Jeff Matthews Is Not Making This Up

The Sears Collapse: Conspiracy or Cluelessness…or Worse?

2012-01-17T08:56:00.009-05:00

Since “Hellhound on His Trail” came out in the spring of 2010, I’ve had occasion to think anew about the many conspiracy theories that swirl around the story of the King assassination…a lot of perfectly sane people believe that Martin Luther King was killed as a result of a vast, shadowy conspiracy.

—Hampton Sides, author, “Hellhound on His Trail.”

This being the weekend America honored MLK, we’re recalling that lament of the above-quoted author Hampton Sides—whose excellent, compelling account of the largest manhunt in FBI history is worth buying, right now, on your Kindle or iPad—about the persistence of weird conspiracy theories surrounding what was, in fact, the well-documented assassination of one civil rights leader by one sorry but clever-enough jailbird, as we consider the persistence of a weird conspiracy theory about a once-proud retailer brought low by one genius of a hedge-fund manager.

We speak, of course, about Sears.

The conspiracy theory, lately making the rounds on Wall Street, stems from the fact that the hedge-fund genius, Eddie Lampert, who also happens to be Sears’ board chairman, recently purchased nearly 5 million shares of Sears, mostly from his own hedge fund, at a price of close to $30 per share.

The conspiracy theory hinges on three verifiable facts: 1) Eddie Lampert is an extremely smart guy with a terrific track record; 2) Sears under Lampert has become even more of a basket case than it was before he took control; and 3) despite the obvious collapse in Sears’ business model, Lampert had been using Sears’ own coffers to buy up stock in the open market at absurd prices that were far higher than what he just paid for the stock, rather than invest in the business itself.

And on all three facts, the conspiracy theorists are correct. Lampert is smart—witness his success with AutoZone. And he has been using Sears’ own cash to buy stock in the open market at absurd prices, in hindsight:

Fiscal Year $MM Bt # MM Shares Bt Average Px

2010 $394 5.5 $72

2009 $424 7.1 $60

2008 $678 10.3 $66

2007 $2,900 21.7 $135

2006 $816 6 $136

2005 $590 5 $125

Total $5.8 Billion 55.6 million shares

Average price: $104/share. Last trade: $33.56 per share. Value destroyed: $3.9 billion.

As for the notion that Sears has become a retail basket-case, look no further than the credit default swap market in Sears Acceptance Corp—the Sears financing arm—and you’ll see they have blown out to levels that even the calculator-impaired credit monitors at S&P would recognize as, er, stressed.

“Why then,” the conspiracy theorists ask rhetorically, “would Eddie have bought back all that stock for the company at stupid prices before buying stock for himself cheap?” Their answer—and while we’re paraphrasing what we’ve heard, we’re not making up the gist of it—is this:

“Eddie wants Sears to go bankrupt so he can take control of the real estate and make a ton of money.”

And while the conspiracy theory seems to wrap up a lot of loose ends, it does not take into account the most obvious notion, which is that Eddie got Sears wrong.

By way of demonstrating just how wrong he may have gotten it, we herewith present a sample of howlers from various Sears filings over the years:

[Sears] completed development of new Internet technologies and migrated our selling websites to an improved e-commerce platform. This new platform positions us to attract and retain customers using a multichannel service approach to create a consistent experience across the channels and enhance the offerings and the shopping experience where channels intersect. Examples include store-to-Web, Web-to-store, special order catalogs and the sales hotline. Multichannel represents the potential for a sustainable growth vehicle for our company and represents an opportunity for us to unify and integrate the customer’s experience.

…in August 2007 we introduced the Ultimate Appliance Promise campaign. The purpose of this campaign is to show our customers that we are uniquely positioned to meet their appliance needs by offering the largest selection of appliances, a price guarantee, one year of free service and support, and next day delivery and installation in many markets across the U.S.

