Tuesday, March 28, 2006

How to Solve the New Jersey Budget Crisis

Until last year…few had heard of [Allan Moss] or his investment bank, Macquarie Bank Ltd. That’s when Moss, 56, decided to go on a $14 billion acquisition spree.—

Bloomberg LP.

Every cycle has a financial star—the “It” guy whose name is sprinkled throughout serious Wall Street Journal articles and whose picture graces breathless Fortune Magazine cover stories about whatever current finance craze is fattening the bonuses of Wall Street bankers.

Now, Macquarie seems to engineer a new international deal every month—most of them purchases of public utilities…. The plan has helped the bank deliver 14 successive years of record profits….

Frank Quattrone was the “It” guy during the Internet Bubble of the late 1990’s—the most powerful investment banker in Silicon Valley—and only recently made the news for getting both a guilty verdict and a lifetime ban from the securities industry overturned.

Michael Milken was the “It” guy during the Leveraged Buyout Bubble of the late 1980’s—the most powerful junk bond financier of hostile takeovers in history—and has successfully resurrected his reputation through smart business deals and aggressive funding of results-oriented cancer research.

Both Quattrone and Milken had unique insights which they used to exploit market inefficiencies on a scale nobody else had dreamed of doing before. Eventually, of course, everybody else woke up from their nap and decided they wanted a piece of the action—and pretty soon everybody was doing it—sparking asset inflation, irrational behavior and collapse.

Macquarie’s success has also lured much bigger investment banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., into planning their own multibillion-dollar “infrastructure” funds.

What Macquarie figured out was this: it could buy public utilities such as airports, bridges and toll roads, package and resell those assets to Australian asset managers looking to redeploy the cash being accumulated by that country’s far-sighted and highly successful public pension plan, and take out fees along the way.

Most Americans first heard of Macquarie last year, when they led a group which paid $1.83 billion—approximately 40-times revenue—for the 7.8 mile Chicago Skyworks. As Bloomberg quotes an admiring fan of Macquarie:

“Macquarie is usually able to bid more aggressively for assets because they have more sophisticated financing capability.”

More recently, Macquarie won the bidding for a 157-mile toll road in Indiana, paying $3.85 billion for an asset that generated $95.6 million in revenues in the 2005 fiscal year. That’s also 40-times revenue. As Bloomberg’s admiring fan says:

“They finance with debt. I don’t know how they do it, but they’re able to finance at lower cost of capital than other people.”

The impetus behind Macquarie’s willingness to pay 40-times revenue for an asset that could be rendered obsolete by any variety of means—acts of God, acts of State Legislatures, or drivers’ unwillingness to pay tolls when they can drive for free elsewhere—comes from the very brilliant notion that such long-lived assets neatly match the long-lived nature of Australia’s pension liability.

As insights go, that’s a powerful one—and ranks right up there with Mike Milken’s discovery that, contrary to popular perception, junk bonds provided better returns, on average, than non-junk bonds, because the default rate on junk was, on average, lower than generally assumed by bond investors at that time.

Like Milken, Maquarie has revolutionized a source of financing which others now seek to emulate and exploit.

And, like junk bonds, internet stocks, and all financial fads that start off from a logical premise, it will get out of hand.

I am sure the Maquarie folks are as brilliant as their reputation, and that they know what they’re doing. But I’m not convinced that everybody else who wants to get in on the action now, by buying toll roads or airports or bridges or whatever else bankers decide to monetize, knows much more than the simple fact that it is, for the moment, a highly profitable way to leverage up the public infrastructure.

If I had a bridge to sell, I’d sell it right now.

And if I were John Corzine, the ex-banker and new governor of New Jersey dealing with a massive budget problem, I'd be getting the Goldman Sachs bankers working on a deal book for every road in the state.

Suddenly that New Jersey Turnpike is looking mighty valuable.

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, March 27, 2006

Leslie Stahl vs. the Supreme Court

I watched the highly anticipated 60 Minutes segment on hedge funds last night, and my first question is why would anybody in their right mind ever watch 60 Minutes?

