“No. Shares look cheap, but management is incompetent.”

Sometimes it’s just that simple.

Regardless of how inexpensive shares might get, I have no desire to be a partner in that particular business. BP is less integrated than its peers, seems overexposed to Russia – at least to a layman like me – and, among other things, now carries with it huge uncertainty in terms of future cash calls related to this spill. And that’s about as much thought as I have given it. That I live in a small fishing village near the Gulf could be coloring my judgment here, but if so, that’s a bias I’m okay having.

I suppose there is probably a moat of some sort around BP’s business in terms of scale and/or reserves, but it does not seem particularly wide. And if you’re investing in a small-to-no moat business, management makes all the difference.

That, incidentally, is one of the advantages of owning a wide moat company…the business should do okay even if management does dumb things.

We do still own Contango in Tarpon, and we now own shares in another deepwater E&P company, but that’s a subject for another time.

Developing story. More here. But I’m afraid I’m just not buying the “dumb trader” excuse. It’s not like he mistakenly added an extra zero before hitting the return key. More likely, if there was indeed an error, the odds seem high that it would be related to high frequency trading.

Ah, Wall Street. Don’t be so afraid to be competent!

And wasn’t there a movie about this sort of thing?

The MBA sold its headquarters building on a short sale for $41.3 million…a little more than half the $79 million it originally financed in 2007.

I’m not sure how they could even attempt to spin that. Sums up this mortgage crisis pretty well, though, don’t ya think?

The frenetic pace. Silly banter. Faux controversy. Flashy things.

I’d say they nailed it.

First State Bank here in the Keys has opened an account to collect donations for the Red Cross and will match the donations. You can also help by visiting the Red Cross or Mercy Corps websites.

If you are aware of other relief efforts, please add in the comments. Thank you.

Update: Here’s a link to a good article on KeysNet, “How Keys residents can help with Haiti relief.”

Who cares if Wall Street ‘talent’ leaves?

If lower pay lures some of Wall Street’s finest away, so be it. It’s not as if the best and brightest were doing a good job to begin with.

By Colin Barr

NEW YORK (Fortune) — There’s no need to fear a Wall Street brain drain — despite the crackdown on pay by Washington.

On Thursday, White House pay czar Kenneth Feinberg outlined compensation restrictions at seven firms that got special bailouts, and the Federal Reserve proposed to review pay practices at 28 unnamed giant banks.

Critics warn that reining in pay makes it hard to keep talented employees. Hemmed in, institutions like AIG, Bank of America and Citigroup could lose their best people.

These firms would then perform even more abysmally, if that’s possible, leaving them hard pressed to repay tens of billions of dollars of taxpayer-backed loans.

Still, we say Godspeed to this “talent.” After all, the traders and suits in the corner offices don’t exactly have an unblemished track record. In 2008, Citigroup, BofA and Merrill Lynch (since acquired by BofA) posted a grand total of $51 billion in losses.

Yet even as they were running themselves into the ground, the firms managed to pay out more than $12 billion in bonuses — including 1,606 million-dollar-plus bonuses, according to a report from the New York attorney general’s office.

“Even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks’ financial performance,” the report said.

Meanwhile, it’s hard to imagine that defection-hit firms would have a lot of trouble finding qualified replacements in the current job market.

Unemployment has doubled nationally since December 2007, when the recession started. Securities industry employment has fallen 10% nationwide and 14% in New York from a mid-2008 peak, according to Bureau of Labor Statistics data, costing some 90,000 jobs in the U.S.

And Goldman Sachs’ charm offensive notwithstanding, it looks like the official response to runaway pay is just starting.

The Fed’s plan to weigh big banks’ compensation plans against their potential for undermining the economy could eventually put pressure on pay at all the big banks.

“This could be a game changer,” said Simon Johnson, an economist at MIT. “There will be a lot of pressure on them in Congress to stick it to the big firms.”

But maybe the best reason not to fret about talent flight is one familiar to cubicle dwellers everywhere: just because someone has a big, high-paying job doesn’t mean they’re good at it.

Take Bank of America, for instance. The bank’s longtime CEO, Ken Lewis, unexpectedly announced his retirement this month, while agreeing to give back his 2009 salary.

