Friday, September 30, 2005

Is This The Sign of a Top?


Forget Chasing The Energy-Fund Money Train


Thus reads the most interesting headline I’ve seen in today’s Wall Street Journal.

Pros Warn It Might Be Too Late To Capture Big Gains in a Sector That Is Known for High Volatility

By now, with oil defying both gravity and the expectation of most forecasters that oil prices would settle down post-hurricanes, you might expect the press to be getting excited about the stocks.

Instead, the same press that has been calling the housing bubble (as I did in this blog on August 5th, 2005) for 2 years, is saying “stay away.”


For people paying hefty prices at the pump these days, it might be tempting to drive straight home -- burning off a bit of that precious gasoline -- and try to make money investing in energy-focused mutual funds.

Don't.

Meanwhile, Venezuela is threatening to seize oil fields and banish foreign oil companies from their rich fields over tax and contract issues.

And Russian oil producer Lukoil just joined India and the China National Petroleum Company in buying up foreign oil producing capacity, making a $2 billion bid for a Kazakhstan producer.

The day after the Kremlin bought yet another major Russian oil producer.

All in all, it doesn’t smell like a top in energy to me.


Jeff Matthews
I Am Not Making This Up



© 2005 Jeff Matthews

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, September 28, 2005

My Second-to-Last Piece on Overstock.com: “The Best CIO in America”

'

Check out this whopper:

The IT staff's ability to make fixes now exceeds the number of bugs being detected, a sign that the system is nearing stability.

Information Week, Sept. 26, 2005


You might guess—and rightly so—that the “IT staff” referred to in the above quote is that of Overstock.com, seeing as how Overstock is one of the few internet retailers I am aware of that is still having problems getting a handle on this whole IT thing.

The problems arose as Overstock was preparing to go live with Oracle financial and order-management apps designed to reduce the load of the company's proprietary shopping engine.

Information Week, Sept. 26, 2005

And you might guess that I am prepared to make plenty of sarcastic references to Overstock’s CEO Patrick Byrne and how he said the following in his second quarter 2004 shareholder letter:

Shawn Schwegman (VP, Technology) remains a star. This year Shawn has assembled a team of mature, experienced Database Administrators (DBA's). Our network has become quite stable… By the end of July, I think I will be able to say, "I could not be happier with the IT team nor the level of understanding between it and its internal customers."

And you might guess I am prepared to show how different a picture from that soft-hued-Monet-style-watercolor of Overstock’s IT system is painted by this week’s InformationWeek article:

Before the Oracle deployment, Overstock relied on its homegrown system to route orders to the appropriate distribution facility. But Schwegman says it wasn't good at detecting and correcting order and delivery errors, a problem that required a great deal of manual oversight and one the growing company could no longer live with.

Information Week, Sept. 26, 2005

And you might expect even more sarcastic comments about the August 3, 2005 earnings call (not quite two months ago), when Byrne said this to investors:

But this is the architecture and we're putting the finishing touches on it now, and it's cost us $35 million. But I think it has been brilliant, I think our CIO, Shawn Schwegman, has done - is the best CIO in America. I think he's done a fantastic job over two years taking us from really a rinky dink arrangement into this architecture. And what's beautiful about it is not only heavy duty, it's so scalable. It's scalable at each layer.

And you might expect me to question why, regarding the very same IT system described as “brilliant” and “scalable” and “beautiful” on August 3, we read in the September 26 InformationWeek that:

The IT staff's ability to make fixes now exceeds the number of bugs being detected, a sign that the system is nearing stability.


But I’ve had it with this one. There’s nothing more to say.

Oh, I know I've said the same thing once before...and kept writing. But in my own defense, that was before Byrne kicked it up a notch, what with Sith Lords and Master Manipulators and all that Conspiracy nonsense, followed by the Friday-after-the-close oops-we-had-a-five-week-$30 million-inventory-upload-problem press release.


I think Schwegman's frank admissions, in contrast to Byrne's well documented public pronouncements on the "brilliant" IT strategy at Overstock.com, tell any observor everything that observor needs to know.

And whoever doesn't know it by now doesn't want to know, and never will...which is, of course, their right. After all, as Paul Simon wrote, "a man hears what he wants to hear and disregards the rest."

So, you have just read my second to last piece on Overstock.com.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

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, September 27, 2005

“The Rig Devastation is Quite Significant”


The best energy industry research firm I know is Petrie Parkman, run by oil research veteran Tom Petrie—a man I interviewed with 25 years ago when I was first looking for work on Wall Street, although he wouldn’t remember me from the Sith Lord.

And from their morning research notes comes the following comment regarding Rowan Companies, a large operator of jack-up drilling rigs in the Gulf of Mexico:

Rowan has its own planes and were thus one of the first on the scene to witness the impact. They say that the rig devastation is quite significant and the pilots reported that in an area where they previously would see about 15 jack-ups there were none visible.

"None visible."

Of course, while Rowan was flying planes over the area where there were no rigs “visible,” the stock market had already decided the impact of Hurricane Rita was not too severe, based largely, I gather, on the fact that Fox and CNN TV reporters in rain gear were able to walk around parking lots in Galveston shortly after the storm passed and could see no visible damage to the infrastructure miles out in the Gulf of Mexico.

