Wednesday, March 30, 2005

Horse Already Out Of The Barn

PricewaterhouseCoopers (I’m not making that name up—that’s what they call themselves now) has determined that China Aviation Oil, the Singapore company which filed Chapter 11 last year after disclosing massive oil trading losses, suffered some basic problems.

Among other things, “CAO valued its crude-oil options incorrectly, misunderstood the risks it was taking, ignored its own internal controls and failed to report accurately its positions to shareholders,” according to today’s Wall Street Journal.

Nice to know, now that the horse is already out of the barn and across the North 40.

The CAO story looks remarkably similar to the Enron story, as detailed in the excellent new book “Conspiracy of Fools,” by Kurt Eichenwald, including the inability of the auditors to understand what was going on beneath their noses.

Perhaps the funniest—and saddest—story in the Enron saga is when the company paid double the nearest bid for a Brazilian pipeline company and then failed to hedge the currency risk.

The Brazilian episode—one of many eye-popping examples of hubris, greed, incompetence and corporate chest-thumping—reads like a sort of billion dollar, high stakes version of two guys leaving a restaurant arguing over whose responsibility it was to leave a tip.

Having known at a least one of the players in the Enron saga fairly well, the Eichenwald book strikes me as the most accurate portrayal thus far of the players and their role in the Enron debacle. I recommend it not only as a good general read, but more importantly as required reading to anybody planning to work on Wall Street, to manage money, or simply to buy a stock.

We’ll have to wait a few years for the full China Aviation Oil story to emerge, but I imagine it’s as interesting as Enron.

Jeff Matthews
I Am Not Making This Up

Tuesday, March 29, 2005

More Exciting Than a Mutual Fund...

The real estate bubble is here and now.

But don't take my word for it--read carefully the excellent article at the following link:,1,6368859.story?ctrack=1&cset=true

The stories are hair-raising to anyone with a memory longer than three years; but more importantly, they put flesh and bones on a story whose skeleton has been constructed by dry data from the National Association of Realtors and Fannie Mae.

And they remind you why cycles happen, over and over, no matter what.

Jeff Matthews
I Am Not Making This Up

Monday, March 28, 2005

Bill's Hideaway

Well now we know.

A breathless Wall Street Journal article today discloses that Microsoft founder Bill Gates spends two weeks a year completely alone in a cottage, thinking Big Thoughts about the Future of Technology.

Bill even has a name for it: “Think Week.”

According to the article, out of twenty years worth of these “Think Weeks” have come such brilliant Microsoft innovations as “plans to create Microsoft’s Tablet PC, build more-secure software and start an online videogame business,” and Bill's decision that the internet was a Big Thought and therefore Microsoft ought to crush Netscape while the crushing was good.

Careful readers will grasp immediately that, aside from copying what Netscape had already done and distributing it for "free," none of the so-called “plans” ever came to much—not the Tablet PC, and not, yet, the online videogame business.

And certainly not a “more-secure” software.

Still, we read with high drama how Mr. Gates starts each Think Week with a helicopter or seaplane visit to a “two-story clapboard cottage on a quiet waterfront,” from which “all outside visitors” are barred—even family. Only a caretaker “who slips him two simple meals a day” is allowed near.

Then, Mr. Gates reads papers. You know—the kind of white papers that make your eyes roll up into your head? Papers that companies like IBM and Digital Equipment and Lotus Development and Storage Technology used to lovingly reprint and mass-mail, and quote during Keynote Addresses while techno-geeks were stuffing their goody bags with free coffee mugs and pens and t-shirts, and the hung-over salesmen slept soundly in their chairs?

Right, those kinds of papers.

Well, according to the Journal, Bill reads those kinds of papers eighteen hours at a stretch, when he’s going strong, and his “record” is 112 papers in one Think Week. Sometimes he gets “goofy” he tells the reporter, and begins “reading aloud words.” After a week of thinking Big Thoughts he will have sent emails to “hundreds of people and also have written a Think Week summary for executives.”

And out of twenty years of doing all of this two times a year, he has come up with “a more-secure software” and the Tablet PC. Oh, yeah—and copying Netscape and driving them out of the market. Perhaps “Bob” and “.Net” and "MSNBC," not to mention the mysterious “insert” key on your keyboard, also came out of this fecund swamp of dried pulp and ink.

But, hey, Bill set a “record” by reading 112 papers in one week.

Perhaps Mr. Gates should—rather than closeting himself in a cabin reading Microsoft papers—have been spending a few days at a Starbucks near a college campus, watching what future customers were doing on their computers, their iPods and their cell phones.

He might have figured out a few more things than how to copy Netscape, incorporate it into his operating system monopoly, and take over the internet access business.

He might have figured out that not every electronic device and every piece of software ought to be stuffed with a clunky, spam-prone Microsoft Monopoly Operating System that does six million things, all poorly, and only twelve of which customers actually use.

Heck, he might have figured out the iPod and iTunes and the Blackberry and Google and Mozilla and all kinds of cool things none of his executives bothered to write up for him to take to a cabin on a lake and read about them, eighteen hours at a stretch.

And he might then have developed a business model that would endure for another twenty five years, instead of an irrelevant monopoly that the world is passing by, as quickly as it can.

