Thursday, September 28, 2006

Where’s Sammy Antar When You Need Him?

.

How Merck Saved $1.5 Billion Paying Itself for Drug Patents

Partnership With British Bank Moved Liabilities Offshore; Alarmed U.S. Cracks Down


Those are the Wall Street Journal headlines, and they certainly seem terrible for the folks from Whitehouse Station, New Jersey.

Here are the details:


Thirteen years ago, Merck set up a subsidiary with an address in tax-friendly Bermuda, in partnership with a British bank. Merck quietly transferred patents underlying the blockbuster drugs to the new subsidiary, according to documents and people familiar with the transaction. Merck then paid the subsidiary for use of the patents.

The arrangement in effect allowed some of the profits to disappear into a kind of Bermuda triangle between different tax jurisdictions. The setup helped Merck slash $1.5 billion off its federal tax bills over roughly the next 10 years.

Sounds bad, huh?

Actually, I’d bet the ranks of companies that engage in same kind of offshore asset-shuffling tax-minimization that the Merck guys used include nearly every member of Fortune 500, and a few others too boot.

But instead of taking that bet, I’d suggest asking Sam E. Antar, the former Chief Financial Officer of one of the all-time great accounting scams—Crazy Eddie.

Sam is a self-described “reformed criminal” who now has a web site (http://whitecollarfraud.com) designed to offer guidance on how to “Protect Yourself against White Collar Crime.”


I know this because Sam posted a comment on this blog recently. (See "Tom Joad's Truck.") It had been about twenty years since I'd heard anything about Sam, which was back when Crazy Eddie was the hottest retailer on Wall Street and before the fraud was discovered.

In those pre-Eddie-Antar's-flight-to-Israel-days, Wall Street’s Finest had been rightly skeptical of Crazy Eddie at first blush, but the company kept blowing out earnings after earnings, which eventually created the kind of momentum that causes suspended disbelief among rational people—so much so that Crazy Eddie himself was the featured luncheon speaker at a giant retailing conference here in Manhattan, hosted by one of Wall Street's Finest.

The presentation started with an emotional introduction by Jerry Carroll, the pitchman whose radio and TV commercials (“His prices are insane!”) made Crazy Eddie famous. Carroll introduced Eddie, they hugged, and then Eddie began a fast-talking pitch for the company to a ballroom filled with enthralled money managers and jealous competitors.

During the question and answer session, somebody asked Sammy, the CFO, what the company did to keep its tax rate lower than other retailers. This is, usually, a softball question that triggers, usually, a bland and highly generic sort of answer about how ‘we work hard to minimize taxes in a variety of ways…yadda yadda yadda.’ Usually.

But Sam didn’t yadda yadda yadda.

Instead, he launched into chapter and verse about how they registered trade names in low-tax jurisdictions and also, if I remember correctly, something about running products through low-tax jurisdictions in the same sort of way Merck apparently did with its drugs.

I don’t recall all the details, but I vividly remember sitting at a lunch table with the folks at Toys “R” Us, who immediately began making eye contact, shaking their heads and rolling their eyes at each other.

I whispered to the Toys “R” Us guy sitting next to me, “I take it you guys do that too?”

He said, “Yeah, but we don’t talk about it!”

That was twenty years ago. So I have to ask this: why did it take the U.S. so long to get “alarmed” at this kind of stuff?

Sam, you got any ideas?


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, September 26, 2006

Beware the Dreaded “Model”


The model you have is wrong because sales were off by a factor of 1000. The associate who input numbers on the revenue line was thinking millions when the model was otherwise scaled to thousands…

We used to do this without computers.

At least, without personal computers, that is. All this stuff—company presentations, research reports, even earnings models—used to be done without the aid of Microsoft PowerPoint or Microsoft Word or even Excel.

Slides were created by graphic artists with sensitive natures who took their creations very seriously.

Word processing was done by secretaries using giant word processors in—consult your Wikipedia on this one, kids—what was, for its time, the wonderfully hi-tech “Wang Room.”

And while most earnings “models” consisted of a fairly basic income-statement projection with numbers obtained by hand on an HP calculator, any analyst with a big, complex “model”—for a North Sea oil and gas producer, for example, with lots of tax and royalty considerations; or a pharmaceuticals company with many new drugs in the pipeline—could take his work to the fellows in the data center.

There, the numbers would be input and later spit out on giant runs of folding paper with perforations along the sides. The analyst would stare at the numbers and make changes if needed and send them back until he got his “model,” which would then be, literally, cut-and-pasted by the graphics people for inclusion in the back of the report.

But the IBM PC and a program called Lotus 1-2-3 changed all that.

With Lotus on your desktop, you could—like a photographer with a digital camera and a one-gig flash card—try as many variations on the model as you wanted. Any oil price, any tax rate, any royalty calculation, any growth rate at all could go in…and out would come a beautiful five-year forecast down to the nearest penny-per-share.

