Why I Hate Jim Cramer

So TheStreet.com issued a press release today saying that Jimmy Baby is going to spend less time on radio and more time in front of the camera. Hooray! Barf. Now I don't particularly like being the 300th person to pile on 'ol Jimmy, who has been taking some body blows as of late, but what I have to say has a somewhat different spin that most of what's out there. My thesis: he is helping to perpetuate addictive, stupid, self-destructive behavior, and he has to be stopped. Except now he is only getting a larger platform. What does this say about our society? I'm not sure, but I don't like it. Professional investors love this, so they can make money off of the sheep-like behavior of hopeful, drooling retail investors. Sorry, pros, to be "outing" you. You must be paying Jimmy on the side to keep him talking. What's bad for retail is good for the pros, that's for sure.

His Mad Money bs is really no different than Philip Morris selling cigarettes: they're bad for you, they effect those around you, and you shouldn't smoke them. Jim Cramer: he makes you think you know what you're doing when you don't, you tell your friends about it, when you really should be in some good equity index funds and high-grade bonds. But hey, call me a cynic, call me harsh. This is just one man's view.

Eric Savitz of Barron's published a post titled TheStreet.com Shares Jump: They're Upping the Ration of Cramer in the wake of today's release. This news was very bullish for the stock, which was up over 5% in mid-day trading. Did you know that Jimmy has a book coming out titled Jim Cramer's Mad Money: Watch TV and Get Rich Now. You've got to be kidding me. Please don't buy it.

There are a broad array of stories and websites discussing Jimbo's approach and record (and, in general, how they suck). Some of these stories are as follows:

Guru Grades, Jim Cramer Deconstructed - CXO Advisory Group, 11/30/06

Site Update - YourMoneyWatch.com, 11/29/06

Sad Money? Cramer's Stock-Picking Prowess In Question - New York Times DealBook, 3/24/06

Unreal Mad Money Trading After Hours! - TickerSense, 1/27/06

It's Me, I'm The Idiot - Random Roger's Big Picture, 6/3/05

As usual, some of the most interesting stuff is in the comments to the posts. You should see the game of comment tennis between Cramer and the guys at CXO. For anyone with a brain this match was 6-0 6-0 6-0, CXO. I won't repost here but the volley was most enjoyable. Problem is, nobody in retail cares. Because it isn't about making money. They think it is. But they're wrong. IT'S ABOUT HAVING FUN, BEING PART OF SOMETHING AND GETTING A HIGH AKIN TO GAMBLING. Now let me be clear: I don't have my PhD. in clinical psychology. But I think I know enough about investing, psychology and group dynamics to speak with some degree of credibility on the topic at hand. Some excerpts from the comments to the DealBook piece reflected this analysis as well.

The problem is that the average investor fails to realize that there is a gigantic gap between knowledge and practice. Meaning, you can know tons about all these stocks and sectors (e.g. being on a conference call, reading the filings, etc.), and still not be a successful trader. Viewers see Mr. Cramer - with this staggering amount of information and data on every possible angle (”here’s a Patriot Act play” e.g.) - and conclude that all this knowledge must lead to wealth creation. As if it were so easy. And who is going to print that? People just want names to play... Just yesterday a trader colleague of mine reminded me of some of Mr. Cramer’s recent stock picks, and I said, “Thank god for Jim Cramer, he makes my job just a little bit easier.” Let’s work towards teaching a process, rather than throwing chairs.

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Let’s face it. If someone REALLY knew how to make BIG money in the stock market, they would make it and not give away the “secret”. All these talking heads on TV are a joke because if they really knew they would not be working, they would have retired. The old expression: “Those who can’t, teach and those who can, do” is the point. As far as Cramer is concerned, he is nothing than a two-bit loud mouth carnival huckster (no disrespect to carnival hucksters) and in the end will cause vast numbers of “investors” much pain. Every person has their five minutes of fame and Cramer has overstated his 5 minutes. Shame on CNBC for airing this trash program for the sake of advertising revenues.

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If you blindly follow ANY stock-picker, you will get burned. Cramer’s value is in giving you some names as starting points for your own research, letting you know what the big money currently likes as far as sectors go, and telling you why markets really move the way they do. All the wild antics are simply because he thinks the markets are fun, and wants other people to think so too.

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The fact is that most people would do much better buying Index Mutual funds. Do the research. If we all ignored trying to pick the stocks and bought then whole market, we’d beat most of the mutual fund managers with absolutely no pain. When it all boils down, CNBC gives you worthless information just like the major liberal network news shows that pretend to be objective. Did you hear that Dan Rather?!

Reading what I've written on Cramer brings me back to a post I had written in August about a social network-for-stock-picking company called SocialPicks. I went completely ballistic on the concept. Why? For exactly the same reasons I think that Jimmy and Mad Money are akin to a WMD. Believe it or not, I even referenced Cramer in my post, and in a truly prescient way, if you ask me.

It is particularly interesting to read some of the comments to the TechCrunch article. The diversity of comments pretty much represents that of the investing public - most comments have no appreciation for history or empirical research, a few are so far off the reservation (citing "wisdom of crowds" as the reason why such sites make sense) as to hardly warrant comment while a few actually raise the fundamental issues of indexing, risk management and diversification. The feel one gets from looking at these sites is that investing is somehow supposed to be FUN. For those of you who have lived in the markets for a long time, we all know this to be the kiss of death.

Investing life should not about being the next Jim Cramer - or if it is, may the force be with you. Investing in equities for long term profits is HARD, and unless you are professional (and, I might add, one of the few rare professionals whose record is empirically proven to be due to something other than pure chance), then it is best to get out of the way and to focus on the one thing that really matters to building and preserving personal wealth - asset allocation.

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I spent over 17 years on Wall Street in M&A, Derivatives and Trading, and I personally don't feel comfortable trading single stocks. Because I'm stupid and don't understand the markets, valuation, and "the Game?" No. Because I am humble and aware of the barriers to success. If you want to play games and have fun on these sites, go ahead. But if you want to be an investor and increase your chances of building and protecting wealth, it is decidedly not fun and it's serious business. No fooling.

Fun. Is that why we invest? Clearly some people do. Based upon Cramer's sub-par record (at least from what I've read, which is pretty convincing), then this is what it must be about. Make a few good calls, print some cash, and believe you can do it all over again. Now this reminds me of another post, one about stock spam and why people actually act on these bogus tips.

My theory is that the mind-set of those who try and take advantage of "tips" imparted through stock spam is similar to those I described in my earlier post on social networks for stock picking - they are entertainment-seekers for whom deploying capital (now, I am specifically NOT using the term investing) is a game, not a vocation. As a result, the emotional state of those responding to stock spam is akin to that of a gambler - trying to make a quick score, trying to be smart, wanting bragging rights, wanting the "high" of a profitable trade. Mind you, this bears no relation the mind-set of a professional investor (or even the prudent amateur): a keen focus on strategy, controlling all the variables you can, long-term orientation, risk mitigation, taking a deep breath, thinking and then thinking again before entering a position.

I have always thought that gambling, in general, gives rise to externalities because it preys on the weakness of the human spirit and the desperation many people feel. That said, regardless of whether or not stock spam gives rise to a similar externality, until the returns are squeezed out and the "dumb money" stays away, it will be here to stay. My advice to those who think my perspective has redeeming value or for whom any of this or my previous post resonates: JUST SAY NO. The "rush" of a successful trade is a drug (and a highly addictive one at that) for many, and I entreat you to stop. Please.

This is the connection. Cramer and his TV show have the (worst) elements of both social networking (being part of the Mad Money "community") and stock spamming (over time, you will lose). Quite simply, Jimmy is effective at making some people believe. If they are vulnerable. If they are thrill-seekers. If they are grasping. If they have an addictive personality. Please, be careful out there.

Boeing: Extracting Value from a Flat World

The Old Boeing

Boeing. Not my image of the progressive, nimble, adaptive company. Innovative, yes. Great products, yes. Insular and vertically integrated? Yes. Subject to booms and busts? Yes. My perceptions clearly relate to the Boeing of the 1990s, which got caught long on factories, long on inventories and long on staff, precipitating a massive melt-down that impacted both workers and stockholders alike:

Boeing, which is based in Chicago, is trying to avoid mistakes of the past. In the last aviation boom, in 1997 and 1998, Boeing gorged itself on orders, but its production lines could not keep up and ground to a halt.

Nevertheless, the company flooded the market with too many planes and ultimately had to sell them at cut-rate prices. Boeing’s write-offs came to more than $4 billion in 1997 and 1998, executives were sent packing and 20,000 workers lost their jobs. Boeing’s stock plunged, as did profits, and many wondered whether Boeing would ever regain its footing.

This was no way to run a company, and this reality was painfully reflected in the two places that really count: the market for their product and the market for their stock.

The New Boeing

Fast forward to today. The company could be a poster-child straight out of Thomas Friedman's book  The World is Flat. Basically, Boeing is focusing on what it does best - designing, engineering and assembling airplanes - and outsourcing everything else to high-value added suppliers across the globe.  And the results of this corporate transformation have been staggering.

Boeing today has only about half the suppliers that it did a decade ago and has shifted more of the risk — and cost — of developing and building the airplanes to them.

Major parts of Boeing planes are built by suppliers in Japan and Italy and come to the Seattle area, where the commercial aviation division is based, only for final assembly. In the United States, its airframe manufacturing operation in Wichita, Kan., was sold to investors and now works for Boeing as a subcontractor, absorbing costs and risks Boeing once shouldered.