By the end of yesterday, however, the oil markets had corrected the market’s misinterpretation of the Talking Heads’ somber yet relieved reports, and bid oil prices back up—while natural gas never even bothered to head-fake anybody, and just stayed strong.

Meanwhile, Rowan sees a more significant impact on their business besides the loss of a few of their own rigs, thanks to the apparent disappearance of so many other rigs in that region: drilling rates in the Gulf should “sky rocket,” according to the Petrie Parkman note.

No inflation indeed!


Jeff Matthews
I Am Not Making This Up



© 2005 Jeff Matthews

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, September 26, 2005

“Dismissed for Violations”


Well now we know where Patrick got his affidavits.

The affidavits I'm referring to are the documents Overstock.com CEO Patrick Byrne brandished Joe McCarthy-like during his “Sith Lord” appearance CNBC, claiming proof of a conspiracy between short-sellers and a research firm called Gradient Analytics before reading selective bits from the so-called proof of the so-called conspiracy.

According to today’s New York Post, of the three ex-employees at Gradient who apparently provided the affidavits, two were “dismissed for violations of Gradient’s corporate policy.”

Furthermore, the two worked in “customer-relationship management” at Gradient—which is not exactly the guts of a research shop, where conspiracies of the scale alleged by Byrne might be hatched.

And one of the two “customer-relationship” ex-employees was, according to the Post, fired for “forwarding Gradient’s client list to his personal e-mail account,” and has “filed and lost repeated appeals to claim unemployment benefits.”

Not exactly an Andy Fastow-type eye-witness, if you ask me.

Now that I think of it, when Patrick read from his “Sith Lord” papers on CNBC (I don't know about you, but I kept waiting for him to say he had in his hand the names of 57 communists now working in the State Department), the phrase that jumped out was the qualifier “it appeared,” which was placed before an allegation of conspiracy between the shorts, Gradient and reporter Herb Greenberg.

There was no first-person “and then I did this” eye-witness account from somebody at the epicenter of the so-called conspiracy—the kind of testimony that put Bernie Ebbers in jail. At least as far as I could tell. And today's article explains why.

Stay tuned, and read the Post.


Jeff Matthews
I Am Not Making This Up



© 2005 Jeff Matthews
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, September 25, 2005

Weekend Edition: A Warbler Takes to Manhattan


Walking towards the skating rink at Rockefeller Center on this quiet Sunday morning, I noticed an unusual flurry of birds in the plantings along the water fountains lining the middle of the walkway connecting Fifth Avenue and John D. Rockefeller's masterpiece of urban renewal.

The birds were sparrows—the scavengers of the city—and nothing particularly nice to look at, except they were having such a great time feeding off the unusual tall grasses and birch trees planted by the pools of water.

Looking closer, I found the sparrows were busy picking seeds that had budded on the tips of the ripe grass, and they seemed extremely jazzed about the whole experience, most likely because it wasn’t at all like the half-empty, ketchup-smeared McDonald’s bag they usually pick apart for their lunch.

This time it was the real deal.

But there was an odd sound—a non-sparrow sound—and an odder flutter among the plants, and I noticed that one of the birds was not a plain old brownish speckled dust-grimed New York City sparrow, but a female Yellowthroat…tiny, delicate and olive-brown with a dull yellow throat.

She was doing the usual warbler thing—hopping around among the lower branches of the birch tree and the clumps of grass, chirping and acting generally like a 7 year old boy on a sugar high.

Yellowthroats come from as near as Florida and as far as Argentina in the spring to nest and hatch fledglings and hop around the lower branches of trees while they look for insects and seeds to eat...and by now they would have returned south. But this one was clearly enjoying the little ecosystem set up there right in the middle of Manhattan.

It was a nice, if temporary, affirmation that, try as the human race might, we haven’t yet killed off every last vestige of nature.


Jeff Matthews
I Am Not Making This Up



© 2005 Jeff Matthews
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, September 21, 2005

Why We Have an Oil Crisis, Or; Wait 'Til Chuck Schumer Gets a Load of This


Chuck Schumer is, in my opinion, a blow-hard, a media hound and a showboat…pretty much your basic U.S. Senator.

But he does mix it up pretty good whenever he finds a cause that gets him publicity—which is more or less every morning—and here in San Francisco, at the BankAmerica conference, I came across a cause that’s tailor-made for Chuck: it is timely, easy to grasp and begs for righteous indignation.

I call it “Why We Have an Oil Crisis.”

The British Petroleum investor relations person presented yesterday at the BankAmerica conference, and during the breakout session she defended the fact that BP uses a $20 per barrel oil price to “test” its spending projects—i.e. to decide whether to go ahead with drilling for oil.

When reminded that oil currently sells for about three-times that figure, the BP investor relations person vigorously defended this $20 “test” price, noting that BP sees oil trading in a $20 to $35 a barrel range over the long haul.

Since it takes five to seven years to bring a big project on stream, “it is reckless to be investing (based) on (today’s) oil price.”

