Wednesday, May 31, 2006

Microsoft Brings Back...The Comfy Chair


So! You think you are strong because you can survive the soft cushions. Well, we shall see. Biggles! Put her in… the Comfy Chair!

—Monty Python


I don’t know what’s worse—Steve Ballmer’s refusal to spring for iPods for his children and his insistence that they not use Google (see “Over-Share from Dr. Evil’s Hideaway,” April 18) or the recent announcement that Microsoft would restore free towel service in company showers and offer loyal staffers “dinners to go from Wolfgang Puck.”

I am not making that up. Here’s the story from MSNBC:

Microsoft said it would supply free towels in company showers, better food in staff canteens and on-site laundry service in an effort to boost employee morale as it battles for talent with Google and other recent start-ups.


The outbreak of the internet "perks war" is the latest sign of Microsoft's attempt to keep some of the trappings of a fast-growing Silicon Valley start-up as it takes on more of the characteristics of other large, slower-growing blue chip companies.

No kidding.


If we learned anything from Microsoft’s bombshell announcement that spending was going to go up a lot more than Wall Street's Finest ever dreamed, it’s that Microsoft’s business model is not what it used to be. The operating system monopoly that allowed 30 cents of every sales dollar to flow to net income is, in my view, no more.

This is due in no small part to Google and its spend-like-there’s-no-tomorrow mentality. Google keeps new products coming so quickly that Microsoft—chained like Frankenstein’s Monster to the dungeon wall that is Vista (the next generation Operating System Formerly Known As Longhorn and soon to be renamed Long Lost, Lost Horizon, or something more appropriate)—has no chance to out-innovate the kids in Mountain View.

A couple of weekends ago, however, Barron’s offered a very different take on Microsoft from Joe Rosenberg, the long-time ace investment strategist at Loew’s Corp—a man whose words I read and consider very carefully. (If you haven’t seen the interview, I’d advise you to study it, if for no other reason than Rosenberg’s contrary take on the bond and commodities markets.)

Rosenberg has this to say about the iPod-distaining Ballmer:

I think Steve Ballmer spends too much of his time on the operational side and not enough time on the financial side. He unfortunately shuts himself off from the financial community. He only meets with the financial community once a year.

Personally, as I have said before (see “Bill’s Hideaway” Parts I and II, from 2005), I think Ballmer’s boss, Bill Gates, should spend more time in a local Starbucks or college campus watching how people use the technology which Microsoft and Intel pioneered—and others have exploited.

And I think the last thing Ballmer needs to do—at least if Microsoft wants to become something more than a slowly-dying, high-margined software enterprise whose main goal is to return cash to shareholders—is spend time with Wall Street’s Finest.

As MSNBC points out:

Google has become the most visible exponent of Silicon Valley's entitlement culture, using the free food in its highly rated cafeteria, along with the availability at its campus of services ranging from massages to automobile oil-changes, to help attract and retain workers. The tech companies defend the on-site perks as a way to reward employees who often work long hours and who would otherwise have to leave the premises, making them less efficient.

Simply put, the cost of being a technology leader has gone up.

As one of many who has migrated entirely away from Microsoft’s dreadful MSN product—email, calendar and all—in the last six months, and who looks forward to a full suite of online application products, for free, sometime in the near future, from the Mountain View crowd, I expect the cash flow available to fund that higher cost will dwindle more quickly than anybody in Redmond expects.

And that trend will not be reversed merely by changing the perks for the engineers working on finding the latest security flaw in an ancient operating system.

Towel service? Wolfgang Puck? The whole thing reminds me of a Monty Python routine.

Fetch…the comfy chair!



Jeff Matthews
I Am Not Making This Up


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Saturday, May 27, 2006

How to Give Christianity a Bad Name

I have a warm and loving and Christian family….
—Ken Lay

When you hear those words from a guy standing before a bank of microphones and news cameras, with his attorney beside him and his faithful second wife in the background, you know whoever he is and whatever he just got convicted of, he's going to be slinging it pretty good.

And Ken Lay did not disappoint.

In fact, moments before telling the world of his Christian family, which is, presumably, better than a Catholic family or a Muslim family, this same man and his Christian family and Christian friends had gathered in the courtroom in prayer with a Christian minister who compared the just-convicted ex-CEO's plight to that of Jesus Christ.

I'm not making that up. The only thing missing from the whole tableau was Tammy Faye Baker dabbing those big raccoon-shadowed eyes of hers for the cameras and declaring her eternal affinity for the good Christian Ken.

I do not mean disrespect to the Christian faith itself, nor do I suggest anyone dismiss Lay's faith-based self-justification out of hand. It provides, I think, as great an insight into his psyche as any phone call recording or board meeting transcript that might have been used as evidence in the trial itself.


Most of all we believe that God in fact is in control, and indeed He does work all things for good for those who love the Lord.


Now, keep in mind, the man saying this is the man who built Enron out of a small Houston pipeline company and who was still in charge when one of the largest corporate frauds in world business history began, was executed and ended in the destruction of the corporation it was meant to perpetuate.


