As Rome burns, there’s plenty of money investing in attention aggregation, innovation, and…burgers?

Let the Old Gods bellow and rage in the distance.There are likes to like and pages to page-view. Swipes to swipe. Items to be ordered and thought-leaders to be thought-followed. We’ve got our own temples, up in The Cloud, to be decorated with selfies and festooned with a million paeans to ourselves, our personal brands and our experiences. Our chauffeured chariots to be summoned, literally, on-demand. The app as finger-snap. People are favoriting us as we sleep. At least, they’d better be.Google is doing the work that priests and rabbis used to do. It has answers. Curious children are learning to consult with Alexa and Siri in kindergarten.And our New Gods have found a way to extract tribute from each and every one of these activities.We’re carrying their altars in our pockets.
“American Gods,” Josh Brown

There’s a quandary in there about why the market is up despite all the craziness in DC. The two reasons seem to be: (a.) in this craziness, customers of major companies are escaping into the comfort of the golden arches, Marriott(?), and iPhones, so, (b.) the Pareto minority who actually does all the investing goes to where the customers are going. For the investing group, there’s also some brand-driven devotion to big companies.

Sure: smoke ’em if you got ’em!

Owning half of all advertising is a good business

The Attention Merchants can fill in the gaps of how companies like Google and Facebook are doing so well here: they’re essentially gobbled up the advertising market, this life-blood of most all business, i.e.:

Information cannot be acted upon without attention and thus attention capture and information are essential to a functioning market economy, or indeed any competitive process, like an election (unknown candidates do not win). So as a technology for gaining access to the human mind, advertising can therefore serve a vital function, making markets, elections, and everything that depends on informed choice operate better, by telling us what we need to know about our choices, ideally in an objective fashion.

You could hang a figure on the value of that over 1, 5, 20, 50 years…but, let’s just say it’s a fuck-load lot of money and, thus, valuation in a company. Controlling what people, businesses, and governments spend their attention and money on? Priceless.

Good companies often have good products

Next, you can get the sense with this kind of talk that what’s being valued in companies is “nothing,” just a feeling, a sense. In reality, for example, with companies like Apple and, now, Amazon, long-term strategies (often risky) that result in cash-spewing machines is what’s being valued. The iPhone and it’s software makes a ton of money; AWS throws off cash.

Google has an 88 per cent market share in search advertising. Facebook (including Instagram, Messenger and WhatsApp) controls more than 70 per cent of social media on mobile devices. “Silicon Valley has too much power,” Rana Foroohar

In the pure “dot.com” category, it’s easy to get beguiled and think that “likes” and baby pictures in Facebook, or putting dog-faces on teens, is the thing being valued. Of course they’re not, people’s attention and the ability to keep those people paying attention (“a culture of innovation”) is what’s valued. Advertising is what’s being valued, not whatever “social” is.

Trading on perception…which is built by good products

Now, I don’t actually know how investing works – I’m one of those hoards of Vanguard-drones – but it’s clear that all the interesting stuff is based on predictions about how other buyers will price/value a share. You can sit around and collect dividends (or wait for a company to be bought by another) as your “payout” in equity investing, but that seems to be the boring game (unless you’re an “activist” investor who hype-engineers those two). So, of course, paying attention to people’s perception of a company’s value is what the investing insiders get all worked up about.

But, again, if you look at “the new gods,” most of the companies have actual, valuable businesses. I can speak to the tech companies like Apple, Amazon, Google, and (a bit) Salesforce. They have good things to sell and good strategies backing them.

Netflix, for example

Netflix, which is on the list of “new gods,” is another example. First, it was a better mouse-trap to browse for DVDs online, queue up ones to get, and have them mailed to you rather than going to the rental store. Then, as streaming became technically possible (queue those endless Mary Meeker decks), simply doing that was better than living at the whim of cable companies that seemed like they were over-serving and over-charging. (And meanwhile, TiVo just sort of shit-the-bed on their go at this market-window – maybe the cable companies gleefully starved TiVo with their own DVRs and lack of partnerships).