That is true enough, I suppose…but when asked if $20 a barrel was not a little on the low side of recklessness, she noted that at the $20 per barrel “test” price, BP has enough exploration and production projects “to grow production 5% per year.”

And since world oil production is growing “at half” that rate—i.e. around 2.5%—then “we are doing more than our fair share.”

Now, this is where the numbers get easy to follow, even for a U.S. Senator.

How much of its cash flow is BP actually spending to explore for and produce oil this year, you might wonder?

“$9.5 to $10 billion,” according to the investor relations person.

And how much of its cash flow is BP “returning to shareholders” in the form of dividends and share repurchase, you might wonder?

$17 billion.

Therefore, British So-Called Petroleum is giving back to its shareholders 70% more of the cash flow it makes thanks to $65 oil prices than it is spending to find new sources of oil supply.

Perhaps they should change the company's name to “British Dividends & Share Repurchases.”

Of course, as this blog has noted previously, BP is not alone when it comes to capital allocation weighted to shareholders at the expense of a resource we are rapidly exhausting: ExxonMobil likewise spends more on dividends and share repurchases than on wildcatting, as they used to call it.

Which is why—along with a ridiculously low gasoline tax that Chuck and his colleagues don’t have the guts to increase—we have an oil crisis, Senator.

Go get ‘em.


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.

Good Thing There’s No Inflation


I'll keep this one brief so that even bond traders can focus on it.

CS First Boston analysts today lowered earnings estimates for 20 companies, mostly due to lower margins owing to higher energy prices and higher related materials prices.

And the firm's analysts raised estimates for three companies, due entirely to higher margins owing to higher energy prices.

Good thing there’s no inflation.


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, September 19, 2005

Is There A Disclosure Issue Here?


On Friday at 4:01 PM, Overstock.com issued the following press release, in bold italics, with commentary from the author of this blog.

Overstock.com Overstocked With Bargains
Friday September 16, 4:01 pm ET

Interesting timing—4:01 Eastern Standard Time on the Friday of September options expiration. Did the facts really not come to light sooner than the market close at 4:00 PM on option expiration day?

Is there a disclosure here?


SALT LAKE CITY, Sept. 16 /PRNewswire-FirstCall/ -- Popular online retailer Overstock.com® (Nasdaq: OSTK - News) today announced a mass upload of new inventory for sale on its website.

Quite a bland way to begin a press release that announces (later in the text) “sharply” slowed sales, “inefficiencies” and “downward pressure on gross margins.”

Is there a disclosure issue here?

The $30 million (retail value) upload of jewelry, apparel, home, electronic and other products far exceeds any single upload in Overstock.com's corporate history (by a large multiple). As always, these products will be priced to move and will sell out on a first-come first-serve basis.


Inventory glitches are, generally speaking, not a good thing for a retailer.

Indeed, just the day before this release, Tad Martin (Overstock’s own SVP of Merchandising) noted on a conference call with investors that “Inventory is not like wine—it does not get better with age.”

Martin made no reference to the $30 million “mass upload” of inventory that would be announced on September 16th, the very next day.

Is there a disclosure issue here?

As previously announced, Overstock.com is completing a massive upgrade to its IT infrastructure. In working through the implementation of these new systems, the company has not loaded new products from its warehouse and fulfillment partners onto the website for nearly five weeks, several weeks longer than the company had anticipated.

On conference calls and in shareholder letters, Overstock CEO Patrick Byrne has given the impression—at least to Wall Street’s Finest, none of whom raised any red flags—that the IT upgrade was largely complete.

But don't take my word for it. This is the way Byrne describes the situation to shareholders in his August 3rd letter to investors:

I believe we have found a healthy balance among the three (growth, infrastructure, and new programs), and am particularly glad that we have super-sized our systems over the last three quarters, as it gives them a quarter to harden before the next holiday wave hits.

No word about the problems that stopped five weeks worth of inventory from being “uploaded.”

Is there a disclosure issue here?

"This upgrade was the equivalent of a heart, lung and kidney transplant," said Patrick Byrne, president of Overstock.com. "The replacement of the core technology infrastructure, which I have discussed at length in my quarterly letters, prevented us from uploading new items to the website for the past five weeks.”

Patrick did indeed discuss “at length” the infrastructure replacement, especially in the second quarter letter. Here’s a sample:

Oracle 10g -- Over the course of May and June, all components with the exception of the B2C shopping site itself rolled from Oracle 9i to 10g running on our new IBM P5's AIX. We expect to do this last piece in August (and will be down for 30-120 minutes some night as we do it).

This transition has been remarkably smooth.

From a “remarkably smooth” transition on August 3rd to a five week inventory “uploading” disruption disclosed on September 16th.

Is there a disclosure issue here?

However, while the operation was going on, our buyers, copywriters and warehouse staff continued to make purchases, prepare postings and stock our warehouse -- which is now stuffed to the gills. This presents our customers with a huge opportunity to find great selection and bargains, but when they're gone they're gone."

Disregarding, for the moment, the question of why "copywriters" and "warehouse staff" are making inventory purchases, the day before this press release—September 15th—Overstock's Tad Martin had the following conversation with Stanford Group analyst Rebecca Jones Kujawa on her conference call with clients:

Rebecca: “What’s going on with the holiday season?”