Strictly speaking, of course, if God “in fact is in control” and the Lord does work “all things for good,” then:

1. No human being was responsible for the off-balance sheet partnerships that brought down Enron, since God was in control;

2. No human being needs to answer to former Enron shareholders whose hard-earned savings evaporated along with that company’s earnings, assets and stock price, since the Lord works all things for good and therefore He presumably encouraged those former Enron shareholders to get in on the Google IPO to recoup their Enron losses.

Of course, God was never “in control” at Enron: human beings were in control.

That the chief human being in control didn’t take responsibility Thursday afternoon is no surprise to this observer. I recall very clearly the October 23, 2001 emergency conference call which he and Andy Fastow (!) hosted, following poor third quarter earnings and a surprise $1.2 billion write-off that had spooked Wall Street’s Finest.

On that call, Lay gave few hard answers to the increasingly desperate questions about what exactly the company was writing off, and expressed nothing but optimism and a weird complacency about the company—possibly because he had been selling stock all along, unlike the poor slobs asking the questions and the clients of those poor slobs, who were watching their retirement funds evaporate with every new disclosure.

In fact, the only disappointment Lay appeared to express on that call was in the company’s stock price—possibly because, as it turned out, the entire operation hinged on shares of Enron that had, unbeknownst to the public, been pledged as collateral for off-balance assets used to prop up earnings and cash flow.

But don’t take my memory for it.

The following is an abbreviated recap of Ken Lay’s opening remarks on that call, provided in summary form by the indispensable Briefing.com. Although the original quotes are gone, readers will get the sense of Lay’s deep denial and shoot-the-messenger self-rationalization that pre-dated this week's comments to the press:

--Company is extremely disappointed with its stock price.

--LJM is no longer is a related party. Terminated the financial arrangement with LJM.

--Welcomes the request of the SEC for information related to certain party transactions. Co-operating fully with the SEC. [Author's note: Patrick Byrne is apparently not, in fact, the first CEO in history to welcome an SEC inquiry]

--Structured finance vehicle in which LJM was investor was established to mitigate volatility associated with certain Enron merchant investments.

--Company recorded a $1.2 billion reduction in shareholders equity and a corresponding reduction in notes receivables.

(Source: Briefing.com)

.

Five years later, after the guilty verdict and the prayer circle in the court room, Ken Lay would tell the world that God is in control and things would work out for him because, as quoted above, "God works all things for the good for those who love the Lord," which was followed by the clincher:

"And we love our Lord."

Personally, I believe that whatever brand you choose, religion has more to do with, to paraphrase Spike Lee, “doing the right thing”—of which the Enron jurors apparently had a hard time finding examples among the former management team—and less to do with justifying one's self before the public by claiming a special relationship with Jesus Christ.

But the damage is done: yet another former high-flying hotshot gives Christianity a bad name.

.


Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Thursday, May 25, 2006

Don’s CPI


Don, my car guy, has a pretty good pulse on the economy.

First of all, he fixes cars—and that’s as basic a consumer spending item as it gets. Second, he employs people, so he knows what the labor market is doing. Third, he buys a lot of stuff—auto parts, certainly, but also utilities, office supplies, and new equipment.

So when I get my car fixed, I like to ask Don what he's seeing.

Now, this may come as less of a shock to bond traders than before the last CPI number was released, and it may not matter to whatever low-level functionary in the statistical collection office of the Federal Reserve spends his day adjusting raw inflation data.

But what I will call “Don’s CPI”—the price of things Don buys for his business—has risen about 5% in the last year. And Don sees more to come.

So Don has raised his own prices 6%, in order to stay ahead of the curve. Last time I checked, that’s higher than any point on the yield curve.

Any resistance, I asked as I paid my bill? (My bill at Don’s—as I have said in the past—is always $700. No matter what gets done. It’s always $700.)

Don shook his head. “Business is booming.”


Jeff Matthews
I Am Not Making This Up


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Tuesday, May 23, 2006

Panic at the Greek Diner


It’s here.

Panic.

A month or two ago, one of the denizens of the Greek diner where I go for coffee and morning research, approached me about her plan to buy into one of the emerging growth funds that everybody was recommending she jump into with both feet.

Being a technician at a local hospital and entirely unfamiliar with stocks or bonds, let alone the countries in which the respective financial instruments are domiciled, she was unsure of only one thing: which emerging country fund to buy as soon as possible.

I told her I was not a stock broker, I did not speculate in foreign country funds, and I did not advise people on what to do. When she persisted in asking my advice, I did the psychologist routine:

She: “Which fund should I buy?”
Me: “Which fund do you want to buy?”
She: “I’m not sure. Which country should I buy?”

Me: “Which country do you want to buy?”

She gave up and went off to the hospital, and I didn’t hear from her again until last week, when she asked me on her way out the door when this foreign market nightmare was going to end. I shrugged and said her guess was as good as mine.

This morning she decided to end her emerging markets nightmare: on her way out the door, she told me she was going to sell out everything.

Time to buy?


Jeff Matthews
I Am Not Making This Up*

* In today’s case, identities have been altered to save anyone embarrassment.


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Monday, May 22, 2006

Today’s Blockbuster, Brought to You by...Merrill Lynch


It’s not often Wall Street Research breaks new ground or gets a leg up on investigative reporters, but hitting my email this morning is a Merrill Lynch report that appears to do just that—and I am not, as longtime readers might suspect, being sarcastic.

