Thursday, June 30, 2005

Wal-Mart 9, Sears Holdings Corp 2

Yogi Berra might have said “you can observe a lot just by looking,” or he might not. But it’s still a wise notion.

Which is why yesterday I found myself in a newly re-merchandised K-Mart store—sorry, a “Big K”—a few towns away from home, just looking.

Visiting stores is the fun part of investing in retail stocks. Unlike a lot of businesses that do things nobody can possibly get a handle on even by visiting the field operations—oil companies, for example, which I used to follow—when you study retailers, you can actually see with your own eyes whether the company is doing what the management says they’re doing.

The trick, however, is to see a lot of stores, at different times of the day and in different parts of the country, if possible.

Stores can be as empty as an Art Garfunkel concert or packed like they’re giving away shares of Google, just depending on the time of day and the day of the week and the season of the year.

Also, talking to employees is not always the best way to find out what’s really going on, because store clerks don’t think in terms of year-over-year-change-in-comparable-store-sales the way Wall Street types do.

When you ask the kid behind the counter, “How’s business?” and he says “Really slow,” he’s talking about the previous half hour. And, since employee turnover at that level averages probably 50% a year, it's likely he's only worked there a few months anyway.

So you go to stores and look at what people are actually buying, and try to talk to the store manager or someone who runs a department to find out what’s selling and what’s not, and see if anyone in a position to know can tell you how business has been for that store in recent weeks. And you do it as often as you can.

All that said, it’s usually pretty easy to see when a retail concept really works—and when it doesn’t—without a whole lot of effort.

For instance, I was having dinner in Chicago last week, taking my sister-in-law and her husband to check out a restaurant spin-off from the Cheesecake Factory called the Grand Lux Café.

(If you’ve never been to a Cheesecake Factory, you ought to try it, if only to see a restaurant concept so successful the menus carry advertisements. In fact, I know some former National Hockey League players who looked forward to playing in certain cities where they could follow up a hockey game—probably the most physically demanding sport on earth—by heading to the local Cheesecake Factory for a few million carbs.)

This particular Grand Lux Café is three years old, and just off Michigan Avenue. While we ate, my brother-in-law asked me what I looked for in a restaurant. I told him I look at what people order, how quickly the tables turn, the cleanliness and the ambiance and service and yadda yadda yadda. “But actually,” I told him, “before we got here I knew all I needed to know when I saw the line out on the sidewalk.”

Grand Lux Café is a retail concept that works.

As for one that doesn’t, check out your local K-Mart.

After watching from the sidelines while Eddie Lampert built his own version of Berkshire-Hathaway buying up the remnants of two once-great retail chains and combining them into a single once-great retail chain, I was interested in seeing how the nearest "Big K" was faring.

This particular “Big K” is off Route One, in a C+ location next to an Ocean State Job Lot, a Dollar Tree and a Fashion Bug, and it looks a lot better than it looked during the the K-Mart Chapter 11 when the vendors weren’t shipping: the shelves are full, the signs are cheery, the lighting is good and the floors are clean.

And that’s about it.

“Big K” had that curiously soul-less feel of a decent-looking place with no particular franchise, nothing driving people in and little to keep them there. One ancient clerk moved slowly around the racetrack, putting up signage from a shopping cart when he wasn’t stopping to chat with other clerks. A few customers lurked in the aisles, but the only crowd was at the service desk.

Registers open? Two.

I then drove a few miles down Route One to the nearest Wal-Mart, which is in an A+ location next to a supermarket and a Home Depot. It was a typical Wal-Mart, bustling even at 11:30 on a Wednesday morning. The demographics of the shoppers were probably thirty years younger than the “Big K,” with mothers dragging children through the apparel section, kids roaming the DVD aisles and men in the tool area. Overall, it had the energy of a store doing a lot of business.

Registers open? Nine.

Now, Eddie Lampert is smarter, and richer, than 99.9% of the money managers on the planet. He found value in AutoZone and Sears and K-Mart, and extracted billions. A couple of other big investments didn’t work out so well, but that’s still a remarkable batting average for anyone in any line of work—and right up there with his role model, Warren Buffett.

But people forget that the original Berkshire Hathaway—the New England textile company Buffett acquired and turned into the conglomerate we all know and admire—failed.

Even Warren Buffett couldn’t make a New England-based textile company successful in a world of cheap southern mills and, later, offshore producers; so he liquidated that business, put the money into insurance, and used the float from the insurance business to buy high-return businesses with “moats,” as he calls their competitive advantages.

I have no doubt Sears Holdings Corp will be an even more successful investment vehicle for Eddie Lampert than it already has been.

But in its base business, with Wal-Mart adding more sales every two years than the combined annual sales of Sears and K-Mart together, I also have no doubt that whatever Sears Holdings Corp is making money at twenty years from now, it will not be making money from its motley collection of stores without billions of dollars of newly invested capital.

Yes, I know the “story” of Sears Holdings—just shut down a few hundred more lousy locations, start selling Sears appliances in the K-Mart locations, and get store productivity up to the level of Target. Voila! The incremental EBITDA and earnings are mind-boggling.

But there are no moats around those Sears stores and K-Mart stores with their lousy merchandising and old clerks and the ratty fixtures and 1980’s-era technology—only streets leading to better-looking, better-run, lower-priced Wal-Marts and Targets and Costcos and Sam’s Clubs.

And to get the customers back will require more than bright signs and Kenmore dishwashers.

From what I saw, the score right now stands at Wal-Mart 9, Sears Holdings Corp 2.

If Yogi were watching, he might just say “it’s deja-vu all over again.”

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Tuesday, June 28, 2005

Where’s Inflation? Ask Del Monte

Everybody knows prices of things are rising. At least, everybody but the bond market, which appears to believe the accuracy of the inflation numbers compiled by the government and reported in various indices which, for the moment, show nothing much is going on in the world of consumer prices.

This despite the fact that pretty much every commodity coveted either by homebuilders in the United States or manufacturers in China has been on a tear the last couple of years.

Still, as Jay Fitzsimmons (who is not Wal-Mart’s CFO, as careful readers noted when I identified him thusly in last week’s post on Russia, but is, rather, Wal-Mart’s Senior Vice President of Finance and Treasurer) noted during his question-and-answer session at the William Blair conference, inflation at Wal-Mart stores is pretty tame.

Food inflation, Jay said, is running 1.8-1.9%; general merchandise deflation is about 1.3%; net-net, “there’s not much” inflation that Wal-Mart can see.

Still, anybody who eats food, drives a car, heats a house, pays rent, stays in a hotel, books a vacation, buys a newspaper and pays property taxes knows, costs of things are in fact rising.

So where are all those costs going?

To answer that question, look no further than the transcript of the recent Del Monte Foods conference call.

Del Monte does food—very basic food: canned fruits and vegetables under its own name, as well as StarKist tuna, 9-lives pet food and some other cats and dogs-type businesses.

The company was shmooshed together via a reverse merger with Heinz’s bad-for-our-P/E-Ratio StarKist tuna business a few years ago, and the ensuing equity roadshow presented a fairly compelling case of good management revitalizing long-neglected brands with strong cash flows underlying the whole smorgasbord.

Then, something happened that was not anticipated during the roadshow: costs went up and Del Monte’s earnings and stock price went down.

More specifically, according to Del Monte, it was “the rapid and unprecedented cost escalation in steel, energy and transportation-related costs, which, combined, represent about 40% of our costs of goods sold,” that hurt the company. “These increases, along with higher fish and other costs, resulted in year-over-year cost increases of over $120 million in fiscal 2005…”

Del Monte did what it could to offset the cost increases by raising prices to the tune of around $90 million a year. But Del Monte’s customers did not entirely go along with that idea, so Del Monte lost market share at the likes of, well, Wal-Mart for one.

Thus, Del Monte’s operating profits in the recent quarter tanked 30%. And the pain from higher costs isn’t stopping.

“Let me just give you a range of some cost increases we’re anticipating,” the Del Monte CFO told disappointed analysts last week. “We’re anticipating packaging costs to [increase] $30 to $35 million. We’re looking at energy and logistics to [increase] $25 to $35 million. We’re looking at raw materials to [increase] $15 to $20 million.”