Tad Martin: “We’re ready for the holidays. We made a decision earlier this year that with the amount of cash we had in the bank and the direction we were heading we’d rather be a little over-inventoried going into the Christmas season than under-inventoried, which all it means is we’re building inventory a little ahead of where we had the previous year. And what that allows us to do is to find some greater marketing opportunities—if the opportunity of a lifetime came in marketing, we’re not gonna be inventory constrained.”

Rebecca: “Is that inventory already up on the web site or are you kind of holding that back…”

Tad Martin: “No, no, no. As much as possible we try and flow our inventories through to the web site at the time [emphasis added]. There’s no reason to hold inventory in your warehouse. Inventory is not like wine—it does not get better with age.”


From "we're building inventory a little ahead of where we had the previous year" and “there's no reason to hold inventory in your warehouse” on September 15th to “our warehouse…is now stuffed to he gills” on September 16th.

From "we try and flow our inventories through to the web site at the time" on September 15th to "the replacement...prevented us from uploading new items to the website for the past five weeks" on September 16th.

Are there disclosure issues here?

"These investments in technology, while incredibly expensive, are providing a foundation for the next five years, and will, I believe, generate huge dividends in customer satisfaction and loyalty. However, by preventing the posting of fresh inventory since early August, this transplant did shock our system."

Let’s consider the public appearances Patrick Byrne made, beginning in “early August” when, according to Byrne, the “transplant” began to “shock” the Overstock inventory system:

On August 3rd, Patrick Byrne holds an 85 minute earnings conference call with investors. He says “we should be able to do somewhere around 1.5 billion or more [sales] next year.”

On August 12th, Patrick Byrne holds a one hour “Sith Lord” conspiracy conference call with investors. He does not discuss revenue or earnings, but does mention Al Qaeda, cocaine, and Wayne and Garth.

On August 12th, Patrick Byrne appears for 15 minutes on CNBC discussing his “naked short-selling” conspiracy theory. In response to a question about Overstock’s profitability, he says “…what you’re gonna see us do is basically double on the top line…”

On August 16th, Patrick Byrne appears for 18 minutes on CNBC to debate his “Sith Lord” conspiracy theory and says “Somehow, in the face of all this poor performance we’ve grown from $2 million to basically a billion [in sales] this year…”

According to Friday’s press release, however, Overstock’s sales slowed “sharply” as a result
of the failure to “upload” inventory starting in “early August.”

Yet even on August 16th Byrne was telling CNBC viewers Overstock was growing to "basically a billion" in sales in 2005.

Is there a disclosure issue here?

"Investors should note that our restricted ability to post fresh inventory slowed sales sharply, a caesura from which we are now rebounding. In addition, the upgrade also caused inefficiencies that, when combined with our extended dollar shipping promotion, has put downward pressure on gross margins this quarter. However, my goal of growing 60% to 100% for the year at break even GAAP, +/- 1%, stands."

Fancy Latin words aside, the fact that “the upgrade also caused inefficiencies” had not, to my knowledge, been previously disclosed—either on the August 3rd call, the August 12th call, the August 12th CNBC appearance, or the August 16th CNBC appearance.

Not even on Tad Martin's September 15th conference call.

One more time: is there a disclosure issue here?


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, September 16, 2005

It's Always Something at Overstocked.com


Well, Patrick has done it again.

With a just-after-the-Friday-close press release headlined "Overstock.com Overstocked With Bargains," CEO Patrick Byrne has come up with another very amusing spin on his company's latest change in fortune, which includes "sharply" slowed sales and "downward pressure on gross margins."

Once again, the CEO who bills himself as "one of the most transparent CEOs" in the world has painted a beautiful face on one dog of an announcement, blaming the whole thing on an IT infrastructure "transplant."

And keeping in style, Patrick uses an elegant, erudite word ("caesura") to suggest his company's latest SNAFU is merely a pause that refreshes...and that everything now is, as they say, up-and-to-the-right.


(Unfortunately, "caesura" is not the correct word, for it implies a pause in a conversation or a break in a line of poetry...and not even Allen Ginsberg's "Howl" would begin to describe Overstock's "caesura.")

Poor word-selection aside, this latest of missives from Overstock.com's "Humble Servant" merely extends the long line of excuses (recall, and I am not making this up, that he mentioned the death of Pope John Paul II after last spring's "caesura") that never admit to an actual problem for which Overstock.com management might bear responsibility.

It's always something, isn't it?

We'll take a closer look at the whole thing on Monday.


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.

The Evil Empire Stirs


We face significant competition from Microsoft… Microsoft recently introduced a new search engine and has announced plans to develop features that make web search a more integrated part of its Windows operating system or other desktop software products. We expect that Microsoft will increasingly use its financial and engineering resources to compete with us.


In addition, advertising and other fees generated from one Google Network member, America Online, Inc…accounted for approximately 12% and 11% of our revenues in 2004 and in the six months ended June 30, 2005…—Google prospectus, 9/9/05.


Demonstrating its growing concern about Google
Inc., Microsoft Corp. has entered talks with Time Warner Inc. about taking a substantial stake in the media giant's America Online unit, said people familiar with the matter.

