One of My Favorite Spaces (these days)

Via Tech Crunch:

Kleiner Perkins is adding to its iFund portfolio of iPhone-focused startups. It’s latest investment is a series A round in stealth gaming company ngmoco. Kleiner partner Bing Gordon, formerly chief creative officer of Electronic Arts, will join the board (he is also on the board of Zynga, which KP also recently invested in through its regular fund).

Ngmoco’s CEO is another EA refugee, Neil Young (not the aging rock star). Young oversaw the development of hit totles at EA such as Lord of the Rings, The Sims 2, and the about-to-be-released Spore. He left EA in June, and wants to both develop its own games and finance and produce games from other developers. He is applying the same studio model that’s worked so well for EA to a new class of mobile games for the iPhone and future devices that have similar characteristics.

The iFund is a $100 million fund set aside to invest in startups targeting the iPhone as a platform. Other announced investments include mobile social networking service Pelago (which makes Whrrl) and iControl (which lets you control you home security through your home network and your iPhone).

I love this space. Particularly as people move away from traditional media TV networks towards gaming. Specifically where location based services, social networking and advertising converge. Someone will have a really nice play here.

Fred Wilson's Comments on Google's Potential VC effort

Fred Wilson who manages Union Square Ventures has a good take on Google's potential entry in to corporate venture capital in his blog. I liked his post so I'm reposting it below.

More broadly corporate venture efforts usually don't do well however Google has the potential to see and do some interesting deals. It also has some odd parallels with the CIA's corporate venture arm...these guys have had a half decent arm as some of their own deals have "self fulfilling" properties. i.e. for an early stage startup to get early traction in forms or revenue or validation it helps quite a bit with follow on deals.

Going to be travelling so posting may be intermittment for some time.

Corporate Venture Capital

The news this morning is that Google is seriously considering entering the venture capital business. They bring a lot to the table for sure.

But as Jessica Vascellaro points out in here WSJ piece (which is what I linked to):

Their [corporations who invest directly in venture deals] track records have been mixed. Corporate venture-capital arms have been hampered by challenges that traditional venture-capital businesses don't face. Venture capitalists invest in private start-ups at an early stage, usually in hopes of a big payout if the company is sold or if its stock goes public.

Many start-ups fear that taking corporate money limits their options and comes with strings that could turn away other potential investors -- such as a right to buy the company at a later date. Some funds with less competitive compensation have struggled to retain managers, and corporate venture funds often don't allow senior employees to invest personal money in their funds, while other venture funds typically do.

Corporate venture capitalists' share of overall venture-capital dollars invested in U.S. companies fell to 7% in the first half of 2008 from 8.4% in 2007, according to PricewaterhouseCoopers and the National Venture Capital Association. Corporate venture capitalists were involved in roughly 20% of the venture-capital deals signed during the first half of 2008, compared with 21% in 2007.

All businesses are about talent and the best talent in the venture industry doesn't work in large companies and won't work in large companies. So corporate venture investors start with a big talent handicap and eventually face employee churn in their venture groups.

And to make matters worse, corporate investors don't really share the profit motive with the entrepreneurs. Let's say Google (or any other corporate VC) invests in a startup and buys 20% of it for $3mm. Let's say that startup is a huge success, sells for $1bn and Google (or any corporate VC) makes $200mm on the deal. None of the employees who made that investment get rich. The founders of Google and the CEO of Google don't get rich (they are already but that's not my point). The company "gets rich". But Google makes $1.5bn of pre-tax profits every quarter. So this big win generates another 12-13% to the bottom line, but just once. It's not a recurring gain.

And that's the big problem with corporate structures for venture investing. One time gains in corporations don't make anyone rich. Wall Street ignores the gain. The company can't put the gain into the pocket of its management. So it just doesn't matter very much.

Corporations have other motives for doing venture capital. But those motives aren't particularly well aligned with the founders, managers, and financial investors. So there's always tension in a corporate venture investment and it's not always healthy.

Please don't get me wrong. There are corporate investors in many of our portfolio companies. Six of our eighteen active and announced portfolio investments have corporate investors in their capital structures. That's one in three, well above the 20% number cited in the quote from Jessica's WSJ piece above. We like working with corporate investors in the right situations and we'd certainly love to work with Google considering all that they bring to the table.

But I do think that venture investing is not the best use of a corporation's capital and that it is inevitable that it will produce sub-par returns at best and significant losses at worst. And as a Google shareholder, I'd prefer to see them do something else with all that money they are making.

Regulatory Mumbo Jumbo at the FCC not Conducive to Innovation

Lots of writing in the last day or so on FCC Chairman Kevin Martin. Here is a piece via the NY Times with an excerpt below.

“That precedent is going to be increasingly applied,” he said. “We are setting a very high bar on what network operators can do in terms of putting limits on consumers.”

That is hardly an absolutist defense of what some call network neutrality. Mr. Martin, a Republican appointed by President Bush, wants to portray his views as moderate. Mr. Martin’s view is that people should generally be able to use any device and any software, and connect to any legal content they want to. But some limits, he said, are acceptable.

For example, he said it would be acceptable for a network to give priority to Internet telephone calls over e-mail, because short delays affect the quality of voice conversations much more than e-mail.

He looks to be getting involved in a issue that will position himself to potentially stay after Bush leaves office while moving into content issues which potentially gives the FCC broader reach into different business. And more generally for a Republican administration he seems to be one of the most pro regulation commissioners I have seen in some time.

And to be clear, I don't want metered data either but if the FCC does it's job and make sure there are low barriers to entry for broadband providers, the market will take care of this issue.

Martin got a relatively high profile reputation from the lengths and contortions he put XM/ Sirius through to get a decision on their merger approval.

Note, I used the words "get a decision" because I think it would have been far less egregious if the guy had just said no from the get go rather than putting these companies though a process that spans well past normal regulatory hurdles. Obviously these two firms were having difficulty reaching the kind of scale around content to survive and finance their businesses so a negative answer might have led to insolvency by one or more of these entities but I thin the long drawn out approval process was far worse.

While the two licenses were designed to function as a duopoly in the license conditions themselves, one could argue this was flawed as designed and there were not a lot of business models that could function well in this particular space as a duopoly with significant competition from terrestrial radio given CPE costs, marketing costs, differing standards and cost of content acquisition. Sometimes regulatory structures that design a certain number of competitors by fiat just can't be supported by the underlying potential of a business depending on its stage and life cycle.

Lesser known are a lot of the smaller wireless deals I've seen be put through ridiculous contortions and prohibitions that have nothing to do with regulatory, business or competitive conditions. I've had CEO's tell me war stories about some relatively surreal regulatory experiences trying to get anything through with unexpected turns and delays even when approval seemed to be a safe bet. I've even seen decency/religion come into play in the FCC approval process and I almost went apoplectic.

Are we in Iran? Is this Mullah Martin?

When I was in the entrepreneur seat waiting for FCC approval, my level of "fear" in terms of waiting for every single turn in the regulatory process was difficult to describe and that was with a Commission that was not nearly so pro regulation. My poor FCC lawyer had to endure me going through 20 permutations and questions about what the FCC might do, when they might do it and what to do if they did. By nature, I like to plan for the worst and hope for the best. But who can plan under these conditions?

What guys have to go through now seems unsupportable.

Look at the approval time period for XM at 17 months. This kind of period pushes regualtory risk too high to plan for and execute deals. Who can reasonably expect business to be conducted that way?

If wireless deals, big and small have to worry about all sorts of extraneous political factors going into deals it makes it very difficult to do business and inhibits innovation and growth in wireless.

Lots of interesting deals now in wireless mobility/wireless advertising, new wireless services and location based services but nothing saps innovation like bad regulation or a lot of unintended consequences from over regulation or regulation that is excessively subject to political influence. If a lot of FCC hand holding and "regulatory consultants" are needed to move wireless deals through the FCC that's going to put US companies at a big disadvantage to foreign competitors.

Is Merrill Lancing a Boil or Cutting off its Arm to get at a Boil

Big piece in the WSJ on the latest at Merrill here and excerpt below:

Merrill's decision to sell the mortgage assets was described by one person close to the company as an attempt to "lance the boil" and put the mortgage debacle behind it once and for all. The decision signals Merrill sees no immediate turnaround in the sharp decline of assets backed by mortgages.

Before the latest announcement, Merrill had raised more than $15 billion through various common and preferred share issues. It also sold a number of key assets, including unloading its 20% stake in Bloomberg LP for almost $4.5 billion.

Investment banking is a difficult confidence game these days as a huge credit bubble and over consumption unwinds for the next year or so.

