Monday, October 25, 2010

Odland Out, Rationality In?

Office Depot announces that Steve Odland, Chairman and CEO, has resigned from co effective 11/1.2010 (4.63)


So reads the headline crossing the proverbial “tape”—in our case, the indispensible


Seems the board of the once-mighty office products retailer has seen fit to divest itself of a once-heralded CEO who, to the applause of Wall Street’s Finest, helped lay low a thriving enterprise by, among other things, “clearing cash” from the company’s once-strong balance by buying paying absurdly high prices for its own shares.


And by “absurd,” we mean more than 6-times the most recent price.


Odland was not alone, of course: hundreds of companies engaged in “cash-clearing” exercises during the heady days of the pre-crisis 2000s, when balance sheets were flush and the uniform question from Wall Street’s Finest—most of whom have never so much had to meet a payroll, let alone run a public company—was “What are you doing to ‘return value to shareholders’?”


So companies bought back stock or paid special dividends, or both, with no thought of the future being any less bright than it was in those halcyon days.


Then, come the crisis, they were frozen, with no cash to take advantage of the once-in-generation opportunity to deploy capital at no-risk prices, while Wall Street’s Finest started peppering them with new questions, such as how in the world they were going to manage their way through the crisis with such lousy balance sheets?


In any event, Mr. Odland is now leaving Office Depot, and we thought it worth reprinting in these virtual pages a column we wrote nearly a year ago to the day, in defense of the still-thriving Google when its cash-hoarding instincts were being questioned by none other than the Wall Street Journal:

Tuesday, October 21, 2008

Memo to Google: Don't “Grow Up”

Google's Cash Conundrum: Too Much

Could Google provide a stimulus package to help boost the ailing U.S. economy?

Google CEO Eric Schmidt revealed Monday to The Wall Street Journal that the company is "thinking" about returning cash to shareholders. It's only a concept at this point, mind you: Mr. Schmidt ruled out a dividend and said no cash return was likely anytime soon.

—The Wall Street Journal, October 21, 2008

Did Eric Schmidt learn nothing this year?

And does the Wall Street Journal not pay attention to the very headlines it has been writing these last few liquidity-deprived months?

Could it be that a single weekend without five or six bank failures around the globe has blocked out the memory of five or six months’ worth of round-the-clock meetings involving sleep-deprived Treasury officials crafting rescue packages for every major investment bank—save the one that filed Chapter 11—in America?

Did we miss something, or did Team Iceland—by losing all three of its banks in one week—not just bat 1.000 in the Bank Failure World Series?

Was this whole crisis all a dream?

Apparently it was, because the above-quoted Wall Street Journalarticle provides a circa 2005-2006 take on the miseries of a publicly traded corporation with too much cash:

Google's growth and love of experimentation is not over. But, on the financial front, it may be growing up.

If “growing up” means throwing away cash on the kind of mindless, investment banker-enriching share buybacks and special dividends that Dean Foods, Scott’s Miracle-Gro, Office Depot and many others embarked on at precisely the wrong time, financial-crisis-wise, we vote for Google remaining a strapping youth.

Readers may recall the “growing up” of Office Depot CEO Steve Odland, who “cleared the balance sheet” of nearly $1 billion in cash in fiscal 2006, buying 26 million shares of Office Depot at an average price of $37. (See
The Shareholder Letter You Should, But Won’t, Be Reading Next Spring,” from August 08, 2007 and “Attention Target Management: Pay No Attention to Analysts Begging for Buybacks,” from November 21, 2007).

Odland’s move earned kudos from Wall Street’s Finest and temporarily provided a lift to the stock price of a second-string office products distributor, but it did nothing to turn Office Depot into a first-string office products distributor, nor did it prepare the company for whatever the world's economy could throw at it: the stock could be bought yesterday at $2.85 a share.

Thus it was with some shock we read the following about Google’s supposed interest in the same sort of “cash-clearing” exercise that crippled more than a few companies at precisely the moment they could least afford being crippled:

Even so, it was a telling comment, indicating that despite Google's continued investment in a range of new business initiatives and infrastructure, the company's cash is piling up faster than it can be spent. On Sept. 30, Google had $14.4 billion in cash and marketable securities.

It may also signal that management is concerned about the roughly 50% fall in Google's stock price over the past 12 months.

We have never seen a company—particularly a supposed high-growth enterprise such as Google—that has successfully propped up its stock in any other way than by continuing to grow its business in a rational, sustainable manner.

