More on Barnes & Noble - a contrarian view

Phil Wahba's article in ABC News / Money points out (a) that Borders outlets overlap substantially with B&N and (b) the leases on Borders stores are long, which suggests they could go out of business first - leaving a cannibal boost for B&N.

We should also remember that in addition to the high street presence, B&N have 637 college stores. Blackwell's has done famously meeting the text needs of generations of Oxford University students and I'd have thought the college connection will continue to be much to B&N's advantage.

Further, the Nook Color is getting favourable reviews e.g. here and here , and this says they expect a million sales by year end.

I don't tip shares - but I'll keep an eye out for B&N news and wouldn't be surprised if the shorters get a surprise in 2011.

Disclosure: None.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Barnes & Noble not finished

In February this year, investment analysts Stansberry and Associates recommended short-selling booksellers Barnes & Noble (BKS). Less than 5 years ago, the share price stood at $46.25; on Friday it was at $14.30. More recently, Stansberry has explained how doomed B&N are, what with their debts and the impact of new technological alternatives.

I sometimes wonder what American business could achieve if all - or even half - the talent that went into stock trading and analysis, finance, banking and law were diverted into actually making things and running businesses.

"Retail is detail", so the adage goes. Please bear with me for an anecdote: I recently idled away some time on a little sim game by Armor Games called "Coffee Shop". You have a sidewalk coffee stand and only one product. All you can change is the recipe, your inventory and the price. Simple enough, and after setting these parameters and running the simulation I ended with a few tens of dollars profit. Isn't business easy?

Then I looked at the high scores - several were over a thousand. What I hadn't thought to do was change the variables according to the forecast weather. So instead of trying not to go broke, I doubled the price, strengthened the mixture and multiplied my final score.

That was without being able to increase my range of products, investing in advertising and marketing, researching locations etc. Macdonald's does, and has turned a hot meat sandwich into a global empire.

So imagine if Barnes & Noble were a sim game and someone let you see the high score beforehand - let's say a mere 13% compound annual growth, which would beat their previous high within 10 years. If you knew for certain it could be done - had been done - don't you think you might find a way?

According to this 2007 article in the Washington Post, Americans read on average 4 books a year. Yet in still-poor, workaholic China the average is 7 - and 25% have read an e-book.

Books increase mental power. Stalin and Mao were huge readers, which helped them dominate their unfortunate fellow man. On "The Long March", Mao was carried about in a litter as he continued to stock his mind with his reading; in his case, it should've been called "The Long Carry". 50 years ago, President Kennedy was concerned that US rates of literacy and scientific learning were falling behind those of Communist competitors; we need to re-visit this issue as our youngsters give themselves eyestrain with PCs, partial hearing loss from cranked-up iPods and repetitive strain injury from thumbing their DSs.

You could argue that B&N aren't done yet. They may have come late to the e-book party, but their Nook e-reader has been out for a year and done well - Amazon are now in the position of playing catchup with a 3G version of Kindle (which I've just bought) - and we've yet to see the impact of the new Nook Color.

That's not to say that the dead tree press is finished, either. Allowing for the 25% of Americans who don't read books at all, the per capita read is 7 books a year and B&N's 1,352 stores therefore have a potential customer base of maybe 150,000 adult readers each. One extra book per year = 14% growth.

There's also the fact that we read products in different ways. I'm enchanted with my Kindle, which I can glance at as I drink my tea without the cover flipping over and losing my place; but although it is good at marching you through a novel, it's not so good for the skimming, riffling through and back-and-forthing I do when I read a newpaper or magazine. It's great if I know what I want to find and download; it's not so great at the serendipitous finds you make browsing through a good shop. And it doesn't serve me a coffee, a doughnut and a pleasant smile.

Did paperback kill hardback? The car, the bicycle? The movies, radio? TV, the movies? No: but the market developed, and some of those that made their money in one invested most profitably in the next (remember when IBM made comptometers? Nor do I).

