Tuesday, December 29, 2009

What if the Government Ran Airport Security? Oh, Wait, It Does...

Editor’s Note: Your editor strongly advises swallowing your coffee before reading this virtual column and risk spitting out that coffee. As always, we are not making this up.

The following poem, which was written under the pen name “Blogger Bob,” appears on the Transportation Security Administration web site, and should provide comfort to all those wondering precisely how Our Government is protecting us.

Note especially the date—i.e. the day before a man set himself on fire while attempting to bring down a fully loaded jet at Detroit International Airport on Christmas Day:

Happy Holidays 2009

T'was the night before travel and all through the suitcase/ Not an item was stirring not even the toothpaste.

The stockings were packed in the bag with great care/ With hopes that they soon would be in the air.

The tickets were nestled all snug in a binder/ Your PDA calendar set as a reminder.

Awaking to a yard of frost and snow/ With a grab of your bags you were soon on the go.

At your gate just in time with moments to spare/ Your seat reclined as you glide through the air.

You fall right to sleep as in your own bed/ While visions of fruitcakes danced in your head.

Awaking to sounds of wheels on the ground/ Waiting for luggage you hope will be found.

You have finally arrived at your destination/ It's time to enjoy your holiday vacation.

Happy Holidays and we'll see you in 2010.
—TSA Web Site

Now, after a moment of stunned silence at this staggering bit of government cluelessness, we here at NotMakingThisUp couldn’t resist coming up with our own version of the friendly TSA holiday poem—although one based on the realities of the day, as opposed to the fantasies of a well-paid government employee whose pension is more secure than that of anyone reading this blog, and whose employment will never be threatened whether or not he or she actually performs his or her job.

Ode to Osama Al Queda Bin Terrorist

‘Twas the night before Christmas and in a safe house,
An explosive device was prepared that would douse,
A passenger booked on a flight to the States,
With chemicals, if he could get past the gates.

“Security? Praise Allah!” his handlers told him,
“Getting through that is the least of your problems.
“The Infidels worry so much for decorum,
“They wand Grannies instead, when fake hips trip alarms.

“But you with your name—‘Osama Al Qaeda Bin Terrorist’
“Should have no problem since you will be on their ‘A-List’
“They’ll let you go through without even a glance,
“While Grandmas and Grandpas must undo their pants.”

And so it was later, on Delta 2-5-3,
Where 300-odd souls had been watching TV,
And while TSA’s “Blogger Bob” ignored warnings of mayhem,
That a terrorist very nearly successfully killed them.

What of Grandma and Grandpa, for whom security freaked?
Well the flight wasn’t nearly as bad as you’d think.
For they were arrested, stripped-searched and taken away,
When their pacemakers set off Codes Red, Blue and Grey.

Well, we did make that up….

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author

Saturday, December 19, 2009

Shazam! From the Boss to the King to John & Paul (But Not George or Ringo), Not to Mention Jessica & Nick...2009 Edition

Editor’s Note:

Back by popular demand, what follows is our year-end sampling of the Christmas songs playing incessantly on a radio station near you, and it demands from your editor only a few updates this holiday season.

For starters, we have not heard the dreaded duet of Jessica Simpson and Nick Lachey singing “Baby, It’s Cold Outside” thus far in 2009, and for this we are most grateful. Still, keep your fingers crossed that we’ll continue to avoid it.

(If it turns out that their recording has been confiscated by Government Authorities for use as an alternative to lethal injections, we’ll consider ourselves a positive force for society.)

On the other hand, we are sorry to report that what has followed this cheery development has been a surge in playing time for Barry Manilow’s chirpy immitation of the classic Bing Crosby/Andrew Sisters version of “Jingle Bells.”

Believe it or not, “Jingle Bells” was written in 1857...for Thanksgiving, not for Christmas. And it’s hard to imagine making a better version than that recorded by Bing and the three Andrew Sisters 86 years later.

But Manilow didn’t bother to try.

Instead, Barry and his back-up group, called Expos, simply copied Bing’s recording, right down to that stutter in the Andrews Sisters’ unique, roller-coaster vocals on the choruses, as well as Bing’s breezy, improvised, “oh we’re gonna have a lotta fun” throwaway line on the last chorus.

Sharp-eared readers might say, “Well, so what else would you expect from a guy who sang ‘I Write the Songs’…which was written by somebody else?”

We can’t argue with that, but we will point out another annoyance this year: the enlarged presence of Rod Stewart in the Christmas play-lists.

Don’t get us wrong: we like Rod Stewart—at least, the Rod Stewart who gave the world what your editor still considers the best coming-of-age song ever written and recorded: “Every Picture Tells a Story.”

It’s the Rod Stewart who gave us “Do Ya Think I’m Sexy?” we’re less crazy about.

So too the Rod who chose to cover “My Favorite Things” (for the definitive version of that classic, see: Bennett, Tony) and “Baby It’s Cold Outside” with Dolly Parton (for an equally offensive version of this one, see: Simpson, Jessica and Lachey, Nick).

As an antidote to Rod, we suggest Jack Johnson’s sly, understated “Rudolph the Red-Nosed Reindeer,” which seems to be gaining recognition, and anything by James Taylor—especially his darkly melancholic “Have Yourself a Merry Little Christmas.”

Of all the singers who recorded versions of this last—and Sinatra’s might be the best—it is Taylor, a former heroin junkie (thankfully he didn’t succumb), who probably catches more of the intended spirit of this disarmingly titled song.

After all, the original lyric ended not with the upbeat “Have yourself a merry little Christmas, let your heart be light/Next year all our troubles will be out of sight,” but with this:

“Have yourself a merry little Christmas, it may be your last/Next year we may all be living in the past.”

No, we are not making that up. But at least Barry Manilow won’t be covering it any time soon.

JM—December 19, 2009

Wednesday, December 24, 2008

Shazam! From the Boss to the King to John & Paul (But Not George or Ringo), Not to Mention Jessica & Nick

Like everyone else out there, we’ve been hearing Christmas songs since the day our local radio station switched to holiday music sometime around, oh, July 4th, it feels like.

And while it may just be a symptom of our own aging, the 24/7 holiday music programming appears to have stretched the song quality pool from what once seemed Olympic-deep to, nowadays, more of a wading pool-depth.

What we recall in our youth to be a handful of mostly good, listenable songs—Nat King Cole’s incomparable cover of “The Christmas Song” (written by an insufferable bore: more on that later); Bing’s mellow, smoky, “White Christmas”; and even Brenda Lee’s country-tinged “Rockin’ Around the Christmas Tree” (recorded when she was 13: try to get your mind around that)—played over and over a few days a year…has evolved into a thousand mediocre-at-best covers played non-stop for months on end.

Does anybody else out there wonder why Elvis bothered mumbling his way through “Here Comes Santa Claus”?

It actually sounds like Elvis doing a parody of Elvis—as if he can’t wait to get the thing over with. Fortunately The King does get it over with, in just 1 minute, 54 seconds.

Along with that and all the other covers, there are, occasionally, the odd original Christmas songs—the oddest of all surely being Dan Fogelburg’s “Same Old Lang Syne.”

You’ve heard it: the singer meets his old lover in a grocery store, she drops her purse, they laugh, they cry, they get drunk and realize their lives have been a waste, and, oh, the snow turns to rain. We make none of those things up.

So how, exactly, did that become a Christmas song?

Then there’s ex-Beatle Paul McCartney’s “Happy Christmastime,” which combines an annoyingly catchy beat with dreadful lyrics, something McCartney often did when John Lennon wasn't around.

Lennon, after all, replaced McCartney’s teeny-boppish opening line for “I Saw Her Standing There”—“She was just seventeen/A real beauty queen” is what McCartney originally wrote—with the more suggestive “She was just seventeen/You know what I mean,” thereby turning a mediocre time-piece into a classic.

But Lennon was not around to save “Happy Christmastime.” McCartney actually recorded this relatively new Christmas standard nearly thirty years ago, and it rightfully lay dormant until the advent of All-Christmas-All-The-Time programming a couple of years ago.