Lewis didn’t say why he was leaving, but it seems that criticism over his empire building, mishandling of the Merrill acquisition and outsize pay got to him. The Charlotte Observer reported he had grown tired of the “mud being thrown on him day by day.”

Another helping or two of that mud could be just what Wall Street needs.

Different world today, to say the least. And I’m happy to say that we have since gotten rid of our TV.

It took three weeks to get used to it, but life without the tube is, well, better. I’m online quite a bit every day for financial news and research, anyway, and I’ve found that I’m okay with waiting a day or two to read most other news if it comes with some real analysis behind it. Between iTunes, YouTube and ESPN.com, is there really a need for Comcast any more?

If you surveyed a hundred typical middle-aged Americans, I bet you’d find that only two of them could tell you their blood types, but every last one of them would know the theme song from The Beverly Hillbillies. – Dave Barry

Most notably, I think she’s a pretty inspiring entrepreneur. Sandra will be one of those overnight success stories that’s ten years in the making. She saw a huge need, boot-strapped her way to production, outsources her manufacturing to China, has national distribution deals with some very well known chains and has been on MSNBC. All from little ol’ Key Largo, Florida.

Sandra also makes a heckuva product. If you’re a new parent, or if you’ve ever had someone else’s baby suddenly thrust upon you, you’ve probably asked yourself, “Where is somewhere safe that I can put this little booger, er, beautiful child while I ________ (find a stamp/make a sandwich/pass out from exhaustion)?” Take the answer to that question, then throw in a crib, splash pool and changing table, and you’re there…the Room to Grow inflatable play yard.

We absolutely love ours, and so does our youngest – to the point where I seriously considered asking Sandra to see if she could manufacture one for a lanky 200 man.

Lastly, thought I’d give Sandra a plug because despite the Keys being full of small business owners and entrepreneurs, it seems like most of the local press coverage in the Upper Keys lately has been about raw sewage. (Don’t ask.) Here’s a local business story that should get more attention.

And to be clear, this is not an ad or ‘sponsored post’ of any kind…though I think Sandra may now owe me coffee at the Conch House.

Here’s the general idea behind the Room to Grow…a commercial they recently taped:

And here are some of Sandra’s thoughts about being an entrepreneur in the Keys:

Q. How did the Room to Grow play yard come about?

A. We were traveling with our 6 month old daughter and needed to provide for her accomodations with something that would fit into a suitcase for the plane or car, and be easy to set up. There was nothing on the market for us or other families…so you could say “need” was the catalyst of this mother’s invention.

Q. At what point did you realize you had a serious business on your hands?

A. When we took it to our first tradeshow and heard the same comment made by so many people – “Where was this product when I had my children?”

Q. What has been the reaction from the national media and big chain stores when they hear where you’re based?

A. They are very interested, and are waiting to see what comes next. Individually they are jealous of where we live and work…especially in the winter months

Q. How challenging was it to find the right manufacturing partners?

A. We were fortunate to have an international company based in the states work with us on initial samples and then set up a meeting at their factory in China. Taking the big step of traveling there and setting up the initial order was something I will never forget.

Q. What do you find the most unique about operating the business out of the Keys? The most challenging?

A. Working and living in the same small community I have loved for 30 years helps. Most challenging? Not having the warehouse and logistics conveniences of the mainland.

Q. Where do you see the business in five years?

A. We got off to a great start, receiving awards and developing additional products to incorporate into a stand alone line that consumers want. However, given the state of the economy, we’ll need to find more working capital to continue into the next phase. Our plan is to go nationwide with a partnering company and/or licensing contracts.

Q. What words of wisdom do you have for other entrepreneurs here in the Keys?

A. Try not to let the business define the success of you or your life. Never give up, but don’t let it rule or destroy you. It’s tough unless you have ample money, time or support from others to make it work….and there’s no guarantee. Just do your best.

Q. Tell me more about your Dreamers & Doers program.

A. We work with charities and those who want to assist families in need by donating play yards for fundraisers or by offering discounts to those who want to donate to their favorite charity. It’s our way of paying forward where we can.

Q. Where’s the closest place folks here can go to check out a play yard?

A. We sell on our website www.GrowingRoomInc.com with free shipping if you need to ship one to someone directly. We also have a posted list of local stores, and do special offers to local daycare centers.

Q. Anything else you’d like readers to know about Growing Room?

A. We just received an award for Best Play Yard from Creative Child Magazine for our second year and an Award of Excellence for our Bathinet, which we will hopefully have out for fall.

