:

IF EMPLOYED: If you were to lose your job, for how long could you afford to be out of work and still meet your financial obligations including monthly expenses?

Less than 2 weeks -- 28%
2 weeks to a month -- 22%
2 to 3 months -- 22%
4 to 6 months -- 14%
7 months to a year -- 5%
More than a year -- 10%

How much do you trust the U.S. financial system? By U.S. financial system we mean the financial institutions, banks, financial markets, and the regulatory system in the United States.

Trust -- 45%
Do Not Trust -- 55%

Now consider that this survey was conducted in early January, and what's transpired in the subsequent months.

So maybe we've seen "the bottom", that's not for me to say. I've long been on record as saying that trying to predict the exact bottom [or top] is a fool's errand. Unless you're a talking head paid more for what you say on TV than what you do for your clients, I just can't see why anyone would try to claim they have any idea if we've seen the bottom or not. The key is to stay nimble, stay humble, and protect those who count on you to protect them. Don't let Freddy Krueger invade YOUR American Dream, I certainly won't.

March 11, 2009 | Permalink | Comments (4) | TrackBack (0)

The Bank of Wal-Mart? Be careful what you wish for...

As the equity markets raced to new lows today, Wal-Mart [WMT] finished up on the day thanks to much better-than-expected same store sales and an increased dividend. Wal-Mart was the top performing S&P 500 component in 2008 [one of only a handful of constituents that provided gains], and although it gave up some ground YTD, the stock has climbed off its lows as the market continues to plummet.

As I look at Wal-Mart and its relative strength, and juxtapose that against what's happening with GE and the fears over its finance unit, I'm reminded of just how easily things could have gone a different way.

It wasn't long ago that Wal-Mart, arguably the most efficient retailer in history, wanted to extend its dominance into the banking arena.

In 2005, Wal-Mart applied to the FDIC for an industrial loan bank license that would be located in Utah and allow the company to forgo the fees it pays to other banks to process credit and debit card charges. Wal-Mart contended, at the time, it had no intentions of expanding into customer-facing banking operations, yet many regional banks vehemently protested the plan; believing that Wal-Mart would eventually move into other facets of banking.

Bankers Oppose Wal-Mart as Rival [NY Times]

A coalition has formed to keep Wal-Mart out of banking and includes the Independent Community Bankers of America (which provided a sample letter for its members to send to the F.D.I.C.), the National Grocers Association, the National Association of Convenience Stores and the United Food and Commercial Workers union, which is trying unionize Wal-Mart workers. A coalition of community groups called Wal-Mart Watch has sent a petition to the F.D.I.C. with 11,000 signatures opposing Wal-Mart's application.

The debate has even reached Capitol Hill, where Representatives Paul Gillmor of Ohio and Barney Frank of Massachusetts, both members of the House Financial Services Committee, have asked the F.D.I.C. to hold hearings. "This is a very controversial application filed by the company that is the largest retailer in the world," they wrote.

This wasn't the first time Wal-Mart tried to work its way into financial services. In the late 90s the Waltons tried to expand the State Bank & Trust Company [which they also owned] by opening branches in Wal-Mart stores. That move was shut down due to the Gramm-Leach-Bailey Act. Three years later, Wal-Mart tried buying Franklin Bank of California but that too was stopped by legislative action.

Fast forward to 2009 and consider what might have been. Had Wal-Mart been successful in its bid for an industrial bank, would it have expanded into customer facing operations as feared? If so, is there any question Wal-Mart could've carved out an important role in the banking system by now? And had that happened, how might the world look at the company differently? One could argue [and I would], that Wal-Mart's lack of exposure to a large financial arm is a big part of why it remains on [relatively] solid footing among investors. Had Wal-Mart gotten what it wanted, we might be seeing the same kind of fear mongering and lack of confidence that plagues seemingly any institution with financial exposure these days.

For even the largest, most dominant businesses, sometimes its better to be lucky than smart.

