Musings of a VC in NYC

Can Amazon Run The Table On Cloud Services?

I was reading my partner Albert's post on cloud services yesterday. Albert explains that he'd like to see all startups building on top of the cloud.

All of this is great news for startups because it is further driving down the cost of hosting.  At this point I am encouraging everyone who is starting up to write for the cloud from day one.  In fact, I think it is time to be somewhat suspect of a technical team that is not doing that.

But what really got my attention was a comment to Albert's post:

I think Amazon is so amazing that there is no point in bothering with the other guys unless the application actually needs geographic redundancy. I would say that's when an hour of downtime directly costs more than $5k (i.e. >$20MM annual revenue through the site). Aside from Google itself, I can't think of a situation where geographic redundancy didn't introduce application-level downtime in exchange for the datacenter-level uptime.

Originally posted as a comment by NYIndependent on Continuations using Disqus.

Is it possible that AMZN will come to dominate cloud services in the same way that Google has come to dominate search (or Amazon has come to dominate online retailing)?

Not only are cloud services commoditizing the dedicated hosting industry, but its not even clear yet that other cloud services are making much headway in competing against AWS (Amazon Web Services). I know that all of you are much smarter about this stuff than me, so I'd be interested in hearing your thoughts in the comments.

Disclosure: I am long Amazon and thinking about getting longer.

Long Google Again

On friday, Google briefly dropped below $300/share. I had a limit order in place at that price and so I am long Google again and feel very good about it.

I've placed another limit order in for the same number of shares at $275/share. Last fall, I bought Google during the downdraft and sold them when the market recovered in early 2009. I made a nice profit and wanted to take a pause and see how things were going for Google.

Since then Google has reported a decent fourth quarter and has been rationalizing its business and making cuts. Eric Schmidt says things are pretty bad out there and that's certainly true. But I think Google's business, balance sheet, and market position are as strong as they come and I'm happy to be back in the stock and will be buying more if it goes down significantly more.

I know that I should be selling puts at $275/share instead of placing limit orders at $275/share. I'd like to try that approach and will eventually get around to doing that.

The Berkshire Hathaway 2008 Annual Letter

I took some time on Sunday afternoon to read Warren Buffett's annual letter. I don't make it an annual practice to read the Berkshire Hathaway letter as many do (nor have I ever been to the shareholder's meeting which Buffett calls "Woodstock for Capitalists"). But given that 2008 was a year unlike any that I have ever witnessed, it seemed like the thing to do on a cold and snowy afternoon.

Buffett and his partner Charlie Munger are the most successful stock market investors of the 20th century and they have consistently outperformed the public markets as shown by this table of annualized returns that I put together with data from the first page of Berkshire's annual report (I love that Buffett starts with the numbers):

 

It is very interesting to me that the past five decades have seen the S&P significantly outperform the long term average for equities of around 7% per annum. Even with the miserable performance of the public markets this decade, we'd have to be flat for another decade at least for the markets to average 7% per annum from 1965 on.

But Buffett and Munger's performance is something else entirely. While it is correlated to the market for sure, it has been so consistently superior for so long that it is clear that they are doing something right (and better).

So with that in mind, here's my take aways from reading Warren's letter.

1) The economy - It's really bad. Warren says the "freefall in business activity" is "accelerating at a pace that I have never witnessed before."

2) TARP and related efforts to stablize the financial system - The Fed "stepped in to avoid a financial chain reaction of unpredictable magnitude. In my opinion, the Fed was right to do so." But it will "bring on unwelcome aftereffects." One likely consequence is "an onslaught of inflation." And "major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won't leave willingly." That last line is classic and true and Obama's greatest challenge.

3) Berkshire's two most important businesses are insurance and utilities, sectors that "produce earnings that are not correlated to those of the general economy."

4) Buffet and Munger are value investors and contrarians. Warren says "When investing, pessimism is your friend, euphoria the enemy" and "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down" and "Beware the investment activity that produces applause; the great moves are usually greeted by yawns." Words to live by.

5) Housing - Berkshire has exposure to the mortgage and housing market by virtue of its ownership of Clayton Homes, the largest company in the prefab home market. Buffett says "Enjoyment and utility should be the primary motives for [home] purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser." And "an honest to God down payment of at least 10% [I think 20%] and monthly payments that can be comfortably handled by the borrowers income. That income should be carefully verified."

