handycap5

During the crisis, NPR Planet Money staff (at the time I think it was a show on This American Life) did a detailed one hour segment on the CP market, which was quite informative. I'm sure you can find it. I think the more interesting question is what will happen with money market funds and the rates they provide. My understanding is that to keep petty cash available on demand, investors could make a deposit in some form at a bank or put the money in a money market fund, which in turn invests in CP. Over the last two decades, the money market yield has averaged roughly 1.5% higher. One wasn't getting the FDIC insurance on the money market balances, until you needed it, and then in fact, the Fed guaranteed them. What is interesting today is that CP yields are very low at around one quarter of 1 percent, while demand deposits at banks (such as ING Direct) are offering 1%. The historical relationship between the rates has inverted. A number of businesses, such as Schwab's, are impacted by this. What is going to happen?

I'm looking for businesses where software/IT spending is a key component of costs and providing a quality service, while revenues are not driven software per se, but by another activity or pricing dynamic. Can you help me brainstorm businesses which would fit this description? Below are some examples and why I believe they fit or don't fit: Amazon (YES): As is obvious, software development represents a significant portion of costs but revenues are driven by volume and price on the shipped items. Competitive pricing dynamics in retail versus Target, Wal-Mart, Barnes & Noble, etc. are not driven by software. Microsoft, Salesforce.com, IBM (NO): Costs are software development, but they basically sell software too. Even though software-as-a-service businesses are not selling software per se, I think revenues will basically be driven by the same dynamics. IBM represents a hybrid of selling software wrapped in a service, in my view. Schwab, Ameritrade (YES): Costs of servicing client activity increasingly driven by software, but revenues are driven by interest rates, trading activity, investor choices. Bank of New York, State Street, Northern Trust (NO APPARENTLY): I would have thought that this would have been a business where costs were driven more by software development but revenues were driven by interest rates and balance sheet management. My quick look at history prior to the financial crisis shows that they did not seem to enjoy any fundamental operating leverage. Title insurance, such as First American (NO APPARENTLY): I would have thought costs would have been driven by maintaining database and revenues driven by home sale and refinancing activity. But they do not seem to generate operating leverage by my analysis, perhaps because the archaic sales channel prevents it being meaningful. Can you help me brainstorm other businesses which might enjoy cost deflation due to software, but revenues driven by other factors?

Thank you for posting. Please let us know if you find any additional notes on the presentation. I recommend his comments related to the financial crisis investigation, some of which provide insight into how he found the idea.

Thank you for the posts and thoughts. I must say, however, that I am disappointed that there are not more creative or counterintuitive suggestions. I am hoping for something like the US railroads in 2004, when pricing power was emerging but not self-evident. So far we have: The obvious: tobacco companies, cigar, spirits, KO/PEP/DPS, US RR’s. The debatable: FDX/UPS, THI/SBUX, ARM, RSG/WM, Canadian chartered banks. The wrong (in my view): MSFT, LUV. The luxury consumer (I don’t know): TIF, COH, LVMO, DECK, TPX. One more, which I categorize as “debatable,” but I mention because the CEO states explicitly in the annual letter that he believes the company has pricing power, is STRA. Please add additions. For my purposes, the “debatable” additions are more useful than the “obvious.”

I want to start a thread of companies which have emerging or temporarily depressed pricing power. Concerning the definition of pricing power, Buffett's example of not having to hold a prayer meeting before asking your customers for a price increase will do. Please exclude cyclical pricing power (i.e. a farmer who today gets more for his corn). My best example is Federal Express and United Parcel Service. DHL has exited the US domestic parcel business. The United States Post Office is loosing money and will be forced to raise prices at some point soon. A duopoly is emerging in US domestic freight and Federal Express and UPS both say the right things in terms of "yield management" being "the number one priority" and returns on capital needing to improve. A thoughtful response will be greatly appreciated. I look forward to the discussion!