Tuesday, February 27, 2007

Kremlinology in Our Times



Flew in from Miami Beach BOAC
Didn’t get to bed last night
All the way the paper bag was on my knee
Man, I had a dreadful flight
I’m back in the U.S.S.R.
You don’t know how lucky you are, boy
Back in the U.S.S.R.

—Lennon/McCartney



I do realize that a certain portion of our readers may never have come across the word “Kremlinology.”

After all, the notion of studying seemingly minor things such as the placement of officials in photographs of the May Day Parade in order to determine what was going on at the Kremlin—and, therefore, in the government circles of the notoriously secretive USSR—seems ridiculous in light of the fact that:

a) The USSR no longer exists;

b) Vladimir Putin, the President of its Russian successor, simply takes whatever he wants whenever he wants it.

So who needs “Kremlinology” anyhow?

To illustrate how quickly the world has changed, the spell-checker in this word processor, brought to you by the Microsoft Monopoly, doesn’t recognize “Putin,” and insists on underlining his name in a squiggly red line as I type.

That squiggly red line is highly annoying, although compared to something as evil and pernicious as the “Insert Key”—which computer users only discover when they accidentally it hit by mistake and then wonder why their words are being eaten up by the computer—the squiggly red line under “Putin” is nothing.

I know some people who, before they learned what that innocuous little button in the right hand corner of the keyboard actually did, would re-start their notebook computer in order to turn off the “Insert Key.” They would then pray that whatever strange bug had suddenly gripped their system would not re-occur.

When they learned the source of the problem, they were so relieved their machine was not infected by some strange virus created by a twelve year old kid in Uzbekistan that they experienced a sense of relief akin to discovering that a biopsy had come back negative.

Now, the fact that twelve year olds in Uzbekistan and Lithuania are free to create computer viruses is all thanks to the end of the Cold War in 1989, when the Berlin Wall fell and the USSR began to disintegrate.

Which is why the term “Kremlinology” means nothing these days: by the time this year’s college graduate was old enough to read a newspaper, the Soviet Union no longer existed.

In any event, the term itself is a good description of the type of work analysts must do when companies resort to the type of self-deception practiced by the occupants of the Kremlin during the heyday of the USSR.

A prime example is the following press release recently issued by Netflix, the DVD-by-mail service that recently upset Wall Street’s Finest with modestly disappointing subscriber growth, even while reiterating plans to reach 20 million subscribers sometime down the road—video iPods and YouTube notwithstanding.

LOS GATOS, Calif., Feb. 20 ...Netflix Inc. (Nasdaq: NFLX - News) today announced that Chief Operations Officer Bill Henderson is planning to become a strategic advisor to the company and that Vice President of IT Development Andy Rendich, an eight-year Netflix executive, has become interim head of Operations. Mr. Henderson is expected to serve as a consultant to Netflix for at least the next two years.

The casual reader might think nothing more of this than what it says: that the Chief Operations Officer is getting a new job title following a job well done. After all, the CEO heaps praise on Mr. Hendersen as follows:

"Bill's unprecedented operational expertise as former Postmaster General of the United States has contributed to Netflix's tremendous gains in automation and efficiency," said Netflix Founder, Chairman and CEO Reed Hastings. "We look forward to Bill's continued participation in the company's growth."

However, the less-casual reader would recall a press release from a little more than one year ago in which the same CEO, Reed Hastings, welcomed Mr. Hendersen to the the COO job with great expectations:


LOS GATOS, Calif., Jan. 18 [2006]…Netflix, Inc….today announced the appointment of former U.S. Postmaster General William J. Henderson as chief operations officer of the world's largest online DVD rental service. He assumes his new role on January 23 and succeeds Tom Dillon, who is scheduled to retire in April.

Mr. Henderson, 58, was chief operating officer of the United States Postal Service (USPS) from 1994-98 and postmaster general and USPS chief executive officer from 1998 until his retirement in 2001. He was the 71st postmaster general of the United States and the fifth career employee to lead the world's largest postal system, which processes, transports and delivers more than 650 million pieces of mail to more than 130 million addresses every day.


At the time, cynical observers scratched their collective heads at the notion that a guy from the Post Office—the Post Office!—could bring anything more dynamic than longer lunch breaks to an operation already honed to a fine tune by the outgoing COO, Mr. Dillon, who as it turns out came from a slightly different background than Mr. Hendersen.

Actually, Dillon came from an extremely different background.

He came from the disk drive industry, which is to the Post Office what a NASCAR driver is to your average Oldsmobile-driving Florida retiree when it comes to speed and efficiency. Mr. Dillon, according to my friends in the business, was the guy who really made Netflix an efficient operation.

But Mr. Hastings, who is nothing if not a cheerleader for his cause—was insistent that this Post Office veteran was the right man for the job:


"Bill Henderson is about the only person on the planet who looks at our volume of mail as a trickle," said Mr. Hastings. Netflix ships over one million DVDs a day from 37 distribution centers across the U.S.

"Bill is the perfect person to ensure that our operations are inextricably linked with every aspect of the business and that our service levels are a linchpin of the Netflix customer experience," Mr. Hastings added. "We'll look for him to extend our current competitive advantages in
this area, particularly as our mail volume increases with our forecasted growth to at least 5.65 million subscribers this year and 20 million by 2010-2012."

“Bill” is gone—at least in Kremlinological terms, having been metaphorically air-brushed out of the May Day parade photo of the top guns at Netflix, and shifted off the platform to a minor post in Uzbekistan.

So what really happened behind the scenes?

Why has a man—of whom so much was expected not 13 months ago—been shifted to the role of “Strategic Advisor” for a company whose strategy has, as far as most observers of the company would tell you, been set and directed by the founder, Mr. Hastings.

And, not for nothing, why in this age of instant communication, Regulation Fair Disclosure and the democratization of the investing class, must we resort to Kreminology here in the first place?