“The world has changed, and Boeing has changed with it,” said Michael Boyd, president of the Boyd Group, an aviation consulting firm in Evergreen, Colo. “They’ve offloaded a lot of production. They are farming out everything to others so they don’t have to build it. ”

That future is perhaps best represented by the 787 Dreamliner. It will be the first commercial jet made in large part from composite plastics, rather than aluminum.

The wings are made by Mitsubishi, Kawasaki and Fuji Heavy Industries, all of Japan. Italian companies are building part of the fuselage, and Boeing has contracted with its former Wichita operation, now called Spirit AeroSystems, to make other parts of the fuselage.

If there is a downturn in orders, Boeing does not have to face the challenge of what to do with a permanent, unionized work force. It also means that fewer workers are needed in Everett since less of the work is done there.

Having components made in the places where they can be produced at the highest quality and at the lowest cost. Transferring a good portion of the financial risks of manufacturing from Boeing to its suppliers. Benefiting from a flexible, global supply chain that can react to changes in demand without causing massive layoffs and its repurcussions. This is good stuff. Friedman must be proud!

Adapting Culture and Mind-set for a Changed World

Boeing was once a company that couldn't say no, pressing production to meet spikes in demand even if it meant massively ramping infrastructure and staff. This led to the inevitable busts when demand spikes abated and excess resources weighed heavily on the Company's cost structure. So now the mind-set is, "Well, we may give up some sales today in exchange for long-term stability in costs, employment and profitability." Sounds pretty sensible, but hard to implement in an old-line manufacturing firm like Boeing. But they've taken their bad-tasting medicine and done it.

Today, having learned its lesson, Boeing is adopting a polar opposite strategy as it faces a new wave of orders that, if not managed right, could swamp the company again.

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“In this hot market, it would be easy to be consumed with the desire to sell anything to people walking through the door who want to buy and push our production system to the point where you could break it,” said Scott E. Carson, the chief executive of Boeing Commercial Aviation. “It’s much harder to say, ‘I’m sorry, we’re sold out.’ ”

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“Frankly, we are much more disciplined than in 1997 and 1998,” Mr. Carson said in a recent interview. “The message is, Don’t get ahead of yourself; don’t go crazy about how we ramp up.”

He added: “We have to communicate that openly with customers and suppliers to be sure they understand why this is good for the industry. The role of the industry leader is to demonstrate discipline and restraint in the marketplace.”

Communicate openly with customers and suppliers? Display industry leadership? What is wrong with these people? What a breath of fresh air from a old-line company. While their pension obligations don't rank up there with GM and Ford, there is a lot they are doing that Big Auto could learn from, no doubt.

There is Always Pain When Undergoing Change

Needless to say, Boeing's onshore unionized workforce is none too pleased with this turn of events, notwithstanding the stellar performance of the company in both the marketplace and the stock market.

Not everyone is happy with this outsourcing — especially Boeing’s union work force, which numbers about 20,000.

“We have an issue with the vendors and the suppliers,” said Connie Kelliher, spokeswoman for Machinist Union District 751, the largest union at Boeing. “We are the smartest, most skilled work force in the world. If there is a problem with vendors, our workers make it right. Boeing is very public about wanting its suppliers to share the risk. But they’ve let go of core competencies. If we are good enough to bail them out, we are good enough to have the work left in our hands.”

Further, some real business risks arise when one is not in full control of the means of production:

All this outsourcing is not without business risk, as well. “The danger is that your supplier can become someone else’s supplier,” Mr. Boyd said. “There is no stopping Spirit or Vought from doing business for Airbus. When Boeing owned all the factories, it only did stuff for Boeing.”

While this point is certainly worth raising, "doing business" is very different than taking someone else's proprietary designs. At the end of the day, who cares if a supplier is providing specific parts for different manufacturers? If Boeing has the better designs and more demand in the marketplace, should they care that Vought is making landing gear for both them and Airbus? I don't think so. Now if there are global capacity constraints then this matters more. But I'd wager that such a shortage would be met by a rapid increase in supply by efficient offshore providers. Therefore, I think this point is valid but ultimately a red herring which represents little true business risk.

The Bottom Line

Successful utilization of offshoring, outsourcing and supply-chain management, as Boeing has done, can deliver a passel of valuable benefits for customers and shareholders alike:

1. Less volatile earnings
2. More predictable cash flows
3. Smoother employment profile
4. Lower fixed asset base
5. More streamlined production process
6. Quicker product development cycles
7. Higher quality end-products

Concerning unionized employees who are mad that some of "their" jobs have moved offshore, would they and the community be better off if Boeing's cost structure was appreciably higher, resulting in fewer sales, possibly triggering additional layoffs and production cuts? I'd say not. The bottom line is that Boeing is delivering a global product addressing the global demand of its global clients, so it is inconceivable to think that a solely local workforce would be best positioned to meet this need. This is the way the world is going and companies can either rise to the challenge or wilt in the face of painful yet necessary change. Boeing has showen its stripes by proactively determining its future by aggressively taking advantage of the flat world. I wish I could say the same for our friends in the auto industry. They clearly have a lot to learn.

Et Tu, WSJ? Another Mistaken Missive on Stock Buybacks

Not a week goes by these days without some commentary on the "evils" of stock buyback programs, and, on occasion, I just can't take it any more. Well, this is one of those days. Barely two weeks have elapsed since I wrote a somewhat harsh critique of the New York Times coverage of this topic, and today I read a column in the Wall Street Journal that has once again sparked my ire. Come on, folks, is it just me or do mainstream media columnists simply have it in for public companies? One might think so based upon the title of today's Ahead of the Tape column, Self-Serve in the Boardroom. Let me say in advance that most of what's reflected in this column is factually correct, and some of the data actually somewhat interesting, but the shallowness and thrust of the piece is what I object to. And I'll tell you why.

The entire column is provided here:

This year's buyout boom means companies and private-equity funds are gobbling up corporate shares like never before. But the buyback boom is having a huge -- and less noticed -- impact.

Buybacks aren't always what they seem. A company might throw confetti for its share repurchase plan with one hand while issuing shares with the other.

In this case it has led to a substantial reduction in overall number of shares outstanding. Reduce shares outstanding and earnings per share -- the usual way of looking at profits -- goes up. Over the past four quarters, Exxon Mobil took its share count from 6.3 billion to 5.9 billion. While its total after-tax income in the third quarter, at $10.5 billion, was 6% above last year's $9.9 billion, its earnings per share of $1.77 was 13% higher than $1.57 last year.

Exxon isn't alone. The past year's buybacks have boosted year-over-year earnings per share growth by four or more percentage points at nearly a quarter of the companies in the S&P 500, according to Standard & Poor's senior index analyst Howard Silverblatt.

Investors tend to look on buybacks favorably, often seeing them as an efficient way to return value to shareholders. Insofar as earnings per share are higher, and therefore price-to-earnings ratios are lower, there is a lot to like. That is especially true now, when companies have plenty of excess cash to distribute.

At the same time, investors need to be careful to avoid mistaking earnings-per-share growth from buybacks for actual earnings growth. When buybacks slow, as they inevitably will, what's left of earnings per share could be a big disappointment.

Now I am not sure exactly whom the WSJ considers its constituency, but the level of this story presumes little or no sophisticaton as it relates to financial analysis and investment. If this story could be summarized in four words (which, in fact, it can), it would be "Don't rely on EPS." Oh, really? Who that is investing money, either their own or others, relies on EPS as the metric for corporate performance? Anyone who is relying on EPS to make investment decisions certainly isn't reading the WSJ and absolutely shouldn't be investing anyone's money.

And the premise that large corporations like Exxon are implementing share buybacks with the explicit goal of increasing EPS is just a bunch of garbage. It's just not true, especially at a corporation like Exxon. These treasury departments are very smart. I know because I spent many years advising them on corporate finance and risk management policies. They understand the trade-offs among ongoing stock buyback programs, self-tenders, regular dividend policy and special dividends. Further, they internalize two key tenets: first (1) provide the financial resources and the stability necessary for the operating business to thrive; and then (2) work to minimize the cost of providing these resources through intelligent capital structure decisions.

That said, are there dirtbag companies that have EPS-driven executive compensation programs and who undertake stock buybacks because they mathematically know it will increase EPS? Invariably there are. But I don't believe they are in the majority and I don't believe an investor should paint the market with a broad brush and say "buybacks are manipulative." They are a legitimate and appropriate element of corporate finance policy, and arguments to the contrary simply fall flat.

But this is neither here nor there relative to the key question - who really cares about EPS? Isn't what we, investors, really care about After-tax operating cash flow, adjusted by capital expenditures? Doesn't it make more sense to first value the business, and then to take into account capital structure? How can you do this if you are staring at GAAP EPS? Answer: you can't.

Does anyone remember IBM in the early 1990s before Lou Gerstner took over? That company was dead in the water. An emphasis on hardware (which is a war they were losing). A large (but not large enough) services and software business. Warring factions with little cooperation across key verticals. Cash being wasted on stupid projects. It was a mess. So what did Lou do? De-emphasize hardware. Invest in software and services. Streamline the sales organization. Cut unnecessary costs. Buy back stock with excess capital. Anyone remember what happened? Shareholders equity plummeted due to restructuring charges and stock buybacks. Stock price skyrocketed because the business was being run more efficiently on a smaller capital base. This was first and foremost a "fix the business" story followed by an "optimize the capital structure" story. So, at the end of the day was this a good story or a bad story? Answer: a good story.

