Trump vs. Clinton – Which Party Is Better for the Economy?

Trump vs. Clinton – Which Party Is Better for the Economy?

Donald Trump has been campaigning on how poorly America’s economy is doing. Yet, the headlines don’t seem to align with that position. Today we learned that U.S. household net worth climbed by over $1trillion in the second quarter. Rising stock values and rising real estate values made up most of the gain. And owners’ equity in their homes grew to 57.1%, highest in over a decade. Simultaneously this week we learned that middle-class earnings rose for the first time since the Great Recession, and the poverty rate fell by 1.2 percentage points.

Gallup reminded us this month that the percentage of Americans who perceive they are “thriving” has increased consistently the last 8 years, from 48.9% to 55.4%. And Pew informed us that across the globe, respect for Americans has risen the last 8 years, doubling in many countries such as Britain, Germany and France – and reaching as high as 84% favorability in Isreal.

successful-presidencyMeanwhile Oxford Economics projected that a Republican/Trump Presidency would knock $1trillion out of America’s economy, and lower the GDP by 5%, mostly due to trade and tax policies. These would be far-reaching globally, likely not only creating a deep recession in America, but quite possibly the first global recession. But a Clinton Presidency should maintain a 1.5%-2.3% annual GDP growth rate.

I thought it would be a good idea to revisit the author of “Bulls, Bears and the Ballot Box,” Bob Deitrick. Bob contributed to my 2012 article on Democrats actually being better for the economy than Republicans, despite popular wisdom to the contrary.

AH – Bob, there are a lot of people saying that the Obama Presidency was bad for the economy. Is that true?

Deitrick – To the contrary Adam, the Obama Presidency has economically been one of the best in modern history. Let’s start by comparing stock market performance, an indicator of investor sentiment about the economy using average annual compounded growth rates:
DJIA S&P 500 NASDAQ
Obama 11.1% 13.2% 17.7%
Bush -3.1% -5.6% -7.1%
Clinton 16.0% 15.1% 18.8%
Bush 4.8% 5.3% 7.5%
Reagan 11.0% 10.0% 8.8%

As you can see, Democrats have significantly outperformed Republicans. If you had $10,000 in an IRA, during the 16 years of Democratic administrations it would have grown to $72,539. During the 16 years of Republican administrations it would have grown to only $14,986. That is almost a 5x better performance by Democrats.

Obama’s administration has recovered all losses from the Bush crash, and gained more. Looking back further, we can see this is a common pattern. All 6 of the major market crashes happened under Republicans – Hoover (1), Nixon (2), Reagan (1) and Bush (2). The worst crash ever was the 58% decline which happened in 17 months of 2007-2009, during the Bush administration. But we’ve had one of the longest bull market runs in Presidential history under Obama. Consistency, stability and predictability have been recent Democratic administration hallmarks, keeping investors enthusiastic.

AH – But what about corporate profits?

Deitrick – During the 8 years of Reagan’s administration, the best for a Republican, corporate profits grew 26.82%. During the last 8 years corporate profits grew 55.79%. It’s hard to see how Mr. Trump identifies poor business conditions in America during Obama’s administration.

AH – What about jobs?

Deitrick – Since the recession ended in September, 2010 America has created 14,226,00 new jobs. All in, including the last 2 years of the Great Recession, Obama had a net increase in jobs of 10,545,000. Compare this to the 8 years of George W. Bush, who created 1,348,000 jobs and you can see which set of policies performed best.

AH – What about the wonkish stuff, like debt creation? Many people are very upset at the large amount of debt added the last 8 years.

Deitrick – All debt has to be compared to the size of the base. Take for example a mortgage. Is a $1million mortgage big? To many it seems huge. But if that mortgage is on a $5million house, it is only 20% of the asset, so not that large. Likewise, if the homeowner makes $500,000 a year it is far less of an issue (2x income) than if the homeowner made $50,000/year (20x income.)