Not that it was any more accurate than the hand-made version. Garbage in, garbage out, as they say.

After all, Enron had a model and eToys had a model and so did WorldCom. In fact, just about every fraud or flame-out ever recommended by one of Wall Street’s Finest has had, at the back of the report, “The Model.”

Which is why I was not entirely surprised to receive the response (quoted at the top) to a question regarding “The Model” I’d been puzzling over. It was for a drug development company we’ve been working on, and I couldn’t understand why the analyst’s numbers showed a massively increasing rate of loss in future years, even assuming the drug under development received FDA approval.

Turns out “The Model” was wrong, “by a factor of 1000.”

There you have it: garbage in, garbage out.



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.

Sunday, September 24, 2006

Airline Mogul Pledges Billions in Fight Against…Global Warming?


The 20th century's 10 warmest years all occurred in the last 15 years of the century. Of these, 1998 was the warmest year on record.

—U.S. Environmental Protection Agency


Richard Branson was, in my estimation, the first “cool” billionaire.

Entirely self-created—he began a student magazine for which he talked Mick Jagger and John Lennon into being interviewed—Branson started Virgin Records and made a splash by signing the Rolling Stones to a mega-contract back when the Stones seemed on the verge of becoming irrelevant.

In fact, the Stones are irrelevant, music-wise. But tell that to the fans who made their “Bigger Bang” the highest-grossing tour of 2005, at $162 million.

What is it about the Stones’ mystique that causes aging boomers to pay top dollar so they can sit in giant football stadiums to watch 65 year-old men play 40 year-old songs on a stage so far away they in fact watch the entire concert on giant projector screens which, for all anybody knows, are showing replays from the 1989 “Steel Wheels” tour?


Is it the infectiously tribal quality of songs like “Sympathy for the Devil” and “Gimme Shelter”? The preening stagecraft of the seemingly ageless Mick Jagger? The delicate interplay between the under-rated Charlie Watts on drums and former Faces founder Ron Wood on guitar?

Personally, I think it’s watching Keith Richards not die year after year that keeps people interested. But that’s just me.

In any event, Branson—long hair, Brit accent, rock star sensibility—seemed like the first cool guy to make a billion dollars for himself. After all, he was (irrelevant Rolling Stones notwithstanding) the guy who signed the Sex Pistols after they’d been dumped by a couple of labels for courting too much controversy.

The irony, I suppose, is that Branson made his first billion by selling Virgin Music in order to start an airline, of all things. Over time, Virgin Atlantic and its various spin-offs have made him more money than the music business, and he is now a full-fledged corporate big, and a “Sir Richard” to boot.

Which brings us to the announcement last week that Sir Richard pledged three billion dollars at the Clinton Global Initiative to combat global warming:

“Our generation has inherited an incredibly beautiful world from our parents and they from their parents,” Sir Richard said. “It is in our hands whether our children and their children inherit the same world. We must not be the generation responsible for irreversibly damaging the environment.”
—The New York Times

Amen to that, right? How can anybody be against irreversibly damaging the environment?

Not lost on anybody, of course, is that this guy runs an airline.


Airlines fly airplanes which run on jet engines that emit carbon dioxide by the ton, a non-trivial problem because rising carbon dioxide concentrations in the atmosphere retain heat—hence the “greenhouse effect” contributing to the above-mentioned warmest years of the 1900s not coincidentally crowding together during the last decade of that century.

Not only do jet engines emit carbon dioxide, but they leave contrails in their wake, which add to cloud layers that likewise trap heat, thus further contributing to the planet’s slow-boil.

Air traffic and, therefore, contrails, are not evenly distributed around the globe. They are concentrated over parts of the United States and Europe, where local warming reaches up to 0.7 watts per square meter, or 35 times the global average.
—American Geophysical Union

The irony of a leading Global Warming Contributor pledging billions to address, well, Global Warming was not lost on even Katie Couric, about whose career, for some reason, people care deeply.

When the perky news gal asked Branson about that very irony following his grand announcement, he responded thusly:


“The only way people can get to London, for instance, is to go on Virgin Atlantic or another airline. And so it's not -- you're not going to stop that happening. So what we've got to do is come up with fuels that Virgin Atlantic can burn that are clean fuels, and that's where our money is going to go, in trying to develop new fuels that can fuel cars and planes and make sure that the world is a safer place.”

Feel-good prattle from a New Age billionaire? That’s what some are calling it.

But keep in mind this is a guy who’s literally risked his life doing stuff—round-the-world hot air balloon trips, for one—that most people with a billion in the bank would be advised by their advisors against doing.

Not only that, but he signed the Sex Pistols.