I appreciate the goal of educating an uneducated body, but a column like this in the WSJ strikes me as sensationalistic and irrelevant. Maybe it is more appropriate for People magazine?

Joe, that little coffee shop: Starbucks Beware

A little story in today's New York Times reminded me why America is great and why big, successful companies are perpetually at risk. This little story makes a big, big point: that passion, creativity and knowledge of product and market can enable you to compete against dominant market leaders. The punch line is this: a little coffee shop down the block from my old apartment on West 13th Street in NYC, called Joe, is doing a nice business. So nice, in fact, that the owner, Jonathan Rubenstein, has expanded to two new sites and is looking for a third. So you're probably wondering, "Hey, stupid, who cares?" Well, I know this place and I know what is around it, Starbucks, Starbucks, Cosi, Cosi, diners, etc. So why has this place flourished amidst a sea of much larger, better heeled, or longer-lived competitors? I'm so glad you asked.

1. Unbridled Confidence

“It never occurred to me we would fail, or what if nobody walked in the door,” Mr. Rubinstein said last week over a cup of Vienna-style drip coffee at Joe, a cafe on Waverly Place in Greenwich Village that he opened in 2003. His recipe is a fanatic devotion to coffee quality and an atmosphere that doesn’t feel like a chain.

Only someone incredibly stupid or unbelievably confident (or both) would open a coffee shop within spitting distance of two Starbucks without having any experience in either coffee or retail. But it is personalities like this that create disruptive applications and/or experiences. This guy's got the stuff. And it looks like his early confidence was well-founded. 

2. Obssessive Attention to Detail

Within a block of two Starbucks shops, Joe draws a steady stream of customers for its lattes and other brews. Employees spend more than three months learning how to make them and must pass tests before they are allowed to run the $14,000 espresso machine.

The cafe, with exposed brick walls, 12 round yellow tables for two, and benches out front, has prices comparable to those at Starbucks, a company Mr. Rubinstein studies carefully. A 12-ounce latte costs $3.65.

Jonathan has created a service culture and staffed his shops with capable, personable people. I am always happy going in there, and even though the place feels warm and not at all chain-like the look (down to the swirl of coffee on my steamed milk) and taste of my cappuccino is the same, every time. Further, the product is priced fairly. In fact, I would pay more for my coffee at Joe than I would at Starbucks, where my coffee is frequently made by a less-than-personable barista who makes it differently than at the other 10 Starbucks I frequent. The same criticism applies to Cosi. Detail has been lost at both Starbucks and Cosi as store growth has gone parabolic. They've both got serious recruiting and retention problems. This will make them vulnerable to small, high quality venues such as Joe.

3. In Touch with the Market

The waits can be long. “Brutal, but worth it,” said one young woman who waited 10 minutes to place her order on a recent Saturday. Richard Châteauvert, a regular customer, said he loved Joe’s neighborhood feel and the fact that it was a small business.

Mr. Rubinstein realizes that “we’re on the verge where we can’t accommodate everyone.” Brisk business has already prompted him to expand to a second cafe, at 9 East 13th Street, and to an outpost in Alessi, an Italian housewares store, at 130 Greene Street in SoHo. Sales are strong. The first two cafes should bring in a combined $1.4 million in revenue this year, Mr. Rubinstein said, and both turned profits within weeks of opening. The business has 10 full-time employees and 25 part-timers.

When you are delivering a commodity product (the coffee itself) in a non-commodity fashion (the experience of being served and sitting at Joe vs. Starbucks) and people are queueing up for the privilege of patronizing your establishment, things are going pretty well. Joe knows its customers, knows what people are NOT getting at Starbucks and are giving them that homey, cared for feel. People want this and Joe is delivering this. My sense is that many more people want it, and that Joe will be one of those in NYC to capitalize on the Starbucks backlash.

4. Condescending Competitors

Starbucks said it welcomed the competition. “There is room for many coffeehouses in the marketplace that can meet different customers’ needs,” said a spokeswoman, Valerie O’Neil.

I'm sorry, but I think this is a stupid thing to say which clearly demonstrates complacency. What Starbucks is really saying is "Hey, we've got no chance to deliver a product as good as yours and we won't even try. We're willing to cede a little corner of the market to you." Who's to say that this little corner of the market doesn't grow as people get increasingly irritated with the increasingly inconsistent and unpleasant experience at Starbucks stores?  My response as a senior member of Starbucks management would be "Oh, crap, we've got some problems when a little nothing store can thrive and grow in the shadows of two of our stores. We'd better figure out what is wrong and fix it - now." Valerie's Presidential-sounding response shouldn't be music to a Starbuck's shareholders ears - it should be a cause for concern. A little to fat and a little too happy, methinks.

5. Ruthless Focus on Quality

As Joe itself becomes a chain, Mr. Rubinstein is struggling with how to manage the growth of his business without diluting Joe’s charm. He gets frequent calls to sell franchises, but says he wants, indeed needs, to stay small. “I have to go to every store two times a day or I go nuts,” he said. “At some point, we will stop growing and just work on bettering and perfecting what we do.”

At this phase of Joe's existence Jonathan is right. Better to focus on refining and perfecting the model than expanding rapidly. Get the model right, learn how to scale and do so - deliberately. This will drive a stake into the heart of the marginal Starbucks, Cosi and other crappy-experience stores. Why would anyone in their right mind go to one of the mega-chains that have lost touch with their customers versus a place like Joe? Answer: they wouldn't.

This is classic Schumpeter creative destruction in action, admittedly on a micro-scale as we speak. I've written a lot about this and believe strongly that creative destruction is a healthy, and unavoidable, fixture of economic development and a natural part of the company life cycle. Success, without question, sows the seeds of failure, as rapid growth has diluted the Starbucks culture and experience and rendered them vulnerable to a down-home, grass roots entrant like Joe. Further, times change, value propositions shift, and the $5 for a consistent venti skim latte just doesn't exist any more. Yeah, people are now spending $5 for this when they don't have many good alternatives, but what about when more Joe's (or places like them) spring up around town? Invariably, they will. I'll tell you one thing - I'd sooner spend my $5 at Joe or even at a Dean and Deluca than I would a Starbucks any day. Better preparation, better experience, and I feel better giving a smaller establishment my money than the Seattle behemoth.

Anyway, kudos, Jonathan. You're on a roll. My best to you for continued success and for keeping the inexorable process of creative destruction going.

Black Box Trading: Panacea or Promotion?

Without question, quantitative trading approaches - carrying names such as "black box trading," "algorithmic trading" and "statistical arbitrage" - are all the rage. Lumped in with these mysterious-sounding approaches are high-IQ terms like "pattern matching," "genetic algorithms" and "neural networks." At the essence of these strategies are two distinct features: (1) humans aren't involved in the decision-making process; and (2) models are designed to either "learn" like humans or to detect non-intuitive relationships among a sea of data that can't be readily seen by humans. Basically, creating models and approaches that are, ultimately, better than humans because they can act faster, trade more cheaply, make decisions dispassionately, process more information and see things humans simply can't due to the limits of our ceberal cortex.

An interesting article in Saturday's New York Times raises an array of interesting issues and uses a new hedge fund started by one of the brainiacs of all-time, Ray Kurzweil, as the vehicle for exploring this fascinating topic. For context, it should be noted that rocket-scientist types running hedge funds is not new: figures such as David Shaw (DE Shaw) and Jim Simons (Renaissance Technologies) have been using higher-order math and computer science to extract value from market data for the last three decades. These skills are now being more broadly applied to news feeds, government filings and other data pools where entities can be extracted, sentiment gleaned and metadata created and analyzed. Other hedge funds as well as both buy- and sell-side firms are using similar technologies and approches in their businesses.

The computerization of trading and investment is a logical and noble pursuit. However, attempts such as these are not without their pitfalls for a variety of reasons. Statistical arbitrage strategies have become progressively less and less attractive as more capital has flowed into the area. Where a super-smart quantitative manager could once design a high frequency, quasi-market making strategy that was both very profitable, required little capital and entailed a small degree of market risk, they now need to extend signal horizons and seek to generate returns by doing what everybody else does when they reach for return - take on more risk and accept greater variation in returns. Further, these high frequency strategies are often not very scalable, a real hinderance for a manager that wants to grow and leverage their brand into a multi-billion dollar operation. Returns in the various statistical arbitrage strategies display asymptotic profiles, where early alpha generation is eventually squeezed to zero as more brains and assets focus on the strategy in question. Managers innovate, enjoy attractive returns for a period after which they need to move on and develop the next set of algorithms. It may appear to a layperson that a black box trading strategy would be great - few PMs with huge egos, relatively modest investment in programmers and hardware to build a scalable platform and a nimble, easy-to-adjust model to adapt to changing market conditions. This, my friends, is simply not the case.

Consider the two black box managers with the most successful long-term records and asset growth - the aforementioned DE Shaw and Renaissance. They both have armies of PhD.s of all stripes - computer scientists, mathematicians, physicists, biologists, chemists, linguists, etc. This is not exactly the cheap and scalable infrastructure many have in mind. It takes a lot of money, relentless and effective recruiting and a culture to support the degree of innovation required to succeed. I think about it as the "cycle of the 4 M's:"

1. Man, who develops the
2. Model, which is operated by the
3. Machine, which executes the Model in the
4. Market, which generates returns, results in feedback interpreted by Man, who modifies the Model, etc.