The Reagan administration really started the big debt run-up. During his administration national debt tripled – increased 300%. This was an astounding increase in debt. And the economy was much smaller then than today, so the debt as a percent of GDP doubled – from 31.1% to 62.2%%. This was the greatest peacetime debt increase in American history.

During the Obama administration total debt outstanding increased by 63.5% – which is just 20% of the debt growth created during the Reagan administration. As a percent of GDP the debt has grown by 28% – just about a quarter of the 100% increase during Reagan’s era. Today we have an $18.5trillion economy, 4 to 6 times larger than the $3-$5trillion economy of the 1980s. Thus, the debt number may appear large, but it is nothing at all as important, or an economic drag, as the debt added by Republican Reagan.

Digging into the details of the Obama debt increase (for the wonks,) out of a total of $8.5trillion added 70% was created by 2 policies implemented by Republican Bush. Ongoing costs of the Afghanistan war has accumulated to $3.6trillion, and $2.9trillion came from the Bush tax cuts which continued into 2003. Had these 2 Republican originated policies not added drastically to the country’s operating costs, debt increases would have been paltry compared to the size of the GDP. So it hasn’t been Democratic policies, like ACA (Affordable Care Act), or even the American Reinvestment and Recovery Act which has led to home values returning to pre-crisis levels, that created recent debt, but leftover activities tied to Republican Bush’s foray into Afghanistan and Republican policies of cutting taxes (mostly for the wealthy.)

Since Reagan left office the U.S. economy has grown by $13.5trillion. 2/3 of that (67%) happened during Clinton and Obama (Democrats) with only 1/3 happening during Bush and Bush (Republicans.)

AH – What about public sentiment? Listening to candidate Trump one would think Americans are extremely unhappy with President Obama.

Deitrick – The U.S. Conference Board’s Consumer Confidence Index was at a record high 118.9 when Democrat Clinton left office. Eight years later, ending Republican Bush’s administration, that index was at a record low 26.8. Today that index is at 101.1. Perhaps candidate Trump should be reminded of Senator Daniel Patrick Moynihan’s famous quote “everyone is entitled to his own opinion, but not to his own facts.”

Candidate Trump’s rhetoric makes it sound like Americans live in a crime-filled world – all due to Democrats. But FBI data shows that violent crime has decreased steadily since 1990 – from 750 incidents per 100,000 people to about 390 today. Despite the rhetoric, Americans are much safer today than in the past. Interestingly, however, violent crime declined 10.2% in the second Bush’s 8 year term. But during the Clinton years violent crime dropped 34%, and during the Obama administration violent crime has dropped 17.8%. Democratic policies of adding federal money to states and local communities has definitely made a difference in crime.

Despite the blistering negativity toward ACA, 20million Americans are insured today that weren’t insured previously. That’s almost 6.25% of the population now with health care coverage – a cost that was previously born by taxpayers at hospital emergency rooms.

AH – Final thoughts?

Deitrick – We predicted that the Obama administration would be a great boon for Americans, and it has. Unfortunately there are a lot of people who obtain media coverage due to antics, loud voices, and access obtained via wealth that have spewed false information. When one looks at the facts, and not just opinions, it is clear that like all administrations the last 90 years Democrats have continued to be far better economic stewards than Republicans.

It is important people know the facts. For example, it would have kept an investor in this great bull market – rather than selling early on misplaced fear. It would have helped people to understand that real estate would regain its lost value. And understand that the added debt is not a great economic burden, especially at the lowest interest rates in American history.

[Author’s note: Bob Deitrick is CEO of Polaris Financial Partners, a private investment firm in suburban Columbus, Ohio. His firm uses economic and political tracking as part of its analysis to determine the best investments for his customers – and is proud to say they have remained long in the stock market throughout the Obama administration gains. For more on their analysis and forecasts contact PolarsFinancial.net]

Why EPS and Share Price Don’t Predict Future Performance

Why EPS and Share Price Don’t Predict Future Performance

Most analysts, and especially “chartists,” put a lot of emphasis on earnings per share (EPS) and stock price movements when determining whether to buy a stock.  Unfortunately, these are not good predictors of company performance, and investors should beware.

