Author: A.T.

Yesterday I told you about the Beardstown Ladies who, though sweet, little and old, may not be quite the tycoons they cracked themselves up to be.

Today let me mention Floyd Norris, Market Watch columnist for the New York Times. He holds forth incisively on the state of various markets and on issues of shareholder rights — and management abuse of those rights. He is someone on whose savvy you can rely. One of the very best.

All of which leads up to my topic for the day, dividends, inspired by a recent Norris column.

When I was growing up, Uncle Lew gave my brother and me 10 shares each in a handful of blue chips. These stocks rarely went up or down more than an eighth or a quarter of a point in a day; they paid 4% or 5% in annual dividends (savings account paid 3%) . . . life was simple.

Nor was America back then in such sad shape. The economy was growing as fast as now; technology was moving along nicely (a vaccine for polio had been discovered; some kids’ folks were getting color TVs; miraculous electric typewriters were on the drawing board). We weren’t the only superpower, but we were certainly the big man on campus. (And somehow all this was possible without paying our CEOs a hundred or a thousand times as much as we paid the guy on the assembly line. And despite the Eisenhower-era 90% top federal tax bracket.)

It was very boring, aged 10, to see these 5% dividends trickle in, 1.25% a quarter. What were my brother and I going to do with a check for $5, even then? (There were no dividend reinvestment plans: the cash was ours.)

Yet that was, theoretically, the reason for buying stocks: you’d get a share in the profit of the enterprise. A dividend.

Today the reason for buying stocks is: they go up. Profits are good if they meet or exceed Wall Street analyst expectations; but if a company makes a $400 million profit and the Street was expecting $435 million, that is a very bad profit. Ick! Don’t want to be anywhere near that $400 million.

Otherwise, there’s little connection these days between a company’s profits and its shareholders. Most of the stocks people are interested in don’t pay dividends or else pay tiny ones.

There is a very good side to this: we are reinvesting our profits, and that’s what builds economies and a bright future.

There is also a tax side to this: when paid out as dividends, our share in a company’s profits are subject to income tax (unless held in a retirement plan); when reinvested for the future, they may ultimately provide us with a less heavily taxed capital gain (or just bigger dividends down the road).

But there are less positive sides to this as well. As Floyd Norris reminds us, CEOs often own relatively little stock (and so get little by way of dividends) but hold gigantic stock option packages (and so care deeply about getting the stock price up). Why pay out dividends when the same money could be used to buy back shares of company stock?

Buying back the company stock adds to the demand for the stock, driving up the price; shrinks the supply, driving up its price; and increases the all-important earnings-per-share (because there are fewer shares to divide the earnings among), driving up its price.

And so far, everyone seems pretty happy with this arrangement.

But there could come a time when, as part owner in the enterprise, you’d like to start getting your hands on a slice of the profits. I guess you’ll just sell a few shares now and then — that will become the retiree’s new monthly income: not bond interest or dividends, but the proceeds from the sale of 10 shares a month.

It could work.

Yet if stocks ever stop rising so fast, people might begin to focus more on dividends — as they used to. If so, given the skimpy dividends so many companies pay, they may decide to invest in something that pays a bit more. Bonds, even.

I’m not predicting this, just trying to make sense of a world in which Amazon.com (a great company, of which I am an enthusiastic supporter) has sales of $147 million, no profit, and is valued by the stock market at $2.8 billion. Is the idea that some distant day it will be paying out $280 million a year in dividends? Or is the idea that it’s an exciting company in an exciting world and the price may continue to go up?

So I don’t want to gloat, but did you hear about the Beardstown Ladies? These are the nicest, sweetest old gals, world famous for their market-beating investment club. Big best-seller, translated into lots of languages, sequels . . . how can this not warm your heart?

It warmed mine, albeit I doubted that they, or almost anyone, could significantly beat the market over the long run, other than by taking greater-than-market risk. (And they did not strike me as the kind of Ladies who’d do that.)