It is usually not the cute, campy story of a smart technician with his trusty computer building a successful and scalable hedge fund. Few have done it well, and it remains to be seen whether Ray Kurzweil and his lot will be able to make it into the pantheon of black box gurus like David and Jim. Do these new entrants have brains? Yes, and often in spades. But success ultimately requires A LOT more than brains, like:

1. Managerial skill
2. Risk management skill
3. Recruiting skill, and
4. Business-building skill, to name a few.

So let's turn to the NYT story for their take on things. Some interesting excerpts from the NYT story are as follows.

But in recent years, as algorithms and traditional quantitative techniques have multiplied, their successes have slowed.

“Now it’s an arms race,” said Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. “Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits.”

So investment firms have increasingly begun exploring mathematics’ furthest edges and turning to people like Mr. Kurzweil, who became an expert in pattern recognition building a reading machine for the blind.

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So Mr. Kurzweil and others took a different tack: instead of creating sequential rules to instruct a computer to read, they thought, why not create thousands of random rules and let the computer figure out what works?

The result was nonlinear decision making processes more akin to how a brain operates. So-called “neural networks” and “genetic algorithms” have become common in higher-level computer science. Neural networks permit computers to create new rules and automatically change underlying assumptions by experimenting with thousands of random sequences and processes. Genetic algorithms encourage software to “evolve” by letting different rules compete, and combining the most successful outcomes.

Wall Street has rushed to mimic the techniques. Because arbitrage opportunities disappear so quickly now, neural networks have emerged that can consider thousands of scenarios at once. It is unlikely, for instance, that Microsoft will begin selling ice-cream or I.B.M. will declare bankruptcy, but a nonlinear system can consider such possibilities, and thousands of others, without overtaxing computers that must be ready to react in milliseconds.

********************

“The downside with these systems is their black box-ness,” Mr. Williams said. “Traders have intuitive senses of how the world works. But with these systems you pour in a bunch of numbers, and something comes out the other end, and it’s not always intuitive or clear why the black box latched onto certain data or relationships.”

********************

“Right now, everyone basically has access to the same data,” said John Bates, a Progress Software executive. “To get an edge, we want to give investors the ability to immediately turn news into numbers. We want to automate what before required human analysis.”

But as these new techniques proliferate, some worry that promotion is outpacing reality. These techniques may be better for marketing than stock picking.

“Investment firms fall over themselves advertising their latest, most esoteric systems,” said Mr. Lo of M.I.T., who was asked by a $20 billion pension fund to design a neural network. He declined after discovering the investors had no real idea how such networks work.

“There are some pretty substantial misconceptions about what these things can and cannot do,” he said. “As with any black box, if you don’t know why it works, you won’t realize when it’s stopped working. Even a broken watch is right twice a day.”

So what are some of the key themes? There is an

1. Arms race, being led by the development of
2. Better models, though
3. Machines lack human intuitition, but can benefit from
4. Digitization of data, which reduces the need for humans, but
5. Is the hype around black box strategies outstripping the reality?

The arms race has been going on for decades. This is nothing new. It is simply the nature of the arms race that has changed. The last leg of the race was largely played with hardware and platforms, with FTP, execution costs being driven towards zero, competitive, low-latency platforms, real-time architectures fueled by incomprehensible processing power and "smart" trade execution systems. But the arms race is changing, with the next leg being driven by highly intelligent software and models. Programs that can take in feeds across different formats, analyze (and possibly create) the metadata at lightning speed, look for statistical and linguistic relationships among elements in the data set, and "learn" from history through enhanced algorithms leading to better performance. Ok, I get it. But it still doesn't answer the question of whether or not these new entrants will have the stuff to generate consistent, sustainable performance across a progressively larger asset base without killing returns and/or blowing up.

I wonder if this new-found emphasis on black box trading will, over time, drive alpha back towards the fundamental bottoms-up strategies. And I'm really not sure if neural networks, genetic algorithms and other ultra high-IQ approaches really change the calculus of how the markets and investor behavior works. Capital tends to flow from the "cold" strategies to the "hot" strategies, which naturally causes hot strategies to become cold and vice versa. Anyone remember convertible arbitrage? What was a darling in 2000-03 was a dog in 2004-05 and a darling once again in 2006. This is an inexorable game of "asset allocation tennis" that has taken place (and likely will continue) for time immemorial. So does it really matter if ever-more sophisticated tools and techniques are used? Or is Ray Kurzweil's knowledge base and its application to the markets so differentiated that he will enjoy a competitive advantage for a material amount of time that would enable him to build a true hedge fund firm with a lasting legacy? Maybe, but I'm cynical. No knock on Ray (he is clearly one of the most brilliant thinkers of our generation), but I think there are enough brilliant minds working in enough related areas with enough access to capital to make any demonstrable advantage fleeting at best. Call me a cynic, but after 20 years kicking around the markets and with a sense of history it takes a lot more than a few good years to convince me that a new paradigm is upon us. Only time will tell.

Apple and Rumors – The iPhone is Coming! The iPhone is Coming!

As noted in a previous post, Apple is a company where the best information doesn't come from Management, but from the "Apple ecosystem" (a/k/a the "Rumor Mill") on the Internet. As I've witnessed first-hand, the difference between the Apple ecosystem and a standard rumor mill is that many of the commenters are really smart, really passionate and do an amazing amount of forensic homework to augment their knowledge base. Today happened to be one of those days when the Apple ecosystem is cranked up in high gear, with both analysts and bloggers alike interpreting new information concerning the iPhone (which, believe it or not, relate not just to iPhone v1.0 but v2.0 as well!).  How many companies can generate buzz around a next generation product release when the first generation hasn't even hit the shelves? I can think of only one - Apple.

I haven't written about Apple since they released their (blowout) earnings October 18th. But the investigative eye of Information Arbitrage never strays far. On November 14th, with Apple trading at $85 a share, someone whispered to the Chinese-language Commercial Times, that Foxxconn, Apple’s third party assembler, received an order for 12 million units of the “new” iPhone.  This little tidbit was all that was required to set the Apple cyber-olympics in motion. It has been some time since I’ve seen this much froth around a pending product announcement. As of this writing, Apple is now trading just shy of $89 after-hours, a new all-time high that reflects excitement not just around the first iPhone release, but the SECOND iPhone in the pipeline.

From Wired:

I love technology analysts and the tales they tell about Apple. The company doesn't show its preliminary products to anyone, least of all people who are likely to go talk about it in the media in detail.

But plenty in the media do pay attention to what analysts have to say about unannounced Apple products, which is why the Internet has been abuzz today with rumors that Apple is already at work on -- hold your breath now – the SECOND iPhone. While the first is still but a twinkle in the eye of a Foxconn executive's eye, the rumor crowd is already over the yet-to-be-confirmed-as-existing initial iPhone. They want to know how Apple can follow on its unrealized success.

From the Mac Observer:

American Technology Research analyst Shaw Wu on Monday issued a report detailing his belief that Apple is working on a second iTunes cell phone, as well as his thoughts on sales of the new red iPod nano. Of the second cell phone, he wrote: "We are picking up that AAPL is working on a second in-house iTunes cell phone that will also feature 'messaging' capabilities. We believe it will focus initially on mobile IM as opposed to e-mail. From our understanding, it will leverage off existing iChat software that runs on Macs. We believe this product is AAPL's 'smart phone' and could be branded as 'iChat mobile.'"

From MR.WAVETHEORY- Broadcom as chip supplier:

The BNP Paribas reported also had a bill of materials for the iPhone. It looks like the beneficiaries will include Broadcom Corporation (Nasdaq BRCM), Infineon Technologies AG (ADR) (NYSE IFX), Intel Corporation (Nasdaq INTC), and Micron Technology, Inc. (NYSE MU).

AND CNBC had a report saying that that the iPhone went into production and that Steve Jobs will annouce it at MacWorld in January. It just keeps on getting better.

The Apple Ecosphere and Mainstream Media – Reflexivity in Action

It is not fair to characterize the “Apple ecosphere” as a purely online phenomenon. What has been happening is that the Internet dialogue has been influencing the Wall Street analyst and MSM journalist communities, which in turn has been influencing the blogosphere, and back and forth. It is this reflexive nature between MSM (and Wall Street analysts) and the blogosphere that has both deepened story discovery and enriched story commentary, and this is vividly on display with the latest iPhone speculation. This phenomenon is further amplified by the fact that the Internet-based Apple enthusiasts have appeared to convert a legion of Apple followers on Wall Street and in MSM into drooling pro-Apple zealots, which is both humorous and interesting.

From Newsfactor.com:

Apple, of course, has pulled more than one rabbit out of its hat in the past few years, and could well do so again. According to Jupiter's Michael Gartenberg, "There's still an opening."

Greengart added that, if nothing else, it's fun to watch a company that has, in his words, "a history of astonishing innovation."

"Occasionally they surprise you," he said.

John C. Dvorak of PC Magazine had a theory about this biased “Apple love” dating back to October 2005:

Apple and Journalistic Bias – They’ve Got the Goods

The reason for this is that today's newspaper and magazine tech writers know little about computers and are all Mac users. It's a fact.

This is why when Microsoft actually does have a good idea, people look to trash it out of hand. With 90 percent of the mainstream writers being Mac users, what would you expect?

The top columnists in the news and business magazines fit this model too. The technology writers fit this model. The tech writers and tech columnists for the New York Times, the Wall Street Journal, Newsweek, and Fortune are all Mac users. I could list them by name, but I'd hate to leave one out. Maybe I'll blog them by name. I could list 50.

Readers should thus not be surprised by the overcoverage of Apple Computer (search). Every time Steve Jobs (search) sneezes, there is a collective chorus of "Gesundheit" from tech writers pounding away on their Macs.