Disclaimer: At the time of writing, the author or firms affiliated with the author maintained a long position in WMT, but did not maintain a position [long or short] in GE or any related instrument. The author and the firm reserve the right to alter their investment positions at any time in the future. The content on this site is provided as general information only and should not be taken as investment advice. Content should not serve in any way as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author. Any action taken as a result of information or analysis on this blog is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

March 06, 2009 in Bail Out, Banking, Investing, Wal-Mart | Permalink | Comments (1) | TrackBack (0)

AIG: The Failure of "Too Big To Fail"

Too Big to Fail

Let's think about those words for a moment.

TOO. BIG. TO. FAIL.

The implicit meaning behind that all-too-spoken term is that certain financial institutions are too important to the economic system to be allowed to fail. It's become a crutch to justify ever-increasing mountains of taxpayer capital being funneled into various and sundry "pillars" of banking, insurance and finance.

No financial institution has come to symbolize the term more so than American International Group [AIG]; which has sucked from the taxpayer teet not once, not twice, not thrice, but FOUR TIMES in the last six months.

September 16, 2008 -- The Federal Reserve provides $85 billion in a 2-year term loan, and in turn the taxpayers are rewarded with warrants to purchase 79.9% of AIG equity
October 8, 2008 -- The New York Fed provides access to $37.2 billion in exchange for various and sundry AIG investments and counterparty exposures
November 10, 2008 -- The Fed and the Treasury take a number of measures including injecting $40 billion of TARP funds in exchange for a preferred with 10% coupon. The previous line of credit terms are lowered from LIBOR+8.5 to LIBOR+3. And the NY Fed creates two new entities [with a cash infusion from AIG] that allows AIG to to buy/dispose of toxic assets
March 2, 2009 -- AIG gets access to another $30 billion more in exchange for the new tranche of non-cumulative preferred stock. The company effectively sells two units to the Fed in exchange for forgiving $26 billion of the existing credit facility, and gets the LIBOR floor removed. Finally AIG continues to have access to at least $25 billion under the pre-existing NY Fed facility.

And what do the American taxpayers have to show for their charitable efforts?

Well, the 4th capital infusion came as AIG announced the largest quarterly loss by any company in U.S. history. In three months time, AIG lost $61.7 billion. I couldn't help but watch, mouth agape, as AIG CEO Ed Liddy appeared on CNBC today acting as though this was just a minor hiccup. His calm in the face of this debacle astounded.

AIG, on the taxpayer dime, just lost more money in three months than Bernie Madoff allegedly bilked out of his investors over decades of supposed fraudulence, and yet the CEO admits the company may need MORE funding before all is said and done. This is not to say the failure of AIG doesn't bring with it tremendous risks. In fact, AIG has taken the liberty of circulating a report on the economic impact of such an event. But the market is telling us SOMETHING.

September 16, 2008 -- SP500 closed at 1213.59
October 8, 2008 -- SP500 closed at 984.94
November 10, 2008 -- SP500 closed at 919.21
March 2, 2009 -- SP500 closed at 700.82

If the market is the ultimate discounting mechanism, shouldn't our policy makers take note? Or perhaps that's too much to hope for; after all, they have a PLAN.

The definition of insanity is doing the same thing over and over again and expecting different results. -- Albert Einstein

You needn't be a genius to understand the pertinence of Einstein's quote.

Disclaimer: At the time of writing, the author or firms affiliated with the author maintained a long position in SDS, but did not maintain a position [long or short] in AIG or any related instrument. The author and the firm reserve the right to alter their investment positions at any time in the future. The content on this site is provided as general information only and should not be taken as investment advice. Content should not serve in any way as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author. Any action taken as a result of information or analysis on this blog is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

March 02, 2009 | Permalink | Comments (0) | TrackBack (0)

When blue chips become cow chips

My friends at Stocktwits have been doing an incredible job building a community of thoughtful, active, spirited investors who congregate online each day to exchange ideas. What's great about Stocktwits [well, one of the many great things], is that it's a true meritocracy. The conversation is organic and people's acumen is judged in real time. But it doesn't matter if you come to the site as an enterprising college student or a bored house wife or a professional trader. If you've got good ideas and are willing to share them, you will flourish. If you are closed minded or unwilling to share your perspectives, you will quickly be forgotten.