Jeff Matthews
I Am Not Making This Up

Sunday, March 27, 2005

Weekend Update: $3 Million Worth Of Steroids

The home run is the most singularly dynamic achievement in all of North American sport.

Thus begins the web site introduction to The McFarlane Collection of home run balls.

A batter uses discipline, knowledge, speed and power to launch a ball into the seats and beyond, thrilling a home crowd and driving opposing fans to their knees.

Babe Ruth did it consistently, never hitting fewer than 40 in ten full seasons played from 1920 to 1932. He retired with a career slugging average of .690.

In 1961 Roger Maris' 61st homer conquered Babe Ruth's all-time record, but that mark has been surpassed three times in recent years.

Maris, of course, was a fluke. A decent home run hitter caught up in a home run race with Mickey Mantle, Maris had a career year in 1961 and went downhill from there.

Sammy Sosa, Mark McGwire and Barry Bonds have eclipsed the former record with homers number 66, 70, and 73.

We now know, of course, how they did it. In addition to “discipline, knowledge, speed and power,” they have been found to have used anabolic steroids. Each virtually doubled his annual home run production to break the record—Bonds went from 34 to 73 in two years. Sosa went from 36 to 66 in one year. McGwire went from 39 to 70 in three years.

All three saw a drastic fall-off in home runs shortly after their peaks. And none of them—even Bonds, with his jacked-up 73 homer year included, approached Ruth’s career slugging average.

The baseballs they [Bonds, McGwire, Sosa] hit to earn a piece of baseball immortality all rest in the possession of Todd McFarlane.

Todd McFarlane is a cartoon creator who paid through the nose ($3 million—the most ever paid for a sports artifact) for Mark McGwire’s 70th home run baseball. He is a sports nut who built a collection of steroid-juiced home run balls, including, according to "The McFarlane Collection" web site, “six of the ten highest priced baseballs ever purchased.”

Whatever the actual current market is for those six steroid-inflated baseballs, it is in my view likely to be far below cost.

Jeff Matthews

I Am Not Making This Up

Friday, March 25, 2005

The New New Old Thing

“It just seems like everyone is doing it.” Thus says a 26 year old Manattanite playing the real estate game—this year’s version of the New New Thing—in today’s New York Times.

After describing the eerie parallels between today’s Real Estate mania and yesterday’s Internet Bubble (for example, houses being bought and re-sold on the same day), the article quotes the scariest sentiment of all, from the president of a Miami real estate outfit predicting boomer demand and cheap foreign dollars will overwhelm the shrinking supply of land to create a nirvana for real estate investors:

“South Florida is working off of a totally new economic model than any of us have ever experienced in the past.”

The man was obviously not around in 1926, when Florida had the first of many real estate busts, following a boom based on the very same conditions underlying today's bubble: cheap money and a get-rich-quick certitude that a Greater Fool exists out there for any property you can grab.

Thus the “New New” Thing—real estate speculation—is actually a New New Old Thing.

And it’s not just in Manhattan and Miami that people are snapping up properties almost as quickly as the Fed raises interest rates: in February, new home sales around the country had their biggest monthly increase—9%—in four years.

Buyers ought to consider one thing before plunking down those deposits: the cost of money. While long bonds yields have not risen very much in the last year, 2 year treasury yields have spiked from a bit above 1% to nearly 4%.

And that takes a good chunk of the “Greater Fool” buying power out of the market.

Everyone seems to be debating the question of whether we are or aren’t yet in a “Housing Bubble.” But we’re there already.

The real question is, how do we get out?

Jeff Matthews
I’m Not Making This Up

Thursday, March 24, 2005

Overstocked and Underauctioned, Part Three

Patrick Byrne is nothing if not bold.

The CEO has built a tiny money-losing internet-based surplus reseller into a large internet-based surplus reseller that made money in Q4 of 2004. Wall Street’s hopes for sustained profitability have been damaged in recent weeks, however, by costs associated with the company’s $1 March shipping promotion and a sudden step-up in marketing that caught most of the analysts by surprise.

That it was caught by surprise is not entirely the analyst community’s fault. Byrne ended his Q4 conference call in January—a few weeks before the $1 shipping promotion appeared—by proclaiming the company had “passed through the tipping point.” “People’s expectations for this year are becoming more confident,” Byrne noted approvingly in his concluding remarks, saying “we can crush” those expectations. “We are really on a roll here,” he said.

In fairness, the sudden downshift from profits back to losses appears to be a part of Byrne’s flexibility in managing He has, in the past, taken what he calls "Patrick Fliers," in the form of new ventures and experiments with the basic model of selling overstocked, surplus merchandise. A laudable trait, for the history of business in America is that companies failing to innovate end up being overtaken—particularly in the fast-paced world of the internet.

Such “Patrick Fliers” include the “sprinkling” of $2 million in bonuses “around the company,” in the last quarter of 2004; acquiring online distribution rights to a movie that “answered” Fahrenheit 911, on which the company lost $700,000 in Q4; and $2 million to start an auction site which Bryne, on his conference call, compared repeatedly to eBay.

Indeed, Byrne claimed the new auction site was already “getting better results than they do on eBay” in certain, unidentified areas. He based this on “feedback” from “the eBay power selling community.”

Based on the data at hand, however, it appears to me the auction site is a “Patrick Flier” not achieving liftoff.