Jeff Matthews
I Am Not Making This Up


© 2007 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, February 25, 2007

Weekend Edition: Joe Biden Outside the Mainstream of America


“I mean, you got the first mainstream African-American who is articulate and bright and clean and a nice-looking guy…I mean, that’s a storybook, man.”

—Three-time U.S. Presidential hopeful and election speech plagiarist Senator Joe Biden, describing fellow Senator and Presidential hopeful Barack Obama


“I take a bath every day.”

—Articulate, bright, mainstream African-American former Presidential candidate Al Sharpton



For the record, I have Al Sharpton’s autograph.

Now, before you spit out your coffee—Al Sharpton is a very divisive character, what with pleading guilty to tax evasion, not to mention perpetrating the Tawana Brawley hoax, which ruined innocent lives and for which he never apologized—let me explain how that happened.

I was leaving a mid-town Chinese restaurant one night shortly after Sharpton had ended his Presidential campaign. On my way out between big glass fish tanks and the red-jacketed waiters I passed by a table where a woman had just excused herself to go to the bathroom and the man who remained seated was exuding an unnatural amount of charisma.

It was Al Sharpton—big hair, big ring and big presence.

I’m a soft touch for celebrity—in particular musical (one day I will relate the Sting autograph story here) and political. So I stopped and asked him to sign my train schedule.

This he did, taking out a big pen of his own and signing with a flourish. As I left to hustle to Grand Central he was being surrounded by a flock of other diners who apparently took advantage of the break in his private dinner to metaphorically kiss his very real, outsized, gold ring. Whatever you think of him, as I said, the guy exuded charisma.

He was also, I can vouch, physically if not ethically quite clean.

So, when Joe Biden seemingly stratified an entire race of Americans into those that are mainstream, clean and articulate as opposed to those that are not, I found the ensuing media and political debate about whether Biden meant what it sounded like he meant to be extremely silly.

Of course he meant it. What else could he mean?

Now, this is not a political blog, although I have written about Joe Biden before (see “Weekend Edition: Say it Ain’t So, Fighting Joe” from August 20 of last year), when he was campaigning against, of all things, Wal-Mart.

Wal-Mart bashing was popular at the time, and Biden had lashed into what is, by any standards, one of the most successful enterprises the world has ever seen—one that has created more jobs and reduced prices for more Americans than Joe Biden could even imagine, if he had the brains to comprehend such things, which he clearly does not.

The fact that Biden has created no jobs himself to speak of despite endless years of seat-warming down in Washington made his remarks even more ridiculous than they were on the face of it, which was the point I made at that time

However, when Biden’s description of Barack Obama—“mainstream” and “articulate” and “clean”—appeared, they surprised even me, given that they are racial code words not usually associated with a liberal Democrat like Biden.

Biden’s lame attempt at damage control—“I have no doubt Jesse Jackson, Al Sharpton and the rest know exactly what I meant,”—did nothing to assuage the issue, particularly when Sharpton came out with the best line of the whole mess:

“I take a bath every day.”

Destroyed Presidential campaign aside, what does all this mean about Joe Biden? Personally, I think it means he is simply a product of his age.

For Joe Biden was born in Pennsylvania in 1942 and grew up in Delaware, which was one of 17 states whose public schools were officially segregated until the 1954 Brown vs. Board of Education Supreme Court decision forbade segregated schools.

I'm not saying Biden attended a segregated school, nor do I know a thing about his family life; but racism back then was out there in every day American life—not hidden beneath the surface as now.

For those of you too young to know what it’s like when racism is right out front in every day life, I recall my parents stopping at a Howard Johnson’s ice cream counter during a family drive in New England sometime in the early 1960’s.

We got in line and my sisters and I debated what flavors to get when a hubbub arose that I did not comprehend until we got back in the car and my parents explained what had happened. What had happened was, a white man with his family got upset that a black man was served ahead of him, and he made his displeasure known to other people in line as well as the lady behind the counter.

I am not making that up. It was my first lesson on racism in America.

Does this mean Joe Biden and other 64-year olds are, by definition, racist? Not at all. But the fact that he used those code words the way he used them, and was entirely clueless how loaded they would appear at the time he used them, means, in my opinion, he is simply a product of his age.

The good news is things have changed since then—not just about race, but also about personal stigmas. Indeed, the demystification of Biden’s racial code words reminds me of something that took place at my own house just a couple of years ago.

John was a family friend of ours and a State Representative we’d helped over the years; he was a good guy at heart, but extremely insecure and, in private, a macho guy who loved to make fun of gays then serving with him in the legislature. And he always had bad dates with women we set him up with. Naturally, we figured he was gay and urged him to come out of the closet before his next campaign, just to stop the rumors flying around town and to get on with his career.

He insisted he was not gay, and although it didn’t figure into the election, he lost.

One Saturday shortly afterwards, John came over to the house as he had done many other Saturdays, to have tea with my wife. Usually they talked politics. This day, he wanted to tell us something. He wanted to tell us he was gay.

It was, for him, a huge deal. His hands trembled and his voice was husky as he told us. Then he cried, we hugged him, and my dog Lucy, who had always loved John more than any other visitor to our kitchen, put her head on his knee and accepted him as she always had done. When John was ready, we called upstairs to our older daughter, who had known him since she was a toddler.

“John wants to tell you something,” we said. When she came bouncing into the kitchen dressed and ready to go out and meet friends, he said nervously and quietly: “I’m gay.” He was still holding his tea cup, and still trembling with emotion.

“Oh, okay,” she said. She kissed him on the cheek. “I gotta go.” And she ran out the door.

To an eighteen year old, what John had told her had none of the shock, the emotion, the power that it had to John’s peers. Her complete indifference to it amazed him at first—then he laughed. It was for him an enormous relief.

When Joe Biden called Barack Obama “mainstream” and “articulate” and “clean,” I think anybody of a certain age, who grew up before the mainstreaming of African-Americans, does, despite Biden's insistence to the contrary, know “exactly” what he really did mean by those words even if they do not agree with him.

