I have been fighting with Windows PCs now for about 15 years and fighting is the right word for them.  Clearly, the Apple operating system is far superior but its limited market share just never made it a viable option.  So I struggled through Windows 3.1, Windows 95, skipped ME, Windows 2000 and Windows XP.  Now that Windows Vista is finally out and all of my computers are starting to age, it seemed like a good time to revisit the decision of what kind of computer to have around, especially since the word from my techie friends is that Vista is better but still leaves a lot to be desired.  Moreover, many of the leading edge techie people that I know have made the switch to Macs especially since they now run on Intel chips and can run many windows applications and interact with PCs on networks.

With all that history, I just recently bought a MacBook for my wife to use as her main computer.  She mostly uses a computer for Internet and email so she didn’t need the MacBook Pro.  However, we still had a Linksys wireless network with SRX.  SRX is Linksys’ attempt to extend the range on their 802.11g wireless router and, as we learned the hard way, it really only works with other SRX devices.  Non-SRX devices tend to crash the system which I had forgotten about when we got the MacBook.  The MacBook worked fine for a week or so but when we tried to start sharing drives and printers, the same problem that we used to have with a non-SRX laptop resurfaced and the network kept crashing.  Plus, the Mac was unable to connect to an HP printer that I had attached to one of my PCs.  I spent about five hours working on the whole thing this last weekend which culminated in a major decision: we were going to junk all of our PCs and our Linksys network and switch completely over to Apple gear.  I just was tired of the constant fighting with and crashing of our PCs and wireless network and, with Apple, it’s all designed to work together.  Given that we can run any application that we need on Macs, I decided that I would eventually buy a MacBook Pro for myself, ditch all the PCs and hook the printer up to an AirPort.

So, off to the Apple store I went.  The kid with all the piercings was very helpful (as my friend Andy correctly point out, however, it is impossible to distinguish workers as the Apple store as those with or without piercings) and a few hundred dollars later I had an AirPort Extreme base station and an AirPort Express (for the printer). 

Now, Apple goes out of their way to say that everything works out of the box and that is mostly true.  The MacBook had no major issue other than the problem with the Linksys network.  The Apple support line was very helpful; however, after an hour of trouble-shooting they told me to call Linksys and just mentioned in passing a power cycle reset which solved the problem.  This call was one big reason we decided to switch completely to Apple…I am sick and tired of one vendor’s equipment not working and being routed to India by one or another vendor.  With Apple, there is an 800 number and the people all know how all the stuff works which is, more than the equipment itself, the reason to switch to an Apple netowork.

The AirPort Extreme worked fine right out of the box and both PCs (I still have a PC laptop that I need to use until I bring myself to write the check for the MacBook Pro that I want) but the HP all-in-one printer that I have did not work.  It took several hours of sifting through Apple’s support forums and a call to the support line before Justin in the wireless networking department (of course his name was Justin) figured out the problem…there was a menu bar that was hidden and that I needed in order for the MacBook to see the printer on the network.  After that, it took me about 5 minutes to install Bonjour, Apple’s wireless networking sharing application on the PC so that it could print too.

Overall, I like the Apple stuff but I don’t think it is light years better than Windows.  It’s definitely better and better in just about every way but I would not agree that it is “Insanely Great”.  I like that everything is designed to work together and is designed for an easy user experience.  I like the look and feel of OS X and the equipment is very nice.  The problem, for me, is that they don’t make a smaller MacBook Pro.  And, because there is only one manufacturer, there are limits on options.  For example, if you want the MacBook with the largest hard drive, you have to get a black case.  If you want a MacBook Pro, the smallest case is 15″ which is too big and the 17″ is way too big.  Try to work on a 17″ MacBook while stuck in the middle aisle in steerage on a cross-country flight.  If the person in front of you puts their seat back, you are toast.  I would say, though, on average Apple offers a better product that is designed well to work with other Apple products.  The other side of that coin, however, is that you are totally reliant on Apple to continue to produce innovative products that you want (i.e., a smaller MacBook Pro) and that work with the products that you already have.