It now turns out, millions of book sales later, that they had a funny way of calculating that market-beating return. Say you or I started the year with $40,000, added $5,000 more from our savings account, and saw our account total $50,000 by year’s end. You or I might say our $45,000 had grown very nicely to $50,000. Not bad for a single year (though most of us have become far too spoiled by this bull market to realize that). What the Ladies apparently were figuring is that they started with $40,000, now it’s $50,000 — that’s a 25% increase for the year.

Which it is, except that half the gain came from their own pockets.

So when all the figures are recalculated sensibly, it turns out, I believe, that the Ladies did a bit worse than the market, like almost everyone else.

No one is suggesting intentional deception. They are sweet little old Ladies, after all, with a sweet little old Publisher that apparently felt no need to check the accuracy of their claim. But it’s rather as if Dolly weren’t a clone after all, just a normal sheep. She might have gained significantly less attention, and would almost surely not have made the Bahhh-Seller List.

All of which suggests, as always, that over the long run, most people who take average risk will get average returns. (Those who take above-average risk will like as not get killed — higher risk makes higher return possible, but by no means guarantees it.) And it suggests, as always, that keeping taxes and transaction costs low (and annual expense charges low, if you’re in mutual funds) may be even more important, and certainly easier, than picking a portfolio of market-beating stocks.

Not that I don’t try.

“So, what do you think of this latest bull run? I’m reading an article in The Wall Street Journal that states the current PE (past 4 qtrs) is an average 22.2 — is that very high? To earn my keep, I’ve been scraping by with investments (very small) in real estate and by trading stocks options.” – David, South Florida entrepreneur

David, if you can make a living over the long run trading stock options, you are a smarter man than I — and most others. By their nature, options involve relatively short-term bets. GOSH, it’s hard to know where anything is headed short-term. (I know it will be warmer in the summer, but next week?) And with options, you’re not investing (where all investors can win), you’re betting (where for each winning dollar there is tax to pay, plus someone’s losing a dollar — plus commissions).

I assume you’re not doing anything crazy (writing naked puts or calls), so if it’s working, hats off to you. But this is a tough way to earn a living.

The market is high here, but with the demographics and psychology at play (“everyone” now knows to put all his or her money in the market, just buy more if it dips), it could just keep going up, with small setbacks, for a very long time. (Or it might not.) I recently tried to sketch what I thought were some of the key overriding positive and negative forces at play.

I know that when one’s stake is small, it’s frustrating not to reach for ways to make big money fast — and options certainly hold out that possibility. Imagine having owned out-of-the-money Oxford puts before it dropped from 67 to 14. Or out-of-the-money calls on Apple before it jumped from 14 to 23. Or a zillion others. (In-the-money options would have been profitable, too, of course . . . but the longer the long shot, the greater the risk and the cheaper the options, and thus the greater potential return.)

I play with options, too, from time to time. Hard to resist. But I think any money you’ve made playing this game has probably come from me. One day, I fear, you will be passing it on to someone else (and no small chunk, in any event, to Uncle Sam).

From Joe: “Enjoyed your recent comment on how having money in stocks and taking out an automobile loan is the equivalent of buying stocks on a margin. [Except that with a car loan, the interest isn’t even tax-deductible! – A.T.] As investors and the drivers of automobiles, my wife and I sold a portion of our holdings in Kelloggs and Campbell (great stock!) to buy her 1995 Cutlass Supreme (low mileage used car, of course!). The dealer would not let us pay cash for the car, so we put 50 percent down and ‘borrowed’ the remaining 50 percent. Within about 30 days, we had paid off the loan. When I called the bank to get the payoff amount, the woman thought I was selling the car. Nevertheless, we paid off the loan and earned a guaranteed 10 percent return on our investment. [Not having to pay 10% is as good as earning 10%. – A.T.] Now we have a decent car for her to drive and excess cash to continue investing in the market.

“This strategy may be scoffed at by some, because the money might have done better sitting in the market. I look at it this way. The market did well, and our unsold shares increased in value. Had the market turned south, my wife’s car would still be paid for, and with our excess cash we could replenish our holdings at lower prices. No one can predict the market, but this is what I call a win-win strategy.”