And, once all of Netflix’s customers had watched that 5% of the streaming catalog that was actually good (I kid! I kid! It’s probably more like 15%, right?), Netflix had to make it’s own original content (and put in exclusive licensing deals). In each round, they had a good product and re-arranged their strategy accordingly (and sometimes it didn’t go well).

(If I knew this industry better, I’d know if my hunch that HBO is the Microsoft here [“fast follower” who was sort of there the whole time with a good product and even evolving, just not getting the glory] was helpful or not.)

“Old Gods” fall


HP(E) and IBM are negative examples here, and Microsoft provides a more positive example. For a long, long time, both HP and IBM were perceived as being rock-solid – their products and services were trusted, worked well, and, thus, were purchased a lot. (I’ll spare you the old IBM adage.)

They had good businesses. But over the past 10 (or even 15) years, each fell behind the times, seemingly willingly: they didn’t evolve their business model, product portfolios, and corporate strategies fast enough. They didn’t change quickly enough, and the worse mistake was that they didn’t realize they needed to change faster and, then, that management didn’t make it happen. HP had got hit up with The Curse of Most M&A Doesn’t Work, But Some of it Really Doesn’t work. In each case, the financials of the company suffered, and so did everyone’s perception of the company.

The point with HP and IBM is: in large, older tech companies you need not only a good product, but you need to a good everything.

Microsoft’s rebirth

Microsoft shows that you can turn that around, and adds more confusion to how investors actually value companies. From what I know, Microsoft has always been a financially good company, but it languished starting in the Internet era, which it barely battled through (to much financial glory after the late 90s).


But as it continued to biff on mobile, SaaS, shoring up desktop sales (I might be wrong on this point), and even cloud (where it’s now considered one of the “top three”), the perception was that Microsoft had lost it, strategically. An early warning sign was screwing up the Danger acquisition, which was a prelude to whatever Nokia was. And, I always found Bing to be overly quixotic: why try? But, really, I suppose you’d want to try to go after that pool of “priceless” advertising money above that Google and Facebook now steel-fist, and analysts would have discounted Microsoft’s share price even more if they didn’t try for a slice of that TAM-pie.

Despite all that, Microsoft seems to have turned it around. Their perception is pretty good now, and they’re out of that share-price plateau of the 2000’s. And, again, what did they do? They made good products, they built a good business, they changed almost everything.

Luck is handy too

You can throw more negative and positive examples on the pile: Yahoo!, how SUSE blossomed after it go out from Novell’s thumb, how AOL lost its way (though, maybe that’s getting better?), SAP & Oracle (deciding which and how each is good or bad is left as an exercise to the reader), etc.

In each case, companies just have to do the simple thing of trying to build a good business, make good products and services, and, well, catch a substantial stream of lucky breaks.

Since I don’t know burgers, payments, and hotels, I can only assume that in Josh’s list of new gods, McDonald’s, Visa, and Marriott are following a similar, annoyingly common sense approach.

Gods become “old god” because they suck versus the new gods

To hop on the American Gods metaphor train, sure, some of the old gods fell into disfavor out of whim (Johnny Appleseed don’t seem half-bad, and Easter seems pretty nice!), but most of them were dumped because they were shitty: blood sacrifice, mind-control, and otherwise treating humans like shit sure seem like a raw deal compared to TV, free-market-money, Jesus, and Paul Bunyan. The old gods stopped trying to innovate, as it were, and got all stuck on hammering in people’s heads, child sacrifice, and hanging humans.

That shit don’t sell now-a-days. So, you know, like the doctor says: don’t do that.

Meanwhile, back to the point

So, still, why’s the money-hole going so well?

You’re wondering how it could be possible that the S&P 500, the Nasdaq 100 and the Dow Jones Industrial Average could be climbing to record highs day after day, given, well, everything.
How is it that stocks can break through to new heights while the country at large seemingly sinks to new depths?

Who really knows why “the market” is “up” when it should be “troubled,”. In general, the way companies are valued and the way businesses run doesn’t seem effected much by cultural strife, change, and, chaos (in the short to medium term, at least). So, if the ruling hill-billy class wants to make a big to-do out of bathrooms, what does “god money” care? If anything, money likes contained chaos, constant change that makes cash turn over and change hands.