I decided years ago that I would just buy new equipment every three years.  I figured that a PC costs about $1,500 and that it just costs $500 per year to be in the game these days and, with the pace of innovation, you just replace the equipment every three years.  We are coming up on the end of the three year cycle for our PCs, so this was a good time to make the switch and use Apple gear for the next three year cycle, especially since Vista doesn’t really offer anything special.  We’ll see how it goes.  Check back in three years from now and I’ll let you know how it went.

No subcategory of mortgage companies makes more money during a boom and struggles more during a bust (i.e., is as volatile) as the subprime mortgage industry.   Subprime, or mortgage companies that make loans to people who cannot get loans through banks or other such channels, have been printing money over the last few years.  Fueled by a seemingly endless appetite among investors for for bonds that are secured by subprime mortgages, subprime mortgage companies have been growing dramatically since early in the decade. Subprime mortgage companies now are not just struggling (almost all of them are struggling), but they are going bankrupt and closing their doors just like their predecessors did in the last 1990s.  In the last few weeks, Ownit and ResMae have file for bankruptcy protection while New Century, Accredited and NovaStar have reported disappointing earnings or are suffering rating agency downgrades or even worse.

So, is this a black swan event or are these companies just not subject to any real rational limitations and taking stupid risks with shareholder money?  It’s the latter.  The crash in 1998 was more of a Black Swan event.  You can read about it in amazing detail in When Genius Failed.  When Russia decided to devalue its ruble in the midst of a global recession in 1998, no bond investor wanted anything but U.S. Treasury bonds.  Thos that were willing to invest in riskier bonds wanted a lot more money, so the “spread” (or the difference in price) between Tresuries and the bonds that mortgage companies sell in securitization transaction “gapped out” and the mortgage companies were left holding hundreds of millions of dollars in mortgages, that they had borrowed to make, without a way to sell them.

This time, though, it’s different but its the same basic underlying problem.  Subprime mortgage companies have been growing and growing while all the time making riskier and riskier loans.  They had no idea just how risky their business models were but they mortgage company down the street was all to happy to make the next riskier loan so they all jumped in.  Since mortgage companies are not regulated like banks are, they are free to take whatever risk they want limited only by the appetite for the bonds in the bond market and the shareholders’ willingness to finance them.  In 1998, subprime companies relied to aggressively on a certain type of accounting for securitizations and nobody realized how vulnerable they were to a shock like the Russian economic crisis.  Everyone had convinced themselves that risks were controlled and that because the market was willing to finance the risk that everything was OK, but it wasn’t.  The dot com boom experience was based on the same human failing…we set aside everything we knew about risk and justified it by just calling it a “new economy”. 

Now, mortgage banks are filing bankruptcy, laying off people and destroying shareholder value.  The bond markets this time are fine but management, fed by Wall Street, just shifted their reckless behavior to another easy target: underwriting.  Just like they piled on non-cash earnings in the late 1990s which, now in retrospect, obviously would come crashing down at some point, they lately have been making loans to people who should never be given someone else’s money and they are going down because of it.

The timing of the eventual collapse is clearly random (and it happens quickly).  However, the crash was very much predictable and not random.

The story, of course, is one of the epic industrial battle of the present time.  Airbus, owned by a consortium of European Union countries with a wacky organizational structure designed to insure that no one country has too much control, has come somewhat out of nowhere over the last 20 years to challenge Boeing who has been the dominant player in the industry for a while now.  Boeing has had its share of public problems lately with several management shake-ups and a merger with McDonnell Douglas.  However, nothing appears to be a bigger mistake than Airbus’ decision to build the giant super jumbo A380 which has not sold well and is late being delivered due to all kinds of production problems.  Meanwhile, after not building a new airplane in over a decade, Boeing is cleaning up with its new 787 Dreamliner.  Basically Airbus made a bet that the world would need super jumbos that would fly large numer of passengers (in some cases over 800 at a time) and Boeing bet that there would be more of a need for point-to-point routes using smaller planes.  They each placed their bets, in amounts in the tens of billions of dollars, that essentially locked in their strategies for decades to come.  Right now, it looks like Boeing made the right bet (after making a series of bad bets) but that could all change.  I was more interested in more of the inside story behind the decisions that led to the strategies the companies elected to employ.

