Thursday, January 24, 2008

Low Fidelity

Somewhere, back in the USofA, I have a fantastic collection of music - pretty complete coverage of rock&roll's Golden Years of the 60s and 70s, and a pretty deep catalog of of jazz beginning with Charlie Christian, through Wes, Art Blakey, the Bird, Trane, Dolphy, straight through to 70s fusion and ending with Miles post-heroin days and the virtuousic Wynton Marsalis. Unfortunately, it is all on vinyl. On top of the racks LPs sits my hi-fi (pre-amp, amp, turntable, speakers, 100lb of sub-woofer and gold-plated cables). The electronics have come vary far, but the gear was all top-of-the-line Harmon-Kardon, preferred by many-an-audiophile for its representation as the best quality-to-price ratio outside the bespoke workshops of the odd Scottish-based nut-job.

But this post, while evoking memories of the many college late nights lost in the wonders of "Shakti", or the narcotic noodlings of "Blue Train", is neither about music nor wistful thoughts of timepermanently past. But it does intersect my kit, and Harman-Kardon, in particular. You see, there was a time in the 80s when an American company profitably making stereophonic gear was an anomaly. Technological change was rapid, and obsolencence and inventory write-offs a real problem. And the Japanese!!! Not only were they innovating at remarkable paces, but they were virtually giving it away. And in the late 80s, with the Japanese bubble, capital was "free" as their rates of financing were negative, allowing them to spend even more on R&D and mmanufacturing capex. Harman, miraculously survived, even as cassettes and turntables wen the way of the steam-engine. For Sidney Harman was an engineer at heart - a seeming rarity amongst company chiefs who rise to power from finance or legal backkgrounds. He treated his employees well, and they worked for him. Hard, allowing the company to weather hard times, and more importantly evolve. You're probably asking yourself: Was this in America, a CEO who cares about something more than this quarter's bopttom line, his gross-ups and the size of his errrrr ummm Golden Parachute?? He introduced high-end automobile systems that carried higher margins, and then, in a surfers' dream, caught the computer wave and became the minature PC speaker of choice with its sleek, modern designs and fine sound. Sales and profits rocketed in the late 90s and through the bubble burst.

Sales, profits, and more importantly, expectations, really took off in late 2002, carrying the stock price over the next few years to dizzying heights, and ever higher ratings, much to the chagrin my large-ish short position in the stock. Here was a company, in a business in which ratings historically were in the single diigits, where Japanese competitors - Pioneer, Nippon Columbia, Sanyo, Marantz, Yamaha, Matsushita, had all terminally wounded themselves in their audio business, but in Japanese fashion continuing out of some bizarre sense of pride and obligation, rather detached from reality. So while vultures (even Hong-Kong based Chinese ones) picked over what was left in Japan, Harman (and its stock) was valued at 25x future earnings and Sidney made the cover of just about every business magazine for the very same reasons Randians would vilify and mock him. Quelle histoire, n'est ce pas?

Well one day, earnings expectations were lowered, and a bit of the fluff went out of the share price, and at the same time every newly minted MBA who didn't want to get his hands dirty with such things as capacitors and resistors, wanted to be David Bonderman, or Henry Kravis. More importantly, the well-spring of lliquidity had a sprung a massive leak, one so large that if seen by a Saharan desert tribesman, he would think that "God Must Have Gone Crazy" or perhaps that it was a sign of the Devil's work, such an offense to his sensibilities. Yet, "Cov-Lite" DID exist, in prodigious quantities, again causing mayhem to those who dare short stocks, for each morning three more fine enterprises would find themselves the object of The Self-Annointed One's" attentions, spinning tall-tales of justification about "efficiency gains", "benefits to employment", "competitiveness" and other increduluous rubbish not seen since the days of Drexel Burnham Lambert, or, more recently, Henry Blodget.

Then, in a serendipitious event that one day might be captured on the silver screen, the Annointed Ones, replete with the foolishly provided capital, decided that Harman-Kardon would make a fine addition to their portfolio. $120 per share or so, it was agreed would be adequate compensation to turn the finest workplace in America, and most forward-looking management over to the bucaneers who would shred it to pieces and slash R&D in order to meet debt payments. Then, however, came July 2007. The buyers (Goldman Sachs Private Equity Group), got cold feet. Perhaps they could see the coming of The Great Unraveling". Or perhaps they jjust woke up on the wrong side of the bed. In any event, they used a disclosure loop-hole to walk away, without payhing the break-up fee. Harman fropped to from $120 to $75. And then, as the The Great Unraveling" began, and , well, unraveled, it dropped to $40,, levels not seen since long before I began shorting it (and getting toasted).