Howard, Soren and Phil are working hard to keep Stocktwits from being consumed by the trappings of scale. As new members flock in, the signal to noise ratio can become hard to manage and one of the ways they're doing this is by keeping a tight lid on speculative penny stocks. No pink sheet or bulletin board companies are on the system, which automatically gives them a leg up from many of the other stock-related communities out there.

But last week an interesting conversation evolved from Howard's worry that stocks trading below $5 should be excluded from the system. Historically, I could understand the merits of that viewpoint. After all, many institutional funds have long been unable to invest in sub-$5 stocks for fear of liquidity and market manipulation.

So while Howard's premise was predicated on sound historical empiricism, it unfortunately was impractical in today's historically damaged market.

Why? Because as I type this 44 of the 500 constituents in the S&P 500 are trading below the $5 threshold.

AIG	American Int'l. Group	$ 0.42
ETFC	E*Trade Financial Corp.	$ 0.80
ODP	Office Depot	$ 1.05
THC	Tenet Healthcare Corp.	$ 1.11
GNW	Genworth Financial Inc.	$ 1.21
DYN	Dynegy Inc.	$ 1.30
ACAS	American Capital, Ltd.	$ 1.35
HBAN	Huntington Bancshares	$ 1.46
C	Citigroup Inc.	$ 1.50
F	Ford Motor	$ 2.00
FITB	Fifth Third Bancorp	$ 2.11
AMD	Advanced Micro Devices	$ 2.18
GM	General Motors	$ 2.25
CIT	CIT Group	$ 2.45
JNY	Jones Apparel Group	$ 2.69
MBI	MBIA Inc.	$ 2.74
JDSU	JDS Uniphase Corp.	$ 2.76
CBG	CB Richard Ellis Group	$ 2.89
LSI	LSI Corporation	$ 2.90
DDR	Developers Diversified Rlty	$ 2.95
NOVL	Novell Inc.	$ 3.16
EK	Eastman Kodak	$ 3.19
MU	Micron Technology	$ 3.22
GCI	Gannett Co.	$ 3.24
S	Sprint Nextel Corp.	$ 3.29
XL	XL Capital	$ 3.31
Q	Qwest Communications Int	$ 3.39
RF	Regions Financial Corp.	$ 3.42
MOT	Motorola Inc.	$ 3.52
WYN	Wyndham Worldwide	$ 3.69
HST	Host Hotels & Resorts	$ 3.70
TLAB	Tellabs, Inc.	$ 3.80
IPG	Interpublic Group	$ 3.81
BAC	Bank of America Corp.	$ 3.95
MTW	Manitowoc Co.	$ 4.10
NYT	New York Times Cl. A	$ 4.13
TER	Teradyne Inc.	$ 4.13
JBL	Jabil Circuit	$ 4.14
CBS	CBS Corp.	$ 4.27
JNS	Janus Capital Group	$ 4.41
GT	Goodyear Tire & Rubber	$ 4.44
MI	Marshall & Ilsley Corp.	$ 4.58
SLM	SLM Corporation	$ 4.60
JAVA	Sun Microsystems	$ 4.68

Source: Standard & Poors

When 9% of the de facto blue chip equity index are below a given threshold, you have to throw out a lot of the rules we used to hold as truths.

But this is just one arbitrary measure of many that hints at the degree of market degradation we're experiencing. Remember, it wasn't long ago that a company had to maintain a market capitalization of more than $5 billion to be included in the S&P 500. Then it was lowered to $4 billion. And then it was lowered again to $3 billion in December.

Why do I bring this up? Because as I type this, I calculate 139 S&P 500 stocks that are BELOW the $3 billion market capitalization threshold. Tough times continue. When we can't even maintain listing requirements for more than a few MONTHS, how can we possibly and credibly argue that any metric like "trough earnings" on said index are relevant to finding a bottom?

Related:

Disclaimer: At the time of writing, the author or firms affiliated with the author maintained a long position in SDS, as well as long positions in several underlying constituents of the S&P 500. The author and the firm reserve the right to alter their investment positions at any time in the future. The content on this site is provided as general information only and should not be taken as investment advice. Content should not serve in any way as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author. Any action taken as a result of information or analysis on this blog is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

March 02, 2009 | Permalink | Comments (1) | TrackBack (0)

Why today mattered...

