Case Blog

As stock markets around the globe continued their slump last week, the headlines proclaiming that we are in a bear market were omnipresent. The markets were all down very significantly from their October ‘07 highs. With oil and gold heading in the opposite direction and setting new daily highs, there was no denying that the bears were now in charge. Very quickly, most of the financial sector stocks were downgraded, many of them, including CitiGroup (C), to sell, by William F. Tanona, a Goldman Sachs (GS) analyst.

Have we finally seen blood in the street? Is this a buying opportunity for many equities that now provide excellent dividend yields,  or should you head to the beach, stay predominantly in cash, and not make any decisions until after Labor Day?

The weak balance sheets of the major banks and brokerage firms and their need for more capital continue to impact the private equity deal market. I do not anticipate that we will see the return of the mega deal in the fall. Deal flow in the media and telecommunications sector will continue to be concentrated in the middle market, most likely through year-end. I also anticipate that an activist Fed, with the support of the Hank Paulson, will continue to make certain that there are no failures that have a contagion effect.  The continued weak economy will provide the backdrop for this fall’s elections, both on the national and state levels.  Let’s hope that the political commentators will help us understand the real differences that the candidates have with regards to economic policy, and how this will impact a potential recovery.

I returned to New York this week, where summer has clearly moved in, from northern California, where we continue to be plagued by a earlier than usual wildfire season that is being fueled by the very dry winter we had.

As you head to the beach, I have three recommendations for new paperback releases to take with you:

The Accidental Investment Banker: Inside the Decade That Transformed Wall Street, by Jonathan A. Knee and The Last Tycoons: The Secret History of Lazard Freres & Co., by William D. Cohan. I know both authors, and while they take a very different approach, I believe that both are must-reads.  Finally, if you are involved with intellectual property decisions and the law, I recommend Norman Pearlstine’s: Off the Record: The Press, the Government, and the War over Anonymous Sources.

I am sitting at my desk in my home office in Blackhawk. It is clear that spring has given way to summer across the United States, and today’s high temperature is forecast to reach 105 degrees. Outdoor activities such as golf will give way to air conditioning today. The summer of ‘08 should prove to be a memorable one, with premium gasoline touching $4.75 per gallon on the west coast and with the airlines canceling flights to deal with the surging fuel costs.

Mary Claire and I had a wonderful time last weekend hosting friends and family for our daughter-in-law Stephanie’s and our son Jordan’s wedding!  We were delighted to spend time with many old friends and to share this special event with those that are closest to us. The Blackhawk Country Club, which has been home for more than 15 years, proved to be an excellent venue for this celebration.

We are gradually recovering and spent several days in Sonoma and Napa counties earlier in the week as part of the process. As always, we were not disappointed by the quality of the wines and food and the overall ambiance of these two special valleys.  We spent one very memorable afternoon lunch and tasting with Wells Guthrie, the winemaker and proprietor of Copain Wine Cellars, at their new winery in Healdsburg.  We also had an outstanding tasting with Fritz Hatton at Arietta.

As we move into summer, the financial markets continue to be unsettled, with the surge in oil prices continuing to depress the stock markets. Is this surge truly driven by demand from growth economies like China and India? I have a hard time reconciling this with the slowdown in growth the last several quarters around the globe, including both China and India. How much of this is driven by commodity speculation, which is fed by a weak U.S. dollar?  In late February, I wrote in a posting titled “The Dollar”: “While we are experiencing an early taste of spring in the Bay Area and New York City remains locked in winter, this week is proving very cold for the U.S. dollar. It has weakened against every major currency, but particularly against the Euro and the British Pound. As the U.S. economy remains stalled, with very little growth in the fourth quarter of ‘07, and the U.S. financial markets remain troubled by various structured financial instruments, with a new acronym encountering trouble each week, global investors continue to move to other currencies…I do not see the current administration changing this policy before the November elections.”  I stand corrected and I believe that Secretary of the Treasury Hank Paulson and our Fed Chairman Ben Bernanke have realized the consequences of a weak dollar and have been trying to talk it up, with only modest success. To reverse the decline and impact will take time and hopefully be continued by an incoming administration in January.

Summer has finally given us two presidential candidates from the major parties, in Senators McCain and Obama. I hope that we start to learn more about their proposed initiatives for the economy, which up until now have been more sound bites than substance. It will require real leadership to turn around a weak dollar and surging commodity prices.

As the subprime mortgage crisis fallout continues, we are now looking to fix blame. We saw the “perp walk” return to New York City this week, with two former Bear Stearns hedge fund managers, Ralph Cioffi and Matthew Tannin, taken to their indictment hearing in handcuffs. This was very reminiscent of the fallout from the equities bubble, when we saw the Rigas family, which ran Adelphia, escorted into court in handcuffs as well. The Cioffi/Tannin case was built around email exchanges between the two managers. Will this approach be any more effective than it was in the prosecution of the tech deal maker, Frank Quattrone, who was subsequently retried and acquitted and has recently launched a merchant bank called Qatalyst?  I believe that fraudulent behavior should be prosecuted and punishment should be part of the process, but I do not believe that the government should look to make scapegoats out of innocent individuals. I am glad to see that Quattrone has started a new chapter and I will not be surprised if someday the former Bear Stearns’ team of Cioffi and Tannin have the same opportunity, if they can afford a legal team of the same quality as Quattrone’s.

Finally, the Celtics and Doc Rivers should be complimented on their outstanding play and their 17th NBA Championship.

On Thursday evening the NBA finals open in Boston, with the Celtics facing the Lakers. These fabled franchises have met eleven times in the NBA finals, but this is the first time since 1987. Back in the ’80s when they met three times in the finals, Larry Bird led the Celtics and Magic Johnson led the Lakers. Their personal rivalry started in the 1979 NCAA championship game, which was won by Magic and Michigan State.  These two champions gave us the most intense rivalry of the ’80s.  Will the Kobe Bryant led Lakers dominate or will the trio of Paul Pierce, Kevin Garnett and Ray Allen prove to be too much for the Lakers? Will Phil Jackson win another championship ring and go one up on the legendary Red Auerbach, who must be tuning in for this series?  This is what great rivalries are all about and I trust that most of the nation will be caught up in the intensity of the battle.

Over the years in business, I came to have a high regard and healthy respect for my best competitors. They are the ones that are able to help you take your game to another level. I started my media career in sales and marketing and to this day I can recite the legendary battles for market share with our competitors. In the ’80s for example, when I ran the special interest consumer magazines for Capital Cities/ABC, two of our titles, High Fidelity & Modern Photography, competed directly with Stereo Review & Popular Photography from Ziff-Davis, which was led by the publishing legend Bill Ziff.  In the ’90s when I joined IDG’s InfoWorld, we battled PC Week, another title from Ziff-Davis.  It is not the easy victories but the hard-fought ones that build character and over time produce winning franchises. These are the ones that you reflect on, as you look back on your career. You also recall the teammates that made these hard-fought battles worthwhile. You remember the days that you went to war and covered each other’s backs.

Several years ago, after a pleasant lunch in San Francisco with a former rival, I remember walking down the street and having him tell me that the ZD team always believed that they were the better team than the IDG team. I challenged him on this and we both understood that even though we were long removed from the IDG vs. ZD rivalry, those were years and battles that would live on for both of us forever.