Most analysts are focused on short-term, meaning quarter-to-quarter, performance.  Their idea of long-term is looking back 1 year, comparing this quarter to same quarter last year.  As a result, they fixate on how EPS has done, and will talk about whether improvements in EPS will cause the “multiple” (meaning stock price divided by EPS) will “expand.”  They forecast stock price based upon future EPS times the industry multiple.  If EPS is growing, they expect the stock to trade at the industry multple, or possibly somewhat better.  Grow EPS, hope to grow the multiple, and project a higher valuation.

Analysts will also discuss the “momentum” (meaning direction and volume) of a stock. They look at charts, usually less than one year, and if price is going up they will say the momentum is good for a higher price.  They determine the “strength of momentum” by looking at trading volume.  Movements up or down on high volume are considered more meaningful than on low volume.

But, unfortunately, these indicators are purely short-term, and are easily manipulated so that they do not reflect the actual performance of the company.

At any given time, a CEO can decide to sell assets and use that cash to buy shares.  For example, McDonald’s sold Chipotle and Boston Market.  Then leadership took a big chunk of that money and repurchased company shares.  That meant McDonalds took its two fastest growing, and highest value, assets and sold them for short-term cash.  They traded growth for cash.  Then leadership spent that cash to buy shares, rather than invest in in another growth vehicle.

buying your own stockThis is where short-term manipulation happens.  Say a company is earning $1,000 and has 1,000 shares outstanding, so its EPS is $1.  The industry multiple is 10, so the share price is $10.  The company sells assets for $1,000 (for purposes of this exercise, let’s assume the book value on those assets is $1,000 so there is no gain, no earnings impact and no tax impact.)

Company leadership says its shares are undervalued, so to help out shareholders it will “return the money to shareholders via a share repurchase” (note, it is not giving money to shareholders, just buying shares.  $1,000 buys 100 shares.  The number of shares outstanding now falls to 900.  Earnings are still $1,000 (flat, no gain,) but dividing $1,000 by 900 now creates an EPS of $1.11 – a greater than 10% gain!  Using the same industry multiple, the analysts now say the stock is worth $1.11 x 10 = $11.10!

Even though the company is smaller, and has weaker growth prospects, somehow this “refocusing” of the company on its “core” business and cutting extraneous noise (and growth opportunities) has led to a price increase.

Worse, the company hires a very good investment banker to manage this share repurchase.  The investment banker watches stock buys and sells, and any time he sees the stock starting to soften he jumps in and buys some shares, so that momentum remains strong.  As time goes by, and the repurchase program is not completed, selectively he will make large purchases on light trading days, thus adding to the stock’s price momentum.

The analysts look at these momentum indicators, now driven by the share repurchase program, and deem the momentum to be strong.  “Investors love the stock” the analysts say (even though the marginal investors making the momentum strong are really company management) and start recommending to investors they should anticipate this company achieving a multiple of 11 based on earnings and stock momentum.  The price now goes to $1.11 x 11 = $12.21.

Yet the underlying company is no stronger.  In fact one could make the case it is weaker.  But, due to the higher EPS, better multiple and higher share price the CEO and her team are rewarded with outsized multi-million dollar bonuses.

But, companies the last several years did not even have to sell assets to undertake this kind of manipulation.  They could just spend cash from earnings. Earnings have been at record highs, and growing, for several years.  Yet most company leaders have not reinvested those earnings in plant, equipment or even people to drive further growth.  Instead they have built huge cash hoards, and then spent that cash on share buybacks – creating the EPS/Multiple expansion – and higher valuations – described above.