The snow cover in the Northern Hemisphere and floating ice in the Arctic Ocean have decreased. Globally, sea level has risen 4-8 inches over the past century. Worldwide precipitation over land has increased by about one percent.
—E.P.A.

I think Branson is still the first cool billionaire.


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, September 22, 2006

Coming Soon to a Movie Theater Near You! “The Undead…at Least for Options Purposes”



Cablevision Gave Backdated Grant To Dead Official
—Wall Street Journal

That’s the headline, and I am not making it up.

According to the article in today's Journal,

Cablevision Systems Corp. awarded options to a vice chairman after his 1999 death but backdated them, making it appear the grant was awarded when he still was alive, according to a company filing and people familiar with the matter.

The funny thing is that just the other day, while discussing the recent firing of Bristol Myers’ bad-news-plagued CEO Peter Dolan, a hedge fund friend said, “Maybe the lesson here is never invest in a company whose CEO is named ‘Dolan.’”

The other, non-Bristol Myers ‘Dolan’ my friend had in mind was James L. Dolan, the CEO and President of Cablevision—the “Dead Official” option-granting company of the above headline, which happens to run one of the better cable franchises around. Dolan is also, unfortunately, the Chairman of Madison Square Garden, home to what has to be one of the worst sports franchises around—the formerly storied New York Knicks.

It is in his capacity as boss of MSG that James Dolan—“Jimmy” to his friends among Wall Street’s finest—gets to sit at court-side and watch up-close what used to be a team that won championships implode under whatever new staff he assembled during the off-season to replace the previous season’s fodder for the New York Post.

(Not that I care much for basketball, the object of which is, as far as I can grasp it, to run out the clock by fouling opposing players the nanosecond the ball is put in play, thus causing the final “three minutes” of the game to stretch out so long that players can be traded to other teams and back again before the final “three minutes” is over.)

Any doubts that Cablevision—long accorded a discounted valuation on Wall Street for the perception of being run by and largely for the Dolan friends and family—could have benefitted from the kind of outside, Federally-appointed overseer that played a key part in ousting Peter Dolan after multiple billion-dollar-type mis-steps at Bristol Myers should be erased by yesterday’s SEC filing from Cablevision, as well as today’s Wall Street Journal story.


Cablevision backdated options from 1997 to 2002, according to its SEC filing. In practically all cases the share prices were lower, "sometimes substantially lower," on the option awards than they were on the actual date options were granted, the filing said.


But here’s the whopper:

"The company's board of directors and senior management believe that the practices...are contrary to the high ethical standards they believe should apply," the filing stated.

What makes that amusing, of course, is that “Jimmy” was CEO of the company during the entire five-year stretch of ethical-standards-contrary backdated options.

Wonder if any of the Cablevision “friends and family” have been granted options that date back to before they were born?


Now that would be something.



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.


Wednesday, September 20, 2006

Sharks in the Water


The partners began to sense that they might not make it. Their exquisitely wrought experiment in risk management, to say nothing of their fabulous profits, was in danger of unraveling.


—When Genius Failed, by Roger Lowenstein


According to natural-gas investors who traded alongside Amaranth, Mr. Hunter repeatedly used borrowed money to double-down on his bets

—Wall Street Journal. 9/20/06


The most memorable part of Roger Lowenstein’s excellent book on the Long Term Capital Management debacle (quoted above) was when LTCC’s founder, John Meriwether, called a retired, street-wise, market-savvy ex-Bear Stearns confidant for advice.

When he heard LTCC was down 50%, the old-timer didn't mince words. He told Meriwether: “You’re finished.”

What the old pro was telling the computer-driven “Genius” of the book title was that when the market smells blood in the water, it goes after whatever is bleeding and doesn’t let go.

Now, this week’s blow-up of Amaranth, a Greenwich Connecticut-based hedge fund which appears to have fallen victim to some wild and crazy natural gas trading, does not, as far as anybody knows, rival LTCC’s when it comes to potentially bringing down the system.

After all, LTCC had margined their positions into a nominal exposure close to a trillion dollars, compared to the multiple billions involved at Amaranth.

Nevertheless, the two situations are not entirely unrelated. As happened with LTCC, when word of a problem at a hedge fund hit the natural gas markets last week, those markets appear to have started going precisely the wrong way for the fund most exposed to those moves—Amaranth.

I have no idea how the situation will unwind, and I certainly hope there isn’t the kind of second and third-derivative damage in other markets of the type that caused LTCC’s demise to force an emergency session of the Federal Reserve. Those were very dark days.

But the lesson is obvious: for all the confidant talk about how derivatives off-load risk and therefore create a safer financial world, there is something to the notion that what we are building up here is the potential for a liquidity crisis that brings the system down.

Before you scoff at this, try to guess who told the Wall Street Journal the following less than three weeks ago:

“Spreads and options are of their very nature instruments for positions which are designed to allow the user to capture upside with a much clearer understanding with respect to downside exposure.”