[Sears] remodeled approximately 30 Kmart stores to include Sears-brand products. We intend to continue our rollout of home appliances, including Sears Kenmore-brand products, into Kmart locations over the next several years as a means of expanding our points of distribution in response to competitor store growth. As of February 2, 2008, approximately 280 Kmart stores, including certain of the remodeled locations, offered broad assortments of home appliances.

MyGofer expanded its fulfillment options in a variety of ways, as well as serving as the engine behind additional integrated retail efforts. MyGofer.com provides features and benefits designed to create a one-stop shopping experience, offering a range of quality products including groceries, prescriptions, health and beauty products, and electronics. MyGofer was created to provide our customers with speed and convenience – the same day a customer places an order, it is ready within hours, with pickup now available in over 600 stores.

And, our favorite:

With regards to social media, we deployed a variety of campaigns and applications to make our experiences more engaging and “sticky,” both on sites like Facebook and Twitter, as well as on sears.com.

Maybe—just maybe—like when a loser from a broken home of whom nobody had ever heard managed to kill the leading civil rights leader of his times and almost get away with it, the facts are just the facts.

To support this perspective, we now harken back to an early report on Sears that spookily heralded everything that came afterwards: a 2006 Fortune Magazine piece in which Lampert is called “The Steve Jobs of the investing world,” yet contains enough evidence of the penny-pinching narrow-mindedness that destroyed Sears to be almost prescient:

The mood was tense at the Bel Age Hotel in West Hollywood, Calif., early last year. The top two dozen executives of Sears Roebuck & Co. were gathering for a strategy session with Eddie Lampert, then 42, the billionaire hedge fund manager who had just engineered an unlikely takeover of their venerable but struggling company. The fact that the vehicle of his acquisition was discounter Kmart--which Lampert had come out of nowhere to snatch control of during bankruptcy--was only one source of unease. Once their presentations started, Lampert also began poking holes in virtually every idea. "What's the benefit of that?" he asked again and again. "What's the value?" He shot down a modest $2 million proposal to improve lighting in the stores. "Why invest in that?" He skewered a plan to sell DVDs at a discounted price to better compete with Target and Wal-Mart. "It doesn't matter what Target and Wal-Mart do," he declared.

Eyes began rolling…

—Patricia Sellers, Fortune Magazine, February 8, 2006

And the eyes should have rolled. Because, as it turns out, it does matter what Target and Wal-Mart do, just as improved lighting does matter in stores where women bring children to shop for clothes.

How much such things matter is evident in the numbers ever since Eddie began second-guessing the expenditure of cash on anything, it would seem, excepting high-priced stock.

From 2006 to 2010, Target and Wal-Mart together spent $16 billion and $33 billion, respectively, on capital upgrades to their businesses (we’ve arbitrarily cut Wal-Mart’s actual capital expenditures of $67 billion in half, to account for the company’s international spending). Sears, meantime, spent a miniscule $1.4 billion, or about 3% of Target and Wal-Mart combined—and less than a quarter of the share repurchase cost—on silly things like “improved lighting.”

The result? While Target’s annual cash flow from operations grew from $4.9 billion to $5.3 billion in that time, and Wal-Mart’s grew from $10 billion to $12 billion (again dividing that company’s total figure in half), Sears was watching cash flow from operations drop 90%, from $1.4 billion—almost 10% of Target’s and Wal-Mart’s combined cash flow—to a nail-biting $130 million…which is less than 1% of its rivals.

And Sears has done that while generating over $40 billion in annual sales—not easy to manage, negatively-speaking-wise.

None of this, of course, is new-news. The 2011 numbers, previewed last month, were even bleaker for Sears.

But beyond the obvious value destruction and the conspiracy theorist-like attempt to reconcile conflicting facts, the company’s recent performance and its chairman’s ensuing share purchase in January raise a rather obvious question that doesn’t appear to have crossed any minds in the press corps: why is it that Eddie Lampert, who directed Sears Holdings’ share repurchases of 55.6 million shares at an average of $104 over the 2006-2010 period, bought for himself rather than for Sears Holdings those 4.8 million shares at around $30 a share (technically the 'purchase' was likely an allocation of his annual performance fee in stock, but still...)?