A smart way to look at it, if you ask me. But, I wrote back: “Huh? The dealer wouldn’t let you buy the car for cash?” And got this in reply:

“Our dealer was surprisingly honest with us. He said they make money three ways. On the sale of the car itself, on the extended warranty (which we didn’t buy), and on the financing (they get a “finder’s fee” from the bank). If we didn’t finance it, he would have given us less money on the trade-in (a fourth way they make money). We didn’t feel it was worth the extra effort to sell the trade-in on our own, so we opted for dealer-financing and paid the loan off in about thirty days.”

I used to advise people to act as if they planned to finance the car, without coming right out and lying about it . . . then, once the price was firm, just to whip out the checkbook and pay cash. That was my suggested negotiating ploy. I felt a little bad about it – but only a little. “The car dealers have their bag of tricks, and you have yours.”

Well, Joe went me one better, although in this case it appears to be the bank, not the dealership, with whom he may have been dealing in less than 110% good faith.

The one thing to be sure of before you play it the same way: are there any one-time loan fees or prepayment penalties? (For example, if it’s a “Rule of 78” car loan – I hope not many are anymore – then the interest is “front-loaded,” which means you get nicked on prepayment.)

Note that the Internet provides all kinds of helpful ways to buy cars cheap, with more coming all the time. I should do a column on that soon – so if any of you have had good or bad experiences with this, or tips of your own, please let me know.

My friend Jim Halperin has done it again. In his first novel, The Truth Machine, he speculated on what the world would be like — how fried O.J. would be right now (though he didn’t use that example) — if we ever invented a 100% accurate polygraph of some kind. The saga of the book’s publication was as amazing as the book.

Here was a guy who’d never written anything in his life other than one slim tome on rare coin grading. I have a copy. It’s probably biblical in its significance if you’re a rare coin dealer (Jim and his partner are the country’s largest), yet it shows no signs of literary grace whatsoever.

But he had an idea for a book — this truth machine notion — and he just set about doing it. He wrote it. He sent it to all his friends for comment. The first chapter was great. The rest needed work. He rewrote it 20 times. He took a night course in writing. He hired local editors to coach him. All the while, he was running his business and fathering two small boys.

The book got better.

Then one day an actual bound book arrived at my door with a jazzy jacket exactly as you’d expect to see it on the shelves at Barnes & Noble. Jim had hired a jacket designer, contracted with a printer and a distributor — in addition to writing the book, he was publishing it. He printed 35,000 copies, a huge first printing for a first novel. He established a web site so people could read it free and comment.

Then one day he got a call from Ballantine, a division of Random House, offering him a couple thousand dollars for the paperback rights. Jim accepted.

And I am watching all this, from 1500 miles away, somewhat bemused. Everybody wants to write a novel, but who actually does stuff like this?

Then a month or so later, July 1996, he gets another call. Ballantine’s higher-ups have been reading the manuscript. They want him to stop selling the hardcover so they can publish it. In fact, they want to make it their lead title for the fall.

Now I am not just bemused, I am agape. Beyond agape. Agape would be that they want to make it their lead title. Plenty to be agape about, no? But that they want to make it their lead title for the fall is beyond agape to anyone who’s ever dealt with a book publisher. Normally, it takes a year after a novel is finished to hit the stores. They were proposing eight weeks for this one. And they hadn’t even begun negotiating the deal!

Long story short, Ballantine upped its offer from "a couple of bucks" to Real Money, took the remaining 30,000 of Jim’s books, rejacketed them, and raised the price from $19.95 to $24. Thousands were sent free to reviewers and "opinion makers" to get a buzz going. A thousand were handed out at the 1996 Republican National Convention — which is pretty funny when you consider that in the book (as in real life a short time later), Clinton wins reelection.

First Ballantine printing: 150,000 copies. This is surely ten or twenty times the size of the first printing of, say, John Grisham’s first novel, A Time to Kill.

Look for the movie from Twentieth Century Fox.

But none of this will make you live forever. It’s his second novel, The First Immortal, that deals with that. To read the prologue and first chapter, click here.