Fortunately, by way of offset, Lennon’s own downbeat but catchy “Happy Xmas (War is Over)” is played about as frequently as “Happy Christmastime.”

Who but John Lennon would start a Christmas song: “And so this is Christmas/And what have you done...”? Of course, who but Paul McCartney would start a Christmas song, “The moon is right/The spirit's up?”

If anything explains the Beatles’ breakup better than these two songs, we haven’t heard it.

Now, we don’t normally pay much attention to Christmas songs. If it isn’t one of the aforementioned, or an old standard sung by Nat, Bing, Frank, Tony, Ella and a few others, we’d be clueless.

But thanks to a remarkable new technology, we here at NotMakingThisUp suddenly found ourselves able to distinguish, for example, which blandly indistinguishable female voice sings which blandly indistinguishable version of “O Holy Night”—Kelly Clarkson, Celine Dion, or Mariah Carey—without any effort at all.

The technology is Shazam—an iPhone application that might possibly have received the greatest amount of buzz for the least amount of apparent usefulness since cameras on cell phones first came out.

For readers who haven’t seen the ads or heard about Shazam’s wonders from a breathless sub-25 year old, Shazam software lets you point your iPhone towards any source of recorded music, like a car radio, the speaker in a Starbucks, or even the jukebox in a bar—and learn what song is playing.

Shazam does this by recording a selection of the music and analyzing the data. It then displays the name of the song, the artist, the album, as well as lyrics, a band biography and other doodads right there on the iPhone.

Now, you may well ask, what possible use could there be for identifying a song playing in a bar?

And unless you’re a music critic or a song-obsessed sub-25 year old, we’re still not sure.

But we can say that Shazam is pretty cool. In the course of testing it on a batch of Christmas songs—playing on a standard, nothing-special, low-fi kitchen radio—heard from across the room, without making the least effort to get the iPhone close to the source of the music, Shazam figured out every song but one (a nondescript version of a nondescript song that it never could get) without a hitch.

And, as a result, we can now report the following:

1) It is astounding how many Christmas songs are out there nowadays, most of them not worth identifying, Shazam or no Shazam;

2) All Christmas covers recorded in the last 10 years sound pretty much alike, as if they all use the same backing track, and thus require something like Shazam to distinguish one from the other;

3) Nobody has yet done a cover version of Dan Fogelburg's “Same Old Lang Syne,” which may be the truest sign of Hope in the holiday season;

4) None of this matters because Mariah Carey screwed up the entire holiday song thing, anyway.

Now, why, you may ask, would we pick on Mariah Carey, as opposed to, say, someone who can’t actually sing?

Well, her “O Holy Night” happened to be the first song in our mini-marathon, and it really does seem to have turned Christmas song interpretation into a kind of vocal competitive gymnastics aimed strictly at demonstrating how much of a singer's five-octave vocal range can be used, not merely within this one particular song, but within each measure of the song.

In fact Mariah's voice jumps around so much it sounds like somebody’s trying to tickle her while she’s singing.

More sedate than Mariah, and possibly less harmful to the general category, The Carpenters’ version of “(There’s No Place Like) Home for the Holidays” comes on next, and it makes you think you’re listening to an Amtrak commercial rather than a Christmas song (“From Atlantic to Pacific/Gee, the traffic is terrific!”), so innocuous and manufactured it sounds.

Johnny Mathis is similarly harmless, although his oddly eunuch-like voice can give you the creeps, if you really think about it. Mercifully, his version of “It’s Beginning to Look a Lot Like Christmas” is short enough (2:16) that you don’t think about it for long.

Now, without Shazam we never would have known the precise time duration of that song.

On the other hand, we would we never have been able to identify the perpetrators of what may be the single greatest travesty of the holiday season—Jessica Simpson and Nick Lachey, singing “Baby it’s Cold Outside.”

“Singing” is actually too strong a word for what they do. Simpson’s voice barely rises above a whisper, and you cringe when she reaches for a note, although she does manage to hit the last, sustained “outside,” no doubt thanks to the magic of electronics. Lachey’s vocals are like what people do in the shower, or their car—not in a recording studio.

Thus the major downside of Shazam might be this: having correctly identified who was responsible for this blight on holiday radio music, if we ever ran across the pair in our car while singing along with the radio too loudly to notice, we wouldn’t stop to identify the bodies.

Fortunately, the bad taste left by their so-called duet is washed away when Nat King Cole’s “The Christmas Song” comes on next.

Thanks to Shazam, we learn that this is actually the fourth version Nat recorded. The man worked at his craft, and it shows. This is the best version of the song on record, by anyone, and probably one of the two or three best Christmas songs out there, period.

Unfortunately, the song’s actual writer, Mel Tormé, had the personality of a man perpetually seething for not getting proper recognition for having written one of the most popular Christmas songs of all time. We did not learn this from Shazam: we once saw Tormé perform at a small lounge, during which he managed to mention that he, not Nat King Cole, wrote “The Christmas Song,” and when this did not seem to make the appropriate impression, he later broke off singing to chew out a less-than-attentive audience member, completely destroying the mood for the rest of the set.

Like that long-ago performance by the "Velvet Fog," the pleasant sensation left behind by Cole’s “Christmas Song” is quickly soured, this time by a male singer performing “Let it Snow, Let it Snow, Let it Snow” in the manner of Harry Connick, Jr. doing a second-rate version of Sinatra.

Who is this guy, we wonder?

Shazam tells us it’s Michael Bublé. We are pondering how such a vocal lightweight became such a sensation in recent years—the answer must surely be electronics: his voice, very distinctly at times, sounds like it has been synthesized—when John Lennon’s “Happy Xmas” comes on.

It’s a great song, demonstrating as it does Lennon’s advice to David Bowie on how to write a song: “Say what you mean, make it rhyme and give it a backbeat.” The fact that Lennon had the best voice in rock and roll also helps.

Unfortunately, his wife had the worst, and a brief downer it is when Yoko comes in on the chorus like a banshee. (Fortunately she is quickly drowned out by the children’s chorus from the Harlem Community Choir.)

The other songs in our Shazam song-identification session are, we fear, too many to relate.

Sinatra, of course; Kelly Clarkson, an American Idol winner who essentially does a pale Mariah Carey impersonation; Blandy—er, Andy Williams; and one of the best: Tony Bennett.

Then there’s Willie Nelson, who has a terrific, understated way of doing any song he wants—but sounds completely out of place singing “Frosty the Snowman.” One wonders exactly what kind of white powder Willie was thinking about while he was recording this, if you get our drift.

Oh, and there’s Coldplay’s “Have Yourself a Merry Little Christmas,” which pairs the sweetest piano with the worst voice in any single Christmas song we heard; Amy Grant, a kind of female Andy Williams; the Ronettes, who are genuinely terrific—a great beat, no nonsense, and Ronnie singing her heart out with that New York accent; and then Mariah again, this time doing “Silent Night” with that same roller-coaster vocal gargling.

Gene Autry’s all-too-popular version of “Here Comes Santa Claus” would be bearable except that he pronounces it “Santee Closs,” which is unfortunate in a song in which that word appears like 274 times. ‘N Sync is likewise unbearable doing “O Holy Night” a cappella, with harmonies the Brits would call cringe-making, and Mariah-type warbling to boot.

Hall & Oates’s “Jingle Bell Rock” is too easy to confuse with the other versions of “Jingle Bell Rock”—thank you, Shazam, for clearing that up—while Martina McBride manages to sound eerily like Barbra Streisand imitating Linda Ronstadt singing “Have Yourself a Merry Little Christmas.”

Winding things down is Dan Fogelburg’s aforementioned “Same Old Lang Syne,” and here we need to vent a little: something about the way he sings “liquor store”—he pronounces it “leeker store”—never fails to provoke powerful radio-smashing adrenalin surges.

Fortunately, we suppress those urges today, because the Shazam experiment concludes with one of the best Christmas songs ever recorded. Better than Bing, and maybe even better than Nat, depending on your mood.

It’s Bruce Springsteen. The Boss. Doing “Santa Claus is Comin’ to Town.”

And even though this version was recorded live more than 25 years ago, it still jumps out of the radio and grabs you.