This has been so successful that in the last quarter untethered corporations have spent $238B on buybacks, while earning only $228B.  The short-term benefits are like corporate crack, and companies are spending all the money they have on buybacks rather than reinvesting in growth.

Where does the extra money originate?  Many companies have borrowed money to undertake buybacks. Corporate interest rates have been at generational (if not multi-generational) lows for several years.  Interest rates were kept low by the Federal Reserve hoping to spur borrowing and reinvestment in new products, plant, etc to drive economic growth, more jobs and higher wages.  The goal was to encourage companies to take on more debt, and its associated risk, in order to generate higher future revenues.

Many companies have chosen to borrow money, but rather than investing in growth projects they have bought shares.  They borrow money at 2-3%, then buy shares – which can have a much higher immediate impact on valuation – and drive up executive compensation.

This has been wildly prevalent. Since the Fed started its low-interest policy it has added $2.37trillion in cash to the economy. Corporate buybacks have totaled $2.41trillion.

This is why a company can actually have a crummy business, and look ill-positioned for the future, yet have growing EPS and stock price.  For example, McDonald’s has gone through rounds of store closures since 2005, sold major assets, now has more stores closing than opening, and has its largest franchisees despondent over future prospects.  Yet, the stock has tripled since 2005!  Leadership has greatly weakened the company, put it into a growth stall (since 2012,) and yet its value has gone up!

Microsoft has seen its “core” PC market shrink, had terrible new product launches of Vista and Windows 8, wholly failed to succeed with a successful mobile device, written off billions in failed acquisitions, and consistently lost money in its gaming division.  Yet, in the last 10 years it has seen EPS grow and its share price double through the power of share buybacks from its enormous cash hoard and ability to grow debt.  While it is undoubtedly true that 10 years ago Microsoft was far stronger, as a PC monopolist, than it is today – its value today is now higher.

Share buybacks can go on for several years. Especially in big companies.  But they add no value to a company, and if not exceeded by re-investments in growth markets they weaken the company.  Long term a company’s value will relate to its ability to grow revenues, and real profits.  If a company does not have a viable, competitive business model with real revenue growth prospects, it cannot survive.

Look no further than HP, which has had massive buybacks but is today worth only what it was worth 10 years ago as it prepares to split.  Or Sears Holdings which is now worth 15% of its value a decade ago.  Short term manipulative actions can fool any investor, and actually artificially keep stock prices high, so make sure you understand the long-term revenue trends, and prospects, of any investment.  Regardless of analyst recommendations.

Those Who Lead (Zebra Tech) and Those Who Abdicate (Motorola)

Those Who Lead (Zebra Tech) and Those Who Abdicate (Motorola)

On April 15 Zebra Technologies announced its planned acquisition of Motorola’s Enterprise Device Business.  This was remarkable because it represented a major strategic shift for Zebra, and one that would take a massive investment in products and technologies which were wholly new to the company.  A gutsy play to make Zebra more relevant in its B-2-B business as interest in its “core” bar code business was declining due to generic competition.

Last week the acquisition was completed. In an example of Jonah swallowing the whale, Zebra added $2.5B to annual revenues on its old base of $1B (2.5x incremental revenue,) an additional 4,500 employees joined its staff of 2,500 and 69 new facilities were added.  Gulp.

zebra-technologies-logo

As CEO Anders Gustafsson told me, “after the deal was agreed to I felt like the dog that caught the car. ”

Fortunately Zebra has a plan, and it is all around growth.  Acquisitions led by private equity firms, hedge funds or leveraged buyout partners are usually quick to describe the “synergies” planned for after the acquisition.  Synergy is a code word for massive cost cutting (usually meaning large layoffs,) selling off assets (from buildings to product lines and intellectual property rights) and shutting down what the buyers call “marginal” businesses.  This always makes the company smaller, weaker and less likely to survive as the new investors focus on pulling out cash and selling the remnants to some large corporation.

There is no growth plan.