The good news is that those who grew up after that time, particularly since the falling of borders across the world and the tremendous globalization of the world’s economies, most likely reacted as our eighteen year old did to the news that her former state legislator was gay: they didn't get what those loaded words meant once upon a time.

That’s even better news than this: Joe Biden has no chance to be President.



Jeff Matthews
I Am Not Making This Up

© 2007 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, February 21, 2007

The Least Helpful Research Report You Will Read Today



The least helpful research report any investor will likely read today comes from the folks at Friedman, Billings, & Ramsey—a firm that hitched its financial star to the sub-prime market and is now experiencing the downside of that affiliation.

FBR, it should be noted, helped manage equity offerings for New Century Financial, a company that was, until last night, the Poster Child of the sub-prime lending debacle now unfolding across this highly leveraged land of ours.

What happened last night—specifically, four seconds after the market closed—was that Novastar Financial took New Century’s crown by announcing one of the most horrific operational 180’s in Wall Street history.

Novastar, it should be noted, is structured as a Real Estate Investment Trust, and as such paid out its earnings to until-recently happy shareholders who were woefully oblivious to the Ponzi-like nature of Novastar’s earnings stream.

The earnings stream itself depended on the company’s ability to package and sell sub-prime loans into a marketplace eager for yield, allowing Novastar to book largely non-cash gains up front on those sales as income, and to pay out that income to those formerly happy shareholders as dividends.

Unfortunately, given the non-cash nature of the up-front gains on those mortgage packages, and the Ponzi-like need to keep amassing—and selling—more sub-prime mortgages, Novastar borrowed money to pay the dividend income to those formerly happy shareholders.

A lot of money.

In fact, from 2001 until last year Novastar shelled out over $500 million in dividends to those formerly happy shareholders, while its debt went up by four billion dollars.

Which is why last night’s disclosure—that the company as a REIT wouldn’t likely generate any taxable earnings through 2011—shouldn’t have been much of a shock to anybody who even casually read the newspapers lately.

But it was, apparently, to the folks at FBR.

For this morning their analysts downgraded Novastar's stock from “Market Perform” to “Underperform,” and cut their price target from $27 per share to $10 per share.

Unfortunately for those formerly happy Novastar shareholders—whose ranks used to include much of the “Naked Short-selling Conspiracy Theory” crowd with whom Patrick Byrne associates and from whom he apparently derived his most bizarre notions regarding naked shorting by hedge funds—Novastar’s stock closed last night at $17.56 and looks to open closer to $11 a share this morning.


Seems the shorts were right all along.

Also seems the FBR report announcing their downgrade and $17 per share price target reduction will almost certainly be the least helpful research report anybody will read this morning.



Jeff Matthews
I Am Not Making This Up


© 2007 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, February 19, 2007

World’s Worst-Kept Secret Revealed!



Satellite-Radio Rivals XMAnd Sirius Agree to Merge
By DENNIS K. BERMAN and SARAH MCBRIDE

February 19, 2007 3:42 p.m.

To absolutely nobody’s surprise, the satellite radio duopoly is going to become a monopoly, if Sirius Satellite’s Mel Karmazin and XM Satellite’s Gary Parsons have their way.

As today's online Wall Street Journal summed it up,

XM Satellite Radio Holdings and Sirius Satellite Radio Inc. are merging into a single satellite-radio giant, the companies announced Monday.

Mel Karmazin, currently chief executive of Sirius, would be chief executive of the combined company, and Gary Parsons, currently chairman of XM, would be chairman of the new entity. The companies would merge as equals, with both companies getting the same share of the new company. The company would keep offices in both New York, where Sirius is based, and Washington, D.C., home to XM.

Anybody who has ever listened to satellite radio knows this: aside from the fact that Howard is available only on Sirius and Major League Baseball is available only on XM, the two satellite services are virtually indistinguishable.

They each have channels devoted to rock hits arranged by decade; they each have the entire spectrum of talk-radio, from right-wing to left-wing; and they each have so many channels devoted sub-categories of rock, classical, jazz, and country music that, for example, the thrash-metal aficionado does not have to settle for mere heavy-metal music.

If you’re in a car and don’t have CDs or an iPod, satellite radio is indispensable. Five minutes with Clear Channel Corporate So-Called Radio and its three distinct formats—“Easy Listening,” “Classic Rock” and “Mostly Ads”—will leave you driving on sidewalks to get through traffic and out of the car.

(In fact, I think a terrific graduate thesis would be to investigate the statistical correlation between the rise of Clear Channel Corporate So-Called Radio and the proliferation of road rage on our nation’s highways: I’d bet the correlation is almost one-to-one.)

It is precisely the broad overlap in their content that makes the two satellite networks attractive merger partners: why have duplicate satellites beaming near-duplicate content to cars equipped with two different receivers? Why have two sets of broadcasting facilities, customer-acquisition programs, call centers and billing operations?

The savings, as Mel Karmazin himself has said in his quite-public lobbying for a deal, would be enormous.

In fact, today’s press release from the two companies notes that Wall Street’s Finest have estimated a range of savings between $3 billion and $7 billion, enough to turn the two money-losing enterprises into one extremely profitable enterprise.

So why not shmoosh the whole thing together?

The one and only negative answer to that question is this: just last month, Federal Communications Commission Chairman Kevin Martin said such a thing was not possible, as reported thusly in Bloomberg.

``There is a prohibition on one entity owning both of these businesses,’’ Martin said.

Mel Karmazin, however, is nothing if not persuasive, and today’s coverage suggests the two companies see a way to get around the prohibition:

…the two sides are likely to argue that the proliferation of Internet-based radio, digital music players, and new HD-radio formats creates a vigorous competitive market for such media. Indeed, in surveys, consumers rarely can differentiate between the two companies, which have spent hundreds of millions trying to appeal to them.