When I say invested, I mean got involved. It's all very well quoting the debt load, the tight margins and all, but perhaps you'd agree with me that the real driver of success or failure is quality of management. Here in the UK, Philip Green (now Sir Philip) took over the failing BHS store chain 10 years ago, grew it an estimated 600% and built an empire. Short, stocky, shirtsleeves rolled up, he got his hands dirty and a billion-plus (sterling) into his wife's Monaco account.

When America (and even more so, poor benighted Britain) gets back to minding the store, instead of boosting its executive perks and playing beggar-my-neighbour with fellow short-term investors, the country will get back on its feet. Don't play the funeral march just yet.

DISCLOSURE: Not trading. 100% in cash.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Passivity and moral implication

A letter to this week's Spectator magazine by a Thomas Furber of Greenwich directs us to the blog of Charles Stross for materials written by Julian Assange, "editor-in-chief" of Wikileaks. Stross' blog includes excerpts from and links to Assange's essays from late 2006, the period in which Wikileaks was founded.

These essays (3 Dec 2006 here and 10 Nov 2006 here) are a sort of attempted revolutionary rationale and have something of the flavour of the autodidact, which to some extent Assange is. They remind me of the 1970 film "The Strawberry Statement", in which the lead character (Simon) gets caught up in the feeling of revolution before he has any particular reason to revolt; at one stage, Simon composes and reads a revolutionary paper of his own, semi-incoherently, blah-blahing his way over passages that even he is impatient with. Interestingly, Assange himself rehearses the old Zen story after which this film is titled (see the entry for 24 October 2006 here).

There is an enemy in Assange's philosophy, but a very generalized one: "authoritarian power". As a child, my imagination fed on war comics, I would drift off to sleep absorbedly machine-gunning Germans running across a barbed-wired battlefield. I suspect the motivation in his case now is the same as mine was then: testosterone, the urge to have a go. The imagery used in the essays is tellingly violent - "knife", "throttle".

Mixed in with this is a sort of cybernetic analysis of communication systems in political circles and a reaching for ways in which communications can be disrupted to create disorder and the collapse of the tyrannous regime, to be replaced (of course) by "more humane forms of governance". (It's amazing that even self-styled right-wingers like James Delingpole harbour this delusion - his latest Spectator column ends with the words "Until we learn to stop thinking like slaves we shall never have the revolution that will set us free." It's as though neither man has read anything about what really happens in and after revolutions.)

As I said here a few days ago, I think the most likely consequence will be a mutation of confidential communications - more use of encoding, more done by whispers and note of hand, more sofa government but this time on the sofas of special advisers' homes rather than in Downing Street or the White House; that sort of thing. The system will react rather like Hot Lips Houlihan in the "natural blonde" scene in M.A.S.H.: humiliated, but afterwards enduringly careful - and resentful.

And yet... here is a footnote on page 1 of "Conspiracy as Governance":

Every time we witness an act that we feel to be unjust and do not act we become a party to injustice. Those who are repeatedly passive in the face of injustice soon find their character corroded into servility. Most witnessed acts of injustice are associated with bad governance, since when governance is good, unanswered injustice is rare. By the progressive diminution of a people’s character, the impact of reported, but unanswered injustice is far greater than it may initially seem. Modern communications states through their scale, homogeneity and excesses provide their populace with an unprecedented deluge of witnessed, but seemingly unanswerable injustices.

That chimes with me: the sense of being powerless, yet also defiled by inaction when action seems impossible. We see a self-serving and corrupt body of politicians and others - two ex-ministers publicly disgraced and disciplined yesterday; a coalition government of parties that didn't win the last General Election and very likely won't win the next one; the official exoneration of the banker who presided over the vast collapse of his firm and almost the banking system; ex-Prime Minister Tony Blair recalled to the Chilcott Enquiry to give "further detail" about how he led Britain into what many say was an illegal war; big bonuses all round for failure; and so on.

There is certainly plenty to be mended, even though I think Assange is not the man, and his methods not the means, to do it.

Purple prose

Sackerson's Prose Prize goes to Liz Jones in today's Mail on Sunday:

Like everything vaguely pleasurable these days – holidays, sofas – Christmas has been so super-hyped that the real thing is bound to disappoint. Isn’t Christmas Day always a bit of a let-down? I far prefer the promise of Christmas Eve, the twinkly equivalent of foreplay.