But Zebra has publicly announced that after this $3.25B investment they plan only $150M of savings over 2 years.  Which means Zebra’s management team intends to grow what they bought, not decimate it.  What a novel, or perhaps throwback, idea.

Minimal cost cutting reflects a deal, as CEO Gustafsson told me, “envisioned by management, not by bankers.”

Zebra’s management knew the company was frequently pitching for new work in partnership with Motorola.  The two weren’t competitors, but rather two companies working to move their clients forward.  But in a disorganized, unplanned way because they were two totally different companies.  Zebra’s team recognized that if this became one unit, better planning for clients, the products could work better together, the solutions more directly target customer needs and it would be possible to slingshot forward ahead of competitors to grow revenues.

As CEO since 2007, Anders Gustafsson had pushed a strategy which could grow Zebra, and move the company outside its historical core business of bar code printers and readers.  The leadership considered buying Symbol Technology, but wasn’t ready and watched it go to Motorola.

Then Zebra’s team knuckled down on their strategy work.  CEO Gustafsson spelled out for me the 3 trends which were identified to build upon:

  1. Mobility would continue to be a secular growth trend. And business customers needed products with capabilities beyond the generic smart phone.  For example, the kind of integrated data entry and printing device used at a remote rental car return.  These devices drive business productivity, and customers hunger for such solutions.
  2. From the days of RFID, where Zebra was an early player, had emerged automatic data capture – which became what now is commonly called “The Internet of Things” – and this trend too had far to extend.  By connecting the physical and digital worlds, in markets like retail inventory management, big productivity boosts were possible in formerly moribund work that added cost but little value.
  3. Cloud-based (SaaS and growth of lightweight apps) ecosystems were going to provide fast growth environments.  Client need for capability at the employee’s (or their customer’s) fingertips would grow, and those people (think distributors, value added resellers [VARs]) who build solutions will create apps, accessible via the cloud, to rapidly drive customer productivity.

Inventory Control Device

With this groundwork, the management team developed future scenarios in which it became increasingly clear the value in merging together with Motorola devices to accelerate growth.  According to CEO Gustafsson, “it would bring more digital voice to the Zebra physical voice. It would allow for more complete product offerings which would fulfill critical, macro customer trends.”

But, to pull this off required selling the Board of Directors.  They are ultimately responsible for company investments, and this was – as described above – a “whopper.”

The CEO’s team spent a lot of time refining the message, to be clear about the benefits of this transaction.  Rather than pitching the idea to the Board, they offered it as an opportunity to accelerate strategy implementation.  Expecting a wide range of reactions, they were not surprised when some Directors thought this was “phenomenal” while others thought it was “fraught with risk.”

So management agreed to work with the Board to undertake a thorough due diligence process, over many weeks (or months it turned out) to ask all the questions.  A key executive, who was a bit skeptical in her own right, took on the role of the “black hat” leader.  Her job was to challenge the many ideas offered, and to be a chronic skeptic; to not let the team become enraptured with the idea and thereby sell themselves on success too early, and/or not consider risks thoroughly enough.  By persistently undertaking analysis, education led the Board to agree that management’s strategy had merit, and this deal would be a breakout for Zebra.

Next came completing financing.  This was a big deal.  And the only way to make it happen was for Zebra to take on far more debt than ever in the company’s history.  But, the good news was that interest rates are at record low levels, so the cost was manageable.

Zebra’s leadership patiently met with bankers and investors to overview the market strategy, the future scenarios and their plans for the new company.  They over and again demonstrated the soundness of their strategy, and the cash flow ability to service the debt.  Zebra had been a smaller, stable company.  The debt added more dynamism, as did the much greater revenues. The requirement was to decide if the strategy was soundly based on trends, and had a high likelihood of success.  Quickly enough, the large shareholders agreed with the path forward, and the financing was fully committed.