Also, of course, Republicans are in power, which makes money-focused people hopeful for tax reductions, repatriation, regulation reduction, and things that are otherwise the opposite of “Democrats wanting to use money to help poor people.” Most investor class people seem to stop reading that sentence after the word “money.”

Finally, you can’t exactly trust anything that Trump and friends say – sure, that 35% border tax would tank huge sectors of the economy, but come on, he’s caved on so many other things…well, actual important, money-related things (though, hey, how am I going to do my pivot tables if I can’t use my laptop on the way back from Zurich?)

There’s an argument to be made that if people can’t maintain steadily, growing salaries, there won’t be enough consumer money sloshing around to spend on things …but if ‘400 wealthiest Americans had “more wealth than half of all Americans combined,”‘ what do they need that other half for but to packaged up their prepared meals and old-man groaning mattresses to be drone delivered?

More, how much influence does the social chaos of state and local government really effect “the market,” and Congress doesn’t seem to actually do anything (nor want to), and we’ve got a little under two years until the next gut-wrenching election night – what if we elect more crazies, but this time they can actually get shit done?!

Don’t worry, though! There’s plenty of time to order five gallon tubs of guacamole and wrastle with (and for) carnies into the office!

Which is to say: in politics, so far, there hasn’t been much more than talk about money. It’s all been able people and culture. Investors don’t invest in people and culture (maybe they use their own cash to buy expensive art, sure), so why should the market be down?

Automation at Goldman, The Computer takes out four people

Today, nearly 45 percent of trading is done electronically, according to Coalition, a U.K. firm that tracks the industry.

Pay:

Average compensation for staff in sales, trading, and research at the 12 largest global investment banks, of which Goldman is one, is $500,000 in salary and bonus, according to Coalition. Seventy-five percent of Wall Street compensation goes to these highly paid “front end” employees, says Amrit Shahani, head of research at Coalition… Investment bankers working on corporate mergers and acquisitions at large banks like Goldman make on average $700,000 a year, according to Coalition, and in a good year they can earn far more.

Automating those $700,000+ meat-sacks:

Goldman Sachs has already begun to automate currency trading, and has found consistently that four traders can be replaced by one computer engineer, Chavez said at the Harvard conference. Some 9,000 people, about one-third of Goldman’s staff, are computer engineers.

Finding the things to automate:

Though those “rainmakers” won’t be replaced entirely, Goldman has already mapped 146 distinct steps taken in any initial public offering of stock, and many are “begging to be automated,” he said.

To be all double-turns-out about the grim automation stuff, in theory, this could mean hiring more programmers and people who support those robots, bringing down those big chunks of cash from “rainmakers” and spreading it down to “lower” grade staff. Of, you know, the bank can just keep that money and trickle it up to execs and share-holders.

Source: As Goldman Embraces Automation, Even the Masters of the Universe Are Threatened

Cash repatriation could inject $850bn, post-tax

If Congress enacted such a deal, of course, only a fraction of the $2.6 trillion would reach shareholders. It’s important to note that much of the UFE is not actually in cash; it’s invested in overseas plants or provides working capital for foreign subsidiaries. At press time, specifics of a plan hadn’t emerged, and figuring out which assets will ultimately get taxed, and at what rate, will be thorny. But based on Trump’s earlier proposal and on past holidays, investing pros estimate that about 40% of the UFE, or around $1 trillion, will come back to the U.S.—and that companies would net at least $850 billion after taxes.

Tech and health care companies would get most of that.


I think most people believe that cash would be used in stock buybacks and dividend to raise share prices and give cash to investors. Trump would probably want it for creating new jobs, and it could be used for domestic acquisitions.

See the rest from Shawn Tully at Fortune.

One in three tech IPOs now trading below their starting price

Around 33 per cent of the technology companies to enter the market in the last ten years are currently valued at a price lower than their IPO mark.

This according to researchers with analytics house Geckoboard, who studied 100 software, hardware, and social networking companies that have undertaken IPOs since 2006. Of those 100 companies, 67 are trading above their IPO valuation and 33 are below.