For the record, I started my career at “Mother Merrill,” and it’s not easy doing timely, groundbreaking, stock-moving research at a vast shop whose constituents include bankers, bond guys, big institutions, small institutions, hedge funds, traders and brokers—not to mention the vast retail account system that feeds the Merrill beast. It’s hard enough keeping those constituents happy and up to speed, let alone finding something new to say about whatever group of stocks you happen to cover.

But the Merrill technology folks today put out a piece examining stock option grant patterns among their companies (“Options Pricing—Hindsight is 20/20”) that adds more fuel to the rapidly spreading fire that the Wall Street Journal, to its eternal credit, sparked some months ago, when it reported that certain company executives had been awarded option grants that had been so timely and profitable that it was extremely unlikely that such grants could have been made without backdating the actual grant date.

In the wake of the Journal’s truly groundbreaking report, at least one CEO has been fired, several executives have quit, and even the SEC (mon dieu!) has stirred into action against several companies.

Being a Merrill client and having plenty else to do, I will not paraphrase the Merrill options analysis or its conclusions here. However, if you are a Merrill client, I’d advise you to get your hands on it ASAP. If not, I suspect you’ll be reading about it soon enough.

Wall Street’s Finest come through!


Jeff Matthews
I Am Not Making This Up


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Friday, May 19, 2006

The 800 Pound Hamster


A distant acquaintance at my previous journalistic affiliation, TheStreet.com, has written extensively of late regarding his love affair with the shares of Overstock.com.

His basic thesis, as I understand it, is that the stock is unduly depressed by bearish sentiment generated largely by short-sellers, and that while profitability is currently non-existent, the price-to-sales ratio renders it attractive to patient, long-term investors.

Indeed, by assuming sales growth picks up and margins go from negative to positive over time, this sober, clear-eyed analyst published a $90 price target some weeks back that sent Overstock.com shares flying—just prior to the company reporting lower-than-expected first quarter sales, a larger-than-expected first quarter loss and a relapse in the share price.

Unlike the analyst in question, I have never expressed an opinion about the valuation of Overstock.com and am not about to publish a price target here. Opinions of value, being in the eye of the beholder, hold no interest to me.

What does hold my interest is the thought-process behind those opinions. And in this case, a cornerstone of the Street.com writer's thesis appears to be an analogy between the Overstock.com of today with the Amazon.com of 2000-2002, when the latter was losing money and likewise highly controversial.

In a recent follow-up post, he expanded on this analogy. After walking through the numbers, he catalogued a host of negative comments from various sources during the dark days when Amazon appeared to be in a barrel-roll a little to close to the ground. '
Look at Amazon now,' seems to be the analyst's Overstock rallying cry—'the nattering nabobs of negativism were proven wrong, and the shareholders who stuck it out were richly rewarded.'

Ergo, how can Overstock.com miss?

Having been one of those Amazon nabobs of negativity, I can recall the issue that made me bearish on Amazon shares back in the late stages of the Internet Bubble quite clearly: it was a slowdown in the company’s core book business, masked by new ventures into music, video and international sales, which got my attention.

As I pointed out in at least one piece for TheStreet.com at the time, Amazon’s core book business growth had actually slowed down to brick-and-mortar-type low single digit rates. I believe it even grew less than Sears’ at one point—although this fact was hard to see for all the other “get big fast” non-book projects which inflated Amazon's overall sales growth.

I recall fielding a Silicon Valley-based reporter’s incredulous questions about my analysis one afternoon in early 2000 while fighting off a stomach-clearing flu in bed. This reporter (I believe he was with Business Week) simply could not believe anybody could be negative about Amazon.com. In the patois of the day, he seemed to think I “just didn’t get it.”

Still, while Amazon was a controversial stock and had its share of short-sellers, to the credit of Jeff Bezos he never included me or any other nattering nabob of negativism in a conspiracy theory involving Israeli mobsters and Eliot Spitzer. In fact, Bezos did what great CEOs do when business gets tough: he ignored the shorts and focused on fixing his business.

Sometime after that Business Week conversation, the stock bottomed out in an avalanche of bad numbers and bad press. Momentum investors bailed out when the sales growth slowed, but beneath the sales line, book numbers began to improve and losses began to shrink. I covered my short at $12.50 a share, and wrote about it on TheStreet.com.

The funniest part was getting a call from the same Business Week reporter, who had by then joined the nabobs of negativism and could not believe I was no longer negative on the stock—since everybody by that time knew that the Internet Bubble had burst and Amazon wouldn't make it. Once again, he seemed to think I just "didn't get it."

Amazon did, of course, make it. My only regret about covering my short at $12.50 was, of course, not going long the stock at $12.50.

As for my former acquaintance at Street.com, he may well prove right about Overstock.com—and today’s nattering nabobs of negativism may well be proven wrong. But his survey of bearish commentary on Amazon.com from the dark days of that Internet pioneer left out one particularly negative nabob—not a stock analyst or a hedge fund manager, but the CEO of a company.