Notwithstanding Mr. Dvorak’s wet blanket, Apple’s product development and marketing teams together with Steve Job’s PR brilliance has cast a halo around everything Apple does. And this slew of praise and accolades is nice, but is most importantly backed up by the one thing that really matters: operating and stock market performance. The minute Apple trips you can be sure a legion of followers will jump off the bandwagon. Like the reflexivity embodied by the relationship between MSM and the blogosphere,  I think it is Apple’s cool and relevant products that generate sales that spur profits and a rising stock price that is evidence of another reflexive relationship, one between the Company’s product development and marketing geniuses and the investment community.

Apple’s iPhone – Why so Hot?

Cell phones have been around quite a while. So what is it about Apple’s pending entrant that has caused such a ruckus? Is it that current offerings in the market just suck, or that Apple has some magic in store?

Is it the unlocking? From The Unofficial Apple Weblog:

Considering Apple's strengths - making great hardware and software - in light of their past failures in working with Motorola in this space, it seems entirely plausible for the company to aim for the stands on their third time at bat. By both developing and - this is the key - selling the iPhone all on their own, Apple not only gets to design everything their way, but they get to sell it to a much broader audience by offering it as an unlocked device through their own retail stores, rather than as a subsidized tool to force customers to either sign or break contracts, depending on their circumstances. This means Apple gets to flex their engineering muscles and rake 100% of their own profits - not a bad prospect for a company who is used to working solo in the hardware department, and by now is probably feeling the heat from sexy music handsets like Verizon's Chocolate.

And some comments:

2. Well I certainly hope it's true. Not that I'm eager to get one of these phones necessarily but it's high time mobile phone manufacturers started

selling unlocked phones anyway. It's just a huge scam that the carriers have with locking us in to their system, and at times locking functions of those

phones too. Personally there isn't a phone out there that would sway me from using the carrier I have to another. That seems absurd to me. But I believe

its time consumers should be able to choose whatever phone they want and use whichever carrier they want. It's a big scam that needs to be broken. If

Apple start selling their own unlocked phone you can be sure that it will have an effect on the rest of the industry.

Posted at 2:29PM on Nov 18th 2006 by Tom

24. Kudos to Apple if they sell the iPhone unlocked. Hopefully this starts a trend that the cell phone carriers will be unable to stop.

The US mobile phone market has really been a mopolists paradise. Why do you think European telecom firms have been buying into this market while no U.S. telecom firm has shown any interest in Europe?

Who says government regulation never does any good? The euro mobile phone market is more consumer friendly because the governments imposed a single standard (GSM) and banned anti-consumer practices like locked phones and nonportable phone numbers.

Posted at 7:57PM on Nov 18th 2006 by tundraboy

And even with Apple’s unprecedented success with the iPod, iMac, etc., doubters still abound.

From BetaNews :

But don't expect smartphone manufacturers to worry about Apple encroaching on their turf. At a gathering with reporters last Thursday, Palm CEO Ed Colligan dismissed the Cupertino company, saying making phones is not that easy.

"We've learned and struggled for a few years here figuring out how to make a decent phone," the San Jose Mercury News quoted him as saying. "PC guys are not going to just figure this out. They're not going to just walk in."

Do these guys have any idea who they’re dealing with? Steve Jobs must be licking his chops at the prospect of getting guys like this to eat their words.

You Just Don’t Mess With Apple and Steve – Karma is a Boomerang, Remember?

Remember the story of another guy who dissed Apple -Michael Dell. These fighting words were uttered back in 1997 and 2001. Woe be to those who mess with Apple and Steve – and boy, is Michael chewing on those words today.

From C/Net – October 6, 1997 

ORLANDO, Florida --When it comes to the state of Apple Computer, everyone has an opinion.

And at the Gartner Symposium and ITxpo97 here today, the CEO of competitor Dell Computer added his voice to the chorus when asked what could be done to fix the Mac maker. His solution was a drastic one.

"What would I do? I'd shut it down and give the money back to the shareholders," Michael Dell said before a crowd of several thousand IT executives.

Ha, ha! Who’s laughing now, Mr. Supply Chain? How’s that iDell selling, anyway?

From BusinessWeek – April 16, 2001 

Q: What is the future of Apple Computer?

A: Silicon Graphics.

Q: That bad?

A: Maybe it's a little bit different. But if you look at proprietary computer companies, whether it's Digital or Silicon Graphics (SGI ) or Apple (AAPL), I think the fates are all relatively similar. We know how the movie ends. It's just a question of what happens in the middle. Apple has a very little customer base. If you look at the economics, it has been extremely hard for Apple to get a return on its R&D with a shrinking volume base. It's not to say that Apple's products aren't innovative or cool, but the economic factors here are so overwhelming, it's very hard for them to swim against that tide.

Q: If you were running Apple, is there anything you could do to change that?

A: I would never take that job.

Wow! I guess things like “innovation” and “cool” mean a little more now than they did then, huh, Michael? Haven’t heard those words used with reference to Dell – ever.

Never one to pass up a golden opportunity, an emboldened Steve Jobs sent a little reminder to his colleagues back in January of this year.

From macnn January 16, 2006 

'Team, it turned out that Michael Dell wasn't perfect at predicting the future. Based on today's stock market close, Apple is worth more than Dell.

Stocks go up and down, and things may be different tomorrow, but I thought it was worth a moment of reflection today.  Steve.'"

And for those of us who like charts, take a look at the comparative analysis of AAPL vs. DELL over the past 5 years. Needless to say, Apple has kicked Dell’s a** all over the block. So who’s the tough guy now? Cupertino Cool vs. Austin Anal? I think we now know how THIS movie ends.

And This Just In

From EETimes:

PortalPlayer Inc., the media processor company that famously lost a key socket in the next-generation iPod nano earlier this year, has secured an applications processor design win in the forthcoming iPhone from Apple Computer Inc., according to a Wall Street research analyst.

Consistent with previous speculation, Nvidia Corp.‹which is poised to acquire PortalPlayer in a $357 million deal announced earlier this month has seen its graphics processor designed into next-generation video iPods due out next year, according to Chris Caso, an analyst with Friedman, Billings, Ramsey & Co. Inc. (FBR).

In a research note published Tuesday (Nov. 21), Caso wrote that FBR believes that Nvidia's acquisition of PortalPlayer "gives it an inside track at providing an integrated applications / video processor in a future video iPod for 2008." FBR expects combined Nvidia-PortalPlayer music player revenue of $280 million in 2007, following the close of the acquisition, "with the potential for further revenue from an enhanced Apple relationship in the future," according to the note.

And the beat goes on.

Conclusion

At the end of the day there are two numbers that matter - $75.5 billion and $56.5 billion. These happen to be the market caps of Apple and Dell. This is not a war of words it is a war of platforms, driven by innovative products, compelling marketing campaigns and customer engagement. It doesn’t take a rocket scientist to see who is winning in today’s environment. The iPhone is simply the coup de grace of a series of moves that has led Apple to the point it’s at – one where they are in complete synch with their addressable market, which has a seemingly insatiable desire for their products. It is quite a testament to the Company, its Management and its employees, considering its dark days were not so long ago. They’re hot and being recognized for it – the onus is clearly on them to keep it up. It won’t be easy, but so far they are clearly up to the task.

EA: “Why Didn’t Wii Focus on Nintendo?”

Note: this post was carried today on Wallstrip

Overview

Make no mistake: EA is a game-creating machine. A techno-behemoth making big-headline games for the Big Three: Microsoft, Sony and Nintendo. But at $58 per share and 43x earnings I would be afraid - very afraid. What was once a company able to focus on harvesting its category-leading franchise is now under siege: high development costs, uncertain platform plays and lofty equity valuation. While EA has deftly navigated the vagaries of the fickle gaming marketplace, it is now facing a competitive landscape unlike any other it has seen in the recent past. Ergo, this is one complex business encountering an array of complex market and business risks. This is not a scenario that makes me terribly comfortable as an equity investor. For a little more insight, read on.

The Business - Like Venture Capital for Gaming

EA creates products for the three major console providers: Microsoft, Sony, and Nintendo, as well as the PC platform. Success in the game creation business is all about economies of scale, flat development costs and luck. Just writing this makes me queasy. Making games is not just coding - it is internalizing the ethos of Hollywood, leveraging a hot idea/story to make a big splash that ripples throughout the addressable market.

In gaming, as in movies, the idea/story can be proprietary or licensed from others. Once an interesting and/or compelling theme is selected, there is the added complexity of choosing a platform for which to adapt your software. If the state of technology is relatively stable, all is well. You pick the platform(s) with the largest installed base(s) and the lowest development costs and code away. This is not much different than a VC spreading bets across multiple early-stage investments, except in gaming-land one is allocating development costs among multiple titles hoping that your hit rate results in an attractive ROI.

However, when a platform technology shift happens (roughly every five years), game developers encounter a rough patch and need to increase diversification by making fewer titles across more platforms. They then wait for the fall-out and watch for the winners to emerge, after which point they revert back to the original operating model. While this is a business that has the capacity to mint cash, it also has the capacity to result in a lot of dry wells. Clearly not a business for the meek.

EA - Does Success Breed Complacency?

EA has had it easy for the past few years, becoming the biggest, baddest, hottest game creator on the planet. EA has ridden Sony’s PS2 platform to market dominance and an $18 billion market cap - wow!. With PS3 around the corner (and in light of their blue diode supply problems), EA is taking a wait-and-see approach to Sony’s newest platform. They are actively supporting the large installed base of PS2 consoles (100 million strong) while closely monitoring the progress of PS3.