So what IS my point. Well I got to thinking: There were LOTS of deals that DID get done, and got done at prices as stupid,. if not MORE STUPID, foir companies of far-less pedigree and mettle than Harman-Kardon! IF Harman is now - according to the wisdom of market voting - worth $40, what, pray-tell, does that mean for the oodles of other, perhaps less-fortunate deals already consummated?? IF Harman is trading 33 cents of the proverbial dollar from the bid price, should their equity other investments perhaps be marked at something other than "Cost"? And what of the debt? Using a broken pencil and a coffee-stained back of the envelope, might such a move wreak havoc to the Annointed One's exit plan models? IF marked-to-market, mightn't such a move have wiped out the 15% equity put up by the Annointed Ones, blowing clear through to the Cov-lite loans, probably marked to "par" on the books of the erstwhile lender (i.e. The Sucker)??? IF the whole enterprise were deemed to be worth 33 cents on the dollar, and assuming valuations' sake that the debtholders are the new owners, and the market is willing to pay $40 for the debt-free enterprise, doesn't that leave the PE loans looking like they might be worth 50% of "par", instead of par? These are perhaps important questions worth contemplating.

Of course, I am NOT an annointed one, and am rather a simple soul, and there may be some very good answers as to why the PE boys should be marking their deals to "cost", and the lenders, should be marking their loans to "par", for IF the the Harman deal were done, and they were able to meet their interest payments, all is ok, no?? I have my doubts. It is the financial equivalent of Clinton's military "don;t ask- don't tell" policy. And it wasn't OK in the land of sub-prime, and it's unlikely to be OK in the land of credit card and auto receivables.

I miss my LPs, especially the ballads from all of Miles' quintet "Prestige" recordings, with the Monk, Garland, Chambers, Philly Joe Jones, just as I reckon lenders will wistfully hope for a return to the days when loans made at "par" were, generally worth "par" in reality.


Anonymous said...

I've been slowly (between work and kids) digitizing my vinyl to mp3. I've found I actually like the lower quality in a nostalgic kind of way. But having to put on a new album (or turn it over) every 20 minutes, that I don't miss. I suppose I should just buy the CD's but I can't quite get over the mental block of buying something I already own.
The don't ask don't tell analogy is excellent. However, to be fair to Clinton (who I wasn't very fond of) he never planned it, he was forced to temporize, and don't ask don't tell was the best he could do under the circumstances. I think there is a lot more malice of forethought on the other side of the analogy,

Charles Butler said...

Take heart.

Human social endeavours eventually become self-referencing, disconnected from any but their own reality, and finally entropic with a truly Marxian predictability. Such was probably the situation of jazz at the time Eric Dolphy died. I remember with great clarity the release of Miles' 'In A Silent Way', and the faint, but undeniable and unforgettable, mist of doubt that blew across the brow of the guitarist with whom I was listening to it. His intuition, expressed in a kind of betrayed rage at the choice of John McLaghlin on his instrument, was right. It was over.

By the way, not being able to get out of mind the guy that parlayed a Nova Scotia stereo manufacturer into Barrick, I'm putting up for offer my Dynaco 70, with pre-amp. At par.

Nice piece.


CDN Trader said...

Nice post - well written. I like the link between the music and the loans. On par with with your friend MM.

Anonymous said...

C, you're describing perfectly the plot of "Other People's Money", a movie in which Danny DeVito plays the urgent little breakup artist Larry the Liquidator. Except the film never had the Japanese investors using cov-light loans. But there was a memorable theme to that little drama: "A good loser is a sure losers."

If you want some static with your music, tune in Radio Malaysia during a thunder storm. I miss my old Leadbelly discs, and Milva singing German torch songs, but not the static and scratches of time.

"Cassandra" said...

Thanks, guys. I really liked this, post, for it conjured itself after I wondered what had happened to HAR's price post-deal blow-up. I would genuinely appreciate feedback on the "back-of-the-envelope" stuff, especially from any PE guys who want to trash me. For I recognize the market might be "wrong" today. Hey, look at AKS, POT or CLF over past few days intra-day: 30% ranges all around, so mark-to-market has its own issues (in the extreme being what day or hour of the week!). But none of these details spoils the big picture question of "Did they pay too much? If so, HOW much? IF so, what does THAT mean for teh bond holders and investors. Clearly if the Central Bank has its way, money illusion will paper over all cracks, so don't scuttle the ship just yet.

Charles, I must admit I loved "In a Silent Way, more for Zawinul than for Miles. There was something brooding and unnaturally restrained in Mclaughlin's contribution that added to the tension, particularly when compared to what he unleashed with Mahavishnu, or on "A Love Supreme" during Santana's spiritual phase shortly thereafter. This hesitancy was probably because McLaughlin showed up cold and there was - as the story goes - no rehearsal but rather pure improvisation - at least by JM.

I probably saw Miles a dozen times after he came out of seclusion, first with his heroin buddies (Mike Stern) , then with John Scofield. But before them all, the first guitar, was George Benson (Miles in the Sky) when Benson was HOT HOT HOT, and didn;t care about pulling chicks by singing. "Paraphernalia" is one of the most songs ever recording during the 60s phase. Stern's guitar in "The Man With The Horn" is just dripping with visceral somethingforwhichthereisnoword and - heroin or not - I completely understand the musical attraction.