And that includes especially the kind of “cash-clearing” follies that helped bring Office Depot from $37 a share to less than $3 in a few short years, and paralyzed hundreds of other companies that might otherwise have taken advantage of cheap prices in the current liquidity squeeze, while forcing the least healthy to seek shotgun mergers or worse.

If a lesson is to be learned from the last three months, it is that cash is not 'trash,' as the saying goes: it is a valuable strategic asset that gives a company an enormous leg up when its competitors have had their legs cut out from underneath them.

Just ask Steve Odland, Eric.

Jeff Matthews

I Am Not Making This Up

© 2010 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.

Monday, October 18, 2010

“QE 2” or “Ben’s Titanic”?

Federal Reserve Chairman Ben Bernanke seems to want desperately to prove Warren Buffett wrong.

He is, in fact, betting the U.S. economy on it.

Bernanke, as all the financial world knows, is pushing the Fed into a multi-billion dollar buying spree of Treasury securities at a time when Treasury securities are at all-time record high prices.

Here’s how he justified it this past Friday:

Oct. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.
“There would appear -- all else being equal -- to be a case for further action,” Bernanke said today…. Bernanke and his central bank colleagues are considering ways they can stimulate the economy as the unemployment rate holds near 10 percent and inflation falls short of their goals.
After lowering interest rates almost to zero and purchasing $1.7 trillion of securities, policy makers are discussing expanding the Fed’s balance sheet by purchasing Treasuries…

—“Bernanke Sees Case for ‘Further Action’ on Inflation,” by Caroline Salas and Joshua Zumbrun.

Ben’s theory is that the Fed can drive the price of Treasury securities even higher than the market has, on its own, priced them; that this, in turn, will cause the interest rate on those securities to drop (even further than interest rates have already dropped); and that this, in turn, will somehow prompt companies to start hiring again.

It is called “quantitative easing,” and since this is the second round of the Fed’s monetary efforts to restart the economy, it is known, cutely, as “QE2.”

We hear at NotMakingThisUp, however, think a far better—and more accurate—model of Ben’s recipe for success is The Titanic, not the venerable QE2.

After all, in the real world (as we described in “Memo to Bernanke: Listen to a Conference Call Once in a While”) companies hire new employees when they are confident enough in their future prospects to believe that adding a full timer will pay off—not when the cost of borrowing drops a few more basis points.

And you would think Ben would have figured this out, since interest rates have dropped a whole lot this past year, and yet unemployment remains, in the current shopworn phrase, “stubbornly high.”

The real problem, as most business people know, is not that interest rates weren’t already low enough. The problem, at least initially, was that taxes were set to rise next year, which made businesspeople leery about hiring new full time employees, despite rising order books.

Then along came so-called healthcare reform, which opened another big can of uncertainty on American business at exactly the wrong time.

And that’s when you could kiss the “V-shaped” recovery good-bye.

(People get touchy about this stuff, and we’ll no doubt get comments from thin-skinned political types about all manner of irrelevant why-this-isn’t-Obama’s-fault rationalizations, which is not the issue: in investing you deal with the world as it is. And if you want to learn about the world as it is, go ask a business owner—any size, big business or small—about how they’re feeling these days. You’ll get an earful.)

But Bernanke isn’t letting the facts confuse him. He’s going ahead with his “QE2,” which, as we already noted, involves buying hundreds of billions of dollars of Treasury securities at all-time, record-high prices.

Now, Warren Buffett has a different opinion on the value of such fixed income securities—i.e. bonds—than Ben Bernanke. In fact, Buffett recently told his friend, ace Fortune Magazine editor Carol Loomis, the following:

“It's quite clear that stocks are cheaper than bonds. I can’t imagine anybody having bonds in their portfolio when they can own equities, a diversified group of equities.”

And when Warren Buffett—who never gives stock tips and rarely comments directly on the merits of buying or selling asset classes such as stocks or bonds—speaks this directly about the lousy prospects for what Ben Bernanke wants to buy, well, attention must be paid.

After all, Buffett is no One-Way-Johnny when it comes to the merits of bonds versus stocks: indeed, for his personal account, Buffett owned only low-risk Treasury securities in the pre-crisis, bull market mania bubble years, even while self-promoting Buffett-followers such as Bill Miller were stuffed to the gills with financial stocks such as Bear Stearns and Fannie Mae in their funds.

And when the stock market began to collapse in 2008, Buffett famously began selling his Treasuries in order to buy stocks—a few months too early, as it turned out, but not as early as the poor shlubs who owned Bear Stearns and Fannie Mae and watched them evaporate.

So it has come to this: Warren Buffett says he “can’t imagine anybody having bonds in their portfolio,” while Ben Bernanke is determined to buy government bonds until the cows come home, or the unemployment rate starts to decline.

