Wednesday, August 31, 2005

Hurricane Katrina’s Sobering Math

Typically, car tanks are about one-quarter full. If buyers start keeping car tanks three-quarters full, the added demand would quickly drain the entire system of gasoline supplies.—Today’s WSJ

Shortly after I got my driver’s license—this is ancient history—an event occurred across the globe that severely altered world economies but made my own myopic world a little brighter.

This was the Arab Oil Embargo, which quickly triggered long lines at those gasoline stations fortunate enough to get their share of supply.

What made my own myopic world a little brighter was the fact that, being a teenager with a new driver’s license, and having the endless spare time that teenage boys seem to have, my job was to find the gas stations with the gasoline, and fill up the wagon or the sedan—whichever was running low.

That meant, ironically, lots of driving around after school, and, then, lots of time sitting in a car listening to WNEW-FM, the New York City radio station that used to play actual music based on the actual whim of the disk jockey [see previous discussions of the inevitability of satellite radio in earlier posts]—neither a bad thing from my teenage point of view.

Having a father who worked for a Big Oil Company—the target of choice for Politicians With No Good Ideas of Their Own as well as Angry Consumers Who Never Conserved in Their Lives—I understood that the problem with the Arab Oil Embargo was not so much the embargo itself, but the consumer reaction to that embargo.

Consumers, fearing a shortage, reacted by hoarding gasoline. That, in and of itself, created the shortage of gasoline that otherwise would have been no true shortage at all, as I heard night after night while my father hurled invectives at Geraldo Rivera, then a cub TV reporter, who would show film of oil tankers waiting off the New York Coast “for prices to go up.”

“They’re waiting to unload, you moron!” my father would yell at the TV. It did no good, of course—this was in the pre-blogging days, when the Mainstream Media could say pretty much whatever it wanted without being corrected.

In time, the hoarding mentality dissipated and supplies became plentiful as demand responded to higher prices by going down, and soon my temporary job disappeared, as did Geraldo’s.

Yet today’s Wall Street Journal coverage of the aftermath of Hurricane Katrina took me back to that summer, and, I think, offers a sobering analysis of the situation we face today, in light of the tragedy—both human and economic—left behind in her wake:

If the U.S. auto fleet of 220 million vehicles went up to three-quarters of a tank—or, say, 10 gallons more—it would be an additional 2.2 billion gallons of demand.

Any figure with a “billion” in it sounds large, and in comparison to available inventory of gasoline, 2.2 billion is very large...

Gasoline inventories were 195 million barrels on Aug. 19, and diesel an additional 77 million barrels, according to the latest government data, or a total of 8.19 billion gallons [of gasoline] and 3.23 billion gallons [of diesel], respectively.

Of the 8.19 billion gallons of gasoline in inventory, much of that is not available—being part of the normal stock throughout the supply chain—refinery holding tanks, pipelines, bulk plants, barges and service station tanks.

Consequently, should the American consumer decide to top off the old Hummer, the supply chain could get strained very quickly.

Let’s hope the oil industry gets those refineries back up and running quickly. I guarantee the so-called villains at Big Oil will do everything humanly possible to get it done.

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, August 30, 2005

They Get Paid For This, Part I

Teradyne upgraded to Neutral at BofA; tgt raised to $15.16 (16.62)

Thus reads a headline coming across my “” this morning.

“” is an excellent, subscription-based online service providing news behind stock movements, and during the pre-market hours it is chock-full of these types of upgrades and downgrades from Wall Street’s Finest.

What that headline means is this: the semiconductor equipment analyst at Bank of America has upgraded his rating on Teradyne, a solid, old-line company specializing in high-end test equipment, probably from “Sell” or “Underweight,” to “Neutral.”

Furthermore, the analyst has raised his target on the stock price to $15.16 a share, compared with last night’s closing price of $16.62.

For those of you rubbing your eyes at this, let me assure you of two things:

1. The “target price” is precisely $15.16. Not $15.15 or $15.14. It’s $15.16.

2. The “target price” on the stock is in fact 10% below last night’s closing price, and yet the stock is rated “Neutral.”

Now let me assure you that nobody I know pays any attention to either the price target or the “Neutral” rating. And, yet, they exist. So how could a Wall Street analyst come up with a “$15.16” price target, anyway?

Well, first the analyst finds some artificial multiple, such as the S&P price-to-earnings ratio or the average semiconductor price-to-book ratio or a peak-cycle-price-to-sales ratio.

Then his assistant plugs a bunch of numbers into their Teradyne model, runs them out five years, and starts multiplying earnings or book values or peak sales ratios times the various outcomes, and blends these into a meaningless “price target.”

As for why the analyst is “Neutral” towards a stock he expects will decline 10%, a quick look at the Teradyne chart reveals the stock is up about 50% from its May lows, and the analyst is probably getting tired of having a “Sell” or “Underweight” rating on a stock that keeps going up.

Merely by going to “Neutral” the analyst has reduced the number of hostile, “why are you so negative?” calls from any number of influential Teradyne shareholders—not only to himself and his assistant, but to his sales people, traders and investment bankers.

Plus, it is almost September, and in just a couple of weeks Bank of America will have its growth conference, and it will be much more comfortable for the analyst to introduce the company’s speakers at the conference if he is able to say “Teradyne is a Neutral-rated stock” as opposed to “Teradyne is a Sell-rated stock” in front of 500 clients who own Teradyne.

Don’t get me wrong: I am not being harsh or critical of the Bank of America analyst, whoever he is. Being an “analyst” on the sell-side is more of a marketing gig than a stock-picking gig, and has been since I was there in 1980. What I described here is simply how it really works, when you cut through all the spreadsheets and disclaimers.