“Part Two” of this series detailed the paltry bidding in various Overstock auction categories. Let’s now examine the travel business on, which Bryne described as demonstrating such improvement that “Somebody showed up here from Latin America… [saying] it’s just that we want to liquidate all of our airline tickets through your site. I mean a well-known Latin American airline.”

Indeed, he claimed "we actually had to hire people to answer the phone for the hundreds of contacts we are getting from people in the travel industry, offering us unique deals."

Unfortunately, those "hundreds of contacts" have yielded, at this moment, all of 278 items for auction in the “Travel” section of Auctions. And of those 278 items, 44 are listed under “Airline.” And just 4 of those 44 have more than 1 bid.

Furthermore, I cannot identify the “well-known Latin American airline” that wants to “liquidate all our airline tickets” through this site, unless that airline happens to offer hokey-looking deals using the handles “4salebyowner” and “sinbad42” and “homeauctionbiz” and “1goodfind” and “freeitemsandmore” and “gailsgoodies.”

Of all the "hundreds of contacts" that beseiged the Overstock phone lines offering "unique deals" there are six entities listing 44 airline deals, of which only 4 attracted more than a single bid. That's it.

But don’t take my word: check it out yourself. And if you happen see that well-known Latin American airline liquidating all its tickets somewhere on the site I haven't found, let me know. The snow is falling yet again here in New England, and a nice, cheap ticket south of the border might be just the thing.

Jeff Matthews
I Am Not Making This Up

Wednesday, March 23, 2005

Of Barbie Dolls, Swiffer Dusters and Alan Greenspan

"Oil's Surge Ignites Cost Increases," the Wall Street Journal reports alarmingly today, "For Products From Plastics to Shoes." Not only has Mattel raised Barbie Doll prices, the Journal reports, but "rising oil is boosting the cost of raw materials for diapers, pantiliners, Swiffer dusters and other consumer products...."

Gee, who'd have thought the tripling in oil prices would have such an impact? Alan Greenspan certainly didn't--I suppose his infinite faith in the power of productivity prevented him from seeing beyond the fake "ex-food and energy" inflation calculation both the Fed and Wall Street like to use.

Today's CPI won't help either--whatever way you look at the data--and the bond market finally gets it: the 2 year yield has spiked to 3.87% this morning...a far cry from the "1" handle on the 2 year not so very long ago.

Perhaps its distance from Wall Street and Washington is what allowed a certain very smart commercial real estate landlord, the privately held Shorenstein Company, to see through the fake CPI data of yore and be a seller of San Francisco real estate for the last year and a half.

Quoting the New York Times: "Prices are staggeringly high relative to the returns and the underlying fundamentals," said Douglas W. Shorenstein, the chief executive of his family business, in an interview in his 49th-floor corner office at the Bank of America Center overlooking San Francisco Bay. "If somebody is willing to pay a lot more than I would pay, then we're a seller."

Yesterday's Fed moves, today's CPI and tomorrow's bond yields will likely prove the Real-Estate-Happy-Little-Guy, who got left holding the dot-com bag, wrong again.

Jeff Matthews
I Am Not Making This Up

Tuesday, March 22, 2005

Overstocked and Underauctioned, Part Two

A full month has elapsed since CEO Patrick Byrne issued his "MOMENT TO STRIKE" bulletin urging his auction foot-soldiers to "HELP CONTACT EBAY BUYERS" to take advantage of eBay's fee increase blunder.

Quothe the CEO: "As a result of these dynamics [eBay's fee increase combined with Overstock's fee decrease], our listings have soared from 50k to 90k in two days. The quality of listings is excellent. "

Well, we now have more than just two days' worth of data to determine the potential boost to Overstock's auction site—we have thirty. And the results are not promising for

Overall listings on the Overstock auction site, by my count, are now in the 150,000 range, with a handful of categories (jewelry most notably) showing continued growth and a majority of others (coins, consumer electronics, crafts among them) not.

Clearly, the early momentum—40,000 of new listings the first two days after eBay's price increase—did not continue. (I do not have daily data stretching back to Bryne's "MOMENT TO STRIKE" proclamation, and welcome it here from anyone who does). Otherwise, Overstock's auction listings would be far higher than 150,000.

In addition, the individual categories themselves do have not much action, when measured by the percentage of listings with more than one bid.

In coins, for example, only 268 out of 2,666 recent listings—just 10%—had more than one bid. Pottery and glass, only 10 out of 2,341…not even 1%. Antiques were slightly more successful, with 56 two-bids or more listings, out of 1,161—just under 5%. That lack of participation is not a good thing, and goes a long way toward explaining why Overstock's auctions appear to have little traction.

Comparable data for eBay is impossible to calculate unless you have no life, because the eBay listings are so vast (205,000 in antiques alone, which is greater than all of Overstock's listings). I would suggest to the Conspiracy Theorists who devote so much of their lives to detailing here and elsewhere the rambling, incoherent, paranoid fantasies they have constructed regarding naked short-selling to explain movements in's stock price, that they divert just a few dozen hours of that time to looking at actual data such as the Overstock auction listings. Perhaps they can show where my calculations have gone wrong.

In any case, we will explore further auction data in Part III. For now, it would appear Patrick Byrne's “MOMENT TO STRIKE” has come, and gone, without sparking much of a fight.