In 2004, a Fortune Magazine reporter quoted this CEO saying the following about Amazon.com:


"They don't have a wonderful business, and the stock is way overvalued."

She also reported he called Amazon an “800 pound hamster.”

This was no one-off dissing of Amazon.com: in 2005 this same CEO said he thought Amazon was “the Ottoman Empire of the Internet,” and repeated the "800 pound hamster" crack.

I’m not making that up. Here’s the full paragraph from the January 28, 2005 conference call:


I think that Amazon is the 800-pound hamster. I think that Amazon is the Ottoman Empire of the internet. And it may just drift along as the sick man of Europe for 200 years or one day you may wake up and it's gone. I don't think Blue Nile faces much of a threat from Amazon. I view us as competitive with Blue Nile. I view them much more as a competitor, but I'm not worried about Amazon.

This nattering nabob of negativism’s name?


Patrick M. Byrne, CEO of Overstock.com.



Jeff Matthews
I Am Not Making This Up



© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Thursday, May 18, 2006

D’oh! Inflation!


Given the bond market’s shocked—shocked!—reaction to yesterday's “core” inflation news, you’d think nobody on Wall Street does any of the following:

1. Buys gasoline, food or clothing.
2. Rents cars.
3. Buys airline tickets.
4. Stays in hotels.
5. Eats out.
6. Eats in.
7. Pays college tuition.
8. Goes to a doctor, a dentist, or a lawyer.
9. Has life insurance, health insurance, or property and casualty insurance.
10. Pays property taxes.
11. Goes to a psychiatrist.

There are more examples of the bond market participants’ apparent lack of participation in the real world than I can fit here, and this is especially true in the so-called “services” sector of the economy—which, according to the papers, is what particularly freaked-out the bond market’s former vigilantes.

Item Number 11, for example, is just one of those services where the cost is now taking off after years of flat-lining—at least according to a psychiatrist-friend who tells me she has raised her standard hourly fee from $200 to $250, without a problem. (You can do the math on that percentage increase. Hint: it’s more than the thirty-year bond yield.)

Indeed, she may have some new customers soon—if the bond market’s Homer Simpson-esque reaction to what had been visible to anybody with eyes is any indication.



Jeff Matthews
I Am Not Making This Up


© 2006 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, May 17, 2006

Alan’s Bathtub Reading


I think I know what Alan Greenspan is contemplating right now in his bathtub.

(Don’t get the wrong idea: Greenspan is famous for spending mornings reading all manner of economic reports while soaking in his tub. Just listen to Don Imus, the no-longer funny ex-shock-jock who likes to ask Andrea Mitchell—a talking head who happens to be Greenspan’s wife—what “Crazy Al” is up to in the bathroom.)

If I’m right, Greenspan is contemplating the fact that U.S. industrial capacity utilization hit 81.9% last month, its highest level since July of 2000.

Why do I think I know that? Well, I happen to know capacity utilization is the sage Mr. Greenspan’s single favorite statistic of all the thousands churned out by government statisticians. It is, in his view, the least volatile and therefore most accurate barometer of economic health, encompassing as it does employment, capital spending and inflation all at once.

I know this because I read it somewhere, probably in a New Yorker profile—one of those endless, detailed pieces that cover everything from what kind of cereal the subject likes to how he or she takes coffee. And the fact the Greenspan relied on one statistic more than all the others was a lot more interesting to me than how he takes his coffee.

But you don’t need a government statistician to tell you that industrial capacity utilization is at the highest level in five years. All you have to do is listen to the earnings calls of companies ranging from teen retailers to coal miners, and you know there isn’t much slack in the system.

Just last night, on Cramerica TV, the CEO of engineering giant Foster Wheeler told a rapt, cheering student audience that business conditions for his company were the best in the entire history of the company. (For the record, that means back to 1884.) The audience of Cramer-mad budding stock jockeys couldn’t have been happier to hear it than if Derek Jeter had appeared on the stage to promise another championship this fall.

Furthermore, the Foster Wheeler CEO also made it clear that his company intends to spend whatever it takes keep up with those all-time-high orders from customers drilling wells in Saudi Arabia and building LNG plants in Asia, and everything in-between.

Which is why, in my opinion, the producer price index might have been ten basis points less than expected yesterday, and the housing market from Boston to Sacramento may be rolling over, and the bond market may find comfort in weaker revenues than expected at Home Depot…but Alan Greenspan’s favorite all-time index is heading up, not down.

The water in that tub is still rising.


Jeff Matthews
I Am Not Making This Up

© 2006 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, May 16, 2006

Where Does This Stop?


Ecuador Revokes Occidental Pact Over Sale of Local Drilling Rights


That’s the headline from today’s Wall Street Journal, regarding yet another hostile takeover of precious energy reserves by a restive Latin American government.


The move by the small, coastal nation, Latin America's fifth-biggest oil producer, came after a long-running legal dispute over whether the California-based firm had broken local laws in selling some of its local oil-drilling rights to a Canadian firm, Encana Corp., without government approval.

Whatever the specific excuse, the trend is clear: precious energy reserves are moving from private hands to whoever happens to be in power at the country in question.

Ecuadorean Energy Minister Ivan Rodriguez said Occidental's contract had been revoked and the company would have to hand over its local operations to state-owned oil company Petroecuador.