Asked if the “raw materials” portion was just fish costs, or “a whole bunch of different stuff” by one of the analysts, the CFO responded: “That’s a whole bunch of different stuff, including fish costs.”

If you’ve never heard Len Teitelbaum, the veteran Merrill Lynch food analyst, on a conference call, you should try to listen in some time. Lenny, as everyone in the world knows him (our paths crossed at Mother Merrill 20+ years ago, but he would not know me from a can of tomatoes), possesses great enthusiasm for his work and his companies, and he knows just about everything there is to know about the food industry.

But when something goes wrong, Lenny sputters—he can barely get the words out to ask the questions; and yet he will not stop until he has asked the questions and gotten the answers he wants.

And on last week’s Del Monte call, Lenny was sputtering. As is Del Monte’s own business.

Blame it on inflation—inflation for “a whole bunch of different stuff, including fish”—and Del Monte’s inability to get Wal-Mart to pass it all on.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, June 27, 2005

Why Down 1.5% Matters

Overall, convertible-bond hedge funds lost 1.5% in May and are down 6.8% since the start of the year, according to data from Hedge Fund Research Inc.

Losses were particularly steep at GLG Partners, London, one of the world's biggest managers of hedge funds, with more than $10 billion in assets. The firm's Market Neutral fund, one of the world's biggest convertible-bond hedge funds, with about $3.5 billion in assets, returned a negative 7% last month, according to people familiar with the matter. The fund is down about 15% for the first five months of the year, these people said.

The firm declined to comment.

--Wall Street Journal

Some people reading that might wonder—what’s so horrible about down 1.5% in a month, or even 6.8% year-to-date?

After all, we’re talking about hedge funds. And in the world of hedge funds, being down 6.8% can happen—depending on the hedge fund’s investment style—before lunch.

Many of the best funds I’ve known have suffered that kind of volatility while accumulating terrific returns over the long haul. Read Jim Cramer’s excellent “Confessions of a Street Addict” to get an idea of what it’s like to be down ten, then twenty, then thirty per-cent, with redemption notices coming in over the fax machine, unable to sleep, eat, think clearly.

Cramer—with the help of his wife, “The Trading Goddess,” and Alan Greenspan’s interest rate cuts—turned his hedge fund around and exited the business on a high.

But innumerable—and I mean that literally—hedge funds have come and gone over the last thirty years, done in by a down 30% year with no hope of climbing back out of the hole. The Granddaddy of them all, Long Term Capital Management, lost 100% of its money and almost took down the entire world financial structure.

So when you see a class of hedge funds down 1.5% in May and down 6.8% year-to-date, you might wonder, “What’s the big megillah here?”

The big megillah is that the convertible-bond hedge funds of which the Wall Street Journal writes are no ordinary hedge funds comprised of “qualified” investors—meaning “rich enough to lose it all”—who accept short term volatility for outsized long term gains.

Rather, these are funds designed to appeal to institutional investors, particularly life insurance companies, seeking consistent, higher-than-the-alternative returns with no capital risk, whether the equity markets are up, down or sideways.

These are funds that aim to provide 1% a month, no strings attached.

I’m not making this up: 1% a month is the implicit promise for many of these “market-neutral” black box Masters of the Universe convertible arbitrage funds. The life insurance companies love them because 1% a month compounds to something nicely above the 4% long bond yield, and since they’re not trading currencies or betting on biotech discoveries, the convertible funds fit the risk profile of a safe, conservative bond portfolio.

But if that 1% a month turns negative, even for half a year…it screws up the entire picture. Suddenly, the capital account is negative, the return calculation goes out the window, and a loss which for many hedge funds—especially the old-fashioned long/short equity funds—might seem like a day at the beach, becomes a crisis.

The life insurance company is going to say “no mas” and yank the capital—especially now that short rates have tripled in the last year, and the risk-free alternative looks a lot better better than a year or two ago.

Which is why down 1.5% in a month and 6.8% for half a year is, as they say, unacceptable.

The markets began freaking out about the convertible arbitrage business two months ago, helping create a short-term bottom in the equity market and a sigh of relief in the Wall Street Journal.

But with end of the quarter approaching, expect the headlines to reappear and some strange action in the markets: there will be more than a few life insurance companies, and other institutional investors, looking to get their money back.

Or what’s left of it.

Jeff Matthews
I Am Not Making This Up

NB: The plug for Cramer’s book is no mere logrolling given my past association with I think there is no better description of what it is like to be inside the hedge fund vortex during a time a financial crisis than that in “Confessions.” I rank that book right up there with “Reminiscences of a Stock Operator” and the “Money Masters” series by John Train.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Thursday, June 23, 2005

Putin’s New Campaign Slogan: “Live Lousy, Die Young & Buy Your Oil From Me”

The most interesting thing I heard this week at a conference with a broad range of companies as boring as Home Depot and as comical as TurboChef Technologies was the blunt assessment of the Russian situation by Wal-Mart’s CFO, the sharp, knowledgeable and quick-witted Jay Fitzsimmons.

Jay, like all Wal-Mart higher-ups, has a very broad knowledge of a very large slice of the world’s economies, and he always has something interesting to say about topics far beyond the usual why-were-comps-below-plan-last-week? nonsense that most retailers end up getting asked on their conference calls.

To put Wal-Mart in perspective, sales will top one-third of a trillion dollars this year. It’s adding $30 billion to sales each year—almost two JC Penneys. And for the typical U.S. consumer products companies ranging from giants like P&G and Colgate to little guys like Acme United and Jarden, Wal-Mart is 20-25% of sales.

So whatever Wal-Mart has to say about the world at large, it’s always worthwhile.

For one thing Jay takes the PIMCO side of the bond trade, saying “there’s not much” inflation in the Wal-Mart shopping cart.

In the food category, which is important to Wal-Mart given the successful roll-out of the company’s huge food/merchandise “Supercenters” over the last decade, inflation is running 1.8-1.9%.

General merchandise prices, however, are deflating at a 1.3% clip. Summing up inflation on the one-third of a trillion dollars that Wal-Mart handles, Jay says “it’s flat on average.”

That was interesting, but not as interesting to me as the discussion about Russia. It is impossible to talk about the future of Wal-Mart without talking international—particularly the opportunities in China, which are, of course, huge; as well the two other large and under-developed countries: India and Russia.

Turns out India does not allow direct foreign investment in their retail sector, so Wal-Mart is not going to participate in that country’s growth any time soon.

But Russia is wide open, and Wal-Mart looked closely there, and was about ready to go…but pulled back following Putin’s hostile takeover of Yukos, the country’s largest oil producer.

As Jay summed up the Russian government’s hostile attitude toward capitalism: “they see a good business—they want to nationalize it.”

Putin might get away with taking whatever he wants to take—a couple of weeks ago it was a newspaper; before that it was a TV station and an oil company. He’ll certainly get even more rich and more powerful than he already is.

Meanwhile, great companies like Wal-Mart with the cash and human capital that could have provided an invaluable engine of growth for the poor shlubs who live under Putin (male life expectancy: 59 years) are investing their money and their knowledge elsewhere.

The Russian Crisis of 200X approaches.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Tuesday, June 21, 2005

Speaking Of Which…

Patrick Byrne is one clever fellow.

The voluble, erudite CEO of has a way of presenting himself at conferences that appears reasonable, informed, and responsive to questions—even when he is saying nonsense.

I saw Doctor Byrne two weeks ago at the Bear Stearns technology conference—the summer kick-off for tech investors at the Grand Hyatt in sweltering New York City. I don’t know why, but New York City weather is always especially miserable during Bear Stearns; nevertheless, the conference always brings together a worthwhile variety of interesting companies with plenty of opportunity to for Q&A.

After all, nobody wants to go outside the building in that kind of heat.

Thus it was that I found myself in the Schubert Room of the Grand Hyatt, listening to the CEO of a public company—namely Patrick Byrne—repeat a false rumor about eBay and Yahoo rather than answer a question.

The question he didn’t answer was about what it might mean to Overstock’s faltering auction effort that Yahoo had waived listing and transaction fees on its own auction site.

“I’m surprised” at Yahoo’s moves, Byrne told the small room of investors, before cleverly shifting everybody’s attention away from the actual question—that is, how Yahoo’s moves might affect Overstock—by saying the following:

“The scuttlebutt in the industry is that there was a private understanding” between eBay and Yahoo, “where eBay would leave Yahoo alone in Japan and Yahoo would leave eBay alone in the U.S.”