Good examples of the sort of story I was expecting are Taken for a Ride, a book about the merger of Daimler Benz and Chrysler or Smartest Guys in the Room, the story of the Enron collapse.  I had a hard time putting those books down.  This book was more of a rambling collection of quotes from other people with a writing style that just never grabbed me.  The author is a fairly accomplished guy apparently but, while I read the whole thing and came away with a few new bits of information, I found the book to be a pretty disappointing experience almost to the point where I want to go and buy one of the other books that tells the same story but with a more typical business story writing style.

I found myself struggling with this tension while reading a recent article in BusinessWeek about Barclay’s Global Investors, a money management firm.  Barclay’s has hired a world-class collection of very, very smart people who look for “signals” in markets that describe investment strategies that can generate alpha, or the amount of return in excess of the beta which is the market rate of return (or the return that you would get by just investing in an index fund tracking the entire stock market).  Barclay’s attempts to use this alpha-hunting strategy to “consistently beat the markets”.

One example is a signal identified by Richard Sloan, a Wharton business professor.  Sloan discovered the accrual anomaly which, in very simplistic terms, exists because stock market valuations have not historically distinguished between non-cash earnings (earnings that result from accruals) and cash earnings.  And, companies with cash earnings tend to be stronger companies and perform better than companies that depend on non-cash earnings.  The result, if you were to have invested in companies with strong cash earnings, is an alpha (or return above the market return) of an eye-popping 12% or more!

It’s hard not to read an article like this and run out and move all of your investments into funds controlled by super-smart people like this.  However, there are plenty of examples of super-smart people who blow up in the stock market.  The classic example is the story of Long-Term Capital Management described in another great business book, When Genius Failed.  LTCM, a hedge fund, thought they had found a signal that nobody else had recognized and they had two Nobel laureates involved in the company with massive amounts of data that pointed to the success of the strategy.  They leveraged themselves way beyond anything that is reasonable and, of course, the event that their models showed was so unlikely to happen as to be practically impossible did, in fact, happen.  LTCM was obliterated with almost $5 billion in losses because they failed to account for skewness (a win-loss record does not matter if a single loss has the ability to lose far more than an infinite number of wins) and almost took down the entire banking system with it but for an unprecedented intervention from the Federal Reserve.  The BusinessWeek article actually mentions the LTCM problem and Fooled by Randomness discusses it also.

It’s not surprising that Barclay’s does well in times of relatively rational markets and tanks when irrational markets prevail (e.g., the dot-com nonsense).  The title of the BusinessWeek article is “Outsmarking the Market”, but is it really possible to do that?  There seems to be so many factors that go into how the market reacts to things that even a strong signal like the accrual anomaly may not work again like the data suggested it did before.  That is the limitation of historical data and the risk of the black swan.  The problem that I have is that the tension between these two ideas has had me in cash for most of the recent run-up in the stock market and I am desperate for an investment strategy that takes all of this into account.

Anyway, despite my overall complaints, I still read my business magazines because (a) I am kind of a junkie so even if with low grade smack, a high is still a high and (b) I am able to converse at least on a basic level about many industries at cocktail parties on those few occasions when I go to such events and (c) I occasionally find interesting articles hidden among the lame graphical features, advertising supplements trying to convince me to move my business to Ohio and “executive life” articles.  