Who would you rather have making investment decisions for the Fed?

Now, readers might well be thinking, “Okay, wise-guy, what would Warren Buffett be doing if he was in Ben Bernanke’s shoes?”

And while we haven’t asked Buffett this question—if we did he’d very likely give a disarmingly amusing and self-deprecating response, along with a verbal pat-on-the-back for Mr. Bernanke (Buffett adheres to the Dale Carnegie school of making friends and influencing people)—we do have a thought about what Buffett might well think would make more sense.

Before we explain, we wish to reprint excerpts from a highly topical news story which appeared on our Bloomberg at the very same moment Ben Bernanke was reiterating his vow to pay top-dollar for U.S. Treasury securities:

Oct. 15 (Bloomberg) -- Washington policy makers, who moved swiftly to calm markets during the subprime mortgage crisis in 2008, have resisted calls for similarly broad steps in response to concern that banks may have acted illegally to seize homes.
President Barack Obama and the federal agencies that share responsibility for housing finance are opposing calls for a nationwide foreclosure freeze, fearing further damage to the housing market. Even as bank stocks tumbled yesterday on concern that the mishandled loans will increase costs for lenders, the White House and federal regulators avoided any grand gestures designed to reassure investors.
Obama this week endorsed a coordinated investigation by attorneys general from all 50 states into whether lenders used false documents to justify foreclosures….
“There are 2.3 million loans that are out there in foreclosure,” said John Courson, chief executive officer for the Mortgage Bankers Association. “The administration has in fact made the right decision by not pressing for an overall moratorium. They see the debilitating effects that could have from the standpoint of the entire economy.”

—“Washington Resists Calls for Big Fix in Foreclosure Crisis,” by Lorraine Woellert and Phil Mattingly

How encouraging 50 state attorneys general to investigate the banking system will help un-freeze the housing market is beyond us.

Rather, we wonder, why doesn’t the Fed use its purchasing power to buy houses in foreclosure?

If 2.3 million loans are in foreclosure, and if the average house in that pool could be bought for $100,000 (a number we are making up for lack of specific data), that amounts to a quarter trillion dollars the Fed could “put to work,” as money managers like to say, in a market that—quite unlike the Treasury market—is suffering from a lack of buyers and an overload of sellers.

A Resolution Trust Corp-type entity could then mass-market the properties to entrepreneurs and capitalist pigs who would maintain them and resell them at reasonable prices.

By thus providing a highly liquid market beneath a seemingly bottomless housing foreclosure pit, the Fed could kill many birds with one stone: a) re-liquify the banks, b) re-liquify underwater homeowners, c) stop the slow-bleeding in housing, and d) start the healing process.

It wouldn’t necessarily make businesses feel better about impending tax increases and healthcare cost increases, but it might make homeowners feel a whole lot better than another reduction in the interest income on their savings account.

Of course, the Fed wouldn’t exactly be the right vehicle for this: it’s a job for the FDIC with some strict legislation behind it from Congress.

Still, instead of buying treasuries at record-high prices in a futile attempt to get companies to hire people, we think Ben ought to consider the merits of buying foreclosed housing at record-low prices.

After all, Warren Buffett’s been buying low for, oh, 60 years now, and it seems to work okay for him.

Jeff Matthews
I Am Not Making This Up

© 2010 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.

Tuesday, October 12, 2010

Memo to Ben Bernanke: Listen to a Conference Call Once in a While

The September employment report “is simply a signal, a strong, strong signal for Fed QE2,” Gross said….

—‘Gross Says Employment Report Signals More Fed Easing,’ Bloomberg, October 8, 2010

"The business traveler is back. We're excited to see demand so strong in so many places with prices moving up. But we know what you want to know, essentially where do we go from here? According to the National Bureau of Economic Research, the recession officially ended in June 2009. Notwithstanding that, many seemed to wonder whether the economic recovery has any strength and about the risk of a double dip.

"Let's be clear. There is nothing in our business which indicates that sort of weakness. Both business transient and leisure travel remain strong."

—Arne Sorenson, President & COO, Marriott International, Earnings Call, October 7, 2010

There’s something about Washington DC that saps people’s brains of all reason, sense and intellectual honesty.

How else to explain the process by which Congress and the Administration undertook to restructure the entire healthcare system of the United States without asking a single insurance company for advice on how to improve the system?

Before you spit out your coffee and scream, in the manner of our President and any random Congressperson running for reelection, “hey, the insurance companies are the bad guys of healthcare,” sit back and think what insurance companies really are: they’re the canaries in the healthcare coal mine.