Having grabbed everybody’s attention with a fake rumor that had no bearing on the actual question, Byrne repeated the rumor that there was some kind of illicit under-the-table deal between Yahoo and eBay, and concluded the non-sequitur by saying,
“The rumor is that goes back five years or so.”

Then it was on to the next question, and yet another non-sequitur—this time intimating that Overstock is an acquisition target, even though the next question wasn’t about Overstock itself being acquired (it was, as I heard it, about whether further acquisitions are likely in the industry):

“The number of phone calls I get where it sounds like that’s what’s on people’s minds [acquisition of Overstock] is starting to pick up…” Byrne said. “But I’m not interested in selling at anywhere near this price.”

All in all, during both his Ballroom D presentation and his Schubert Room Q&A session, Byrne made a money-losing hodge-podge of backwater technology (“We got to where we are on a shoe-string”) supporting me-too jewelry/auction/travel offerings sound vaguely sexy, alluring, and ripe for a takeover—while deflecting one of the better questions by repeating a false rumor.

Meanwhile, he casually dropped a bomb that nobody in the Schubert Room seemed to grasp—probably because they were still fantasizing about the takeover inquiries Byrne intimated he was starting to get.

The bomb being Overstock’s cost of acquiring new customers—which is, to continue the metaphor, exploding.

Overstock’s cost of attracting new customers (called CPA), hit $21 in the first quarter of 2005: asked about this, Byrne—who has always focused Wall Street’s Finest on Overstock’s low CPA—talked about the rising costs of attracting customers and said:

“I don’t want to chase it [CPA] over the mid-$20’s.”

This is the same man who 24 months ago bragged, “we basically have the lowest customer acquisition cost on the internet,” when the CPA was $8.69 per customer.

This is the same man who explained away an $18.30 per customer CPA in October 2004 by saying “remember, we’re coming into the fourth quarter…I suspect that you see it drop.” The same man who called that $18.30 CPA “the high end of respectable.”

Now he says he doesn’t want to go over $25?

As usual, Byrne had a ready comeback to the notion that maybe $25 a customer is not economic:

“We’re getting a lot more lifetime value in a customer.”

Right. Okay, Patrick. Whatever. I didn't want to disturb the fantasy by reminding Byrne that large catalogue retailers view $2 a customer as a reasonable CPA.

Oh—one thing more.

Shortly after the Overstock Q&A broke up, I had the chance to ask somebody about Patrick’s “rumor.” That somebody was Rajiv Dutta.

Rajiv is the CFO of eBay, and he happened to be conducting a Q&A about an hour after Doctor Byrne. So I asked Rajiv about Doctor Byrne’s rumored illicit agreement between two of the most successful companies in the world.

After smiling with incredulity as I read him Byrne’s absurd remarks, Rajiv became sober and firm: “There is no agreement, tacit or otherwise,” he said.

His face hardened: “this is an extremely competitive market,” he went on, getting very sober and very firm. Leaving no doubt that eBay and Yahoo were engaged in a high-stakes internet version of Mortal Kombat, Rajiv added, “If we see them doing something well, we will look at it.”

I left the Grand Hyatt for the hazy, hot and humid streets of New York, debating which guy to believe: Patrick Michael Byrne of the tripling customer acquisition costs and the “decrapitating” technology and the $7 million diamond “steal of a lifetime” and Project Ocean and Project Rocket and Project Whatever…or the CFO of one of the most successful Internet companies ever.

It wasn’t much of a debate.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Sunday, June 19, 2005

This Just In: “Spin” Becomes “Lying”

"It seemed to us he [ex-Tyco CEO Dennis Kozlowski] told a few lies."--Tyco juror.
"A lot of people felt he [ex-Tyco CFO Mark Swartz] was an extremely good liar."--Tyco juror.

Friday afternoon the headline came across my Bloomberg: Dennis Kozlowski and Mark Swartz had been found guilty of conspiracy, fraud and grand larceny in their roles as CEO and CFO of Tyco International.

I instant-messaged my partner, “yesssssssssssssss,” and he understood immediately, catching the same headlines at the same moment.

It felt terrific—Dennis and Mark had misled not just Wall Street analysts, who should have known better, but thousands of investors who bought the Dennis-Kozlowski-as-the-next-Jack-Welch public relations scam, and lost millions as a result—and I personally and professionally had gone out on a limb discussing Tyco and the problems-behind-Dennis-and-Mark's-curtain in “The” as well as on Kudlow & Cramer.

It was nice to feel vindicated, even though it took three years and two trials, and millions of taxpayer dollars.
Oddly, however, I also felt a twinge of guilt for reveling in the misfortune of other human beings. After all, the ex-CEO and ex-CFO are not threats to anybody anymore, except the taxpayers funding the three-years-and-counting prosecution of their cases.

So I began looking back at their public pronouncements while Dennis and Mark ran Tyco, just to recover the atmosphere of the moment. In so doing, I revisited a piece I’d written in May of 2002, called “When Does Spin Become Lying?” and intended for, where I was writing at the time.
Now, that title got watered down—lawyers, you know—and editors removed some of the stronger language before it was published as "Hook, Line and Sinker." I was very disappointed at that time.
After all, the piece was constructed almost entirely out of quotes from Dennis and Mark themselves—I was "not making this up"—so I didn't understand the sensitivity to whatever legal ramifications there might be to pointing out that the CEO and CFO of a major public company couldn't seem to keep their stories straight.

Still, I acquiesced to the edits and the title change. But today, after re-reading the original, unedited "When Does Spin Become Lying?," I wished I hadn't.
What is remarkable about the piece is not that I wrote something wildly terrific or profound, because I didn't. In fact, it's a bit choppy and probably deserved every edit that was made to it.
What is remarkable, I think, is simply this: there is nothing that took the Feds three years to prove "beyond a reasonable doubt" to a jury of their peers that wasn’t evident to anybody with a pair of ears and an open mind who listened to Dennis and Mark’s carefully rehearsed sessions with Wall Street’s Finest in the months before their arrests.

Those two guys said stuff and took it back like third-graders trying to explain what exactly happened on the playground during recess; only Dennis and Mark were not spinning lies about who threw the first punch to some gray-haired, hard-of-hearing spinster: they were, as the jury finally concluded, spinning lies about businesses, earnings, cash flows and asset sales to millionaire MBAs and Wall Street veterans.

Yet during that period of time, throughout all of those conference calls, not one of Wall Street's Finest ever called 'em on it.

So here it is, as originally written—provocative, lawyer-scaring headline and all:

When Does Spin Become Lying?

This Thursday Tyco International will hold its earnings conference call for analysts and investors. Despite Tyco’s rocky history and recent earnings and cash flow disappointments, don’t expect much in the way of fireworks on this call—at least from the so-called analysts recommending Tyco stock.

Over the course of the last four months, since launching their surprise split-up plan, Tyco International’s CEO Dennis Koslowski and CFO Mark Swartz, have hosted a series of conference calls with the analyst community to discuss the plan itself, earnings releases and accounting issues.

In that brief period of time, Tyco’s Plastics business was put on the block for $3 to $4 billion and pulled off the block after expected proceeds had dropped by as much as one-quarter.

A promised separate audit of Tyco Plastics was “ceased,” in management’s word, before it could be completed—leaving potential buyers of Tyco Plastics, and the investment community at large, in the dark regarding any issues that might have been uncovered.

Furthermore, Tyco’s earnings and cash flow guidance were reaffirmed and then slashed by as much as one-quarter; and the need to take a goodwill charge was denied again and again, before a $3.3 billion impairment charge was taken in the second quarter.

Remarkably, throughout the on-and-off sale of Plastics, the on-and-off audit of Plastics, the earnings and cash flow reductions, and the newly impaired goodwill, most Wall Street analysts have retained their “buys” on Tyco shares.

Yet it may not be so remarkable. For one thing, Tyco is selling off its CIT finance subsidiary in one of the largest public offerings in history, while employing a good many of these same analysts’ firms to handle the fee-rich deal.

For another, Tyco management did such an excellent job “spinning” the news of each disappointing turn of events that the analysts appeared to take everything at face value. A review of the Tyco conference calls from the January 15th first quarter call, to the April 25th second quarter call, hosted by either or both CFO Mark Swartz and CEO Dennis Koslowski, show a management team consistently eating their own words.