However, the price on this debt at 22 cents on the dollar is a notable number given its supposedly underwritten by some kind of real property. The corresponding write down is forcing the antidiluition provisions from the good people of Singapore and crushing Merrill shareholders which is a very stiff penalty that gave me some early 2000 startup flash backs.

Some of this to me seems more than a little out control. I do think we are witnessing some of the extreme behavior that occurs when people panic and fear dries up all liquidity.

More to the point why are they unloading mortgage debt at such a huge discount with the new housing bill that allows banks to write the debt down in exchange for government insurance on the debt. Couldn't they go through the process over time and get at least some of the securities marked up? I'm sure we'll learn a bit more on this in the next few hours and I'm curious how the new law will impact banks and this problem in specific. It would seem they timed this transaction around the passing of the bill itself.

I suppose that's what Lone Star is going to do and it would seem to me they might make out just fine from this deal.

Merrill must believe that either new housing law won't help the mortgage market overall, or it won't help them specifically, or it won't help them quickly enough or they have some other shoe that is about to drop and they need to eliminate all risk on their balance sheet. Seems to me Merrill has more shoes than a caterpillar these days.

That said at 22 cents on the dollar and the huge dilution, the analogy of lancing a boil doesn't do this situation justice.

This seems more like the took off their arm though too, just to get the boil and the lancing was just for show.

On the bright side, they are financing 75% of the 22 cents on the dollar of the deal. Hopefully they'll make some fees on that. It's a developing story I suppose and it will be interesting to learn more over why they did what they did over the next few hours.

Another Guest Blog for Paul Kedrosky Up

Charlie Brown Piece is up here.

Linkfest Montage

The monthly letter from Bill Gross just came out. It's a good read here.

The guy owns a lot of debt obviously so there is some (unconscious) bias but it provides a great perspective.

And this political satire of Obama is hysterical even though I loved his speech in Germany.
From the Times here.

I excerpted my favorite parts although all of it is good:

And it came to pass, in the eighth year of the reign of the evil Bush the Younger (The Ignorant), when the whole land from the Arabian desert to the shores of the Great Lakes had been laid barren, that a Child appeared in the wilderness.

The Child was blessed in looks and intellect. Scion of a simple family, offspring of a miraculous union, grandson of a typical white person and an African peasant. And yea, as he grew, the Child walked in the path of righteousness, with only the occasional detour into the odd weed and a little blow.

When he was twelve years old, they found him in the temple in the City of Chicago, arguing the finer points of community organisation with the Prophet Jeremiah and the Elders. And the Elders were astonished at what they heard and said among themselves: “Verily, who is this Child that he opens our hearts and minds to the audacity of hope?”

In the great Battles of Caucus and Primary he smote the conniving Hillary, wife of the deposed King Bill the Priapic and their barbarian hordes of Working Class Whites.

And so it was, in the fullness of time, before the harvest month of the appointed year, the Child ventured forth - for the first time - to bring the light unto all the world.

And the Child spake and the tribes of Nato immediately loosed the Caveats that had previously bound them. And in the great battle that ensued the forces of the light were triumphant. For as long as the Child stood with his arms raised aloft, the enemy suffered great blows and the threat of terror was no more.

In Jerusalem and in surrounding Palestine, the Child spake to the Hebrews and the Arabs, as the Scripture had foretold. And in an instant, the lion lay down with the lamb, and the Israelites and Ishmaelites ended their long enmity and lived for ever after in peace.

Thence he travelled west to Mount Sarkozy. Even the beauteous Princess Carla of the tribe of the Bruni was struck by awe and she was great in love with the Child, but he was tempted not.

Tea, the Czar and Polonium 210

Russian markets are tumbling with comments on Mechel Steel's pricing policy. Here is a good summary of what happened and the specific comments that have put markets in an "antsy" state:

At a meeting with metal producers in Nizhny Novgorod, Putin accused Mechel of selling raw materials for twice the price at home as it does abroad, the Interfax news agency reported.

Interfax quoted Putin as saying he wanted Russia's antitrust regulators to pay "special attention to this problem."

Putin also noted that Mechel's biggest shareholder and chief executive, Igor Zyuzin, had been invited to the session, but had fallen ill. He urged him to get better soon. "Otherwise, we will have to send him a doctor to get rid of all these problems," Putin said, according to Interfax.

I love the gallows humor as much as anyone but am I the only one who is wondering if Putin was only half kidding? Or if maybe he might have used that strategy before to solve a "problem"?

I bet the CEO of Mechel won't be accepting any invites from old friends for tea. Would you like some tea with your Polonium-210 Sir?

In addition, today you have more comments from Putin citing "Tax problems" which is exactly the same method he used to strangle Yukos. Link to that article here.

If you'll remember, Putin used tax authority to force Yukos into bankruptcy and seize the assets and eliminate a political rival. Now with the BP/TNK CEO leaving Russia like it was the fall of Saigon in 1975, it underlines Putin's willingness to over reach and test limits.

One also has to wonder with all these confiscatory acts, how much of the wealth is going into Putin's pockets. There are rumors of Marcos style secret accounts and direct/indirect ownership of substantial Russian companies.

I don't know if the Mechel issue has to do with long term contract prices vs spot pricing or some other mechanism but this is all serving to push the Russian markets past 6 month lows in a bull market for energy and raw materials.

What's the bottom line for me? Well, the questions about some sort of more prevalent Yukos type power play by the Kremlin causes anxiety for any investor in Russia and in the end I think makes it harder for them to attract capital and solve some of these oil scarcity problems through new investment. Russian oil production forecasts for this year are dropping, not rising despite record oil prices as the foreign oil companies with the technology need to exploit Russia's vast oil reserves hesitate.

More broadly however, I think Russia's early experience with democracy was clouded by rock bottom oil prices. One could argue it was a primary contributor to the collapse of the Soviet Union as they had difficulty supporting their military while feeding their people at the same time.

Unfortunately, the low oil prices lasted well into Russia's early experiences with democracy under Yeltsin. So what do Russians see and experience? As soon as they got a more Czarlike government with power centralized in the Kremlin their economy began to expand rapidly and political stability returned albeit under an iron fist. But Putin's rise more closely correlates with a rise in the price of commodities rather than any efficiency of government or sound policies.

What did they have under Yeltsin with an attempt at a liberal Democracy? Chaos, unemployment, Weimar Republic level inflation and geopolitical calamity. So it follows logically that the Russian appetite for democracy is relatively low and their love of the Czarist tradition and what they see Putin has brought back to Russia as more valuable. I also wouldn't be surprised to see many Russians view democracy as having an inverse relationship with economic and political stability. Russia has a very complicated history to support that viewpoint.

The Russians recently went online to pick the top two Russian hero's of all time. At the top, none other than Czar Nicholas and Stalin.

What are the implications? Well energy prices have too much of a sway on politics here and creates all sorts of distortions, not just economic ones. The centralized lock down of Kremlin power, his ability to appoint governors now directly, and its tendency to over compensate for weakness in the Yeltsin years may cause a lot of artificial political and military conflicts inside and outside of Russia.

In short, the world, Russia and its quick experiment with a true democracy was an unlucky one . Not just unlucky for Mechel Steel shareholders either.

Look at Eastern Europe and their movement towards democracy. Why are those countries integrating so well economically and politically but Russia drags on estranged? Does it have to do with the factors in this piece...or is it something else?

Thinking Ahead at Ford and Charlie Brown's Football

This piece about Ford's just announced $8.7 billion loss was interesting via the FT here with an excerpt below:

Ford has unveiled an ambitious facelift for its troubled North American operations aimed at shifting its focus from big pick-up trucks and sport-utility vehicles towards smaller, more fuel-efficient passenger cars.
Announcing a net second-quarter loss of $8.7bn, the number-two Detroit carmaker said on Thursday that it would bring six small European models to north America, and convert three existing truck and SUV assembly plants to small cars.
The conversions are in addition to plans announced earlier to cut SUV and pick-up production for the remainder of this year.
The carmaker also plans to accelerate the introduction of a new fuel-efficient V6 engine and to double four-cylinder engine capacity. It quashed speculation that it might eliminate the Mercury premium brand from its product line-up.
Alan Mulally, chief executive, said the moves were designed to respond "to the rapidly changing business environment".
Ford's US sales volumes shrank by 14 per cent in the first half of 2008 from a year earlier, including a 28 per cent dive in June, due largely to plummeting sales of such former mainstays as the F-Series pick-ups and the Explorer SUV.