6) History as a predictor of the future - "If merely looking up past financial data would tell you what the future holds, the Forbes 400 would consist of librarians."

7) Quants - "Beware of geeks bearing formulas."

8) Lean and mean organizations - "BHAC: Who, you may wonder, runs this operation? While I help set policy, all the heavy lifting is done by Ajit and his crew. Sure they were already generating $24 billion of float along with hundreds of millions of operating profit annually. But how busy can that keep a 31-person group? Charlie and I decided it was high time for them to start doing a full day's work." Wow. I'm stunned. And now I have something other than Craigslist to use as an example of a lean and mean profit generating machine.

9) Bubbles and Panics - "The investment world has gone from underpricing risk to overpricing it." And "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the US Treasury bond bubble of late 2008 may be regarded as almost as extraordinary."

10) Derivatives - "Derivatives are dangerous" and "When Berkshire purchashed General Re in 1998, we knew we could not get our minds around the book of 23,218 derivative contracts, made with 884 counterparties. So we decided to close up shop. Though we were under no pressure and we operating in benign markets as we exited, it took us five years and more than $400 million in losses to largely complete the task. Upon leaving, our feelings about the business mirrored a line in a country song: "I liked you better before I got to know you so well."

11) Risk and Responsibility - "It is my belief that the CEO of any large financial organization must be the Chief Risk Officer as well. If we lose money on our derivatives, it will be my fault."

I'll stop there because I really like lists with eleven entries. It's a quirk of my personality. All you have to do is read Warren's letter (or even my cliff notes version) to understand why he's the best investor of the past century. Common sense married with a native understanding of markets and value is what produces the returns at the top of this post. Everyone who invests and manages money for a living can take a lot away from Berkshire Hathaway and Warren and his partner Charlie.

When Government Funds Business

The Gotham Gal opened the NY Times this morning and she says to me "didn't we just put money into Citibank?". The we being all of us taxpayers here in the US.

I said, "yes, a couple times I think". And then she got upset. Because there at the bottom of the NY Times is a big advertisement for Citibank (see the photo on the right).

She went on. "We are paying for that ad. In a newspaper that less and less people read every day. No wonder they are in trouble".

There's something poetic, ironic, and iconic about that ad at the bottom of the NY Times today. It sums up so much of what we are all seeing and feeling these days.

Old school companies sticking to old school approaches that don't work anymore. All the while new companies with new approaches are succeeding and even thriving. Welcome to the macropocalypse.

But there's a bigger issue here. Bob Lefsetz talked about it in his post last night about Sheryl Crow and Maureen Dowd.

Northern Trust, a bank, took our money and then flew their peeps out to Southern California for a golf tournament, where they wined and dined them, even closed the House Of Blues so they could showcase Sheryl Crow.  Only problem, we, the public, paid for this show!  What’s a bigger crime, scalping tickets to shows people want to see, after all, that’s supply and demand, or major corporations filching money from us in great quantities?  Obviously, the latter.  But now it’s become a sexy issue.  Because they’re truly doing it on our dime.

When our government starts spending our money backstopping companies, then we start paying more attention to how those companies are spending our money. And we don't like it. It is going to get worse.

We are involved with a non-profit group here in NYC that is doing some very important work around parks and public spaces. In the past they had funding from companies like UBS and JP Morgan Chase. They can't tap that money anymore because those companies don't want to be doing anything "inappropriate" with public funds (as if supporting parks was inappropriate). And since all money is fungible, all of these companies' funds are public funds now.

Being the CEO of a company who has taken government money is like having a big target on your back. Everything you do is going to be second guessed, debated and discussed like never before. "Now it's become sexy because they are doing it on our dime" Well said Bob.

This whole situation sucks. When government funds business, it messes everything up.

Is There Such A Thing As A Blue Chip Stock Anymore?

On friday, we saw Citigroup do a recap and dilute the common stockholders significantly and we saw GE cut their dividend by 2/3 to conserve cash. Both stocks are trading at below $10/share and are at fifteen year lows. There's a significant chance that the common stockholders on Citigroup will end up with nothing if the bank is nationalized. And GE is facing a huge debt maturity next year that could cause a similar outcome for its shareholders. And what about GM?  That's another potential bankruptcy looming. The NY Times quoted an automotive consultant today about GM:

“G.M. can’t raise more capital in the private markets, it can’t influence demand and it can’t adjust its cost structure enough in the short-term,” Mr. Casesa said. “There is no economic solution, only a political one.”