Now that the acquisition is complete we will all watch carefully to see if the growth machine this leadership team created brings to market the solutions customers want, so Zebra can generate the revenue and profits investors want.  If it does, it will be a big win for not only investors but Zebra’s employees, suppliers and the communities in which Zebra operates.

The obvious question has to be, why didn’t Motorola do this deal? After all, they were the whale.  It would have been much easier for people to understand Motorola buying Zebra than the gutsy deal which ultimately happened.

Answering this question requires a lot more thought about history.  In 2006 Motorola had launched the Razr phone and was an industry darling.  Newly minted CEO Ed Zander started partnering with Google and Apple rather than developing proprietary solutions like Razr.  Carl Icahn soon showed up as an activist investor intent on restructuring the company and pulling out more cash. Quickly then-CEO Ed Zander was pushed out the door.  New leadership came in, and Motorola’s new product introductions disappeared.

Under pressure from Mr. Icahn, Motorola started shrinking under direction of the new CEO.  R&D and product development went through many cuts.  New product launches simply were delayed, and died.  The cellular phone business began losing money as RIM brought to market Blackberry and stole the enterprise show.  Year after year the focus was on how to raise cash at Motorola, not how to grow.

After 4 years, Mr. Icahn was losing money on his position in Motorola.  A year later Motorola spun out the phone business, and a year after that leadership paid Mr. Icahn $1.2B in a stock repurchase that saved him from losses. The CEO called this buyout of Icahn the “end of a journey” as Mr. Icahn took the money and ran.  How this benefited Motorola is – let’s say unclear.

But left in Icahn’s wake was a culture of cut and shred, rather than invest.  After 90 years of invention, from Army 2-way radios to police radios, from AM car radios to home televisions, the inventor analog and digital cell towers and phones, there was no more innovation at Motorola.  Motorola had become a company where the leaders, and Board, only thought about how to raise cash – not deploy it effectively within the corporation.  There was very little talk about how to create new markets, but plenty about how to retrench to ever smaller “core” markets with no sales growth and declining margins.  In September of this year long-term CEO Greg Brown showed no insight for what the company can become, but offered plenty of thoughts on defending tax inversions and took the mantle as apologist for CEOs who use financial machinations to confuse investors.

Investors today should cheer the leadership, in management and on the Board, at Zebra.  Rather than thinking small, they thought big. Rather than bragging about their past, they figured out what future they could create. Rather than looking at their limits, they looked at the possibilities.  Rather than giving up in the face of objections, they studied the challenges until they had answers.  Rather than remaining stuck in their old status quo, they found the courage to become something new.

Bravo.

 

Some Leaders Never Learn – Tribune’s Big, Dumb Bet

Tribune Corporation finally emerged from a 4 year bankruptcy on the last day of 2012.  Before the ink hardly dried on the documents, leadership has decided to triple company debt to double up the number of TV stations.  Oh my, some people just never learn.

The media industry is now over a decade into a significant shift.  Since the 1990s internet access has changed expectations for how fast, easily and flexibly we acquire entertainment and news.  The result has been a dramatic decline in printed magazine and newspaper reading, while on-line reading has skyrocketed.  Simultaneously, we're now seeing that on-line streaming is making a change in how people acquire what they listen to (formerly radio based) and watch (formerly television-based.)

Unfortunately, Tribune – like most media industry companies – consistently missed these shifts and underestimated both the speed of the shift and its impact.  And leadership still seems unable to understand future scenarios that will be far different from today.

In 2000 newspaper people thought they had "moats" around their markets. The big newspaper in most towns controlled the market for classified ads for things like job postings and used car sales.  Classified ads represented about a third of newspaper revenues, and 40% of profits.  Simultaneously display advertising for newspapers was considered a cash cow.  Every theatre would advertise their movies, every car dealer their cars and every realtor their home listings.  Tribune leadership felt like this was "untouchable" profitability for the LA Times and Chicago Tribune that had no competition and unending revenue growth.