Meanwhile, Western Bankers including Morgan Stanley are preparing the initial public offering of Rosneft, the Russian state oil company that ranks just beyond Exxon Mobil, reserve-wise.

Potential investors in what is expected to be a very highly anticipated deal might want to consider the fate of companies in Venezuela, Bolivia and, now, Ecuador, before they plunk down their hard-earned US dollars for oil and gas reserves located in—literally—Outer Siberia, among other places.

Occidental has denied wrongdoing, and said in a statement that the company remained “committed to an amicable settlement of this dispute.” The company, which relies on its Ecuador operations for 7% of its global production, said it was reviewing a 33-page document it received from the government and was considering its legal options.

Not many legal options come to mind when a sovereign government decides they want their black gold back.



Jeff Matthews
I Am Not Making This Up


© 2006 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, May 12, 2006

Déjà vu All Over Again


At 6 a.m. yesterday morning, I noticed the price of regular gas at the local Cumberland Farms was $3.04 a gallon—up five cents from the day before.

When I got to the coffee shop, the first thing the barista asked me was, “Are they going to stop raising rates?” I told him it looked like they were going to raise one more time. He shook his head and made my drink. He’s a real estate broker on the side, you see—he works at Starbucks for the healthcare. And his real estate business has collapsed.

Later, on the way home, the price of regular gas at the same Cumberland Farms had risen to $3.16 a gallon.

The last time I remember a bull market in interest rates and gasoline was, oh, 1979. It was like déjà vu all over again.


Jeff Matthews
I Am Not Making This Up


© 2006 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, May 11, 2006

Bored of Directors?


Back in junior high school, when it didn’t take much for a classmate to seem funnier than Leno, Letterman and Dave Chappelle combined, I recall seeing the phrase “Bored of Education” written in big block letters on some wiseguy’s notebook and thinking, while not laugh-out-loud funny, it was amusing and vaguely anarchic.

For some reason that silly play on words came to mind when I saw the headline of the press release issued by Overstock.com two nights ago, in which that company’s Chairman of the Board declared himself seemingly delighted to see his company get a government subpoena.

That subpoena requested, among other things, “all documents relating to the Company’s accounting policies, targets, projections, estimates, recent restatement, new technology systems and their implementation, and communications with and regarding analysts,” according to the last paragraph of the press release.

Readers might not have gotten that far down, however, given the preamble in the body of the release from the Chairman of the company’s Board, Patrick Byrne, which I am not making up:

Overstock.com Chairman and CEO Patrick Byrne said, "I may be the first CEO in history to celebrate receiving an SEC subpoena. Some of the requests suggest the whispering of the blackguards, but I remain unconcerned about their hokum….

Not only that, but the headline on that press release read: “Overstock.com Celebrates Receipt of SEC Subpoena.”

Which is why I wondered whether it is Overstock’s Board of Directors—for whom, presumably, the Board’s Chairman speaks—that is delighted with the government subpoena, and “celebrates” its receipt.

Or whether they’re just plain Bored of Directors and don’t pay any attention to what the Chairman of their Board is writing in his press releases.

Merriam-Webster’s Dictionary of Law defines “Board of Directors” as:

A group of individuals elected by the shareholders of a corporation to manage the corporation's business and appoint its officers

I always believed being a Director was serious business, although there was a time during the lax old days of the dot-com bubble and the telecom frenzy when boards approved mergers, option packages, and off-balance sheet deals with abandon. Those days are over, and being a director nowadays is usually considered a non-trivial position of responsibility.

So who exactly constitutes the Board of Overstock.com?

Just looking at my Bloomberg, I see that—aside from the Chairman who “celebrated” the SEC subpoena, the Chairman/Celebrant’s father, and the Chairman/Celebrant’s self-described “best buddy”—the members of the Board of Directors of Overstock.com include some familiar and non-lightweight figures:

Ray Groves is a former Marsh Mac CEO and a good guy, according to a friend who knows him.

John Fisher is a sober, highly regarded Wall Street guy, according to a friend who knows him.

Gordon Macklin is a former H&Q Co-CEO who also sits on the Chairman’s father’s company’s board.

Allison Abraham worked at a dot-com during the Bubble Years.


After considering the long string of proclamations from their Chairman, from his “Sith Lord” speech to his 'Celebration' press release, I wonder: could it be that, like my old high school classmate, these good board members are all simply “bored” of directors?



Jeff Matthews
I Am Not Making This Up


© 2006 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, May 09, 2006

Consumer Reports Says…Dell to Miss Numbers


Actually, I made that headline up.

What Consumer Reports actually says in its current issue is that Dell’s technical support is—as our readers already know (see “Dells Screws Up a Good Thing,” January 24)—bordering on K-Mart quality. Which is to say, it may actually be driving customers away.

“Get the most from tech support,” is what the Consumer Reports cover promises its readers. And based on the results inside the magazine, Dell customers are not getting very much.

In both laptops and desktops, Apple led the tech-support pack, being the only desktop vendor to have even satisfactory ratings for each of three measures—waiting time on the phone, how knowledgeable the support staff appeared to be, and whether they solved the problem. (Lenovo managed to tie Apple in each case in the laptop survey.)