Today I am struck by the complexity of our lives.

This morning, my wife gave birth to our 3rd son; and both mommy and son are healthy and happy as I write this. As I sat holding my newborn son, most likely our last, I was overwhelmed by a feeling of gratification. Gratification that I have a wife who supports and understands me, and who so beautifully and intelligently serves as the foundation of our family. Gratification for three healthy children. Gratification that I'm fortunate enough to have the means to support them in a way that will provide them with every opportunity. Gratification for the overwhelming support my colleagues and friends show me every single day.

My personal gratification was counterbalanced by the historic nature of today's inaugural festivities. To see millions of Americans descend upon the Capitol to show support for President Obama, to see the hope for great change physically manifested in a wave of citizens as diverse in ethnicity, age, sexual orientation and personal beliefs, was a powerful thing. And certainly President Obama delivered a speech worthy of his standing as an accomplished orator.

...So let us mark this day with remembrance, of who we are and how far we have traveled. In the year of America's birth, in the coldest of months, a small band of patriots huddled by dying campfires on the shores of an icy river. The capital was abandoned. The enemy was advancing. The snow was stained with blood. At a moment when the outcome of our revolution was most in doubt, the father of our nation ordered these words be read to the people:

"Let it be told to the future world...that in the depth of winter, when nothing but hope and virtue could survive ... that the city and the country, alarmed at one common danger, came forth to meet [it]."

America. In the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children's children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations.

But I couldn't help and think about the exorbitant costs being incurred, well north of $150mm according to the latest tally. Was today historically significant? Yes. Did we deserve a day to celebrate all that's still great about our nation? Certainly. But isn't there something obscene about spending $150mm on pomp and circumstance at a time when our nation is at its most precarious in generations? My friend Howard Lindzon said it best:

It would have been a great idea to therefore cancel the first, biggest and dumbest party of the administration for an "America has a surplus party" one or two years out if all goes well.

We are the Capital One Society. Pleasure now.

I have seen zilch that shows me we are willing to push off the "pleasure now" philosophy from our new President. Even if he talks about it tonight, he sure wont be taken seriously buy me.

Color me skeptical.

And then on top of all that, I see the market by which I make my living completely give up the goat. I've never before felt so unhappy to be right about the way things are going, and where I fear they're continuing to head. Today's market action was negative on many levels, another day of indiscriminate selling across all sectors, caps, valuations and relative fundamentals. We broke key technical support levels and saw the financials lead the way down. Even the most balanced market prognosticators understand that financials need to find their bottom before the market can begin to heal; and yet we saw carnage in the sector today: Bank of America (BAC) down 29%, Citigroup (C) down 20%, J.P. Morgan (JPM) down 21%, Wells Fargo (WFC) down 24%. Even State Street (STT), thought to be a relative safe haven in the sector, lost almost 60% of its value as problems in its commercial paper business may necessitate a capital infusion. With each passing day more people realize the crutches and cliches that helped make their investing careers are just that, crutches and cliches that fail to support Mr. Market when we're in unprecedented times.

So as I get ready to call it a night I'm left thinking about the complexity of perspective, and wonder if tomorrow will prove any less conflicting.

January 20, 2009 in Bail Out, Current Affairs, Democracy, Finance, Hedge Fund, Obama, Personal, Politics, Recession | Permalink | Comments (3) | TrackBack (0)

Apple: Silence is Golden, Deception Inexcusable

By now I'm sure you've read 1000 places that Steve Jobs has taken a leave of absence from day-to-day operations at Apple:

Team,

I am sure all of you saw my letter last week sharing something very personal with the Apple community. Unfortunately, the curiosity over my personal health continues to be a distraction not only for me and my family, but everyone else at Apple as well. In addition, during the past week I have learned that my health-related issues are more complex than I originally thought.

In order to take myself out of the limelight and focus on my health, and to allow everyone at Apple to focus on delivering extraordinary products, I have decided to take a medical leave of absence until the end of June.

I have asked Tim Cook to be responsible for Apple’s day to day operations, and I know he and the rest of the executive management team will do a great job. As CEO, I plan to remain involved in major strategic decisions while I am out. Our board of directors fully supports this plan.