For more info, visit Growing Room, Inc. Sandra is also currently looking for good salespeople. Check out her video here.

Update: Forgot to mention Sandra is on Twitter, too. She’s @GrowingRoomInc.

Standard & Poor’s backtracked on ratings cuts issued last week and raised the ranking on commercial mortgage-backed debt from three bonds sold in 2007.

The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility to jumpstart lending.

In other words, one of the rating agencies whose previous negligence and/or greed was near the core of the global financial blow-up would like folks to believe that these securities actually deserved to go from being top-rated, or AAA, to BBB- and then back to AAA in the space of a single week.

Pay no attention to the fact those securities were owned by institutions that paid Standard & Poor’s to rate them and that given the dour state of commercial real estate, those institutions really, really need access to TALF.

Here’s more on the deeply flawed ratings agencies.

This is the application banks filled out to receive TARP funds.

The application is only two pages long. The first four pages are guidelines.

To receive billions of dollars in taxpayer money, banks had to answer just twenty simple questions. They were permitted to attach more info in response to one of those questions – but only if it took less than a page.

I think I answered twenty one questions to get the electronic toll pass on my windshield. And as Graydon Carter pointed out, if you wanted to open an account with Federal Express just to overnight the TARP application back to the Treasury Department, you’d need to fill out a three page, 74-question form.

Righty-o.

The online version of The Wall Street Journal is currently running an article titled “In Obama’s Overhaul, Big Change For Brokers.” If you’re a subscriber, you can read it here.

The article contains a graphic that is stunningly incorrect. And if the journalists who wrote the article are confused, can you blame investors for being baffled?

Here is the graphic:

The first sentence in the above makes it sound like “fiduciary duty” is a box on a checklist that a broker must sign off on before “pitching investments.” That was the first clue that the authors – or the graphics people, or the editor – failed to grasp what a fiduciary duty is really all about. Them came the kicker – the bar graph.

Here are the comments I just posted on the WSJ site about it:

The graphic in this article is terribly misleading. It implies that all investment advisors at the firms listed already have a fiduciary duty. They do not.

Included in your total numbers of “investment advisors” at each firm are stock brokers and registered reps, and they are not held to any fiduciary standard. Investors should know that investment advisors affiliated with a broker-dealer firm are most likely not fiduciaries.

If the investor signs an NASD binding arbitration agreement (which is required by almost every broker-dealer firm), then the firm’s advisors would not be held to a Fiduciary Standard by the North American Securities Dealers. CFP practitioners and financial planners will be held to a Fiduciary Standard if they are also Registered Investment Advisors (RIA).

So it would be helpful to differentiate between “investment advisors” – a job title used at the big wirehouses unrelated to a fiduciary standard – and Registered Investment Advisors, typically independent advisors who are legally held to a fiduciary standard by state and/or federal regulators.

This sort of confusion is no doubt why these changes are being considered.

More from the Focus on Fiduciary website (www.focusonfiduciary.com):

“Unfortunately, only a small proportion of ‘financial advisors’ are federally or state-registered Investment Advisors. Most so-called financial advisors are considered ‘Broker-Dealers’ by the United States Securities and Exchange Commission (SEC). They are held to a lower standard of diligence on behalf of their clients. In fact, they are required by federal law to act in the best interest of their employer, not in the best interest of their clients.”

Mistakes like the above happen in journalism – these days especially, when “old media” outlets like The Wall Street Journal are more pressured than ever to put out news before the blogosphere, cable news and each other. And I’m very much aware that the media exists for one primary reason – to sell ads. To expect much in the way of public service or investigative journalism is to be disappointed.

But unlike the media coverage of politics, sports, music or celebrities, mistakes in financial journalism can cost people significant sums of money.

I also find it ironic that as a portfolio manager I can’t publicly disclose anything that might in any way be perceived as an investment recommendation without disclaiming the dickens out of it…while every month the popular financial magazines show up on news stands with cover page headlines like “50 Great Stocks and Funds” (the June 22nd Fortune), “A Simple Strategy for Fixing Your Portfolio” (the July Money), and “3 High-Paying Bonds to Boost Your Portfolio” (the June SmartMoney). It’s financial porn.