But tomorrow we will look at a more egregious type of behavior from Wall Street’s Finest—the kind that results in a well-paid analyst being off by almost 100% on his “free cash flow” analysis of a money-losing company that has experienced a reduction in its cash balance, net of debt, from $170 million to almost zero in the space of nine months.

Analysts really do get paid for this kind of thing.

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, August 29, 2005

The Million Angry-Ex-Day-Trader-Turned-Condo-Flipper March

Aug. 19—It's a sign of the times: Jim Eggleston, owner of Sacramento's biggest residential “For Sale” sign installer, predicts this will be his busiest week in 21 years in business. He's had to hire an extra worker and buy a new delivery truck since his crew planted a one-day record of 225 signs on Monday.

Sacramento is not a household name on the East Coast.

Unlike San Francisco and San Jose, it has not had a song written for it—at least not that I’ve ever heard—and if it did, the song would probably have been a Johnny Cash/Folsom Prison Blues/“I shot a man’s leg off just because he was bothering me and now I hear the lonesome Sacramento whistle outside my prison window” type of thing.

And, in fact, Folsom Prison happens to be right outside Sacramento, about 20 miles east along Route 50.

Sacramento itself lies 90 miles east of San Francisco, in the agriculture-rich Central Valley of California, on the road to Lake Tahoe, Reno, Salt Lake City and beyond. It is, for some reason, the oldest incorporated city in the state of California, and the State Capital to boot.

“There are whole lot of houses going up for sale,” says Eggleston, who promises next-day installation when a real estate broker orders a new sign. “The number of 'For Sale' signs we're removing keeps going down relative to the number we're putting up.”

Sacramento is also the home of McClatchy Newspapers—publisher of the Sacramento Bee, the source of this article—and one of the fastest growing metropolitan regions in the nation.

And while Sacramento is not a Speculative Housing Bubble-type market of the Las Vegas/Phoenix stripe, it’s close—having appeared alongside the San Diego, Los Angeles, Riverside, San Francisco and San Jose “Metropolitan Statistical Areas” in a listing of least-affordable U.S. housing markets earlier this year.

If this Sacramento Bee article is accurate, however, that region may be getting a little more affordable in the near term:

His [Jim Eggleston, the ‘For Sale’ sign guy] experience is just one more signal that the Sacramento region's housing market continues to cool off, as inventories rise, price reductions become rampant and homes stay on the market longer, particularly those in the $400,000-and-up price range.

In July, the monthly inventory of resale homes for sale in Sacramento, Placer, El Dorado and Yolo counties combined shot up to 7,263—the highest for any month since September 1998.

In other words, the number of Sacramento area homes for resale in July was the highest since September 1998, just before the Asian crisis hit the California economy.

And it appears that inventory actually increased in August:

As of Thursday morning [August 18], the inventory had risen another 26 percent to 9,141 homes, reports TrendGraphix, a local data firm affiliated with Lyon Real Estate of Sacramento.

"The inventory is ramping up and we're now seeing a changing market—the bell has tolled," said Michael Lyon, head of TrendGraphix and Lyon Real Estate.

Does Sacramento matter? Is it a canary in a coal mine? Is the Speculative Housing Bubble doomed to burst in a hail of fireworks?

Will angry ex-day-traders-turned-condo-flippers march on Washington to bemoan their top-ticking yet another market—The Million Angry-Ex-Day-Trader-Turned-Condo-Flipper March?

Beats me.

But I know this: human beings take comfort in the safety of numbers—and they are taking comfort, right now, in the safety of numbers of friends and family and neighbors and distant relations who are making money in the market…the housing market.

On Saturday night a proud father was regaling our table at dinner about his daughter who, to his amazement, had created a business fixing up and flipping houses out in Phoenix. “The first couple of houses, the banks needed our signature,” he said. “But now they don’t!”

Everyone at the table nodded in approval, and one lady said, “That’s the wonderful thing about children…they have no fear.”

Fifteen years ago, however, when the Resolution Trust Corporation was selling off bad real estate owned by failed savings and loans, there was plenty of fear. The average American considered buying real estate too risky. Proud fathers didn’t brag about their young daughters flipping houses—chances are Dad was already holding the bag on a condo he bought during the late-1980’s boom.

Besides, Dad couldn’t have gotten the financing anyway, given the state of the Savings and Loan industry.

But today there is no fear. Lots of headlines, lots of worried journalists and a few economists crying ‘wolf’—but among the young men and women taking out the interest-only mortgages, there is no fear.

And in at least one hot region of the country—Sacramento—inventory is rising and the market is “changing.” According to one real estate professional there, the bell has already tolled.

Too bad Johnny Cash is no longer around to write about it.

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, August 25, 2005

Instability Adds Up

With protests that virtually halted oil production in this country now quelled, Ecuador's government took grim stock Tuesday of a week's worth of damage that unsettled the oil markets, and began the demanding task of getting production levels back to normal.

The threat of more protests has only added to more uncertainty in this country, whose $30-billion-a-year economy depends on oil for 40 percent of export earnings and a third of tax revenue.

Oil companies have long complained about rampant corruption, the propensity of the Energy Ministry to alter contracts, and chronic political instability. Three presidents have been ousted in the last eight years.

"This is an extremely dysfunctional place," an executive of a foreign company said.—New York Times, August 24.

So who cares about Ecuador?

It is, after all, only the fifth-largest oil producer in Latin America, behind Venezuela, Brazil, Argentina and Columbia.