What follows are the words of Dennis Koslowski or Mark Swartz, either directly from my own notes, or from Dow Jones wire stories, or from transcripts.
You be the judge!

1. Sale of Tyco Plastics
[NB: All dates are 2002]

What they told the analysts about the sale of Plastics:
1/22 “We’re estimating $3 to $4 billion from Plastics.”
2/6 “…we will have $3 to $4 billion” from a sale of Plastics.
2/6 “Tyco has received strong interest from both strategic and financial buyers.”
2/13 “We…will sell Plastics.” “It’s not the best business….”
2/19 “[We’re] looking at $2.5 to $3 billion…after taxes on the proceeds from Plastics”
3/19 “We are on track within the ranges that we had expected on the Plastics.”
3/26 “…the bids came in within the range of expectation.”

What they said upon announcing they will not sell Plastics (4/25):
“We want to keep Plastics. It is a solid business with substantial free cash flow…Tyco Plastics’ operations generate excellent returns…Our decision to retain Plastics…had nothing to do with pricing or accounting.”
2. So-called “Distractions”

What they told analysts about distractions caused by the break-up plan:
2/6 “A nickel or so” per share from “distractions.” Ship is in “good” shape. “Now back to spending time with people and customers, to crank out earnings and cash flow.”
2/13 “Other sides of business [outside electronics] have recovered and are doing well.”
2/19 “No incremental adverse competitiveness seen from any [healthcare] competitor.”

What they said upon announcing how distractions hurt earnings (4/25)
“We had many concerns by customers and employees… And, as I saw this first-hand and spent most of my time visiting with customers, visiting with employees, the shock, the dismay that we were putting the organization through made us recognize we did make a mistake here….Many units suffered productivity declines due to volume issues as well as just simply losing a bit of focus.”

3. Healthcare Business

What they told analysts about the strength of the healthcare business:
1/15 “Revenue growth [in healthcare] is not sensitive to the economy.”
1/15 Margins for healthcare “will go up.”
2/6 “All other businesses continue to show good growth, particularly healthcare…”
4/2 “Our healthcare business and fire and security continue to perform well.”

What they said upon announcing weaker-than-expected healthcare results (4/25):
“Our major competitor had played some havoc within the healthcare customers…We did lose some business at the same time.” “We had difficulty within the last quarter and some pricing pressures in order to hold on to customers.” “Our competitors…charged in and tried to take advantage. We certainly lost business.”

4. Goodwill Impairment

What they told analysts about not taking a goodwill charge, particularly in telecom:
2/19 “Impairment review should be done…end of March. We are not expecting impairment.”
3/19 “We are not looking at an FASB 142 impairment charge on goodwill.”
3/16 “I continue to believe there will not be a charge…”
4/2 “I will reaffirm…that there will not be an impairment charge on goodwill… The reason for that…we paid very reasonable purchase prices for those businesses, and the same can be said looking at even the electronics business.”

What they said upon announcing a large goodwill impairment charge (4/25):
“The vast majority of the [$3.3 billion impairment] charge is the result of the fierce decline in the electronics and telecom markets.”

5. FY 2002 Free Cash Flow Guidance

What they told analysts about FY 2002 Free Cash Flow:
1/15 “Free cash flow exceeding $4 billion [in 2002].”
2/19 “As we look here right now we’re able to make very clear we’re able to get to the $4 billion.” “We’ve always been conservative on the guidance we’ve given on cash flow, regularly we have far exceeded the guidance we’ve given.”
4/2 “As I have said over the past few weeks, based on January and February’s numbers, we see no need to revise earnings or cash flow guidance for the quarter.”

What they said upon announcing weaker than expected free cash flow guidance (4/25):
“We do believe that our free cash flow estimate for the full fiscal year of ’02 is $3 to $3.5 billion.”

6. FY 2002 EPS Guidance:

What they told analysts about FY 2002 Earnings Guidance:

1/15 “Committed to full year earnings guidance of $3.70 per share.”
1/22 “We foresee strong earnings growth through then [2003]...”
4/2 “As I have said over the past few weeks, based on January and February’s numbers, we see no need to revise earnings or cash flow guidance for the quarter.”

What they said upon announcing weaker than expected earnings guidance (4/25):
“Including the impairment charge and other unusual items, I expect [FY 2002] earnings to total around 98 cents to $1.08 per share. Excluding these items...$2.60 to $2.70 per share."

Like barking seals clapping their flippers when fed baitfish by their trainer, the Wall Street analysts have, for the most part, accepted the steady diet of disappointing news with remarkable aplomb and sustained zeal for Tyco stock.

“We reiterate our buy” is a phrase that appears in the First Call notes of the analysts following Tyco with almost as much regularity as “We reduce our price target.” Bob Cornell of Lehman takes the cake: after steadily reiterating his buy while taking numbers down, he recently cut his price target on Tyco stock from the nicely round $100 per share to the equally clean $50 per share, just like that. Overnight. Oh, by the way: Lehman Brothers is acting as an underwriter of the CIT initial public offering.

These professionals don’t seem to understand the lessons of Enron. It is no longer enough to accept at face value the numbers typed into a press release or the soothing, upbeat words of a conference call, nor is it deemed “analysis” to repeatedly recommend a stock whose management the bankers are courting for a deal and whose fundamentals are deteriorating. Enron bull Curt Launer of CSFB appeared before Congress and said, in effect, “I can’t do my job if the company doesn’t give me the right numbers.” And he was laughed at, for he is supposed to be an analyst, not a stenographer.

This is serious stuff—this is people’s retirement accounts and pension plans. It is college educations going up in smoke. The analysts who can, with a straight face, accept the kind of spin practiced by so many companies—and recorded above—are risking severe professional liability by accepting spin at face value, without due diligence of their own.

For we have seen that “spin”—the art of putting a good face on potentially bad news—can become what lawyers and Attorneys General regard as “lies.” And this usually happens when the spin stops working—as when Enron’s stock fall triggered the hidden liabilities which blew apart what good spin and a thousand press releases had kept together.

Thursday’s conference call should be interesting. Let’s see if Tyco’s spin is still working.


Yet even today, in a Sarbanes-Oxley world brought about thanks to people like Dennis and Mark, there are companies as egregious in their spin-doctoring and as opaque in their accounting as Tyco ever was—and they are being touted by Wall Street’s Finest, who don’t seem to bother asking themselves when, exactly, does "spin" become "lying."

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, June 17, 2005

So Why Exactly Is The Lady A Tramp?

I’ve never understood “The Lady is a Tramp.”

The lyrics to that brassy Rogers & Hart tune made famous by Frank Sinatra, if you actually listen to them, ascribe to “The Lady” such qualities as one associates with a person of some social standing and breeding—not actual tramp-like qualities:

“She loves the theater, but doesn’t come late…” “She’d never bother with people she’d hate…” “Doesn’t like
dice games with sharpies and frauds…” “Won’t dish the dirt with the rest of those broads….”

Seems to me the lady is a class act.

Nevertheless, those are the lyrics that Frank Sinatra made famous, and that is the song he sang for the first record printed on The Beatles’ brand new Apple Corps label back in mid-1970.

The story, as told in Tony Bramwell’s “Magical Mystery Tours: My Life With The Beatles” (which is a must-have book for Father's Day, assuming you are a father and a Beatle's guy), goes like this: o
ne of the Beatles’ people decided it would be fun to have a new version of “The Lady Is A Tramp,” with lyrics slightly altered, sung by Frank Sinatra himself and presented as a birthday gift to Ringo’s wife, Maureen.

I’m not sure how Maureen felt about it, but since, back in those days, anything The Beatles wanted they could pretty much make happen, it happened exactly that way: Sammy Cahn rewrote the lyrics, Sinatra himself recorded the song, and one copy was pressed using the very first Apple Corps label and presented to Maureen.

Which makes “The Lady is a Tramp” the first printing of a record on Apple, before “Hey Jude.”

With important issues like this out of the way, on Monday we will return to current events—including an office furniture company that appears to offer good long term value, and the latest antics of our favorite CEO-of-a-money-losing-Internet-company, who used the recent Bear Stearns conference to repeat a false rumor about his two biggest competitors.