Specifically, in desktops Apple scored 82 (out of 100) in tech-support satisfaction, compared to eMachines at 62, Sony at 57, Gateway and Dell at 54, HP at 53 and Compaq cruising in with a 46.

In laptops, Apple also scored an 82, with Lenovo at 69, Toshiba 57, Dell at 56 and the rest below 55.

Repair history showed the same general trend, with Apple desktops having the fewest repairs by far, according to Consumer Reports readers.

Meanwhile, Dell’s fiscal quarter ended a week ago, and it didn’t take the company’s bean-counters too long to figure out the numbers had come up short—with revenue up less than 10% and earnings per share down more than 10%.

CEO Kevin Rollins put the usual glossy spin on the announcement, saying “We are committee to delivering industry leading value to our customers, which ultimately results in industry leading growth for the company.”

But based on our own informal survey of reader satisfaction, not to mention the Consumer Reports data, Mr. Rollins may want to re-examine the logic behind his bold statement.

A personal computer long ago ceased being a stand-alone box used for calculating spreadsheets or creating slide shows: it is the means to connect to the internet, upon which all businesses now depend.

When the box at one of those businesses goes down, the business—which may be one guy in his basement office in Livonia Michigan or a trader in a glass tower above Canary Wharf—goes down.

And when a business goes down, no amount of pennies saved by buying the box direct from Dell can make up for lousy tech-support-on-the-cheap.

Me, I think Dell needs to do a Microsoft: I think it needs to start spending some serious money to upgrade its customer service. “Delivering industry leading value” is no longer just cheap boxes. It’s great service, too.



Jeff Matthews
I Am Not Making This Up


© 2006 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, May 06, 2006

How Not to Invest


THE DOW INDUSTRIALS ROSE more than 120 points to their highest level in more than six years as traders weighed nonfarm payrolls data and Warren Buffett's next move.

—Wall Street Journal Online


That was the explanation for Friday’s market rally on the WSJ online edition during the late afternoon.

The Journal may have been right about the reasoning behind the rally, but buying stocks based on Warren Buffett’s purported acquisition plans is a heck of a lousy way to invest.

While Buffett did indeed make a “move”—announced yesterday at his shareholder’s meeting—it was not what those traders were looking for. Instead of a nice, big, juicy, all-cash deal at a huge premium for one of those thirty Dow Jones Industrial companies, Berkshire Hathaway announced it is taking an 80% stake in an Israeli metalworking company.

Worse, for those traders at least, Buffett told the faithful at his shareholder meeting that he remains bearish on the U.S. Dollar and is more interested in making new investments outside the U.S. as opposed to in.

Meaning that a $15 billion acquisition, which Buffett also disclosed he is working on and appears to be the anticipated deal everybody was front-running on Friday, is certainly not likely to be any one of the 30 components of the Dow Jones Industrial Average that was bought in anticipation of Buffett’s “move,” nor even a NASDAQ-listed company.

In any event, the notion of buying stocks because Warren Buffett is looking to make a large acquisition is one of the least appealing reasons to invest that I can fathom, although buying a stock that might appeal to Warren Buffett--say, for its high return on equity, business "moat," excess cash flow and simple operating model--is certainly one of the best.


Those Friday traders might want to consider that Buffett recently sold a large market “put” with a reported maximum notional exposure of $14 billion—meaning that if the indices covered by the put contracts fall to zero in the next 15 to 20 years, Berkshire would lose $14 billion.

While it might look on the surface that Buffett’s huge sale of market puts with a 15 to 20-year time horizon represents a positive bet on the trend in equity prices—after all, he loses money only if the market goes down—it is actually a brilliant way to accomplish what Buffett most fervently wishes for: the ability use Berkshire’s $40 billion cash hoard to buy stocks at drastically reduced prices.

If the market goes up, the puts Buffett has sold expire worthless, and he’s had the use of that cash for many years, at no cost to Berkshire.

If, on the other hand, the market collapses, Berkshire will be “put” a large basket of stocks at dramatically lower prices, and Buffett will have put his cash hoard to work at the kind of prices he has been waiting patiently for.

Either way, Buffett wins in a big way.

Which is more than you can say for most of the traders speculating on whatever Warren Buffett might announce at his weekend shareholder meeting.


Jeff Matthews
I Am Not Making This Up


© 2006 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, May 05, 2006

A Funny Thing Happened on the Way to Unlimited Productivity...


In the longer term, productivity growth appears to be decelerating—a sign that the business cycle, now in its fifth year of expansion, is maturing as companies gradually exhaust their ability to get more out of their workers.

—Wall Street Journal.


No kidding.

A mere week ago, the poster child of Alan Greenspan’s theory of endless rising worker productivity—Microsoft—announced a shocking ramp-up in spending that sent Wall Street’s Finest back to their earnings models and wiped $30 billion off the company’s market value in a few hectic minutes of trading.

Microsoft’s new, higher-cost business model appeared to be a one-off, sparked by Google’s ascent to the top of the Internet pyramid and Microsoft Network’s fast slide into obscurity. Analysts blamed it on Microsoft’s own mistakes—and the world moved on.