I am half-suppressing a mental image of tiny lights, um, ...

Will commodities protect investors in a major crisis?

John Butler fears that we will be overwhelmed by debt and governments must - perhaps should - default. In his Financial Sense article "A Century of Money Mischief and the Rising Sea of Debt" he looks to commodities as the Ark that will save us from the flood:

Everywhere you look, there are increasing risks to currencies, sovereign bonds, corporate securities and financial assets generally. The problem is, as pointed out above, there is just too much credit risk in the world and investors demand that it be reduced, by crisis if necessary. But how to avoid taking credit risk when even sovereign debt is at risk of default? When the world’s reserve currency, the dollar, is being deliberately devalued? There is only one asset class that has zero credit risk or devaluation risk: Unencumbered real assets. While in principle this includes property owned free and clear, with banks still on the hook for massive losses in residential and commercial lending, most of which are still not marked-to-market on balance sheets, we think it is too early to venture back into the property market. A much safer alternative is liquid commodities that can be traded for other goods, or services, all over the world. These cannot be defaulted on. They cannot be devalued by central banks or governments. As such, in a world of unstable currencies and financial markets generally, a well-diversified basket of liquid commodities provides the best available store of value until the reduction in credit risk has run its course, one way or the other. As global debt levels are still rising, we have a long, long way to go yet.

In the long run, he may be right. But although commodities tend to rise in value in the buildup period, the liquidity shortage when the crisis hits forces them down with other assets, as we see from the events of 2008:

Chart: Google Finance

In the above chart, we see that the Deutsche Bank Liquid Commodities Index rose while the Dow fell, then collapsed, almost closing the gap. This suggests that a potentially very profitable strategy for the nimble and daring, would be a switch to cash just before the dam breaks. That still assumes a degree of normality, and I'll say a little more about that in a moment.

Meanwhile, how is the DBLCI doing now? It's nominally around where it was in the Summer of 2007 and has been trending up from its low of December 1, 2008. But allowing some adjustment for inflation, it seems to be indicating, not a crisis, but a slow recovery from crisis.

Chart: Yahoo! Finance

That's not to say that a fresh catastrophe is remote, but we have to remember that the worst part of the 2008 crunch was the moment when interbank lending broke down. Now that governments have established a policy of supporting the banks (or at least, their favoured ones) at all costs, the next blow is more likely to come from a different direction; maybe in the form of a breakdown in Eurozone intergovernment lending.

Or perhaps we may see the sort of sovereign default that Mr Butler urges; but this could spread in a way that might make conventional investment strategy irrelevant. And default is a more brutal and naked form of cheating others than the slow embezzlement of inflation. What will those who stand to lose the money they've loaned, do about it?

It seems to me that some financial commentators are like those people who stood still and stared at the pretty white line on the ocean in the 2004 tsunami, unconscious of the need to move immediately; or like the farmers who grudgingly gave my refugee grandparents shelter in their barn in 1945, not dreaming that a couple of days later the Soviet Army would overtake them also.

Instead of a market readjustment, with winners and losers in a system basically unchanged, we may be facing a reordering of world affairs, one that may not have a comfortable place for ourselves personally. If Mr Butler is right in comparing debt to global warming, we must hope for the financial equivalent of the Kyoto and Cancun Summits.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

One Flew Over The Cuckoo's Nest, revisited for real

If this is to be believed, health workers are effectively kidnapping an autistic lad without sectioning him... a case of officialdom creating the problem it claims to be trying to solve?

Please read this and pass it on.

And on the other hand ...

In contrast to my item yesterday, which I consider 'reality' (in my own biased way), we have the following piece on a Sudbury alternative school No Teachers, no homework .

The article contains this gem: 'While some may question how the format works with reading and math, "the truth is, that's the easy stuff,'' Ekendiz said. "Our children will need skills like self-understanding, self-motivation and creative problem-solving.'''

Hands up those who think that the typical child from this school will find reading and math 'easy'.