I’d like to see The Journal and other financial outlets take a cue from Jon Meacham’s latest changes over at Newsweek. After all, media people, I can now get my news instantly, anywhere, thankyouverymuch. Be a filter, not a flood. I’ll happily wait a day or two for your story to come out if it contains some real analysis and insight. And I don’t have to agree with it. In fact, if it challenges how I think about something, all the better.

But rushing something out like the above is just irresponsible. Investors deserve better from the financial media.

Until then – stay frosty, investors. It’s easy to get snookered.

The story came from a Newsweek piece last year. I’d sent it to a buddy in Iraq then, and I’m about to send it to another friend still over there. Thought it was important this weekend in particular.

It’s about a Vietnamese immigrant named Anh Duong, who fled that country in 1975 as a fifteen year old, nearly drowning in the South China Sea in the process. She got picked up by the U.S. Navy and was sent to a refugee camp in Pennsylvania with the rest of her family, which eventually was taken in by a church outside Washington, D.C.

Anh went on to the University of Maryland, got three degrees and led the team that developed the thermobaric bomb in record time for our troops to use to drop into caves in Afghanistan. Gruesome business, war. And Anh’s job was not easy. But she did it so our troops could avoid the bloodbath of searching caves the old fashioned way.

For her efforts, Anh was to be recognized with a big civilian service medal at a black-tie dinner. Upon receiving the award, she walked up to the mike and without reading any notes, says this:

“Thirty two years ago I came to this land as a refugee of war with a pair of empty hands and a bag full of broken dreams. This land is a paradise not because of its beauty or richness but because of its people, the compassionate, generous Americans who took my family and me in, and healed our souls, who restored my faith in humanity, and who inspire me to public service.

There’s a special group of people that I’m especially indebted to and I would like to dedicate this medal to them. They are the 58,000 Americans whose names are on the wall of the Vietnam War Memorial and the 260,000 South Vietnamese soldiers who died in that war in order for people like me to earn a second chance at freedom.

May God bless all of those who are willing to die for freedom – especially those who are willing to die for the freedom of others. Thank you.”

To Memorial Day.

During the sign-up process for investing in the Tarpon Fund you may remember that you chose to either vote the shares in the companies you owned or allow me to vote those shares on your behalf. This is proxy season for most of corporate America, so I’ve been doing a fair bit of voting lately.

A proxy is a statement that a company is required to file every year with the SEC that discloses among other things the bios of company officers, compensation for executives and directors and the number of company shares that each executive owns. Proxies are also used to solicit votes prior to a company’s annual meeting.

Here’s how I’ve voted our shares so far in 2009:

For almost all of the companies we own that have recently issued proxy statements, I have voted as management recommended. It’s not that I have a rubber stamp, though. Most votes have just dealt with routine issues such as ratifying the appointment of new auditors, re-electing board members and approving amendments to compensation plans.

In one case, however, I voted our shares against management’s recommendations.

Google

Google shareholders floated a proposal in this year’s proxy that would effectively require the company to resist censoring its web searches in foreign countries. You may recall the company’s 2006 agreement with the government of China to censor its search results as a condition of gaining access to that market. In the proxy, management acknowledged that free expression on the internet was important but opposed the proposal.

I’m not too strident about the issue one way or the other in terms of political policy. As a businessman, however, I do think it probably damages Google’s brand both here and abroad to agree to censor searches.

Marketers often try to define “brand” as some sort of mysterious collection of mass impressions. I think the better way for investors to define a brand is as a long-term asset, no different than a building, despite not being found on a balance sheet. The value of a brand is, like any other asset, whatever it costs to reproduce it.

In Google’s case, the company’s brand is hard to reproduce here in the U.S. because the company has amazing user loyalty despite the ease with which searchers could switch to another service. They’d likely come back, because Google’s search results are superior, but I’d prefer to not give anyone an excuse to think about switching loyalties in the first place.

Censored search results by definition won’t be superior, however, and in the dark of the night I fear that could make Google searches in foreign countries appear no different than those of inferior search engines. I’d rather not see the asset that is Google’s brand being impaired in any countries.

Back to the proxy. Rather than acknowledge the potential impact of censorship on its brand, management argued against the proposal by disputing the role Google has played in developing industry censorship standards. As I read it, however, the proposal wasn’t asking the company to develop better standards – it was asking the company to take a stand.