The way I grasp the show is this: a bunch of extremely old, infirm, out-of-touch people—all white with the exception of the ridiculous looking, earring-wearing Ed Bradley—pretend to ask tough questions while the camera tries to make them look somewhat younger than Keith Richards.

Is that about it?

And to paraphrase Andy Rooney (who strikes me as not so much a humorist but just a really bitter old guy), I don’t know about you but Leslie Stahl seemed to me so financially illiterate she’d have trouble making a withdrawal from an ATM machine.

Still, the show carries some weight, so I watched. And I did learn something new.

It is, apparently, terribly suspicious behavior when a person arranges a conference call with analysts and then provides those analysts with information, especially when the person arranging the call has a financial stake in the company and hopes to benefit from a movement in the stock.

If this is so—and since Leslie Stahl thinks it’s so, who am I to quibble—then this country is in big trouble.

Because the arranging of conference calls by interested parties with analysts, in order to influence those analysts and the reports they write to clients, is (it seems to me) precisely what all CEOs and CFOs do each time they hold an earnings call with Wall Street analysts.

So if Ms. Stahl is to be believed, all those CEOs and CFOs attempting to influence analyst opinion every quarter are doing something terribly terribly evil.

As is anybody in America who talks to a reporter, hoping to influence a story.

And wouldn’t this apply also to lawyers speaking before the Supreme Court, hoping to influence the outcome of a case?

I just have one question for Ms. Stahl: how is she going do her next story if nobody is supposed to talk to her?

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.

Friday, March 24, 2006

Paradise Found: A Public Service Announcement

Earlier this month, in “Monkeys Over America,” I noted the emergence of a Sheffield, England band called the Arctic Monkeys, and described how their music—urgent, fast and funny—took over our household in a matter of hours.

I saw the Monkeys last night at the Paradise Lounge, on Comm Ave in the heart of Boston University, and I will say right now they are better than the hype.

Without giving too much away here (that’s for a later post) I’ll just say it was the best show I’ve seen since—okay, I’m dating myself here—Bob Marley at the Orpheum Theatre, also in Boston, in 1978.

Since they caught fire in England last year, The Monkeys do not play many clubs like the Paradise. Early in the set the lead singer/songwriter, Alex Turner, touched some hands reaching out to him and said “It’s nice bein’ so close. We haven’t played like this for a while.”

And for good reason: they blew the grime-encrusted roof off the Paradise. Halfway through the second song I said to my 17 year old, “pay attention: you’ll never see them this close again.”

She smiled sadly and shouted back, “I know.”

The Monkeys play Webster Hall in New York City tomorrow night and the Crocodile Café in Seattle next Wednesday.

If you live near either city, and if you like music and if you want to see this generation’s version of The Beatles playing the Cavern Club, go get yourself tickets from whatever scalper you have to. Lift the offer—just get the tickets.

You’ll thank 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, March 22, 2006

50 Million Lines of Trouble

Microsoft Corp. announced a delay in its long-awaited Windows Vista operating system, and people familiar with the matter said the company is planning a major management shake-up in its Windows group.

The Redmond, Wash., software company said it will begin broadly selling a version of Vista for consumers in January, compared to its earlier plan of offering the product in time for the holiday selling season.

—Wall Street Journal

Well, it only lasted about a month.

I’m speaking about the 30 days or so that Microsoft was not everybody’s favorite technology whipping-boy—and it was Google’s turn to find out what happens in America when you disappoint people.

Following its fourth quarter earnings report and right up until last night’s admission by The Evil Empire that the so-called “Vista” consumer operating system would be yet-again delayed, Google had been the former whiz-kid-led outfit everybody wanted to mock.

A week or two after its earnings miss, Google’s CFO made some off-the-cuff remarks that panicked the market; then came the Analyst Day when management recanted those comments; which was followed by the accidental sales guidance release on the web site, not to mention Congressional appearances and Justice Department lawsuits.