Jeff Matthews
I’m Not Making This Up

Monday, March 21, 2005

Not Exactly A Berkshire Hathaway Move

Well, the "Berkshire Hathaway of the New Economy," as world-famous Legg Mason money manager Bill Miller has called Barry Diller's IAC/Interactive, is making a very non-Berkshirian acquisition.

IAC will shell out nearly $2 billion of stock for Ask Jeeves, the Bubble-Era search engine briefly revived from the near-dead thanks to its relationship with Google, which provides 70% of Ask Jeeves' advertising revenue by placing ads on Jeeves' sites.

The spin thus far seems to be that IAC's travel sites will benefit from their natural synergy with search engines, of which Ask Jeeves is considered something of a player.

In reality, Diller is buying yet another weak, third-string broken-down business. Hardly the "Berkshire Hathaway" model so loudly touted by Miller and other Barry Diller acolytes.

It will be interesting to see how Miller--no dummy--reacts to this one.

Jeff Matthews
I'm Not Making This Up

Friday, March 18, 2005

Overstocked and Underauctioned, Part One

On February 20th, CEO Patrick Byrne posted a bold message on the Overstock auction message board.

"THE MOMENT TO STRIKE," Bryne's message began, noting the February 18 eBay fee increases and the opportunities these offered to grow listings. Bryne noted that Overstock's auction listings had soared from 50,000 to 90,000 in just the two days since eBay shot itself in the foot by annoying its members and doing exactly what low-cost retail operators never do: raise prices.

Since a full month has now elapsed since both the eBay move and Byrne's clarion call to his auction members, we now have some data to assess the impact of Byrne's call to action, and in ensuing posts will take a closer look at the results.

Suffice it to say, it does not appear at this point that eBay has anything to worry about from Auctions.

Jeff Matthews
I'm Not Making This Up

Thursday, March 17, 2005

'Napster To Go' Is Not Going Anywhere

Napster's launch of a new music-download service, called "Napster To Go," is being touted today in the Wall Street Journal as "a completely different model for buying and playing music."

Napster's "new model" is indeed completely different from Apple's 99c download model: instead of charging per song, the Napster user "rents" all the songs they want, as long as they pay a $14.95 monthly fee. When they stop paying the rent, they stop getting access to the songs.

States the Journal, this is "a model that Apple can't match today."

Unforunately for Napster, Apple has no need to "match" the "Napter To Go" model, because Napster To Go will not ever, in my opinion, go anywhere.

But don't take my word.

Go to a college campus. Ask a random student how many songs they have on their iPod. The student will probably say something between 200 and 2,000. I am not making this up. Students take their music seriously.

Then ask how many of those songs have been purchased from iTunes. They will smile, wrinkle their brow, look up at the ceiling and ponder this, and then probably say something like maybe 1%.

Yes, 1%. Not half, not a quarter, not even 10%. Kids do not download music from iTunes for 99c a pop. They burn compact discs already in their collection, they burn friends' cds, they swap files.

So this notion that an online rental service for music is far more cost-effective for the average iPod user than iTunes itself, is hokum.

Kids wanted their MTV, and they want their iPods, and they are not going to pay $14.95 a month or $14.95 a year, for that matter, to rent something they can download for free.

Jeff Matthews
I Am Not Making This Up.

In memory of Henry M. Matthews, February 26, 1926-March 17, 2005.

Wednesday, March 16, 2005

How Out Of It Is Kodak?

Dan Carp, who happens to be CEO of Kodak, the company that has been left high and dry by the digital tsunami, gave a keynote speech at a wireless trade show this week in which he warned that camera phones could "fade into niche obscurity," according to the Wall Street Journal, "if the industry doesn't improve the quality of the phones and the experience of using them."

According to Carp, who has successfully redeployed the fast-fading cash from Kodak's film business into all manner of lousy digital and printed-related businesses, the consumer wants better image quality, battery life and printing capabilities. Many consumers find camera phones "less than satisfying."

The man has no clue.

Far from being a teenage girl-specific fad--and I have two teenage daughters--camera phones are useful in a whole bunch of ways I never imagined, from Sting fans taking pictures and short videos of the rock star and sending them to friends while the concert was still going, to heavy travelers like me swapping pictures with their kids to let them know, say, your plane landed safely, or you miss them.

Being in Florida for a family illness, I got a late-night picture on my cell phone last night showing the cats resting comfortably on the bed. All was well at home.

Mr. Carp, in remarks intended, I suppose, to show how aggressively Kodak is staking out new frontiers in the digital realm, only proves how ignorant he is of what consumers actually do with one of the most successful consumer products of modern times.

Don't bet on him--or Kodak--to lead the revolution.

Jeff Matthews
I'm Not Making This Up

Tuesday, March 15, 2005

Warning: This Could Be Your CEO!

If you are, or plan to be, a shareholder of, make sure you read the message board at the following URL:

You will find a message board titled "Deep Thoughts" by Overstock CEO Patrick Byrne, who posts his "Deep Thoughts" under the name Hannibal. You should read his posts.

You will find thoughts both deep and shallow, facts in the form of definitions of certain issues dear to his heart (including short-selling)...and you will also find weird tangential points, borderline-paranoid musings, and outright inanities.