Total production from pristine jungle lands occupied by natives who've been treated about as fairly as native Americans back in the 1800’s—while meaningful enough to Ecuador to cause government instability and political protests—amounts to all of half a million barrels a day.

That’s barely a drop in the 84 million barrel a day world oil habit.

And while Ecuador does send half its production to the refinery complexes of the United States, Ecuadorian light sweet crude amounts to only about 2% of our total crude oil imports.

The reason to care is that it’s not just inside Ecuador that this battle of “with, without” (to quote Pink Floyd) is taking place.

There’s Nigeria (10% of U.S. crude oil imports), which is run by a “former military ruler” who was about as “freely elected” as Saddam Hussein back in his glory days of winning 99.9% of the Iraqi vote; along with a whole lot of corrupt government officials each with their hand in the till.

There’s Iraq (5% of U.S. crude oil imports), where things aren’t exactly settled yet.

And then there’s Venezuela (11% of U.S. crude oil imports), which is run by a certifiable Castro-style socialist and a whole lot more corrupt government officials than even Nigeria can come up with.

In July, for example, Venezuela “tax auditors” raided Chevron offices in Maracaibo, seizing boxes of records “to build a case that Chevron and other energy companies owe Venezuela $3 billion in back taxes,” according to Bloomberg. “The raid is part of President Hugo Chavez’s push to squeeze more money out of foreign oil companies…”

Add them all up—Venezuela, Nigeria, Iraq and Ecuador—and you’ll find that more than 25% of daily U.S. oil imports come from countries which are, as the man said, “extremely disfunctional.”

And I’m not even counting Mexico (15% of U.S. crude oil imports), whose corruption and bureaucracy have stifled the state-run oil company’s exploration efforts to the point where Mexico is now an importer of natural gas from the United States.

For those of you not familiar with the history of U.S. energy relations with Mexico and our dependence on that country’s rich offshore fields for our oil and gas needs…well, let’s just say that this development is about as shocking as if we learned that an OPEC member country (OPEC stands for “Organization of Petroleum Exporting Countries”) such as Indonesia had become a net importer of oil.

Oh, wait. I forgot. Indonesia has become a net importer of oil.

Instability adds up. Let’s hope the math doesn’t get out of hand.

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, August 23, 2005

Trickle-Down Inflation

“Every vendor that delivers to my stores, their fuel charges are going up and they’re passing the costs along to us.”—Glen Rega, local supermarket owner, in ‘The Trickle-Down Costs of Higher Oil’ from the New York Times, August 21.

The price of oil is trickling down into the real world, and making itself felt to consumers and retailers and distributors alike in ways apparently not contemplated by the various price indices.

In a brief but information-packed story in the Connecticut section of the Sunday New York Times, real people who run real businesses talked about the impact of rising energy costs—some being borne by the business and some being passed on to the consumer.

And some appearing in the strangest places.

Mr. Rega said he just received notice of a price increase from his linen company, which cleans the aprons and smocks used by deli workers and cashiers.

Too bad that linen company can’t fly the smocks and aprons to China or India to get them cleaned.

But it's not just linens. It seems that a very large segment of the economy is not able to offset the cost squeeze by packing up and moving to Guangdong Province or Bangalore.

Rick Crays, for example, owns a flower shop in Fairfield and is “getting ready to make an adjustment” to cover the cost of delivering flowers (as many as 60 each day). The adjustment Rick is contemplating amounts to a 10 percent hike in the delivery charge.

Marty McCarthy, a pizza store owner, doesn’t have Rick's delivery cost problem, because Marty's pizza drivers pay for their own gas (how’s that for trickle-down inflation!).

However, the story notes:

[McCarthy] does have to deal with the rising costs of the ingredients, all of which are dropped off by truck.

The reporter also talked to movers (the cost of diesel fuel) and home builders (the price of asphalt shingles) now raising prices to cover the rising cost of just doing their job every day.

Larry Buck, manager of Feinsod Hardware…feels the pinch of higher fuel costs every time he looks out the door to the store and sees, on the sidewalk, a garbage-can shed for sale. The wholesale price on it went up $27 recently, an increase of more than 10 percent…

Sounds like the “trickle-down” cost of energy has become a flood.

Jeff Matthews
I Am Not Making This Up

Saturday, August 20, 2005

My name is MR John Wale Balogun, from The Republic of Schlemeil ...

My name is MR John Wale Balogun the eldest son of Formal Inspector General of the Nigerian Police Force (N.P.F) Mr.Tafa BalogunI am contacting you in a benevolent spirit; utmost confidence and trust to enable us provide a solution to a money transfer of $22M that is presently putting my entire family into great disarray.

Thus begins an email I recently received in my Gmail account.

It had been, quite correctly, flagged as "Spam" and moved to a separate folder which I had decided to peruse just to see what it was that the folks at Google were not letting through to me.

It is, of course, a variation on the "send money to me so I can recover millions more that are due to me for some ridiculous and entirely incomprehensible reason" type of scam that has been floating around the internet for years.

And which, of course, has been convincing enough to that portion of the population of internet users which, on Official Government Census forms checks the box marked "Knucklehead," to keep doing.

I could have deleted it and moved on, but there was something so bizarre and so amusing that I couldn't stop reading--funky grammar, typos and all...

You may be quite surprised at my sudden contact to you but do not despair, I got your contact from a business site on the internet and following the information I gathered about you, I was convinced that you could be of Assistance to me.

Ah--well, that settles that! This was not a mass mailing to 800 billion email addresses: it was addressed to me alone. Quite the honor.