The Google-bashing culminated in yesterday’s reaction to Google Finance, the underwhelming knock-off of Yahoo Finance: even Jim Cramer—the man who once declared National Google Day on his show and urged everybody who would listen to buy the stock a hundred and fifty points lower than the current price (and two hundred fifty points below its peak)—dismissed Google Finance on air to the hundreds of thousands of Cramericans to whom his word on Google is, rightly so, the last.

But last night Microsoft disclosed yet another delay in the already-delayed “Vista” operating system launch—and everybody can go back to making fun of Microsoft while Google catches a break.

Last night’s news probably comes as no surprise to anybody in the industry, given the fact that Vista contains 50 million lines of software code and is based on an operating system that’s about as secure as an unlocked Yugo on blocks.

Over a year ago I asked the CEO of a large software company (which had managed to flourish in Microsoft’s shadow despite being viewed as eventual road-kill) about the impact “Vista” would have on his company’s business.

At the time, “Vista”—then known as “Longhorn” for whatever reason—was expected to be the Swiss Army Knife operating system that would finally make his company’s product obsolete.

“It’s not the same Microsoft,” he told me. “They have so much on their plate just trying to deal with virus attacks on their core operating system, it’s hard to get all the new features right.”

He said he still worried about Microsoft, and never counted them out. But, all the same, he felt pretty sure that “Longhorn” (or “Vista” or “Slowpoke” or whatever Microsoft wants to call it) wasn’t going to launch on time—and, when it launched, it wouldn’t run him over.

So far, he’s right.

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, March 20, 2006

Score—Financial Buyers, Five; Strategic Buyers, Nothing

Michaels Stores Inc., the nation's largest arts-and-crafts retailer, is expected to announce that it is exploring "strategic alternatives," a decision that could lead to the sale of the company, which has a $4.61 billion market capitalization, according to people familiar with the matter.

—Wall Street Journal

A small, closely held company with which I am familiar decided to put itself up for sale last year.

The company is a perfectly decent little manufacturer of glass fiber yarn—a sort of poor-man’s Corning. It's had a rocky history, having been in and out of bankruptcy, but management did a good job of turning things around and decided, in today’s vernacular, to “explore strategic alternatives.”

Being small and closely held, however, the company was on nobody’s radar screen—and the Wall Street Journal didn’t even report on the fact that it had put itself up for sale.

Nevertheless, according to the information statement mailed out to shareholders, a total of 105 potential buyers signed confidentiality agreements to look at the financial package.

And of those 105 potential buyers, 15 were “strategic or industry buyers” while 90 were “financial buyers and capital providers.”

(This kind of information is contained in the “Background to Merger” discussion which is always the most interesting part of a merger or takeover information statement. I recommend reading as many as you can get your hands on.)

Back to those 105 “potential buyers” for our little glass fiber company: 21 of them expressed interest in pursuing further negotiations, and out of those 21, 11 actually went into a second round of negotiations, out of which “five potential buyers submitted second-round bids.”

Now, you might expect a small glass fiber yarn manufacturer to prove most valuable to other industry players—the original group of 15 “strategic or industry buyers” out of the first 105 willing to sign confidentiality agreements. After all, an industry buyer would be best able to assess the value of the assets and derive the greatest benefit both in adding sales and being able to reduce costs.

You might expect that, and you would be wrong: all five of the second round bids “were from financial buyers.”

Last week at the Bank of America consumer conference, one of the most crowded presentations was not current investor fave Coldwater Creek or bull/bear tug-of-war Toll Brothers: it was a panel discussion among representatives from several large private equity firms.

The private equity cycle, which today looks to engulf Michael’s Stores, is nowhere near finished.

If our experience with a tiny glass fiber yarn company is any indication, this feeding frenzy is going to make the Drexel/Milken years look positively tame.

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, March 14, 2006

Best Buy + Guitars = No Threat to Guitar Center, Yet

Best Buy hasn’t become the last man standing in the notoriously fickle electronics retailing business for nothing.