So the worst-kept secret in corporate deal-making has finally been made public, but now the hard part begins: getting the deal approved by all the relevant regulators.

I can't take credit for knowing this was imminent, but I did suspect something was up just three weeks ago when I saw Mel Karmazin at the Four Seasons Hotel on 57th Street. I was leaving an IPO roadshow lunch and noticed Mel standing along in the hallway outside a room where a Sirius Satellite Radio lunch was in progress.

Mel was talking not on his cell-phone, but on a regular land-line phone, and he looked very very very serious.

I wondered why the CEO of a public satellite radio company would be using something as ancient and outmoded as a land-line for a serious conversation—one urgent enough to disrupt his appearance at a company-sponsored lunch with investors. It seemed obvious the call had to have something to do with the hoped-for merger Mel himself had been pushing in the press for months.

I flirted briefly with the idea of going back and whispering something like, "What does Howard think of the deal?"

But I resisted the temptation. Mel looked like he wanted to hit somebody.

I suspect he'll be a lot cheerier tomorrow on the conference call.


Jeff Matthews
I Am Not Making This Up

© 2007 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, February 16, 2007

Three Cave-Ins, From White House Station to New Delhi



Merck & Co. will pay the federal government $2.3 billion to resolve roughly a decade of disputed back taxes, in one of the largest publicly disclosed settlements between a U.S. corporation and the Internal Revenue Service.
—The Wall Street Journal


It’s not every day you see a big U.S. company cave in to the I.R.S. with a multi-billion dollar settlement, but White House Station, New Jersey-based Merck did just that.

In “Where’s Sammy Antar When You Need Him?” last September 28, 2006, we looked into a Wall Street Journal report on how Merck had transferred patents for certain blockbuster drugs to offshore entities in low-tax jurisdictions, shielding itself from $1.5 billion in federal taxes.

I pointed out at the time that such tax-avoiding asset-shuffling is quite common among all companies with good tax departments; now it seems the folks at Merck are admitting as much.

After all, when was the last time you saw a company fork over $2.3 billion to the I.R.S. without a real fight? ExxonMobil is still fighting a multi-billion punitive damage suit from the Exxon Valdez oil disaster—which happened eighteen years ago.

Speaking of ExxonMobil, that’s another company which also caved recently…on global warming.

After years of fighting the rather common-sense notion that the presence of 600 million gas-guzzling cars, not to mention millions of diesel-guzzling trucks and hundreds of thousands of coal-guzzling factories, might have something to do with the melting ice cap, ExxonMobil has taken full page ads stating its new, if highly nuanced, position on global warming:


Much has been said recently about ExxonMobil and our views on climate change. So we’d like to take this opportunity to set out, clearly and concisely, our position on this important issue.


* The earth’s climate has warmed about 0.7C in the last century
* Many global ecosystems are showing signs of warming

* CO2 emissions have increased


However grudging the ExxonMobil Bigs’ admission that there just might be some link between the stuff they make and the suddenly-receding glaciers in Switzerland, Greenland and Bolivia, corporations don’t usually cave like that.

Governments, on the other hand, cave every day, and India is a case in point. See if you can detect the flaw in the logic of the latest attempt by that government to both ameliorate inflation and stay popular:

NEW DELHI -- The Indian government Thursday cut the price of gasoline and diesel, the latest in a string of measures aimed at containing inflation, and said more steps will be taken to ease the pressure on supplies of key commodities.

—The Wall Street Journal

Correct me if I'm wrong, but I can't recall a single instance when “pressure on supplies of key commodities” has ever been “eased” by decreasing the price of those commodities. Still, the lack of historical examples is not stopping the pols in New Delhi from trying:

The announcement came after the government released data that showed the wholesale inflation rate rose to 6.73% for the week ended Feb. 3, the highest in more than two years and well above the central bank's comfort zone of 5.0% to 5.5% for the fiscal year ending March 31.

Reacting to the price cuts and latest inflation data, Finance Minister P. Chidambaram said the price cuts will moderate inflation.

It may take longer than Merck took to give in to the I.R.S. for the Indian government to realize the errors of artificially cutting prices in the face of rising demand, and it may even take as long as it’s taken ExxonMobil to pay up for the Valdez verdict—which is to say a long long time.

But I suspect at the end of the day, the Indian Government will figure it out.



Jeff Matthews
I Am Not Making This Up



© 2007 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, February 14, 2007

“Let’s keep going”: The Credit Markets Find Their Inner Thelma and Louise



Thelma Dickinson: OK, then listen, let's not get caught.
Louise Sawyer: What're you talking about?
Thelma: Let's keep going.
Louise: What do you mean?
Thelma: Go.
Louise: You sure?
Thelma: Yeah, yeah. Let's.

—Thelma and Louise
Written by Callie Khouri


Seems to me the world’s credit markets have found their Inner Thelma and Louise.

For those not familiar with that movie of “lady fugitives on the run,” the quote above is from the final scene in which the pair of sympathetically-depicted criminals in their getaway car decide—police behind them and canyon in front—to “keep going” over the cliff.

Which is, it seems to me, exactly what the world's credit markets have decided to do en masse, so inexorable is their drive to lend to anybody with title to an asset—any asset—and a pulse.

The head-scratcher, of course, is that it was precisely the same type of non-existent credit standards that got America’s home-buyers, and their lenders, in trouble not so long ago.

And by “not so long ago,” I mean, “like, last week.”

For that is when HSBC announced a $1.76 billion dollar sub-prime debt impairment charge, blowing the collective minds of HSBC shareholders and U.S. sub-prime mortgage lenders alike.

Here's how last week's Wall Street Journal described the errors of HSBC's ways:

When the U.S. housing market was booming, HSBC Holdings PLC raced to join the party. Sensing opportunity in the bottom end of the mortgage market, the giant British bank bet big on borrowers with sketchy credit records.