They gather cost data, put a mark-up on it, and negotiate with their customers the delivery of their services—i.e. the parsing and paying of healthcare claims. As a result, no part of the healthcare chain knows more about the actual costs of trial lawyer abuse, hospital waste, insurance fraud, drug company price hikes, and the staggering inefficiency of a Balkanized, paper-based delivery system than the insurers.

And if anybody had bothered to ask where to find and how to prevent inefficiencies, fraud, abuse, and inflation exist, the so-called healthcare “reform” act might have managed to do a thing or two to reform our healthcare delivery system.

But, of course, Congresspersons don’t like to be confused by the facts.

Neither, apparently, does the White House. Bloomberg recently reported that IBM offered to analyze the healthcare system, free of charge. You might think the offer would have been snapped up—but, then, you would be a rational human being:

IBM said it would analyze health-care spending, at no cost to the government, to hunt out fraud, Sam Palmisano, the company’s CEO, said at a conference in New York on Sept. 14. The White House wouldn’t sign on to the plan.

“We offered to do it for free to prove a point, and they turned us down,” Palmisano said. “Our recommendations weren’t aligned with the priorities of the administration. Their priority was not to reduce fraud and improve productivity. It was to increase coverage.”

— ‘Obama May Try to Woo Business as P&G, Blackstone Blister Moves,’ Bloomberg, October 8, 2010

Sure, nobody likes the cost increases insurance companies pass on, and nobody likes the impersonal, bureaucratic decisions they make when it comes to healthcare coverage, or when they make mistakes. Indeed, some people find it offensive that many insurance companies are for-profit enterprises.

But taking out anger at the lousy healthcare delivery system in the US on the insurance companies the way Congress and the Administration did was more like shooting the mailman who delivers the eviction notice than dealing with the actual problem that caused the eviction notice to be sent by the bank.

Consider for ten seconds the mark-up on an insurance company’s services versus that of one of the drug companies on whose behalf the insurers collect much of our hard-earned premiums: United Healthcare’s gross markup (i.e. before administrative and selling costs as well as taxes) on its services is 23%; its net after-tax margin is 4%.

Pfizer’s gross markup on its products is 85%; its net margin 17%.

How, exactly, are the insurance companies the bad guys here?

Of course, people in Washington DC consider nothing for ten seconds unless it involves the prospect of getting reelected, or getting reappointed.

Look at Ben Bernanke and the panic-stricken reaction of the Federal Reserve to the recent employment data. So freaked out is the Fed by the lackluster hiring that it is preparing something called “QE2”—Quantitative Easing, Round 2—by which the Fed will buy government debt (at record, all-time high prices…hardly the time to buy anything) in order to keep the economy from stalling.

The Fed’s reaction to unemployment data, unfortunately, ignores a simple fact: nobody hires new employees because interest rates go down.

They hire when they are confident of their future.

Thus, the weak employment data are not telling the Fed that business stinks—in fact, business is actually fairly healthy. Indeed, if Bernanke listened to an actual company talk about business, he’d hear some interesting stuff.

Take the above-quoted commentary from Marriott International, and think about what it means that both business and leisure travel are “strong.”

It means companies see deals that can be done, so they’re sending people on the road. And if hotels are filling up, it means that airplanes are flying full, rental cars are being rented, restaurants are being booked and cabs are being hailed.

It also means that city hotel room taxes and airport gate fees and sales taxes are being paid, and waiters and waitresses and cabbies and bellmen are being tipped.

Travel is one very important canary in the economic coal mine, and it’s telling us that business really is getting better.

So we have a suggestion for Ben Bernanke, and, for that matter, Bill Gross, ace bond king of PIMCO who seems to manage PIMCO from within a CNBC studio, so frequently do his musings on the state of the economy appear on that TV channel, and a cheerleader of the Fed’s impending QE2 campaign: listen to a few conference calls some time.

If they listened, they’d know that companies aren’t holding back on hiring because business stinks: they’re holding back because they see tax hikes and healthcare cost increases coming, and they’re not sure adding a new FTE is a smart thing to do.

And no amount of “QE2” or QE3, 4, 5 or 6 will change that.

Ah, but who in Washington needs facts to make up their minds?

Jeff Matthews
I Am Not Making This Up

© 2010 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.

Tuesday, October 05, 2010

Steve Ballmer, on the Blind Side

Microsoft hopes to bury iPhone, Android
By Bill Rigby

Last month, a few hundred Microsoft Corp employees acted out their fantasy with a mock funeral for Apple Inc's iPhone at its Redmond, Washington campus….