Few other retailing concepts generate as steady a rate of failure as electronics retailing—falafel stands in Fargo, North Dakota, I suppose—and the formerly large publicly traded electronics retailing flameouts I can name without pausing to think about it includes Crazy Eddie, Newmark & Lewis, The Good Guys! and CompUSA.

(Circuit City looked like it was coming close to joining that parade, but it’s still standing up, although not quite as tall as Best Buy.)

Best Buy has managed through electronics product cycles better than anybody: the corporate culture is terrific at focusing on new product categories and dominating them, re-formatting the stores when necessary to accommodate what customers want—home theater being the latest example.

Which is why I was intrigued to hear Guitar Center management mention a Best Buy experiment in musical instruments on their earnings call recently.

Other than the fact that the Best Buy store was in Riverside California, Guitar Center claimed to know little about how it was going or what it might mean—except that it would no doubt expand the category by encouraging many more consumers to pursue their inner Joey Ramone, as it were.

(“Expand the category” is what every retailer in existence has said whenever a bigger, better-run player has moved into their category. I wasn’t there at the time, but I imagine that when smallpox-infested whites began settling the Eastern Seaboard, the more optimistic Native Americans were telling their friends the pasty-skinned intruders would “expand the category.”)

Having been to Riverside, I can report that while Best Buy’s musical instrument effort is decent enough, it is no Guitar Center—yet.

The most impressive part of the whole thing, in my opinion, was the fact that Best Buy carved it out of the rear corner of the store in such an unobtrusive way that it’s hard to remember what had been in that corner before. It’s big and airy, but it fits the store. You wouldn’t know it hadn’t always been there.

The second impressive aspect is that, yes, there are real guitars—Gibsons, mainly—hanging up across the back wall, in Sam Ash/Guitar Center-fashion. While not nearly as comprehensive, it does tell you they’re selling something besides a plastic grab-and-go disposable gift-pack for somebody’s birthday.

There’s also a glassed-in room with acoustic guitars set up so users can try them out. And along the other, non-guitar wall (we’re in the corner of the store, remember) is a row of computers set-up to show how to create your own home studio. I was told this gets a lot of traffic.

That’s the good stuff—from my point of view, as a hack-drumming semi-regular customer of local Guitar Center and Sam Ash stores.

The rest of the lay-out was weak, I thought, with a very limited set of song books and accessories, and a haphazard collection of electronic pianos and synthesizers scattered around the floor, along with stacks of the grab-and-go guitar/amp starter sets.

Furthermore, the second glassed-in playing room was stuffed with electronics and a measly single set of drums—not very inviting. (It was explained to me that when the drums had been out in the open they attracted a little too much attention from boys.)

On the whole, the new musical instrument section in the Riverside store makes a good first impression, although I doubt it will siphon off the hard core Sam Ash/Guitar Center customers. Eventually, however, I suspect Best Buy will get it right.

Up to now, the musical instrument business has operated in a relatively quiet backwater of Big Box consumer retailing.

Whether Best Buy “expands the market” for the current market leaders, or does what the whites did to the Native Americans, remains to be seen.

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.

Saturday, March 11, 2006

If This Isn’t Racism, What is It?

The following paragraphs contrast the excellent Wall Street Journal reporting on the recent Dubai Ports World’s aborted effort to acquire certain U.S. ports with the also-recent acquisition of a toll road in Chicago by the Australian investment bank, Macquarie Bank.

I have not added, changed, or modified a single word.

Dubai Ports World's offer to delay exerting corporate control over operations at five U.S. ports did little to calm the political firestorm in Congress as several key lawmakers dismissed the step and continued to demand that President Bush reopen a federal review of the deal.

—Wall Street Journal, 2/25/06

Last year, the city of Chicago was in a bind. It faced a $220 million budget deficit and its credit rating was under review for a possible downgrade. Voters feared a jump in property taxes.