For example, this from CEO Patrick Byrne:

The key is this: if given the right to create an unlimited number of new shares essentially out of thin air, not limited by the number of shares “in the borrow” as legal shorting requires, these hedge funds can always drive the price down and always cover for a profit.

To which, I would say, "Well, yeah, sure, Patrick...but nobody is given that right to create unlimited shares out of thin air, least of all hedge funds. And even if they could, no hedge fund could always drive the price down and always cover for a profit--unless the fundamentals of the company justify that price action. Otherwise, Patrick, willing buyers--who vastly outnumber the ranks of shortsellers, as your own conference calls attest--would step in and buy."

Now, before readers accuse me of exaggeration for effect, or simply of making it up--not allowed on this site--let me highlight a couple more facets of the Byrne "precis" on naked shorting (which clearly does exist, although not on the scale imagined by Bryne and his certifiables, nor is it practised by any legitimate, professional hedge fund I know--and I know a lot of them).

Byrne lays out in great detail the same bizarre scenario explicated at length on the Overstock conference call by "X-Files" O'Brien, full of paranoid delusions of market-making in "German exchanges" and the supposed "nudge and a wink" by which the DTCC supposedly gives free reign to the hedge fund Visigoths.

But that's not even the most bizarre thing about these posts.

The most bizarre thing is that the Byrne postings on "Naked Shorting" have each been edited by Byrne himself as many as 8 times.

Posted: Sun Mar 13, 2005 6:04 am
Post subject: A Concise Summary of the "Naked Shorting"
Last edited by hannibal on Mon Mar 14, 2005 6:24 pm
edited 8 times in total.

This is a CEO who really likes to write on message boards.

Yes, some unprofessional, bad guys short stocks naked. No,'s problems are not naked shortsellers. They are, by and large, professionals who think, among other things, a man who spends part of his day alerting his auction site readers to an upcoming appearance on Charlie Rose (also on the message board), and who has taken up the banner of a bizarre, paranoid and highly delusional individual who goes by the alias "Bob O'Brien" is probably not the guy you would want running a fast-growing public company.

Especially when earnings estimates are coming down.

Jeff Matthews
I'm Not Making This Up

Monday, March 14, 2005

When Strong Men Resign: Whither AIG After Greenberg? (Revised)

So the board of directors of AIG, according to the Wall Street Journal, is close to jettisoning long-time CEO, Strong Man "Hank" Greenberg, as a tide of regulatory problems at AIG rises ever-closer to the executive suite that Greenberg ruled with an iron fist.

I know ex-AIG veterans, and they swear by Greenberg and his get-it-done, make-the-numbers, show-the-growth style. He came into a small, insular company and made it a Wall Street fave and an insurance industry steamroller. But what problems has he steamrolled along the way?

Time will tell, and I have no particular insights into AIG itself--perhaps a reader or two may enlighten this page. But I can not name a single company of the get-it-done, make-the-numbers, show-the-growth type that has not uncovered vast problems--from the billions of dollars in overstated earnings at Tyco to the vast channel-stuffing uncovered at Coke--whether the Strong Man has retired in glory or resigned in disgrace.

Think about them: Tyco afterKozlowski; Coke after Goizueta; GE after Welch; Enron after Lay; Worldcom after Ebbers; Pfizer after McKinnell (McKinnell is still there, but the problems are already surfacing)...

It will be very interesting to see what the regulators uncover now that Greenberg is out at AIG. My guess--an educated guess--is that it will get much worse before it gets better.

Jeff Matthews
I'm Not Making This Up

P.S. My first draft of this piece omitted two of the most obvious of all Strong Men: Sandy Weill, whose heir Chuck Prince is dealing with festering problems at Citibanks all over the world; and Michael Eisner, Disney control-freak extraordinaire finally yielding to--or perhaps more like installing--former weatherman Robert Iger in his place.

Saturday, March 12, 2005

Weekend Edition: Three Shots in Dallas

Almost nobody thinks we really know who killed JFK.

Indeed, the JFK Conspiracy debate covers everything—how many shots were fired, by whom, from what part of Dealey Plaza, with what type of gun...and that’s just the few seconds of the entire tragedy. I’m not even going near the grassy knoll or the manhole cover or anything else the Conspiracy whacks get into.

So let’s just look at the most basic issue of all: how many shots were fired? It’s a very specific question, and it should be among the least debatable, considering the number of witnesses and the brief time span of shots. The Warren Commission said three. Oliver Stone says six. Somebody’s got to be right about this.

Now, the purpose of this blog is not to debunk JFK Conspiracy Theorists. We’re trying to bring accountability and insight to Wall Street.

But it’s the weekend, and weekends mean a feature unrelated to stocks.

Steady readers will know how I feel about Conspiracy Theorists in the stock market (see “When CEOs Obsess” and “These Are The Patsies”). They’re certifiable.

And if the JFK assassination-obsessives share the shallow, paranoid thought processes that Wall Street Naked Short-Selling Conspiracy Theorists bring to the stock market—well, maybe it’s better to let them obsess about grassy knolls and manhole covers. Better than having them loose on the sidewalks of Dealey Plaza, trying to make eye-contact with tourists.

Still, I could not resist breaking the news here that the question of how many shots were fired at JFK has been answered, soundly and soberly by multiple eye- witnesses, who were riding in the cars right behind the President: there were three shots fired at JFK. And only three.