—Reuters, October 1, 2010

The iPhone “funeral” Reuters thus reported on—and which we are not making up—included a kilt-wearing bagpiper, a frock-clad minister, and Windows-signboard-wearing pallbearers carrying a mock-up of an iPhone, all trailing a white hearse.

The stunt, of course, is the act of a desperate company. Worse, it is the act of a company that might have learned by now that what kills-off a competing product is not hackneyed publicity stunts, but better products.

Besides, even really bad publicity doesn’t necessarily hurt a great product: does anybody recall the lasting damage from the firestorm that erupted over the iPhone 4’s antenna? No?

Well, that’s because there really wasn’t much lasting damage to speak of, if iPhone market share is any indication.

Now, as deluded antics go, Microsoft’s “iPhone funeral” smacks of no one so much as Steve Ballmer, the former P&G marketing genius who, as Employee Number 24 at Microsoft, helped his friend and fellow genius, Bill Gates, build and enforce the software monopoly by which Microsoft would come to wreak havoc on the lives of millions of computer users through subtle but devious methods such as the strangely insidious “Insert” command, which nobody uses except by mistake.

Indeed, so Ballmeresque is this particular stunt that we here at NotMakingThisUp are willing to bet dollars-to-donuts, as the saying goes, that Ballmer dreamed up the funeral as one way of heralding the imminent launch of a new generation of Windows software for mobile phones—specifically, Windows Phone 7.

The fact that Windows Phone versions 1-6 have made so little impact on the mobile phone market that nobody outside Redmond, Washington particularly cares what the new version looks like, does not seem to have made an impression on Mr. Ballmer, and for good reason: he famously (as previously reported in these virtual pages) does not use Apple products, nor does he allow his children the pleasures of anything so easy-to-use as an iPod, or Google, for that matter.

Lest readers think we are making that up, here is how we reported what Ballmer told Fortune Magazine when asked if he had an iPod, in “Over-Share from Dr. Evil’s Hideaway”:

“No, I do not. Nor do my children…. I’ve got my kids brainwashed: You don’t use Google, and you don’t use an iPod.”


Is it any wonder that Microsoft has failed to replicate the success of both Google and Apple in the various markets with which it has attempted to compete—such as music players and search engines, let alone smart-phones?

But that’s exactly what happens when a heretofore successful company cuts itself off from understanding first-hand what its customers really want, as the former “Big Three” Detroit automakers finally found out, to their chagrin and the American taxpayer’s loss.

The consequences of precisely this kind of intentional blindness are now being felt by Mr. Ballmer and the company he has run with a iron hand since becoming CEO in January of 2000—the literal and figurative peak of Microsoft, if the stock price is telling us anything—and only now does it seem the Microsoft Board of Directors may be coming out of their torpor, if Microsoft’s recently issued proxy statement is any clue.

For the following is how the proxy describes Mr. Ballmer’s latest incentive awards, or lack thereof:

For fiscal year 2010, Mr. Ballmer’s Incentive Plan award was $670,000, which was 100% of his target award. The incentive plan award was recommended by the Compensation Committee and approved by the independent members of our Board of Directors based on his performance appraisal by the independent members of our Board and other information deemed relevant, including: Mr. Ballmer’s performance against his individual commitments; the strong financial year…; the operating income performance of the Company relative to 25 large technology companies; his leadership in continuing the prior year’s disciplined expense management; a series of successful product launches including Windows 7, Office 2010, Bing, Windows Server, and SQL Server; progress pursing new innovations that will position the Company to lead the transformation to the cloud (Azure and Office Web Apps) in active gaming (Kinect), and in other product areas in which work is well underway; the unsuccessful launch of the Kin phone; loss of market share in the company’s mobile phone business; and the need for the Company to pursue innovations to take advantage of new form factors [Emphasis added].

Give Ballmer and Microsoft’s Compensation Committee credit for paying the man a much smaller figure than most hard-charging, long-time executives could chisel out of their pals on the Board of Directors.

Give the company credit, too, for laying out in a public document the reasons for doing so—both the good and the bad.

But instead of watching idly while the CEO is wasting time and money on the kind of stunts that help make their company a YouTube laughing-stock—and doing so before their smart-phone product is actually released, and actually has succeeded in coming close to “burying” their dearest rival—it might be worth the Board’s time to wonder how, exactly, Ballmer’s self-imposed blindness to the wonders of Apple’s new products (not to mention Google’s search engine and its Android smart-phone operating system) have damaged for all-time the company they are charged with caretaking.

Jeff Matthews
I Am Not Making This Up

© 2010 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.