However, I was not "surprised" by the "sudden contact," nor did I "despair." Rather, I marveled at the notion that not only would somebody send this kind of email, but somebody else would actually still be reading it by this point...

So, I decided to contact you at once due to the urgency required for us to immediately transfer the said funds out of the country. During the time my father was in the government with the Nigerian Police Force (N.P.F} as the police Inspector General, he was able to involve himself in several contracts and business transaction and deals that yield him several millions of United State Dollars.

You'd think this Nigerian connection would start making the average reader nervous.

Nigeria is, after all, one of the most corrupt counties in the world--last year only Haiti and Bangladesh were more corrupt, according to one study. If you're going to scam somebody, why would you pretend to be from Nigeria?

Why not just invent a country--"Moronia," say, or "The Republic of Schlemeil"?

The prominent amongst the deals was money that emanated from funds set aside for the importation of Arms and Security Gadgets to boost the Nigerian Police Force, funds set to embark on oversea training of some young Nigerian Police officers to boost there strength in combating crimes in the Nigerian territory, if you are conversant with world news, you would understand better.

Yes, that's what I want to get involved in: money that's been laundered from the importation of guns into the third-most-corrupt country in the world!

"Hey, Hon, get the checkbook out. A guy name John Wale Balogun from The Republic of Schlemeil needs some cash. That new condo we have our eye on in Vegas can wait--in a few weeks we'll be able to buy ten new condos in Vegas!"

Jeff Matthews
I Am Not Making This Up

Thursday, August 18, 2005

The Goldman Gurus Do It Again

Goldman ups U.S. long-term oil forecast to $60—Reuters.

One of the top news stories of the morning seems to be word that the Goldman Sachs oil gurus have raised their long-term U.S. price forecast for next year to $68 a barrel, up from $55, and determined that oil prices will stay above $60 for the next five years.

Crude oil prices are, of course, trading up in Europe on the Goldman call, the first rise in four days.

Back in March, readers will recall, Goldman did much the same thing, calling for “a ‘super spike’ period” for oil and noting that “Resilient demand has caused us to revise up our super-spike range to $50-$105 per bbl…” (See The Goldman Gurus: Two Years Too Late, April 1.)

That "super-spike" forecast came after Goldman had for years maintained an entirely consensus view of oil prices (in January, strategist Abbey Joseph Cohen had told Barron’s Roundtable “we’re pricing $28 a barrel oil into Goldman earnings estimates”) despite the fact that oil had hit $55 and refused, under any circumstances, to break below $40.

The day after the Goldman Gurus called for “$100 oil,” as the Street interpreted the ridiculously broad $50-$105 “super-spike” target range, oil hit $58 a barrel and then fell for seven straight weeks before touching bottom at $47.

In other words, the Goldman Gurus—in the grand tradition of Wall Street analysts everywhere—threw in the towel at precisely the wrong moment. Anybody who bought crude on their “super-spike” call stood to lose nearly 20% in seven short weeks.

And today we have, I believe, a similar situation.

Oil prices stubbornly refused to do anything else but keep rising since the May 20th post-Goldman “super-spike” bottom—up 30% from that low—and now appear to be at a high-end-of-the-range level. Thus, to me, Goldman’s newer, higher forecast looks once again to be marking a near-term peak.

I still believe the world is running short of oil; that oil companies need to spend far more on new exploration and development and far less on buying back their own shares than they’ve been doing; and that the remarkable complacency exhibited by most economists (until quite recently) towards the imbalance between oil supply and oil demand has been misplaced.

But when the Goldman Gurus make another headline-grabbing and largely irrelevant oil forecast after a 30% run, it’s more than likely that we’re in for another short-term correction.

This time the Goldman Gurus look to be about two months too late.

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, August 16, 2005

Target-Envy and Inflation in Our Time

Wal-Mart’s earnings call just ended, and, as usual, it contained an interesting—although too brief—snapshot of the world’s economies and some insight into the rising cost of doing business at the world’s largest retailer.

In the U.S., “summer did arrive” after an unusually cool and wet spring dampened sales. Germany is weak, as is the U.K. But China sales were up 20% and operating profit there was above plan and the company sounded very optimistic about new store openings there.

Interestingly enough, Wal-Mart in the U.S. is making an effort to attract more customers in Target’s middle-to-upper economic space, noting a large push into digital televisions. After a year or two of sub-par comp-store sales, Wal-Mart is clearly suffering “Target-envy”—a highly unusual turn of events for long-time retail watchers such as myself.

The culprit appears to be Wal-Mart’s lower-income customer and the toll higher oil prices are taking: energy “impacts an important portion of our customer base,” as the company noted several times on the call.

Energy also (somebody should tell the economists who subtract energy from the various price indices) hurts Wal-Mart itself: total utility costs “were up $100 million in the quarter,” while “the cost to move freight from our distribution centers to our stores” jumped $30 million in the quarter.

Bad for Wal-Mart? Not particularly, given that it’s spread over a quarter-trillion in sales.

But it sure makes things tougher on the little guys.

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, August 15, 2005

“I’m Not a Cokehead” and Other Truths from Patrick Byrne, CEO


I agree that CEO’s who spend time worrying about shorts or obsessing about shorts are fools. And that most of the CEOs who tangle with shorts are crooks...

I believe there’s been a plan since we were in our teens to destroy our stock, drive it down to $6 to $10...

These are the folks I’m going to talk about….Leon Black I’ve put in there just because he’s a well-known financier hedge fund guy. Got nothing to say about him. Sort of putting him in as an example of a -- just somebody in a hedge fund...