In the meantime, is it just me or does it seem pathetic that Washington is debating the existing of global warming while—as reported in today’s Wall Street Journal—glaciers in the Peruvian Andes are melting away at a thirty-feet-a-year rate—and they’ll be gone as quickly as 40 years from now?

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Thursday, June 16, 2005

What To Get For Father’s Day

If you’re a father and a Beatle’s guy, there is no better book to ask to get on Father’s Day than Tony Bramwell’s recently released “Magical Mystery Tours: My Life With The Beatles.”

Bramwell grew up with George Harrison and worked for Brian Epstein during the years Epstein discovered and managed the group, and stayed on with them through the break up—doing tasks as grand as handling radio promotion for new Beatles songs and as mundane as being asked by John to go fetch his belongings from Yoko’s flat when John had determined to break off their affair. (Yoko wouldn’t let Bramwell in the building; John eventually returned to her.)

Bramwell saw it all, from beginning to end, which makes this book much more interesting than all the other Beatles books out there.

“The Sun Also Rises,” this is not: repetitive, longer than necessary, and written more in the manner of a guy sitting in a pub telling the stories…nevertheless, “Magical Mystery Tours” has a tremendous amount of stuff in it that you never knew.

What’s really interesting is how the band became a sensation in the first place. This was no “boy band” put together by some impresario and given a TV contract and vocal lessons. These guys worked like dogs, and before they broke in America they had created a buzz at every gig they played.

Bramwell describes nitty-gritty you never knew, including the disguises they wore and deceptions they used merely getting into and out of the theaters they were playing in Britain, without being torn apart by screaming girls—and this was years before Ed Sullivan made them bigger than Elvis.

The other interesting stuff here is how the boys actually lived after they stopped touring and were cranking out albums in Abbey Road. Girls camped out on the sidewalks in front of Paul’s house for months on end, climbing in unlocked windows and making themselves available (many eventually worked at Apple Corps, The Beatles’ own record label); while John holed up in his house—a fairly miserable character, knowing not much else besides getting high and writing and recording songs.

And for those of you who always blamed Yoko for breaking up The Beatles, even after these twenty-plus years of sympathetic revisionist history since Lennon’s killing, well, you were right.

Yoko does not come off well here—I’ll leave it at that.

But I do not want to spill all the beans, so I’ll just leave you with a trivia question to which you will not know the answer, unless you read this book or you’ve in fact spent evenings sitting in a pub with Tony Bramwell:

“Hey Jude” has always been called the first record printed and released on Apple Corps, The Beatles’ record label. But it was not. It was actually the second record printed under the Apple label.

What was the first record printed by Apple, and who sang it?

Jeff Matthews
I Am Not Making This Up

Wednesday, June 15, 2005

The Last, Best Hope For Prosperity, Part III: A Tale of Two Markets

We have plenty of evidence there’s a large amount of speculative activity going on in the real estate markets. The issue is where.

Like the Internet Bubble of 1998-2000, the real estate speculation is concentrated in certain markets—Las Vegas being the most visible, but also Phoenix, Austin, and anything near water, on either coast.

The best example of this tale of two markets comes from one reader, who tells of how lousy the housing market appears to be in her home area of suburban St. Louis—with “New Price” (real estate-eze for "Lower") signs sprouting up outside stale homes for sale…

Meanwhile, on the Carolina coast, a piece of land she purchased two years ago went up something less than 50% the first year…and more than doubled in the last twelve months.

There was a time in 1999 and 2000 that you couldn’t pay enough for a money-losing internet stock, and you couldn’t give away a highly profitable monopolistic newspaper stock, because newspapers were part of the “dead-tree press” that was going to be made obsolete by those internet companies.

In fact, one newspaper chain—Central Newspapers—put itself up for sale precisely because the Trustees that controlled the voting shares of the company, had decided the internet represented precisely the threat to the business that was the sole reason the Trust could allow a sale of the company, and Gannett bought it for a huge price.

(Ironically, now that the newspaper stocks have all recovered from those “dead-tree press” fears, the newspapers are in fact being driven slowly out of business by the internet.)

There was a lot of value outside the dot-com “space” in those years, just as there are housing markets unaffected by the speculators crowding the tables at Vegas, Phoenix, Atherton, Charlestown, West Palm and other real estate casinos.

When raw land in a sweltering environment with mosquitoes the size of small dogs goes up 50% in one year and then doubles the next …that is 1999-2000 dot-com blow-off type stuff.

Keep your wits about you even while Time Magazine encourages others lose theirs.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Tuesday, June 14, 2005

The Last, Best Hope For Prosperity, Part II

I’m not going to leave the Time Magazine “Home Sweet Home” story just yet: the feedback is still coming in, and it is interesting.

We have this from the California Association of Realtors: the percentage of San Diego County households able to afford a median-priced home was 10% in April. Statewide, just 17% of California households are able to afford a median-priced house.

And there is this from a downsizing family having trouble selling their house in an enclave of Connecticut: the house is, they are finding, too nicely maintained to be a tear-down, but not up-to-date enough with all the modern conveniences (granite counter-tops, cathedral ceilings, Sub-Zero freezers) that the McMansion Crowd has come to expect.

They’ve had more than twenty lookers and no bids, while, just down the street, poorly built McMansions are going like, well, eToys in 1999.

Finally, a glance at the NASDAQ chart in the months following Time Magazine’s other hair-raising mania-marking cover story (on the dot-com frenzy in September 1999) reminds us that the NASDAQ stood at roughly 2,700 the week Time published “Get Rich.Com” on the front cover…and proceeded to nearly double before peaking out at 5,000 the following spring.

We may yet have a long way to go before the greater fools in the real estate frenzy have gone “all in,” so keep those cards and letters coming!

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Sunday, June 12, 2005

The Last, Best Hope For Prosperity

I bought Time Magazine today for the first time since…probably since 9/11, when I bought every newspaper and magazine available with a cover story on the World Trade Center attacks. The relevance of a weekly “news magazine” these days is, after all, right up there with “Book-of-the-Month” clubs and the Sears Catalogue.

Nevertheless, I bought this new issue of Time Magazine because the front cover is titled “Home Sweet Home” (stamped in large letters, the “S” converted into a Dollar sign) with an illustration showing a man covetously hugging a house. The sub-title reads: “Why we’re going gaga over real estate.”

I bought it, quite simply, because this Time Magazine is as good a “cover story” kind of market-mania, surely-we-are-approaching-a-top indicator as I have ever seen.

Now, careful readers who’ve been asking about the promised follow-up to last Thursday’s piece on internet-jewelry retailer Blue Nile will have to excuse me. As fun as it is to chronicle the bizarre public musings of CEO Patrick Byrne and his company’s failure at pretty much every new venture he touts to Wall Street—the latest being a Blue Nile knockoff—the current issue of Time is both fecund and worth a good look.

So we will get back to Doctor Byrne and his false-rumor-spreading appearance at the Bear Stearns conference, eventually.

It’s just that, when a Time Magazine comes along declaring “Record home prices are inflaming passions—and pocketbooks—as never before,” well, as Willy Loman’s wife said, attention must be paid.

After all, this is still a magazine with a circulation of something like four million, and its sole function in the world is to sell as many copies as possible before they get recycled into cat litter or something else.

Obviously, the editors of Time believe that a feel-good article about the joys of home-ownership—actually, more precisely, about the ability of average people to strike it rich by buying, flipping, or just putting down deposits on as-yet-to-be-built condos—will sell a lot of copies. Making it, of course, red meat to anyone who’s seen more than one cycle on Wall Street.

So let's take a look.

Opening the “Home Sweet Home” cover of this latest Time Magazine, one finds an article titled “America’s House Party” which begins with the Siren Song of all bubbles, whether the South Sea Bubble of the 1700’s or the Internet Bubble of the late 1990’s or the Tulip Bubble of the 1600’s or the Oil & Gas Bubble of 1980: the guy who sees his friends doing it:

“I saw so many friends and colleagues getting rich,” John Williams, a disc jockey from Long Beach, tells the magazine, “I wanted to get rich too.” So Williams is buying houses, fixing them up and, according to the article, “flipping them for a quick profit.”