EA has announced and launched three titles so far for the PS3: Madden NFL ‘07, Need for Speed Carbon, and Tiger Woods PGA Tour ‘07. For the Nintendo Wii EA has launched Madden ‘07 and Need for Speed Carbon. For Microsoft’s Xbox 360 EA has delivered 15 games, and all of those mentioned for Wii and Sony are also available for Xbox 360.

One interesting note: EA just pulled NBA ‘07 Live for PS3, shocking both the market and its user base.

Electronic Arts has decided not to pursue its plan to port NBA Live ‘07 to PlayStation 3, deciding instead to focus on the upcoming next-generation version of NBA Street.

That’s according to EA Canada PR Manager David Tinson, who told IGN that the developer is “concentrating [its] efforts on creating a spectacular NBA Street: Homecourt”. That title is due out on PS3 and 360 “early next year”, he added.

In other words, basketball fans will have to wait until the release of NBA Live ‘08 before the series takes its PS3 bow.

That comes as a bit of a surprise, not least because Sony actually had EA demonstrate the game during its E3 2006 press conference, where Live was one of the few games shown off in playable demo form.

Not that the PS3 will suffer from a dearth of EA titles at launch, with Fight Night Round 3, Need For Speed Carbon, Tiger Woods PGA Tour ‘07 and of course Madden NFL ‘07 down for release in the US on 17th November.

More on NBA ‘07 pull-out:

Electronic Arts has canned the PS3 version of ´NBA Live 07´, as IGN reports.

It´s perhaps not too surprising, since IGN lists another three NBA titles as confirmed for the console:

* ´NBA ‘07´ by SCEA (launch)
* ´NBA 2K7 by 2K Sports (launch)
* ´NBA Street Homecourt by Electronic Arts (Q2 2007)

Still, that very game was an integral part of Sony´s pre-E3 show, showcasing the console´s power, as the article remarks.

Though PS3-specific features or fixes for the PS3 edition of NBA Live ‘07 were never announced, the game was used to demonstrate what EA Sports could do with the system’s hardware during Sony’s onstage presentation prior to E3. Specifically, the demo focused on NBA Live’s “Procedural Awareness Technology” and how that would translate into realistic on-court reactions. Pulling the product neither bodes well for Sony nor for EA, contributing to concerns over both the competitive landscape as well as dependence of what has been a historical cash machine for EA.

PS3 vs. Nintendo: A Celebrity Death-Match in the Making

So if EA continues its emphasis on Sony it is clearly exposed to the degree of adoption (and supply) of new PS3 consoles. If PS3 flops then what? EA will need to identify and milk another future cash cow. They could look to Microsoft’s Xbox 360, with a current installed base approaching 10 million by Dec 31. Not exactly the 100 million installed user base of PS2, but not too shabby nonetheless. However, if the situation evolves such that the Nintendo Wii becomes the rising star, EA may be in trouble. FYI, the French company Ubisoft has lined up nine titles for Nintendo including that exculsive to the Wii: Red Steel.

Ninendo has forecasted up to 4 million units shipped worldwide and with sharply lower development costs than Xbox and PS3: $5-$8 million per title for the Wii vs. the $15-$20 million for Xbox 360/PS3 platforms. This makes the Wii far more attractive (and less risky) for both developers and publishers. If EA sticks to their PS3/Xbox 360 strategy, they may miss the boat on Nintendo, spending too much in development costs while missing what looks to be a home run console in the Wii. This could dent the next several quarters of EA’s earnings, painting a pretty ugly picture for the stock price going forward.

For a little additional reinforcement of this theme read:

WMS: Wii To Double PS3 Game Sales This Xmas?

What are Wii Doing? This Market has Gotten Real Ugly Real Fast

It was only a few years ago that EA owned sports games. This included exclusively licensed content from the major sports leagues: NHL, FIFA, MLB, NFL, and the NCAA. All that changed when a little company called Take2 (being investigated as part of options scandal) came on the scene and decided to compete with EA through a subsidiary called 2k. 2k Sports has been challenging EA on game play, graphics, and “sports-feel.” Continued encroachment on the Sports franchise is the spot to watch for weakness. With the release of Madden ‘07, chinks in the EA armor have appeared. Yes, it is a great selling title and there has historically been no competition due to an exclusive licensing relationship; however, there is a growing discontent with EA among the user base. Check these comments out:

EA’s premium ripoff: football tutorial videos on XBLM

3. Just another example of EA ripping their Madden fans off. The xb360 version 06 was bare bones. having a pay per view early viewing. EA is really pissing me off.
Posted at 3:07PM on Oct 4th 2006 by jonm

4. Its a freakin shame that EA has the exclusive NFL license because I would have loved to have seen some competition the last two years. I can still dream of NFL 2K7 on the 360. EA Sucks!
Posted at 3:09PM on Oct 4th 2006 by Dominic

8. Did you guys see that there’s also “classic stadiums” available for the Rams and Seahawks for 300 points?! This is ridiculous, this stuff was FREE in all the other games, 300 points for ONE old stadium. I dont even want to know what they’ll charge for each individual alternate and classic team jersey for each team. Makes me sick.

If only they could bring back NFL2K series, the world would be a better place. But then again, they might do it too.
Posted at 3:15PM on Oct 4th 2006 by Mike

Conclusion

EA has some real problems. Historic market dominance, rising development costs, backing high-end platforms with limited user bases - none of these factors point to an explosion in valuation in the near term. And these issues are compounded by EA’s gold rush resulting from the run-away success of PS2, which does not look to be replicated by PS3 in light of both production delays and fierce competition from the lower-priced and highly innovative Wii. As noted by the ‘Net, all ain’t well. In short, all I can say is: Buyer Beware.

Thanks to Rob Passarella for his passion for gaming and his assistance with this post.
The Author does not hold a position in EA.

Sony - “Wii Are In Trouble”

Note: this post was carried today on Wallstrip

Overview

When I think of what Sony used to mean to me, the following adjectives come to mind: Innovative, High Quality, Close to the Customer, Smart, Long-term Focused. When I think of what Sony means to me today, and the sentiment that is reflected across the Internet, most of these adjectives are not currently in play. While Sony is certainly capable of innovation, a new adjective set might include Customer Unfriendly, Not So Smart, and Short-term Focused. Needless to say, none of this bodes well for the stock price, which has encountered a roller-coaster ride from $34 up to $52 and back down to the current $40. Clearly not a ringing endorsement of current management or their strategic direction. Sony is, in fact, living out the plot of one of its horror movies, “The Grudge”:

The normal façade of a modest house in Tokyo belies the hidden terror within. It is possessed by a violent plague that destroys the lives of everyone who enters. Known as The Grudge, this curse causes its victims to die in the grip of a powerful rage. Those who are fatally afflicted by the curse die and a new curse is born–passed like a virus to all those who enter the house in an endless, growing chain of horror.

Sounds kind of like what is going on at Sony these days. Sad to say, all is not well, much to the chagrin of those long SNE. Read on.

ISSUE #1: Customer Awareness as a Historic Asset? See Asset Destruction in Process

Exhibit 1: The Sony Rootkit Fiasco

From BoingBoing

Mark Russinovich, a security researcher, discovers that Sony has been sneakily installing “rootkit”-based DRM on their customers’ computers. Rootkits are black-hat hacker tools used to disguise the workings of their malicious software. Removing Sony’s rootkit nukes your Windows installation.

And a little history and perspective from Sony Management, via an interview with Thomas Hesse from Sony BMG’s on NPR

In an interview with NPR late last week, Sony BMG’s Global Digital Business President Thomas Hesse downplayed the recent DRM fiasco saying he objected to terms such as malware, spyware and rootkit. “Most people, I think, don’t even know what a rootkit is, so why should they care about it?” he said.

Hesse acknowledged that the controversial First 4 Internet technology that installs and “cloaks” the DRM software without a user’s permission shipped on about 20 CDs. But “no information ever gets gathered about the user behavior,” he claimed. “This is purely about restricting the ability to burn MP3 files in an unprotected manner.”

Pure genius? Not. And it gets even worse - when (now Governor-elect) Elliott Spitzer got involved:

“It is unacceptable that more than three weeks after this serious vulnerability was revealed, these same CDs are still on shelves, during the busiest shopping days of the year,” Spitzer said in a written statement. “I strongly urge all retailers to heed the warnings issued about these products, pull them from distribution immediately, and ship them back to Sony.”

Punch line: Sony put a rootkit on some CDs to stop the ripping and burning of MP3s, in order to essentially manage music rights. Why? Could it be because of Apple’s dominance of the portable digital music business? Was Sony testing a way to slow their progress and regain ground? Who knows, except that their actions spawned a PR nightmare among the smartest and most influential members of their user base - the tech-savvy users and bloggers. Not a segment of your customer base that you should be pissing off.

ISSUE #2: The Battery Melt-down: Crisis Management Required

Who can forget the recent history of Dell and the exploding laptop battery. What started out as a little video clip on the Internet (showing a laptop bursting into flames) became the Web 2.0 version of the J&J Tylenol scare.

Exhibit 1: Dell laptop explodes at Japanese conference   

From The Inquirer.net 6/21/2006

AN INQUIRER READER attending a conference in Japan was sat just feet away from a laptop computer that suddenly exploded into flames, in what could have been a deadly accident.

Gaston, our astonished reader reports: “The damn thing was on fire and produced several explosions for more than five minutes”.