After all, a company that had spent nearly $6 billion on its stock at an average price of $104 would presumably have found the shares even more attractive at $30.

Wouldn’t Sears Holdings have liked to average down?

To the conspiracy theorists, the answer is self-evident: it clinches their view that Eddie has purposely been buying back stock at silly prices in order to shrink the share base and drive up his personal percentage of the remainder, while simultaneously disinvesting in the stores so aggressively that the Sears parking lot is the only place to find a space at the mall during the holidays, making it worth more to Eddie dead than alive.

But we don’t buy it.

We think Eddie’s mother, quoted in the above Fortune article, had it right:

“I never thought he would go into retail,” Dolores Lampert says. “It's a very hard business. But it's a challenge, and Eddie likes a challenge.”

Still, if Warren Buffett is looking for scapegoats on Wall Street, he might want to direct some attention to Sears. Unlike Staples, for example, which private equity nurtured and grew into an industry-creating powerhouse, here’s a business that was an industry-creating powerhouse that has, pretty systematically, been destroyed by private equity.

Retail is indeed a very hard business.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

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.

NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.” So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff. And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management

Why Eddie Never Hired “The Guy”

2011-12-28T08:31:00.000-05:00

We’ve been poking fun at Sears—the Sears of Eddie Lampert, at least—since the inception of this virtual column in 2005.

But now things are getting more serious, what with yesterday’s dreadful holiday sales report and store closing announcement from that once proud, powerful retailer of all things an American household could need.

Today’s Wall Street Journal mulls the situation over on its front page, including Lampert’s preference for investing in the shares of Sears as opposed to the stores themselves, and Eddie’s revolving-door CEO selection process that has left the business in limbo for years while all manner of lower-cost, better run, sharper-focused businesses (think Costco, Amazon, Kohl’s and many others) ran rings around it.

And it was the lack of a great CEO that always stumped the company’s observers.

I once asked a person (a person who I thought would know the answer) why Lampert had never hired “The Guy”—meaning an Alan Questrom (the genius who turned around Federated Department Stores and, later, JC Penney) or Ron Johnson (the ex-Target executive who helped create the Apple Stores and is now “The Guy” at JC Penney) type of heavyweight retail CEO who could turn the company into something great.

“It would cost a lot—$20 million, $30 million for the guy, plus hundreds of millions for the stores,” he said.

I told him that was chump change given Lampert’s big investment in Sears and the potential for a billion dollar payday down the road.

“Doesn’t matter. Eddie won’t spend that on anybody.”

Consider that hearsay, but I believe he was being straight.

And now the chickens have come home to roost at the Sears of Eddie Lampert.

By way of looking at how little it took to see that Lampert wasn’t going to make it work, we’re reprinting “Buffett vs. Lampert: A Tale of Two Letters,” written earlier this year after both investment titans had written their year-end missives to investors.

Buffett’s letter, of course, is, as always, informative, interesting, snappy and yet suffused (as noted below) with a 50’s-era sensibility when it comes to nagging-wife jokes.

Lampert’s letter, on the other hand, is full of unintentional howlers—not the least of which is comparing the Sears mindset with that of Apple’s.

Yes, he compares Sears to Apple—although he is unlikely to do it in his upcoming letter, for an investor with access to a Bloomberg machine can spot one difference between Sears and Apple that would make a Sears shareholder throw up: even at current prices, Apple shares are cheaper than Sears, at 8.3X EBITDA versus 10.2X for Sears.

Oh, and we used EBITDA to compare the valuation, since Sears doesn’t have any earnings to speak of.

Enough said.

—JM 12/28/11

Sunday, February 27, 2011

Buffett vs. Lampert: A Tale of Two Letters

Two significant shareholder letters were released this week.

The first was from Sears Holdings’ Chairman Eddie Lampert; the second from Berkshire Hathaway Chairman Warren Buffett.