Give up? It was the CEO of Amaranth.

Three weeks after that statement, reports the Journal, institutional investors in Amaranth are now trying to sell their interests in that hedge fund to a firm that provides secondary markets in such things. Says the market-maker:

“Sellers want 30 to 40 cents on the dollar, but buyers are only willing to pay 10 cents to 20 cents on the dollar.”

When sharks smell blood...


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.

Sunday, September 17, 2006

Has Anybody Driven a Ford Lately?


...one of the biggest changes I've seen as a result of the Way Forward plan is a new culture of candor and honesty in both our decision-making and our communications. We remain dedicated to honest, open, two-way communications throughout the business even when we have tough news to deliver. And today is no exception.


So began Friday’s conference call held by the Ford Motor bigs charged with turning around the company that Ford family management has done their inadvertent best to drive into the ground.

The “honest, open, two-way communications” did not appear to make Wall Street’s Finest feel any better: Ford’s stock dropped as soon as the market opened midway through the call, and continued dropping, especially when the Q&A session began.

Ford stock finished the day down just over a buck a share on nearly two hundred million shares traded. Now, a buck may not seem like much until you consider there are only eight more of those to go before the stock reaches zero.

“Open” and “honest” management may be, Ford shareholders would probably take “ruthless” and “hard-nosed” any day.

I should make clear that “Way Forward” is the appellation given to the restructuring plan introduced by then-CEO Bill Ford early this year—a clever publication relations means of spinning a large, ugly restructuring plan into a kind of rallying cry.


After all, “Way Forward” certainly sounds more upbeat than other, possibly closer-to-the-truth alternatives, such as, for example, “Failure is Not an Option at This Juncture.” Or my own personal favorite twist on the kind of sappy, eye-rolling motivational slogans you see on posters near the vending machines of cubicle-oppressed drones, which is “If at First You Don’t Succeed, Skydiving is Not for You.”

But I digress.

After noting “a lot has changed since January,” Ford's President of the Americas, Mark Fields, delivered a laundry list of issues leading to Friday's updated “Way Forward” plan, the first being gasoline prices:

In April, gas prices rose $0.40 a gallon to $2.90 and they hit $3.00 a gallon this summer, the first time since Hurricane Katrina. This triggered an acceleration in demand away from less fuel efficient vehicles and it hit the full-size pickups, our bread and butter, particularly hard.

A cynic might note that Hurricane Katrina and $3.00 gas occurred before the first Way Forward plan. Furthermore, our cynic might note gasoline prices have collapsed lately, thanks to the resumption of refinery capacity taken offline for maintenance earlier this year precisely at the same time the summer driving season is winding down.


Nevertheless, Fields moved on to the second burden:

In addition to gas prices commodity costs are up substantially this year. That has put even more pressure on the business. Rhodium and copper are up about 60%. Platinum and palladium are up about 30%. And steel has risen another 15%.

Our cynic might note here that prices for rhodium and copper, as well platinum, palladium and steel, have presumably risen for every car maker, not just Ford.


Nevertheless, so far, it all seemed clear to this listener until Mr. Fields put forth an analysis of changing automobile demand patterns supposedly being caused by the aging of us Baby Boomers.

See if you can spot the non-sequitur in Mr. Fields' speech:

Added to this are the demographic changes that will accelerate over the next decade and dramatically affect the types of vehicles we produce.

Just as the largest buying groups, baby boomers, are downsizing every other aspect of their lives, including their homes, they are moving to smaller cars, crossovers, small SUVs and small premium utilities.

Does anybody out there besides Mr. Fields see baby boomers “downsizing every other aspect of their lives, including their homes”?

I see tiny 2,000 square-foot Colonials on half-acre lots being bulldozed and replaced with 6,000 square-foot McMansions, cathedral-ceilinged and three-car-garaged to boot. I see boomers whose parents rented beach cottages by the day buying, leveling and supersizing those cottages for their weekend getaways. I see Starbucks serving espresso drinks in twenty-ounce "Vente" cups instead of Greek diners serving plain old coffee in six-ounce cups.

And I see zero evidence that Baby Boomers are practicing anything remotely close to the ascetic behavior Ford Motor puts forth in order to justify doing what they should have been doing when oil prices broke above the $40-a-barrel all-time-record a few years back: which was building quality, fuel-efficient cars instead of bigger trucks.

Still, the hands-down strangest part of the conference call came at the end of the company's presentation and before the Q&A, after
Mr. Fields had tried to impart to Wall Street’s Finest the company’s sense of urgency:

Now, to be clear, a lot has changed since January. And it's required us to take another look at the industry and our business in light of the significant changes we've seen externally. The conclusion has been very clear -- we need to go further and faster and accelerate our pace.