Essentially Ford's message was-- "Hey we just lost $8.7 billion. But don't worry, we got this idea...we are going to make smaller cars".

Now don't get me wrong, it seems like an obviously sound idea but I wonder if they are not a little late on this and more than a dollar short. All the US car makers are in the same boat and their pace of adaption to business changes are glacially slow. Chrysler which is privately owned now seems equally flat footed so I don't think it's necessarily a function of managing short term business profits to long term strategic plans.

This would ordinarily be 20/20 hindsight commentary but this has happened before in the 1970s and 1980s. High oil prices caused a shift to higher fuel economy cars and smaller cars and the Japanese destroyed these companies for decades with various crisis and requests for bailout assistance.

No question Americans love big SUVs, and they don't mind forking over a higher margin for them temping car companies all around the world.

Much like Charlie Brown aiming for the football only to have it pulled away to his surprise these high margins seem especially tempting for American car companies. But are the short term higher margins worth the big write offs you take when the fuel price jumps and you have to retool plants?

Since Americans don't mind paying so much for large SUV's why not just make them with alternative fuel engines that give them ultra high fuel economy. It may cost quite a bit more but American's have shown a propensity to pay extra for big behemoths and it would shield them from fluctuations in gasoline.

Of course if they do this they will sell less of them but they won't have to retool plants and risk bankruptcy on huge write offs every 20 years. This thinking never seems to be factored in, time and again-- Just like Charlie Brown and his football..

With the plummeting dollar, and an increasingly competitive manufacturing base in the United States you would think this would give US car makers, particularly export oriented ones like GM a big edge selling to the 1.3 billion new consumers entering the marketplace. US based auto manufacturers actually have a huge opportunity to expand and grow as the US dollar provides a very large cushion of competitiveness.

If the US auto makers actually shifted to a new more technologically advanced fuel standard, wouldn't this give them a huge edge over foreign competitors? Wouldn't other countries be tempted to migrate to this new standard given the largest market in the world had shifted? This might be a chance for the American auto makers to become technological leaders for the first time in 40 years but they'd rather keeping kicking that same football.

Do we need a "Tabula Rasa" to get this kind of change in the industry? i.e. something like a bankruptcy to have these companies start from scratch or can management make the changes needed.

What's the reason for management's inability to adapt quickly or prepare for change? Why is it so much worse than other US industries?

Energy prices have been rising for years but why are the US companies caught so flat footed over and over?

• Is it the relationship between the companies and unions? Either lack of flexibility in contrasts or built in costs that give them a competitive disadvantage compared to everyone else?
• Is the misalignment with our fuel taxes in the US vs Europe and Japan the reason our companies can't adapt quickly? I.e. if our gas prices are always lower are car companies that much more vulnerable when we experience big price surges because of the elasticity of demand for gasoline?
• Is it a case of be careful what you wish for? The US Auto industry has lobbied tooth and nail to keep higher fuel economy standards from becoming law and the US has severely lagged against the rest of the world in these standards. But the billions in political pork and back room lobbying has got them lower standards but has it now come back to haunt them?
• Is it all of these combined or is it something completely different causing this. If so what?

You can reach John for comments as johnspencerboyd@gmail.com

Big Turf War Brewing Between Fed, SEC and Others

Big regulatory battle between the SEC and the Fed in terms of bank and investment bank regulation. This battle has been launched by Paulson's effort to restructure and reform the regulatory environment in the US. Most of what Paulson has been proposing has been centered around consolidating authority into the US Federal Reserve.

There are a lot of interesting debates including whether to give investment banks some kind of safety net without requiring them to implement some minimal amount of risk controls. Or should they have a safety net at all? More broadly the biggest danger is "pro cyclical regulation" where in times of fear and retrenchment the government over regulates. As opposed to times of greed where the government stays "hands off".

For the record the best regulation is vigilant in times of greed, and lenient in times of fear. We rarely get that combination however.

My theory is a lot of Paulson's plan is focused on the Fed because it is an organization seen as being "outside the administration" and thus de facto having more credibility. He is focusing on an agency that the general public and Congress see as being effective so it can be used as an agency to consolidate regulatory authorities and powers.

That's not a good reason though.

Despite having a lot more credibility than any other agency, it seems to me that if the Fed becomes too much of a regulatory agent responsible for the health and regulation of these institutions it impairs their role in securing price stability and employment.

Turning the Fed into some super monster of regulation and monetary control seems to be too conflicted to do either particularly well.

I agree with reforming the Byzantine regulation that we've had in place since the civil war, just not too comfortable with all the power going to the Fed. We have an actual government, if we need it to change we do that through elections not by turning over all the power to appointees.

Something just doesn't feel right about the approach here.

Via the WSJ.

Non-Olymic Russian Acrobatics in Cuba

The missile shield in Eastern Europe is really causing a lot of non Olympic Russian acrobatics. The idea of landing bombers in Cuba is frankly kind of a weak move because it makes the bombers vulnerable to US air defenses when the strategic value left of these relatively old bombers is to be able to hit targets from outside the range of air defenses.

In truth, I don't think it's a wild theory that the intransigence in the US position on the air defense shield is a tool to acquire Russian cooperation in the UN to constrain Iran. The question is if Russia decides to escalate where does this end? In the original Cuba missile crisis, the US agreed to pull weapons out of Turkey in exchange for Russian removal in Cuba.
In this case, is the end game here a UN resolution that bans export of weapons and air defense networks to Iran? Some other tougher measures?

Tough to see the Russians agreeing to this but we'll know more in a week or two when the Security Council takes up resolutions against Iran again.

Via Novosti below:

MOSCOW, July 24 (RIA Novosti) - The deployment of Russian nuclear-capable strategic bombers in Cuba to counter U.S. missile defense plans in Europe would be a destructive move, a Russian military expert said Thursday.

Russian daily Izvestia on Monday cited a senior Russian military source as saying that Russian strategic bombers could be stationed again in Cuba, just 145 km (90 miles) from the U.S. coast, as a response to the U.S. missile shield in Europe.

"I believe that stationing Russian bombers in Cuba would be a destructive step because the advantage of these bombers is that they may launch missiles from outside the effective range of an enemy's air defenses," said Col. Gen. Viktor Yesin, former chief of staff of the Russian Strategic Missile Forces, now vice president of the Academy of Security, Defense and Law Enforcement Studies.

Both Tu-160 Blackjack and Tu-95MS Bear strategic bombers have been recently modernized and fitted with new X-555 cruise missiles with a range of over 3,500 km (2,200 miles).

There is no need to deploy bombers 145 km from the U.S., where they would be easy targets for U.S. air defenses, if they are capable of hitting targets on U.S. soil from a distance of more than 3,500 km, the general said.

The reports about the possible return of Russian bombers to Cuba prompted an angry response from the Pentagon on Tuesday.

Commenting on the Izvestia article, U.S. General Norton Schwartz, nominated to be the air force's chief of staff, said in Washington that this move would be "something that crosses a threshold, crosses a red line for the United States of America."

In response, the Russian military officials said the bombers would not threaten the U.S. and former Cuban leader Fidel Castro said Havana owed no apologies to Washington over reports that Russia might station strategic bombers to Cuba.

"We need not offer any explanations or excuses nor ask forgiveness," he wrote in a letter posted on cubadebate.cu web site.

Slow Posting

Been a little buried folks. Got some ideas though......soon.

In a Bear Market do You Need to Lowball?

So Apple had quite an earnings call last night. The current quarter numbers sans IPhone were pretty much great but the forecast for the next quarter at a buck was a material disappointment. A bit more material was when the CFO said the health of Steve Jobs was a "private matter" and "Steve has no plans to leave the company".

The low ball forecast combined with the choice of words will provide for a bit of an unpleasant reaction tomorrow, especially given we are in a bear market. From those comments, people started pricing the stock like Steve died over night. Cancer is one of the most infamous of unplanned events.

The health of any CEO is not private, if there is a problem that might result in a change, that's a material event. I'm not sure they can hang their hat on privacy. Time to put some kind of succession plan in place and if Steve is not actually dying imminently, they should come out tomorrow and clarify the comments made on the call.

I understand the value of sandbagging, but the two factors combined, the low forecast and the CEO's health are too much of a built in low ball that takes a well executing company into some probably undeserved territory. In a bear market like this, you really don't need to low ball too much to manage shareholder expectations.

Bloomberg story here and excerpt below:

July 21 (Bloomberg) -- Apple Inc. said Chief Executive Officer Steve Jobs has no plans to leave the company and that his health is ``a private matter.'' The shares fell 10 percent.