Then help came from a surprising place: Australia. Macquarie Bank, Australia's biggest homegrown investment bank, organized a deal to take over Chicago's historic Skyway toll road under a 99-year lease for $1.8 billion -- hundreds of millions of dollars more than some Chicago officials thought it would fetch.

—Wall Street Journal, 12/6/05

Officials at the government-owned Dubai management company said they plan to complete the $6.8 billion purchase next week of London-based Peninsular $ Oriental Steam Navigation Co, but to freeze all operations as they are at the five U.S. ports where P&O now manages terminals -- New York/New Jersey, Baltimore, New Orleans, Miami and Philadelphia.

Australia's emergence as Chicago's white knight illustrates a surprising development in the world economy.

On a given day, Macquarie Bank has a dozen bankers roaming the U.S. in search of deals.

But Sen. Charles Schumer (D., N.Y.), who has led the charge against the transaction, shot back that "the cooling off period isn't going to work." He and other Senate critics insisted that Congress needed more than just additional briefings by the White House and DP World officials, and should begin a full 45-day investigation of the security implications of the deal.

In San Diego, one of its funds is building a 12-mile-long toll road. In Virginia, a Macquarie fund invested more than $600 million to take control of the Dulles Greenway, a 14-mile toll road outside of Washington. Macquarie operates the tunnel that connects Detroit to Windsor, Ontario, and just bought, with other investors, Icon Parking Systems, one of the biggest parking-lot operators in New York City.

In another sign that the uproar hasn't subsided, Sen. Hillary Rodham Clinton, (D., N.Y.) plans to introduce legislation barring all foreigners from managing U.S. ports, despite the fact that the vast majority are now run by foreign companies and that U.S. companies are minor players in the industry. "We cannot cede sovereignty over critical infrastructure like our ports. This is a job that America has to do," Ms. Clinton told a gathering in Miami.

Macquarie funds also hold stakes in the airports of Brussels, Copenhagen and Kilimanjaro, Tanzania. Macquarie funds own stakes in a major port in China, a Japanese turnpike and one of England's biggest toll roads. This year, Macquarie said it was weighing a bid to buy the London Stock Exchange, though it is unclear whether that deal will be completed.

Mr. Chertoff [Homeland Security Secretary] denied that DP World was being held to different standards than other prospective foreign investors, but said that because the company was the first foreign terminal operator to be vetted by the secret Committee for Foreign Investment in the United States, the safeguards could serve as a template for future deals. "I would certainly anticipate that if another country had a company taking over a port [terminal] we would do the same thing," he said.

Chicago is certainly glad the firm came knocking. Opened amid great fanfare in the late 1950s, the Skyway was supposed to be a critical leg in a stretch of toll roads extending to New York City. The Skyway turned into an epic white elephant. The toll road failed to generate enough traffic. In the 1970s, Chicago defaulted on its Skyway debt.

[DP World] said they played by long-established rules that control the government's review of foreign investments. "We just complied with what was required," said Ted Bilkey, DP World's chief operating officer. Mr. Bilkey said the company began working last October to get the administration comfortable with the deal, and he personally met with senior officials in early December. "We felt we've done everything correctly, and all of a sudden there's this furor," he said.

Executives at Macquarie say U.S. drivers can expect to see more of them in the future. Says Nicholas Moore, the head of Macquarie's investment-banking division: "It's a firm bet that all of the roads that are being talked about in America, we'll be looking at."

If the political outcry against unfamiliar and dark-skinned foreigners from one side of the world owning ports in the United States, when contrasted with the red-carpet treatment given a more familiar brand of white-skinned foreigners from another side of the world, isn’t ignorance at best and racism at worst—then what is it?

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.

Thursday, March 09, 2006

Down and Out in Mountain View

In its latest communication fumble, Google Inc. accidentally revealed an internal financial target for 2006 on its Web site but said it didn't constitute financial guidance.

