Ed’s Daily Notes for August 15th   37 comments

Bloomberg: Cisco Cutting Jobs as Turnaround Hit by Sales Slowdown

Cisco Systems Inc. (CSCO) Chief Executive Officer John Chambers’s turnaround effort is sputtering as a revenue forecast falls short of estimates and the company resorts to a second round of job cuts this year.

Facing weaker sales outside the U.S., the biggest maker of networking equipment is cutting 4,000 jobs, or 5 percent of the workforce, underscoring the pressures facing the company’s core businesses and profit margins from competitors including Huawei Technologies Co., Juniper Networks Inc. (JNPR) and Hewlett-Packard Co. (HPQ)

Could we be seeing the death spiral of Cisco Systems? I would hesitate to call it a “death spiral”. Cisco is still a very healthy company financially. I think Cisco’s situation is comparable to the following Warren Buffett saying:

“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

Cisco is a great example of wonderful business being run by an idiot…

Fox News: California economist says real U.S debt $70 trillion, not $16.9 trillion the government claims

The federal government has been low-balling the public for years on how much debt it actually has, a University of California, San Diego economics professor says, adding that the real amount is $70 trillion – not $16.9 trillion.

James Hamilton’s claim the United States is in a much deeper financial hole than many realize comes as Congress gets ready for another budget battle when lawmakers return in September. Both sides have been digging in on their policy positions over the debt, spending and the country’s future fiscal health.

Hamilton believes the government is miscalculating what it owes by leaving out certain unfunded liabilities that include government loan guarantees, deposit insurance, actions taken by the Federal Reserve as well as the cost of other government trust funds. Factoring in those fees brings the total amount the government owes to a staggering $70 trillion, he says.

Why is this important?

“The biggest off-balance-sheet liabilities come from recognition of the fiscal stress that will come in the form of an aging population and rising medical expenditures,” Hamilton says, adding, “It is worth noting that there are many historical episodes in which off-balance sheet liabilities ended up having quite significant on-balance sheet implications.”

For example, he says, fiscal problems stemming from the saving and loans crisis from the 1980s.

“Losses at these institutions ended up dwarfing the capabilities of the now-defunct Federal Savings and Loan Insurance Corporation to honor its promise to guarantee depositors,” he says.

The final on-balance-sheet cost to taxpayers honoring those guarantees came out to $124 billion.

Hamilton isn’t the first person to suggest this:

David Walker, former U.S. Comptroller and CEO of the Comeback America Initiative, made similar claims in 2012. Walker’s calculations include unfunded Social Security, Medicare and retiree pension promises.

Boston economists Laurence Kotlikoff and Scott Burns, warned in a 2008 Forbes article about what could happen if the government doesn’t curb its spending.

“The earthquake will come via a collapse in the market for U.S. government bonds as domestic and foreign investors realize that the only way Uncle Sam can meet his future spending obligations is to print massive quantities of money,” they said. “The result will be sky-high inflation and interest rates and, most surely, a prolonged reduction in output and employment. This could happen today. It could happen tomorrow. But it will happen here just as it has happened in every other country that tried to spend far beyond its ability to pay.”

Needless to say, the American people don’t want to hear this. Any politician who comes out and says we need to fix this will be booted from office as soon as he explains how.

If you need to understand why gold is a great long-term investment, look no further than this.

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Posted August 15, 2013 by edmcgon in Market Analysis, News, Politics, Precious Metals, Stocks

37 responses to “Ed’s Daily Notes for August 15th

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  1. “If you need to understand why gold is a great long-term investment, look no further than this”
    Real gold in your hand- maybe- paper gold will be just as worthless as the greenback. Food will be king-water-fuel-look no further then the soup lines of the great depression. Look at the prices of hard assets in 29 and then 38. Your gold will have no buyers- now your guns and ammo-now their will be buyers.

    • Mike, you’re assuming a cultural breakdown. While you may be right, I don’t think the data necessarily leads to that conclusion.

      • Obviously you do not follow the price of guns and ammo. 🙂 🙂 And I would assume there would be some kind of breakdown if the US gov could not pay it’s bills- but then again what the hell would I know I sold my silver when it was $45- missed out on that $5. Try 2008 and 9 and look at what puked first- I think the price of gold bottomed in Dec of 2008. The federal government debt- will in time sink all ships- the key is to figure out what will rise fastest. Well if you are going to base your business/ investment plan or justify your investments on said BS articles. I say BS cause this is by no means new news.