The conversations have centered on whether AOL would switch to using Microsoft's search engine instead of Google's, these people said, as well as other areas of potential cooperation. AOL and Google shared about $380 million in revenue last year derived from displaying ads on AOL's search results.—Wall Street Journal, 9/16/05.


I apologize up front to those of you who, based on the title of this piece, expected commentary about Sith Lords and Master Puppeteers and other fantasies of a certain CEO who sees conspiracies to ruin his share price where others merely see what they believe to be a lousy business model and poor corporate governance.

The “Evil Empire” referred to in the title is, of course, Microsoft, whose own CEO—the brilliant and irascible and monopoly-spoiled Bill Gates—has decided to target Google after letting two Stanford grads undermine his hold on the hearts and minds of millions of Windows users around the world, and, ultimately, threaten that very monopoly by making the software underlying the search platform irrelevant to the user.

And now we see one thrust of Bill’s attack plan: pick up in a single, quick move the biggest piece of Google’s business—that portion of its revenues generated by AOL users who do Google searches from the AOL web site.

The timing couldn’t be better.

Google just priced its secondary offering of 4-plus million shares at $295 a share, after management road shows that included meetings with some of the biggest funds on the planet and a luncheon at the top of the St. Regis in New York—the main feature of which was co-founder Sergey Brin, young and scary-smart, looking for all the world like a high school sophomore dressed for his first prom in a new and very uncomfortable suit and tie.

For the record, as readers have gleaned, I own shares of Google, because I think the earnings power of the business is much higher than Wall Street thinks. But I could very well be wrong and change my mind in a minute, and I don’t recommend anyone go near the stock.

Why point out a very large potential short-term negative to Google—i.e. the Evil Empire’s courtship of a damaged AOL and the one trump card in its otherwise weak hand?

Well, because it’s right there on the front page of the Wall Street Journal, and because we all knew this day was coming.

In previous posts, I’ve argued that “you can’t under-price free”—meaning that Microsoft’s disadvantage in the search wars is that users don’t pay for search, and, therefore, Microsoft couldn’t undercut Google the way it undercut Borland and Lotus and WordPerfect and Novell and all the dozens of other software companies it destroyed by selling under-priced software subsidized by its desktop operating system monopoly.

But, here, at least, is an example of where Microsoft might be able to simply buy outright more than one-tenth of Google’s current search revenues by cutting a deal at the source—the AOL web site.

I do not know details of the AOL/Google contract, but today’s WSJ reports that “people close to AOL say the company has the option to walk away.”

If I was Bill Gates and had $40 billion of cash in the bank, my “negotiation” with Dick Parsons of Time-Warner (parent company of AOL) would go something like this:


Gates: “We want to buy an equity stake in AOL in return for AOL walking away from Google and giving that business to MSN.”

Parsons: “Okay. We’re willing to sell—”

Gates: “Done.”

Parsons: “I haven’t told you what we’re willing to sell to you, or the price.”

Gates: “Sorry. Hurry up.”

Parsons: “We’re willing to sell 49% of AOL for twenty—”


Gates: “Done.”

Parsons: “I haven’t told you the whole price.”

Gates: “Sorry. Hurry up.”

Parsons: “For twenty-five—”

Gates: “Done.”

Parsons: “I’m not finished. For twenty-five HUNDRED billion—”

Gates: “Here’s the check—fill in the blanks.”

But that’s just me. H
owever this supposed deal works out, if at all, one thing is certain: Darth Vader is looking for blood.

I'm rooting for Luke.


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, September 15, 2005

INTERNET TO NEWSPAPERS: DROP DEAD!


BED, BATH MAY BUY LINENS & THINGS—NO SHEET!
--New York Post, September 15, 2005


I’m going to miss those New York Post and Daily News headline writers.

You see, the August numbers are in, and the newspaper industry is looking increasingly like the “dead-tree press” as it was dismissively dubbed by the Yahoos of the world during the Internet Bubble days.

Total ad revenue among the big three—Gannett, Knight-Ridder and Tribune—ranged from up 1.2% to down 0.6%...during a period of strong economic growth and record consumer spending.

In the old days—i.e. the last economic cycle—ad revenues would have been up 5% or more in this environment.

Most ominous was the collapse in so-called “national” advertising—those ridiculous Microsoft ads, for example, showing office-workers wearing dinosaur heads and muttering about Dilbert-type office-worker concerns such as getting their Power Point slides to the Big Meeting on time—which tanked 5.5% at Tribune and 8.2% at Gannett.

Advertising aside, the other key to a newspaper’s health—circulation—continued its unhealthy trend, from barely flat, to down a couple percent, depending on the paper…about in line with the rate at which readers are dying off.

(Tribune’s circulation revenues were down 8.6%, demonstrating that you can both cut price and lose volume at the same time.)

I do not mean to dance on anybody’s grave. If anything, I root for the newspaper industry because, a) I grew up reading the papers (and remember the Daily News headline, FORD TO NY: DROP DEAD, upon which the title to this piece is based), and b) I have a longstanding investment in one of the smaller, better run newspaper chains.