1. If you ask for “half a cup of coffee,” especially on an airplane, you will get a full cup. The way to get half a cup (60%, actually), is to arch your eyebrows in an unusual way and ask for “just a quarter of a cup.” To get a quarter of a cup, squint as if trying to see something very small and say, “Could I have just a sip — one finger — of coffee? Really: just one finger.” And hold out the index finger of your right hand horizontally, grasping it with the thumb and forefinger of your left hand, as if to put it on display.

2. Never use an S in Scrabble if it doesn’t enhance the score you otherwise could get by at least 15 points (unless you have two S’s, which is rarely the bonanza that it seems). Never use the blank other than to make a seven-letter word, or else to earn at least a 60-point score. Yes, JO, AA, AI, AE are words (and AG and ED are in the latest Official Scrabble Dictionary).

3. It is perfectly all right to eat a full grapefruit. And the best kind to eat are the ones with the thin shiny skins even though they’re harder to peel. (You peel them, because then you can just eat the sections, eliminating the need for a spoon, eliminating the waste, and eliminating the possibility of squirting juice on your tie or your companion.)

4. It is dumb to buy annuities. And yet people keep doing it, in droves. Stop it! (Having bought, though, it’s usually wise to hang on. And console yourself with the knowledge that, while it may not have been your very best alternative, you were a heck of a lot smarter buying the annuity than not saving that money at all.)

It was Friday afternoon, the “w” on my Thinkpad keyboard was in a state of obstreperous revolt (or should I say obswtrewpewrousw rewvolt?), IBM had not rushed me the “Easy-Serve” carton as promised (you get a carton, FedEx it to them, they fix and FedEx back), and I’d been meaning to splurge on an even newer, faster laptop, so . . .

I was all set to spring for an IBM Thinkpad 770, even though it’s almost twice the price, but (a) they don’t make it easy to buy, and (b) it inexplicably didn’t seem to come with a 56K modem like the competition (it still offered 28K).

A call to Dell revealed that El Niño in the Austin area had kept the company’s employees from getting to work that day (literally: the recording said they were closed).

So then I did what I almost always remember to do when all else fails — I called 800-243-8088, a phone number hardwired into my brain from way back in the mid-80s, when the 8088 chip was today’s Pentium II.

It was now 4:23 p.m. Eastern Standard Time. Justin, who answered with minimal branching (with IBM you want to kill yourself by the time you get to a human), said he’d be happy to get a computer to my home 1500 miles away before noon the next day — Saturday. The one I picked required some extra memory to be installed and tested, but they could do that, too.

“How much time do I have before the cutoff?” I asked quickly, figuring it was a matter of minutes. “Until 9 p.m.,” Justin said, although he himself would be there working until 1 a.m.

So he leisurely faxed me the specs, I called back, placed the order, and had my new laptop delivered — with its additional 32MB of RAM installed — at 11:15 a.m. the next morning.

Call for software or a printer cartridge — or a laptop — in the evening and there it is, right as rain, in the morning.

Awesome.

I’m sure PC Connection is not the only outfit that can do this. (They have their warehouse at an airport, which helps.) But in a world of “please listen carefully as our menu options have changed,” 800-243-8088 is a good number to remember.

It was October 2, 1976. General Electric had bid to acquire Utah International for $2 billion. Reported the New York Times:

The largest merger proposed in the nation’s history
will not be challenged by the Justice Department.

This got me thinking. We seemed to have become merger mad. If it kept up this way, where would it lead?

So I wrote an article for New York magazine set in the impossibly far-off future — March 3, 1998, to be exact. (Horrors! I’d be fifty by then.)

Now, like a time capsule, that day has actually arrived. I thought it might be fun to reprint the article here. (To see what really happened, pick up a copy of Fortune‘s famous “500” issue, out in mid-April.)

THE DAY THEY COULDN’T FILL THE FORTUNE 500

NEW YORK, March 3, 1998 — It wasn’t such an awesome decision, really, and it had to be made, so Carol J. Loomis, formerly one of Fortune‘s most gifted writers and now, in 1998, its managing editor, made the obvious choice: They would still call it “the Fortune 500,” even though this year there would be only 479 companies on it.

The day had finally come.

In prior years it had been possible to fudge a little: In 1991 the list had been broadened to include firms based outside the United States; in 1995 nonindustrial companies had been added to the list, where previously they had been accorded their own lists.

