Journalism is both “literature in a hurry” and the “first draft of history,” and journalist Sarah Lacy’s new book Once You’re Lucky, Twice You’re Good fits those descriptions well. A fast developing topic that clearly hasn’t reached it’s apothesis makes for a tough subject for a history. But the successful access to some of the leading lights of the movement provides for some good gossip (Al Gore’s CurrentTV wanted to buy Digg) and a decent composite picture of the industry as it stands now (VCs driven by competitive rivalries at least as much as fiduciary duty.) It also is laden with some tiresome ancedotes (Max Levchin is intense! No you don’t understand, he’s intense!) and very shopworn characterization of programmers (They like girls but are misfits. They drink Red Bull.) Continue Reading

In April 2005 Goldman Sachs’ oil analyst Arjun M. Murti predicted oil prices could enter a “Super spike” phrase trading all the way to $105 a barrel. Ah, thanks for the memories. The forecast has been updated to possibly $200 as the top range barrel. Congress is alarmed and talking about legislation to impede institutional investors participation in the futures market. The FT blared front page headlines of $140 oil in the 2016 futures contract.

But more importantly to the trader, no one is seeing response that the forecast is ridiculous.

“The market is still of the mind that supply/demand is still very tight but the fundamental situation is not nearly as bad as what current oil prices would suggest,” said David de Garis, an economist at ANZ Investment Bank.

“A move to $105 per barrel would represent a jump of more than 80% from today’s historically high levels. It’s not exactly Amazon.com (AMZN, news, msgs) at $300 per share, but it’s close. [Robert Walberg, MSN Money]”

“But Geoff Trotter, the general manager at price monitoring firm Fueltrac, says there is no fundamental reason for oil prices to be any higher this month than last month.

“It makes my blood boil to see forecasts from investment banks for oil to be priced at more than $US100 a barrel. There has been no change in output or production of oil, yet the price has risen since the start of the year,” he says.” [The Age, Australia, April 13 2005]

The conclusion: it just might be time to short oil. When everyone is on one side of the market its time to go the other way.

Yes there is a tight balance between the 85 million or so a day demand and supply of oil. But there isn’t a scarcity problem yet. Only imminent war with Iran could hold prices at these levels. The dollar’s decline which has exacerbated the problem appears to have bottomed out. But the high price of oil is the cure for the high price of oil, as is always the case with commodities. Trees don’t grow to the sky (imagine what that would do to lumber prices), and to project out a short term trend of a supply demand imbalance perpetually into the future without thinking the market will come up with replacements (The Tesla, The Volt; whose names should indicate their power source) is foolish.

I’m not going predict a return anytime soon to $20 oil. But a glut is far more probable that current fears and supply disruptions would indicate.

Techcrunch just broke the story that Microsoft is announcing Wednesday the option of allowing users to get a cut of the purchases they make found through Live.com. Microsoft now competing on price? Really?

Taking their first featured case study, the Canon PowerShot A470 Digital Camera, I compared the Live.com Cashback up-to-the-minute offering to Amazon and Google. Microsoft acquired Jellyfish last year (and Compete.Net many years before that) and mentioned this in their product roadmap ever since. The end result is underwhelming.

Amazon’s price for the same good, while allowing you to select the color, and not wait until your cashback hits $5 is within $2 of the lowest post-cashback price. If you’re looking to buy on price alone, Google triumphs as its a better search algorithm trumps a product roadmap and M&A activity-driven strategy to bring the lowest price of all.

Does Microsoft really want to compete on price with all the dangers that entails…and still lose?

Screenshots from 12:20 AM May 21 2008 of the three services follow (click to enlarge):

Google:

Amazon:

Microsoft:

In a must-read for insights into how upper managers really work, the New York Times today has a profile of Zeus, the all-knowing football program.  The program seeks to apply rigorous statistical methodology to determine Gameplay decisions.  Zeus allows specific team versus team scenarios.  Coaches when asked essentially if their poor decisions should be replaced by better ones, were understandably reluctant to resign.