Yet according to my Bloomberg, the lessons learned are not, apparently, stopping anybody from throwing money at leveraged buyouts the way HSBC was throwing money at the Thelmas and Louises of the sub-prime mortgage market.

Univision Seeking Record “Covenant-Lite” Loan for LBO — By Harris Rubinroit, Bloomberg

Feb. 13 (Bloomberg) -- Univision Communications Inc., the largest U.S. Spanish-language broadcaster, is asking potential lenders to forgo restrictions on a $7 billion loan to fund its leveraged buyout, according to investors who may participate.

Now, you might think that those “potential lenders” would have second or third thoughts before committing to such terms, what with the sub-prime blow-up still reverberating on the Wall Street Journal's front page this very morning:

Rising defaults are prompting some lenders to clamp down on the use of “piggyback” mortgages, a risky type of loan that allows borrowers to finance up to 100% of the purchase price.

Yet according to the Bloomberg story it would appear that sub-prime commercial borrowers are being courted with as much fervor as the sub-prime Thelma and Louise-type home buyers during the housing boom of, oh, eighteen months ago:

Univision is seeking a covenant-lite loan, which has no quarterly limit on the borrower's amount of debt relative to cash flow. The Los Angeles-based company also wants no quarterly requirement for the minimum amount of cash flow it must generatein proportion to interest expense, said three investors, who declined to be identified because the terms aren't public.

Correct me if I’m wrong, but that looks suspiciously like a sort of corporate version of the “no documentation” loans described in the HSBC report just last week:

To speed up these purchases from other lenders, HSBC accepted loan paperwork that didn't verify whether borrowers made as much as they claimed. Mortgages that rely on the borrower's word about that are called "stated-income" loans. (More conservative lenders might demand full documentation of income.)

More conservative lenders than HSBC are not taking $1.76 billion charges for their fully documented loans.

And more conservative lenders will probably shy away from deals like Univision. But that is not stopping Univision from demanding the virtual equivalent of “stated-income” loans for its multi-billion dollar buyout from the HSBC's of the commercial markets:

The seven-and-a-half year covenant-lite loan would be the largest loan of its type. The money is part of $10.2 billion in financing to be used to help pay for Univision's $12.3 billion takeover by a buyout group that includes Madison DearbornPartners LLC, Providence Equity Partners Inc., Texas Pacific Group, Thomas H. Lee Partners LP and Saban Capital Group Inc.

And despite what you heard Mick Jagger sing growing up in the early 70's, Univision will probably get what it wants.

The Univision loans are a ``function of excess liquidity in the market driven by institutional investors,'' said Neal Schweitzer, a senior vice president in corporate finance at Moody's Investors Service in New York. ``The loans are structured to weather a potential hiccup.''

As with HSBC and its sorry tale of woe, however, I suspect we will find in the not too distant future that the Univision loans are structured for nothing but the simple blind faith that the worldwide asset bubble will continue to expand—the same kind of blind faith that blew up HSBC:

"There was very little data on loans to subprime borrowers where the borrower put very little down," says Thomas Lawler, a housing economist in Vienna, Va.

Chris Freemott, president of All American Mortgage Inc. in Naperville, Ill., says it was a time when "everyone lowered their credit standards" in what he refers to as "a race to the bottom." Adds Mr. Hamilton at Lime Financial: "People got way too aggressive in pricing, and they weren't pricing for the risk."

And so the commercial credit markets, as did the sub-prime mortgage market once upon a time, “race to the bottom.”

While Thelma and her pal have already driven off the cliff.


Jeff Matthews
I Am Not Making This Up

© 2007 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, February 12, 2007

The Best Press Release of 2007: A Sentimental Journey with J. Lloyd Tomer



Yes, I know what you’re thinking.

You’re thinking, how in the world can I declare “Best Press Release of 2007” only 42 days into the year, with another 230 or so business days remaining before the year 2007 officially ends?

Simple.

Get a load of the following explanation for a stock sale, excerpted from a press release which hit my Bloomberg late last week, issued by a company called “YTB International.”

"Coach Lloyd Tomer sold his dream home a few years ago to help fund YTBI at a critical time inthe Company's growth. A few days ago he regained ownership of his dream home by giving one million shares of YTB International, Inc. stock to the person he sold it to, John Simmons. In return, Coach got the real estate back."

—YTB International Press Release, 2/8/07


I make none of that up.

And while I certainly expect there will be some hefty competition for the title of Best Press Release of 2007 in the weeks and months ahead, I can’t imagine a more hilarious example of the dumbing-down of corporate America than the full release, which was headed as follows.

YTB INTERNATIONAL Chairman Provides Clarification Re: Real Estate

Press release “Clarifications” are always worth a glance, no matter what the company—even one so obscure as YTBI, which describes itself as follows:

ABOUT YTBI: YTB International, Inc. provides Internet-based travel booking services for travel agencies and home-based independent representatives in the United States, Puerto Rico, and the US Virgin Islands. It operates through three subsidiaries: YourTravelBiz.com, Inc., YTB Travel Network, Inc., and REZconnect Technologies, Inc.

Googling “YourTravelBiz” brings up a “YTB Demo Site,” which kindly provides the YTBI closing stock price ($9.20), but only fairly limited information about the exact nature of the business itself. See if you can figure out what the business of this company is:

The YTB companies offer two unique and powerful business opportunities, that of referring travel agent or "RTA" and that of independent marketing representative or "REP". The travel agent opportunity has an initial fee under $500 and a monthly license fee of $49.95. There is no fee or travel agency purchase required to be a REP. You may choose to participate in one or both opportunities.

Hmmm. Does that smell like one of those direct-selling pyramid things to anybody?

Fortunately for the skeptics among us, the YTB Demo Site publishes a vast array of testimonials from satisfied customers, in a section titled “Testimonials.”

At the risk of boring our readers, I will reprint all the Testimonials from that front page, for the sake of accuracy. Bear with me. Here goes:

“YTB gives anyone who wants it, fun, financial freedom, and time with their FAMILY!"
--Kevin Adams

That’s it.