I look forward to seeing all of you this summer.

Steve

As I write this, Apple's stock is trading right around the 52-week low [$79.30] and speculation is rampant about what this means for one of the most beloved technology companies on the planet.

The Right to Privacy

A lot of people are incredulous at the thought that Jobs' illness has been kept quiet. I, on the other hand, STRONGLY believe that all things being equal, a person has an undeniable right to privacy when it comes to their health. Sure, Jobs has a fiduciary duty as CEO of Apple, but to that end he only really has a responsibility to assure the board of directors that any illness doesn't impair his ability to perform his duties. Beyond that, as long as the board is satisfied, it's NONE OF OUR BUSINESS.

I've heard all the arguments to the contrary...

Jobs IS Apple
Much of the company's valuation is tied to Jobs specifically
Jobs made his medical history fair game when he came public 5 years ago about his first bout with pancreatic cancer
Jobs' celebrity expands the boundaries of what should be "fair game"

The Duty to be Truthful

While I dismiss the arguments as to why he owed Apple shareholders, customers and employees an open book into his health, the right to privacy doesn't obfuscate the requirement for honesty. Over the last year, as Jobs' appeared to have lost weight; the market began postulating that Jobs' cancer may have returned. The sad truth is that pancreatic cancer is rarely survivable. From the Hirschberg Foundation for Pancreatic Cancer Research:

Survival Rates
According to the American Cancer Society, for all stages of pancreatic cancer combined, the one-year relative survival rate is 20%, and the five-year rate is 4%. These low survival rates are attributable to the fact that fewer than 10% of patients' tumors are confined to the pancreas at the time of diagnosis; in most cases, the malignancy has already progressed to the point where surgical removal is impossible.

In those cases where resection can be performed, the average survival rate is 18 to 20 months. The overall five-year survival rate is about 10%, although this can rise as high as 20% to 25% if the tumor is removed completely and when cancer has not spread to lymph nodes.

So while it's morbidly understandable that Apple onlookers would start fearing the worst, Jobs didn't owe us any explanation. So where's the problem? He went ahead and gave us an explanation...

After bowing out of his annual keynote at MacWorld, Jobs broke his silence:

Dear Apple Community,

For the first time in a decade, I’m getting to spend the holiday season with my family, rather than intensely preparing for a Macworld keynote.

Unfortunately, my decision to have Phil deliver the Macworld keynote set off another flurry of rumors about my health, with some even publishing stories of me on my deathbed.

I’ve decided to share something very personal with the Apple community so that we can all relax and enjoy the show tomorrow.

As many of you know, I have been losing weight throughout 2008. The reason has been a mystery to me and my doctors. A few weeks ago, I decided that getting to the root cause of this and reversing it needed to become my #1 priority.

Fortunately, after further testing, my doctors think they have found the cause—a hormone imbalance that has been “robbing” me of the proteins my body needs to be healthy. Sophisticated blood tests have confirmed this diagnosis.

The remedy for this nutritional problem is relatively simple and straightforward, and I’ve already begun treatment. But, just like I didn’t lose this much weight and body mass in a week or a month, my doctors expect it will take me until late this Spring to regain it. I will continue as Apple’s CEO during my recovery.

I have given more than my all to Apple for the past 11 years now. I will be the first one to step up and tell our Board of Directors if I can no longer continue to fulfill my duties as Apple’s CEO. I hope the Apple community will support me in my recovery and know that I will always put what is best for Apple first.

So now I’ve said more than I wanted to say, and all that I am going to say, about this.

Steve

And therein lies the problem. I have NO IDEA if Jobs is being truthful here, but a lot of people are asking questions. Once he gave an explanation for his weight loss in a public forum, and attributed it to hormonal imbalances, he's opened the door. And more importantly, some stakeholders will have construed his January 5th memo as an assurance that his health wasn't really a problem. Yet, just two weeks later, he's stepping away from day-to-day operations.

What does the future hold for Jobs? I don't know, but I sincerely hope he's back at the helm in July as promised. Not because I'm worried about what might happen to Apple in his absence, but because I want to see him triumph against a deadly disease that so few overcome. In the meantime, the world is going to finally come to terms with how much of Apple is really tied to one man, versus the other 31,999 employees on the payroll.