Jim Caruthers is an interesting fellow. He’s up at Eastborne Capital, north of San Francisco. Eastborne has an “E” at the end. It’s funny because there’s a fellow holding himself out in a nearby location by the name of Jim Karruthers, with a slightly different spelling, holding himself out as a private investigator from Eastborn Investigations, no “E” at the end. I know that couldn’t be this Jim Caruthers, because that would be a felony for a person to hold himself out as a PI when he’s not. And that PI has a very interesting relationship with a certain lawyer in Detroit who has some very odd practices that maybe we’ll have time to get back to...

Kevin Ingram was a prominent fellow in the late 1990’s in Wall Street. He left Wall Street, started a dot com. I think it was crashing. He got caught attempting to sell Stinger missiles or obtain Stinger missiles for some Pakistani ISI agent, who turned out to be undercover feds. In fact, he agreed to work on obtaining a nuclear trigger for them. So he went to the pen for a few years. He’s out now and he’s basically a gopher for some of these folks...

I finally wrote Herb and I said, “Herb, is this some subtle way of approaching me? It’s okay if it is, but I’m just not into that.” He just seemed obsessed with me. Well, oddly enough, he stopped in February, more or less stopped writing about me. And the same week practically he stopped a blog was created by Jeff Matthews who runs Ram Partners. And in my view, I think the assignment got passed from Herb to Jeff...

And somebody, a politically connected investor with the hedge funds calls up the SEC or the DOJ and says hey, you know, “Listen I was just having breakfast with George and Laura and they sends their regards. And by the way, I know a guy on Wall Street who’s come across something you really need to take a look at.” And so then one of the hedge funds goes in, sends somebody in with this white paper and they try to get an investigation started. That’s how the basic system works...

And they turned that into a white paper that said Byrne is tied up Al-Qaeda and terrorism and money laundering and you ought to look at this guy...

I’ll only talk to a Wall Street Journal reporter with a phone on because they’re such crooks…

Well, something else funny happened. My phone went dead, my phone went dead and a message came up in Spanish that said this has been diverted to some telephone company in Mexico and the line was out...

As this went on I started realizing that there was actually some more orchestration here being provided, by what I’m calling here is the Sith Lord…He’s one of the master criminals from the 1980s, and he’s back in business. But I’m not going to. I’ll just call him the master mind today...

So, in the words of Wayne and Garth, “Squeeze me?”

By the way, Carol Remond has something stuck in her craw about the fact, most people I think understood that when I said “those I took baths with” to mean like my cousins and brothers, whatever, girlfriends. She’s calling around and saying that there’s a, Byrne has a gay bathhouse cabal and that’s where this has been organized. Something about the whole bath reference has steamed Carol. My theory is it’s because she’s French…

I put information down there that I was gay. And…I put information down that I was a coke head. Now my apologies to my gay friends, both within and without, outside the company, I don’t mean to equate the two. I don’t care. I’m a libertarian and I don’t care at all. In fact I don’t give a hoot if anyone thinks I’m gay, but I thought that by keeping, by putting that information down on one channel and putting the coke head information down the other channel, I would then know if it leaked…

On the coke head thing, and by the way, I’ve never, with one exception, I’ve never even seen cocaine in my life so in case you’re wondering, no, I’m not a coke head...

I made something up. I said, “I’m going to Venezuela, I’m going to need some bodyguards.” Well, there’s no way he could really say no. And he’s a fine guy. I mean, I don’t envy him. So I went in to see him and he met me, brought a witness and my guess is he was taping it...

So that’s where we are. You may think I’m nuts…. If you think I’m nuts about all this, just ignore. Just ignore me. Just don’t do anything about it...

I like these guys, they’re sort of guys out of a John Grisham novel, real smart, O’Quinn is a great big strapping Texas cowboy. He sued Texas, he sued big tobacco on behalf of Texas and won $17 billion, pocketed a couple of it himself. And now he just funds lawsuits that he thinks has a social purpose. And we met. It was like two lost brothers meeting because we’ve come from very different directions to the same conclusion...

Why not take it to the authorities? Well, to that I say, “The SEC, come on, look at those, the graph of the Miscreants Ball and tell me the SEC is up to taking something like on. They’re up to going after Martha Stewart on a good day. They’re not up to taking on a web like that. They probably are afraid it might cause volatility.”

Did I stutter? Did I stutter or did I say I was going to take this fight to you? Well now you know what I meant. And lastly, the man I’ve identified here as the Sith Lord of this stuff I just say, you know who you are and I hope that this is worth it, because if the feds catch you again, this time they’re going to bury you under the prison. And I’m going to enjoy helping.

Those are the words of Doctor Patrick M. Byrne, Chairman and CEO of, reprinted straight out of the conference call transcript announcing a lawsuit against short-sellers.

"Squeeze me?" and "Sith Lord" and "Stinger missiles" and all.

For first-time readers, is a money-losing, internet-based enterprise whose stock is currently recommended as a “BUY” by Legg Mason analyst Scott Devitt and W.R. Hambrecht & Co. analyst Craig Bibb.

Nobody can make that up.

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, August 11, 2005

Coming Soon to an Airport Near You?

Airports in Arizona, California, Florida and Nevada recently came within a few days -- and at times within hours -- of running out of jet fuel, according to airline industry officials.

Because of supply bottlenecks, airlines were forced to fly in fuel from other markets and scramble for deliveries by trucks. But these are expensive, short-term fixes that don't address what airline executives consider to be the underlying problem: With passenger traffic rising above levels before Sept. 11, 2001, the nation's aviation business slowly is outgrowing the infrastructure that fuels it...