Yet after the company’s presentation a Ford Investor Relations came on to announce the following:


“We’ll now take a short break for 10 minutes and then will begin the Q&A session.”

A ten minute break in the middle of a crisis-induced conference call! I am not making that up.

Maybe they needed a vente espresso to get through the Q&A.


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, September 14, 2006

Tom Joad’s Truck


One of Wall Street’s Finest is today reiterating a “Buy” rating on Dollar General, mentioning, among other things, ‘store environment enhancements’ according to the summary email I received this morning.

Dollar General, as you may know, is a former high-flyer retailer and one of the original so-called dollar stores that blanket the country—in particular, the south. Yet the company's stock price has done nothing for a decade.

(I do not exaggerate. At $13.67 last sale, shares of DG trade precisely where they traded ten years ago this month, with a brief visit to $25 and an equally brief stop at $10 in between.)

Whether DG is a value here is anybody’s guess, but I will wager the analyst in question and her one or two other fellow Dollar General bulls on the Street have not seen the half a dozen stores I recently viewed in the heart of Dollar General Territory.

To quote Mick Jagger, they’d make a grown man cry.

Now, “Dollar General” is a misnomer: the company does not sell “everything for a dollar.” Rather, it sells a mix of general merchandise and basic apparel that a lower-income family would need. I do not derogate DG’s customer base—the company’s self-described mission is to serve “the basic consumable needs of customers primarily in the low and middle-income brackets and those on fixed incomes.”

And the company isn’t kidding: its customers have an average annual income of $30,000; a quarter of them earn less than $20,000 annually. Most items in the store cost $10 or less; a third cost a buck or less. And the average ticket per shopper is nine bucks.

Despite longstanding fears of Wal-Mart’s dominance of the lower-income customer in DG’s territory, the company grew and thrived, with a good return on capital, a 20%+ return on equity and years of sales growth.

Turned out, some of the good numbers owed themselves to flakey accounting rather than great management, which revelation and subsequent SEC investigation knocked the stock off analyst “Buy” lists a few years ago. Nevertheless, the scandal triggered a change at the top much anticipated by investors eager to buy a growth stock on the cheap, assuming the 'store environment enhancements' would have the desired effect.

The results under new management have, so far, been mixed. Sales growth has slowed and recently net margins have been chopped nearly in half. For all the share buybacks and new initiatives, the stock has languished and Wall Street by and large is on the sidelines, except the aforementioned, buy-reiterating, bull.

Which brings me back to my recent tour of Dollar General—and other—stores in the south.

I can’t say it was scientific, being a random collection of stores in random small towns in random areas of Mississippi and Tennessee. And I certainly wouldn’t make an investment decision on the basis of a small sampling of a few stores.

But after seeing the same old 'enhanced' Dollar General stores with the same old stuff in the same old displays and on the same old shelves, what came to mind—particularly as I skipped the last store because a sorry array of rickety tables had been set up in the parking lot piled high with sale items—was Tom Joad’s truck loaded with his family's every earthly belonging, in the Grapes of Wrath.

As poor Tom once said, “Sure don’t look none too prosperous.”



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.

Monday, September 11, 2006

Where Were You?


I was coming out of the gym of a hotel in San Francisco, around 6 a.m. local time. A woman working for the broker whose conference I was attending was on her cell phone telling somebody, “A plane hit the World Trade Towers.”

I checked a Bloomberg near the elevators, and the top story was exactly that: an airliner had hit one of the towers.

I rode up the elevator with another guy, speculating on which airline the plane belonged to, because the stock would get crushed on the opening. It sounds callous, but that’s how you think in this business—or did, before 9/11.

When I got to my room I turned on the TV and the second tower had been hit, and the government announced it was shutting down the airports. I used to work at One Liberty Plaza and saw the towers burning.

I thought, “Market closed for a week. Conference over. Drive home.”

I left the room and it was strange: nobody was up. Newspapers hung on the doorknobs and the lobby was quiet.

I asked the concierge to get me a car, told him I would return it 3,000 miles away and he didn’t blink, just said it’d be out front in about 20 minutes. I checked out, went back to my room and packed, called my partner, called home, called traders and left the room for good.

Back to the lobby and all hell had broken loose. Phones ringing, people from the conference walking around on cell phones, and a long line at the concierge desk for rental cars.

A young woman was pacing frantically, shouting into a cell phone that her friend worked on the 93rd floor and she couldn’t reach her.

Then I overheard one of the conference minions telling somebody that the morning sessions would be delayed until they figured out what the markets were doing, and I wanted to strangle the guy and tell him the conference was over, but the car had arrived.

I turned down California Street, got on Route 80 and headed home.


Where were you when it happened?