Now, as Shazam informs us, this particular recording was actually the B-side of a single release called “My Hometown.” Back in the day, kids, “singles” came with two songs, one on each side of a record: the “A” side was intended to be the hit song; the “B” side was, until the Beatles came along, for throwaway stuff.

Fortunately nobody threw this one away.

Springsteen begins the familiar song with some audience patter and actual jingle bells; then he starts to sing and the band comes to life. Things move along smoothly through the verse and chorus...until ace drummer Max Weinberg kicks it into high gear and the band roars into a fast shuffle that takes the thing into a different realm altogether.

Feeding off the audience, Bruce sings so hard his voice slightly breaks at times. Then he quiets down before roaring back again into a tear-the-roof-off chorus, sometimes dropping words and laughing as he goes.

This is real music—recorded in 1975 during a concert at the C.W. Post College—with no retakes, no producer, and no electronic vocal repairs, either.

Try doing that some time, Jessica and Nick.

Actually, come to think of it, please don’t.

Merry Christmas, Happy Hanukkah and a Good New Year to all.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, December 18, 2009

The Meredith Whitney Memorial NotMakingThisUp Trivia Quiz

Dec. 17 (Bloomberg) -- Meredith Whitney, the analyst known for correctly predicting Citigroup Inc.’s dividend cut last year, reduced earnings estimates for Goldman Sachs Group Inc. and Morgan Stanley through 2011….

If it’s Thursday, it must be time for Meredith Whitney to be downgrading something—at least that’s the way it seemed to us yesterday when news hit the tape that Last Year’s Star was making the tape once again, with another irrelevant bit of analyst-speak.

Here are the details:

The New York-based analyst, who runs Meredith Whitney Advisory Group, now projects Goldman Sachs will earn $19.57 a share in 2009, $19.65 in 2010 and $20.60 in 2011. Those were reduced from $19.95, $21.73 and $24.04, respectively. The 2011 forecast is 4.2 percent less than the average analyst estimateof $21.51 in a Bloomberg survey…

Why are these earnings changes irrelevant?

Well, for one thing, to make a 38 cent-per-share change in a round-numbers $20 per-share 2009 earnings estimate really isn’t worth the cost of preparing the press release.

For another, the implied precision—so Goldman is going to earn “$19.57” per-share? Why not $19.56? Or $19.58?—is the unfortunate by-product of Wall Street analysts not understanding that businesses are living, breathing, human organisms, not spread-sheet by-products.

Witness the dramatic drop in Whitney's 2011 numbers from the amusingly precise $24.04 per share—we’re talking about a financial enterprise with a trillion dollars in assets: not even Warren Buffett has a clue what 2011 will look like, let alone Meredith Whitney—to the equally ridiculously precise $20.60.

Speaking as a former member of Ms. Whitney’s club—i.e. Wall Street’s Finest—we’ve long thought analyst estimates should be limited to “Higher,” “Lower,” “Much Higher,” and “Much Lower,” and leave the faulty precision to the people who actually buy the stocks.

In any event, we write not to disagree with Ms. Whitney’s basic call: that the earnings outlook for Wall Street’s biggest investment houses may not be as perky going forward as it is right now.

But the reason is not that we see Armageddon ahead, as Ms. Whitney seems to do with every CNBC appearance.

It is simply that the earnings of Wall Street’s investment banks have almost nowhere to go but down.

Let’s look at a Bloomberg story on the subject, published the day before Ms. Whitney blasted her new, precise, earnings forecasts to a world on edge:

Wall Street’s $49.7 Billion Profit Tops OutlookBy Pete Young

Dec. 16 (Bloomberg) -- Wall Street earnings soared to $49.7 billion in the first three quarters of the year, exceeding the state’s forecast for all of 2009, New York Comptroller ThomasDiNapoli said…

That’s right: Wall Street made big bucks in 2009—bigger than even New York State dreamed a few short months ago.

Profits from the broker-dealer operations of New York Stock Exchange member firms…topped a November projection of $38.4 billion for the year, DiNapoli said in a report today. Wall Street lost $11.3 billion in 2007 and $42.6 billion in 2008, the comptroller reported.

And now for the Trivia Question:

What was the previous annual earnings peak for Wall Street broker-dealers, and in what year did that peak occur?

Winners will receive nothing but the satisfaction that they have not made it up.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Sunday, December 13, 2009

HarperCollins & Friends: In the Footsteps of Dinosaurs

“I’ve got this wonderful idea: we’re going to chop down some trees up in Canada and we’re going to ship them to a paper mill…and then we’ll ship that down to some newspaper and we’ll have a whole bunch of people staying up all night writing things….”

—Warren Buffett, explaining the death of newspapers, May 4, 2009

Buffett was talking about the newspaper business, but he may as well have been describing the book publishing business, too.

Having had some experience in dealing with book publishers (i.e. “Pilgrimage to Warren Buffett’s Omaha,” McGraw Hill, 2008), your editor can confirm that the book publishing business is doing its best to follow the newspaper publishing business into the La Brea Tar Pits, as quickly as possible.

Now, for the record, book publisher are full of very intelligent people who work hard doing the best they can to publish quality printed material. And they’re nice people to be around, too—at least, for a writer—because they really like books. T
hey obsess not only about the words inside each book, but they take enormous pains to get the cover artwork and the jacket design and even the physical look and feel of each book just right.

And they do all that not only for the U.S. versions of their catalogue: when the Japanese edition of “Pilgrimage” came out this past summer, our publisher raved about the finished product. “It looks gorgeous,” she said.

And indeed it did—although certainly nothing like the English version of our journey to the heart of Berkshire Hathaway.

Instead of pictures of Warren Buffett on the cover, and the use of bold colors along the borders to attract the eye (as in the photo to the right of this virtual column), the Japanese book cover was pure white and somewhat compact. Inside were thick rich pages covered with beautiful, black-typed ideographic characters printed in columns running right to left.

It even had—and we are not making this up—a silk-tasseled book marker worked into the binder.

It was like holding the Beatles’ White Album for the first time.

And we mean the White Album, not the CD version of the Beatles classic. “Gorgeous” though it was, the book seemed like something out of the 60s: thick, costly and a relic of the past.

After all, the world is awash in “gorgeous” printed material.

Last year alone, 275,000 new books were published in the United States alone. (That’s 5,288 a week, for those of you who think you might want to write a book some day.)

Meanwhile, simple economics are compelling the book world to move online, and those simple economics are as compelling as they were for the newspaper world a few years back.

To explain them, we’ll paraphrase Buffett’s remarks about the newspaper model thusly:

“I have a great idea: physical books!

“All we have to do is pick a topic today for a book that we hope will still be timely a year and a half from now, when it’s actually published. Of course, we’ll have to pay the author in advance for work that might or might not be any good, and also hope the author gets it done in time…

“Meanwhile we’ll design a book cover that might or might not be attractive when the book comes out; cut down a bunch of trees, turn them into paper, line up a printer for the cover, line up a printer for the book, estimate how many copies we might possibly sell if everything goes just right, print that many copies of the book, and ship them in big heavy trucks to distributors and booksellers while hoping that somebody influential reviews the book.

“Then we’ll pray enough people buy the book so that there aren’t any books we need to take back.”

You might think—given the hit-and-miss, but mostly miss, nature of this so-called business model—that a rational book publisher would gravitate swiftly to the online business model in order to eliminate the monstrous waste that goes on at every stage of the book publishing business—i.e. printing and shipping millions of books each year that are highly likely to be irrelevant by the date they reach the stores, and having to take them back.

But you would be wrong. The book publishers are fighting the online delivery of books.

Here’s how HarperCollins’ CEO Brian Murray has reacted, according to the Wall Street Journal:

Mr. Murray said that if new hardcover titles continue to be sold as $9.99 e-books, the eventual outcome will be fewer literary choices for customers, because publishers won't be able to take as many chances on new writers.

Mr. Murray is pursuing the absolutely correct—but fatally flawed—understanding that a $9.99 e-book will not cover the cost of a manufacturing and distribution system built around $30 hardcover books, i.e. his system.