One of the latest supply snags began around July 20 in Phoenix. The trouble apparently began after Kinder Morgan didn't make a scheduled delivery of jet fuel, at which point carriers began "ferrying" extra fuel to Phoenix from California and Nevada.

The near-shortage in Phoenix gradually spread to airports in Reno, Nev., San Diego and Ontario, Calif. Jet fuel had to be trucked in just to keep the ferrying program to Phoenix alive, executives said.

The crisis was resolved gradually as pipeline deliveries returned to normal and airlines focused on using as little fuel as necessary.—Associated Press

Let me get this straight: of all the stories in the world that make the front page of my online New York Times and my online Wall Street Journal, the fact that jet fuel shortages have forced airlines to fly jet fuel from one airport to another and to use “as little fuel as necessary” somehow doesn’t make the cut?

On the New York Times web site we can, of course, read the latest installment in what Judge Roberts may have written in a letter home from summer camp when he was twelve that might or might not provide a clue about his position on abortion.

I am, of course, making that up—barely. But I am not making up the fact that on the Wall Street Journal site's front page we can read not about the airline industry's jet fuel problem but about how the Chinese government wants Chinese families to use an extra pair of chop sticks when they eat, so as not to contaminate the common food bowl.

Now that is fascinating stuff, and I’m sure it plays into the Journal’s desperate attempt to attract new readers (“Okay, what’s our Chinese angle today…?”)

But when I read of a jet fuel problem that forces airlines to use “as little fuel as necessary,” I wonder just how blind we want to be to what’s causing oil prices to hit $65 a barrel—and ask myself how the editors at those two distinguished bastions of journalism determine that Judge Roberts’ abortion position and China's two-chop-sticks push can overshadow what we may very well look back on as The Energy Crisis of 2005.

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, August 10, 2005

He’s Got Eisner’s Number

"Despite all of the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom, I nonetheless conclude … that Eisner's actions were taken in good faith."

"By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz's hiring in particular, Eisner to a large extent is responsible for the failings … that infected and handicapped the board's decisionmaking abilities."

"Eisner stacked his (and I intentionally write "his" as opposed to "the Company's") board of directors with friends and other acquaintances who .. were certainly more willing to accede to his wishes … than truly independent directors."

—Delaware Chancellory Judge William Chandler III

Well somebody’s got Michael Eisner’s number.

Here’s a judge who tells it exactly like it is—even going so far as to identify the Disney Board of Directors as Michael Eisner’s puppets.

Chandler’s comments need no elucidation from me—I have pointed out Eisner’s vainglorious paranoia in June 8th’s “Summer Reading: ‘Eisner’ Without the ‘D’” and urge all to absorb the gory details of Eisner’s follies in James Stewart’s wonderful “Disney Wars.”

But his comments should be read.

All those in control of our legal system should think so clearly.

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, August 08, 2005

Report from the Midwest

Even here, in the cool, quiet dawn of the northernmost point of Michigan’s Lower Peninsula, major worldwide economic trends make themselves known.

For starters, the daily parade of iron ore ships that first appear on the western horizon heading towards us under the five-mile Mackinac Bridge and then plow inexorably through the narrow channel between Bois Blanc Island and Mackinac Island, are greater in number than I have seen in a decade—and they are always startlingly huge beasts.

Those ships are taking iron ore from mines in Minnesota to steel plants in Hamilton Ontario and the Detroit area—which are having the best years of their lives thanks to booming consumption in China and India.

For another, the woman at the front desk of the hotel—this is a 118 year old hotel in the heart of the Midwest—is from Bulgaria. So is the kid in the coffee shop, and so is the girl who serves coffee at breakfast.

Before they arrived this year, the only seasonal staff was the local kids from the area and the Jamaican men and women who have been handling the dining room for years. Turns out, the Bulgarians responded to a jobs fair and came over here to work.

That’s globalization.

One more economic trend: inflation, or at least whatever it is you call price increases which the bond bulls wants to pretend don’t exist.

The ferry to the island—diesel fuel costs, you know; the hotel itself—being fully occupied and consuming millions of BTUs of electricity for running the building and gas for cooking the food; and even the local fudge-makers who churn out cubic yards of the thick, fattening stuff—which requires that pesky, ever-present and highly costly thing that the government and the bond buyers deduct from the various inflation indicators as if it doesn't matter...also known as “energy.”

They’ve all raised prices.

Let the bond market beware.

Jeff Matthews
I Am Not Making This Up

Friday, August 05, 2005

Playing The Spot Market…For Houses

“With buyer appetite so healthy, approximately one-third of our communities now have backlogs stretching out twelve months. Therefore, in a number of communities, we've chosen to hold off taking new home sale contracts rather than lock in sales prices today for deliveries more than a year away. Instead of selling out communities too quickly, we've chosen to ration our supply to maximize profit.”

So said Robert Toll, CEO of the red-hot high-end homebuilder with his name on the door, in the company’s press release announcing yet another huge quarter yesterday.

Toll Brothers, in other words, is playing the spot market.

This move could have interesting consequences down the road, should the red-hot housing market ever blow a gasket.

Back in the prime days of the last energy boom (1979-1981) the oil service companies faced a similar situation: too much demand for their services from oil companies eager to drill as many wells as possible as quickly as possible, and too little capacity.

Solution? They raised prices—and the oil companies happily paid up.