—Wall Street Journal, Wednesday

Google Inc. said it agreed to pay as much as $90 million in legal fees and advertising credits to settle a lawsuit filed against it and other Internet companies last year alleging that the companies knowingly overcharged for online advertisements and conspired to continue doing so.

—Wall Street Journal, Thursday

The Cover Story Curse still holds: just three weeks after Time Magazine featured “The Google Guys” on its cover, those same Google Guys appear no more adept at running a public company than my dog Lucy.

Funny how perceptions change, and change quickly.

During the IPO process two short years ago, The Mainstream Press could not have been more dismissive of The Google Guys, their “Do No Evil” ethics, and the ad-driven search-engine business they had created.

A year later, after that same ad-driven search-engine business model had blown through pre-IPO earnings forecasts on the heals of some terrific new products—including Google Maps and Google Mail—and the stock had tripled, The Mainstream Press jumped on board the Mountain View Express.

Even CNBC, chastised into sobriety after its Bubble-Era cheerleading had come to grief, finally joined the caboose, giving full exposure to an analyst expounding a Bubble-Era, $2,000-a-share theoretical future Google stock price in the first days of 2006—which coincided precisely with the peak in Google’s stock.

Then came a disappointing quarter, and now comes word of two more Google Gaffes, straight on the heals of last week’s miscue by CFO George Reyes, a straight-arrow guy if ever there was one, who triggered panic-selling in the stock by making very rational comments about the likely diminution of Google’s growth rate.

Reyes’ comments should have surprised nobody who has been paying attention to the public comments of Google customers such as Blue Nile and FTD Group regarding the diminishing value of Google search—but Wall Street’s Finest, no doubt feel embarrassed to have finally embraced the Googlephoria at the moment it was about to evaporate, have not been mollified.

Somewhat obscured by the Google miscues was Tuesday’s excellent Wall Street Journal piece by Mylene Mangalindan regarding the heavy investment spending required by internet-based companies:

As the big survivors among Internet companies mature, they are learning a painful -- and unexpected -- lesson: Staying in the online game requires heavy, constant spending.

That is something Amazon.com has been dealing with for some time, and it triggered an excellent question on that company’s last conference call, when Mark Rowen of Prudential asked what I thought was very interesting question, foreshadowing the Wall Street Journal story:

“Jeff [Bezos, Amazon CEO], you have said for a long time that your model is more efficient that the traditional retail model because you don’t have to invest in real estate, which always goes up. Instead you can invest in technology, which goes down.

“But if I add up all of your expenses as a percent of revenue, and add in free shipping…I think in 2005 it was a little over 20% in the fourth quarter…which is 200 or 300 basis points higher than a company like Wal-Mart.

“So could you just sort of give us an idea…why is it that we are not seeing more efficiency, if, in fact, the model is more efficient?”

Mr. Rowen was not making his numbers up.

In calendar 2005, both Amazon and Wal-Mart generated roughly the same gross margin (24% and 23%, respectively) while Wal-Mart’s pre-tax margin came in half a basis-point above Amazon’s 5.04% pre-tax margin.

The difference between gross margin and pre-tax margin is cost-structure, and since Wal-Mart starts out with a lower markup to consumers but ends up with a higher piece of the gross profit dollars, it would appear that Wal-Mart—stodgy old brick-and-mortar Wal-Mart—is more efficient than technology-savvy Amazon.com.

To Rowen’s perceptive question, Jeff Bezos gave a bland answer:

“Well, I think one thing to keep in mind is that if we were not investing in some of these new initiatives such as digital and Web Services, our cost structure would be different today. So if we were totally optimizing our cost structure for a kind of steady-state business, you would see a different cost structure…”

“If you look at the return on invested capital, the dynamics between our business and traditional retail are very different in large part because of the efficiency of our capital model, high inventory turns, low PP&E.”

All of which is very true but ignores the fact that Wal-Mart is always investing heavily in “new initiatives” and does not operate “a kind of steady-state business,” despite the fact that Wal-Mart came public back in 1970.