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, September 08, 2006

SimplyNotHappening.Com


There’s on old Seinfeld episode in which Elaine hosts a baby shower for a woman she’s trying to impress; and when things go wrong the unimpressed woman says, “Elaine, who catered this…Sears?”

That “Sears” had become a one-word punch-line in a popular sitcom pretty much sums up the problem Sears Holdings has with efforts to rejuvenate its brand—especially under the Eddie Lampert regime.

Lampert, whose track record in finding value in public companies—notably AutoZone—is among the best ever, shmooshed K-Mart together with Sears to create a retailing giant whose customer base is either dying off or increasingly shopping elsewhere.

That’s not mere opinion: sales at the combined Sears and K-Mart stores declined nearly 4% last quarter. Happily for Sears’ shareholders, however, margins were up—illustrating the major theme of the Lampert-engineered business model, which is to sacrifice unprofitable sales (something retailers hate to do) for the sake of fatter margins and excess cash flows (something shareholders love).

Wall Street’s Finest have been slow to embrace the Lampert makeover, mainly because they suspect that Lampert is starving the Sears/K-Mart store base of necessary capital. Unlike, say, natural gas pipelines, retail brands require intensive care and feeding every year to maintain their cash flows, because a fickle shopper has many alternatives.

Nevertheless, Lampert’s strategy worked wonders at AutoZone, the ubiquitous auto supply store, and Lampert appears to see no reason it can’t work at Sears/K-Mart.

But there is good reason it may not work at Sears/K-Mart—mainly that, unlike Sears and K-Mart, AutoZone is a convenience-based supplier of mostly specialty parts selling to mechanics and car-guys who couldn’t care less about a crack in the floor tile or whether they could find the same product cheaper in another store a half hour away.

To paraphrase Jim Morrison, they want that timing belt and they want it now.

Blue jeans, laundry detergent, diapers and washing machines are a different story. So Sears/K-Mart runs the very real risk that traffic continues to decline store by store until the business loses its customers and its cash flow.

To quote the Lizard King, “When the music’s over, turn out the lights.”

Still, Sears is not doing nothing. A recent story in the New York Times touted the company’s online efforts to market to college students for the all-important back-to-school season.

To whit:

Sears Holdings... has gone further than most other online retailers in appealing to college students this year by creating a Web site, SimplySearsCollege.com. Like other online executives, Lorna Sargent, director of e-commerce content for Sears Holdings, struggled to explain why retailers chose this year to pursue college students with such zeal.

“Everyone just kind of realized there was this untapped market out there,” Ms. Sargent said.

This sounds pretty good, as does the site description:

Perhaps fittingly, the site is designed for visitors who might like to relax a bit, browse articles and interact with various features, rather than rushing through the purchase process. Visitors are greeted with background music ranging from retro rock to contemporary metal, and a screen that bristles with features like idea lists and articles and videos about surviving freshman year.

Unfortunately, as with so many other recent attempts to recharge the Sears shopping experience (Lands’ End being one; Sears Essentials being another), this one has that Seinfeld feel to it.

“Today’s specials” highlighted on the first page include a “3 Shelf Bookcase” for $49.99, a “Manchester City Convertible Sofa”—whatever that is—for $299.99, and a “Back 2 School TXL Mattress Pad”—whatever “TXL” means—for $12.99.

(Hint to Sears: not many college students are looking for bookcases these days.)

For the record, I am not deliberately picking the least desirable stuff to show how dull the site is. I have even less time to bother with this than a college student trying to fill his apartment with—as the site calls it—“The Gear.”

For comparison’s sake, Sears’ laundry selection for the college-bound contains 8 items, 5 of which are laundry hampers ranging in price from $20 to $50. I am not making that up.

I don’t know about you but my college experience did not involve a major emphasis on laundry hampers. Nor would I have spent fifty bucks for the “Supreme Laundry Sorter” offered by Sears, or even twenty bucks for the “Collapsible Hamper.”

For one thing, the “Supreme Laundry Sorter” would have occupied most of the available free space in our cramped room. For another, if you asked a nineteen year old male what he would do if he had fifty bucks, the first thing he would not say is, “I’d buy a Supreme Laundry Sorter.”

He would probably say, “I could play foosball at Smuggler’s Tavern for the rest of my life or as long as I don’t flunk out of school,” not that I spent much time playing “foosball” at “Smuggler’s Tavern” when I was nineteen. (I was actually twenty at the time.)

And in fact, given the space issues in our dorm room by which only one of us could be standing at a given time, plus the finance issues, my laundry solution was a cheap old cloth laundry bag I could stuff under the bunk bed that probably cost five bucks.

For comparison’s sake, I checked out Bed Bath and Beyond’s web site—to take a real growing retailer, not a cash-cow being milked for all it’s worth—which has a college tab with actual products that a nineteen year old might need, at great prices. Including, by the way, laundry bags for five bucks.