As background, the term “oil service company” actually encompasses a wide range of offerings, from low value-added, anybody-not-too-hung-over-to-drive-a-truck-can-do-this services such as putting down portable mats over swamps so equipment can reach a drilling site in the bayou, to high value-added, don’t-try-this-at-home stuff like building floating offshore rigs the size of a large office building.

When the oil bubble burst—and burst it did, suddenly and with no helpful warning from Alan Greenspan or CNBC talking heads—the oil service industry hit the wall in pretty much a sequential order, from low value-added services with day-to-day contracts that dried up overnight, to the high value-added equipment with long-term contracts that took years to finish.

If you were an anybody-not-too-hung-over-to-drive-a-truck-can-do-this road-builder like Newpark Resources, it was “See ya!”

If you were a smart, well-run, big-rig operator like Sedco, you had a few years to work off your backlog before the order book vanished and you had to shut down the yards.

By holding off on new home contracts in certain areas—in the hopes of getting higher prices down the road—Toll Brothers is no longer just “a homebuilder.” It is now also a speculator, making bets that prices will be higher next month, next quarter, and next year.

And since the reality that building a house is of the anybody-not-too-hung-over-to-drive-a-truck-can-do-this type of business, Toll runs the risk of becoming the Newpark Resources of the next building cycle.

But I’m sure they know what they’re doing. Demand this huge never goes away. Just ask the folks at Newpark.

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, August 04, 2005

Rearranging Deck Chairs

In a huge shake-up of the market, Gannett Co. has agreed to sell the Detroit News to closely held MediaNews Group Inc., and to acquire the larger-circulation Detroit Free Press from Knight Ridder Inc.

With the purchase of the Free Press, Gannett is raising its bet on Detroit's long-term viability as a newspaper market.—Wall Street Journal

While such a shifting of ownership from one un-readable newspaper to another (I spend a week each year in Michigan, and am always struck by how terrible the Detroit papers are) might have been a “huge shake-up” in the old days—i.e. two years ago—today I believe this kind of deal is about as notable as two fence post manufacturers merging.

Take the New York Times, for example—a highly readable newspaper, with very strict editorial controls (I had a piece published on the op-ed page many years ago, and they do not mess around with what goes on the printed page) and reporters around the world pumping out Pulitzer Prize-winning stories.

In the quarter just ended, during the fattest part of a multi-year economic upturn, the Times reported a 1.1% increase in revenue. In the mid-to-late 1990’s—the last period of multi-year economic growth, the company was turning out 6-8% annual revenue increases until the 2001 downturn.

What has changed since the last upturn, of course, is that consumers, advertisers and corporations now have Yahoo, Google and Craig’s List—not to mention Expedia and a lot of other ways of putting stuff out there—to reach end-users, without spending money and time sticking a classified ad or a full-page color ad or a fat, coupon-loaded insert into newspapers that lose thousands of aging customers each and every day, through no fault of their own.

It’s just demographics.

Google’s revenue, for example, grew 110% last quarter; Yahoo’s grew 50%.

Lest you think these are apples-and-oranges comparisons using percentage growth off small bases, well, in dollar terms the comparison is even starker.

The New York Times added about $10 million in revenues (excluding an acquisition) and Gannett added $63 million in revenues last quarter—a total of $73 million.

Google, on the other hand, added $685 million in revenues and Yahoo added $420 million—a total of about $1.1 billion.

Hmm…let’s see…$73 million growth in newspaper revenue versus $1.1 billion growth in internet revenue…hmmmm.

So, if the big news in newspapers today is that Gannett swapped one doomed newspaper—fully loaded with union employees, aging plant and a dying customer base—for another…well, I guess it’s more fun than watching that big iceberg dead ahead.

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, August 03, 2005

Great Quarter, Guys!

Well, I was wrong.

Overstock reported, and they missed the Street’s operating income number by 50%, coming in at a $6 million loss versus the Street's $4 million-plus forecast.

In true Patrick Byrne fashion, of course, Overstock masked the bad news by including a one-time $4 million gain in the reported number—making no mention of the gain in the press release discussion of income items, as far as I can see.

Rather than include the $4 million one-time gain in the headlines or the introductory paragraph, it is buried at the bottom of Patrick’s list of “mud-pies and cream-pies,” which never seem to go stale at Overstock.

They just keep baking more.

The CEO's letter is, of course, full of the usual technology-heavy nonsense Byrne likes to employ when he wants to keep attention away from the business itself, which is slowing and losing money.

But if you read carefully you will see that “Project Propeller” has twirled away and the rest of the fanciful dreams and yearnings of the CEO can be summed up in the rather pathetic note that the Teradata implementation was so quick, “I believe we have been invited to speak at a conference on just this theme.”

Well, Patrick, you're certainly not being invited to speak at a conference on how to run a great company.

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, August 02, 2005

The Supercalifragilisticexpialidocious Marketing Experiment and Other “One-Time Items”

It’s the tale-end of earnings season, at least for companies on a calendar fiscal year, and for the most part earnings have been terrific—despite a very mixed reaction among the stocks themselves, especially in the technology sector.

For example, Apple, IBM, Amazon and eBay had nothing particularly spectacular to say—and yet their stocks took off based on little more than a relief that earnings had not disappointed and that guidance was, as Wall Street’s Finest like to say, “upbeat.”

Yahoo, Google and Microsoft, on the other had, reported no great tragedies—yet guidance was not judged “upbeat” enough, making the Street suddenly “downbeat” about their prospects and, therefore, sellers of those stocks.

So it is that these and other well-run companies have reported, and what is left are the stragglers—and one in particular that we monitor rather closely which will report tomorrow (following a one-week delay reportedly owing to unforeseen complications from a headquarters move and technology investments and an acquisition).