This story with the accompanying photos spread like “wildfire” (yes, we over at IA are witty) on the Internet. Action was taken by Dell, the maker of the offending laptop, two months later when more incidents began to appear on the Internet. Trivia question: Which company was the principal battery supplier to Dell? You guessed it - Sony. But wait - it gets even better.

From InfoWorld August 2006:

Dell, Sony discussed battery problem 10 months ago

Dell and Sony knew about and discussed manufacturing problems with Sony-made Lithium-Ion batteries as long as ten months ago, but held off on issuing a recall until those flaws were clearly linked to catastrophic failures causing those batteries to catch fire, a Sony Electronics spokesman said Friday.

Spokesman Rick Clancy said the companies had conversations in October 2005 and again in February 2006. Discussions were about the problem of small metal particles that had contaminated Lithium-Ion battery cells manufactured by Sony, causing batteries to fail and, in some cases, overheat.

As a result of those conversations, Sony made changes to its manufacturing process to minimize the presence and size of the particles in its batteries. However, the company did not recall batteries that it thought might contain the particles because it wasn’t clear that they were dangerous, Clancy said.

“We didn’t have confirmation of incidents [involving fires] until relatively recently. We received reports, but didn’t know if there were environmental situations not related to the systems themselves,” he said. “Different measures were taken in February and in October [2005] to further ensure that there were as few of these particles as possible and that they were as small as possible.”

You have got to be kidding me. Did these guys learn anything from the Rootkit PR debacle? As I’ve discussed in previous posts, there are tried and true ways of getting out in front of serious PR problems, acknowledging them early, dealing with them openly and honestly and protecting the safety of your customers. Sony Management’s reading of their customers likely response to he Rootkit strategy backfired in 2005, and they repeated the same mistake with the battery problems in late 2005/early 2006. It didn’t need to happen this way. 4.1 million batteries were going to be recalled in any event, so why not use the problem as a PR opportunity to do the right thing and regain the confidence of your key constituency, your customers? Because Sony Management doesn’t get it, that’s why. This is not the customer-focused company I remember from the Walkman days. Something has happened to Sony’s DNA - and it’s not good.

ISSUE #3: Why are we feeling so Blu when Wii should be feeling happy? Supply-chain and Strategic Hell

Sony has been losing ground for years in Home Entertainment. The long-time edge in portable music - gone. The game-changing Walkman is a name scarcely known by today’s young influencers. Apple is the new King. In the face of stiff competition, Sony has been concentrating its hopes on its next generation gaming consoles. Sad to say (but no surprise), things did not go exactly as planned. Microsoft was able to beat Sony to market for Christmas 2005 with their next generation console. Microsoft has been waiting a year for Sony’s new entrant - PS3. With Sony’s hand forced by delays, PS3 shipped this November 17 with an eye towards going head-to-head with Xbox 360. Without question, Sony needed an edge, so they chose to go way, way up market to try and bring the coolest high-tech gaming engine to market. This relied upon Blu-ray technology. Unfortunately, this go-for-broke strategy with an immature technology has raised two unintended consequences: (1) supply-chain problems; and (2) a potential paradigm shift.

1. Supply-chain problems

In order to make Blu-ray players you need these things called Blue Laser Diodes. And if you want to make high-end consumer Blu-ray players/recorders you also need these things called Blue Laser Diodes. And if the supply of Blu-ray diodes is limited you have an issues of scarcity and production allocations that need to be addressed. Ergo, in Sony’s case two different divisions were competing for the same scare component to achieve their strategic objectives. This is a story that just can’t end well, and, in fact, because of this “crowding out” Europe will essentially miss PS3 for Christmas. You have to read the stuff below to believe it.

In EE Times on October 24, less than a month before PS3 launch

Sony delays Blu-ray Disc player again

In news coming out of Japan this week, Sony has apparently delayed again the release of its stand-alone BDP-S1 Blu-ray Disc player to December or possibly not till 2007. The player was scheduled to due to arrive on retailers shelves this week. Originally, the BDP-S1 was due out in July, but was postponed until August, then to October 25.

Apparently, the delay seems to have been a strategic decision that is based on availability of blue laser diode supplies rather than any trouble with the player - unlike the problems that Samsung has recently encountered. As early as a year ago, it was speculated by several journalists and industry insiders that Sony would have problems delivering both PS3 and a stand-alone Blu-ray Disc player. Not surprisingly, the Blu-ray diode used in the BDP-S1 is the same one used in Sony’s PlayStation 3 game console, which is set for release on November 17. According to experts and analysts in Consumer Electronics, there simply doesn’t seem to be enough parts to go around.

Who’s driving the bus here, folks? One team, right? Wrong.

2. Paradigm shift? Nintendo and the Wii

Is Nintendo Changing the Game?: An Innovator’s Dilemma (thanks, Clay). Sony and Microsoft have been battling it out in a classic “feature war,” replete with ever-higher levels of graphics quality and more and more realistic polygon images. That is where they believe games are going. On the other hand Nintendo, an earlier winner of the game wars, has concentrated on a revolutionary controller that allows motions to be captured as part of playing the game. With Sony’s delay problems we have the opportunity to witness the juxtaposition of two new product launches with different fundamentally gaming approaches. On the one hand, Sony is going straight for the hard-core gaming market against Microsoft, with an expensive $500 - $600 machine that has roughly the same resolution as Xbox 360. On the other hand, Nintendo is offering a $250 machine with fewer high-tech graphics but with clear emphasis on a revolutionary controller that seeks to make the gaming experience active, fun, and more accessible to wider audience. Nintendo has worked to make natural hand movements displayed and reflected both on the screen and in the game, creating a much, much flatter learning curve. In short, fun and success are much closer at hand than in the high-end games of Sony and Microsoft.

Sony appears to be going after the existing market while Nintendo is looking to expand the market, opening it up to people who have either never played or are causal players intimidated by the high-end games. From Dr. Christensen (The Innovator’s Dilemma) himself:

“Consistently, established firms attempt to push the technology into their established markets, while successful entrants find a new market that values the technology.”

Nintendo just seems so smart and thinking outside-the-box, while Sony seems so slow and hamstrung by convention. Add to this the fact that the Wii has garnered lots of buzz, has far lower development costs than for the PS3 and Xbox 360 ($5-$8 million vs. $15-$20 million) and has laid the foundation for lots more game titles than the higher-end consoles (and rapid and prolific third-party development is the lifeblood of success for a gaming platform), it would appear that Sony’s technical tour de force may not win the war of economics in the end.

And this is not just our view of the Wii. Check out these articles:

Nintendo’s Wii Is A Revolution - Forbes.com November 13th

Question of the Week: Are Games Industry Professionals buying a PS3 or a Wii? - Gamasutra.com November 17th

Game makers say Wii a bargain - Yahoo! News November 16th

Wii Launch NYC: 5,000 Wiis in Times Square - Gizmodo.com November 18th

Conclusion

Sony, the once-dominant home entertainment giant is a shadow of its former self. Loss of customer focus, lack of out-of-the-box thinking and crushing internal and external competition is laying it low. It is hard to see a near-term scenario that results in a rosy picture for SNE’s shares. And in light of the Yahoo! Peanut Butter Manifesto, it seems that Sony could benefit from such a wake-up call.

Thanks to Rob Passarella for his assistance with this post
The author does not currently own securities of Sony.

The Value of Eyeballs and Its Impact on Journalistic Motivation

On Friday, Thomas Kostigen wrote a piece for MarketWatch titled DIGG it: story rankings play havoc with traditional journalistic tenets, that raised a host of important issues concerning the impact of the Internet on content creation that warrants discussion. His thesis: that story rankings have an influence on the type of stories journalists want to write. Why? Recognition and popularity, obviously. And while I agree with much of what he says, I think a key element is missing from the story, that of economic motivation. Clearly not all eyeballs are created equal in the eyes of advertisers. Further, the Internet has given advertisers the unprecedented ability to measure the value of those eyeballs and bridge the gap between popularity (read: pageviews) and value (pageviews x value of purchase/pageview). This is a critical subtlety that I believe needs to be addressed in order to fully assess and appreciate the ramifications of Kostigen's contentions.

On story rankings generally, Tom says the following:

The ranking either makes me feel really good or like I've missed the boat, depending on how high up the popularity list my story is.

I've never intentionally written a story to get hits, but I wonder whether subconsciously the ranking influences my decision to write about certain topics. I know, for example, that if I write about something provocative it will get readers over and above that I would get if I write about something educational or informational. I understand the art of column writing is to infuse a little of both information and entertainment, but being led by a ranking system is a different path than being led by experience and journalistic instinct.

To be clear, writers -- or at least this writer -- don't get paid by the number of readers who read them. The influence wielded upon us is one of ego. "My story was the most read on the site," produces glee, sort of the same feeling as winning when gambling. It hits those feelings in the brain associated with "You're good. You're better. You're smarter."

I've got to say he has a point. Though a newbie to the world of content creation (and as one who is clearly NOT a journalist), I can see the Pavovlian appeal of creating a story and seeing how it takes off in the blogosphere (aren't we just a bunch of animals with hard-wired responses, long-ago figured out by B. F. Skinner and the advertising industry, anyway?). Though I personally write for catharsis and self-satisfaction, I'd be lying if I said I didn't care about whether or not people read my stuff. The number of hits per story doesn't consciously impact what I choose to write about, but how can I say a bunch of poorly-received stories wouldn't subconsciously effect my choice of topics?  Invariably it would, over time.