So in 2000 Tribune spent $8B to buy Times-Mirror, owner of the Los
Angeles Times.  Unfortunately, this huge investment (75% over market
price at the time, by the way) was made just as people were preparing to
shift away from newspapers.  Craigslist, eBay and other user sites killed the market for classified ads.  Simultaneously movie companies, auto companies and realtors all realized they could reach more people, with more information, cheaper on-line than by paying for newspaper ads. 

These web sites all existed before the acquisition, but Tribune leadership ignored the trend.  As one company executive said to me "CraigsList!! You think that's competition for a newspaper?  Craigslist is for hookers!  Nobody would ever put a job listing on Craigslist."  Like his compadres running newspapers nationwide, the new competitors and trends toward on-line were dismissed with simplistic statements and broad generalizations that things would never change.

The floor fell out from under advertising revenues in newspapers in the 2000s. There was no way Times-Mirror would ever be worth a fraction of what Tribune paid.  Debt used to help pay for the acquisition limited the options for Tribune as cost cutting gutted the organization.

Then, in 2007 Sam Zell bailed out management by putting together a leveraged buyout to acquire Tribune company.  Saying that he read 3 newspapers every day, he believed people would never stop reading newspapers.  Like a lot of leaders, Mr. Zell had more money than understanding of trends and shifting markets.  He added a few billion dollars more debt to Tribune.  By the end of 2008 Tribune was unable to meet its debt obligations, and filed for bankruptcy.

Now, new leadership has control of Tribune.  They are splitting the company in two, seperating the print and broadcast businesses.  The hope is to sell the newspapers, for which they believe there are 40 potential buyers.  Even though profits continued falling, from $156M to $89M, in just the last year. Why anyone would buy newspaper companies, which are clearly buggy whip manufacturers, is wholly unclear.  But hope springs eternal!

The new stand-alone Tribune Broadcasting company has decided to go all-in on a deal to borrow $2.7B and buy 19 additional local television stations raising total under their control to 42.

Let's see, what's the market trend in entertainment and news?  Where once we were limited to local radio and television stations for most content, now we can acquire almost anything we want – from music to TV, movies, documentaries or news – via the internet.  Rather than being subjected to what some programming executive decides to give us, we can select what we want, when we want it, and simply stream it to our laptop, tablet, smartphone, or even our large-screen TV.

A long time ago content was controlled by distribution.  There was no reason to create news stories or radio programs or video unless you had access to distribution.  Obviously, that made distribution – owning newspapers, radio and TV stations – valuable.

But today distribution is free, and everywhere.  Almost every American has access to all the news and entertainment they want from the internet. Either free, or for bite-size prices that aren't too high.  Today the value is in the content, not distribution.

In the last 2 years the number of homes without a classical TV connection (the cable) has doubled.  Sure, it's only 5% of homes now.  But the trend is pretty clear.  Even homes that have cable are increasingly not watching it as they turn to more and more streaming video.  Instead of watching a 30 minute program once per week, people are starting to watch 8 or 10 half hour episodes back to back. And when they want to watch those episodes, where they want to watch them.

While it might be easy for Tribune to ignore Hulu, Netflix and Amazon, the trend is very clear.  The need for broadcast stations like NBC or WGN or Food Network to create content is declining as we access content more directly, from more sources.  And the need to have content delivered to our home by a local affiliate station is becoming, well, an anachronism. 

Yet, Tribune's new TV-oriented leadership is doubling down on its bet for local TV's future.  Ignoring all the trends, they are borrowing more money to buy more assets that show all signs of becoming about as valuable whaling ships.  It's a big, dumb bet.  Similar to overpaying for Times-Mirror.  Some leaders just seem destined to never learn.

Hostess’ Twinkie Defense Is a Failure

Hostess Brands filed for liquidation this week.  Management blamed its workforce for the failure.  That is straightforward scapegoating.