``Steve loves Apple,'' finance chief Peter Oppenheimer said when asked about Jobs's health on a conference call today. ``He serves as CEO at the pleasure of the board. He has no plans to leave Apple. Steve's health is a private matter.''

Since Jobs, 53, took the stage in San Francisco last month to introduce the newest iPhone, speculation among attendees and bloggers has run rampant that he may be sick again after successful surgery for a form of pancreatic cancer in August 2004.

If Jobs were to leave for any reason, the stock would plummet 25 percent, said Gene Munster of Piper Jaffray & Co. That would erase about $36 billion in Cupertino, California-based Apple's market value. The company, maker of the best-selling iPod media player, the Macintosh computer and the iPhone handset, depends on Jobs for his fashion sense and technology savvy.

Is it just me, or is this an Unsatisfying End?

We get Icahn with 3 boards seats and no real resolution to the Microsoft Deal and a continuation of the status quo for Yahoo management. It's a smart deal on the part of Yang to give these board seats up even though he really didn't have to given Bill Miller's support of Yang. Once Miller voted for the existing slate, Icahn's goose was pretty much cooked.

All in all this does not bode well for the made for TV movie "Gates the Barbarian".

A nice summary via the FT.

While I think Icahn is obviously a great investor and I have been rooting for him, his track record with technology related companies is not as stellar. Motorola for example seemed like he was playing a game a year too late to make a different to the share price and it's not clear to me how he can generate a win out of that deal.

Yahoo still has a strategic level share of online advertising but after this deal both Yahoo and Microsoft still feel like the "Ottoman Empire" in the internet space.

In fact, I look at the product launches by Microsoft and I wonder if these guys are actually afraid of the internet and are still holding on to the pre internet Windows dominated world.

That's right, I said it. Microsoft is afraid of the internet (which is why Yahoo management is somewhat justly afraid of Microsoft).

In any event, it's a smart move by Yang that gives him more time to weather this out but I think that will result in a slow churn down as Google grabs more share and Microsoft OS/Office share continues to burn off.

All in all, a really unsatisfying end.

Two Great Pieces on Tax Policy in the WSJ

Looks like the WSJ has been trying a preemptive strike on election tax policy with a slew of editorials on the topic in the last week. I don't agree with all of them but two of the interesting are here and here.


Essentially there is a big fight brewing to make sure the rich pay more. But if California indeed raises its rate to 12% I think that's going to have severe implications for small business and others who flee to tax havens in neighboring states. California is already suffering from increased competition from venture communities starting in Europe and China, do we really want rates to be so high that we get further exodus of business here?

There are real lessons in terms of that places in Europe and Asia that have instituted flat or consumption based taxes and seen huge bursts in government revenue and growth.

That said, in California's particular case the huge increase in spending seems to be more the culprit here with a rise of 44% over 5 years.

Two quick points I'd like to make.
1) Income taxes are a deficient way to tax the rich. If you want to tax the rich, tax their consumption not their income. Taxing income primarily taxes those trying to get rich, not those that already are rich. And it's those that are rich that drive the economy forward and create jobs for everyone else.

2) If you are opposed to a consumption tax and decide you want to tax income , make it as simple as possible but no simpler. Flat taxes are the way to do this and they raise more revenue more efficiently than any other system.

Guest Blogging a Piece for Paul Kedrosky

So Paul Kedrosky is going on vacation for a few weeks so I did a piece for him. You can find it here.

Paul is smart guy and can be seen on CBNC and everywhere and anywhere else. He's blog is a great one to watch and he's got a fresh and well reasoned perspective on a lot of interesting areas.

p.s. I actually didn't send him the title just the text of the piece--and he made one up. "The way forward on energy". Uh, I actually wouldn't have picked that for a few reasons but it describes the piece well.

Some After Market Musings

ONE. Earnings are out for IBM, Microsoft and Google after the bell. The early reaction is somewhat negative with people concerned about slight bottom line hits in Microsoft and Google.

At the same time, we are worried about the world ending in banking with profits going to zero and we are going to take Google down 10% after hours.

More to the point if you look at the top line revenues, they are really quite good given the world was going to end a day or so ago (whew). I am not a buyer of Microsoft but for all those traders out there I think you can buy these once people realize these guys have strong top lines which are very difficult to barter with.

TWO. Boy UBS folded quick on the tax evasion probe. I remember when bankers use to call me all the time telling me how dumb I was not using all these tax shelters to shield income. At the same time I feel like UBS and others are getting unfairly lambasted. It's got to be the most hypocritical case since Elliot Spitzer since the US does not report foreign capital gains to other countries to foreign citizens at all yet we want other countries to report this information to us?

And the United States is the only major country that enforces a global income rule where you are forced to pay income tax on earnings abroad. The only way to escape this is to write to the State Department to void your citizenship which isn't usually done very successfully.

What if I go to Mars, and I make a million mining martian oil, is my income still taxable? Will the IRS come and get me? Will there be a congressional probe?

THREE. If anyone can ruin a party it's Citibank. The bank has been run so badly. They report tomorrow and their writeoffs will be colorful one way or the other.

The World's Next Hotspot

I know there is a lot of worry and talk about Iran, Iraq and the middle east in general. But trouble often brews up in the place you are not looking. Here is an article in Bloomberg on the Pakistani's putting down riots in the stock exchange there down 35% from it's peak. While 35% is a bit more than the declines felt here (20-25%), the Pakistani market was up quite a bit more in a country without natural resources such as oil or raw materials. Full piece here and an excerpt below:

Pakistan investors stormed out of the Karachi Stock Exchange, smashed windows and cursed regulators after the benchmark index fell for a 15th day, the worst losing streak in at least 18 years.

``I have lost my life savings in the last 15 days and no one in the government or regulators came to help us,'' said Imran Inayat, 45, a protester and a former banker who retired early and said he lost 300,000 rupees ($4,175) on the market.

Police surrounded the exchange after hundreds of investors stoned the building and shouted anti-government slogans. They directed their ire at the government and Securities and Exchange Commission of Pakistan, which this week removed a 1 percent daily limit on price declines. The measure was aimed at halting a slide that wiped out $30 billion of Pakistan's market value in three months, threatening to undo a 14-fold rally since 2001.

``There has been some level of mismanagement by the authorities,'' said Habib-ur-Rehman, who manages the equivalent of 6.5 billion rupees in Pakistani stocks and bonds at Atlas Asset Management Ltd. in Karachi. ``This may be due to their misperception that they can prevent the market from falling. Investors have to learn to bear losses as they do gains.''

The benchmark Karachi Stock Exchange 100 Index dropped 278.96, or 2.7 percent, to 10,212.92 at the close. The index has plunged 35 percent from the record of 15,676.34 on April 18.

In addition, a piece in the times on the border region in northwest Pakistan which essentially is a no man's land for anyone and everyone here.

Checking in With Tonto

So Tonto wasn't too far off the mark in a post here.


The most concerning thing I see is we are at the March lows but fear is really not that high at all as measured by most option volatility indexes I watch. They need to go up by about 35% for me to feel like some sort of wash out has occurred.

In the words of old show "the Lone Ranger, which an old boss of mine used to use to communicate profound happenings to my amusement, ideally utilizing a thick Native American accent:

"Tonto throw rock into bush, but see no rabbits".

I think what Tonto meant here was, it's a lot easier to be long when there is fear in global markets.

Additionally, we are in front of a Fed meeting but what tools does the Fed have this time? It will provide some stability until the decision is announced but there are not a lot of upside tools. The Fed has to come out somewhat hawkish, provide some comforting words on inflation and somehow talk up the dollar without spooking the markets. That's a bit of a tall order even for some very smart minds.

I can see a rebound around earnings in two weeks as world markets acclimate to lower earnings from leveraged assets somewhat offset by robust earnings in industrials, some technology, energy and agriculture. But it might get a little rough in the mean time as the Fed tries to talk up the dollar to mute oil without throwing the markets off their horse on hawkish inflation language. Poor Tonto.

We've actually seen some relatively decent results from the financials and as industrial and BRIC related companies report we could get the nice jolt up Tonto promised us.

Does this mean we are saved from a long term shift to fixed income as the asset of choice for the next decade? We are not out of the woods yet, with the biggest savior behind some kind of plan put in place to solve the energy problem.

Bernake Comments

Light posting today as I am in meetings most of the morning...but Bernake is out with comments that I believe are on point such as:

The best strong dollar policy is a strong economy policy. Good points on energy and he has pointedly said that drilling now will lower prices now.