New York Times puff-pieces aside, SearsSimplyCollege or SimplySearsCollege or SearsSimplyNotHappening or whatever the heck it is appears to be a cobbled-together effort to market existing Sears merchandise on the cheap, and in fact the company spokeswoman admitted as much.

Ms. Sargent said SimplySearsCollege.com, which was introduced late last month … represents another first for the company, in that Sears Holdings has never before integrated products from Lands’ End, Kmart and Sears on one site.

“Sears has generally approached back-to-school from a school-kid age demographic,” she said. “So this is a new demographic for us.”

Any college students out there buying it?



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.

Wednesday, September 06, 2006

This Weekend Only! And Next Weekend! And Next!...


$1 Shipping*
Ending Tomorrow!


That email, from an online retailer, appeared in my inbox last Wednesday. And while the prospect of getting something as big and bulky as a bed, for example, delivered to my house for a mere $1-with-an-asterisk might sound appealing, I paid no attention to it.

Aside from the fact that I don’t have any particularly pressing needs in bedding, lighting, jewelry, furniture or electronics—the categories highlighted in the email—the reason I paid no attention to it is that I’d seen the same kind of email, from the same web site, before.

In fact, it was just weeks earlier that I got a similar email promising $1-with-an-asterisk shipping from that web site, as a quick search of my never-discard-anything Google inbox disclosed. August 21st to be precise:

$1 shipping*
This weekend only!

And that was a month after the previous “This weekend only!” $1-with-an-asterisk shipping offer hit my inbox, on July 19th.

In fact, I’ve gotten these “Last Day” for “$1 Shipping” emails almost every month this year:

June 21st: “$1 Shipping - Last Day.”

April 21st: “$1 Shipping – This Weekend Only.”

March 19th: “$1 Shipping – Ends Today!”

February 27th: “$1 Shipping – Extended – Today Only”

January 23rd: “$1 Shipping – Extended – Today Only”


Consumers are not this dumb—as Sam Walton, the founder of Wal-Mart, knew when he dropped the this-weekend-only! kind of promotions that drove mass merchandise retailing during the 60's and 70's and switched to everyday-low-pricing.

And consumers have become even less dumb thanks to the Internet, which provides pricing transparency never before easily available to the average shopper.

So why on earth a web site would blast-mail “$1 Shipping, Today Only!” offers month after month is anybody's guess.

While I have no specific insight into whether this particular web site’s repeated ‘one-time only’ offers are turning off, rather than turning on, buyers, the company has reported a marked slowdown in sales growth—from the 100% early last year to sub-10% currently—which management attributes to deliberately easing up on the marketing gas.

Meanwhile, the CEO has told Wall Street’s Finest that he has taken over the email marketing program, with no apparent impact on the repeated “Today Only!” $1 Shipping offers. These are his words from a recent conference call:

I've taken over the internal marketing personalization, email -- well we call it internal marketing as opposed to online marketing and offline marketing. So the website and everything related to customer analytics.

Sounds clear enough, until he goes into details later on:

And then the Teradata data warehouse, we have super sized it with a new system. I think I'll leave it to Teradata - they're going to announce some time soon what they've done here. But they have super sized the system and that's important for a bunch of reasons like we're now personalizing e-mails, but we had trouble personalizing more than about 500,000 e-mails -- we send nearly 10 million.

We have 22 million addresses, but we sent 10 million about three times a week. And we could personalize about 500,000. We're actually through some brands in IT group, I think, figured out a way to get about 2 million. But with the super size system we'll be able to handle a lot more and we're very glad we upgraded.

What all this means I have no idea, nor did any of Wall Street’s Finest follow up on what it actually meant, so I suppose it’s no surprise that this weekend another email arrived, with an even better deal than the recurring one-time only $1 Shipping offers:

FREE SHIPPING*
This Weekend Only!

But I’m not biting. Something tells me this isn’t the last “FREE SHIPPING”-with-an-asterisk “This Weekend Only!” email I’m going to see from this web site.

Oh, I almost forgot. The web site is 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.

Friday, September 01, 2006

And Simon Will Get Back Together With Garfunkel.


Is an Apple-Sun merger in the works?

Commentary: Why Apple really put Google's Schmidt on board


So reads the breathless this-could-be-big MarketWatch headline above a column by John Dvorak, the old-time PC Magazine columnist whose musings on the state of the computer industry used to be followed closely by anybody with an interest in the business.

That was up until around, oh, 1984 or so, when Dvorak—a longtime Apple-basher—dismissed the new-fangled invention called a “mouse,” which Apple had begun shipping with its machines, by saying “There is no evidence that people want to use these things.”

(Yes, kids, it’s true: computers used to be controlled by keystrokes. Ask your Mom or Dad about the “F” keys at the top of your keyboard.)