What does this have to do with Google? Well, Google management highlighted big capital expenditure plans at last week’s analyst meeting—which at a minimum would equal 19% of net sales.

Just for comparison’s sake, Caterpillar Tractor’s capital spending amounted to roughly 8% of sales last year.

How could a search-engine company dealing in bytes be spending more heavily, relative to its sales, than a brick-and-mortar manufacturer of earth-moving equipment?

When I first started using Gmail, which encourages users to never delete an email (see “Plastics” from January 9), I could literally watch the storage space available in my Gmail account rise, like a population count in Times Square, as Google added the servers and storage to accommodate all the data piling up from Gmail accounts around the world.

Then, about two months ago, that storage counter slowed to a crawl, and now increases modestly only every few days.

As a result, my use of the Gmail storage space allocated to my account has ballooned from 1% of my storage capacity to 24%.

24% is not sustainable: at the rate I’m going, it’ll be at 50% by summer and 100% by December.

Sure, I can revert to MSN methods of deleting all the emails I don’t especially need—and I’ll do it if I have to. But that wastes time.

Could it be the dot-coms have underestimated the long-term capital required to maintain, let alone grow, in the online world?

I don't know the answer to that question: but having trained its customers to expect “limitless storage,” Google needs to deliver precisely that, otherwise, it will start losing customers.

And if it starts losing customers, the “Do No Evil” Google Guys will not be able to do much good, for themselves or their fellow shareholders.

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, March 06, 2006

Meetings about Meetings?

For particularly crucial meetings, Intel has a special team of six full-time facilitators who guide participants through intensive sessions in a 5,000-square-foot building in Oregon.—Wall Street Journal

So this is what it’s come to at one of America’s great companies: meetings to get ready for meetings?

The facilitators can tap a database of techniques ranging from good icebreakers, to how to evaluate competitive threats.

“Good icebreakers?” What—like, “Business is so bad at Intel…”?

I mean no disrespect here: I’m writing these words on a computer powered by a microprocessor made by Intel (at least I think it’s Intel—although given the recent market share losses to AMD, who knows), and my life has benefited immensely from the computer revolution.

But a 5,000 square-foot building to get ready for meetings?

And they can draw on an armory of tailor-made equipment, including hand-held voting pads for quick, anonymous polling of the meeting members, rolling 6-foot-by-6-foot white boards that can double as space dividers and a 42-foot-long white board.

I admit, I’m not a big Meeting Guy—maybe because the smartest guy I ever worked for had his staff meetings right in his office, at his desk.

And since he worked at a specially-made stand-up desk, we all stood while we talked. No coffee, no doughnuts, no icebreakers or 42-foot white boards or hand-held voting pads. We talked about whatever we had to talk about and then left.

Of course, we weren't running a huge multinational manufacturing enterprise. Still, after reading today's Journal, it makes me wonder: I always thought the guy who started Dilbert worked at the phone company, not Intel…

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, March 05, 2006

Monkeys Over America

“All great popular music is based on cool riffs.”—Dave Davies.

So the Kinks lead guitarist (and less famous brother of lead singer Ray Davies), now in his 60’s and slowed by a stroke, tells this month’s Mojo, the British music magazine that does what Rolling Stone long ago stopped doing: it actually covers what’s going on in the music world.

Dave, the unheralded co-leader of one of the 60’s most adaptable and long-lived bands makes that profoundly simple observation when discussing the origin of “You Really Got Me,” the Kinks’ first hit single 40 years ago—yes, forty years ago.

The way Dave tells Mojo, his teenage brother Ray walked into the room at their sister’s house where Dave was practicing guitar chords, said “What about this?” to his brother, and played, one fingered on the piano, “Da-da-da-da-da.”

When Dave played back the riff on his fuzzy electric guitar, he says, “The hairs just stood up.” He knew they had created a hit song.

Lest grey-hairs like me bemoan the passing of time and the decline of music “today” from those fertile years of our youth by insisting that no two teenage kids from nowhere could create a song and a sound like that ever again, I’m happy to report that not only can it happen again, but it just did, in Sheffield, of all places.