But now there was nothing for it, unless you wanted to include some of the Soviet bloc or Chinese state enterprises, a step which Fortune — every bit as much a capitalist tool as Forbes — simply would not take. (Not that the communist firms were really so different from the many noncommunist giants that were government-owned.)

First on Fortune‘s list again this year, it would surprise no one, would be Citicorp, with worldwide assets, expressed in American dollars, of $1.2 trillion. (Fortune had switched from sales to assets in making its rankings when nonindustrial companies were added to the list.) Over the past 22 years, Citicorp assets had grown at a more or less steady 15 percent, right on target. Buried somewhere in that total were this writer’s automobile loan (and 17 million others, worldwide), his mortgage (the lines between savings and commercial banks having long since been erased), and a vast computer network that, with others like it at the seven rival global megabanks, had largely eliminated the use of checks and significantly lessened the use of cash. The same Citibank computer network handled this writer’s brokerage transactions and travel arrangements, prepared his taxes, reminded him of upcoming birthdays and holidays, clipped his municipal bond coupons, evaluated his creditworthiness, and would doubtless have scrambled or unscrambled his eggs for him, as it did his bank statement, had he been of a mind to sign up for the service.

The remarkable thing was that Citicorp had managed to expand so dramatically, swallowing so many other banks and financial institutions in the process, and yet still keep its payroll down to the 50,000 or so who were needed to man the infant operation back in the mid-1970s. Where once there had been fifteen clerical people at a work station, now there was a thumbnail-size silicon chip. Tellers now were mostly electronic. Mail boys had been replaced by robots — beginning as long ago as 1975. The entire margin department of what had once been the brokerage firm of Harris, Upham & Company, files and all, was now contained in a Citibank computer cell the size of a pack of Salems. Almost all of the people on the payroll in 1998 were officers. Several hundred were in the $250,000-plus compensation range.

Second on Fortune‘s list this year would be Aramco, with stockholders on six continents but more than 80 percent of its shares in the hands of the Saudi royal family — which itself had spread lavishly over six continents. Once a largely American-owned oil operation, the global energy combine had most recently acquired a million square miles of Brazilian interior — 640 million acres — which Brazil, desperate to outbid Japan for an assured long-term source of energy, had reluctantly bartered. Valuing this land at $100 an acre, Saudi Aramco had in one falcon swoop added $64 billion to its asset base, putting it, too, over the trillion-dollar mark.

There followed the predictable list of megabanks, multinational energy combines, conglomerates, IBM, and AT&T in much the same order as in 1997. But it wasn’t the rankings so much as the process of growth itself that had started Loomis ruminating.

In a way, she couldn’t complain. Her bank service was excellent; her phone service — miraculous (it now cost only 35 cents for the first minute to call from New York to Tokyo, although the rates to Westchester and Long Island were still somewhat higher). Her hamburgers were uniformly nutritious and quality-controlled, her brokerage commissions were cheaper than they once had been, and many of the companies she dealt with, although subsidiaries of one or another giant, were left largely on their own so long as they produced adequate profits.

And yet she was troubled. Somehow it struck her wrong — and had as long ago as 1976 — that Marquis Who’s Who, the snob-appeal company, was just another arm of ITT; that Dannon Yogurt had sold out to multibillion-dollar Beatrice Foods; that Halston was part of Norton Simon; that Welcome Wagon was part of Gillette; that Simon & Schuster was part of Gulf + Western; that Indiana Farmer magazine was one of the American Broadcasting Companies. What had really killed her was when, years later, L. L. Bean had been merged into Spencer Gifts, a division of entertainment octopus MCA.

The day The New Yorker, too, went to MCA — MCA had long been looking for a profitable magazine to acquire — had been even more depressing. Loomis had canceled her plans for a weekend out in Long Island’s sludge-free zone and just moped around her apartment.

This relentless conglomeration troubled Fortune‘s managing editor, but she couldn’t say for sure that, on balance, it had been a bad thing. As for the executives who had built and now directed these giants, she considered most of them brilliant, ethical, tremendously hardworking men and women. They had played by the rules — and won.