      • Mike, you know as well as I do that if the government can’t pay it’s bills, they’ll just print more money. At some point, the inflation will become so bad they will be forced to do something about it (remember the 70’s?). If hyperinflation alone was enough to end “civilization as we know it”, then Robert Mugabe wouldn’t still be in charge in Zimbabwe.

  2. “Cisco is a great example of wonderful business being run by an idiot… ”

    John Chambers is an idiot? Only managed to turn a 70 million dollar a year company into a 46 billion dollar a year one…I bet most people wish they could all be so “idiotic”.

    Death spiral? Even suggesting, and then disagreeing with your suggestion, shows you know next to nothing about Cisco and the business they are in.

    I do not work for nor own any Cisco stock. All you need to know about why I dislike large companies is in their announcement, they made 2.8 billion dollars last quarter but need to cut 4000 jobs. Hopefully they are just exiting a line of business and plan to sell it off to someone else preserving those 4k jobs but if not imagine how you would feel after getting fired because the company could only make 2.8 billion dollars a quarter…

    Robb

    • Robb,
      If Chambers is such a genius, why is Cisco struggling now? I stand by my statement: It’s a great business run by an idiot. Chambers gets far too much credit for their growth. At best, you might say that “idiot” is a harsh label for him. I could buy into the argument that he is a “less than stellar” CEO.

      Your complaint about “death spiral” is pretty meaningless. “Even suggesting, and then disagreeing with your suggestion” is about one of the weakest rhetorical arguments I’ve ever heard. If you have a problem with the way I write, state it as such. Saying I know nothing about Cisco based on how I write is silly.

      • I stand by my statement, you know nothing about Cisco. Most of the time I simply ignore your daily notes but every now and then you post something so misinformed I can’t help but respond.

        Robb

      • Robb,
        Cisco’s high for the past 5 years is $27.47, back in 2010. It is currently selling at $24.55. If Chambers is such a great CEO, how come he can’t seem to get back to that price, let alone above it, after 3 years? And you call ME misinformed?

      • Ahh so stock price ends up being the determining factor in CEO “greatness” that is a rather shortsighted way of looking at “greatness” but it certainly explains a lot.

        All I know is that anyone who calls someone that grows a company from a 70 million dollar mid-sized business to a 40+ billion dollar colossus an “idiot” or “less than stellar” probably doesn’t know what they are talking about.

        Robb

      • And you’re telling me that a company whose stock barely budges in price for over 10 years is a glowing endorsement of the CEO? I guess it would be if you’re Robb….

    • Robb, I agree with you on making $2.8B and cutting 4000 jobs. If the average total compensation of those people is $100,000, that would be $400M. Nothing to sneeze at, but if it is a temporary fix designed to show the stockholders that they are “doing something”, then it is a ridiculous gesture as $400M is just outside the noise for Cisco’s budget ($400M of $11.2B in profit for a year based on the $2.8B Q profit). The real test will be if they hire in the next 2Q’s. If they do, then they likely overreacted. Hiring and firing is an enormous drain on resources. It will be interesting to see. The other consideration is for the people that remain at Cisco. If there is a perception that they made $2.8B and layoffs are not necessary, then you may start to see remaining workers start to look for greener pastures. Keeping your key people in place is probably worth $400M to a company like Cisco.

  3. Ed, other than Yahoo’s CEO what technology CEOs do you think are doing a good job today and maybe a sentence or two on why they are out performing the ones we know you believe are less than stellar CEOs. You know a heck of a lot more than me on technology — then again don’t let that statement go to your head because everyone on your blog does — so I am always interest in your thoughts on where technology “may” be going.

    • Latetom,
      Elon Musk comes to mind, although it could be argued he is more “auto” than “tech”. He knows how to take an idea and execute on it. Tesla isn’t his first time either: He was a founder of Paypal also.

      The “3-headed monster” at Google may be the best leadership of any company today, tech or otherwise. They are the best example of how to develop a company, and then keep it growing. They keep on innovating, and they aren’t afraid to make mistakes.