And while it is certainly easier, and a lot more fun, to write about good news—as Buffett has been accustomed to doing over the years at Berkshire, in contrast to the kind of bad news that has issued forth from Lampert’s fading retail giant of late—there is, even so, a remarkable difference in both the substance and style of letters by two men who actually have a great deal in common.

For one thing, both started out as hedge fund managers. For another, both are without peer in their fields, and fabulously wealthy as a result. For a third, they each got into the position of writing annual shareholder letters as a result of taking control of a fading, once-giant, public company. Finally, they each spent years personally wrestling with how to turn the original business around.

In the end, of course, one (Buffett) decided the rational thing was to disinvest in the original business and re-create the company to his liking, while the other (Lampert) is still wrestling with Sears even as he extracts cash from “hidden” assets like real estate and minority-controlled subsidiaries.

Still, differences between the two men are legion (Midwest publicity-magnet versus East Coast recluse, for starters) and do not end with how they played the hand they were dealt: differences in how to hire, invest, manage and incentivize people are revealed in almost every sentence of the respective shareholder letters they have penned.

Indeed, so remarkably different are the letters that we here at NotMakingThisUp couldn’t help but compare the two, by topic.

On Investing Excess Cash:

“As we have done since we took control of Kmart in 2003, we will continue to evaluate alternative uses of the company’s cash flow and capital resources to generate long-term value for all shareholders. Each year brings with it different circumstances, and we expect to have a variety of opportunities to invest our cash in the years to come. Our discipline in evaluating opportunities leaves us prepared to weather difficult times as well as to prosper when economic conditions improve.”

—Edward S. Lampert

“Our elephant gun has been reloaded, and my trigger finger is itchy.”

—Warren E. Buffett

On Management:

“We continue to make changes in our broader leadership team, as we allocate more responsibility to leaders who have delivered results and seek to attract leaders who are capable of improving performance in areas that have lagged. In particular, we want leaders who are capable of transforming key aspects of our business, as retail is increasingly impacted by new technologies and social interaction.”

—ESL

“Our trust is in people rather than process. A 'hire well, manage little' code suits both them and me.”

—WEB

On Investing for the Long-Term

“We will continue to make long-term investments in key areas that may adversely impact short-term results when we believe they will generate attractive long-term returns. In particular, we have significantly grown our Shop Your Way Rewards program, improved our online and mobile platforms, and re-examined our overall technology infrastructure. We believe these investments are an important part of transforming Sears Holdings into a truly integrated retail company, focusing on customers first.”

—ESL

By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of liquidity, though, lets us sleep well…. That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.

—WEB

On Making a Key Hire

“Lou knows what it is like to be the 800-pound gorilla from his days at IBM, and he knows what it is like to compete against 800-pound gorillas from his days at Avaya. He also understands how technology can shape and change companies and industries. The profound changes that many industries, including retail, are currently experiencing require new thinking, new leadership and new business models. Information and technology have always been an important part of the supply chain in retail, but more and more it is becoming critical that we use information and technology in a much more profound way to deliver great customer experiences. Lou is a proven winner, and I am excited to have him as the leader of our company.”

—ESL

“It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of—and sensitivity to—risk…. In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.

“When Charlie and I met Todd Combs, we knew he fit our requirements.”

—WEB

On How to Deal with a Cyclical Business:

“Given the large proportion of the Sears Domestic business which is in 'big ticket' categories and linked to housing and consumer credit, Sears is much more susceptible to the macro-economic environment than Kmart. But I don’t accept this as an excuse: our results at Sears in 2010 were completely unacceptable. The profit erosion at Sears Domestic occurred primarily in appliance-related businesses and in the Full-line Store apparel and consumer electronics businesses….

“When industry margins are shrinking, an organization must respond by adding new innovative products and bundling them with services and solutions that meet customers’ evolving needs….

“The new management in our appliance business has already taken actions to rebuild leadership in this area and to further reinvigorate the Kenmore brand….

“In parallel to the efforts that we are making to increase the productivity of our Sears stores, we are also looking at adding world class third-party retailers to our space. Earlier this year we announced that Forever 21 will be taking over 43,000 square feet of Sears space at South Coast Plaza in Costa Mesa, CA…”

—ESL

[Editor’s Note: We are not making this last part up; the author also discusses leasing out space to Whole Foods].