What he does not grasp is this: if he doesn’t offer the books at that price, any number of virtual book publishers will rise up and take chances on precisely those authors Mr. Murray thinks will not be chanced on any more, and his model will disappear as swiftly as that which produced the original White Album.

Alas, Mr. Murray is not alone among his La Brea Tar Pit-marching brethren: Simon & Schuster and the Hachette Book Group also recently announced they would delay offering e-books in an effort to avoid cannibalizing new hardcover editions.

But the ground is shifting beneath their feet, and the book publishers find themselves stuck in something that seems to grip them tighter the more they struggle. Ahead they can see the newspaper companies, encased in the black bubbly, gasping for air and barely able to breathe.

The tar pits beckon, but HarperCollins & Friends march on.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, December 03, 2009

The NotMakingThisUp Interview with Alice Schroeder

Editor’s Note:
We had the opportunity to interview author Alice Schroeder as the paperbook version of her best-selling, and eye-opening, "The Snowball: Warren Buffett and the Business of Life" was hitting stores. We emailed more than a dozen questions to Alice, including a few that might have been uncomfortable, but, we thought, worthwhile. Alice answered them all.
Our questions are in plain typeface; Ms. Schroeder’s responses are italicized in bold.
For her thoughts on brilliant people, costly aspirations and codependency, as well as working against actuarial tables, sources fearing retaliation and when “he stopped speaking to me,” not to mention the next CEO’s biggest challenge, Charlie’s dictionary entry, “a major case of monkey mind” and other unique insights into Warren Buffett and the future of Berkshire Hathaway, read on!

JM: First of all, Alice, congratulations on having written a book—that isn’t easy. Second, congratulations on the book being successful enough to warrant a paperback—that isn’t as common as it used to be.

AS: Thank you very much. And congratulations on your very successful book.

JM: Thanks. What was the worst part—not the hardest, but the worst—about writing the book in the first place?

AS: Wow, we are really launching right in here. Okay, the worst part was living with fear. Nearly all writers live with a fear of being judged that increases as the book draws closer to its publication date. I did live with that fear, yet it was far outweighed by my fear of the consequences of publishing this book. I wrestled with that daily for years.

Eventually, I could judge the truth of my writing by my feelings. If it made me feel weak, even nauseous to write something, that was good. It meant that I’d succeeded in subduing the fear monster with my blow dart just long enough to pen it on the page.

I never reread The Snowball if I can help it. The fear monster glares at me from its captivity inside the book. Better to just shut the covers and leave it there.

JM: Understood. What was the best part of writing “The Snowball”?

AS: There’s no one best part. You can’t imagine how grateful I feel to have had this opportunity. I have never learned so much about so many topics so fast. Warren is a great teacher. Simply by observing him and his world you absorb a whole new culture, as an anthropologist would. I got to spend time with a whole cast of other interesting, brilliant people. Imagine being able to talk to Bill Gates for hours. He’s a great teacher, too.

I researched all sorts of unusual topics that would never have crossed my desk otherwise. The history of desegregation in Washington, D.C. How a slaughterhouse was organized in 1940s Omaha. The history of Las Vegas.

I learned to write narrative nonfiction. Some days the words well up inside you and you know they are coming from somewhere outside yourself. To experience that sense of grace is why writers write. This experience changed my life in so many ways that I can’t recount them in a paragraph.

JM: So what, if anything, did you regret about the book once it was published?

AS: According to both my agent and editor, every writer sees the flaws in their book, real and imagined, as soon as they open the covers. And it’s true.

JM: You bet. Now, the new, paperback version of “Snowball” is shorter, but I honestly couldn’t identify major chunks that you removed—and that is no easy feat. What did you remove and who decided what to take out?

AS: I did the cutting myself, which was essential, and removed words, phrases, and sentences to condense stories when possible rather than wholesale cutting. I had to make some tough decisions. One story that was hard to cut, for example, was the story of Warren’s silver investment in the chapter “Semicolon.” He had bought almost a third of the world’s silver supply. He wanted to go to London to visit the silver, and pictured himself in the vault, enjoying the feeling of being surrounded by all those silver bars. What an image.

JM: Yes it is. Now, a question about the title. Not about “The Snowball” part, which some Buffettologists thought was odd given that the snowball metaphor is one of his least well known—but about the “Warren Buffett and the Business of Life” part.

As your book points out, his wife left him—physically, at least—after 25 years, and his children, in their formative years, appear to have occupied his mind less than 10-Ks and 10-Qs.

Indeed, subheadings in your book’s index under “Warren Buffett” include, and I am not making this up, ‘attention-seeking,’ ‘emotional frugality,’ and ‘focus, total absorption and obsession.’

Isn’t one subtext of your book that WB failed where it really matters in the “business of life?”

AS: We read biographies of eminent subjects to learn from their lives, for better or worse. These are people who have succeeded and failed on a grand scale, and the lessons they impart are magnified accordingly. Warren’s life is so instructive – the Inner Scorecard, his way of dealing with people, how he taught himself to think about risk, about time, about responsibility. When I started working on the book it felt like getting a post-graduate degree in life. I wanted to give those lessons to the reader.

As for the business of life in the title, the point is that business is inseparable from life. Most of the investing books focus on financial success as an isolated goal. Yet his business life can’t be understood outside the context of his personal life. Warren’s story is a living illustration that aspirations to be as successful as him have a cost. Until I got to observe him closely I didn’t realize how single-minded he is. People who want to invest like Warren Buffett ought to understand what this would mean to their lives.

Lastly, readers might be interested to know that a professional indexer creates the index. This is a real job – indexer -- I am not making this up. Other terms she chose: complex personality, honesty, sense of rectitude, sentimentality, showmanship, personal growth after Susie’s death.

JM: You interviewed a lot of people for your book. First, what was your relationship with Susan T. Buffett, and how comfortable were you interviewing her?

AS: I met Susie the day I first interviewed Warren as an analyst. The first five years we barely knew each other. It wasn’t until the book got going that we started getting acquainted. Susie’s very comfortable to be around. One time she took me down to Glide Memorial Church to see the gospel choir rehearse, and we had dinner with the Reverend Cecil Williams and his wife, Janice Mirikitani. I’ve had a couple of meals with Susie, and her eating habits were nearly as appalling as Warren’s, incidentally.

As you would expect from reading The Snowball, when I was interviewing Susie, she didn’t want to talk about herself, but was forthcoming about Warren. She was diagnosed with cancer six months after I started working on the project, which limited the interviews we were able to do. That was too bad. She was a wise woman.

JM: Who was most fun to interview?

AS: Warren, of course. He’s nonstop funny as well as always teaching you things. Among the rest, my favorites, hands down, were the older people. The actuarial tables were not working in my favor, with so many people of Warren’s generation and older to interview, so I started with the oldest first – those over age ninety – and worked my way down. We so rarely spend generous amounts of time with our elders. I was able to do it often and at length. It was a privilege to spend so many hours among people who had accumulated such a great store of wisdom.

JM: Who gave you the most insightful view of Buffett?

AS: Warren, by letting me spend so much time observing him and talking to him. My observations of him became the litmus test against which I measured everyone else’s statements. Beyond that, his sisters, Doris and Bertie, who have known him longer than anyone. Charlie Munger. His kids. Sharon Osberg. Don Graham. A few others that I’d prefer not to name.

JM: Speaking of those last, in your acknowledgements you cite “those who asked not to be named”: what, in general, did those who didn’t want to be named have in common?

AS: They wanted the truth to be told, and were afraid of retaliation if they were named.

JM: Wow. Okay. One final question along this line: there’s a quote late in the book (Page 694 in the paperback), about how Buffett held off on endorsing Obama “until it became irrelevant.” You write:

As one observer put it, “Warren only ever wants to back winners. Your real friends are the people who are there for you even though it might cost them something.”

That sounds remarkably catty for a true friend of Buffett to say. Buffett is a guy who won’t sell the Buffalo News even knowing its value is going to zero and who almost never fires a CEO, even if the business is underperforming. I suspect it was said by a political acquaintance. Am I wrong about that, and do you agree “he only ever wants to back winners”?