The paradox is that poor revenue trends aside, the newspaper business is still blessed with huge cash flow margins and low capital needs.

At the end of the day I suspect most of the chains—especially those that are controlled by families such as the New York Times and Dow Jones—will go private…either slowly via share repurchases as management disinvests in the business, or all at once as the families see more value in their heritage than Wall Street’s Finest are willing to give them.

In the meantime, we still need a healthy newspaper industry, if for no other reasons than to keep the headline writers at the New York Post and the Daily News busy.


Jeff Matthews
I Am Not Making This Up



P.S. To "FrmrOSTKGrunt": shoot me an email at the address posted above and we can talk off-line.


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, September 13, 2005

“Scouring the Globe to Find Raw Materials…”


Hands down the most interesting piece of research I’ve come across this morning is a Bear Stearns comment that management of Proctor & Gamble “is scouring the globe to find raw materials” in the wake of rising energy prices and the disruptive impact of Hurricane Katrina.

(While the Bear analyst is lowering P&G estimates all of a penny per share owing to said cost pressures, keep in mind this is a company with 2.5 billion shares outstanding.)

According to the report, P&G management—which I think anybody on Wall Street would rank up there with the best in the world—“has been working for quite a while at insuring an ability to use a variety of input costs [sic]. Nonetheless, we think that the recent announcements by chemical companies that they could be declaring force majeure on key inputs could limit supply and raise costs.”

Somebody ought to tell the bond market what one of the world’s biggest, and best, companies is seeing out in the real world.


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, September 12, 2005

Anybody Remember the Hurricane of '38?


But while rebuilding hurricane-ravaged regions will eventually mean more orders, it's also bringing more immediate supply glitches and rising prices, particularly for petroleum-based raw materials.

Certain manufacturers are building inventory of steel, plastic resins and cardboard boxes and such stockpiling could eventually lead to even higher prices in the near term. The result is an uneven picture, as certain manufacturers gear up to produce more, while also facing negative cost and supply-related fallout from the storm.

—Wall Street Journal, 9/12/05


The bond market’s immediate reaction to Hurricane Katrina was a big sigh of relief.

Not, however, because the human catastrophe of lives lost and homes destroyed might be less than feared—no, that's not what the bond market worries about.

The big sigh of relief came because the only thing the bond market worries about, economic growth, suddenly looked imperiled by the massive structural damage to the country’s infrastructure.

Bonds soared on the short and long end as the bond market decided that by destroying great parts of the Gulf Coast, Katrina would, therefore, cause the Federal Reserve to ease up on its previously relentless program of 25-basis-points-a-meeting-until-it-hurts.

But the bond guys weren't reading their history.

The Hurriance of '38 decimated Long Island and hit a large part of New England with 121 mile an hour steady winds (gusts up to 180 MPH), killed 700 and left 60,000 homeless.

And the rebuilding effort from that hurricane helped start bringing New England out of the worst of the Great Depression (of course, when World War II came along, that recovery turned into a boom).

Katrina was bigger, and the rebuilding efforts will be enormous—already the Federal Budget Deficit is being revised upwards by one-third thanks to Katrina, and companies ranging from Masco to Massey Coal have discussed the highly inflationary impact of Katrina on their own operations.

If I were a bond guy, I’d read today’s Wall Street Journal very carefully before paying up for sub-4% 2 year notes.

And also dust off some history books.


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, September 09, 2005

Eddie to the Rescue

Edward S. Lampert, the billionaire who bought Kmart when it was in bankruptcy and then used it to buy Sears, Roebuck, put himself in charge of creative decision making on Thursday, taking a measure of personal responsibility for lifting two retailers out of a long sales slump.

A person familiar with Mr. Lampert's thinking, who declined to be named because Sears keeps tight control of all disclosures about its business, said the financier believes there is a shortage of talented merchants in the industry. "This is a work in progress," the person said. "It's going to be a bumpy ride." But he noted that Kmart's sales have pulled out of a nosedive under Mr. Lampert and that both chains are also forsaking mere sales growth through discounting.—New York Times

It’s hard to choose where to begin here.

Let’s start with the obvious: Eddie Lampert is one of the all-time great hedge fund managers—in fact, as we have observed in prior discussions of Sears, one of the greatest investors of all time.

Then there’s the other obvious fact: Eddie Lampert has no apparent merchandising skills whatsoever.

And if you want to argue with me about that—well, I suggest you first get yourself to a “Sears Essentials” store and see for yourself how Eddie’s vision of combining the best of Sears’ merchandising with the best of the old K-Mart real estate locations is working out.

I’ve done it, and I can tell you that it’s about as effective as, say, combining US Trust and Charles Schwab.

For starters, the stores all carry bilingual signage—English and Spanish—in one of those corporate money-saving moves that looks good on paper but looks really dumb in a store in rural Putnam Connecticut, with an Hispanic population of zero.

For another, the Lands’ End merchandise is mixed in with all the other Sears apparel brands, further destroying whatever equity value the Lands’ End brand had after the last few years of intensive destruction by the old-line Sears “merchants.”