In 1978 Dan White killed San Francisco's mayor George Moscone and city supervisor Harvey Milk.  The press labeled his defense the "Twinkie Defense" because he claimed eating sugary junk food – like Twinkies – caused diminished capacity.  Amazingly the jury bought it, and convicted him of manslaughter instead of murder saying he really wasn't responsible for his own actions.  An outraged city rioted.

Nobody is rioting, but management's claim that unions caused Hostess failure is just as outrageous. 

Founded in 1930 as Interstate Bakeries Co. (IBC) the company did fine for years. But changing consumer tastes, including nutrition desires, changed how much Wonder Bread, Twinkies, HoHos and Honey Buns people would buy — and most especially affected the price – which was wholly unable to keep up with inflation. This trend was clear in the early 1980s, as prices were stagnant and margins kept declining due to higher costs for grain and petroleum to fuel the country's largest truck fleet delivering daily baked goods to grocers.

IBC kept focusing on operating improvements and better fleet optimization to control rising costs, but the company was unwilling to do anything about the product line.  To keep funding lower margins the company added debt, piling on $450M by 2004 when forced to file bankruptcy due to its inability to pay bills.  For 5 years financial engineers from consultancies and investment banks worked to find a way out of bankruptcy, and settled on adding even MORE debt, so that – perversely – in 2009 the renamed Hostess had $670M of debt – at least 2/3 the total asset value!

Since then, still trying to sell the same products, margins continued declining.  Hostess lost a combined $250M over the last 3 years. 

The obvious problem is leadership kept trying to sell the same products, using roughly the same business model, long, long, long after the products had become irrelevant.  "Demand was never an issue" a company spokesman said.  Yes, people bought Twinkies but NOT at a price which would cover costs (including debt service) and return a profit. 

In a last, desperate effort to keep the outdated model alive management decided the answer was another bankruptcy filing, and to take draconian cuts to wages and benefits.  This is tanatamount to management saying to those who sell wheat they expect to buy flour at 2/3 the market price – or to petroleum companies they expect to buy gasoline for $2.25/gallon.  Labor, like other suppliers, has a "market rate."  That management was unable to run a company which could pay the market rate for its labor is not the fault of the union.

By constantly trying to defend and extend its old business, leadership at Hostess killed the company.  But not realizing changing trends in foods made their products irrelevant – if not obsolete – and not changing Hostess leaders allowed margins to disintegrate.  Rather than developing new products which would be more marketable, priced for higher margin and provide growth that covered all costs Hostess leadership kept trying to financial engineer a solution to make their horse and buggy competitive with automobiles. 

And when they failed, management decided to scapegoat someone else.  Maybe eating too many Twinkies made the do it.  It's a Wonder the Ding Dongs running the company kept this Honey Bun alive by convincing HoHos to loan it money!  Blaming the unions is simply an inability of management to take responsibility for a complete failure to understand the marketplace, trends and the absolute requirement for new products.

We see this Twinkie Defense of businesses everywhere.  Sears has 23 consecutive quarters of declining same-store sales – but leadership blames everyone but themselves for not recognizing the shifting retail market and adjusting effectively. McDonald's returns to declining sales – a situation they were in 9 years ago – as the long-term trend to healthier eating in more stylish locations progresses; but the blame is not on management for missing the trend while constantly working to defend and extend the old business with actions like taking a slice of cheese off the 99cent burger.  Tribune completey misses the shift to on-line news as it tries to defend & extend its print business, but leadership, before and afater Mr. Zell invested, refuses to say they simply missed the trend and let competitors make Tribune obsolete and unable to cover costs. 

Businesses can adapt to trends.  It is possible to stop the never-ending chase for lower costs and better efficiency and instead invest in new products that meet emerging needs at higher margins.  Like the famous turnarounds at IBM and Apple, it is possible for leadership to change the company. 

But for too many leadership teams, it's a lot easier to blame it on the Twinkies.  Unfortunately, when that happens everyone loses.