There are few computer-related innovations more revolutionary than the mouse—which was not developed by Apple but rather by the poor shlubs at Xerox PARC (Palo Alto Research Center), who invented a whole bunch of cool stuff, including the graphical user interface (ask your parents about that, too, kids) and Ethernet, without making a dime for themselves or Xerox.

Legend has it that Steve Jobs, on a tour of PARC, saw the “mouse” in its primitive stages, grasped its significance, and made it happen. Nowadays, of course, a personal computer without a mouse—what Dvorak dismissed as “these things”—does not exist.

In any event, for reasons that escape me, the world still pays attention when Dvorak produces one of his deliberately attention-getting columns, as it did with his “Apple-Sun” merger piece this week.

Let’s examine Dvorak’s evidence for making the case that, as he wrote, “Schmidt [Eric Schmidt, the Google CEO who recently joined the Apple Board of Directors] may have been brought in as the set-up pitcher for what may finally be the often rumored merger between Apple and Sun.”

Dvorak’s Exhibit A: Eric Schmidt used to work at Sun.

His [Schmidt’s] executive training began at Sun and he is still close to the company and its founders. Being the CEO at Google, a somewhat goofy high-energy creative company, should enable him to handle the Apple side of things. Nothing could be harder to manage than Google.

Think about this for, oh, thirty seconds—as Mr. Dvorak apparently did not.

Eric Schmidt is a guy who for one brief shining moment after leaving Sun had one of the biggest stacks of chips at the high-tech poker table, when he was CEO of Novell during its late-1990 glory days. Then Microsoft came along and destroyed Novell’s networking franchise in about as much time as it takes to say “I call.”

After Schmidt spent what must have seemed like a couple of decades, but was in fact only a year or two, missing earnings, laying off engineers and taking hits from Wall Street’s Finest, he left Novell, took his few remaining chips and went all-in by taking a job as CEO of a funky little search engine called Google.

And as everybody including Dvorak knows by now, Eric Schmidt drew an inside royal straight flush on the river card at the final Texas Hold ‘Em table at Binion’s. For one thing, he's a billionaire; for another thing, he runs what many people think is the coolest, most revolutionary, and most zealously missionary technology company in the world right now.

So Eric Schmidt is going to give up all that (excepting the billion dollars) in order to figure out which software engineer from Sun should get which cubicle in Cupertino?

I don’t think so.


Dvorak’s Exhibit 2: Apple’s stock price is high, Sun’s is low.

As of this writing the two stock prices have never been more skewed, making the deal attractive to Apple.

It’s true that Apple’s $50 billion market valuation (net of cash) is more than triple Sun’s $15 billion market value.

But Apple is, in fact, profitable, while Sun is not. So whatever Dvorak means by “the two stock prices have never been more skewed” (and I think he means one is simply larger than the other), Sun’s stock is in fact far more expensive than Apple’s.

So Jobs would be better off buying Apple’s own stock than buying Sun’s operating losses, whether or not one integer happens to be larger than the other in the stock tables.


Dvorak’s Exhibit 3: It seemed like a good idea 200 years ago, so maybe it still does.


In the past the deals have always fallen apart before they began because (among other reasons) the combined companies would not have an acceptable CEO. Neither Scott McNealy nor Steve Jobs nor John Sculley nor Mike Spindler (not to mention Gil Amelio) seemed capable of handling a combined operation.


With today's two CEO's, Steve Jobs at Apple and Jonathan Schwartz at Sun, this continues to be true. But with Eric Schmidt in the game as a middleman it'squite possible that he could take the reins of such a combined operation and make it work

Dvorak really dredges up ancient history here, with names like John Sculley—the John Delorean of the computer business—and Gil Amelio, a guy maybe ten people remember, who briefly ran Apple during the dark days of the mid-1990s.

Which leads to the fourth and weakest piece of his evidence that Sun and Apple are headed for a merger—

Dvorak’s Exhibit 4: Apple wants to sell more servers.

Apple is looking to make a splash in the server market to solidify its position there, but it does not have the credibility of a Dell, HP, IBM or a Sun despite the quality of its offerings, and it would love to grow that very profitable side of the business. Sun is positioned to make another run at server dominance as this is written, thanks to its superstar engineer and co-founder Andreas von Bechtolsheim.

I don’t know Steve Jobs, and I don’t know Eric Schmidt, and I don’t know Andy Bechtolsheim, and I don’t know John Dvorak.

But anybody who thinks that Apple—which revolutionized the personal computer industry and then the music industry, and is now on the verge of revolutionizing the television and movie industry—is going to spend $15+ billion to “make a splash in the server market,” well, they might as well be wishing for Simon to get back together with Garfunkel.

Or, even less likely, I think, a return to the pre-mouse days, when computers played pong and were controlled by F-keys…and people wrote columns to explain how to operate the damn things.


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.