 “In his model, you should go for it on your own 20-yard line because you’re going to convert 80 percent of them, but that 20 percent is going to lose the game,” said Bengals Coach Marvin Lewis, who has met with Bower and his partners. “To say you could just plug it into a computer and say you should go for it here, I don’t think you want to explain that to the owner on Monday.”

Lewis inadvertently reveals himself and fellow entrenched managers as entirely the problem.  By and large, upper-managers are there to make cautious decisions and keep their careers and vesting going, so they don’t have anything to explain on Monday.  Lewis, after all, is scheduled to make $3 million this year.

Jim Schwartz, defensive coordinator for the Tennessee Titans goes one better — vaguely hoping his “instincts” will still have a place in the coaching world.  Instinct being of course your own algorithm to assess the likelihood of winning:

“It’s never going to take the place of instinct and due diligence,” said Jim Schwartz, the defensive coordinator for the Tennessee Titans, who said he liked the concept when he talked to Bower about it. “But every single person uses some sort of statistical analysis. This is just taking it to another level.”

Sports have defined rule sets whose decisions could be easily optimized.  And still coaches don’t use it.  How much harder is it to evaluate managers when there are infinite possible outcomes?  “Betting the company” and taking risks are things for 2-and-20 fund managers; they can have spectacular flame outs time and again and still start new funds.  Brand managers generally can not.  Compensation plans have no means of evaluating a risk-adjusted return, which is a common benchmark institutions use to guide against gunslinging 2-and-20ers.

The worst team in the league, the Cardinals at 3-13 had the lowest (best) score of only .42 games lost for not making bad decisions, which is entirely consistent with what should be predicted: they had nothing to lose and were free to play more optimally.  Zeus ranked all teams on their regular season decision-making.  The highest (worst) score was Tampa Bay Bucs at 1.42 games lost to bad decisions.  Full list here.

The ‘72 Dolphins can drink their regular season perfection champagne in Peace, with the Patriots coming in Zeus-adjusted at 15.33-.67 last year.

For those of you chomping at the bit to review such cases as Bonaparte v. Tax Court (1882), the Kentucky Department of Revenue versus George Davis gives you a chance to refresh your memory.  The Court overturned by 7-2 though with a ton of side opinions a lower court ruling that said it was unconstitutional for states to give preferential tax treatment in their own bonds versus those of other states.  Wall Street was more or less unanimously pleased with the ruling, given the turbulence that would have ensued in the already volatile municipal bond market.  California surely dodged a bullet.

David Souter wrote the decision for the court in an unusual fit for him of stare decisis and historical justification.  The decision hinges in part whether the states are akin to private market participants in the markets they regulate.  In Bonaparte, the court held that a…

foreign State is properly treated as a private entity with respect to state-issued bonds that have traveled outside its borders. See id., at 595 (beyond its borders, a debtor State “is compelled to go into the market as a borrower, subjectto the same disabilities in this particular as individuals,” and has none “of the attributes of sovereignty as to the debt it owes”) (p. 13)

 But, amongst the states within the union:

 There is no forbidden discrimination because Kentucky, as a public entity, does not have to treat itself as being “substantially similar” to the other bond issuers in the market. [Given the particular state-centric goals municipal finance attempts to achieve.]

A series of cases are cited by the majority, most notably United Haulers from last year.  There the court ruled the state could favor itself over private entities in matters of health, safety, and welfare of its citizens.  Here the state’s bonding authority is judged to be different and therefore the protectionism a tax differential implies is allowable.  The court notes 41 states have this policy in place and states were unanimously in favor of overturning the brief (well, of course they are, noted the opposition, given that they are the beneficiaries of the discriminatory allowance.)

Scalia joined the seven but noted he rather have Congress set policy here and Thomas would likely concur were Congress to overturn this policy and mandate equal treatment.  Alito and Kennedy, writing for the dissent, disagreed, saying the court essentially decided this not on sound constitutional principles but for the stability of the market and allowed a protectionist loophole that could be exploited in other ways.  Borders here are not relevant in a mostly national market for capital.