I am starting to become a bit of a Bernake fan. I thought he kept rates too high too long, but his policy stances now are incredibly on point.

Highlights of Congressional Testimony Today

1. My favorite quote of the testimony today was actually by Paulson and I think it's right:

"If you have a squirt gun in your pocket you may have to take it out, if you have a bazooka you probably won't have to use it".

2. Lots of bickering between Paulson and several committee members. Some of which was highly amusing but mostly it was just partisan positioning and grandstanding.

3. Pelosi and several others have announced it is "time for more rebate checks". Firstly, all the first scheme did was have the government borrow a bunch of money from the Arab's ad Chinese, then send the money to American's so they could afford to buy more gas and goods from the Arabs and Chinese, so the Arabs and Chinese could buy our buildings and companies cheaper (or the Koreans buying Sprint for a wing and a song).

Instead a more sensible approach would be investing in our energy independence, our infrastructure and reforming our tax code to make our country more competitive.

If Congress enacted a comprehensive investment plan in our energy future, that is the single most effective way to bolster this economy. If you enact a plan of energy related investments in infrastructure I will show you a way out of this recession and back to a more competitive position. Oh and by the way, it's okay to borrow overseas if it's to invest in our future. It is not okay to borrow overseas to buy more cheap stuff from China or just to fill up the gas tank.

Congress doesn't want to do that because it won't help us right away and thinking too long term is "complicated".

But no matter how much money we borrow overseas and send out as rebate checks, that won't help us right way anyway. The sooner we address our global competitiveness issues the sooner we get out of this fix.

4. Chairman Cox has announced he is going to start enforcing the ban on naked short selling in government agencies--Fannie and Freddie Mae as well as Broker Dealers.

....Since they are "fundamentally sound"...and "good companies"

While few and far between these days, all of our longs are also good companies. Several of them give to charity including rescuing lost puppies.

Can we enforce the ban on naked short selling on our longs as well?

For what its worth naked short selling is illegal anyway unless its between primary dealers and the agencies. Not sure what he is talking about or if he is sure he knows himself.

Harry Reid Offers the Country Leeches

We have the President picking a fight with Congress over drilling since he knows this is a fight he can get a win. Harry Reid responded last night and this former doctor did not demonstrate a lot of coherent economic thought or understanding of the problems the country faces:



After seeing this guy open his mouth on camera 4-5 times in the last year, I wouldn't trust this former doctor to take my blood pressure. In the middle ages, doctors used to use leeches to kill a variety of ills from the flu to cancer. Half way through his speech I expected him to pass a bucket of leeches around to the audience and tell them this was how to solve their ills.

A colleague tells me there have been some other speeches where he talked about U.S. income tax being "voluntary" and some other inane rants that don't relate to reality. We don't need more ignorance from the Senate in the form of "leeches" or in any other form, we need reasonable educated people working for compromise to reform our economy and increase our competitiveness. I think if we have to, it would be worth selling the state of Nevada to Canada and using the proceeds to deleverage banks just to get rid of this Senator.

You don't need to be a genius to be in Congress but guy is one or two mental leaps from the middle ages and if he is continued to run amok, it won't be long before we are all there with him.

Why the Focus on Fed Rates Doesn't Matter

Look no further than New Zealand to see that the debate over whether the Fed will raise or cut is a false one via Bloomberg:

New Zealand's consumer prices rose at the fastest pace in 18 years in the second quarter, fanned by fuel and food costs, adding to signs the economy is facing stagflation as it slips into recession.

The consumer prices index rose 1.6 percent from the first quarter, Statistics New Zealand said in Wellington today. The median estimate of 12 economists surveyed by Bloomberg was for 1.4 percent. From a year earlier, prices rose 4 percent.

New Zealand and Australia both have "carry currencies". Their central banks have forced short term rates so high that people borrow in Yen so they can lend in Australian or New Zealand currency.

The U.S. has lowered rates dramatically in contrast over the past year so it must have much higher domestic inflation right?

Actually at about 4% the inflation rates in New Zeland and the US are exactly the same. What about those inflation hawks in the ECB that are showing Ben Bernake how to be a real central banker? Those German bankers are tough right?

Similarly their inflation rate is about 4%.

Why? All the pricing pressure is from food and commodities driven by demand in China and India. They are eating more and they tend to use commodities a lot less efficiently for the same unit of aggregate output. People keep trying to make this look like some kind of wage price spiral and it just isn't.

The U.S. and Europe act like an only child who suddenly discovers they've got a younger sibling. It's 1.3 billion people become consumers and they want better food and we have to share ours until we learn how to make more.

Options are:
1) Shift manufacturing back to the more efficient manufacturing operation in the United States and Europe so we waste less raw materials
2) There is still quite a bit of central planning in China and that included big buys and stockpiles of commodities which has driven prices up a bit more than they should
3) Growth needs to moderate slightly in China and BRIC overall
4) We have to raise rates to such a crushingly high level that it lowers our own growth to -3% to -5%

More to the point the effective tightening from dramatically higher credit standards and lack of lending capital suggest a big shift in returns away from equity assets into bond assets. While on paper our own 2% rates seem like money is virtually free, the effective rate is much higher since in some cases money just isn't available to lend. In fact, I would argue that money is actually much more expensive with Fed rates at 2% than it was a year ago with the Fed rate at 5.25%.

Additionally, banks are being forced to de lever their balance sheets so they simply don't have the money to lend.

Consequently, Bill Poole and others arguing the Fed is creating inflation by keeping money cheap just don't make any sense to me. It' also frustrating to watch a Congress that is more focused on the election than actually forming some kind of "moderate" compromise on problems the country is facing.

Update Info on IPhone

To my earlier point on battery life as well as a link to an article that shows I am not the only one bashing David Pogue:

Contradicting claims by the New York Times' David Pogue, who was told by Apple that iPhone 3G's GPS chip is too small to work for turn-by-turn navigation, Apple product chief Greg Woswiak tells ExtremeTech that the hardware is just as capable as in other GPS-aware phones, many of which provide live driving directions.

Instead, the lack of an existing program from Apple or someone else to handle real-time road navigation is due to "complicated issues," according to the executive. He expects full navigation functionality to be expanded once developers are given more time.

"It will evolve," Joswiak says. "I think our developers will amaze us."

At least two veteran companies of the GPS industry, TeleNav and TomTom, have already said they are developing fuller navigation software than what's offered with the iPhone edition of Google Maps.

Separately, PC World argues that claims of short battery life are also misleading. The publication agrees that Apple's call time on 3G is much shorter than the 10 hours promised on normal GSM phone networks but has run tests it says show iPhone 3G to be the longest-lived of the 3G cellphones in its class, which includes both smartphones and high-end media phones.

Full piece via Apple Insider here.

Review of the Iphone after a Weekend

Just a quick couple reactions

• For business users there are going to be some battery issues. Note, I don't think any other device maker has made a device that does all the things the IPhone does that has longer battery life. It's just a matter of so many juice hungry applications in video, audio, internet, audio etc, all in one device draining much more power than any other phone you use. I genuinely feel like the device is like a mobile laptop with applications in some cases being as good or tolerably as good in a much smaller form factor.
  
• The GPS applications are fantastic. I wish there was a way for me to plug my IPhone into my car either via bluetooth, or some other wireless mechanism so that it would supplant my existing car's applications. Keep my car relatively dumb and allow my device to arrange for internet and interface with my cars systems. My navigation system in particular is much less "up to date" than the one on my IPhone and for example does not include traffic information like the mapping applications on my IPhone does.
  
• I was bullish on Apple's ability to gain Mobile OS share before this device and this launch only adds to my convictions. I don't think RIM is going to be able to innovate on its OS quickly enough to challenge Apple. RIM is very good at device design, usability and hardware development and they have come a long way from those SMR based devices in the 1990s (although in some ways the SMR devices were better).
• Voice dialing is missing. I would love to see some kind of voice control of applications as well. Lots of potential here.
  
• If Apple comes out with a more business oriented device quickly enough I think a few cracks will start to show on RIM' up until now invincible armor. Symbian has been at this for a while but the rate of change of innovation from Symbian is just not high enough. They are the global leader currently however. And I don't have a lot of confidence in Microsoft's ability to capture any imagination or increase share internationally.
  
• David Pogue. This has to be my least favorite technology reviewer out there. He is pretty much everywhere you go and the guy just doesn't seem to understand anything about technology. Specifically the comment about the turn by turn navigation because the Apple antenna is too small. Uh? What are you talking about? His review is linked here.
  