The teenagers call themselves The Arctic Monkeys, and I'd read about them in a flattering New York Times story a couple of weeks ago.

They sounded interesting, but when I asked my younger daughter if she’d ever heard about them, she said no, and I forgot about it—until the next day, when she dragged me upstairs to her computer, saying “Dad, the Arctic Monkeys are great.”

She played me the four or five songs she’d downloaded the previous night after checking them out thanks to the magic of iTunes, and the very first, “I Bet You Look Good on the Dance Floor,” made, as Dave Davies says, the hairs stand up.

Better yet, the band’s first CD just came out, and proves the Monkeys have a lot more in them than those first few songs that appeared on iTunes.

The singer, Alex Turner, has a voice that sounds like early David Bowie at times, only ragged and with a thick accent which makes the very sharp and often funny lyrics that much more interesting. (I’m willing to bet there aren’t too many songs in your own personal archives with the line, “’Cos he’s a scumbag, don’t you know?”)

The music is mostly fast and has a sort of sloppy Nirvana-type feel of guys actually playing instruments as opposed to session men covering songs for a producer attempting to create a Sound.

You can hear influences ranging from The Pretenders to Squeeze to Rage Against the Machine to early Beatles and even very early Genesis, but the minute you think the song settles into a certain style the music shifts direction and goes somewhere else.

Maybe the most interesting and encouraging thing about the CD itself, from the point of view of good things to come—is the narrowness of the songs’ subject range: it’s about what happens at night in Sheffield, England, involving pubs and bouncers and dance floors and under-aged drinking and birds and blokes and toffs, and not much else.

It will be very interesting to hear what they’re writing about when their horizons open up—say, after the coming tour of the United States.

Unfortunately for the Monkeys, word-of-mouth about the band exploded after the tour was planned, and tickets that went for $12.50 at the Paradise Lounge in Boston—a Dive with a capital D—are now offered at $110 online.

(Lest the Paradise consider legal action for that remark, let me state unequivocally that the Paradise is, in fact, one of the all-time great places to see a band play, and I’ll be bringing my daughter up early so we can get a good spot at the edge of the stage, which is not hard because almost anywhere you stand you’re ten feet from the drummer.)

My prediction—and I hope the SEC understands that I make this forecast without having received any illicit payments from journalists or stockbrokers or record companies—is that the Monkeys take America by storm.

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.

Friday, March 03, 2006

How to Deflate a Housing Bubble

Editor’s Note: Given the current state of government oversight over our public capital markets, in which attorneys working for the SEC issue subpoenas for phone records of investigative journalists who dare investigate publicly traded corporations—as opposed to those attorneys going after the phone records, for example, of message board stock manipulators or corporate executive stock manipulators—the writer of this blog is no longer willing to speak his unadulterated mind.

The following reflects the New, Always-Upbeat World of Free Speech which seems to be preferred by the same SEC that regularly shuts down hedge funds after the principals have absconded with the cash and which was unable to detect and prevent the collapse of numerous Bubble-Era companies, including Enron, whose former Chairman and former Chief Operating Officer are now on trial for allegedly hiding that collapse from public investors whom the SEC was supposed to protect, following the Hovnanian conference call yesterday.

“We are projecting margins to be lower than we have had for the last few years,” a very savvy member of the top-flight home-builder Hovnanian’s management team said on yesterday’s superb and highly upbeat conference call.

“Although it’s too early for a formal EPS projection for fiscal ’07,” the superlative management executive continued, “we expect to see a similar trend to what we are projecting this year—further reductions in gross margins offset by further gains in deliveries and revenues, resulting in an increased EPS.”

I have no doubt that this strategy—of homebuilders seeking to make up in volume what they are losing in price—will have the most salutary and beneficial impact on the current housing situation in the United States, which, in the New, Always-Upbeat World of Free Speech, I should describe as not a bubble but more a nice warm bath.

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.