The list could go on—but suffice it to say that while the store looked clean, thanks to a fresh paint job; and cheery, thanks to new light-bulbs…it uses the same old K-Mart fixtures and the same old K-Mart layout and (I hate to say it because they are the sympton, not the problem) the same old K-Mart employees.

For comparison purposes, the TJ Maxx store right next door not only looked like a real store run by real merchants, but with only half the square footage of the “Sears Essentials” store it was doing more business.

Sears Holdings needs a lot of things—great merchants among them.


And there are plenty of great merchants around—but they work at Abercrombie or Penney or Nordstrom or Williams-Sonoma or Quiksilver…not at hedge funds.


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, September 08, 2005

Is Meg Pulling a Carly?


When Carly Fiorina announced her plan to have Hewlett-Packard—one of the all-time great, if fading, technology franchises—buy commodity PC-maker Compaq Computer for $25 billion shortly before 9/11, she told HP employees in a horribly prescient email that the deal marked “a historic day.”

She was right about that, because in retrospect it marked the beginning of the end for Carly Fiorina as the restorer of HP’s faded luster.

Even worse for Carly is that she was wrong about nearly everything else in her email, including the guts of the problem, as this excerpt makes clear:

Our competitors are going to use every chance they can to discredit it: They'll say we'll lose focus, they'll say we won't be able to execute, they'll say we won't be able to make the tough decisions fast enough.

I believe we will prove them wrong.

[http://news.com.com/2009-1001-272560.html?legacy=cnet]

Four years later, Carly was out.

Now, today, we read that Meg Whitman, the toy company executive who guided eBay up one of the greatest growth paths in world business history (and I mean that sincerely—no sarcasm at all), is making a $2 to 3 billion overture to buy Skype, the Swedish-based internet phone company, from the ex-Kazaa creators who founded it and the VCs who funded it.

According to the online Wall Street Journal story,

…the person familiar with the situation said that eBay is keen on adding services that make it easier for its customers to buy and sell goods online, as it did when it acquired the electronic-payment processing service PayPal in 2002.

Now, to give Whitman her due, PayPal was a homerun deal for eBay. And not just a barely-over-the-glove-of-the-leaping-outfielder type of home run, but a Manny Ramirez, screaming-over-the-light-poll-at-Fenway type of home run.

PayPal not only fit like a glove with eBay’s business of acting as middle-man to online buyers and sellers, but eBay gave PayPal’s payment system instant critical mass that made it an internet standard.

Today PayPal generates one quarter of eBay’s revenues, and Whitman deserves all due credit for the deal.

But Skype?

According to the WSJ story,

EBay's massive and technology-literate user base of 157 million could prove willing adopters for Skype software. And those customers — which are often segmented into niche communities — could use the software to communicate with like-minded enthusiasts. Skype's software has been downloaded 162 million times, and has 52 million users world-wide.

Well, I guess.

But my partner uses Skype and so does my brother-in-law…and while they like it well enough, I run my business on instant-messaging and wireless email. Telephones are used for company conference calls and other, less frequent, human interaction—and I suspect the core eBay user acts the same.

I mean, how many of eBay’s users actually communicate regularly via phone to run the nuts and bolts of their business? How many want to start?

As for the real behind-the-scenes stuff going on here, I don’t know much more than what I’ve read.

I know that Meg tried out for the top job at Disney and backed off after getting mixed signals from the Disney people—probably a very wise move, considering the blood-sucking, Machiavellian DNA of the Walt Disney Company.

So why she wants Skype is beyond me.

I suspect, however, if she gets it by paying $2 to 3 billion for a company with an estimated revenue base (the Skype financials are not public) of $6 to 10 million and no apparent fit to the eBay operating model, then it could mark yet another “historic day” in the annals of technology-related acquisitions.

As Compaq did for Carly.


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, September 06, 2005

Too Expensive…at One-Third the Cost of Water?


“There are going to be questions about what major oil companies are doing with all the resources they’re accumulating…they can’t escape that.”—U.S. Senator Pete Domenici, WSJ


Now the witch-hunt begins.

With gasoline prices rising (a minimum of 50c a gallon in my part of the country) in the seven days since Hurricane Katrina disrupted a tenth of the domestic refining capacity and much of the energy transportation infrastructure, politicians whose previous “fact-finding” missions to that hurricane-prone region of the country had no doubt been limited to touring the newest casino, are doing what they do best: they’re blaming somebody else.

The above-quoted Senator Domenici’s official web site, for the record, has a handy “On The Issues” segment devoted to four topics: Health Care, National Defense, Taxes/Economic Growth, and Water.

Energy—specifically why energy policy in this country has promoted truck traffic at the expense of railroad traffic and protected car companies from including SUVs in automobile mileage standards—is nowhere to be found in Senator Domenici’s Fab Four topics.

But now that gasoline prices are up in his district—a natural occurrence when 10% of refining capacity gets shut down for a week—Senator Domenici is all over this one.

As will be, I’m sure, my own Senior Senator, Chris Dodd—whose Kennedyesque Big Hair looks really terrific on TV when he starts working up his righteous indignation at whatever it is he wants to get on TV for.

Meanwhile, here at the local Starbucks they sell “Ethos” brand bottled water for $1.85 a bottle.