Part of the problem, Loomis reflected, was just that — competition. Competition in industry was not like competition in an athletic league. In an athletic league, teams are of equal size and get to start out with a clean slate at the beginning of each new season, no matter how badly they have been clobbered. In a competitive economy, the strong tend to get stronger and the weak tend, over the long run, to go out of business.

The brokerage industry in the 1970s was just one example. In the spirit of free enterprise, the U.S. government had stepped into the securities industry to require price competition. As a result, commissions were cut, weak firms were liquidated or merged into stronger ones, and what had been a highly fragmented, largely inefficient industry became by the end of the decade a handful of efficient firms. (Their absorption in the following decade into still larger financial concerns simply completed the process.)

The same thing happened with the airlines in 1979, when the government lifted its price and route regulation, only there had been fewer companies in the industry to begin with.

And it happened throughout the economy generally when the government began cracking down in earnest on what the courts had come to define as “tacit price fixing.” The crackdown — at first — was hailed with great enthusiasm by all but the tacit price fixers themselves. It was given much of the credit for slowing inflation to a crawl — but then most of the blame for plunging the country, and with it the rest of the world, into depression. The Econolypse of ’81, it was called, although it actually stretched well into 1986. Truly aggressive competition had led to truly horrendous bankruptcies, which in turn led to a self-fulfilling lack of confidence in the future.

Vigorous competition was a requisite for a healthy economy, Loomis reflected, but winners posed a bit of a problem.

She recalled a ditty Malcolm Forbes had spotted which illustrated the problem neatly:

You’re gouging on your prices if You charge more than the rest.
But it’s unfair competition If you think you can charge less.
A second point that we would make to help avoid confusion:
Don’t try to charge the same amount — that would be collusion!
You must compete. But not too much, for if you do, you see,
Then the market would be yours — and that’s monopoly!
— R. W. Grant, Tom Smith and His Incredible Bread Machine

It wasn’t only competition, by any means, that had led to a world of 479 giant enterprises. It was largely the process of conglomeration — of old family managements selling out for estate reasons; of young entrepreneurs selling out to cash in big; of financially straitened companies merging into solid ones (particularly during the Econolypse); of acquisitive managers spying opportunities for synergy (at best) or for easy growth (at least); and of empire builders collecting assets as Midas once collected money.

My God, she thought, just look at what had happened! In the last three decades, small-town banks by the thousands had become BankAmerica branches (81,000 in all on six continents). Luncheonettes and family delicatessens had folded in droves under competitive pressure from McDonald’s and McDeli’s (two of eleven McCorp Corp. subsidiaries), from Jack-in-the-Box (a Ralston Purina subsidiary), and from Burger King (a Pillsbury subsidiary). Local groceries had given way to Grand Unions or to 7-Elevens. (Along with Gristedes and many others, the 7-Eleven chain was even in 1976 an arm of Southland Corporation. Grand Union was a branch of the British-based Cavenham empire. Abroad, Southland and Cavenham were partners.)

Small proprietorships had become branches of subsidiaries of divisions of subsidiaries of conglomerates. And this was before taking any notice of the interlocking directorships between the sprawling giants.

What some called diversification Loomis had as long ago as the mid-1970s thought of as corporate dilettantism. General Tire operated radio and TV stations and an airline (Frontier) and bottled Pepsi-Cola; General Electric was acquiring Utah International, a California-based mining conglomerate with major interests in Australia; General Motors grew coffee in Brazil; General Mills owned Parker Brothers; Parker Pen owned Manpower; Manpower operated service stations under contract to Shell; Greyhound, once a bus line, was in the meatpacking and computer-leasing businesses; LTV, the steelmaker and aerospace firm, was a major factor in meatpacking, too; and Esmark, the largest meat packer of them all, was making dental supplies and panty hose and drilling for oil in the North Sea.