The proof is in a remarkable book nobody seems to be reading.

It's called "President Kennedy Has Been Shot," by a news media organization called "The Newseum." It describes the assassination of JFK “through the eyes of more than sixty print and broadcast journalists” covering the motorcade and the other campaign events that day—in Dallas, Washington, and on Air Force One. The book combines the reporters’ and photographers’ statements with transcripts of the Dallas Police Department radio transmissions and communications between the White House and a plane carrying Cabinet officials to Japan, to create a compelling minute-by-minute account.

It is a very easy read, but packed with such detail that it is not a quick read. For purposes of this essay, I pick up where the first shots are heard by reporters riding in the Presidential motorcade.

Tom Dillard, Dallas Morning News photographer: “…when the first shot was fired, I said ‘They’ve thrown a torpedo.’ At the second shot, ‘No, it’s heavy rifle fire,’ and at the third shot I said, ‘They’ve killed him.”

Bob Jackson, another photographer riding with Dillard, had just unloaded his camera and passed the film from the first part of the ride to a reporter on the ground. “And that’s when we heard the first shot, and then two more shots closer together.” He says he looked at Dillard: “We knew it was a gunshot, no doubt about it. On the fifth floor I saw two men leaning out and looking up. And my eyes went up to the next window and I could see the rifle on the ledge and I could see it being drawn in.” Jackson had not yet reloaded his camera with film.

Merriman Smith, the legendary UPI White House correspondent, was riding in the front seat of the White House press-pool car, four cars behind the President’s limousine. Smith said: “Suddenly we heard three loud, almost painfully loud cracks. The first sounded as if it might have been a large firecracker. But the second and third blasts were unmistakable. Gunfire.”

Robert MacNeil, NBC News correspondent, recalls: “I said, ‘Was that a shot?’… Then there were two more explosions, very distinct to me.”

Bob Clark of ABC News: “When [Merriman Smith] said those were gunshots, I think we all in the car just accepted they were gunshots. They were loud and clear and more significant—for the historical record—they were equally loud and equally clear and were clearly fired from almost over our head…”


Anybody else see the pattern?

Not one person—not one—in the press covering the motorcade that day in Dealey Plaza claimed anything other than three shots. Distinct, clear, loud, and overhead. By a gun being withdrawn from the window of the Texas Book Depository.

The oddest aspect of the book, in my opinion, is that it makes no point about this fact, or any other facts debunking the Conspiracy myth. It merely continues via eyewitness snippets of the rush to Parkland Hospital, Officer Tippit’s shooting, Oswald’s arrest, LBJ’s swearing-in, flying the body to Washington, Ruby killing Oswald, and finally the funeral in Washington.

It never stops to consider the significance of the simple words of those men about what they heard and saw: one rifle, three shots, history changed.

Jeff Matthews
I’m Not Making This Up

Friday, March 11, 2005

Diamonds Are Forever, But Where Did Overstock Get Them?

“The steal of a lifetime,” crowed Patrick Byrne on the earnings call. “We did a $7 million deal on diamonds," Byrne told his admirers, for a 'Build Your Own Ring' feature the web site had opened--one of the “skunk works projects” Byrne likes to tease his fans with on the calls. “We intend to dominate in the $1,000 to $5,000 range” of diamond engagement rings, he bragged.

Big talk, even for the voluble Doctor Byrne.

According to Byrne—and this is important—Overstock will sell engagement rings at price-points above the low-end, which is “controlled by Zales and Wal-Mart,” and below the high-end where, among others, fast-growing online jewelry retailer Blue Nile lives.

Byrne defined the low-end as "up to $1,000"; the high-end at $5,000 and up. Blue Nile, for example, operates with an "average order size [of] about $5,500,” according to Bryne. This price gap between the Wal-Marts of the world at the sub-$1,000 low end, and the Blue Niles of the world at the $5,500 high-end, offer the potential for “fantastic pricing” for Overstock, Byrne exulted.

Unfortunately for, for Patrick Byrne and for shareholders and the analysts who recommend the stock, there is no such gap that I could find in the actual web sites of the companies he mentions; only, apparently, in the fertile imagination of Doctor Byrne.

Go to “”. Type in “Diamonds.” Sort them by “Top Seller.” You will find the Top 5 sellers to be priced, in order: $697, $5,488, $1,399, $3,288, $898. I wasn’t a math major, but that’s an average price of $2,354 per ring. Smack in the middle of the price range fancies itself "dominating."

Now, Wal-Mart certainly sells a great many more pieces below $1,000, and its average ticket is undoubtedly below the $2,354 average of its five best-selling rings. But Wal-Mart's best sellers are right there in Bryne's price "gap," and I find it hard to see how will source and sell better than Wal-Mart.

What about the high end of the diamond ring market—the $5,500 “average order size” that Blue Nile operates on, according to Byrne? Another sketchy data point from the erudite Doctor Byrne.

“A key metric is our average order size,” Blue Nile’s CFO states on that company's recent earnings call, “which was $1,283 in the fourth quarter.” While engagement rings did indeed average $5,500 in 2004, as Doctor Byrne noted, Blue Nile sells far more units of lower-priced merchandise. Tour the Blue Nile site and you will find pre-set engagement rings starting at $325.