And then along came Electronic Arts.

Two nights ago “ERTS” (as Electronic Arts is called on the Street owing to its stock ticker of the same four letters) likewise shocked Wall Street’s Finest by announcing a large ramp-up in costs necessary to deal with the diffusion of gaming hardware choices, which are shifting beyond the simple teenage-boy-on-computer-at-2 a.m. platform to handhelds, cell phones, PDA’s and wirelessly-connected modes of play.

As with Microsoft, this change in “The Model” of a company formerly known, loved, and given an extremely high P/E multiple owing to its ability to beat Street estimates by the proverbial penny no matter what the external environment, was viewed as a one-off.

And maybe it is.

But maybe it isn’t. When we looked at Google’s high capital expenditures—bigger than Caterpillar Tractor, as a percentage of sales (see “Down and Out in Mountain View” from March 9)—it was strictly in the vein of an interesting factoid regarding Google’s business model.

But perhaps the experience of ERTS and Microsoft show that Google may in fact be foreshadowing where the digital world is going. Perhaps the digital economy is just a lot more expensive than envisioned.

In the brick-and-mortar world, physical costs are mainly plant and equipment, lots of sales people and administrative support. Pricing is not always transparent, and inertia plays a part in determining whether customers stay with their old supplier or whether they go with a new one.

In the digital world, the costs are office buildings and lots of computer equipment, and the engineers to run the equipment and design the software and keep it running 24/7 against viruses and spam attacks and network outages. Pricing is highly transparent and speed is essential. Inertia evaporates: with a keyboard click a customer can do an internet search on Google rather than Microsoft; buy a digital camera from Amazon rather than Best Buy; list their car on eBay rather than Yahoo; outsource their back office through an auction to a lower cost supplier that may be next door or may be in Bangalore.

And while all of this transparency lowers costs to the customer, it raises the costs for the companies doing business in the digital world.

A funny thing happened on the way to unlimited cost compression: companies have to pay to play. Perhaps it’s no coincidence that the era of endless productivity enhancements appears to be—appears to be—waning.

Informed opinions and observations on this topic are welcome.


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, May 02, 2006

My Plan for the Freedom Tower

Who Might Fill Freedom Tower?

Thus asks today’s Wall Street Journal, in an article describing the obvious reluctance of mortal human beings to work where lightening has already struck, to deadly result:

Private businesses scoffed at locating in a tall, high-profile building on the site of two terrorist attacks. New York City's government and the building's owner, the Port Authority of New York and New Jersey, say they won't take space in Freedom Tower, opting instead for less-visible buildings on the Ground Zero site.

To fill the offices, plans include forcing government employees to put themselves in harm's way for what would surely be the most tempting terrorist target in the world. It doesn't look easy:

"It's frightening," a Customs border-protection worker said in an interview yesterday. The worker, employed by the agency at the former trade-center site, refused to give her name for fear of retribution from supervisors. "When I heard about the Freedom Tower, I just stood still, I couldn't feel," she said. "They're going to have to take me like this" -- she motioned with both arms -- "and move me."

I have a suggestion that would make the building safe for all and require no coercing of private employees or U.S. government workers to sit in fear of their lives in return for a paycheck.

My suggestion is this: put the United Nations in the top fifty floors of the “Freedom Tower.”


That would render the entire Freedom Tower impervious to attack. Not to mention resolving the mid-town parking crisis.


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, May 01, 2006

Free Ken Lay!


Former Enron CEO Ken Lay is, as we all know, on trial, and the big question the talking heads are debating is whether he has done himself any favors by testifying in his own defense. The consensus seems to be that he has not.

I agree with the consensus, although that question doesn’t particularly interest me. What interests me is precisely why Ken Lay is on trial.

I understand Jeff Skilling being on the stand—after all, he ran the joint while the Fastow deals were being concocted. But from what I’ve seen, Ken Lay isn’t accused of putting those deals together or managing earnings to meet or beat Wall Street targets.

As best as I can tell, Ken Lay’s alleged crime was deliberately misleading investors about the health of his company—giving upbeat public statements even as the business was falling apart. Sounds bad, I suppose. But when, exactly, did corporate spin-doctoring become a crime?

I am asking a serious question. Rose-colored glasses exist everywhere in corporate life as well as on Wall Street. Entrepreneurs and empire-builders tend to be optimists, not pessimists. They do not dwell on the negatives and they do not tend to naval-gaze. The type of brutal introspection and self-criticism spiraling through the DNA of Warren Buffett does not exist in most corporate genes.

Furthermore, calling the glass “half-empty” rather than “half-full” is certainly not in the economic interest of public company managers, given how closely tied to stock prices is corporate pay these days, thanks to lottery tickets known as stock options. This is particularly true when it comes to the kind magical lottery tickets the United Healthcare Board of Directors showered on their favored son—I’m speaking of stock options which appear to be retroactively granted to assure the beneficiary that he has already won the lottery.

But I don’t mean to single out United Healthcare. Has there ever been a company whose CEO emphasized the negative rather than the positive on an earnings conference call? Has any COO ever honestly admitted that he made an emotional decision to throw good money after bad on a stupid initiative, rather than blame its failure on unforeseen market changes?