Furthermore, unlike most of the Housing Bubble stories recently appearing in various newspapers and magazines, this article is a straightforward encomium to the financial rewards of buying, selling, trading or owning a house:

The stock market may be dragging, but home prices are soaring, fueling a national obsession with real estate.

Your house is now your piggy bank.

House gawking is a hobby; remodeling, both entertainment and an investment.

Folks brag about having bought their home in the ‘90s the way they used to brag about having bought Microsoft in the ‘80s.

Real estate isn’t so much about nesting today as it is about nest feathering.

And—I’m not making this up—that’s just in the first two paragraphs.

The article goes on, with the usual Time Magazine-ish snappy quotes from newly-minted tycoons; weirdly all-encompassing-yet-inane statements (“It’s about the giddy tabulation of how many plasma TVs your house’s appreciation could buy and the embarrassment of feeling too poor for your neighborhood as houses around you are torn down for McMansions…”); and, of course, simplified, happy graphics.

However, as in all manias and bubbles, lurking within the happy graphics are some potentially disconcerting statistics, if you really look at the Time Magazine charts.

They show, for example, that the number of second homes purchased in America stayed within a range of 300,000 to 400,000 a year from 1989 to 2002—then suddenly doubled to over 800,000 in 2003 and broke 1 million in 2004. Home equity loans have also spiked, at the same time that rates appear to have bottomed and are moving higher. And in several non-sexy, non-condo, non-second-home-inflated states, mmortgage foreclosure rates have tripled.

But you will not read about all that in the article itself, for Time readers presumably do not want to read about anything except how much fun this house flipping thing is.

There’s a trivia “test,” although it is not designed to test the reader’s knowledge of issues that might have a bearing on whether they are familiar with ARMs and IOs and transaction costs—knowledge that might be useful as they toss their chips into the game.

Rather, it asks things like “Which of these entertainers has sold at least seven homes in the past 10 years?” (Answer: Courteney Cox, although why anybody would care about that is beyond me.)

More interesting than the graphics or the cute quotes, is a look at a single block in a Chicago neighborhood, detailing how the real estate boom has affected seven different houses:

House 1 has a middle aged owner who did a tear-down/rebuild on the house, and is reinvesting the equity in other properties, the profits from which “will put my kids through college.”

House 2 has a long-time owner “using it as a piggy bank,” via home equity loans.

House 3 is an eventual tear-down whose long-time owner hates what has happened in her neighborhood.

House 4 was sold by its previous owner after property taxes rose 1,059% in 10 years.

House 5 is being sold by its long-time owner to support her retirement.

House 6 has been flipped twice in seven years.

House 7 was inherited; the owner did a recent tear-down/rebuild.

Further on, and like the dot-com stories from the late 1990’s, the article is chock-full of real-world people throwing off the shackles of benighted thinking and plowing their worldly savings into housing.

Maybe you’re like Mike Oakley, 43, who has poured $100,000 into redecorating his Chicago house, figuring it is already worth $150,000 more than when he bought it. “Rather than invest in stocks,” Oakley says, “invest money in your home.”

You shouldn’t get the impression that you can make six figures in real estate by snapping your fingers. Just ask Max Kaiser. It once took him a whole hour.

“Buildable land here [in Las Vegas] is running out. We have only one place to go, and that’s up.”

“We might be riding that wave,” he [a General Mills operations manager considering switching to the real estate business] says. “But the wave is there. So I’m going to get on it.”

And it’s not just Young (and-never-seen-a-down-cycle) Turks grabbing for the gold who are being celebrated here; it’s the old-timers, too:

Of course, you don’t need a portfolio of condos to have made a pile. Average homeowners who bought in the ‘90s…are now, like modern-day Clampetts, sitting atop newly discovered gushers of wealth.

As I recall the “Beverly Hillbillies,” the kids were morons and Granny was a lunatic. The only smart one in the bunch was Jed Clampett, a cagey old redneck, and he had wisely sold his “newly discovered gusher of wealth” and put the money in the Jed the right to drive poor Mr. Drysdale insane.

Of course, nobody here in Time-land is doing anything of the sort, except a few renters, as the article notes in a brief piece called “The (Surprising) Case For Renting” appended to the end of the eight-page “America’s House Party.”

Yet buried within the “Case For Renting” is a cautionary paragraph containing the seeds of what will, I expect, mark the germination of the seed containing the eventual reversal in the Housing Bubble:

The Choes aren’t alone in finding value in the rental market. With so many people buying homes in the past few years, landlords in certain frothy markets, like San Diego, Miami, Las Vegas and Washington, have gone begging. Not a few are collecting less rent than they are paying in mortgage expense. Their bet is that in the end, rising values will make up for their losses.

They “will make up for their losses,” of course, because, as we have been told by a Las Vegas player earlier in the article, “We have only one place to go, and that’s up.”

Anybody who reads this article—and I mean anybody, whether they are the last remaining Communist still farming onions on a collective outside Vladivostok, or a jet-setting, highly-leveraged real estate mogul who pretends to be worth more than he is, like Donald Trump—will feel that internal sense of failure, jealousy and greed that they, too, are missing out on something more.

Gushers of wealth…nest feathering…piggy banks…getting on the wave…only one place to go, and that’s up....

It’s all here in Time Magazine, available on your newsstand today: The Case for Owning Real Estate in America.

You have to excuse homeowners for getting a little giddy. When they look at the rest of the economy, they see little else to be excited about. Employment has picked up, but wages haven’t [not true: just last week it was reported that wages rose 6.3% last quarter, the largest first-quarter increase in years]. Inflation has risen from the grave. The stock market is crawling to get back to where it was five years ago [also not true: most stocks are higher than they were five years ago]. Savings accounts throw off barely enough interest to feed a parking meter [also not true: short rates have tripled in a year].

So people see their homes as their last, best hope for prosperity—as not just houses but also lifeboats.

Compelling, is it not?

Very nearly as compelling as a previous Time cover story on a similarly widespread investment mania that also, according to many, looked like the “last, best hope for prosperity.”

You may recall that Time Magazine cover story. It was published in the fall of 1999—September 27th, to be precise. It was titled:

Get Rich.Com: Secrets of the New Silicon Valley.”

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, June 10, 2005

Intolerance Finds Its Voice

“They all behave the same, and they all look the same.”

With that sentence, Democratic firebrand and Party Chairman Howard Dean labeled the entire Republican Party—and, by definition, his own Democratic Party as well—according to today’s New York Times. In this, The World According To Howard, the political party to which I belong is “pretty much a white, Christian party.”

Well, he’s got me—Republican, white and Christian—although I’m not sure if I’m precisely the kind of “Christian” Howard Dean is talking about.

There is, you see, a very broad spectrum of Christians—ranging from Catholics to Episcopalians, Presbyterians, Methodists, Lutherans, Baptists, Congregationalists and Unitarians, with probably a few in between that I left out.

Catholics, of course, have the most rigorous and dogmatic faith; Unitarians, on the other hand, pretty much agree that some kind of God probably exists, more or less, somewhere in the universe, now and then, most likely. (I was best man in a Unitarian wedding: it was all very laid-back.)

Even within Christian doctrines, there are sub-spectrums: Northern Baptists—the people who came over with Roger Williams and settled Rhode Island—share a faith and a lack-of-organizational-structure remarkably similar to Congregationalists, of which I am one. In fact, during the summer I attend a small Baptist Church in Rhode Island, and except for the large baptistery (a Jacuzzi-like tub) built into the wall behind the altar, you wouldn’t know the difference between a Northern Baptist and a Congregationalist church service.

Southern Baptists, on the other hand, are most likely the kind of “Christians” Howard Dean has in mind with his “white, Christian,” label—and apparently Howard doesn’t like their kind.

Whether we Republicans are Baptist, Congregationalist or Episcopalian, one thing is clear in The World According To Howard: “Republicans are not very friendly to different kinds of people.”

Dean’s brand of weirdly intolerant liberalism struck me as particularly interesting this morning, having attended a fundraiser last night for a local elderly care center with which I am involved.

This was an old elementary school converted into a welcoming center that helps care for a relatively small number of elderly people during the day, while their children are at work. They come from families that can not afford home nursing or do not want their parents in nursing homes. The facility generates a great amount of local support within our community, precisely because it works, and thus has touched many lives.