The company, of course, is, and in the spirit of this blog, which is to look at facts rather than engage in speculation, I thought it worthwhile to examine Wall Street’s earnings expectations for the company and provide my own preview.

For starters, Wall Street’s Finest are all predicting a fairly tight range of revenues right around $150 million, which their computers all seem to translate into a net loss in the equally tight 22c to 24c per share range.

One independent outlier expects far lower sales and somewhat lower earnings than the Street so we will ignore him for purposes of assessing "the consensus." The most bullish "consensus" analyst, as I can see, is Craig Bibb, who assumed coverage at WR Hambrecht in April, a few months after the previous analyst, Bill Lennan, cut his earnings and revenue numbers and took his price target from $85 to $60, helping spark a decline in the stock.

Bibb took over for Lennan with a buy rating and a decidedly cheery note in which he compared CEO Patrick Byrne to Olympic Ski Champion Bode Miller. I am not making that up.

Bibb further ingratiated himself with Overstock by writing that “Management is taking a dynamic approach to finding the efficient frontier of growth and profitability…,” precisely the kind of Wall Street lingo that makes sense only if you start your day sniffing glue.

But back to our earnings preview: Wall Street expects to report a $4 million-plus operating loss in the second quarter of 2005—about a million worse than the $3.4 million operating loss reported in the first quarter of 2005.

This is based on a modest sequential decline in revenues, a pick-up in gross margins, and far higher selling, marketing, administrative and technology costs than in Q1.

To the naïve observer, this losing-money forecast makes no sense, because in his first quarter 2005 letter to investors Patrick Byrne identified $7.9 million worth of supposedly one-time items that reduced first quarter earnings, without which the company would have been handsomely profitable.

(Byrne had done the same thing in the fourth quarter of 2004, identifying $6.5 million of one-time items that supposedly hurt reported earnings.)

The items enumerated by Byrne this time included a $1.2 million shipping promotion; a $600,000 blown electronics deal; a $1.2 million bonus accrual; $1.8 million to market an auction and jewelry site; $500,000 on technology consultants; and a $2.6 million “binomial marketing experiment” which apparently, like Frankenstein’s Monster, went horribly wrong before it could be killed.

(For the record, even though nobody listening to that conference call had the faintest idea what constituted a “binomial marketing experiment,” Wall Street’s Finest dutifully wrote down “binomial marketing experiment” in their word processors and sprinkled the howler throughout their research reports later that afternoon and in subsequent documents, without ever actually explaining what a “binomial marketing experiment” might be.

I believe Patrick Byrne could have called it a “Supercalifragilisticexpialidocious marketing experiment,” and Wall Street’s Finest would have dutifully written “Supercalifragilisticexpialidocious marketing experiment” in their reports without a second thought.)

So, back to the first quarter numbers, and assuming Byrne was being accurate with those numbers on the conference call—keep in mind this is a man who tosses around numbers on conference calls like bond traders toss around $50 bills at Scores—Overstock would have reported $3.5 million worth of positive operating earnings in the first quarter.

And, therefore, without the $2.6 million Supercalifragilisticexpialidocious marketing experiment, the $1.2 million shipping promotion, the $1.2 million bonus accrual, the $600,000 blown electronics deal, the $500,000 on consultants and the $1.8 million on auction and jewelry sites that are stumbling out of the gate, Overstock should be able to make money in the second quarter—even assuming higher depreciation, higher rent and higher technology costs.

Unless, of course, Doctor Byrne was not being precisely, um, accurate with the $7.9 million worth of so-called one-time costs.

For help on this, I turned to Overstock’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (usually referred to as the MDA) in Overstock’s first quarter 10Q filing with the SEC, where companies normally enumerate those items which had significant impacts on earnings.

And in so doing I couldn’t find even one of the $7.9 million worth of items highlighted by Doctor Byrne.

For the record, the MDA is the place in a 10Q and 10K where companies are expected to discuss the guts of their business and report important factors behind changes in sales, margins and expenses.

Here’s what the SEC expects in the MDA:

The Commission has long recognized the need for a narrative explanation of the financial statements, because numerical presentations and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company.

The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.

For the record, Amazon’s latest-quarter MDA runs for 28 pages, with great detail on all manner of sales and expense items.

Google’s first-quarter 2005 MDA runs 36 pages.’s Q1 MDA runs for a little over 2 pages, offering a bare-bones description of the company and the components of its income statement, and that’s about it. Pull it off the web site yourself: you will find that in place of what normally constitutes the bulk of the MDA is something called an “Executive Commentary” which, for some reason, is excluded from the MDA with the following disclaimer:

This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business elsewhere herein.

Yet even here, only the $2.6 million marketing experiment was mentioned, and none of the other cost items Byrne had highlighted.

You’d expect a company that missed a quarter thanks mainly to $7.9 million worth of one-offs would explain this somewhere.

And so we await tomorrow’s report, which will no doubt include a wonderfully descriptive letter by the ever-erudite Doctor Byrne, explaining things to Wall Street’s Finest, and a conference call with Wall Street's Finest asking acute and piercing questions of Doctor Byrne.

In the meantime, anybody with an informed opinion on the nature of those Supercalifragilisticexpialidocious “one-time” costs that seem to crop up time after time in the shareholder letters and conference call discussions is welcome to enlighten our readers here

Tomorrow we will see whether Wall Street’s Finest—who expect a loss; or the naive reader of Overstock’s first quarter earnings report—who might expect a profit if for nothing else than the non-recurrence of $7.9 million worth of one-time items, is right.

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.