Link

Living life one quarter at a time, maybe it’s fine

Tyler Cowen suggests that we shouldn’t be freaked out by the emphasis on quarterly returns. Many public companies companies blame making quarterly numbers as a reason for short term planning, versus long term (one assumes) innovative strategies. The pieces suggests that that short sightedness may have a reason:

In information technology, the average life of a corporate asset is about six years, in health care it is about 11 years, and for consumer products it runs about 12 to 15. Very often it is hard for a company to plan its operations beyond those time periods, as the U.S. economy is no longer based on durable manufacturing machines. Production has shifted toward service sectors with relatively short asset lives, and that may call for a shorter-term orientation in response.

And, throw in all the “change or die”, digital transformation stuff and who knows what tomorrow will look like? As a counter, re-jiggering a company to be “digital” can take time. But, as Coleen suggests, investors don’t always seems to punish that (I’d add, if they have faith in management and the culture of the company):

Equity markets do not seem to neglect the longer run. Amazon has a high share price even though its earnings reports have usually failed to show a profit. Possibly the market judgment is wrong, but it’s hardly the case that investors are ignoring the long-run prospects of the company.

Further more, if I doesn’t work out:

If public shareholders are placing too much short-term pressure on their companies for a good quarterly earnings report, companies have the option of boosting their value by going private, as has been the trend. By 2012, the number of U.S. public corporations was less than half what it had been in 1997, in part because many companies went private. This is possible evidence that there have been problems with corporate short-termism, but on the other hand it shows that a market response is possible. Good governance is a scarce resource, and it may be that markets concentrate it in the places that need it most.

Source: Is corporate thinking too short-term?

The media doesn’t know what they’re talking about w/r/t Yahoo, a study in i-banker rhetoric

The notion that some in the media – who usually have no specific knowledge about Yahoo – have recklessly put forward that Yahoo is “unfixable” and that it should be simply “chopped up” and handed over for nothing to private equity or strategies is insulting to all long-term public shareholders.

This presentation is an example of many things we discuss on Software Defined Talk around large, struggling companies and the way they’re covered. Among other rhetorical highlights:

  • Check out how they make their case
  • Use visuals and charts
  • The informal nature of their language, e.g., they use the word “stuff” frequently
  • Their citations, e.g., citing themselves (I always love a good “Source: Me!”) and citing “Google Images”

These things, in my view, are neither good or bad: I’m more interested in the study of the rhetoric which I find fascinating for investment banker documents/presentations like this.

Not only that, it’s a classic “Word doc accidentally printed in landscape.” The investment community can’t help themselves.

As another note, no need to be such a parenthetical dick, below, to prove the point of a poor M&A history, just let the outcomes speak for themselves, not the people who do them.

img_4051

They actually do a better job in the very next slide, but that kind to pettiness doesn’t really help their argument. (Their argument is: she’s acquiring her friends.)

This is a type of reverse halo effect: we assume that tree standing goofiness has something to do with the business: an ad hominem attack. But, I think most billionaires probably have picture of themselves in trees, wearing those silly glove shoes, roasting their own coffee, only eating meat they kill themselves, or any number of other affectations that have nothing to do with profit-making, good or bad.

HFT tech

To illustrate this point during the opening keynote, George Kledaras, CEO of FIX Flyer, which creates algorithmic trading platforms, talked about how impossible it is for people to keep up and used the day when the statements from the Federal Open Markets Committee of the US Federal Reserve Bank are put out. The entire cycle, from the nanosecond that the FMOC statement was released, including the transmission of trading instructions from Chicago, where the report came out, to the exchanges in New York, took 150 milliseconds. After that, most of the trading was done.

Well, index funds it is for us normals I guess.

HFT tech

Companies get worse at truly innovating the more financial analysts cover them

They did a study! The number of patents filed (an easy, cross-industry measure of innovation, though not perfect) went down the more scrutiny there was overly quarterly performance:

[The study] demonstrated that companies produce fewer, and less-significant patents the more financial analysts cover them.

I’m fascinating by this quandary at tech companies. Some like Google and Apple seem fine, Microsoft who has generally had stellar financials over the past decade nonetheless gets punished (for not being Apple and Google, basically), and then folks like Dell feel the need to go private to escape this problem. It’s a wicked problem.

Companies get worse at truly innovating the more financial analysts cover them