I sat at a table with a couple who are good friends of mine who happen to be a member of the Political Party that is “pretty much a white, Christian party,” according to Howard Dean. Except they somehow missed the indoctrination seminar, because they are, in fact, Irish Catholics—not the Southern Baptists of Howard’s stereotype.

Furthermore, across the table from us was another long-time friend with whom I served on the board of a local senior housing commission a few years ago. She and her husband are both Democrats, and, as it turns out, white—somehow crossing Howard’s color line. I am not sure of their religion—they share an Irish Catholic surname, but, of course, she may in fact be a Southern Baptist or possibly Jewish by birth.

Gosh, just thinking about the whole thing the way Howard Dean thinks about things, I’m not sure how it is possible that the six of us—Republicans, Democrats, Catholic, Congregationalist and possibly Jewish—even bothered sitting together, given all the differences we have.

It’s a wonder we even attended the same function.

Just thinking about it makes me ponder whether I should stop being friendly to Manny, my friend, who happens to be non-white, and, therefore, "different." On the other hand, Manny is a Republican, so he is one of "our kind," according to Howard.

Maybe I should straighten out the whole mess by informing Manny that he signed up for the wrong political party after his boat trip across the Florida Straits, Manny being both non-white and Republican. Also my pal Art—who is both Jewish and Republican.

Or, perhaps, in the interests of his new brand of intolerant liberalism, Howard Dean can come to my town and explain to all of us why it is we shouldn’t live together and work together and give time to a local elderly care facility together, given all our differences.

Then we could be functioning about as well as Washington, D.C.

Jeff Matthews
I Am Not Making This Up

Thursday, June 09, 2005

No Slowdown Yet

Yesterday’s panic-selling in Google—in response to a report that internet search pricing was weakening—may or may not be rational, given the fairly high altitude Google’s stock has achieved in recent weeks.

However, there is no weakness in internet search pricing that at least one large internet word buyer, online jewelry retailer Blue Nile, is seeing.

And Blue Nile should know better than most, because it spends about a third of its online advertising on search.

I saw Mark Vadon, the founder and CEO of Blue Nile here in New York today, and for what it is worth, I think he runs a nice, consistent business. Every time I see the company, I want to buy the stock—although the valuation always holds me back.

The business is a bit like Price Club meets Tiffany: sell the product at a significant discount to retail, collect the money the next day from the credit card company, and pay the vendors 45 days later.

Negative working capital with 23% gross margins and no stores: not bad.

Tomorrow we will explore other aspects of online jewelry retailing, with a different slant, as we return to the antics of someone whose “Build Your Own Jewelry” business ought not to cause Blue Nile to lose any sleep at all.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, June 08, 2005

9 Blocks, 3 Observations

Walking the nine blocks between Grand Central Station and the Four Seasons Hotel to see some companies, I made three observations, and for what they are worth--you paid nothing to read them--here they are.

First, I witnessed an as-close-to-bodily-injury-as-an-accident-gets-without-actual-death-or-dismemberment, when a woman in a hurry to get to her desk in a high-rise office building tried to cross 52nd Street in front of a cab. She barely made it unscathed, thanks to quick breaking by the cabbie. It was entirely her fault: for some bizarre reason the cab was neither traveling above the speed of sound or running a red light when she made her move.

Observation #1: Sometimes we risk an awful lot for a very little.

Second, there is the sad phenomenon of office-workers-who-stand-in-front-of-office-buildings-smoking-and-looking-generally-pathetic. They are almost always in pairs: the better to chat while they smoke, so they don't appear to be standing on the sidewalk doing nothing but smoking. And there is no glamour attached to what they are doing--they are not ripping power chords on stage at Madison Square Garden; they are not sitting around a campfire reliving the day's roundup; they are not hanging out in a French cafe.

I don't know about you, but all I can think of when I see these clumps of people is "I will be paying your medical bills when you are dying."

Observation #2: Frequently we risk future pain for near-term pleasure.

Finally, I am writing this while drinking coffee at Starbucks, which has created an entire ecosystem for people who drink coffee. There is now food, there is now wireless, and there are tables to meet and conduct business. When Starbucks came public, a lot of people--including me--snorted that it was just a coffee shop. But a lot of people--especially me--were wrong. Starbucks has probably added more value to the American white-collar-worker's daily experience than any service company in its time.

Observation #3: Sometimes we--especially me--are so smart we miss great long term investment opportunities even while we are exposed to them every single day.

Jeff Matthews
I Am Not Making This Up

Tuesday, June 07, 2005

Anybody Used Lotus 1-2-3 Lately?

Today's New York Post--which despite its lowly pedigree does in fact have a must-read business section that occasionally scoops even the Giants of Journalism (mostly in matters of corporate takeovers)--reports today that certain U.S. newspaper chains are planning to go head-to-head, or, at least, toe-to-toe, with Google.

That's right: as Google moves into local search (if you haven't tried Google for local search, you should, because its mapping product is so superior to Mapquest...put it this way: Google Maps is to Mapquest as broadband is to dial-up internet access) the newspapers are getting worried about losing their local advertising base to the Google monster.

So what's the newspapers' solution?

Their "solution," according to the Post, is to opt out of Google Adsense and keep their local ads "in-house."

So when you do a Google search for lunch delivery in Greenwich, Connecticut, you would no longer, as I interpret this, find "The Plaza Diner" in Greenwich because the Plaza Diner would be advertising in the Greenwich paper, which would not be part of Google Adsense.

So you'll get all the other diners delivering lunch to businesses in Greenwich, Connecticut that use Adsense.

This reminds me of the early days of Microsoft Windows, when the boys at Lotus Development Corp (makers of the Lotus 1-2-3 spreadsheet program--remember that, kids?) decided to fight Microsoft's shift from a DOS operating system to a Windows operating system.

Which, it turned out, was the functional equivalent of a 98-pound Little League batter digging his cleats into the dirt, crowding the plate, and daring Roger Clemens to throw the high, hard stuff.

Microsoft obliged--as would Clemens if given the chance--and Lotus was carried out on a stretcher, into the waiting arms of IBM.

Anybody used Lotus 1-2-3 lately?

Will the newspapers' plan work?

Not bloody likely.

Jeff Matthews
I Am Not Making This Up

Monday, June 06, 2005

Whipping Inflation Now?

Remember Gerald Ford's "Whip Inflation Now" campaign?

If you don't, no matter. It was a lame attempt by a lame-duck President to encourage Americans to defeat inflation during the highly inflationary 1970's.

Precisely how Americans were supposed to do this was not clear, and the plan failed, overwhelmed by Market Forces.

Speaking of Market Forces, my morning research is awash with inflationary reports, ranging from the rebound in crude oil prices and a surge in heating oil prices to the fact that the airline industry is running at its fullest capacity in years--crude oil prices notwithstanding--while cement shortages have "spread to most U.S. regions" (according to the Wall Street Journal)--crude oil prices notwithstanding.

And demand is so strong--crude oil prices, again, notwithstanding--that the average hotel room-rates are expected to be up 4.3% this year, to an all-time record $89.97.

Somebody remind me again why the 10 year is trading below 4%--crude oil, of course, notwithstanding?

Jeff Matthews
I Am Not Making This Up

Sunday, June 05, 2005

One Foot Over The Edge, Or...What If Gifford Miller Ran Exxon?

Well so much for our “Southern New England Summer Job Index.”

Despite the fact that Tommy Goodwin no longer has to bag groceries at the Stop & Shop in Westerly, Rhode Island—he got a job waiting on tables at a good restaurant, and who knows what might happen when they seat me at one of his tables (Tommy was my youngest daughter’s first boyfriend)—Friday's jobs number was the worst in two years.

I guess oil prices do matter, after all.

(We’ve been told by economists and talking heads and front cover stories in Forbes that rising oil prices don’t matter like they used to, because the economy is so much more energy-efficient than it used to be. Which must be why people drive Hummers that get, literally, 9 miles per gallon—because there’s so much energy left over from all the efficiency going around these days.)

Speaking of oil and energy, there was important, and bad, news Friday from the other side of the world, where half of our newly found oil has been coming from.

Russian Czar—er, President—Vladimir Putin stole—er, purchased—another asset for the State of Vladimir, having “ordered” the owners of Izvestia (the Russian equivalent to the Washington Post), to sell a controlling piece of that newspaper to Gazprom.

