Thursday, November 1, 2012


Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)
            Jacques Barzun, who died last week at the age of 104, is known to most Americans, where he is still known at all, for one statement: "Whoever wants to know the heart and mind of America had better learn baseball..." Rarely is his explanation discussed. He saw a combination that was uniquely American: teamwork and technique. Boosters and critics of GDP growth as an end in itself should immediately recognize this truth. Barzun's observation helps explain why Americans were uniquely drawn to stock market technology bubbles. ("Were" - such a distinction between Americans and the rest of the world may have passed.)

Today's bubble-builders root for Apple's ascension to a $1 trillion market capitalization. Comparisons have been drawn to Cisco and Microsoft. But who remembers the post-Sputnik technology boom and bust in 1958? Or the bowling binge in 1962? That was whipped up by the introduction of the automatic-ball-return machine. Americans would be more efficient bowlers, spend, accelerate, and multiply, or some such New Economics interpretation. Bowl-Mor Corporation fell from $51 to $3-7/8; Fairlanes Inc., from $12-3/8 to $4-3/4; Major League Bowling, from $14-1/4 to 5/8; Sports Arenas Inc., from $14-1/2 to $1-1/8.

As to the application of technology, the October 31, 2012, King Report gathered bulletins from the embers: "Power could be restored in Manhattan and Brooklyn within four days, but other boroughs and Westchester County could be without electricity for a week." "[C]ell phone coverage is down as users in Manhattan battle signal failures. Many people are virtually cut off [sic - they are either cut off are they aren't - FJS] and have no way of contacting friends or family or calling for help if there are further emergencies." "A call to FEMA's news desk" found "even they didn't have any non-Internet information readily available beyond suggestions that people call 911 in an emergency."

Investors should watch this development closely: Consumers have dropped non-cell phones, declaring there is no need for Ma Bell's relic. However, this decision is often a means to cut costs. Lifting the veil on falling corporate revenues, many are reductions of spending on, if not formerly "necessities," objects and services that were not consciously considered an "expense." Cell phone or TIVO charges were not matters to ponder.

FEMA's response to those in need: "Well, those people who have a laptop with a little battery life in it can try that way. Otherwise, you're right."

Most markets, including the New York Stock Exchange, were closed Monday and Tuesday, October 29 and 30. The New York Stock Exchange's "main data center for U.S. markets is in Mahwah, New Jersey." It has no remote back up center. After 9/11, we heard: "just-in-case will replace just-in-time." This was specifically directed at the exchanges in New York. October 31 is the last day of the month and the last day of the year for most mutual funds. (Bonuses and retention are swayed by November 1 through October 31 performance). A breakdown at Rahway could have produced untold gains to the swift and the clever, but the exchanges are public now, and precautionary expenses are not accretive to NYSE shareholders.

The presidential election is less than a week away. The clear winners are political opinion makers. Now, no matter what they predicted and no matter who wins, consultants can blame poor forecasts on Americans subjected to a cone of silence rather than the incessant roar of electronic communications.

                                                                                                                                    Nevertheless, technology gadgets are dominant. Yet, in finance, knowledge is regressing. Is it also possible "just-in-time instead of just-in-case" has left us vulnerable, trusting our lives to an i-thing? Electronic communications betray shaky foundations and gee-whiz faith in spreadsheets and models is built on ether.

            Recent conversations reveal the loss of financial acumen.

            Balance sheets are not taught at business school. There will be exceptions, but it is normal to graduate from a celebrity business school without understanding the relationship between the income statement and balance sheet. This makes for frustrating discussions about corporate valuations within investment firms.

            Related is the ignorance of CEOs and CFOs who go about acquiring and spinning off businesses. It has been brought to these elders' attention that they are making such decisions without an appreciation of (for instance) the value of retained earnings vs. those from acquisitions. It makes no impression on top management that earnings that are neither retained nor paid out in dividends are a house of cards.

            Top business schools still drown students in efficient market theory and the capital asset pricing model. The theory is bogus; to those who still believed, it was shot full of holes in 2008; yet, finance professors who rose and landed astoundingly high-paying corporate directorships are not going to think differently.

From someone who attended a reception at his business school, after cornering two finance professors:

"Are you still teaching CAPM?"

"Of course."

"With a negative risk-free interest rate? How does that work?"

"You move it down....."

"How can you teach it when there's obviously no such thing as a risk-free rate?"

"Because that's what we teach."
"Yes, yes. That's what we teach."

It is also evident there is a new taboo when meeting with top-tier investment firm strategists and analysts. That is the touchy topic of monetary policy. Just try and ask a simple question to often-quoted Wall Street oracles: "Do you think Bernanke's policy is working?"

Silence. A cough or two. Then, one of the top-tier analysts dares speak: "Yes." This is the classic Emperor-who-wears-no-clothes. The financial celebrities cannot bear to either think or talk about it.

            My daughter (age 9) was reading a fictional biography of Anne Boleyn to me. Henry VIII was anxious to produce a male heir. Anne Boleyn was eight-and-a-half months pregnant when she had a miscarriage. Life went on at court as if nothing had changed.

            This called for an explanation: "Wait a second. Henry's court - the whole kingdom - was anticipating Anne was about to produce a male heir. Now, she's obviously no longer pregnant. And nobody says a thing? Nobody mentions it? That doesn't make sense."
            Daughter: "Of course it does. It's the same as when Bernanke and Obama say things that everyone knows aren't true but nobody says it. People don't change that much, Daddy. It will be about the same 500 years from now."

            "Keep reading."