Tour the site, on the other hand, and out of the Top 20 sellers, only 5 of the rings sell for over $1,000. The other 15 range from $199 to $999. Hardly the $1,000-$5,000 pricing strata staked out by Byrne.

So much for the hype behind the Byrne spin. But here's where the whole "steal of a lifetime" gets interesting.

Blue Nile ended its year with $9.9 million worth of inventory. Inventory for Blue Nile consisted of “settings for our customized diamond products, customized jewelry…and finished jewelry such as pearls and sterling silver products.”

Notably absent in Blue Nile’s inventory is the mention of a large slug of diamonds. This is because Blue Nile operates with hardly any actual loose diamonds. As of last October Blue Nile carried a mere $120,000 of loose diamonds on its balance sheet.

Patrick Byrne, on the other hand, positively gloats about “a $7 million deal on diamonds that was the steal of a lifetime.”

Why a fledgling Blue Nile-type web site knockoff requires $7 million worth of diamonds, when the actual Blue Nile operates with 98% less is a question worth asking.

Furthermore, even assuming has—thanks to its “skunk works”—figured out how to convert $7 million of diamonds into a profitable business, it would be worth understanding how exactly one goes about getting a “steal” on $7 million worth of diamonds.

The wholesale diamond market is not exactly inefficient in the manner of, say, Chinese pottery. Diamond sellers know what their inventory cost them, and what it is worth, and the wholesale buyers know it, too. Getting a “steal of a lifetime” on $7 million worth of diamonds is as hard to imagine as an oil trader pulling one over on the boys at Chevron.

I have no answers. But these matters of the price-point "gap" Overstock aims to "dominate" and the $120,000 of loose diamonds on Blue Nile's balance sheet compared to Overstock's $7 million "steal of a lifetime" are all subjects that should be explored more deeply.

Any informed input here is welcome.

Jeff Matthews
I'm Not Making This Up

Thursday, March 10, 2005

Ask Jeeves, Or Not

The unintentionally funniest--and most poignant--line from Ask Jeeves CFO Steve Sordello's presentation yesterday at a Lehman conference came during his analysis of Ask Jeeves' brand awareness.

"Ask Jeeves has 80-85% aided brand awareness," Sordello told the audience. "That means, you go up to somebody and ask Do you know what Ask Jeeves is, they'll say Yeah, it's a search engine."

Sounds good, right?

Unfortunately, Sordello continued, unaided awareness is only 20-25%. Ask people to name search engines, and Jeeves only comes up one out of four or five times. "People know about us," Sordello explains, "they just don't recall us."

Yes. And people know who Weird Al Yankovic is, they just don't recall him.

Like all public companies with a hot past and a deteriorating future, Jeeves is trying its best to keep up with the Googles, buying up a slew of companies and turning on the spending faucet. "We think marketing here is gonna tremendously help close that gap" between those who know about Jeeves but don't bother to use it, Sordello declares rather hopefully.

It's a happy thought. But the reality is, Ask Jeeves' 15 minutes of fame--like Weird Al Yankovic's--looks just about up.

Jeff Matthews
I'm Not Making This Up

Wednesday, March 09, 2005

Way To Go, OFHEO!

Fannie Mae better watch out, or it's really gonna be in trouble.

As reported in today's Wall Street Journal, Fannie's regulator--the Office of Federal Housing Enterprise Oversight (OFHEO)--announced new requirements. And boy, are they tough.

For one thing, the new requirements would have Fannie Mae adopt policies "limiting employees' ability to alter database records."

Yes, that's right. No more altering database records at Fannie Mae!

But it gets better: OFHEO also wants Fannie to adopt policies which "ban falsified signatures on accounting journal entries."

Way to go, OFHEO! They finally get around to--after all these years--deciding that they don't want the lynchpin of our national housing market to go around letting its people falsify accounting documents.

Man, when the Feds want to get tough, they really come down hard, don't they?

Why Fannie Mae is still in business, with its Congressional charter and its overpaid executives and its fake accounting, is beyond me. But that's my opinion. The rest of this piece, is, unfortunately, all too true.

Jeff Matthews
I'm Not Making This Up

Tuesday, March 08, 2005

Maxing Out at CarMax

CarMax Inc., the "big-box" used car retailer spun out of Circuit City years ago, carries a very fancy p/e ratio of nearly 30-times forward earnings despite the company's inability to string together more than two up year-over-year quarters in a row since the fall of 2002.

The fancy p/e ratio probably owes itself to the fact that CarMax appears to be a great concept: the Best Buy (or Home Depot or Wal-Mart or whatever category killer you want to name) of the highly fragmented, poorly staffed, consumer-unfriendly used car business. Give people a huge, clean, well lighted store, with a transparent trade-in value and a pleasant buying experience, and the world will beat a path to your door.

At least, that's the concept. And while the stores are in fact well run, and the buying experience very positive, CarMax has the least consistent earnings pattern of any actual category killing retailer out there.

The reasons CarMax has such a tough gig are several. For one, the company does not have a parts and service business, which is the flywheel in the hugely cyclical auto sector. For another, people don't shop for a used car every couple of weeks, as they do for groceries or consumer electronics or hardware, so between the time they buy one CarMax vehicle and go back for another, they have to get re-sold on the CarMax value proposition.