“Our businesses related to home construction, however, continue to struggle…. A housing recovery will probably begin within a year or so. In any event, it is certain occur at some point. Consequently: (1) At MiTeck, we have made, or committed to, five bolt-on acquisitions during the past eleven months; (2) At Acme, we just recently acquired the leading manufacturer of brick in Alabama for $50 million; (3) Johns Manville is building a $55 million roofing membrane plant in Ohio…; and (4) Shaw will spend $200 million in 2011 on plant and equipment, all of it situated in America. These businesses entered the recession strong and will exit it stronger. At Berkshire, our time horizon is forever.”

—WEB

On Wonderful Businesses vs. the Wonder of Financial Legerdemain

“I wouldn’t be surprised to see our share of Coke’s annual earnings to exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.”

—WEB

“In April, we had the opportunity to purchase an additional 17% of Sears Canada for $560 million, increasing our ownership from 73% to 90%. In 2010, Sears Canada has paid two dividends, which returned $639 million of cash to Sears Holdings. Of course, of the cash we received in dividends, we would have received $518 million without the additional shares purchased (because we already owned 73% of Sears Canada), so in effect we received $121 million in dividends on behalf of the additional shares purchased in 2010.”

—ESL

On Reinvesting in the Business, or Not

"Furthermore, not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years. Instead, we have retained all of our earnings to strengthen our business, a reinforcement now running about $1 billion per month."

--WEB

"We invested more than $400 million in capital expenditures in 2010, including significant investments in stores in important markets, and contributed over $300 million to our pension and post-retirement plans. We invested just under $400 million in Sears Holdings share repurchases in 2010, a slight reduction from 2009....

"Share repurchases are not a panacea, nor are they a singular strategy. Yet they are more than just the return of capital to shareholders... As a form of discipline on alternative capital allocation strategies, share repurchases can magnify returns."

--ESL

Did He Really Say That?

“At Sears Holdings, we seek to create long-term value for our shareholders. Like Apple, we seek to do so by improving our operating performance, innovating, and delighting customers…”

—ESL

[Editor's Note: The first and last time you will see 'Apple' and 'Sears' in the same sentence, at least for some time to come.]

“As one investor said in 2009: ‘This is worse than divorce. I’ve lost half my net worth—and I still have my wife.’”

—WEB

[Editor’s Note: Buffett’s letters have always been suffused with a 1950’s-era Hugh Hefner-style male/female sensibility, but it never ceases to amaze us that he continues with the nagging-wife jokes]

On ‘Painting the Bull’s-Eye’ of Performance

“Charlie and I believe that those entrusted with handling the funds of others should establish performance goals at the onset of their stewardship. Lacking such standards, managements are tempted to shoot the arrow of performance and then paint the bull’s-eye around wherever it lands…. To eliminate subjectivity, we therefore use an understated proxy for intrinsic value—book value—when measuring our performance.”

—WEB

“Despite our challenging performance over the past several years, the difficult economic environment, and the dramatically changing retail environment, we have generated very attractive returns for shareholders since May 2003, when we assisted Kmart in its emergence from bankruptcy.”

—ESL

[Editor’s Note: While SHLD stock has more than quadrupled from the aforementioned May 2003 "bull's-eye," it is in fact down more than 50% from its 2007 peak.]

What Happens to the Wrong Managers

“This requires us to part ways with some who have given great effort, but who have fallen short of the performance required for us to be competitive.”

—ESL

“Our compensation programs, our annual meeting and even our annual reports are all designed with an eye to reinforcing the Berkshire culture, and making it one that will repel and expel managers of a different bent.”

—WEB

What Happens to the Right Managers

“We will continue to provide great opportunities for talented individuals to run businesses, while holding them accountable for performance.”