In 22 years the pace of conglomeration had, if anything, picked up. Take publishing. By 1976, many small newspapers had been consolidated into chains, such as Britain’s Thomson Organization (148 newspapers and 138 magazines); most airline magazines had been consolidated into a single publishing company, East/West Network; and a company called Professional Sports Publications was putting out programs — once highly local affairs — for no fewer than 27 pro teams. But in 1983 all three of these — the Thomson chain, East/West, and Professional Sports — were picked up in rapid succession by publishing behemoth McGraw-Hill.

Rival publishing giant Macmillan, meanwhile, after a brush with bankruptcy in 1982, had been acquired by Mobil/Marcor, the oil-and-retailing giant, and had, with this new backing, gone on to acquire MCA, Morton Salt, and Motown Records. Analysts began to wonder whether strategic planners at Mobil/Marcor/Macmillan had decided, in a moment of corporate whimsy, to go after only M’s — when without warning the company turned around and acquired Belgium.

(Why not? The Belgians were a practical people, and Mobil’s terms had been good. If countries could own companies — as, for example, Britain owned British Steel or Iran owned the Iranian National Oil Company — why couldn’t companies own countries?)

Carol Loomis closed her eyes. All she could see were corporate logos, corporate slogans, corporate letterheads. Then she had a vision of a Gulf Stream IV zooming across the sky at supersonic speed with Harold Geneen, still deferring retirement, waving from the window. Geneen, whose ITT would be nineteenth on this year’s list, with assets of $122 billion, was one of the original, and most adroit, conglomerateurs. Charlie Bluhdorn was another, and he, too, had not let up. A vigorous 72, he had in the past eight years added to Gulf + Western, among others: Perdue Farms, the Lefrak Organization, Federated Department Stores (which included, as of 1976, Rich’s, Bloomingdale’s, I. Magnin, Burdine’s, Bullock’s, and Filene’s, and had subsequently added Abercrombie & Fitch, Franklin Simon and Zayre), Bally Manufacturing, and the E. & J. Gallo Winery. All had gone kicking and screaming to Gulf + Western, which the average man on the street still mistook for some kind of far-flung railroad. Financiers marveled at how Bluhdorn, cursed as always with a pitifully low stock market multiple, had managed to pull off these acquisitions, but pull them off he had.

The antitrust division of the Justice Department, which enjoyed a confidence rating of 8 percent of the public even in 1976, could not begin to cope with the conglomeration of the world economy. Its big effort of the late 1970s and early 1980s, the crackdown on tacit price fixing, valiant though it was, had brought on the Econolypse and, with it, a spate of colossal desperation mergers. (It was the Econolypse that finally cemented Chrysler to Volkswagen, for example.) To the extent Justice wasable to keep firms from acquiring related concerns, it merely forced them to go outside their fields of legitimate expertise in search of growth.

Beyond that, lawyers in the Justice Department were ridiculously outnumbered and undercompensated vis-à-vis their corporate counterparts. And much of the conglomeration had been achieved abroad, where U.S. antitrust regulations did not apply. A favorite merger haven, particularly after Mobil acquired it, was Belgium. Just as U.S. firms had once favored Delaware as their state of incorporation, so now multinational firms tended, for technical purposes anyway, to be headquartered in Belgium.

As for other regulators, well, they had gradually been made to see private industry’s point of view. For example, there had been the marathon bargaining session late into the night of March 3, 1983, when the bankers agreed, for their part, not to foreclose on the cities, and the President agreed, for his, to see to it that the banks be allowed to cross state lines. (“The President is still the President,” opined one dismayed columnist, “but Citibank’s Walter Wriston, apparently, is chairman of the board.”)

Conglomeration, competition, automation, economies of scale, corporate elephantiasis . . . in 1964 there were 1.2 million egg farms in the United States (statistics like this stuck in Loomis’s head; she didn’t know why), and by 1976 the ranks had been thinned to 200,000, of which 4,000 accounted for 90 percent of production. By 1997, seven major producers accounted for 98 percent of total production, and all but one were subsidiaries of larger firms.

It was all damnably efficient, damnably rational, and Loomis found it damnably depressing.