AS: To help and endorse and support your friends when they are in need is different than making business decisions about underperforming assets and people. The quote you refer to came from a close friend of his who has no involvement in politics, and is simply one of the people who have been hurt. I would describe it as a wounded, not catty statement.
Remember, we’re speaking of the man who wouldn’t help his sister when she nearly went bankrupt, who wouldn’t help his daughter when she was pregnant (and they are not the sources of this quote).

By the way, as you can tell from The Snowball, people who’ve been hurt by Warren almost always rise above it, and still love him in the end.

JM: You became the first major sell-side analyst (we call them “Wall Street’s Finest” here—no offense, I hope) to cover Berkshire Hathaway after Buffett merged with Gen Re. You gained enough of Buffett’s respect that he regularly appeared at your famous (among Buffettologists) Friday night dinner in Omaha during the annual meetings, and ultimately gave you his blessing to write what was perceived to be his one and only authorized biography.

How did your own personal view of Buffett change from the first time you ever met him to the day “Snowball” was published—and how about as of today?

AS: If I could make one small adjustment to your introduction, Warren cooperated with me for The Snowball, but it was not an authorized biography. The latter means the subject has editorial control over the book.

When I knew Warren as an analyst he was an awe-inspiring, almost infallible-seeming figure. Fortunately he didn’t care about the stock’s rating, and I believe he might even have been perversely pleased had I put a sell rating on it, so that he could show off how little he cared and make a point about Wall Street. (I didn’t, and it would have been a mistake to do that during the time I followed BRK).

Once I got to know him better he became real, fallible, even fragile. His achievements actually seem more impressive to me with hindsight. To start out in life with a family like his and accomplish what he has done is, in my opinion, a greater feat than the public generally gives him credit for. Whereas the hero-worship of Warren Buffett has been overdone, his real accomplishments are underappreciated.

Today, he seems the same person as when I finished the book. The test of whether you’ve done good research is how well you can predict and, more important, explain your subject’s behavior. Warren rarely surprises me, and I nearly always understand his motives.

JM: You wrote extensively—I'd guess too extensively for most Buffettologists, not to mention for Buffett himself, if the rumors are true—of his personal life. In fact, you named his first wife’s lover. Having been a Wall Street analyst and having written a book about Warren Buffett, I know it is not easy to write something unflattering about a person you both like and admire.

How hard was it to physically put those words down in a book that would be read by WB, not to mention his best friends and family?

Also, where did the worst reaction come from, and do you think you could have or should have done anything differently?

AS: It’s strange that this is a controversy. A biography includes the details of the personal relationships that influenced the breakdown of the subject’s marriage. That goes without saying. You can’t really understand Warren Buffett without this information.

And of course I didn’t want to hurt Warren. I care about him as a human being. It was hard to know that he was going to be hurt and that I would be the instrument of his pain. But let us turn this around a bit.

Warren knew my work as an analyst. He knew that I was dogged about research and that I had a history of writing things that were true even if they upset people. He chose me for this project anyway. He may have thought, who knows what. That in exchange for such complete cooperation, I would owe him the loyalty of writing the version he wanted. As many people would. Nonetheless, he knew what he was getting when he chose me. That was not an accident.
He immediately began shoveling biographical material of an intensely personal nature at me. Until that point I had no idea of the situation I was walking into. Once I started to understand, it became my responsibility to do corroborative research. The choice was to tell the truth, which would hurt Warren, anger other people, and expose me to vindictiveness, or to lie, which would violate the reader’s trust and my integrity. I had to work myself up over and over to find the courage to tell the truth.

From time to time, I talked to Warren, and my agent talked to Warren, to let him know that he wasn’t going to like, or even necessarily agree with, some aspects of the book. He continued to cooperate with me throughout. Warren read the book in July 2008, right before it went to the printer.
Afterwards, we continued to have a perfectly friendly relationship, right up until the week The Snowball was published. It was only then that he stopped speaking to me. Under the circumstances, someone might deduce that other people’s reactions influenced him, although there’s no way to know for sure.

I wouldn’t do anything differently with hindsight. This was an important book that needed to be written. I made a considered judgment based on the readers’ needs, and have tried to set my own feelings aside.

JM: The results speak for themselves, I’d say. Now, moving beyond the personal, while researching “Pilgrimage to Warren Buffett’s Omaha,” my thought process on Berkshire changed: I went in thinking Buffett the Investor could be replaced by an equally rational investor, while Buffett the Manager could be replaced by anyone who merely left the Berkshire companies alone.

However, I came out thinking Buffett the Investor may not need to be replaced—because the investment portfolio is so minor relative to the businesses Berkshire now owns—while Buffett the Manager can’t be replaced for the simple reason that nearly all those Berkshire companies are run by individuals who sold to Warren Buffett, not to Howard Buffett and the Board of Directors. Furthermore, it seems unlikely that families who might want to sell to Warren Buffett would feel comfortable selling to a David Sokol on anything like the terms Buffett would get.

What's your take?
AS: Allocating Berkshire’s capital (as opposed to investing in stocks) is going to be the CEO’s biggest challenge. The Berkshire companies throw off a lot of cash. Even after the company declares a dividend, as it almost certainly will, there is still the capital management question.

Warren has a term, the Institutional Imperative, to describe the empire-building and other foolishness that leads to overpriced acquisitions, underutilized capital, stock repurchased above its intrinsic value, stock issued below its intrinsic value, and all the other failures of capital management that companies are so prone to commit. CEOs are rewarded in all sorts of ways for creating bigger companies, not more profitable companies. That’s putting aside all the risk that goes with running a big insurance business and the other financial exposures that Berkshire’s balance sheet includes. Then there is the Buffett charm you describe, which has brought the company such good acquisition opportunities. How do you replace that? Capital management is the biggest risk shareholders face.

Warren’s not replaceable as a manager, in my opinion, because he’s created a company that’s an expression of his personality. Even so, Berkshire can evolve to become a more conventional yet still successful company without losing its essence if Warren’s successor does a good job.

I am not in the camp that believes it must be broken up. That’s conceivable, but not necessary. The most critical issue is choosing good operating managers. Undoubtedly many of those who are running the businesses now will retire when Warren leaves. They have hand-picked their successors without much, if any, oversight from Warren. The next CEO will need to approach the turnover as an opportunity, not a problem, if he wants to succeed. It is, for example, an opportunity to improve diversity in Berkshire’s leadership.

JM: Good points, all. Now, you are not a Berkshire shareholder: why?
AS: I thought it would be a conflict of interest to own BRK while writing the book, and didn’t want to have to deal with that. Plenty of people who write about him do own the stock, which I’m not criticizing. Whether someone can manage a conflict of interest is purely a personal thing. But you can also see, collectively, how it influences the gestalt. The tone of writing on Buffett as a whole is largely set by the way so many authors are financially invested in him. If all these people have gotten rich or are getting rich or hope to get rich because of Warren Buffett, how objective can they be?

Journalists and analysts disclose whether they own a stock, but interestingly, they aren’t ever asked to disclose whether the investment is material to their net worth. After the book was published and I’d said my piece, I did buy some BRK. It’s not significant to my net worth.

JM: I meet an inordinate number of people who have personally met Buffett and/or Munger in one way or another—finance (Buffett), real estate (Munger), charity (Munger), and education (Munger also)—and I've heard some great stories.

You must hear things all the time: what’s a favorite story, or a favorite interaction of your own with them, that you didn’t include in the book?

AS: Warren is not so good with anything visual. Once we were talking on the phone after I had known him for years and he had seen me on many occasions. As a sort of joke, I asked him what color my hair was. He paused for quite a long time, and then said, “Not black.”

JM: Perfect. Of course, Charlie Munger is as important to the Berkshire model as Buffett himself. My own feeling is that Munger has had a better rounded life than Buffett—and yet he comes across to strangers as impossibly arrogant.

What's your take on Charlie?

AS: It’s hard to sum up Charlie in a couple of sentences or a paragraph. He’s quite humble in his genuine respect for the achievements of others, as long as they equal or exceed his own intelligence, in his opinion. He is so ungodly judgmental that some people find him insufferable, yet his fundamental kindness shines through. Politically … if you look up “politically incorrect” in the dictionary you’ll find a picture of Charlie there instead of a definition. That’s part of why Charlie is refreshing to be around, though. He’s always himself. There is not a phony cell in his body.