But Kostigan steps back and attempts to separate ego from reality, one in which the quality of one's story is not related to popularity in a linear manner:

Of course when you step back and think about it, this is nonsense. More readers may have read a story because of a variety of factors that have nothing to do with the quality of the writing or the subject matter. Wednesday, for example, one of the most read stories on MarketWatch was "Enron's Ken Lay dead at 64." Its dateline was July 5, 2006. I thought that the sentencing of Enron's chief accountant Richard Causey that day might have prompted readers to click in droves back to the Lay story, but that wasn't the case; it was a technical glitch. (Note to all writers now working on "Ken Lay is dead" stories.)

In many ways, the Internet is becoming much more like television, where ratings influence content. If no one is watching, off the air the show goes, no matter how good the quality. More importantly, if many people are watching, no matter how bad the quality of program, more spring up like it -- game shows, talent shows, makeover shows, comedies trying to be the next "Friends." In the world of journalism, in-your-face-talk shows hosted by people with strong points of view are good examples of content being led by format being led by viewers.

Writing for the Web used to be much more like print, the world from which I'm sprung, than television. But it's heading much more in the direction of television; the advent of video networking assures this.

In order to analyze Tom's argument, I'd like to establish a concept: the Economic Character (EC) of a story. My belief is that a story's EC has three principal components:

1. Quality - which is comprised of

     i.   Accuracy

     ii.  Style

     iii. Insight

2. Popularity - which is comprised of

     i.   Interest

     ii.  Timeliness

     iii. Reputation

3.  Audience - which is comprised of

     i.   Size

     ii.  Breadth (diversity)

     iii. Purchasing power

It seems to me that Kostigen's analysis is a little flat in that it seems to genericize eyeballs and to equate popularity with success, which simply can't be the case. Is the right question to ask whether or not your story is listed in the Top 10 from a popularity standpoint, or if your story is being read by the right people in a quantity that would, on an EC basis, put you in the Top 10? If your story is "buzzy" and forwarded around a lot but not being read by those with the economic power to act when relevant ads are displayed, what does this mean? That you are a cult hero but not an economic success? I guess one also needs to define what success means for them - is it simply popularity by count or commanding the greatest salary because of the EC appeal of your product? This area is clearly not my bailiwick, but I don't think the ideas I'm raising here are either heretical or irrational - are they?

Tom goes on to discuss his perception of change in the editorial landscape in light of Digg and other popularity measures:

The job of a journalist is to lobby and report stories that he or she covers, or better yet, uncovers. In this way, the story is forced upon readers. At a newspaper that's more easily done because an editor can't point directly to a story's ranking and say, "Look son, no one wants to read about that. Go cover something else." But now he or she can. (Take a look at the NYTimes.com and you'll see what I mean.)

To blame for all this is DIGG. It's a Web site and technology that allows readers to exert hierarchical control over stories. It was started two years ago and has spilled into many different forms, all with the same sort of mission: move to the top/front page/whatever the content readers are most in favor of.

Don't get me wrong. DIGG is a great technology. What I am writing about are the ramifications of that technology on the brains of people like me who write professionally.

I now know readers of this site, for instance, like to read most about stock tips, gold prices, Warren Buffett, Bill Gates and anything that has to do with making them rich quickly, especially if it's written as a list such as "The Top Three Things You Can Do."

I also know people aren't so much interested in explanatory pieces such as this. And it will be easy enough to see whether or not I am correct: After you read this, just look to the right of your screen and check the "Most Popular" box. It may or may not determine if I write another story like this again.

Again, I buy his argument in terms of uni-dimensional popularity. But my ego is much more textured as it relates to popularity - if journalism were my business, popularity would be a secondary consideration to things like economic and personal achievement, which would driven by the intersection of the three EC concepts listed above - Quality, Popularity and Audience. It would be interesting to quantify the EC generated by, say, a writer on the Times Select platform (among the most respected writers in mainstream media) versus one writing for the most popular Internet sites like BoingBoing, Engadget and Huffington Post. Again, I am confident many of my readers have far more insight and data into this than I do. I believe that Tom has raised lots of really good points that are, in fact, quite relevant for today's journalists. However, I think he is missing the boat by being so focused on popularity and not on his ability to monetize his skill base. I guess it is just the hedonistic Wall Streeter in me talking. Please forgive me.

AOL, Culture and Success: They Just Don't Get It

Crazy times these days in new media land. One day I see Jon Miller give a very lucid and sensible overview of the re-positioning taking place over at AOL (at the Web 2.0 Summit), and the next day he is gone. One day I hear Ross Levinsohn talk about his successes and challenges over at Fox Interactive Media, and the next day he is gone. What is going on here? I'd like to look at Jon Miller's (and subsequently Jason Calacanis's) departure, its ramifications for the AOL business and the signal it sends to the AOL, new media and investment communities. In short, I believe the signal it sends is really, really bad, and will only serve to damage the nascent recovery happening over at AOL and the value of an asset that is critical to the Time Warner stock price.

The story in the New York Times depicted Jon Miller's departure in the following terms:

In recent months, Mr. Calacanis said he was considering leaving AOL to start a new company. His decision to resign was hastened by the news that Time Warner, AOL’s parent, had replaced Mr. Miller with Randy Falco, the president of the NBC Universal Television Group.

“I’m not inclined to start over with a new guy,” Mr. Calacanis said in an interview on Thursday. As for what to make of the treatment of Mr. Miller, who discovered he was being replaced after a reporter called AOL asking about Mr. Falco’s appointment, Mr. Calacanis said only: “I’m perplexed. Why now?”

On his blog (www.calacanis.com), Mr. Calacanis wrote a long entry on Wednesday praising Mr. Miller and calling it “a very sad day.”

Several AOL executives said morale at the company had been shaken, and that many of the people who reported to Mr. Miller saw the shakeup as an affront, given the amount of work they had put into creating a new strategy for AOL.

This year AOL has moved to sharply scale back its Internet access business to create a free advertising-supported service on the Web. AOL executives say early signs show that the service is taking off with consumers.

Good question, Jason. Why now? AOL recently announced its tectonic transformation from a subscription-driven ISP to an advertising-driven portal, with all of the risks and opportunities presented by such a radical shift. Jon Miller was clearly the catalyst for this strategic shift, and he was Jason's mentor and protector. And Jason has been a key driver of the change in culture that has taken place, giving AOL an element of edginess and swagger that it hadn't had since the Time Warner merger. This kind of culture shift was essential to giving AOL a fighting chance in the hyper-competitive portal space, knocking heads with the likes of Yahoo!, Google, MySpace and many, many others. And the changes appeared to be working, albeit the jury was still out on whether or not AOL could succeed as a stand-alone portal. But they were trying to re-build brand value one brick at a time, and the Jon and Jason Show was certainly making headway.

So in the face of these huge changes and in the midst of a brutal competitive landscape, Time Warner decides to force Jon Miller out, which has the collateral effect of pushing Jason out as well. The two guys working to change things. The two leaders around which a previously weakened and despondent AOL staff had started to rally around. All one can ask is why, why, and why? And unless Jason is one of the greatest actors in America today, the comments on his blog illustrate his shock and sadness of Jon Miller's departure:

Today was a very sad day for me. One of the few mentors I've had in my life, Jon Miller, was replaced as CEO of AOL.

I feel in love with the challenge of AOL 18 months ago when Jon Miller, Ted Leonsis, and Jim Bankoff courted me and my team to join their revival of the company. The goal was ambitious: move AOL from a multi-billion dollar subscription business to an advertising business--in real time. It was a crazy mission, and as you can probably guess I'm always up for a crazy mission.

Leading this mission was Jon Miller, a quiet samurai of a leader who built our turnaround team and plan--and then lead us into battle as we relentlessly executed against it. I watched him masterfully turn around AOL firsthand. It was impressive considering when I got here the company was torn between the two business models (subscription and advertising), and a year later we were CRUSHING Yahoo's growth rate and were second only to Google's. It wasn't easy to turn this huge ship around, but we did it thanks to Jon's leadership.

Jon gets the Internet, but most importantly he gets people.

Honestly, I wouldn't want to manage someone like myself, but he embraced it. Whenever he was in town we spent time together and he would randomly setup calls to chat me up. He was 100% open with me about all the challenges of his job and AOL's future. He took me to dinners with all kinds of famous and powerful folks, and proudly introduced me to them as "someone you need to know and spend time with."

He made me feel like part of the team which was something I frankly didn't think would happen when we sold AOL our business. He did this with everyone however. He would get to know you and then he would drill down into the finest details of what you were working on. He would look at Engadget, Netscape, and my personal blog every day and send me comments. He would ask me about things I wrote six months ago--he's a detail guy like that.

At the same time he didn't assume he knew better than "the kids" he had working for him. He made us feel like peers and he listened intently to our opinions and advice. He asked great questions and he pushed us to think big.

What did Jon Miller help create at AOL? CULTURE. What skills did he both display and cultivate in others? LEADERSHIP. This is a guy you show the door? And at a time so critical to the business unit's turn-around? If you are a high-quality and sought-after employee at AOL today, are you inclined to stay under new management? I know I wouldn't. I'd be pissed, depressed and utterly lacking in confidence about Time Warner management's vision and efficacy. Unless I am missing something deeply profound in the facts about which I am aware, this change only serves to reinforce the series of missteps promulgated by Time Warner management over the past several years. It is all about culture and leadership, boys, and if it is these two attributes which you seemingly feel are so unimportant then you deserve neither Jon nor Jason in your firm. Or the top employees that were previously under their wings. And your stock is a short. Because any management team seemingly so out-of-touch with its employees and the market deserves little support - and neither does the stock.