—ESL

“Many of our CEOs are independently wealthy and work only because they love what they do. They are volunteers, not mercenaries. Because no one can offer them a job they would enjoy more, they can’t be lured away.”

—WEB

On Throwing Good Money after Bad

“At Berkshire we face no institutional restraints when we deploy capital… When I took control of Berkshire in 1965…the dumbest thing I could have done was to pursue 'opportunities' to improve and expand the existing textile operation—so for years that’s exactly what I did. And then, in a final burst of brilliance, I went out and bought another textile company. Aaaaaaargh! Eventually I came to my senses, heading first into insurance and then into other businesses.”

—WEB

“We have a need to manage the scale of our operations at the same time as we transform them. The activities required for transformation are vast and time-consuming. As the retail industry is reinvented, we intend and expect Sears Holdings to be a significant player in this reinvention.”

—ESL

Sentences We Didn’t Want to Read

“By aligning our associates with our customers, not with our stores or products, we believe this reinvention will play out in our favor.”

—ESL

[Editor’s Note: That was perhaps the most astonishing sentence we have ever seen in a Chairman’s Letter—the runner-up being the one that follows.]

“To update Aesop, a girl in a convertible is worth five in the phone book.”

—WEB

Jeff Matthews

I Am Not Making This Up

Shazam! From the Boss to the King to John & Paul (But Not George or Ringo, or Keef or Mick), Not to Mention Jessica & Nick, and Bob Dylan of All People...2011 Edition

2011-12-08T12:56:00.012-05:00

2011 Editor’s Note: Back by popular demand, we’ll again try to keep this year’s update brief…but past performance would tell you not to hold your breath. Here goes.

Our annual holiday music survey—highly biased, rankly unscientific and in no way comprehensive—covers new ground this year, to wit: the SiriusXM all-holiday-music channel.

Actually, there are two such channels courtesy of the satellite radio monopolists at SiriusXM. There’s one for “traditional” music of the Bing Crosby kind, in which human beings sing traditional Christmas songs while actual musicians play musical instruments; and there’s another channel for everything else.

By “everything else” we mean much of what we will cover in the text below, particularly the Auto-Tune-dependent sensation Michael Bublé, who has only gotten more popular—unfortunately—this year, along with a new presence not entirely unexpected but nonetheless frightening in its implications: Justin Bieber.
Enough said about that, for our main beef with SiriusXM is not the presence of yet another teen idol on the holiday music scene: our beef lies with the soul-less quality of the entire SiriusXM gestalt, which requires its three thousand channels to carry songs strictly on the basis of whether they share either a common date of issue (as on the “40's at 4,” “50's at 5,” “60's at 6” et al channels), or a common target audience demographic.

Among the later, for example is the “Classic Vinyl” channel, which is essentially a “Classic Rock” channel (“Classic Rock” being a Baby Boomer euphemism for what our parents knew as “Oldies” radio) that plays the WNEW-FM playlist from around 1968 to 1978.
And nothing else.

And there is the “Classic Rewind” channel, which is another Oldies channel that plays the WPLR-FM playlist from about 1979 to the late 1980s.
And nothing else.

Then there’s “The Bridge,” a Baby Boomer euphemism for “Easy Listening.” It plays Oldies of the James Taylor/Carole King/Jackson Browne vein.
And nothing else.

Certainly there are one or two such channels that manage to jump around between genres (The Spectrum is worthwhile on that score). But, in the main, each SiriusXM channel is tightly focused on a specific, narrowly defined demographic...sometimes scarily so.
Here we're thinking of the “Metal” channel, which plays loosely defined “songs” that consist of young men screaming their apocalyptic guts out above what appears to be a single, head-banging, machine-gun-guitar-and-drumming musical track that never, ever changes.
You marvel at where these guys came from, what portion of the domestic methamphetamine supply they consume, and how many serial killers might be listening to “Metal” at the very same moment as you. If Beavis and Butt-Head could afford a car, this would be their channel.

Unfortunately, no matter which channel you pick and who the purported “DJ” may be (there are a lot of old-time, smokey-voiced, recognizable DJs on the various Oldies channels) you’ll hear a sequence of songs that all sound like a computerized random-number-generator picked ‘em.