Now, before you rush out there and join Kevin Adams to get some of that fun, financial freedom, and time with your FAMILY, I suggest you read the full text of the press release in question, the one “clarifying” the recent “real estate transaction.”

WOOD RIVER, IL -- (MARKET WIRE) -- 02/08/07 -- YTB International, Inc. ("YTBI" or the "Company") (PINKSHEETS: YTBL) and its Chairman of the Board, J. Lloyd Tomer, provided clarification today regarding Mr. Tomer's disposition of 1,000,000 shares of YTBI's common stock in payment of the purchase price in a real estate transaction that had closed in January 2007.


Seems Mr. Tomer sold 1 million shares at $6.69 a share on January 24, which is not a bad gig for a company with no quarterly earnings reports that I can find since year-end 2005.

On the surface, Mr. Tomer's sale might look a little opportunistic, considering the fact that the stock had doubled in three weeks. Furthermore, it constituted about a quarter of Mr. Tomer’s reported holdings, leaving him with 3.28 million shares.

Not to mention the fact that early in 2006 the company had “initiated an internal inquiry” into “accounting-related matters” causing the company to report, in a recent 10QSB/A, that it “needed to restate certain of the Company’s financial statements.”

The phrases “material weaknesses” and “deficient controls and procedures” appear as well, along with the fact that the company’s previous accounting firm “had provided prohibited services and appeared to have not followed the standards of the Public Company Accounting Oversight Board…”

However, YTBI wants to set the record straight: turns out, the sale had nothing to do with the price of YTBI stock or Mr. Tomer wanting to sell while the selling was good, nor the “material weaknesses” or “deficient controls.”

It has to do, instead, with getting back “his dream home.”

I am not making that explanation up.

As required under federal securities laws, Mr. Tomer filed a Form 4 disclosing the transfer of the shares as part of the purchase of a piece of real estate. While the disposition of the shares was technically deemed a "sale" under the rules that govern Mr. Tomer's SEC filings, in reality the shares were merely used as a means to purchase a piece of property that had long-standing sentimental value to Mr. Tomer.

The Company released the following statement in clarification of the true story behind the share disposition: "Coach Lloyd Tomer sold his dream home a few years ago to help fund YTBI at a critical time in the Company's growth. A few days ago he regained ownership of his dream home by giving one million shares of YTB International, Inc. stock to the person he sold it to, John Simmons. In return, Coach got the real estate back."

And that’s it.

Now, until a week ago I knew nothing of YTBI, and today I know only slight more than nothing, aside from what is quickly and easily at hand on my Bloomberg.

But I know this: a sale is a sale is a sale.

And I know this is the Best Press Release of 2007...unless YTBI has another one up its sleave.


Jeff Matthews
I Am Not Making This Up


© 2007 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, February 09, 2007

The Not Making This Up Awards Part III: Announcing “The Patrick” Award for Worst Conference Call of the Season



Long time readers may feel a certain assuredness reading the title of this particular post, believing they already know what company—out of the thousands of possibilities—The Not Making This Up Awards is nominating for Worst Conference Call of the Season.

But the fact that we here at Not Making This Up have chosen to label our “Worst Conference Call” award “The Patrick” does not actually mean that Overstock.com has won “Worst Conference Call.”


It’s just what we decided to call the thing.

After all, Overstock’s quarterly conference calls are like nothing else. To paraphrase the narrator in “A Christmas Story” when describing his father’s prowess in cursing, Overstock CEO Patrick Byrne works in non sequiturs the way Picasso worked in oils.

Take his wrap-up on this last quarter’s conference call: see if you can figure out what this means...

I have never heard Jason [Lindsey, Overstock President] so optimistic for the future actually. Okay, that is all we have to say. Thank you, owners, for sticking with us, those that have.
We have been through tough times. '06 was a wipe out year. And there was a lot of pain, but a lot of it -- all the pain of tightening the belt and resizing our expense structure, we got our infrastructure fixed, but our expense structure still isn't there. But we have already taken steps at the end of the year and the first part of this year. We have made most of the decisions and made some of the changes. And there is -- we just have to carry them out in the next few months.

But I actually have never heard Jason -- I'm just not going to comment on my own emotions, but those of you who know Jason, know you probably never heard him so optimistic. But we do have our work cut out for us still. But we do think we've gotten through the toughest part. Thank you all for your time. Bye-bye.

Why it matters that “Jason” has “never been so optimistic for the future” is beyond me—“Jason” is both President and Chief Operating Officer of the company, yet he failed to correctly answer a pretty basic question earlier in the call:

Jason Lindsey, President and COO: Bill asked three questions. The middle question I don't think we answered, which is where do you see the $5.5 million co-location termination payment. And Dave correct me if I'm wrong, that is in our G&A expenses, is that correct?

David Chidester, SVP Finance: It is actually in our technology expenses which relates to the co-location facility

As far as I can tell, even a cursory glance at the Overstock “L” statement (that’s a “P & L” without the “P”) would have revealed the likely placement of the one-time $5.5 million line-item to the most casual financial observer—but you be the judge:


Overstock’s G&A expense rose $4.2 million year over year, from $11.6 million to $15.8 million; Overstock’s technology expense rose $15.4 million year over year, from $9.9 million to $25.3 million. Where would you guess the $5.5 million technology related co-location payment had been expensed?

Still, the point here is not to belabor the latest public statements of a company whose operating problems are well known, and whose CEO has, lawsuits and conspiracy theories notwithstanding, taken the blame for those operating problems.


The point here is to highlight a company whose fourth quarter conference call was one of the worst I have ever heard.

The company in question is a biotechnology company with a great product (Synagis, an anti-viral medication for premature infants) and a less-great product (FluMist, a nasal flu vaccine that has generally failed to meet anybody’s expectations since a much-ballyhooed introduction flopped a couple years back).