What do Citigroup, GE, and GM have in common? They are "blue chip" stocks and members of the elite Dow Jones Industrial Average. There are 30 stocks in DJIA and they are the biggest and, in theory, the strongest companies in America.

But the past six months have taught us that no company is bulletproof and just because a stock is a "blue chip" doesn't mean it is safe.

In fact, we are learning the opposite. Here's the chart of the Dow since Nov 1, 2008:

The Dow is down 25% since Nov 1, 2008 and is ~7% below the November lows.

Here's the chart of the NASDAQ since Nov 1, 2008:

The NASDAQ is down 20% since Nov 1st and is 7% above the November lows.

Six months doesn't mean all that much, but I think its instructive that the "strongest" companies in America have underperformed their smaller brethren and I think this trend will continue as we work our way out of the mess we are in.

I've said this before and I'll say it again. This economic crisis is not limited to banks and housing. We are witnessing a "sea change" as my father in law called it today. Businesses that were built in the 19th and the first half of the 20th century are finding their underlying fundamentals challenged by a new economy that is global and driven by information and technology. Businesses that were built at the tail end of the 20th century and even in the 21st century are faring much better.

So be wary of "blue chips". They aren't such a sure thing anymore.

Taking It To The Hood

Note: This is a first for the AVC blog. I did not write this post. It was written by Jeff Minch, known to this community as JLM. Jeff has been leaving comments on this blog for the past six to nine months and I've enjoyed reading them very much. Jeff has a very different view than I do about politics and about other areas as well. But you cannot read his opinions and not come away impressed and thinking differently. That's the kind of voices we have here in our community and I am excited about sharing some of them with all of you every once in a while. I don't plan to do this very often, but I do plan to do it from time to time. With that said, please enjoy Jeff's thoughts on the President's housing plan.

Taking it to the Hood
The Homeowner Affordability and Stability Plan

Fred Wilson asked me to react to the President’s housing initiative and I am honored to do so.  I find “A VC” to be the single best blog that I have the opportunity to read primarily because of the content offered by its participants and their obvious qualifications but also because of the comity of the dialogue and the ability for strong willed folks to disagree without being disagreeable.  Fred has chosen some great blog topics and while there is a “forum” quality to the actual dialogue, it is the selection of the topics which focuses all of that intelligence.

The TARP was for Wall Street.  The Stimulus was for Main Street.  The HASP is for the Hood.  There will be much to like and there will be much to dislike.  A frame of reference:

1.    Our Nation was in great measure formed by folks who had a desire to have their own house.  A gross oversimplification, I am sure but a bit of truth nonetheless.  Increasing home ownership in the United States after World War II was one of the single most important elements in the wealth creation and evolution of the culture of that extraordinary time.

2.    Housing is both physical and emotional as it is where our sweetest memories are made, discussed and lived.  It is where our hearts are and if we fail in this arena we have more than just financial failure, we have broken hearts and a diminishing of the American dream.  [If you knew me well, you would be amazed to hear me say something so “squishy” like that but I have my own reasons.  More importantly, I truly believe it.]

3.    Housing --- or perhaps I should say abuses of housing, particularly housing finance --- is at the root of our current financial problems.  There is plenty of blame to go around without resorting to political finger pointing.  A good idea got swept up in the euphoria of the times and we allowed basic rules of finance to be violated at the personal, industry, banking, regulatory, legislative, GSE and securities levels.  Housing was the spark which ignited the flames which fanned out of control.  It is good therefore that President Obama is addressing a root cause of the problem.

4.    Homes are very important to the fabric of our Nation from a social perspective and while I cannot readily quote any supporting figures, I can say with some conviction that a child raised in a stable home is more likely to become a contributor to society rather than a cost center to society; and, conversely the opposite is also true.  [At the end of the day, all we are trying to do is to get the taxpayers to outnumber the recipients of government largesse.]

5.    Home equity represents the most important (and generally hidden) asset in most folk’s lives when it comes to building long term retirement equity.

So, I am a big fan of stable homes for a number of reasons.