• It's easy to adapt to the new keyboard and it is very fast and exceptionally well done however I'd still rather have one. To attract business users I think you need to have that option so I hope the rumors about the prototype in existence are true. If they could up the battery life -even sacrificing a bit of size to do so would be well worth it.
• The network hand offs are sloppy. I have not used AT&T's network before but the hand offs from 3G to Edge and to Wi-FI are sort of awful. Also the 3G rollout of the AT&T network seem rather limited so far. If I am in an office tower in the Embarcadero in San Francisco I should have 3G coverage somewhat consistently. I found that even if I moved from one side of the building to the other I would lose 3G and hand off to Edge, and in some cases lose coverage entirely.
• The camera is bad. I don't even use the camera but that's a big market for Apple. I was a little surprised here.
  
• Sprint seems to have better coverage to me than AT&T. AT&T has been in San Francisco since time began in the form of PacBell. Sprint is a much newer network on a decade or so old. How is it that Sprint has better coverage?
  
• I think at least some of the power use issues will be mitigated once the next generation of chips comes out. The Infineon stuff they are using is fine, they just need more efficient chips that are more integrated with much lower power usage.
  
• The idea for solar power in the LED screen is fascinating and I wonder what it will do to battery life.
  
• The applications have huge potential, particularly the social networking / location based applications. Huge potential for new business models/ideas and applications. I can't wait to see what people come up with. From 1999 to 2005 there wasn't a wireless application deal I could get excited about (maybe 1 out of 1000), but the ratio now is much higher and I think the potential for real business creation in wireless applications has finally hit critical mass.
• The "phone" should just be another application. Voice is just an application that doesn't really use that much bandwidth. I would love to see Wimax built out in the United States as an alternate data network in major cities. I think indirectly or directly the IPhone is going to urge this along and I think there is most definitely room for a wimax carrier with a soft launch in top 25 markets. Put a voice app on it and go around ATT and the other carriers entirely and innovate freely.
  

The net is-- it's a great device but I am not sure you want to ditch your blackberry just yet. If you are on a plane or away from a power source for very long periods of time you are going to be in a bit of trouble. I do believe though anyone who invests in technology or just a passion for it needs to pick one up. It is far and away the best device on the market.

Some Scoop on Why Activations Went Badly this IPhone Launch

VIA Silicon Alley Insider:

For the second year in a row, first-day iPhone buyers are feeling the pain of early adoption. This year's issue: A problem with Apple's (AAPL) iTunes software that's not letting AT&T (T) fully activate subscribers' phones in their retail stores. This means much teeth-gnashing from the poor souls who've stood in line to get the gizmos, only to be told they can't use them quite yet.

While a bit of a black eye for Apple and AT&T, one company's shareholders rejoiced today: Synchronoss, the company that once powered Apple's activate-your-iPhone process -- and got the boot this year for AT&T's in-store iPhone 3G activation system.

Synchronoss (SNCR) stock is up 11% today to $10.09 -- presumably because AT&T and Apple's woes are making Synchronoss's service look a lot better. So what is going wrong today, and what could Synchronoss have done to make things right? You got us. A Synchronoss rep referred us to AT&T, which referred us to Apple, which hasn't yet responded to our query.

Early reports are lines are still going on over night. AT&T wanted to make sure activations took place on it's network as opposed to jailbroke then used on T-Mobile so negotiated hard with Apple to do so.

In Soviet Russia, you will stand in line and you will like it. I've likened AT&T to Soviet Russia in the past, but at least we don't have to stand in line for bread. Let's hope AT&T doesn't get an exclusive contract for that too.

Oh by the way if you are good at what you do you don't need exclusive contracts to make customers buy from you.

Selling my Soul to Soviet Russia

Well I did it this morning....I took off two hours to attempt to fulfill my lust for gadgets and attempt to secure an Iphone. I gave myself a limit though, my plan was if I could get the thing in an hour or two on the outside I would get it today otherwise I'd just get it later on in the week. How could I resist really...I mean, it's one of the most interesting gadgets and software platforms on the planet in a sexy form factor with tons of potential for useful location based applications and services that I've been dreaming about for 10 years.

And with all the tumult in the financial market could I have picked a worse time to go off on a gadget adventure? But hey- we have been either out or short of most the financials for two years so a 2 hour vacation is not too much to ask eh?

So it all started off pretty bad really. I walked by the AT&T Store on main and there was a line completely around the block and then some. They were having major server problems so there was zero to no movement in the line.

I love gadgets but the only time I'd do a line that long was when I was 7 years old when the original Star Wars came out. And even then, I found out a way to bypass that line with my sister who was 14 years older than me. In case you were wondering, she took me to see Star Wars at a really nice theater in Monterey and she flirted with a bunch of marines who were at the front of the line from the local military base. Boom, we were at the front of a several block line.

No such luck this time and I'm not as good looking as my sister. I had even been hearing about people on the East Coast who had waited in line for 2 hours only for the store to be out of stock.

Next I went to the Apple store in San Francisco (their flagship) which was 2 blocks from the ATT store and the line was even longer circling the block with a bit more movement than at ATT which had no movement.

Things were looking bleak. I was about to give up at 8:20 AM and decided to try one of the teeny tiny Kiosks inside Westfield next to the Apple store. They might have phones right? Sure enough I trudge up the escalator thinking there is no way I will get a phone today. There appeared to be people manning the booth and wow I was in luck, they had tons of Iphones. I was lucky, arrived with only 4 people ahead of me and made it out of the store relatively quickly.

In contrast to the death and destruction the financial markets were spewing forth, it was my lucky day.

So yeah I didn't have my sister here to use as bait for marines but sometimes it's better to be lucky than smart and I got lucky this time. It was kinda ironic standing in line as #5 thinking just outside the building the Apple store had a full block at least worth of line.

I will say their activation servers were severely slow and I can't imagine what the waits must have been like at the places circling the block. It seems like they would be there for days if you had like 30-45 minutes an activation and 500 people ahead of you.

I had a lot of mixed feeling about dumping Sprint which I have had for 12 years with perhaps a 1 week interruption. More to the point, ATT is basically the equivalent of buying from Soviet Russia with outrageous pricing across all their products in voice and video and their Uverse "exclusive agreements" with ultra compressed copper video signal is a plague across fiber rich San Francisco.

Quickly enough my turn came at the Kiosk, and a nice lady named Regina asked "How can I help you?"

I thought I would try to be witty and told her I was here to check out her selection of Palm Centro's. She didn't get it so I quickly explained I was there for a 16gig Iphone.

She then found out I was porting from Sprint and asked if I was coming to AT&T solely for the Iphone. Uh if I am buying cell phone service from a LEC, you know it's because I have no other choice.

Man, I feel like I was selling myself to the devil just to get my hands on some gadget porn. But seriously how could I not do this? It's an amazing device. How could I call myself a technology lover and not get this phone? The potential for location based services, selling, gaming and media on the device is huge. It's necessary R&D and if I have to make a few compromises by going to a carrier I don't care for at inflated prices so be it.

I love the device so far and I have not been this excited about a device since I got my first Blackberry in 1999 (which had no voice if you remember and operated on tiny slivers of SMR spectrum but was still outstanding).

I've already found an application that looks interesting called Whrrl. It's a location based people/place tracker that some people I know from T-Mobile/Voicestream invested in. It looks really promising and I can't wait to try it out.

The rest of the device is awesome and it's absolutely excellent. The OS apple has put on this thing is fantastic and I am fairly confident if they come out with a prototype with keyboard they will slowly eat RIM share and take on Symbian in the rest of the world. If they end up coming out with the keyboard prototype I've been hearing about I think that will really put a dent into Rim.

Oh one last thing. To get around the 5 year exclusivity with AT&T why can't Apple take an ITouch (and Iphone without a GSM radio in it) and put a Wimax radio on there instead. Then market it as data only then put some ip based voice ap on it. Just utterly bypass AT&Ts outrageous fees for voice and collect that directly. I suppose Clearwire/Sprint has to get Wimax ready but that's bound to be an option very very soon.

Fannie and Freddie

A lot of people are banking on a big bailout this weekend for these entities. Other than the housing bill that has been working its way through the Senate and House and later stalled by one Senator using procedural machinations we won't get any bailouts of Fannie or Freddie.

The government is going to hang its hat on the idea that this is long duration paper as long as both agencies still have access to the debt markets to borrow short and lend long. Basically sticking its head in the sand and hoping things will get better.

I'm not saying you can't make protected bets here (calls with built in put protection) but don't count on the government or the Fed or anyone doing anything especially over a weekend to make your strategy work.