On the plus side, the company provided key IP for Gardisil, the new Merck HPV vaccine that is on track to be one of the blockbuster new products of the decade, so it should ride a fast-growing royalty stream from the HPV vaccine for years to come.

In the meantime, the company has been struggling to demonstrate to Wall Street’s Finest—almost uniformly skeptical since the FluMist debacle—that it has a worthwhile pipeline of new products, and held what is generally referred to as an “upbeat” analysts day almost exactly 60 days ago to showcase all the great things it was doing to extend the Synagis franchise, to get FluMist back on its metaphorical feet, and to hit two bucks a share in earnings in 2009.

On the surface, this company's Q4 numbers looked like a pretty good start towards that goal. According to the press release issued Wednesday morning,

[The company] also announced today that it had exceeded its earnings guidance for 2006 by reporting net earnings of $75 million, or $0.30 per diluted share, excluding share-based compensation expense. Including share-based compensation, [the company's] net earnings for 2006 were $49 million, or $0.20 per diluted share, as calculated in accordance with generally accepted accounting principles (GAAP).

The casual reader would be pleased especially with the fourth quarter, which by all appearances was a bang-up way to end the year:

For the 2006 fourth quarter, [the company's] net earnings were $155 million, or $0.64 per diluted share, excluding share-based compensation.

Wall Street’s Finest had been looking for $0.54 per share.

It is only by reading further down, under “Gains on Sale of Asset and Investment Activities” do we find that the company—which, yes, is MedImmune—did not get to those chest-thumping numbers by dint of strong sales and reduced costs alone:

During the fourth quarter of 2006, MedImmune completed the sale of the CytoGam … product line, recognizing a gain of $49 million. Also during the fourth quarter of 2006, MedImmune realized gains of $42 million, after impairment charges of $6 million, primarily from the sale of two investments in its venture capital investment portfolio. For all of 2006, gains on investment activities totaled $34 million, net of impairment charges of $15 million.

One of Wall Street’s Finest—taken aback at the convoluted disclosure—later described the super-duper reported earnings as “almost fictional.” But that was later, after the conference call.

Another “almost fictional” number trumpeted in the press release was the U.S. revenue number for Synagis—an important and very profitable but highly seasonal drug under pressure from managed care providers—in the press release:

In the fourth quarter of 2006, worldwide sales of Synagis grew to $457 million from $439 million in the 2005 quarter, due primarily to an increase in reported sales for the U.S. to $403 million in the 2006 period from $379 million in 2005.

That U.S. Synagis number was right in line with Wall Street forecasts, although a little disappointing to the optimists. But in one of the greatest “oh, by the way” bombshells I’ve ever heard, the CFO disclosed on the conference call that $20 million of those so-called sales had actually been the result of a reversal in previous reserves “with respect to Medicaid rebates.”

Management also used the conference call to drop two other bombshells: first, that FluMist doses fell about 20% short of managements guidance at the analyst meeting 60 days ago; and that the introduction of Numax, a follow-up drug to Synagis on which management has placed great emphasis, has been pushed back following a meeting with the FDA.

Now, business is full of risks—and the medical business is probably full of bigger risks than any other. If a new drug isn’t toxic, and doesn’t kill patients, and actually does what the drug discoverer hopes it will do, there’s no telling whether the FDA will approve it, the government will reimburse it, and doctors will use it.

So there is no shame in a company—any company, but especially a biotech company—missing quarterly numbers and adjusting new product schedules without mentioning all the details in the earnings press release.

But MedImmune not only missed numbers and pushed out an important new product without discussing the details in the press release: on the ensuing conference call, the company limited Wall Street’s Finest to one question each and cut off the call after an hour, with only nine of Wall Street’s Finest able to ask questions.

I am not making that up.

For the record, I counted 12 questions from the floor, including three brief, apologetic follow-ups from those of Wall Street’s Finest who dared cross the “one question only” rule, before the CEO wrapped things up by noting that the hour was up.

By way of contrast, when Boston Scientific was missing numbers last fall, I counted 36 questions on their third-quarter conference call, from ten analysts with no limits on their questions or their follow-up questions.

As I said, there is no shame in a company missing numbers.

But companies that do miss numbers, or push out new product releases 60 days after reaffirming those product releases, or fail to highlight non-recurring gains in their earnings release—or all three, as in this case—generally spend the time to take all questions, in public, however they hurt, and answer them.

This award—“The Patrick”—is named for the CEO of Overstock.com, whose conference calls some find as unintentionally amusing as a grade-school production of “Fiddler on the Roof.” But I will give Patrick Byrne one thing: he takes questions on his calls, good, bad, ugly, from Wall Street’s Finest, no holds barred, as MedImmune did not.

Hence, the first “Patrick” award goes to David Mott, CEO, MedImmune.



Jeff Matthews
I Am Not Making This Up


© 2007 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, February 06, 2007

Exciting Days in Takeover-Land!



"What's exciting is when you buy them when no one wants them,"

—Carl Icahn to the Wall Street Journal


Carl’s back. As reported in today’s Journal,

Carl Icahn is making a $2.75 billion bet that battered U.S. auto-parts suppliers are poised for a comeback.

His rationale?

Mr. Icahn said the beaten-down share prices of auto suppliers like Lear have made them attractive values.

"What's exciting is when you buy them when no one wants them," Mr. Icahn said in an interview [emphasis added].

And truer words word never spoken: it is exciting to invest when nobody else sees the value, or wants to take the risk that that value will be realized some time in the uncertain future.

But, according to my Bloomberg, the time when nobody wanted Lear—which happens to be one of many auto suppliers struggling to make something out of a commodity business under severe price pressure with a high cost union work force—was a year ago March, when the stock bottomed at $15.60.

Not yesterday, at the $34.20 opening price before Icahn’s bid got even fewer people not wanting the shares.