On the whole, the HASP is a damn good start but it is only a start.  Is it perfect right out of the chute?  Hell no.  Here are the things I like in the order in which I like them:

1.    I think the probability of the plan working is dramatically heightened by the President’s wisdom in originating the plan in his office rather than having the Congress draft legislation and running afoul of the partisan minefields such action would generate.  President Obama can barter a bit of political capital in this endeavor by direct sponsorship and can avoid the unifying opposition of having Speaker Pelosi being the plan’s sponsor.

2.    I just love the idea that a Federal Bankruptcy Judge can intervene in the dialogue between a bank and a borrower and take immediate and almost unappealable action to force a mortgage settlement.  This is a shadow of the “cram down” provision of bankruptcy law but it is even more effective because neither party regularly appears in that Court and thus there is a real balance of terror.  Federal Bankruptcy Judges are the most powerful Judges in the judiciary, they are experienced in dealing with tales of woe, they are very decisive and do not suffer fools well.  It will also motivate banks to settle things quickly once they know the model which will be used.  This will help deal with all of the mortgages, including jumbo mortgages, which are not held by the GSEs.  The Federal Bankruptcy Judges I know will be able to modify a mortgage in about 12 minutes.

3.    The application of a specific financial yardstick at 38% of gross income able to be “bought down” to 31% is pragmatic.  Of course, this will be complicated by the ability of a borrower to free up other funds to inject equity but it is a good start.  I would have liked the final residual number to have been 25% because I think we are still headed downward for about 12-18 months.

4.    The other important element of this buy down approach is the ability to now put a definitive price on the formerly “toxic” assets.  Remember, the most important element to trading this stuff off balance sheets has been the inability to price it.  This solves a lot of that problem.

5.    Discrimination between those already in the ditch and those who are at the edge of the abyss as well as those whose only real problem is the declining value of their home is useful and while it doesn’t cover every single circumstance, it does cover a huge portion.

There a couple of areas which merit a bit of discussion and undoubtedly will require some modification.

1.    First, let me ask that everybody go re-read the Parable of the Workers in the Vineyard.  Why?  Because like laborers in the vineyard, the HASP will leave some folks feeling like they were mistreated because they were prudent in their mortgage dealings and will not benefit from the HASP.  My answer?  “Friend, I am doing you no wrong.”  There are just some things in the life of a Nation in which you simply cannot get the toothpaste back into the tube regardless of how firmly we believe that is the just solution.

2.    The plan is simply too complex on its surface.  This is a problem with President Obama, he is smart and he assumes that others are equally smart.  The average Wharton MBA could not read the Executive Summary of this plan and “brief back” its provisions from memory.  The borrowers?  Hey, they didn’t provide income documentation and were not interested in a lot of paperwork to begin with --- do you think they are going to come trotting into their bank with a bunch of documentation now?  The plan has to be simple enough that a high school grad (OK, in the top half of his class.) could understand it.

Does a fish taste any different if you catch it with a worm, hook, bobber, line and a cane pole?  KISS --- keep it simple for the stupid!

3.    The plan does nothing to stop pending foreclosures.  I would like to have had a 90-day moratorium on foreclosures currently pending.  It is outrageous that banks receiving TARP funds are not called to cooperate fully with all government sponsored bailouts.  They were first in line to receive assistance and they should also be first in line to provide assistance.  These guys owe us!

4.    I hate the provision that if a borrower who has received a loan modification is current in their payments that they receive $1,000 annually for five years.  When a cute little mouse has his leg removed from a trap, he does not negotiate for a piece of the cheese before scurrying away.  This paternal approach is really insulting to all involved.  Everybody should get one chance to be saved with no do overs.

5.    I wish the plan had a provision that the “work out” financing could also be applied to first time home purchasers in order to soak up some of the excess inventory out there.  Missed opportunity to work down the supply of troubled housing and for banks to reduce their REO.

6.    There is a sense that the mortgage modifications are only going to be for five years.  This is silly.  Make them permanent and make the solution permanent.  Five years is not very long for an asset which is normally financed over 30 years and which can last for 100 years.  There is ample evidence that re-default rates are as high as default rates.  Solve the problem permanently.

7.    The government should get an “equity kicker” for their trouble.  If you participate in the plan and peg a new value on your home, then the government should get either a par payoff of a 25% equity kicker above the marked down price for the next ten years.  Why not?

