I caught part of crazy Jim Cramer’s investment show on the radio yesterday. I listened for about ten minutes as Cramer reviewed several stocks, and offered his buy/sell recommendations. What struck me was how little his recommendations had to do with a company’s actual performance at delivering a good product to its customers, and how much of it had to do with how good the company was at rent seeking and jiggering the system in Washington.

XM for example, was a definite sell. But why? The company’s customer satisfaction is off the charts. So XM’s not struggling because it isn’t delivering a good product to people who want it. Rather, the company’s struggling because two of the oldest, most stubborn, most powerful lobbying organizations in Washington — the National Association of Broadcasters and the Recording industry — have forced XM to divert a massive amount of resources toward legal defense pretty much since the company’s infancy. NAB wants to protect its monopoly over local news, traffic, and weather. RIAA meanwhile, wants to extort a ransom in exchange for not suing XM for allowing its customers to keep digital recordings of songs on portable music players. Oh, and the company’s also being investigating by the federal government over emissions standardsd and telemarketing.

At the same time, Cramer was bullish on Archer Daniels Midland, a company that’s stock was stagnant for decades, but has shot up 140% over the last year. Why has the company taken off? And why is a guy like Cramer still recommending a buy?

Ethanol.

In a free market, ADM would be punished — severely — for its heavy investment in the corn-made fuel. Ethanol is terribly inefficient. It doesn’t burn well. And it corrodes pipelines, making it difficult to transport. Instead, since gas prices have taken off, ADM has been rewarded for its inefficiency. Not because high oil prices suddenly made ethanol additives to gasoline a better deal. But because powerful politicians in corn producing states have exploited high gas prices to force more ethanol additives and to divert subsidies back to ethanol producers. So ADM gets rewarded on Wall Street for its bad investment in an inefficient source of energy, not to mention its uncanny ability to suck up billions in taxpayer-funded corporate welfare. Wanna’ talk about gouging?

So a good company’s a sell, and a company that would have been clobbered in a truly free market is a buy — not because of actual either’s performance in the free market, but because one company’s good at playing bureaucrats, regulators and politicians, and the other isn’t as seasoned at the game.

I know all of this obvious. But it’s worth pointing out when it’s again presented in as striking conrast as it is with these two companies.

This entry was posted on Sunday, May 14th, 2006 at 7:49 am by Radley Balko and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.