Both sides have reasonable jurisprudence brought to their arguments.  But this case illuminates possible court reaction to what will surely be a big consumer test, which are internet sales taxes levied by one state for good bought in another.   The court here holds that bond issuance is different than tax policy, though the dissent believes the historical conceptual separation is not appropriate since both aim at the same goal of revenue generation.

Congress has held off allowing internet taxation for a while, something that is doomed at some point to expire.  Would levying a sales tax on commerce that really has occurred in another state be held to be favorable treatment?  The dormant Commerce clause faces one of its biggest tests yet where technology raced far ahead of what the founders would have concieved as possible, and Kentucky is a warm up pitch.  It’s not beach reading, but the slight differentials between the justices could be magnified in many unexpected ways should the court face that test with these members.

In July 2003, Citibank triumphantly raised their dividend 75% from 20 cents a share to 35 cents. Subsequent increases brought the dividend to 54 cents before the cuts of the last two quarters. A complete history is here. This was done to take advantage both of the Bush tax cut lowering federal taxes on dividends to a flat 15% instead of being treated as regular income (39% in the late Clinton years), and frankly business was on a roll, the fed was cutting, housing was booming. It was also, as BusinessWeek put it at the time in what can now only be regarded as an ominously prescient article, a way for long time CEO Sandy Weill to go out on a boom:

“I don’t think it’s a coincidence that they raised the dividend 75%,” says Samuel L. Hayes III, professor of investment banking at Harvard Business School. “He wants to go out with a bang, and this does it in terms of a very tangible signal that goes out to the shareholders of Citigroup.” Adds Prince Alwaleed: “This is Sandy looking after his legacy and very deservedly so. And he’s telling the market that he is very confident about the future of Citi, otherwise there’s no way he would implement the dividend increase.”

Fast forward a mere four years and forty billion in capital raised later, and what is the common dividend? 32 cents, still 60% over the quarterly payout in the 2nd quarter of 2003.

Of course directors of a firm whose stock price is largely held up by the dividend think very cautiously about any cut, much less one to a rate that was in effect five years ago. Citibank was the recommend-every-issue-of-Money-Magazine safe global banking play. But what happens to this last leg if the Bush Tax cuts do in fact sunset in 2010. An event which will be rapidly priced in six months from now with either an Obama victory or greater Democratic gains in the House and Senate. Should the former not occur, the latter almost certainly is on the table with three successive midterm house losses in “safe” Republican seats.

A study from the Federal Reserve concluded that while the tax cut did not have an overall effect on the aggregate value of the US market (arguable,) it did “induce asset reallocation within equity portfolios [towards high dividend stocks, like the 4% yielding banks].” That process would clearly reverse.

Citibank has 5.25 billion shares outstanding, a number that has fluctuated of course over the last five years. Assuming the average was five billion shares, over the last twenty quarters of payouts the difference between the increased payout at the time and theoretically maintaining the payout was $4.52/share, multiplied over 5 million shares is a 22.6 billion cost, or slightly over half the capital they’ve had to raise. If one did a n.p.v. calculation depending on the annualized return on that difference you could say the sums are roughly equal.

This is a train barrelling down the track at the stock of Citigroup. It would be rewarded — if after a volitile adjustment of portfolio managers — by cutting the dividend altogether until the company was in a decent enough capital shape that their shareholders won’t feel a need to tremble every time Meredith Whitney comes on Bloomberg to discuss their future.

The original Citibank vision even before the similar original Weill/Travellers vision, of a truly global entity dominating diversified financial services, is probably still the legitimate future of banking. It was a model company, the Great company in Built to Last by Jim Collins contrasted with the stodgy Chase. Scale nearly always wins. But only if you have the dry powder to use when the getting is good, as Berkshire Hathaway (dividend: 0) repeatedly demonstrates. Until then, AVOID C $23.

Two acquisition announcements last week should shed some light on the valuation of “old media” newspaper organizations who clearly are or should be in the process of moving online themselves. All the newspaper conglomerates have suffered in the last year: majors such as Gannett, McClatchy, the New York Times Co., Scripps, and the Washington Post. Smaller players such as A.H. Belo, GateHouse Media, Journal Communications, Lee Enterprises, and Media Genera. The two stocks that had a decent return were those bought out; Tribune and Dow Jones.