In closing, let me say that of the three plans advanced thus far I like the HASP the best.  Remember we are only talking about a national mortgage delinquency rate of something less than 7%, so while the problem is huge in terms of dollars it is really more manageable in terms of the numbers of folks impacted.  We desperately need a win on the economy and this may be a promising start.

I rate the TARP at zero probability of working because I think that Darwin was right all along.  I rate the Stimulus at 25% with its most significant failing its disconnect between the spending and the creation of jobs.  I rate the HASP at 50% with the possibility to engineer that upward with some simple modifications.  Thanks for listening.

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Fred's Update: You might enjoy watching the Rick Santelli rant on CNBC in conjunction with this post. What a great discussion and debate we are having here. I love it.

Fred's Update 2: I measure the success of a post by the number of comments. By that score, JLM hit one out of the park with over 100 comments and still growing in less than 24 hours. Well done JLM, great topic, great post, and great discussion. You will be a tough act to follow.

Extracting Insight From Stock Research Analysts

Wall Street research has been in a long and steady decline for years. Between the obvious loss of objectivity brought on by huge investment banking fees being paid to "buy coverage" and regulations like FD which made it almost impossible to get any information out of companies, Wall Street research has lost a lot of its mojo in the past decade.

But that does not mean that there aren't good analysts doing good work. Many of them are not at the large banks and brokerage firms anymore and some of them are even blogging for a living.

There's a new service launching today called Pulse that does a nice job aggregating a lot of these voices, not in the form of research reports, but in the form of relevant comments made about public companies.

I should disclose that I am a shareholder and director of Alacra, the company that is behind Pulse. I've been an investor in Alacra for over ten years and I know the team and the quality of the work they do and Pulse is yet another example of a great product coming out of Alacra.

The thing about Pulse is its "real time" and you get a sense of what analysts are saying right now. Another thing I like is that their definition of analyst is very broad. Most people would not think of Kara Swisher as an analyst, but you can see her comments about companies in Pulse:

You can also see all my comments about public companies here.

But Pulse is really more about full-time professional stock analysts like Doug Freedman, a semiconductor analyst at American Technology Research. You can see his comments here.

If you are an investor or trader who values getting the "pulse of the street" then I think Pulse will be a valuable new service for you. Check it out and let me know what you think.

Does Apple Have A Blind Spot About Flash?

I think the news that Flash is coming to smartphones over the next year is a big deal. Most of the rich media experiences I have on the web are in flash. YouTube's success had a lot to do with its choice of Flash for its video player. Now almost every video site on the web uses a Flash video player. The same is true of audio. It used to be that when you wanted to listen to streaming audio, you had to use windows media player, the real player, or a link to iTunes, but all that's gone, thanks again to Flash. Whether its last.fm, Pandora, most radio station web streams, or hypemachine, you are listening via Flash.

I have been able to port most of my web activity pretty seamlessly to a smartphone, either iPhone or Blackberry. But the one thing I've not been able to replicate is the seamless experiences of watching video or listening to streaming audio on my phone (downloading an app to listen to music is not seamless). I realize that the mobile networks may not yet be ready for hundreds of millions of people watching or listening to streaming media on their smartphones, but they will be someday and getting Flash onto smartphones is going to accelerate the demand for this.

It's also true that a lot of the interesting new desktop apps like Twhirl and Tweetdeck are written for AIR, Flash's runtime cousin for the desktop. I'd love to have apps like this on my smartphone too.

So it's very exciting to me that Flash is making a big move over the next year onto smartphones. I'm also very excited to see Nokia and Adobe creating the Open Screen Project and Open Screen Fund to promote an open and consistent experience for web browsing and mobile apps across mobile devices. The mobile web needs to be just like the web for innovation to flourish and capital to flow.

Which takes me back to the title of this post. I believe Apple is making a mistake by snubbing Adobe's desire to get Flash on the iPhone. And I believe Apple doesn't share in Adobe and Nokia's vision of an open and consistent experience for web browsing and mobile apps. It seems to me that Apple is interested in replicating its iTunes/iPod strategy it used to dominate digital music to dominate the mobile web.