Your time will not be wasted talking to Charlie. Usually he’s got something very interesting and insightful to say. It’s better to listen when you’re around Charlie than to try to talk. The phenomenon I wrote about in the book, about him turning his head off when other people are talking, is very much in evidence at times. He’s really a treasure. I enjoyed interviewing Charlie immensely.

JM: I bet. Now, back to Warren.
There’s a single sentence in your book (page 650) that blew my mind. It puts Buffett in focus like nothing else I’ve read, but I’m not sure if you meant it the way it’s written. The setting is this: Susan T. Buffett, his first wife, has had a brain hemorrhage in Sun Valley; Buffett is distraught and at her side in the hospital; their two younger children have traveled a long distance to get there; and when they arrive at the hospital, you quote Buffett telling them nothing about their mother, her condition, or what exactly happened. You have him saying, "I've been here 5 hours."

Is it really all about him?

AS: Well, I guess the best way to answer that is to say that a trained psychologist or psychotherapist would have a field day reading The Snowball. I’m not qualified to diagnose psychological conditions. But my observation was that Warren knows himself pretty well. He’s intentionally arranged his life so that things center around him. He’s got his own means of reciprocating and being loyal to people, yet at the same time is not the least ashamed to say that he feels needier than others.

He’s so open about his self-orientation that it’s quite disarming, even part of his charm. He seeks out people who are comfortable with one-sided relationships, and once said that he felt he served Susie and Astrid by being a “taker,” because they loved to “give.” I thought that was pretty astute of him. He’s got a knack of making codependency work for the people involved, which is why people love him even after they get hurt.

JM: Buffett is known as a guy who “tap-dances to work,” and is so comfortable in his rational approach to the market that he could turn things off and nap whenever he needed to. When did he start taking sleeping pills?

AS: Warren is not a big self-medicator, unless you count work, sugar and caffeine. He loves going to work. It really is the highlight of his day. Work is his stress-reliever. He told me he’s never been a great sleeper, and I’m sure that’s true. He goes through withdrawal from work, and he can’t play bridge in his sleep. He’s got a major case of monkey mind, as the Buddhists would say.

My recollection is that he first started using Ambien for jet lag. If he uses it for insomnia, who cares? He’s certainly no Michael Jackson. Probably at least half the people reading this take Ambien or something similar from time to time.

JM: True. Of course, Buffett is, we know, astonishingly intelligent—and not just about investments. For example, he saved Salomon from extinction; turned around the Buffalo News during a very difficult time; and gave excellent advice to Kay Graham—as you write in your book—that helped her save the Washington Post during a crisis early in her tenure running that company.

So how does he sit on the board of Coke while its CEO starts promising growth targets—which Buffett hates—that leads to channel-stuffing and an SEC investigation?

Does he really hate confrontation that much? Or can he simply rationalize his way out of anything?

AS: Warren is pretty good at rationalizing what he needs to if there is money to be made, and he really does hate confrontation. This is mostly about something else, though. You will notice a seeming passivity when he sits on a board that is similar to his reluctance to direct his own managers. (This trait is almost always taken at face value as being one of his strengths, by the way, rather than being studied for the lessons it yields as both a strength and a weakness. But I digress.)

Warren divides the world into matters for which he has assumed personal responsibility and everything else that is not about him. Where he’s taken responsibility and will be judged for it, he’s uncompromising with himself, and even a micromanager. Otherwise, he “abdicates,” to use Tom Murphy’s term.

With both the operating managers and the CEOs of the companies who’s boards he’s sat on, the point at which he takes action is when the damage done by others could reflect on his reputation. The best example is Coca-Cola. He was passive until the crisis, then took on a role so active it shocked people.

JM: Understood. In the paperback “Snowball,” which is updated to cover the financial crisis, you make the excellent point that Buffett's derivatives position handcuffed him during the market collapse last year. But instead of taking sides on whether Buffett should or shouldn’t have sold puts with $37 billion in notional value on the market near the peak, let's invert the question in a manner of speaking, as Charlie Munger likes to do, and look at the sale of puts this way: What does it mean that he did it?

Does it mean that he had become as complacent as everyone else, despite years of warning about “ticking time bombs” and “financial weapons of mass destruction”?

AS: I don’t think he was complacent. Warren views derivatives as being fraught with credit risk. He structured these, and other deals, to protect the company from the capital calls that such risk entails. The decisions he made were excellent in that sense. They are the reason why Berkshire is still standing, financially healthy and why it did not require a bailout.

It’s dicey to second-guess an investor as successful as Warren Buffett. Chances are he will be proved right on those puts and they’ll be profitable. I do think Warren, in his focus on the long-term, missed how much the short-term volatility of the market would affect others’ perceptions of Berkshire’s day-to-day financial strength. Berkshire had an awful lot of market exposure going into the crisis, and unfortunately, during the bloodbath, it didn’t look like the Ft. Knox of capital to the rating agencies.

JM: Okay. And last but not least—you. You describe yourself as “a full-time writer.” What’s next?

AS: I’m working on another book, subject undisclosed except that it’s not a biography. I have been approached to write a biography by several other well-known people, but said no. Right now my interests lie elsewhere.

I’m also writing a column on general topics for Bloomberg, roughly once a month, which has been incredibly enjoyable. Occasionally I’m also writing other short pieces, for example, like this, or for The Motley Fool or Huffington Post. You can find these at my website,

JM: Excellent, Alice. On behalf of our loyal and thoughtful readers, I thank you very much and wish you good luck.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, November 27, 2009

Finally, A Crisis We Can Enjoy!

“People are panicking: This whole process counters everything that the rulers have been saying and the way it has been communicated before the holidays so no one can get any information is confusing,” said one hedge fund manager.

A conference call on Thursday for bondholders of Nakheel, the Dubai-owned property company at the centre of the storm, collapsed after phone lines were swamped with callers.”
—The Financial Times

The bad news is there’s another crisis. The good news is it’s not ours.

That’s right: after two straight years of erupting crises, starting with the subprime mortgage crisis (remember “What Happens in Subprime Stays in Subprime”? Ah, those were the days…) and moving on through the housing crisis, the auto crisis, the Iraq crisis, the fiscal crisis, the Bernie Madoff crisis, and now the heath care crisis, it’s a positive relief that a crisis has erupted 6,859 miles from the eastern shores of the United States.

In Dubai.

The word thus far is that European bankers may have $40 billion exposure to that debt-fueled, island-building, Las Vegas-on-the-Persian-Gulf, while U.S. banks appear to have almost none at all.

And while at least one idiot hedge fund manager, quoted above, is telling the Financial Times that he is shocked—shocked!—to discover that some form of gambling has been going on under the noses of the “rulers” of what was, until this weekend, the world’s last remaining Great Bubble, readers of this virtual column could not have suffered any such surprise.

Here’s how we wrote about it one year ago this month, on Friday, November 07, 2008:

Dubious about Dubai

In Dubai, Show Goes On for Property
DUBAI -- Housing crisis? Mortgage meltdown? Credit crunch?
After spending a few hours at Cityscape, this Mideast boom-town's annual real-estate trade show, you just might forget about the financial crisis gripping much of the rest of the world.—The Wall Street Journal, October 7, 2008

It seems like only a month ago that real estate speculators in Dubai were patiently explaining why their Real Estate Bubble was different from our Real Estate Bubble.

In fact, it was just a month ago!

On Sunday evening before the show, Nakheel, a Dubai-government-backed property developer, invited guests including the acting couple Catherine Zeta-Jones and Michael Douglas to the pink Atlantis hotel at the tip of its man-made, palm-shaped archipelago.

The occasion was the launch of Nakheel's latest project: a kilometer-tall skyscraper. The $38 billion project is supposed to someday tower above the world's current tallest building, Burj Dubai, itself nearing completion here.

Hey, with a government-backed developer and Catherine Zeta-Jones on board, what could go wrong with a kilometer-tall skyscraper?