C|Net, a broad online media site with properties such as News.com and Gamespot, is being aquired by CBS for 1.8 billion, Ars Technica, a techie blog, by CondeNast for a reported $25 million. Both are tech sites and as such possibly more desirable and not terribly analogous to the properties held by the Newspaper chains but long term there is unlikely to be a large gap between the ability to monetize traffic in the vertical most likely to lead the charge online, and others such as local content that the newspapers still dominate.

One privately held company being acquired by another doesn’t give a flurry of public documentation. Unique visitors a month to Ars Technica are reported to be anywhere from 1.5 million to 4. Federated Media gives list prices for CPM campaigns there as $36-40. Assuming 2 million uniques averaging 1.5 page views a month and 50% of inventory sold at 24 on average after discounts of list prices brings us to 4.32 million in revenue before Federated Media’s cut, typically 40% = 2.5 million revenue site with very minimal expenses. Assume 2 million pretax profits. (CondeNast will be able to immediately squeeze greater profitability through the use of their internal sales force, a classic acquisition where both sides immediately benefit.)

C|Net, being acquired at a multiple larger than the market multiple for CBS’s earnings (7.9x versus 22.5x EBITDA, according to Wall Street Journal, which looks pretty dubiously at the deal) means even greater synergies or growth are expected to occur.

Are online media properties worth around 20+x the value of pre-deal sales force consolidation EBIDTA? Then the Newspaper stocks, savaged over the last five years are clearly worth a great deal more than the market bears. This assumes a gradual senescence of their still strong cash cows. Sam Zell may get the last laugh after all. However, this deal price presupposes a decent online content strategy. But as Tribune and Dow (and the acquisition of the Philadelphia Inquirer by Brian Tierney) show there are buyers out there.

The executive mentality that characterizes blog networks such as weblogs (part of AOL) and Gawker Media that understand the importance of structuring content for search, and the network effects of Google PageRank appears rare. Executives impress upon investor audiences their A) amount of content B) pure reach both in their localities and nationwide and C) the local sales force. None of these are fundamentally secure the way the high infrastructure costs of print distribution made their local positions pretty solid in the pre-internet era. Warren Buffett (owner of the Buffalo News, and with a substantial stake in the Washington Post) once believed newspapers were a license to print money, now they’re in terminal decline.

Management changes however don’t come from value investors. But what if there was a sea-change in management? What if a Nick Denton or Jason Calcanis were to come in as the publisher of the online divisions of these papers, someone who truly understood internet media in his or her blood more than pulp prices? Those two may have too much entrepreneurial blood to try to reshape sometimes century-old organization. But understanding the strategies they have and implementing them HBS case-study style is not beyond the legions of media-oriented MBAs out there. Nearly all the major stocks are trading at 20x the likely EBDITA of their online news divisions alone.

They come from private equity. In the next few years and they will gobble and replace these firms one by one. Michael Arrington has written about raising money for a massive blog roll up. But the valuations the market pay for online content and the ability to finance loans at substantially less than the Free Cash Flow of the existing newspaper industry indicates the roll up is more likely to be in the newspaper field. Some new funds are raising upwards of $10 billion. For $20 billion you could buy the entire industry. There was already one stab at Knight Ridder by private equity by A-List PE firms such as Bain and Texas Pacific, only to be outgunned by McClatchy. More will come. The acquisition of Dow Jones showed even families with long standing ties to an organization and special classes of shares can be persuaded to part with control at the right price (the only impediment to a New York Times takeover.)

But I don’t have $20 billion; How do I play this market?

Following the investments of Harbinger Capital is a very low friction way to play this. They have stakes nearing 20% in the New York Times (NYT, $19) and Media General (MEG, $15). They believe that the About.com properties of the New York Times are worth $700 million alone (NYT has about a 1.8 billion market cap.) BUY NYT, and BUY MEG.