I don't think that will work. In fact, I don't think the iTunes/iPod strategy has much life left in it. Things like Pandora, MySpace Music, music blogging, and other forms of streaming music will eventually chip away at that franchise. But leaving the digital music situation alone for the moment, the mobile web is not going to be dominated by a single device and a single app ecosystem. I don't even think an app ecosystem is the long term solution for the mobile web. It's a bridge enviroment that allows for rich experiences on devices that don't have reliable high bandwidth connections yet.

But the mobile web will eventually just be the web. And a big part of getting it there is to get the tools that allow us to seamlessly consume rich media on the web onto mobile devices. To me that means Flash. I'm rooting for Adobe and its allies like Nokia and Palm (and hopefully Blackberry) to win this game. If they do, we'll all be much better off because of it.

Related articles by Zemanta

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When Greed Is Good

For those of my generation, Gordon Gekko is the ultimate Wall Street caricature. Oliver Stone's movie Wall Street, in which Gordon is the main character, came out in 1987, just as I was getting out of business school and starting my career in venture capital. The big line in that movie is when Gordon says "greed is good."  Here's a ~3 min clip from the film and the whole thing is worth watching but the big line comes around 2:40 into the clip:

If you watched until the end, you also got to hear this line:

Greed, you mark my words, will not only save Teldar Paper, but also that malfunctioning corporation called the USA.

That's the first thing I thought of when I read this morning in the NY Times that the bank rescue plan that Geithner will announce tomorrow relies in part on private investors:

Administration officials said the plan, to be announced Tuesday, was likely to depend in part on the willingness of private investors other than banks — like hedge funds, private equity funds and perhaps even insurance companies — to buy the contaminating assets that wiped out the capital of many banks.The officials say they are counting on the profit motive to create a market for those assets. The government would guarantee a floor value, officials say, as a way to overcome investors’ reluctance to buy them.

The smartest people I know have been saying this has to happen for over five months. Roger Ehrenberg has been pleading for the good bank/bad bank solution since the late summer early fall. In the good bank/bad bank scenario, the bad bank gets all the "toxic" assets and private investors are allowed to speculate as to their worth in an open and transparent market.

The single best comment I've received on this blog about the banking mess came last September from JLM, who was hanging around this blog community during the election but sadly seems to have left the conversation, at least he's gone silent.  JLM said:

Sometimes a bit of historic perspective is useful in trying to deal with TODAY. Remember that quote about being doomed to relive the history we ignore? Well we are not being very thoughtful about this. We have actually seen this movie before though maybe it was a shorter version.

Remember the S & L crisis and the Resolution Trust Corp? I do because I hit a very, very good lick in purchasing distressed properties from the RTC, pension funds, insurance companies, banks and S & Ls. I bought them for $0.20-0.30 on the dollar of replacement cost, fixed them up, owned them for about 5-7 years, had the numbers audited annually and sold them all to institutions in 3 transactions in 1995 --- 6,000 apartments, 100 warehouses, 7.5 MM sf of offices.

My partners were the likes of GE Capital (for whom I also fixed up some of their problems), Fidelity and private foreign investors. BTW, GE Capital is the smartest bunch of real estate folks I ever met and the best risk takers a partner could ever have hoped for. And they made a ton of money in the deal while conducting themselves like perfect partners and gentlemen. Private money jumped in big time!

I trooped around Wall Street trying to raise money for a long, long time and shared my contrarian investment strategy (and believe me the folks were looking for the lobotomy scars all the time) with the likes of KKR, Odyssey, Bear Stearns, Allen & Co, Leon Black --- the usual suspects. And guess what? They never gave me any money but they all went into the business themselves. Capitalism was alive and well.

Here's the bottom line: If the RTC had held every property and just injected a bit of management they would have recovered every penny of principal, every penny of interest at the default rate and they would have firmed up the national commercial real estate markets more quickly.

This is not some mythical academic theoretical tale. This is something that a bunch of guys did the last time the markets crashed (then it was more commercial than residential) and the government stepped in to bail out the transgressors. This is reality.

BTW, the final price tag on the RTC was about $200B last time around. How much would that be in today's dollars? Oh, about $700B maybe?

Here's a suggestion based upon what was learned the last time around ---

Let all the originators of the problem fail. Suck their capital dry. Punish them like a VC would punish the first round guys.

Don't use a penny of government money. If pressed, use government loan guarantees only. The only entity left with real credit is the US government. Use it. This will make the markets tell us what this crap is really worth. Right now the issue is the pricing.