The paper these guys wrote actually is not bad--these are not subprime loans or Alt-A paper with bad underwriting. Most of it is decent.

Like Jamie Dimon said -- there are a lot of things in this country that are great. But we are in a tricky area with how we finance and borrow in this country and rates will start to rise quite a bit from their currently depressed levels in the fullness of time.

A Show of Strength before Blinking?

That's my most optimistic view of what the Iranians could be doing and what I think the logical response from them should be. In six months a lot of their leverage will be gone, they either have to provoke a conflict now or blink in exchange for some "fabulous prizes" from the west. I'd take the fabulous prizes.

Coverage on the tests here in the WSJ.

Last month, members of the U.N. Security Council and Germany offered new economic incentives in exchange for Iran freezing its uranium-enrichment activities. Top Iranian officials, such as Foreign Minister Manouchehr Mottaki, have suggested Tehran might accept the incentives as part of a new diplomatic track.

In another encouraging sign, the day-to-day commander of U.S. forces in Iraq said Wednesday that attacks involving Iranian-made rockets and mortars have fallen sharply.

Bill Gross on Lehman Rumor

Whew-- he is on CNBC and I've never seen this guy sweat so much. CNBC had him on to address a specific rumor PIMCO was pulling money out of Lehman Brothers.

Bill if you are going to go on CNBC make sure you are okay answering the question. Did they not tell you why they were having you on? Last time I saw that kinda of angst was when Bill Clinton was asked if he knew someone named Monica Lewinsky. That said we are late in the cycle and it's tough to short these on insolvency with the Fed in the background. i.e. you can get the Bankers down on the loss of structured products as a revenue generator but I wouldn't buy their securities or derivative thereof based on the idea they will go insolvent which is what the derivatives are starting to price in (over priced).

Nice New Deal in Austin

Via PEquity Hub:

This looks like a very interesting deal that I wish I had money in. I wonder if the team will be focusing on Mobile MMOs with geographic based content. I think there is huge potential there. Big question is why no Austin based firm in the deal? AV's not around doing early stage stuff any more (they have a pro cyclical VC policy I guess?) No early stage players in there local to Austin to do the deal looks like a gap to me. Austin has some venture funkiness that inhibits the industry there particular at early seed/A rounds.

With all the venture money sloshing around it's amazing to me that Austin has scared away all the early stage VC's and a fund has not been formed there to provide a 2nd or third player.

And what's the deal with the "we don't to consumer deals" or early stage deals they got from the local big VC there. That kind of answer kind of vicariously irritates me without me actually experiencing the rejection.

If the deal was in "consumer electronics" I could see a blanket "no" but consumer media for a CEO with multiple wins some of which were for AV?

Sure the consumer is hurting but we are looking at a 5 year exit here despite the current business cycle. Frankly traditional media does not know how to entertain with their offerings in television and other media. Fewer and fewer young people are watching TV these days and that trend will only accelerate as they look for more interactive forms of entertainment. Even the TV that is on tends to be more interactive and reality based such as American Idol and the various voting shows.

Solutions that are interactive, real time, and geographic based are needed. This deal has a lot of those element which interest me. The manner and location (on the move) that we entertain ourselves is going to change more quickly than people think in the next few years.

Today, Austin-based Challenge Games announces a $4.5 million Series A round from Sequoia Capital — which is great for the startup; Sequoia has backed a long roster of some of technology’s biggest stars, from YouTube to Google to Yahoo to Apple.

I also think Sequoia was lucky to land this funding. Challenge Games, which has released two multi-player online games — Duels and Baseball Boss — seems particularly promising. Duels was introduced last summer; the free, online game where players build their own avatars and then challenge others who’ve registered online, can be played in minute-long bouts and is highly addictive if you have a little time on your hands between calls. Baseball Boss comes out of beta today. It’s another “short form” game, but it combines virtual baseball card collecting with fantasy sports. (You can create teams based on whichever historical players you choose, then challenge the teams of other registrants.)

Immelt's Strategy with GE, Buy High Sell Low?

GE announced that it is exploring "all options" for its Consumer and Industrial businesses, saying the primary focus is spinning off the entire
unit -- which includes appliances, lighting and industrial -- to existing GE shareholders. It had previously said it was exploring options for the appliances unit. "As we explored our options for Appliances, it became clear that the fastest, most efficient step we could take in completing the transformation of our Industrial portfolio would be to focus on a possible spin-off of the entire
unit," GE Chairman and CEO Jeff Immelt said in a statement.

I really don't understand the Strategy of this CEO? Buy high and sell low? While particular unwind is going to shareholders, he has been attempting to unload large portions of of GE's industrial businesses at a "suspect" pace.

Now is a horrible time to unload assets generally. To justify this strategy one would have to believe the global economy is going to enter a long depression. If it isn't, those businesses are going to be a lot more valuable in 5 years and he's unwinding these assets at a huge discount. He either believes there is going to be a significant slow down in emerging markets, BRIC, or there is something going on inside GE that is not publicly known, or- he is making an error.

I am missing something.

No doubt we'll get a good read from their earnings tomorrow. Last time they blew up it caused major market problems...a death blow now from GE could send the VIX to the levels needed for panic selling. It may be nothing but whenever I see a lot of reports about disposing of business units and I can't detect a strategy it usually means the board is trying to "anchor" the stock ahead of some major news. Could be wrong but protection is currently cheap and one could get some this evening and simply sell it at the open almost without cost if GE reports a fine quarter (which they really should given the business units they still have and their global expsoure aside from finance)

Bernane and Paulson Testimony Happening Now

Just a quick comment on their testimony and the subject of regulation.

Most of the economics I've learned has been free market based. Among these concepts are "the free markets clearing process", "supply and demand", "the invisible hand", "creative destruction", and allowing that process to unfold unfettered by government interference.

All these concepts have been drilled into me since I was a kid. A lot of this I think was over emphatically pounded into be because as I was learning it, we were in the cold war and central planning was constantly vilified while the free market and the "invisible hand" were highlighted.
My own boss at the White House was a Libertarian and his economic views on free markets had a big impact on a young kid learning his way in the world.

However, one of the most powerful tools in economics is human psychology and I don't think the "invisible hand" accounts for human emotions in periods of greed and fear. It's kind of the "unified field theory" of economics in my opinion. Free market economists, and Ayn Rand libertarians like Greenspan just don't factor this in.

You saw my favorite banker, Jamie Dimon use the words "pro cyclical" meaning that in periods where things are good less regulation occurs and in periods where things are terrible, more regulation seems to occur.

One of the things that Greenspan comes to grips with a a libertarian is his belief in the free markets but concerns he did not use the Fed's regulatory authority to constrain the mortgage market. Greenspan is about as free market as you can get but if you actually look at what he did in practice he interfered quite a bit.

I actually don't have as many qualms with his monetary policy as others do since I think you need a much tougher standard to second guess an individual. However the lax mortgage regulation was a problem. He essentially allowed this mortgage market to grow into an unwieldy beast that people are still trying to understand and control. In his defense, the oversight responsibility for the Fed here and the other agencies goes back to the civil war so it's not clear that even if he had wanted to he could have constrained it effectively.

My own views have shifted more towards "counter cyclical" regulatory policy. This means, when things are good, regulators needs to make sure the risks being taken are clear and that new products introduced by investment banks don't circumvent existing regulation like they pretty much always figure out how to do.

On the other hand, during period of fear, regulation needs to hold a less heavy hand. In contrast, we appear to do the exact opposite. I sincerely hope the government does not over reach here and constrain the recovery and healing process that needs the take place. At the same time I believe we need a more pro cyclical regulatory regime.

Poole Pushing Fannie off a Cliff

As reported byBloomberg these comments below are relatively interesting:

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday.

Poole is known for being a "curmudgeon". He tends to be incredibly hawkish on inflation and believes Bernake cut way too much and has fought him every step of the way. Part of the reason Bernake has cut is to allow institutions like Fannie and Freddie to borrow short term at a much lower rate, than go ahead and turn that into funding for mortgages. It's called "borrowing short and lending long". This keeps the juices of the mortgage flowing and helps our markets restructure old debt into a new more stable financial structure until something better comes along.

At the same time Paulson has introduced the European concept of "covered bonds"...securitizing mortgages with ultimate recourse back to the originating source. In the US we securitized these loans but there really was no recourse if there was poor underwriting and the assets had bad paper in them. The amount of bad paper was so high that it ended up contaminating the whole asset making an already illiquid market less so causing further deterioration in the assets, and ironically the real estate they were designed to finance.