The funniest of them all is an article in the most recent issue of FORTUNE (which I got through quickly because most of the magazine was devoted to a feature on The 100 Best Companies to Work For  in which I had no interest) entitled The Blind Undercutting the Blind (the article has a different title online, New U.S. Bills: Blind Justice?).  So, there are apparently two advocacy groups that represent blind people: the American Council of the Blind (”ACB”) and the National Federation of the Blind (”NFB”).  NFB claims to have about 50,000 members while ACB claims to have about 40,000 members.  But they don’t see eye-to-eye about the blind agenda!  Some judge has ruled recently that “…our currency violates the federal Rehabilitation Act because the various denominations are not readily distinguishable by blind people.”  Moreover, the ACB and NFB are odds over whether this ruling is good or not for their constituents.  The ACB was the plaintiff in the case and the NFC, citing concerns that people will think less of the blind if we try to help them out by changing the money, is supporting the Treasury Department’s appeal of the case.  There are a number of things that strike me as funny and/or sad about this story:

1. It is estimated to cost about $215-228 million to make the plates and other such stuff to create new bills in various sizes.  That’s not a lot of money but, come on, we’re talking about 90,000 people in the two organizations plus the cost does not take into account the cost of implementing the change in banks, casinos, vending machines, etc.  I don’t know how many blind people there are but can’t we figure out something that is cheaper that still allows blind people to transact in cash?
2. Isn’t there something kind of funny and sad about the fact that these two organizations can’t agree on a way to address issues for blind people without suing and opposing each other.  I guess being blind or sighted is not necessarily related to common sense.
3. Only the federal government would impose a law like the Rehabilitation Act (whatever that is) which could be interpreted by one of its employees, a judge, to require us to change our money so the blind can use it.  Haven’t the blind been figuring it out for as long as we have had our money?  What is that like at least 100 years?
4. Apparently we are the only country that uses paper money and that is not at least considering some kind of change or accommodation for the blind.  I guess that leaves us as the sole survivor on the island of common sense…at least until the NFB and ACB duke it out in court, wasting even more of our tax dollars.  What a joke.

I personally do everything I can to avoid going to Home Depot.  I much prefer Lowe’s and even my local Ace Hardware.  In my opinion, Nardelli should have done something about making his stores more appealing and focused less on services and selling to contractors (programs that he invested billions of dollars into).  I’m not the only one with these opinions and that is often the reason cited by “experts” as to why Lowe’s outperforms Home Depot in certain performance metrics, including stock price appreciation.

All that being said, I don’t feel too bad for stockholders of The Home Depot.  They had the ability to vote with their dollars and not invest in the stock if they didn’t like Nardelli.  What makes me mad is people like Barney Frank, the new Chairman of the House Financial Services Committee, who wants to use this issue (and a few other big pay packages for CEOs) as an opportunity to create some kind of legislation to address the issue.  Barney Frank had this to say:

“The action of Home Depot’s Board of Directors to simultaneously dismiss Robert Nardelli and provide him with $210 million in severance is further confirmation of the need to deal with a pattern of CEO pay that appears to be out of control.  Some defenders of CEO pay argue that CEOs are rewarded for increasing the stock or the overall value of the company, but judging by today’s market reaction, Mr. Nardelli’s contribution to raising Home Depot’s stock value consists of quitting and receiving hundreds of millions of dollars to do so.

Business leaders who are frustrated by the unwillingness of the American voter to be supportive of their agenda for economic growth should look to the contrast of Mr. Nardelli’s consolation prize and the resistance of business to raising the minimum wage.”

Please, Barney, don’t do us any favors.  Stockholders can decide for themselves and they ultimately pay the price if they overpay their CEOs.  Just leave them alone.  Why not focus on injustices that matter, like wasting taxpayer money.  Taxpayers can’t decide not to invest in the government anymore (well, I guess they could through Treasury bonds but that’s different).  If I don’t like the way the government is spending my money, I can’t elect to take my money elsewhere.  I am stuck investing in the most evil, greedy and wasteful corporation in the world and there is nothing I can do about it except select from lame choices of people who waste billions getting elected. 

I think it would be an excellent use of taxpayer money to pay a $210 million to Barney Frank if he would just resign from Congress but it would probably cost more than that to remove him.  At least Bob Nardelli actually can get fired.  Barney Frank has been a member of Congress since 1981, firmly entrenched enough to be, abset a sex scandal or something like that, largely untouchable.  Barney Frank should stop worrying about stockholders who are just fine, thank you, and worry about fixing the big, stupid corporation that he works for.  And, by the way, raising the minimum wage will cost stockholders a lot more than CEO pay package…by order of magnitude!