She turned her attention back to the list. There were more than 479 companies in the world, she knew she would have to explain in her preface. There were still tens of thousands of firms that ranged from one-man shops up to what once would have been considered a fairly good-sized company. But the gap between these and the 479 giants was enormous. It would have looked silly to put even a company with $248 million in assets on the list, when the next largest, United Immortality (hospitals, nursing homes, artificial organs, blood banks, sperm banks, vitamins, pharmaceuticals, and health foods) — number 479 — had assets of nearly $7 billion.

There were still small companies, and any man or woman with enough gumption and modest backing could still try to build his or her own business. But as the giant corporate sector of the world economy had ballooned, the independent entrepreneurial sector had shrunk nearly to nothing as a proportion of the whole.

Loomis had worried over this problem on and off for 30 years and had never come up with much of an answer. The problem was so abstract, and corporate momentum so overwhelming, that no one had done much of anything at all — and this was the result. And Carol Loomis was not even sure that it was bad. But it troubled her.

#

PS – Three weeks after the foregoing appeared in New York magazine, in December 1976, New York was itself, without warning, acquired by media conglomerateur Rupert Murdoch.

DEFLATION

Recently, I sketched a few of the big positives and negatives — four each — I thought could affect the market. Writes Roger Dankert: “If worldwide automobile production capacity in the year 2,000 is 80 million cars/year, and effective demand is 59 million cars/year (according to morning Baltimore Sun), who loans the money for customers to buy the extra 21 million cars or do they not get made? Of course prices can fall somewhat to help clear the market, but more likely production will have to be shut in. I don’t see deflation or excess capacity on your list. Do you have an antidote?”

Yes: Growth.

But you raise an important and completely valid point.

On the one hand, of course, factories don’t have to produce everything they’re capable of for companies to stay afloat. And the least efficient plants can get shuttered — one or more auto companies could get swallowed up and “downsized” by the acquirer. That wouldn’t be the end of the world.

But the real question is, how good a job will the world do of providing the economic climate for increased demand? Imagine all the Russians and Chinese, etc., who would like cars. If these economies can get onto (or in the case of Asia, back onto) a strong growth path, the demand will be there. If not, it’s going to be some tough times.

My own feeling is that when push comes to shove, we will not go down the path of trade wars, protectionism, etc. that could lead to a global recession, deflation, pushing-on-strings and all the other rotten stuff that could go with it. But you’re right: it’s a possibility.

* *

THE SOCIAL SECURITY PROBLEM

“Just a quick comment regarding the Social Security Number ‘problem’,” writes Michael Rosner. “Since these ‘numbers’ really don’t count anything, there’s really no reason that the digits have to be numbers. By using letters as well, the number of sequences available becomes (26+10)^9, or over 101,000,000,000,000. Not a likely population to be reached any time soon. Even excluding the letters ‘O’ and ‘I’ to avoid confusion with the numbers ‘0’ and ‘1’, the number is still over 60,000,000,000,000. Plenty of room. Of course, all of our legacy programs will need to be adjusted to allow for Social Security ‘Alpha-Numerics.'”

Clearly this problem is far off and, in any event, nothing compared with the Year 2000 problem we’ve been talking about.

* *

CROATIA

“Incidentally,” I quoted Dan Scott, “most Bosnians speak Serbian, a relative of Croatian.” Now comes Tomislav Peric: “I’m sorry, but Dan Scott is wrong. The Bosnians are now attempting to ‘create’ their own language. Only linguists will decide whether it is a ‘real’ language. Prior to that, Bosnians (Muslims and Croatians) spoke Croatian. They used, and continue to use, Latin letters such as used in English. Muslims and Croatians are a clear majority, about 70%. They do NOT speak Serbian. The Bosnian Serbs speak and write Serbian, using Cyrillic letters. P.S. My family has lived in the same Bosnian village for 200 years.”

Tomorrow: The Day They Couldn’t Fill the Fortune 500

Making the Internet rounds, in case you missed it:

“The Jewish people have observed their 5758th year as a people,” the Hebrew teacher informed his class. “Consider that the Chinese have observed only their 4695th. What does this mean to you?” After a reflective pause, one student volunteered, “Well for one thing, the Jews had to do without Chinese food for 1063 years.”

(With respect to Jewish humor generally, and the Jewish parrot joke in particular, if you missed it, please click here.)