  4. I have to agree with Ed- the guy is a real yutz taking a company from 78M to 2+ B. What is that % Increase? @2.8 revenue they are probably talking to their lawyers about the BK as we speak. 🙂 🙂
    As far as the layoff- seems we probably are not privy to the info that made decision- second guessing them is just that. Probably have to wait a while to see why.

    • Well, I would do that but I hate doing what’s already been done. Boring. I’ll just slave away at my current salary thank you very much. 🙂

    • Sorry- moose fingers is alive and well-2b=46b If anybody thinks even surviving in a small biz is easy- TRY IT!!!!! But You have to have something going for you besides luck to survive as CEO and take a co. that far.

  5. Regarding Chambers, I have a simple question for all of you: How much has networking and the internet grown since 1995, when Chambers took over as CEO of Cisco? Did Chambers actually grow the internet and networking, or was he just in the right place at the right time selling the right product? I would argue the latter.

    Another thing you have to consider: Chambers’ background was in sales. He has an MBA. He is no Steve Jobs or Bill Gates. Chambers is no tech guru.

    • Since when does being a sales guy disqualify you from being an effective CEO? Honestly if you believe Chambers was “simply in the right place at the right time” and that is why he built a company with 70 million a year in revenue to one with 40+ BILLION a year in revenue then you just don’t get it. I suppose there was absolutely no competition in the networking space that entire time or are all of those companies also bringing in 40+ billion a year?

      Robb

      • A salesman as an effective CEO? No problem. A great CEO of a tech company? Not impossible, but not likely either. How can a person be a “great” CEO without a complete understanding of the product? I won’t say Chambers doesn’t understand the product, but then why does Cisco seem to be stuck in a rut? Great CEO’s don’t get “stuck in a rut”.

        In 1995, nobody made $40 billion/year from networking. The demand wasn’t there. Chambers was no Steve Jobs, who made a product and then sold the world on it. Chambers was a good salesman sitting on a good product which the world discovered a need for, but not because of anything Chambers did, other than selling it. Unfortunately, now with a saturated market for networking equipment, we discover Chambers’ limitation: He can sell, but he can’t innovate.

      • You have one definition for a great CEO of a tech company I choose not to agree with it. You seem to have this silly notion that networking equipment and the market simply made itself and any one would have succeeded. How many of Cisco’s competitors in the 90s are now 40 billion dollar a year companies? Heck how many of them are even around now?

        You adore Google but what is their next billion dollar product? At the moment they are a one trick pony, granted it is a fabulous trick and makes them a ton of money but 90%+ of revenue comes from advertising, you would think they could have come up with at least one other successful product that actually made the company enough money to register. Google will hit the same law of diminishing returns that all large companies reach probably in the not too distant future. For all of their innovation I am still waiting to see something new that will turn the needle from them. They create some amazing things but none of that matters if they can’t make money off of them.

        Robb

      • Robb,
        Considering most of the smartphones sold run Google’s Android, I’d call that pretty amazing.

        The fact they use advertising to make their money, and then they come up with ways to sell MORE advertising, is not a bad thing. Do you think advertising will become obsolete someday?

        As for the fact the market made Cisco, and not the other way around, answer me this: If the internet wasn’t as popular as it is, what do you think Cisco’s revenue would be? Also, did Cisco make the internet popular, or did the internet make Cisco a ton of money?

        I will happily give Cisco, and Chambers, credit for taking advantage of the internet’s growth. But now the internet is a mature market, and Cisco can’t seem to find any growth. Whose fault is that? It’s that sales guy at the top’s fault.

      • Android is free.
        Where is their next billion dollar plus product? They have tablets, they have phones (they are hemorrhaging money at Motorola though there is hope for the next generation of motorola phones supposedly), they provide high speed fiber, they have chromebooks and chromecast, they have Google+, tons of things and yet none of them seem to move the needle because they are now a 50+ billion dollar company. They can only grow advertising so quickly, much harder to show 30% growth as a 50 billion dollar a year company than a 10 billion dollar a year one. They may still have a couple more quarters of their rapid growth but size catches up to everyone.

        They are still a one trick pony at the moment and regardless of how you feel about advertising and its future having all your eggs in one basket is rarely a good thing. They certainly seem to be trying to branch out but we will see if their innovation actually equates to anything. Personally I wouldn’t necessarily bet against them because they have literally billions from their advertising empire to pay for any mistakes but I do think their best days are now and living up to expectations will eventually become impossible for them.