Now, I understand that when Carl Icahn walks into any room, he is very likely the wealthiest individual in that room. And his record for creating value for himself and his investors ranks up there in the thermosphere of all-time great investors.

But by my calculation, nearly $1.5 billion of potential value has already been absorbed by public shareholders who ventured to buy Lear when the stock was being thrown out in the mid-teens—the time when “no one” wanted to own poor, suffering Lear.

And grey-hairs will remember another company Carl Icahn bought “when no one wanted to own it.”

That company was TWA.

And Icahn’s tenure over that veil of tears turned out to be merely one of several times “no one” wanted to own what was, in the end, a commodity business under severe pressure with a high cost union work force.

Let the excitement begin!


Jeff Matthews
I Am Not Making This Up


© 2007 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, February 02, 2007

The Not Making It Up Awards, Part II



"Very…very…very…very...very…very…very…very…very…very…very…very…very…very...very…very…very…very…very…very…very…very…very…very...very…very…very…very…very…very…very…very…very…very...very…very…very…very…very…very…very…very…very."


—Eric Schmidt, Google CEO, earnings call


Earnings season is winding down, and even Google has proved itself mortal—or at least subject to the same law of large numbers that causes all things, eventually, to regress to the mean.

The Mountain View boys' U.S. revenue growth rose 53%, a number Microsoft would kill for but which is nothing like the 80% growth in 2005. In fact, Google’s U.S. revenue accelerated during the first three quarters of 2005, but has decelerated every 90 days since.

It was up to non-U.S. countries to carry the ball, which they did with 90%-type growth, but the rising cost of doing business online and Google’s own spend-for-growth mentality—which has paid off in spades since the IPO—caused a slight but notable company-wide margin contraction.

Overall, Wall Street’s Finest “reiterated” their positive ratings on Google, which in these post-Enron days of extreme skittishness may take the form of “Buy” or “Outperform” or “Overweight” or “Legally We Do Not Want to Be Held Liable if You Lose Money But We Do Believe the Stock May Be Appropriate For Certain Accounts Assuming You Are Not a Moron But Before You Invest Please See the Attached Sixteen Pages of Legal Disclaimers.”

Google’s conference call did not, alas, generate the kind of fawning from Wall Street’s Finest that makes for good copy here, although CEO Eric Schmidt did do his usual impersonation of a kindergarten teacher at Parent’s Night, both congratulating his class on their work and expressing his great satisfaction to his listening audience, repeatedly, to the point where you want to either break something or vomit, or both.

In fact, Schmidt gets our first award of this second installment of The Not Making It Up Awards:

The Most Use of “Very” as an Adverb in One Sentence Award

Eric Schmidt, Google Inc. - CEO

Thanks very much, Kim. Business continues to be very, very good here at Google, and we are very happy to present another very strong performance from the Company.


And that was just the first sentence. In fact, he used it 11 times in his opening remarks and 43 times during the entire call.

I am not making that up.

Here are the other awards we deem worthy of either Wall Street’s Finest or the Captains of American Industry, in no particular order:


The Why They Call Us a Cyclical Award

Bill Foote, USG Corporation - Chairman, CEO

Each downturn is unique, and a distinctive feature of the downturn that began in 2006 has been the speed with which adjustments have been made by both homebuilders and drywall dealers to keep inventories under control. For us, that has meant a rapid contraction in wallboard demand.Let me illustrate. Industry wallboard shipments were up 6% in the first six months of 2006 year-to-year. They were down 17% in the last six months year-to-year. Up 6 in the front, first half; down 17 in the second half.


The Worst Reason for Not Answering A Simple Question Award

Antonio Perez, Eastman Kodak Company - Chairman, CEO


Analyst: And would it be possible to give us some sense of what you think investable cash flow or what you now call net cash generation will be in '07?

Perez: For the year -- on the 8th, again, we'll talk to that. We won't have the time -- if I give you a number now, I won't have the time to explain why we reached that number. The -- and why we have the -- the two, three hour meeting on the 8th. We'll do a much better job at that time.

Analyst: Okay. Okay, I tried. Thank you.


The Bob Nardelli Lives! Award

Mark Ketchum, Newell Rubbermaid Inc. - President, CEO

In 2006, we also announced the building of a new headquarters building in Atlanta, which will bring together several of our business units and functions, further supporting our cultural transformation. At the new Newell Rubbermaid, we want to foster a Company culture that embraces consumer centric innovation and branding, collaboration and team work, training and development, diversity in all its forms, and best-in-class performance.


The More “Cute Stories About Inflation” Award

Mike Mangan, Black & Decker Corporation – CFO

During the fourth quarter, we had about $39 million in incremental commodity inflation. So for the year, that resulted in 2006 with a number of $95 million. As we look to 2007, we are expecting about $120 million of incremental inflation, weighted a little more towards the first half.


The Eddie Haskell Lives! Analyst Award

Eric Katzman, Deutsche Bank - Analyst


Katzman: Good morning, everybody.

David Mackay, Kellogg Co. - President, CEO Good morning.

Eric Katzman: Congratulations on your new titles.

David Mackay: Thank you.


The Most Bizarre Impersonation of a Low-Cost Airline Award

David Neeleman, JetBlue Airways - CEO

First of all…our primary goal is to institutionalize low cost carrier spending habits. We are really, really focused on not only keeping low cost but even driving our cost even lower through improved productivity and through automation. And we think that we have some room to go on our cost initiatives, and John'll -- like I said, will give you a lot more detail on that.



The Most Refreshingly Candid CEO Award

Reuben Mark, Colgate-Palmolive - Chairman, CEO

Let me back up for a moment. Well, we'll wait until the next question. I assume somebody else will ask about margin because I have some interesting things, I think, to say about gross profit.

Why did I screw that up? Who knows? Okay. Anyway, sorry. Go on.




To be continued. Nominations from the floor are welcomed.



Jeff Matthews
I Am Not Making This Up


© 2007 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.