"I'm sure most of you are asking why we're launching this, and you'd be mad not to question it," Nakheel's chief executive Chris O'Donnell said. He added, "The project will be built over 10 years, and we'll have many more [economic] cycles before then...the world will be a different place by the time it's built."

"Mad" is, we think, the exact word for O’Donnell's assurances, as reported by the Wall Street Journal, that the speculation in Dubai will survive whatever cycles the world will throw at it.

In fact, O'Donnell's words bring back memories of summer, 2007, when an investment banker stood at a podium in New York City and confidently explained to a group of investors why Bubble-era multiples on peak-cycle EBITDA numbers for deep-cycle, capital intensive businesses like Freescale Semiconductor made sense.

The key, he said with a straight face, was the lack of restrictive covenants on the leveraged loans, which would help Freescale and others survive whatever economic cycles might be thrown their way.

Still, now that the leveraged loans of Freescale and others are going begging, we find that Perini Corp, a builder of mega-casinos among other things, wants to go to Dubai and get in on the game, as management explained on yesterday’s earnings call:

“The current economic climate involving the credit markets has caused some customers delay in certain new project starts, primarily in the hospitality and gaming markets. Some customers have decided to postpone preconstruction activity until financial markets regain their footing and open up credit capacity….

“Overall, we continue to see many opportunities to secure new business in each of our business segments, both domestic and international. Bob will share more details of our prospects in a few minutes, including our strategy to become a significant contractor in both Dubai and Abu Dhabi in the Middle East.

“In Dubai, we have agreements in principle with substantial local and international partners to participate in construction joint ventures which may be awarded within 90 days. These are for large hospitality and mixed-use projects for which we have participated in several design workshops to date….”

Call us cynics, but if we were building “large hospitality and mixed-use projects” in an overbuilt, Bubble-ridden market like Dubai, we’d want the cash up front, in the bank.

—JeffMatthewsIsNotMakingThisUp, November 9, 2008

Just three months after that conference call, in February 2009, Perini management told Wall Street’s Finest that the Dubai projects “are now on hold.”

Good thing, too: everything in Dubai is now on hold.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, November 23, 2009

The New Risk Factor: Expletive Deleted

A new “risk factor” is cropping up in company conference calls: healthcare legislation.

Before the Securities Litigation Reform Act came along in 1995, companies could—and would—be sued for things that influenced their stock prices, even if those things were beyond management’s control.

Nowadays, so long as a company starts off its earnings call or conference appearance with a long-winded disclaimer of “risks and uncertainties”—to the effect that “Anything we say today might turn out wrong”—the company is somewhat safe from tort lawyers with nothing better to do than trolling for companies to drag down like wolf packs.

Usually, the “risks and uncertainties” covered by these disclaimers relate to demand, supply, pricing, margins, currency fluctuations, tax rates, inflation, earthquakes, patents, intellectual property and, of course, litigation from tort lawyers—among much else.

We are here to report that this “much else” now includes a new “risk factor,” healthcare legislation, as management of Dick’s Sporting Goods—a well-run retailer currently suffering at the hands of a retrenched consumer—highlighted on last week’s conference call:

We believe there is much uncertainty around the consumer's attitude towards spending this holiday season, driven in part by the potential impact of healthcare legislation, possible new tax legislation, and the recently-announced 10.2% unemployment rate.

Dick’s management did not elucidate on the legislation coming out of Washington, but David Farr, the CEO of Emerson Electric Company, did, at a presentation on November 11 at an RW Baird Industrial Conference.

In fact, “elucidate” is too sedate a word for what Farr did: in fact, he unloaded.

Now, David Farr is not your normal grumpy CEO. He does not, for example, preside over a market-share-losing, money-losing, possible-NASDAQ-listing-losing enterprise like a certain irascible, finger-wagging, conspiracy-spewing CEO we could think of.

Nor has he done a discreditable job guiding his worldwide, industrial-sensitive enterprise through the financial crisis: indeed, despite a $4 billion sales drop (on a base of $24 billion), Emerson generated near-record cash flows in its just-ended fiscal year.

And since Emerson has its fingers in almost every aspect of the global economy, from chemicals to climate controls, attention ought to be paid.

Thus we thought it noteworthy to pass on Farr’s passionate, but informed, views on the current healthcare legislation and much else coming out of Washington, thanks to the indispensible StreetEvents. (Farr’s words in bold.)

“A Whole Different World”:

[This has been] a very drastic downturn.

And the key issue is how fast is it going to recover? I'll give you some ideas in a second on this. But I don't think it's going to be as fast as people believe. There's a lot of stress in the world today.

As I look at the Company and I look at the last two recessions, I just started my 10th year as CEO and I have had my second recession. It used to be ten-year cycles. We're going to five-year cycles now, it looks like.

And so if I look at the last downturn in '01 and '03, we took a 14% reduction in the headcount. We closed 75 facilities worldwide. We spent about $440 million restructuring, got the Company going and we grew quite rapidly.For five years, underlying growth rate of 8.5%, earnings growth close to 20%, certainly a lot of cash, the returns at an all-time high, close to 22% return on total capital for us at the endpoint. And then the shock came.

I look at this cycle and what's happening to us different than anything we have seen before. The world is definitely changing.

You're going to see a whole different world emerge in my opinion over the next five to 10 years as the mature markets -- the US, Japan and Western Europe which are highly stressed, highly increasing debt levels and basically restricted of what they can do; if you don't have a major play in the emerging markets, you will not see the type of growth that we have been seeing for the last four or five years.

“Definitely Getting Better”:

We are dealing with a very difficult environment. It's not going to change. It's going to get a little bit better. But we are still dealing with a very weak global manufacturing industrial environment, though not as bad as it was two or three months ago as you'll see.

So as I look at that this right now, we're looking at a very challenging year again; not as bad as last year. I mean, down 12% is the worst we have ever seen but it's definitely getting better and you'll start seeing this trend line coming. You will see that our orders will follow that very quickly….

“I’m Not Going to Hire Anybody in the United States”

Now, to tell you how bad this is and tell you what I think Washington is doing right now, Washington is doing everything in their manpower capability to destroy US manufacturers, fundamentally destroy US manufacturers.

Cap and trade, medical reform, labor rules, whatever they want to do, raise taxes. They're just going to destroyed jobs. We have already reached 7.3 million jobs in this downturn. We're going to 8. That is a summation of the last four downturns.

So what do you think the recovery is going to be in jobs? It ain't going to be very good. I listen to everything Washington is doing -- wasting money, raising the deficit to 10, $12 trillion -- the debt level to 10, $12 trillion, going to $23 trillion; raising taxes; putting regulations and requirements on me as a manufacturing company.

What do you think I'm going to do? I'm not going to hire anybody in the United States. I'm moving. So they're doing everything possible to destroy jobs, in my opinion. That's my opinion as a manufacturer and we employ 125,000 people worldwide. So I do know what the (expletive) I'm talking about.

We used to employ a lot more in the United States and we will continue to move [all this]. When I see guys like this, Wall Street bailouts, car bailouts, I'm looking -- what are these guys doing with our money? They're wasting trillions of dollars, trillions of dollars.

So what they are going to do, they're going to pass a new medical healthcare, raise my costs, jobs will go. Cap and trade, tax me, jobs will go. It's pretty straightforward. What they're doing right now ain't working. 8 million jobs, summation of the last four downturns….

“Where the Opportunity Right Now Is”

Why do you think we're moving our companies into the emerging markets? Because that's where the growth is. That's where the jobs are going to be. That's where we can create value. Share of this market is going to get less. It's going to go down to 45%.

So this is where we're making our investments because this is where we are going to grow. This is what is going to happen in the economy. And so if you look at where the opportunity right now is, it's not in Rhode Island. It's not in Connecticut, it's not in Illinois.

It is in India, it's in China. I'm taking another trip to China on Saturday. I go there seven, eight times a year. I go to Latin America, I go to the Middle East. That's where the growth is going to be, international.Since I've been CEO, we've added close to 19 points of emerging market sales. We're up to 33%.....

If you look at the last 10 years…73% of our growth has been in emerging markets. We have invested aggressively.