And even if a satisfied CarMax customer does decide to buy another used car, they may have moved away in the two or three year gap. So the churn in the customer base is much higher than for the grocery shopper at the Wal-Mart Supercenter, or the building contractor at Home Depot, or the Play Station gamer at Best Buy.

Finally, CarMax's sales depend on more variables--credit conditions, new car incentives, used car inventory--than any normal retailer. Thus, the company's results vary both ways--to the good and the bad.

Right now, CarMax is varying to the good: last quarter's unit comp store sales came in at the high-end of guidance and the company now expects the current quarter's EPS to top its recently raised guidance by $0.01 a share.

There is--as always with CarMax--a caveat. The caveat to the sales acceleration is that it coincides almost precisely with the company's rollout of sub-prime financing (called "DRIVE") to its stores in August of 2004.

Indeed, sub-prime contributed 5% to the recent 12% comps.

Most analysts expect the sales impact from DRIVE to diminish over time. It is hard to imagine how it will not. Meanwhile, the earnings benefit is quite a bit smaller than it might otherwise be, because CarMax has over 100 million shares outstanding--and in a low-margin business like used cars, there's not much left over for shareholders no matter how big the sales boost.

Analysts seem to love this one, for reasons that escape me, except that some very smart investors own the stock and have played it quite well over the years. That plus management's open playbook and excellent systems make this an easy name to go back to when the stars are lining up for a couple of good quarters.

But the fact that CarMax is juicing up sales by reaching down the credit curve illustrates the problem here: there is no fundamental franchise in used cars.

Let the buyer beware.

Jeff Matthews
I'm Not Making This Up

Monday, March 07, 2005

Mr. Greenspan's Conundrum: Is The Bond Market Playing With Fire?

According to the crack analyst team at Midwest Research, the current 3-plus year rally in the Commodities Research Bureau Index recently became the longest on records going back to 1960, by 15 trading days.

Perhaps this fact is one reason Alan Greenspan calls the current long-bond yield "a conundrum."

On the other hand, the bond market--especially after Friday's 'whoopee' reaction to the jobs report--would probably take the glass-is-half-full view, and point to the fact that the CRB is at the peak of an extended run as a clear indication that the China-driven raw materials inflation has peaked.

Whatever the case, on top of the long-running surge in oil prices--one of the reasons behind the CRB's hefty move of late--oil-rich Iran has just warned that any attempt to impose sanctions on its nuclear activities would lead to an oil crisis in the US and Europe. "Playing with fire" is what Iran's top nuclear official called it.

Not for nothing that the last oil shortage--in 1979--was caused by production cuts in...Iran.

Perhaps the bond market is right, and Alan Greespan is wrong. Perhaps, though, as the CRB suggests, the bond market is playing with fire.

Jeff Matthews
I'm Not Making This Up

Thursday, March 03, 2005

Brookings Institute to Hovnanian: "Don't Worry, Be Happy."

Hovnanian reported today, and the numbers were all--this is a homebuilder, you see--excellent.

Except for one small piece of the business, which happens to be Hovnanian's captive finance business.

"Due to the falloff in the re-finance business, Hovnanian is experiencing competition from third-party mortgage lenders who have been reducing their margins in order to originate more new business."

Seems also that there's an increasing demand for adjustable rate mortgages, which are less profitable than the old-fashioned fixed-rate kind--and this too hurt the finance arm.

ARM's were--get this--45% of origination volume in the quarter. That's right: almost half of all Hovnanian's mortgage volume is of the let's-take-the-lowest-monthly-payment-mortgage-because-otherwise-I-can't-afford-this-house variety.

But not to worry: "According to the Brookings Institute," the company reported on their conference call, "new housing starts should average 2 million a year for the next 25 years."

Phew! Thank goodness. If somebody at the Brookings Institute says so, it's gotta be true!

Seems to me the Housing Bubble is here. But not to stay.

Jeff Matthews
I'm Not Making This Up

Wednesday, March 02, 2005

Bubble? What Bubble?

According to the National Association of Realtors, who should know, second homes accounted for 36% of U.S. home purchases last year, up from more than 16% in 2003. That 36% breaks down thusly: 25% of homes were bought for investment; 13% bought as vacation homes.

Think about that for a second. More than a third of all homes bought last year were bought for either speculative purposes or as vacation homes.

This doesn't square at all with the mantra of the home building companies and their fans, which is that the U.S. has a perennial housing shortage caused by job creation, immigration and the deep-seated hunger for home ownership.

It has nothing to do, they assure investors, with the recent 4% 10 year treasury yield. It has nothing to do with adjustable rate mortgages or "IO" loans--interest only loans--in which the only thing the homeowner pays is the interest, leaving the principle for later (which to the buyer means "when I flip the thing for a big profit").

And it has absolutely nothing to do with speculative buying, according to home builders including--and I've heard them all say it--Toll Brothers, Pulte, Lennar, KB and Hovnanian.

But now we know the facts: home purchases were inflated a full 20% (the jump from 16% in 2003 to 36% in 2004) by boomers snapping up spec housing and vacation homes around the country. That's a bubble.

And not for nothing, it seems the average single-family home financed by Fannie Mae or Freddie Mac shot up almost 12% last year, the highest rate since 1979. For those who remember that far back, 1979 ushered in a couple of pretty ugly years in the housing market.

Jeff Matthews
I'm Not Making This Up