Fix the problems that created this mess quick and do it publicly. No 100% mortgages even for Warren Buffet. No low doc mortgages. No financing of closing costs in mortgages. Make all borrowers have skin in the game. No leveraging capital 30-40 times for any financial instititions. No mortgage based derivatives of any kind --- why? Cause you cannot collect mortgage payments when the mortgage is "embedded" and "divided" by securitization. Teach the guys with mousse in their hair how to collect a past due payment. No extraordinary compensation for investment guys who are primarily salary men --- let them take a piece of their own deal if they want an equity style upside. No naked short selling. Ban short selling for 24 months. Then reinstate the uptick rule. Bring all hedge funds out of the woods and under the regulatory umbrella. If you want American markets, tax laws, securities laws, etc, then you have to be regulated. Lower the capital gains rate to 0% for five years --- because that's how long it will take to work this through. The private capital will come to that lowered capital gains rate like a moth to a flame and it will be immediate. Merge Freddie and Fannie and obtain meaningful merger efficiencies.

Stop the foreclosure process on residential real estate which can be salvaged. If a borrower can pay anything --- owes $100 per month but can pay $70 --- keep him in the house because real estate plummets in value the second it is empty and every foreclosure ever sold has been sold at a deeper discount than the foreclosure price. Make a trade. Rework the mortgage in return for a 50% equity slice above the mortgage amount. There is a certain irony in allowing the public to solve their own problems rather than just sending them the bill. It shortcuts the flow of money and it has a social benefit. Can every deal be reworked? No, but many can be and should be.

Oh, yeah, get rid of Barney Frank, Chris Dodd and Chris Cox.

That's even better than I remember it. I should print it out and mail it to every single legislator and policy maker in Washington. But my favorite part of it is this:

I hit a very, very good lick in purchasing distressed properties from the RTC, pension funds, insurance companies, banks and S & Ls.

It's time for America to get up off its ass and start looking for some "good licks". Howard Lindzon has it right.

This crisis of confidence will only be fixed by you and me

Greed is good when fear rules the roost and fear is good when greed rules the roost. Now is the time for greed.

Not All Earnings News Is Bad

We are in such a negative/bearish environment and it seems like all the economic news, including individual company earnings news, is bad these days. But it's always worth noting the exceptions to the rule and thinking about why that is.

Yesterday IBM announced it's fourth quarter earnings and it's net income was up 12% over the fourth quarter of 2007. Revenues were down slightly as hardware was down 20% and higher margin software and services were up a similar amount. But most interesting was IBM's move to increase the expectations for earnings in 2009 and 2010. IBM said that the company "was ahead of pace to increase earnings to $10 to $11/share by 2010".

What's going on at IBM is an ongoing transition from a hardware oriented business to a software and services business which is driving margins up combined with a still healthy book of business from its clients all over the world combined with an ongoing ability to reduce costs and become more efficient.

And also yesterday, I saw a report from Jeffries and Company that said this about Google:  

Positive ad-coverage and acceleration in paid clicks growth in
   Oct/Nov/Dec. give us more confidence in Google's ability to meet our
   and consensus 4Q estimates despite the severe ad climate. We reiterate
   our Buy based on ad budget migration to Search, Google's relatively
   resilient model and its newfound cost discipline.

   comScore released ad-coverage data for December after market close
   yesterday, which we use to derive Y/Y paid clicks growth.

As we've discussed on this blog recently, Google has the ability to drive paid clicks (which is what generates revenue for Google) in a number of ways, including by increasing ads per page and total ad views, and they may well be doing exactly that.

Moving away from tech and internet, there's Abbott Labs which just announced "double digit sales and earnings growth in the fourth quarter". This is largely a new products story around stents and a new arthritis drug.

I found all of this good earnings news (the Google info is not actual, just projected) in about ten minutes this morning and I am sure there is a lot more out there.

We are in a bad economy for sure and many sectors like banks, financial services of all kinds, real estate, oil and gas, automotive, etc, etc are hurting big time.

But there are companies that are doing well in this environment, including many small companies like the ones we have in our portfolio. You have to be very careful investing in this environment and must understand what the companies you invest in do, you must make sure their balance sheets are strong and the can self finance, and you must look for businesses that are "recession proof" in one way or another. My point is simply that they are out there and you don't have to look that hard to find them.

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