Gazprom happens to be the Russia state gas monopoly, which happens to also own NTV, a television channel that was known for going after Putin’s administration...until Gazprom happened to buy NTV and install nicer reporters.

So don’t expect much groundbreaking journalism from Izvestia any more.

And don’t expect much new oil from Russia, either. Because the really bad news from Friday was this: Russian oil production is stagnating thanks to the Kremlin’s heavy-handed takeover of Yukos (you recall the sometimes-deleted scene in The Godfather where the Godfather’s button-man slaps around the casino owner and chases him out of the building?—that’s about the way the Kremlin took over Yukos).

Yukos is Russia’s largest oil producer.

Now, try to imagine what a large oil company run by, say, the New York City Council might look like.

More specifically, try to imagine Gifford Miller—the slick-haired, perpetual New York Mayoral Candidate and, in his spare time, Speaker of the New York City Council-who-has-never-held-a-real-job-but-he-sings-on-the-campaign-trail—running America’s largest oil company, which would be Exxon.

For starters, every Exxon station in America would immediately have fifteen relatives of Al Sharpton, Fernando Ferrer and young Gif himself on the payroll, if not actually pumping gas.

And good luck getting your heating oil delivered on time.

Visualize, for a minute, budget meetings with Gif, Ferny and Al deciding what to do with Exxon's $40 billion of cash flow…(think Homer Simpson dreaming of beer and drooling here)…

Then, move them to a smoke-filled room on the other side of the world; change their accents; give them all sharkskin suits, guns and heavy Russian mafia connections…and you now have an idea of who is running the largest oil producer in the Union of Decidedly Un-Socialist Vladimir and His Friends and Family.

Any wonder why Russian oil production is stagnating?

One Russian who sees the writing—and the higher oil prices—on the wall, is Andrei Illarionov, who told reporters (according to the Wall Street Journal) "it's not possible yet to assess the scale of the damage" caused by the Yukos takeover: "We are on the edge and we've already put one foot over.”

Illarionov is not a Russian dissident who just got out of a Siberian prison camp: he is the Kremlin’s own “Economic Advisor.” (If Vegas is making odds on Illarionov’s life expectancy, I will take the under.)

Now, let’s look at some actual numbers, to see what the problem might be.

Thanks to the unleashing of the Soviet oil industry from the days when People Like Gifford Miller controlled the means of production, Russian oil output rose 50% from 6 million barrels-a-day in 1999 to 9 million barrels-a-day in 2004—a 3 million barrel-a-day increase.

Almost 7 of those 9 million barrels-a-day are exported. (Only Saudi Arabia exports more oil—between 8 and 9 million barrels-a-day—than Vladimir & Friends.)

World oil demand is running at 84 million barrels-a-day, up about 6 million barrels-a-day since 1999.

Therefore, Russia alone has satisfied half the total increase in world oil demand since 1999.

If that extra source of oil goes away—and Russian oil output has been flat for eight months in a row, for the first time since 1999—the world is looking at a very large mismatch in supply versus demand some time in the future.

The Oil Crisis of 200X awaits us, in my view, its precise date yet to be determined—weak jobs number on Friday or not.

So enjoy your Hummers while they’re not yet outlawed.

And keep an eye on the future political career of Gifford Miller, whose campaign slogan could be, “At Least He’s Not Running Exxon.”

Jeff Matthews
I Am Not Making This Up

Thursday, June 02, 2005

The Southern New England Summer Jobs Index

During yesterday's panic buying of longer-dated treasuries, with 10 year yields plunging to levels forseen only by truly smart guys like Bill Gross, I called a bond-trader-friend to ask what was going on.

"Guys are throwing in the towel," he screamed over the din. "And Friday's jobs report is probably going to [insert-filthy-bond-trader-language-here]."

He may be right about the throwing-in-the-towel stuff, but I don't see how the jobs report is going to [insert-filthy-bond-trader-language-here].

If the ready availablity of summer jobs in southern New England for my daughters and their teenage friends is any indicator, jobs are all around us. Every teenage boy that darkens my door these days--and there are far too many of them for my taste, but that's another discussion--has already lined up a job. Girls too.

And they're not working at places-of-last-resort, like Mike's Deli, where stacking firewood and putting together a hundred and fifty copies of the multi-sectioned New York Times on Sunday mornings drives teenagers to college. For the most part, they're getting good-paying waiter and waitressing jobs.

Maybe this has no bearing on anything, but in years past, when things were tight all over, it was a lot tougher for the kids to find work.

(One summer, Tommy Goodwin ended up bagging groceries in the Stop & Shop, which was great because it allowed me to torture him mercilessly pretty much every Saturday morning. You can get a kid in a lot of trouble at a grocery store. Served him right for making our Friday and Saturday nights miserable.)

But what about the rest of the country? What's the summer job index like out there?

Perhaps your own anecdotal evidence will tell us something about whether Friday's jobs report is going to be as [insert-filthy-bond-trader-language-here] bad as the bond market expects.

Jeff Matthews
I Am Not Making This Up

Wednesday, June 01, 2005

Even Armageddonists Need An Office

Now that Steve Roach, Morgan Stanley’s Chief Economist, has jumped on the collapsing-long-bond-yield train, I feel safe in highlighting an investment idea whose success depends, in part, on Roach being wrong.

According to my Bloomberg, “the likelihood of a China-led slowing of Asia” has caused Roach to join PIMCO bond ace Bill Gross in looking for a 3% ten-year bond yield sometime in the future.

Only six months ago Roach was arguing for higher-than-expected rates—the non-intuitive result of an economic “Armageddon” caused by our unsustainable trade deficit leading to a Dollar collapse, forcing the Fed to raise interest rates more than Greenspan would like.

I’m not making up that “Armageddon” quote, by the way. A Boston Herald reporter got a copy of Roach’s presentation to Boston money managers last November, which was a lot more bearish than Roach’s public research: Roach told the group he saw a 60% “muddle through for a while and delay the eventual Armageddon” scenario, and a 30% chance at recession.

Roach gave it only 10% odds that we get through the trade-deficit, budget-deficit, consumer-savings-deficit, and listenable-new-music-deficit without either a recession or an eventual “Armageddon.”

So, if Roach is right, you probably don’t want to buy shares of Steelcase, the world’s largest office furniture manufacturer, based in the office furniture capital of the world, Grand Rapids, Michigan.

Indeed, if Roach is right, Steelcase—founded in 1912, IPO’d in 1998—is not going to be selling a whole lot of anything, because what it sells is the cubicles made fun of in Dilbert as well as the desks, chairs and fancy-shmancy conference tables from which Chief Economists like Roach make their morning calls to brokers around the world, warning of economic Armageddon.

(The brokers, of course, have been too busy flipping real estate on the Upper West Side and St. John’s Island to pay much attention to Roach.)

If Roach is right, in fact, you probably want to join the crowd of inside owners of Steelcase—all those Grand Rapids heirs to the company fortune—selling their stock in six-figure blocks every time it hits $14.

But, on the other hand, if Roach is wrong, Steelcase could be a nice, low-risk investment in a muddle-through world. We will explore its merits later this week.

For the record, I started in this business working at one of the big wire houses—not Morgan Stanley, but pretty much the same idea.

In addition to our equity research department, where shlubs like me toiled over the nitty-gritty of the actual companies which, to paraphrase Jimmy Stewart in It’s A Wonderful Life, did most of the building and growing and hiring and firing in this world, we had Big Picture Guys who thought Great Thoughts About The World without paying much attention to what it was all our companies were actually doing.

Those Big Picture Guys included a Chief Economist and a Chief Strategist and their staffs. They never agreed about much, and their forecasts didn’t particularly make a difference as far as I could tell.

But they put out a lot of interesting statistics.

On the other hand, I have immense respect for Bill Gross. Unlike Big Picture Guys, who get paid for making forecasts that don’t particularly matter, Gross manages money, which makes all the difference in the world.

Not only does Gross manage money, but he manages billions, successfully. And not only has he been doing it for decades, he tells you exactly what he’s doing and why.

And most of the time, as far as I can tell, he’s proven right.

Which is why the totally contrarian 3% bond yield call by Bill Gross is so appealing. But now that one of the Big Picture Guys has joined him, I have to admit, I feel a little better buying a muddle-through company like Steelcase.

Details to come.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.