Has any CFO ever rounded a number down instead of up?

I listen to hundreds of earnings conferences calls and management presentations each year, and I can count on one hand the number of companies whose top managers have gone out of their way to downplay good news or highlight bad news before it shows up in the income statement.

Wall Street loves “upbeat”—expects it, and punishes its absence brutally. For proof, check out Aetna’s ten-point collapse after last week’s less-than-upbeat earnings call.

It’s only human nature, then, that a CEO will do everything possibly to avoid the non-upbeat conference call. Heck, they don’t even like to take responsibility after the fact, let alone in real time, as the government appears to have expected Ken Lay to do.

For proof, look no further than the just-released General Motors CEO's shareholder letter, in which he resorted to the classic Nixonian “mistakes were made” defense regarding the multi-billion-dollar accounting error at GM. (I am not making that up: he actually wrote “errors were made.” You can read the full letter along with the proxy statement that reports his $5.48 million compensation last year.)

Thus, I am happy to report an exception to this rule occurred on a Friday morning conference call. That’s when my old Is-Naked-Shorting-Really-To-Blame? CNBC sparring partner, Overstock.com CEO Patrick Byrne, took full responsibility for the problems that have ensnared that internet reseller:

So to me, this is all a function of bad decisions I made in the first half of '05, both in that they were belated, and then I made a bunch of them and we tried to throw a bunch of stuff together, and we stumbled.

The rest of the call was not quite so straightforward, as I gathered from the instant-messages I received while the call was underway. Although I don’t listen to Overstock conference calls, I could tell it was a doozy, even by Patrick Byrne’s self-established lofty standards of dooziness.

Indeed, the transcript is one for the ages—here’s an actual quote:

It's funny that you ask that. We actually have a truck full of important parts trucking in through -- coming in from L.A. through southern Utah, ran into a cow and tipped over the cab, and that actually, literally, has stopped the project for two weeks. But short of any more cows on the interstate, I don't see how that gets delayed. That's just bolting things together.

I am not making that up. And there’s plenty more where that it from, but I won’t reprint them here, because, like all Byrne conference calls, the more outrageous he may sound, the more it masks the serious nature of the claims he makes, not just about his perceived enemies but about his business. Particularly the earnings power of that business.

One year ago Byrne addressed a question about when Overstock would be profitable by telling analysts that profits could come when the company slowed down its sales growth. Specifically, he said:


Well the answer to that is you tell me when our growth tails off. You tell me when we're not growing 100% a year and when we can't grow 100% a year and I'll tell you when our -- at what level we will show profit.

—April 22, 2005 conference call.

A few months later, Byrne returned to the subject with a bit more granularity, as the analysts say, and mused on what would happen to operating income as a percentage of sales if sales growth slowed to 15%:

I think it's a north of 6% operating income business if we're going to slow it down to 15%. If we're going to be slowing it down to 15% secular, I think that we can do north of 6% at this point.

—August 3, 2005 conference call.

Those were not the first times Byrne had addressed the issue, which is, after all, the key to any fast-growing business except, perhaps, Google, which has managed to maintain fantastic profits even while maintaining 100% growth rates. As early as 2004 he suggested the company didn’t need to slow growth in order to become profitable:

As far as the trade-off between growth and profit, I think that the absolute trade-off between the two is maybe going away. I think that we see--we seem to be reaching the point that--you know, I think with just a little bit more -- I'm optimistic that our -- that our losses may shrink or disappear while we continue this kind of growth. Or even accelerate. Okay? Next question

.—July 23, 2004

And here:

But I think that it's more prudent to say I see that Piper just came out with -- I didn't even realize we were talking to Piper and I'm thrilled that they picked us up. And they came out, I think they plugged 60% growth for the next couple years and that seems to me a prudent growth assumption. And then sort of how -- where the profits come out, I think we should be able to be profitable next year, certainly on a year basis

.—October 22, 2004

More recently, Byrne presented this tantalizing assessment of the web site’s earnings potential:

And he's back [Jason Lindsay]. He's actually sort of kept a toe in the water with us for the last couple of years, and he knows everything going on in the business. He's much more conservative than I am. I think he'd like to see us throttle back to 20% growth and start spitting out $40 or $50 million.

—October 28, 2005


Nevertheless, as reported on Friday, Overstock’s first quarter 2006 revenues grew at somewhat less than 100% cited in the April 2005 quote. They even grew less than the 60% cited in October 2004 and the 20% in October 2005 and the 15% in August 2005.

Overstock’s first quarter revenues grew 9%.

But the business was not profitable. Rather, the company lost $15 million, or 8.3% of sales. Operating cash flow, according to the CFO, was a negative $73 million.

How to reconcile Byrne’s comments on prior earnings calls with this year’s actual results was not specifically addressed on Friday’s conference call—at least according to the transcript before me—and remains unclear.

How to reconcile Rick Waggoner’s formerly upbeat assessments of General Motors with his “errors were made” confession is also not clear.

Nor is the line Ken Lay crossed in his upbeat assessment of Enron’s prospects, nor the management of any other public company where the glass is not, in fact, half-full.

I say, “Free Ken Lay!”



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.