"Cassandra" said...

Old Vet

The best Blues Program in America is WXPN from the University of Pennsylvania, a guy named Johnny Meister, on Sat eves 8pm til 1am...I am sure its available on the net , but his knowledge is encyclopaedic and his selections are without compare.

Anonymous said...

I saw him at a club at home after Bitches Brew was recorded, but not yet released. The band was de Johnette, Shorter, Holland, Corea and Sonny Greenwich, whom he was auditioning cold, on guitar. He got the gig, but a bit of history deprived him of the green card.

The reaction, however, among guitarists reared on a diet of comping and solos to McLaughlin's playing on those records verged on rabidity - made worse by the fact that he was completely unknown and masking a certain amount of suspicion concerning Davis' motives.

As for marking to market - anything derived from the VIX on Tuesday. Wooey!


"Cassandra" said...

Charles, I've been bugged by the whole "In a Silent Way", thing, because when I remember it, I think of Zawinul's recording released in 1970 under simply "Zawinul", which unlike the Davis Album (and I am doing this from memories 25 years old) was way more Spartan and stripped-down. I'll admit I haven't listened to the Davis Album for at least 20 years, but I have a few hundred well-record hi-quality cassettes plucked from vinyl for car journey's and travel, most of which survived in perfect form (all purchased cassettes have long since disintegrated orr been eaten), and the 1970 "Zawinul" is one (With "The Griffith Park Collection" on the 'B' side. The "Zawinul" album is an absolute "must". It's haunting in its space and languid pace, and evokes for me "heaven" for the sharp light, contrast and beauty. Zawinul apparently described them his memories as a shepherd boy in high alpine country, and the last piece was memories from his grandfathers funeral on a cold winter day. Shorter & Hancock were there, as Hart, DeJohnette and Miroslav Vitous (sp?) amongst others. I read a bit more, since it got my goat, and apparently Zawinul wasn't happy with the Miles version of In a Silent Way, which they hadn't rehearsed, for Zawinul was asked to, and showed up with a "few of his compositions".
So he pared it down, went back to the studio later, and the its the really spartan version of "In a Silent Way", that he recorded.

I saw "Weather Report" a few times, still listen to their albums on occasion, but were always to loud, and the venues too big. I pine for that sound of the musicians playing for themselves, and NOT for , or to, the audience. THere is something reflective and introspective - for this genre of jazz in particular - that is absent from the "big gig". Thanks for helping me dredge up these thoughts!

As for the market, its amazing how much better everyone feels now that they KNOW that the market really wasn't falling of its own accord , but merely the result of a Banque reversing it's clerks -7bn bad trade. Of course, it may soon occur to market that they perhaps should be concerned that reversing a position that caused a mere -7bn bad trade wiped HowManyTrillions? off share values in so little time, and caused the largest central bank in the world beg&plead for market-mercy by tossing it the largest cut in 25 years. By right they should revoke it, if only to punish the carry-trade urchins that have once again broken in through the back door, while one of their lot sniggeringly rang the front doorbell causing the front door to open, with no one around.

Anonymous said...

My memory of the recording was that it didn't sound like it was 'finished', or something to that effect. 'Brew', though, was another matter - a one-off bit of true brilliance that was never made commonplace by imitators.

If the reason Berbanke lowered rates was the Monday sell-off, I agree he should reverse. I suspect though that he's taking advantage of headline justifications so as not to communicate his, ummm, disquiet. For the moment, 3/4 doesn't get me to come out of the bunker.


Macro Man said...

While I am a little too young to have seen Miles play live, as some one who owns and loves pre-fusion Miles (and 'Trane, and Blakey, Monk et al.) and still has a set of Harman Kardon Forty speakers, purchased in 1993, sitting in his living room, may I add my belated appreciation of this post.

Anonymous said...

Love the blog, very helpful to me as I have recently started a career in finance working at a quant shop in Princeton...

Anyway, I was in the air force in 80s and stationed on Guam, what a great time to be 19 with lots of disposable income and access to the best japanese hi-fi equipment for ridiculously low prices.

I still rock my massive cerwin vegas from that time--although I wish I had bought the more practical and excellent jbl 4312s!

Anyway, keep up the good work with the blog!

"Cassandra" said...

Thanks. As an economist, the P-to-Q ratio was always important. HK was the best of class and a nice value proposition. My speakers were "Mirage" which also offered nice value with excellent crossover network between satellites & subwoofer and fine response for classical, Jazz and, if one fancied, Joe Satriani or Steve Vai. The most amusing concert I ever went to, in fact, was Satriani, at (I think) some place like the Academy in Brixton (London). Sure he was ripping but the crowd consisted amusingly of about 3 women and perhaps 1500 men - few whose hair had seen scissors in the past 12mo, most whom were wearing leather/denim combos, and ALL of whom were playing racuous air-guitar throughout the show.