        It is funny that you seem to equate the only successful tech company as one that is a growth company. Will your opinions about Google and its management change when they are only showing 5% or 10% year over year revenue growth and their stock has stagnated for a year or two?

        Robb

      • On the contrary. I like dividend stocks too. Of course, it took a decade of no price movement before the brain surgeon running Cisco finally relented to pay a dividend…

    • Dang, was Bill Gates to be lucky to be in the right place at the right time — came out with a soft ware just when everyone wanted it, then expanded just as the “whole computer” thing took off, etc.

      Can’t get much luckier than Steve Jobs: computers were flying out the window just when Apple let him back in — how easy to increase sales.

      Jeff Bezos and Amazon — lucky he decided to lose money on his management skills when everyone else was making money in the retail business.

      I don’t know Ed, but if a CEO gets the blame when things go bad it seems to me they ought to get a fair share of the credit when things go good.

      • Latetom,
        Even without Gates, Microsoft still pulls in $77 billion in revenue. That said, what Gates did was create an easy to use operating system. Compared to DOS (remember that?), most of the Windows versions were a breeze for the average pc user.

        Jobs was lucky? I’m sorry, but the iPod, which is still used by many today, was a stroke of genius, especially from a computer company. That was a classic example of outside-the-box thinking. The iPod saved Apple, and made every other innovation by Apple possible. Jobs was a genius, period.

        The jury is still out on Bezos.

        Actually, it’s funny you mention Gates and Jobs. Without them, the argument could be made that Cisco would never have become the company it is, and we wouldn’t even be discussing Chambers.

      • Just to clarify- the computer yutz disagrees- Gates bought DOS for 50K from IBM- it was and still is the underlying operating system- Windows is the Utility that works above it. Pretty good investment on his money and one helluva blunder by IBM………….

  6. Mike&Kathie, Great to see you back. I have been missing your comments all summer.

  7. Cisco’s high market cap for the last 5 years:

    2013: $138 billion
    2012: $113 billion
    2011: $118 billion
    2010: $157 billion
    2009: $141 billion

    If you want to talk about how Chambers increased Cisco’s market cap, don’t forget to mention how he’s done squat the last 5 years…

    • Being in the construction industry every company had a bonus pool. The problem was always how to split. It the project manager were rewarded on bottom line profit (market cap) then those who were given the toughest jobs or maybe the mis-bid job didn’t have the biggest bonuses but may have deserved to.

      Chamber has had to face in the last six years: IPhone was introduced on 6/29/07, the IPad on 4/3/10, and there was the Great Recession. The IPhone and follow on Smart Phones and the IPad blind sided PCs and servers. If you can blame Chamber for not foreseeing these issues or reacting to these issues better, then he is in a large group of poorly performing CEOs.

    • Stock price and market cap the ultimate arbiters of CEO “greatness” in Ed’s world.

      Robb

      • Robb,
        What other historical numbers would you like to see Robb? Pick one for Cisco. I’m sure it hasn’t moved much in the last 10 years, much like the company. That is my point. By every objective and subjective measure, Cisco is spinning it’s wheels under Chambers. Is that the sign of a “great CEO” in your book? Or do you prefer a CEO who lays off 4000 employees to pay for his mistakes? I guess that’s your sign of a “real” CEO, huh?

      • the numbers you put up Ed make your statements seem just a little jaundiced. Those numbers seem to prove that the Cisco CEO is earning his money………..

      • Ed, did you get layed off while working for Cisco? 🙂
        Also I think you need to apologize to your readers…if he is an IDIOT then all of us are.
        Strong words.

      • Mike,
        How is he earning his money when the market cap, as well as the stock price, is no higher than it was 5 years ago? (actually longer than that)

        M,
        Actually, the more I read about Chambers, the more I realize what a truly lame CEO he is. However, like I said earlier, “idiot” might be too harsh, but don’t misread that as some kind of endorsement of him. If I were a shareholder of Cisco, I’d be calling for his head.

      • I think great CEO’s create great companies but the reverse is also true. Great companies (read: great businesses and business environments) create great CEO’s too. I believe Cisco and Chambers were great in their own times and now it’s not their fault that both of them suck. My 2 cents.

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