While I think Poole is respected by many for his tough stance on inflation these comments on Fannie Mae were unconstructive and may actually force a government bailout. These companies while suffering from somewhat deteriorating equity values were on a path to at least raise a portion of the funds needed to continue operations however I am not sure that is going to be possible now given Poole's comments. I doubt the investors are lining up at the moment.

In addition you've had the real estate bailout stalled in Congress because a Senator from Nevada using procedural tactics. Depending on how the House sends up legislation to the Senate 40 votes is not enough to blocks something, sometimes 1 vote is enough. And now even if the vote is passed it isn't going to enough help Fannie Mae or Freddie given the deteriorating in the last few days.

So we've got a bit of a perfect storm of events that are driving Fannie/Freddie into the sea thus requiring the bailout Poole wants to avoid. It may also force further cuts that he fought so vociferously against. No question if Fannie Mae goes under Poole will have earned his reputation as a truth teller but there is a difference between forecasting the future and giving it an unhelpful nudge off a cliff.

If I am lucky enough get to the age of 71 I hope I will have learned the humility to know the difference. Former government officials such as Poole and Greenspan owe a grace period to the country in terms of caustic comments like this and in my opinion these comments were highly irresponsible.

Dimon for Treasury Secretary?

Fantastic speech the day after the big Charlie interview by Jamie Dimon of JP Morgan. I have not seen this anywhere I can link directly except through CNBC.

His views on almost every policy issue are progressive and well done.

It's frankly an excellent non scripted speech. I wouldn't be surprised to see his name on a short list for Treasury secretary and I think the speech and the Charlie Rose interview are partially designed to do that.

CNBC link to the excellent video here.

Iran Not to be Outdone by IPhone Launch

Iran had a new product launch of it's own last night. Not to be outdone by Apple, the mullahs in Iran launched the Shahab-3 missile. Writeup in the FT here and an event better one by Bloomberg here. A couple of interesting stories played in at around the same time making for an interesting confluence:

• The Russians came out prior to the missile launch criticizing the US / Czeck missle defense deal and threatening "military-technical" responses. The odd thing about that is every press story you read about the comments implied the Russians were implying a military strike of some sort. I read that as the Russians threatenting to put up a missle defense system of their own or testing new missles which is far less omnimous. Literally it could have been just a mistranslation from Russian to English.
  
• The Iranian launch played right into Secretary Rice's hands since it showed Iran indeed had a missile capability and were intent on developing it. The Russians know the reason we are putting the defense system in Eastern Europe is to not only extend the missle shield but also to secure their cooperation in containing Iran. So far, they are not really going for it.
  
• The Iranians are betting they can argue they are only doing these tests for peaceful purposes. However, it's a harder case to make when you are working really hard on 1) a nuclear program and a 2) ballistic missile program at the same time. You can get away with working on one or the other but not both at the same time.
• Secretary Rice characterize the Russian move with exactly the right word "disappointing". Her job is not to escalate Russian rhetoric as it is hollow at this point and downplay it where possible.
  
• I think the President of Iran did this test on his own, and I'm not sure he had the knowledge or consent of the rest of the government (the mullah's themselves). I think it was an error to do the test as it will give more credence for a preemptive air strike.
• The developments in Iraq with the government there arguing for US Troop withdrawal deadlines. The Iraqis are starting to feel more confident in controlling their own country I think it's a huge mistake for it to look like we want to stay longer than the local government wants us there. Deadlines may be a mistake and play into the hands of our enemies but it's far more valuable to have the Iraqi's a strong, independent democracy without US troops enforcing it. This presumes that goal can be accomplished, and I'm hopeful it can be. Pointedly, I think we should arrange for a six month extension of the current troop agreement to give the new President time to negotiate exactly what he wants to do.
  
• This all plays interestingly into the elections as the candidates shift positions around the Iraq/Iran war. This will move both candidates to be more hawkish on Iran and their positions on Iraq will continue to shift in interesting ways.
  
• I still believe if the Iranians don't provide a verifiable enrichment regime that Israel will do an air strike on the enrichment facilities within a year, most likely in December to January.
• All these factors highlight several macro bets you can make if one is so inclined
  

Iphone Sighting in the Wilds of Portugal

Here are some scooped images of an Iphone out of Portugal. Lines start Friday at 8am and given you are required to activate in the store it's going to be a bit more hectic than last time. That said I am more than a bit excited about this particular gadget as well as rumors around a keyboard based version that is in working prototype form.

I can't wait!

UPDATE 7:11PM: Reviews are out tonight on the Iphone. The one from Mossberg was kind of well----dour. He really feels like the battery life took a major hit. The rest are pretty possitive. Also the GPS while good, can't do turn by turn. I'm still excited though. Links to Reviews below.

1. NY Times
2. Mossberg
3. USA Today

New Website for Boone Pickens Energy Plan

Boone has a new website that pushed for alternative energy and independence. The website is here.

I don't necessarily believe natural gas should be as big of a substitute as Boone Pickens however, I think we to work across multiple fronts until one or more of these solutions achieves critical mass and gains momentum of its own.
The energy plan of Obama and McCain are both really lacking. For example McCain has lukewarm support for several alternative energy solutions such as solar saying subsidies distort the market. And Obama wants to tax the oil companies when taxes tend to make oil companies produce less or move production out of the United States forcing us to import even more oil unti a longer term soltuion is found.

The thing I love about what Boone is doing is
1) He is very credible on the issue
2) He asserts it is the single most important problem the next president must solve
3) It will help bring more focus to a problem that the government is currently doing nothing about. Both candidates are still very much in the policy formulation phase as both race toward the middle (I hope) and I think Boone can make a difference here.
4) How can you not love Boone Pickens? He is an inspiration guy, represents the best of Texas, and has an amazing spirit.

I signed up, you should too.

Yahoo Ballmer Redux Part VIII

So Icahn is out with a letter confirmed by Microsoft that states they would be interested in the transaction if there was new management at Yahoo. I think this is an effort by Microsoft to buttress Icahn's efforts in a critical time before the shareholder meeting. We didn't get it too far off the mark in this post in June 12, here with this line:

Perhaps this is Microsoft's way of lending juice to Icahn's board slate and to get a new "culture" in place. But I wouldn't lay odds on this scenario either.

Given the letter is out in the open and Yahoo now in the low 20s to high teens, I think it's more likely they can get the votes to replace the Yahoo board and consummate a transaction and I'm raising my odds accordingly. What institutional shareholder is going to vote for Yang when he is essentially an untested CEO and has already shown the propensity for poor judgement in not taking the offer in the first place.

Also, I don't know if I 100% buy that this was in Ballmer's mind the whole time. It's rational and logical but he just seems so erratic to me. This letter from Icahn makes Ballmer look good but I don't think it's fair to paint Yang as the sole source of problems here. It takes two to tango.

Last but not least, my bet is this deal goes through and Icahn gets a new board. I'd guess $29 bucks a share, maybe as low as $27 and Icahn will have to pick a new CEO that can execute in case a deal cannot be consummated.

Is the Blink from Iran a Blink or a Wink?

There is very concise but on point piece in the economist in Iran. Essentially the gist is air strikes against Iran are probably very risk but at the same time Israel is likely to go ahead and do them anyway.

I think it's fairly clear the Iranians have sensed a change in the winds driven by the lack of progress in sanctions and importantly the increased stability in Iraq. As Iraq succeeds you are going to see the pressure and dynamic on Iran shift dramatically. A vibrant strong Iraq can make things far more difficult for the mullahs in Iran than anything Hussein or Bush could ever do.

So far the Iranian's are blinking by throwing out a few olive branches on enrichment but it's not clear that has the support of the entire Iranian government or that the overtures are real. i.e Is this a blink or just a wink?

My bet is the Iranians will offer this olive branch but try and stall around US elections and to get a better sense for how Iraq plays out. Unless they offer full and verifiable concessions I don't think it will do anything to stop the air strikes as the Israeli's perceive this as a closing window. The Israeli's just view the equation differently than the rest of us and you will continue to see a diplomatic effort by Israel with Syria, Palestine, and even Hamas while readying the attack on the nuclear facilities in Iran.

Full piece here and excerpt below:

The trouble is, this logic looks different from Tel Aviv. Given their history, a lot of Israelis will run almost any risk to prevent a state that calls repeatedly for their own state’s destruction from acquiring the wherewithal to bring that end about. Till now, the world has talked a lot and applied some modest sanctions to stop Iran’s dash to enrich uranium. It is time to apply much tougher ones, in the hope that it is not already too late.