It was an artful dodge of a tough question, and though I still have tremendous respect for Google’s business and its management team, I voted against management’s recommendation on this particular issue because they need to get some clarity on censorship policy. They’ve been waffling for years now.

I don’t pretend to know the true impact foreign censorship could have on Google’s brand or business. It’s probably minimal. But I don’t think anyone at Google truly knows, either, and as a shareholder, I’d like some assurance that management is leaving no chinks in the armor. I think it’s probably worth spending a few bucks to assess the perceived value of Google searches by foreign users and advertisers who are aware that results are censored before committing capital to expand in other countries.

So our votes were cast in favor of the shareholder proposal regarding Internet censorship. Here is the proxy statement if you’d care to read it. See page 33 for details on the censorship proposal.

Again, I am less concerned with the specifics of Google’s policy than I am with making sure that management has thought out all the possible negative business consequences of a formal position either way. I don’t think they have, so I publicly pinged them as best we could. I suspect most shareholders will vote as management recommended, but I thought it important to send a message to protect the company’s brand.

Target

The other proxy worth mentioning was that of our company Target. On the surface the issues up for vote seemed pretty innocuous. Voting to formalize the number of directors at Target at 12 and not 13 seems an issue more suited to a party planner than a shareholder. Behind the scenes, though, there has been considerable drama.

For several years the activist hedge fund Pershing Square has been discussing various initiatives with Target’s management. A few years prior Pershing had seen high returns by agitating at the hamburger chain Wendy’s. Pershing’s interest in Target was similar.

Pershing’s founder Bill Ackman is by all accounts sharp. Last October he published a 164 slide presentation on his latest plans for Target. In a nutshell, Ackman wants to place a few friendly faces on the board to push the company to about this plan:

To have Target form a REIT (real estate investment trust) that owns the land under all of its stores. Then the company will spin off a 20% stake of that REIT through an initial public offering to Target shareholders. The REIT would then lease the land back to Target for 75 years. Target would retain 80% ownership of the REIT and use the capital raised from a $5.0 billion IPO to pay down its debt.

If you’re asking yourself, “Why should Target go to all this trouble?”, you’re not alone. I slogged through the Ackman slideshow last fall and did again prior to voting. Both times I couldn’t help but think it seemed a bit myopic.

While no one should question Ackman’s financial engineering abilities, it’s not clear what business problems he is attempting to solve at Target. I don’t believe the company has a dilemma when it comes to its real estate. I’m comfortable with their debt levels, as is management, who even Ackman concedes is the best team in the retail industry.

There is certainly a gap between the value of Target’s real estate and what the market believes it to be worth, but, hey, we’re in the middle of the worst real estate bust in the modern era. Gaps are everywhere. Trying to accelerate the market’s recognition of one particular discrepancy above all others these days is like paddling a canoe to Cuba with a baseball bat. You may get there eventually, but you’ll be exhausted.

The second time through the presentation I also found myself nitpicking at certain assumptions. For instance, I wouldn’t want to acquire any commercial real estate or land leases with an 8.5% cap rate these days, as the opportunity cost is too high. And even if the company’s new leases qualified as operating (versus capital) leases for accounting purposes, those new payments would in the analytical sense be just as much a commitment as interest payments on debt. So I’d treat them as debt, anyways.

By my estimate Target would also be paying at least $2.1 billion a year in lease expense under Ackman’s plan. Spinning off the land under Target stores to pay off $5 billion in debt now, only to be left with $3 billion owed to JP Morgan and still have $2.1 billion in debt-like lease payments every year for 75 years doesn’t sound too appealing. As a standalone entity, Target’s financials will look better, but I fail to see how the plan will improve the economics of the business. Perhaps I just don’t get it.

In the end, it became hard not to think of the plan as a Wall Street straw man propped up to help reverse the disastrous bet Ackman made on Target at a much higher share price. To each his own. But for the record, I voted our shares with Target management to formalize the number of directors at 12. Pershing is a good firm, but Target’s management has earned the benefit of the doubt.

Please email me with any questions. And someone please send Bill Ackman this book.

Disclaimer: Cale Smith owns shares of Google and Target. Clients advised by Mr. Smith also hold long positions in both companies. This post in no way constitutes investment advice. Commentary on this blog should never be relied on in making an investment decision. Not now, not ever.