Where “The Degree of Freedom” Lies:

I lived over there, I ran Asia for a long time, for almost five years. I see the next five years an underlying growth rate of 5 to 7%. We're going to have over 60% of our growth in emerging markets, maybe 70% again.

The trend lines are there. Mature market growth will be a lot less just because the economics and the degree of freedom and the overcapacity issues we face in these countries.

So we as a Company today are putting our best people, our best technology and our best investments in these marketplaces to grow. Because my job is to grow that top line, grow my earnings, grow my cash flow and grow my returns to the shareholders.

My job is not to shrink and roll over for the US government. That is not my job. That's not what I get paid to do.

“Expletive Deleted”

You talk about in renewable and alternative, we have $50 million this year. We're going to go to over $800 million in five years. We created wind converters for China. We have pitch controls, electronic controls for the windmills.

At the bottom, we have solar products, both the systems and power conversion. So we have created a whole portfolio of products for this. But you're not going to see Emerson going out there with fancy commercials or sitting at the right hand of some president talking about this (expletive). We do it. We (expletive) do it (expletive).

I don't need to be told, I don't need to get government handouts, I can do it without them.

Before dismissing Farr as somewhat unhinged, recall that he employs 125,000 human beings and knows a thing or two about global competition—having lived in Asia himself, and more than doubling his company’s international business in ten years.

Also, companies do not call out items as “risk factors” just for the heck of it: clearly Dick's Sporting Goods sees a potential problem looming with its own customers.

And by way of coda, we’ll share a quote on the subject of healthcare reform from the calm, deliberate CEO of a small US-based company that manufacturers nearly all its product in China.

When asked if the recent drop in the US Dollar would hurt his price advantage versus US-sourced competitors, the CEO noted that, for one thing, dollar-priced raw materials consumed in China are paid for in a strong currency, keeping his cost of goods lower than for a US producer importing the same raw materials.

And for another thing, he added matter-of-factly, “When this healthcare bill passes, nobody’s going to want to manufacture in the U.S. anyway.”

Expletive deleted, indeed.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, November 20, 2009

Shoot the Messenger! Or at Least Get the SEC to Investigate Him!

“When all else fails we can whip the horses’ eyes,
And make them sleep
And cry.”

—“The Soft Parade,” The Doors

Okay so we’re not exactly sure what Jim Morrison’s “Soft Parade” lyrics have to do with the central message of today’s virtual column—except that the dead poet’s gloomy words came immediately to mind while reading what we here at NotMakingThisUp believe is the single most important story in today’s Wall Street Journal.

The story is titled “A Tough ‘Sell’ for Jefferies Analyst,” and reporter David Armstrong starts it off thusly:

Jefferies & Co. analyst Brian Kennedy made the best call of his fledgling career when he slapped a ‘sell’ rating on shares of CardioNet Inc. earlier this year.

Then he quit his job

Our sharp-eyed, long-time readers will know precisely where this story is going before it gets there.

But to spell it out for any less-than-sharp-eyed readers out there—i.e. Congresspersons, especially those on Important Financial Sub-Committees—the story of Brian Kennedy and CardioNet is the story of every Wall Street analyst who didn’t go along with the crowd in recommending a company otherwise universally touted by Wall Street’s Finest.

Kennedy was snubbed within his own firm and investigated by its own attorneys, and he was blacklisted by CardioNet management, who decried him as a tool of short-sellers and filed a complaint against him with the SEC.

That he was right in the end—CardioNet blew up for exactly the reason he put a “Sell” on the stock to begin with—didn’t help Brian Kennedy at all.

Thus the story of CardioNet is the story of Citigroup and Fannie Mae and WorldCom and Enron and every other bad investment idea whose cheer-leaders steamrolled whoever tried to raise a factual dissent of “The Story.”

As such, it ought to be required reading in every research department where Wall Street’s Finest practice their craft, not to mention in the hearing committee rooms of Congress, where short-sellers—rather than bad lending, bad borrowing, bad management and bad regulators—are routinely trotted out as “Exhibit A” in the Causes of the Financial Crisis.

Having recently visited the Rock and Roll Hall of Fame and Museum in Cleveland—which has, among its many mind-numbingly detailed displays, a fascinating collection of childhood memorabilia of a surprisingly innocent Jim Morrison, including a grade-school report card and a polite thank-you note written to his mother years before he became a fall-down drunk—Morrison’s dark exhortation at the end of “The Soft Parade” simply seems to fit the mood of the Journal’s article

“When all else fails we can whip the horses’ eyes,” indeed.

But so as not to end on a down beat, we are happy to report that, when asked to name the nicest guy she’d met at the Rock and Roll Museum thus far, the grey-pony-tailed ticket-taker said “Alice Cooper” without missing a beat.

One day, as promised, we will tell the story of How Jed Drake and I Stole Alice Cooper’s Mailbox.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Tuesday, November 17, 2009

REALLY Grumpy Analyst Syndrome

In “Grumpy Analyst Syndrome, or, ‘Optimistic, How Dare He!’” from August 31, we noted the uncanny tendency of Wall Street’s Finest—of which we were one, once—to throw in the towel on their favorite stocks at precisely the end of whatever bear market has caused those stocks to collapse.

This makes WSF look doubly-dumb: first for stubbornly keeping “Buy” ratings on stocks that collapse, and then for stubbornly keeping “Sell” ratings on those same stocks as they begin to recover.

As we pointed out, Grumpy Analysts often take out their ensuing frustrations on earnings conference calls—sometimes in the manner of radio call-in conspiracy theorists who seek to dump As Much Vital Important Information As Possible on their hosts Before Government Agents Pull The Plug.

By way of example, we quoted from the Toll Brothers earnings call that triggered our initial musings on Grumpy Analyst Syndrome, when one such GA actually warned CEO Bob Toll of “ominous statistics” that he would be wise to keep an eye on:

Well, just to keep in mind, Bob, keep in mind before you go there, these are foreclosures in process so they're not yet hitting the real estate for sale side market, so they are ominous statistics and I think that we have seen false recoveries before…

When the CEO attempted to point out that his company had seen a recovery in housing demand despite the rise in foreclosures, the GA, rather than being mollified, continued to wag a finger with this warning about Toll’s fourth quarter results:

I guess what I'm just trying to point out and make sure that Toll Brothers is thinking about as well is the headwind that might be fourth quarter 2009…

That was in August, and apparently the world has not taken heed of such “headwinds,” for when Toll Brothers reported its fiscal fourth quarter 2009 results last week, orders were up 42% in units and 62% in dollars from the year before.

This good news was, apparently, too much for our Grumpy Analyst, who did not bother to ask questions on the ensuing conference call.

Instead, the GA spoke truth to power by appealing directly to the New York Times, in a Sunday column by the redoubtable Gretchen Morgenson, called “Home Builders (You Heard That Right) Get a Gift.”

Morgenson's column concerned the latest Tax Break for Businesses that Don’t Need Tax Breaks: a $33 billion gift to, among others, homebuilders.

And in it, Morgenson makes the plain point that providing more government assistance to companies that contributed to the housing bubble at the center of the crisis in the first place makes no great amount of sense—especially since it merely encourages the same mindless growth-for-growth’s sake that caused the problem we’re now coming out of.

Besides, as she rightly points out, having come through the down-cycle relatively intact, homebuilders don’t exactly need more dough.

Still, you might wonder why one of Wall Street’s Finest would bother commenting in that article, since government policy isn’t exactly what Wall Street’s Finest are paid to evaluate.

Investors live in a world as it is—not as they wish it to be. If the government decides to throw more money at one particular interest group, well, so be it.

But not to our Grumpy Analyst, who sniffed to Morgenson as follows:

“I AM surprised that home builders are getting hundreds of millions of dollars given that many have very strong balance sheets,” said Ivy Zelman, chief executive at Zelman & Associates, a research firm. “We question the public policy decision to gift home builders with capital that many will not use to create jobs, since they admit that job growth will be dependent not on capital, but on improving demand.”

Hence do Grumpy Analysts become Really Grumpy Analysts.

And stocks do what they will.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.