January 14, 2009 | Permalink | Comments (5) | TrackBack (0)

Inexperienced Denizens of a Brave New World

The economic picture continues to darken and most investment asset classes continue to flounder in lockstep. To say it's been a trying time as an investor would be akin to saying you might get wet in a monsoon. These last few weeks the bulls and many of the bears have been trying to find reasons why the market should stop going down, but the technical, fundamental and sentiment indicators remain burdensome.

I'm not an economist and am not going to pretend to know just how bad things will ultimately get, or how long they'll last that way. But I do trust my instincts and have the good sense to listen to people smarter than me who deign to share their views when asked. Times are tough. Times will get tougher. And, as I said several times over the last few months, be wary of thinking bad news is priced in, or that valuation is, in and of itself, a catalyst to move markets.

We're no longer debating the issue of recession, but rather the magnitude of said recession. We have a tendency to find false comfort in prior comparison. When something has "happened before", it's easier for us to wrap our minds around the eventualities and potentialities. That's been a huge part of this market correction. For most of us, the velocity, breadth and severity of this economic downturn is unprecedented. As a result, we have no safety net with which to react.

It would be one thing if investors were the only ones wading into uncharted waters; as an industry we've proven quite adept at adjusting to the paradigm du jour. But here's the rub...this is a generational problem that permeates every rung of our society.

Let's focus our attention on an industry near and dear to me, the information technology sector. Let's say, for argument sake, this recession is going to resemble the early 70s recession in magnitude [I think we have to go much further back to any reasonable comparable]. How many publicly traded technology companies even existed 35+ years ago? Those that did, for example IBM and Hewlett Packard, were entirely different constructs back then. And they're the exceptions to the rule. Think of a technology bellwether today and realize that, with near certainty, they haven't had to deal with an economic environment like the one we're currently enduring.

The internet didn't exist the last time things were this tough
Online advertising models are untested in a time of global deleveraging
The cellphone industry has never had to deal with a period when worldwide GDP was as slow as we can reasonably expect in the next 6-12 months
Semiconductors were a high growth cottage industry in the last slowdown of any magnitude
Will the video game cycle really survive unscathed in a consumer-driven recession?
...and so on and so on

How will companies react? How will their employees handle the new reality? Will executives have the appreciation for history to make the tough decisions? There's a lot of talk about the strong getting stronger, but are they prepared to take truly dramatic measures?

I don't mean to pick on the technology industry, although I think it has unique challenges because of the relative newness and embedded sense of "growth over all else" that's driven the industry for the last few decades. But this systemic inexperience I'm referencing extends far and wide. Precious few management teams have handled this kind of global picture, and fewer still have navigated it successfully, in any industry.

What's the moral of the story? Uncertainty abounds. Logically you can't have any faith in forward estimates right now, particularly those over the next 6-12 months. So my advice? Don't try. Focus on companies that you believe are survivors, those that have a history of doing right by shareholders in good times and bad. Those who are targeting secular trends that will supersede a multiyear recession if you're patient enough. Understand that valuations as most of us have known them are irrelevant now. Right now it's about surviving. Unless you have to catch the bottom, don't try. Roughly 50% of the S&P500 is trading at 10x or less trailing GAAP earnings now, so just because something is "cheap" doesn't mean it's investable. Appreciate dividends and the power of compounding. REALLY appreciate a company's ability to generate cash flow, preferably sustainable FREE CASH FLOW. And recognize that anything you buy today, probably wll be cheaper tomorrow. These are humbling times, and we are all inexperienced denizens of this brave new world.

November 17, 2008 in Inexperience, Investing, Recession | Permalink | Comments (15) | TrackBack (1)

The Ponderings of Woodrow

What comes to mind and doesn't leave before I have time to write about it...

Yippee! At Least We're Not the Worst!

Bullish Bears and Bearish Bulls

Nightmare on American Streets

The Bank of Wal-Mart? Be careful what you wish for...

AIG: The Failure of "Too Big To Fail"

When blue chips become cow chips

Why today mattered...

Apple: Silence is Golden, Deception Inexcusable

Inexperienced Denizens of a Brave New World

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