Many of the other firms have other investments in the online space; Scripps has Shopzilla, which may be under-realized value. They are trying to realize some of that value through the same spin-off strategy A.H. Belo just did. CareerBuilder and Topix.Net are investments shared amongst a variety of companies; as such they are harder to singularly monetize. Gannett (GCI, $30) is the largest of the players and perhaps the most difficult to navigate both their balance sheet and value their shared investments. But at $30 could be a compelling play.

The community newspapers are more problematic. Without the resources to develop significant online presences, facing the cost of newsprint as the chief determinant of your success is staring down the barrell of the Craigslist gun. AVOID LEE ($8) and Journal Communications (JRN, $6)

While Microsoft and Yahoo trade bitter press releases capable of being written only by the embittered and the scorned, Google marches forward in product leadership.

Google Health was introduced to the public today at the Google Search Factory tour. Ample news coverage has preceded the (delayed) launch. This is a large target. Health care spending represents around 15% of U.S. GDP, or nearly $2 trillion dollars. Depending on which estimates one uses (such as here) administrative expense represents up to 31% of that number.

This was the earlier vision of Healtheon, now webMD. Google appears to have made great advances where Healtheon stagnated, which is the participation of health care providers to join into the system. Even small issues such as the NAME field can be represented very differently by different providers - one field, two: first, last, two: last, first. What to do about middle initials? How to resolve this? Google has the participation already of Pharmacy providers Walgreens, CVS, Longs bodes well for pushing the most reluctant sector, doctors, to join allowing secure data transfers. This isn’t a new problem, many companies such as Revolution Health have tried to solve this problem but by having doctor’s offices pay for it through paying to automate their systems on a proprietary platform. That was a tough if not impossible nut to crack. To have a more open system which Google presumably will monetize as always with context-specific ads clearly was the way to go. However, HMOs were notably absent from the presentation.

Marissa Mayer concluded the Google Health presentation mentioned there are thousands more partnerships to go, and “petabytes” of data that need to get into users hands. But if the engineering wizards have built an easy enough system for providers to sign up for without the overhead and specialization of a business development effort, it could succeed.

The biggest objection will undoubtedly be privacy concerns. Whimsically Google introduced Google Walk with the Cleveland clinic. You can drop this widget into iGoogle to track the amount of walking you do. This sound trivial, if not trite, but is the type of comfort-inducing outreach to a mass audience that helps build trust in the user base. No link is available yet at google.com.

Google is trading now at 580, with expected earnings this year around $20. That’s a 190 billion market cap. What contributing to solving the health care administration cost crisis would add to that is anyone’s guess but it will undoubtedly be significant. Google had traded down when Microsoft and Yahoo first courted, thinking critical mass would provide ammo against Google. This is another demonstration of how irrelevant the competition to Google has become.

The January 25, 2008 edition of Valueline’s 100 Top Ranked Stocks for Timeliness swapped out IBM for Nvidia.� IBM joins Coke, Merck, Microsoft on the list; within the last year, nearly half of the Dow 30 has marched through the timeliness list: in addition to the four above, Alcoa, American Express, AIG, AT&T, Boeing, Caterpillar, Dupont, Exxon, Hewlett-Packard, Honeywell, have all sauntered through.� � Most fell off the list as a function not of earnings disappointments but “dynamism of the ranking index”

Could overly� frequent large cap presence amongst the go-go VL Timeliness rankings be a bearish signal?� � � A mere� flight to safety given that 2007 registered only a 6.4% gain in the Dow?

Banking industry chief executives in sunnier times make for good board members amongst the Fortune 500 inner circle.� But what happens when these paragons of probity fail and they lose their day job?

Stanley O’Neal, late of Merrill Lynch, two months after disgrace at Merrill Lynch, managed on January 18th to slip in a board appointment to Alcoa.� � On the� Audit� Committee no less.

� What will Charles Prince late of Citigroup be doing with his spare time?� How about board membership at Johnson & Johnson?� � Would it not be appropriate for the board to reconsider statements expressed in the announcement release?

� James Cayne, busy on the golf courses and bridge tournaments, was not on any other public company boards.