The bottle contains 1.5 pints of water from the Tomhicken Mountain Springs—which happens to be in Pennsylvania, near Pottsville. Cost: $1.23 a pint.

There are 8 pints in a gallon.

So the Starbucks customer is paying about $9.85 a gallon…for water that comes from a self-replenishing spring, gets put into bottles and shipped to the store as is.

Yet that same Starbucks customer is going to complain bitterly to Senators Dodd and Domenici that it now costs $3.25 for a gallon of gasoline that has been shipped via crude oil tanker from depleting oil fields in Saudi Arabia across 3,000 miles of ocean to an offshore tanker port, pumped through pipes to a refinery in the Gulf Coast, refined via an energy-intensive distillation process into a variety of fuels—jet fuel, diesel fuel, kerosene and even asphalt, not to mention three types of gasoline—and then shipped by pipeline to distribution terminals from whence it has been loaded into tank trucks and hauled up an Interstate Highway to a gas station for the Starbucks customer who is complaining about the High Cost of Gasoline to Senators Dodd and Domenici…

…and doesn’t think twice about paying $9.85 for a gallon of water.


Jeff Matthews
I Am Not Making This Up

Monday, September 05, 2005

Riding the Shark


The scene is a coffee shop in coastal Rhode Island, not too far from the University of Rhode Island.

The characters are two men: one, a pot-bellied, middle-aged, academic-looking man with reading glasses perched atop his head and a kind of retro, John Quincy Adams hair style—complete with mutton chop sideburns; the other is a young man in shorts, t-shirt and baseball cap, who uses the word “Dude” incessantly.


The actual unedited dialogue:

John Quincy: You watch Cramer?

Dude: No.

John Quincy: He’s on at night, on television. Stock market show.

Dude: What’s he saying?


John Quincy: Genentech. He thinks Genentech is for everyone.

Dude: Dude, you believe it?

John Quincy: Sure. Cramer was a hedge fund manager…

Dude: Hunh.

John Quincy: That’s like riding on top of a shark and surviving. He knows how they do it.

Dude (Nodding): Dude.


John Quincy: He’s very funny. He’s a nut. He’s VERY good.


***

Understanding fully that this post may become Exhibit A in whatever new Conspiracy Theory is being constructed by Patrick Byrne to attract attention away from his company's poor financial performance, that last line sums up "Jim Cramer's Mad Money" precisely, for me.


Jeff Matthews
I Am Not Making This Up

Friday, September 02, 2005

No Sarcasm and No Conspiracies…Just Some Help Where It’s Needed


The first time I went to a fundraiser for the United Jewish Appeal, my WASP sensibilities were startled by the blunt, straightforward way the members made their pledges.

Instead of writing a figure down on a pledge-card in the quiet of their den, men stood right up at their dinner table in a ballroom filled with their peers and said, “I’m so-and-so and I’m pledging [insert large dollar figure here].”

The bigger the large-dollar-figure pledged, the bigger the applause from the crowd—which, in and of itself triggered ever-larger large-dollar-figures for the UJA coffers. I was both shocked and awed—it was the most effective way of raising money I’d ever seen, and I’d been involved in fundraising for my own church for years.

I looked at bringing that style to the fund-raising efforts of my church, which does things in the normal WASPY privacy-of-your-own-home way, but it never flew.

So I’m going to try it here.

Despite accusations by Business Week that this blog is “sarcastic” and “rambling,” and accusations by at least one apparently hallucination-prone CEO that this blog is much worse, today we have no sarcasm and no conspiracies to offer—just an effort to accomplish something more useful than Hamlet’s “Words, words, words.”

Last night, while looking up a song at Apple’s iTunes Music Store, the site offered the ability to donate to the Red Cross relief efforts on the Gulf Coast in the wake of Hurricane Katrina.

I gave $200 and I admit I gave it feeling guilty that I had not already done something. Then I read up on the relief efforts in general and the Red Cross in particular, as well as its efficiency rating at
http://www.charitynavigator.org.

My own experience with certain charities and non-profits that my church has helped fund over the years is that some do spectacular good with very little money, and some do very little good with spectacular amounts of money. (Jim Rogers’ two “Investment Biker” books covering his round-the-world travels contain hair-raising insights on “relief effort” scams that make church groups here in America feel good yet do nothing for the third-world refugees they intend to aid.)

But the American Red Cross does good work—and millions of Americans urgently need that help right now.

So, for today at least, you’ll read no sarcasm here, no rambling, and nothing about the housing market or the Energy Crisis of 2005.

If you have time to read this blog, then you have time to go the Red Cross web site at http://www.redcross.org/ and click on the “Donate Now” button. It took me maybe two minutes to make another, more substantial, donation just before starting this piece.

An hour ago, that site had generated $27,684,625 through 191,682 individual donors. Moments ago the figures were $28,079,870 and 194,198, which work out to an average of $157 for each of the 2,516 donations that were made in the 45 minutes it took me to write this.

Let’s see if the good readers of this blog can help raise that average donation, right here and now.


And, like the stand-up guys at a UJA fund-raiser, let us know when you’ve done it.


Jeff Matthews
I Am Not Making This Up