Listening to the “60's at 6” channel, for example, you may hear a great Beatles single like “Hello, Goodbye” from 1967, followed by the wretchedly excessive “MacAurther Park” from 1968, followed by an unrecognizable chart-topper from 1962 that nobody plays anymore because it wasn’t any good even in 1962.
The listener ends up flipping around from channel to channel and wondering why the bandwidth-happy SiriusXM monopolists don't just give every artist its own channel.
Happily, there are channels devoted to single artists. There is, for example, a Springsteen channel, an Elvis channel and a Sinatra channel, as you might expect. There's even a Pearl Jam channel.
But there is, oddly enough, no Bob Marley or Rolling Stones channel—and, head-scratcher of all head-scratchers, no Beatles channel.
In fact, the absence of The Beatles from the SiriusXM digital bandwidth relative to, say, the Eagles and Fleetwood Mac, is one the great mysteries of the age.
After all, the Beatles individually and collectively contributed 27of the Rolling Stone Top 500 Songs of All-Time, yet they get nowhere near 5.4% of the SiriusXM airplay, whether on “Classic Vinyl,” “Classic Rewind,” “The Bridge,” “60's on 6, ” “70's on 7,” “The Spectrum” or any of the other three thousand channels here.
You quite literally have as much chance of hearing “Snoopy and the Red Barron” on SiriusXM as “Revolution.”

So why then is there a Jimmy Buffett channel (“Margaritaville,” of course)? Hey, why not a Nancy Sinatra channel?

Having gotten that off our chest, we can move on, since SiriusXM’s holiday channels added little new material to our annual survey because most of the songs are widely played everywhere else.
Furthermore, we've recently been asked to assemble a “Top Ten Worst” list of holiday songs for this review. The problem is there are just so many, as we'll be getting to shortly. Rod Stewart's somnambulant “My Favorite Things,” which sounds like he's reading the lyrics from a child's book of verses, is right up there, while Dan Fogelberg's “Same Old Lang Syne” stands out in any crowd of non-favorites.
Easier, then, to simply identify the All-Time, Number One, No-Question-About-It NotMakingThisUp Worst Holiday Song of All Time, and let everyone else argue about the remaining 9. It is “The 12 Pains of Christmas.”
This so-called comedy song takeoff on “The 12 Days of Christmas,” a pleasant English Christmas carol discovered by a U.S. schoolteacher from Milwaukee and used by her in a Christmas pageant in 1910, is an easily forgettable humorous novelty song that is neither novel or humorous, in any way.
It isn't even fun writing about, so we won't bother; we'll simply move on to something pleasant, which happens to be an entirely different sort of humorous novelty song that is both novel and humorous, and, therefore, well worth a mention here.
We're talking about the wonderfully bizarre, catchy, Klezmer-style cover of “Must Be Santa,” from Bob Dylan's 2009 Christmas album, “Christmas in the Heart.” (Yes, Bob Dylan made a Christmas album.)
The music is fast and cheerful, and Dylan's low, growly voice is almost indistinguishable from Tom Waits. (The truly bizarre music video is not to be missed, watch it here.) After you get over the initial shock of hearing Bob Dylan singing what most Baby Boomer parents will recall being a Raffi song, it becomes impossible to not enjoy.
Another glaring absence from our previous years' commentary is neither novel or humorous, and inconceivably does not appear to qualify for the SiriusXM random-song-generator holiday song playlist despite being many-times more worthwhile than most of the SiriusXM catalogue, whether holiday-themed or not.
The song is “2000 Miles” by the Pretenders, and it belongs on anybody’s Holiday Top Ten.
If hearing Chrissie Hynde on that original song (she's also recorded some good Christmas covers, including one with the Blind Boys of Alabama) doesn’t get you in a mellow holiday mood, nothing will.

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

—JM, December 4, 2011

2010 Editor’s Note: Back for the third consecutive year by popular demand, we’ll try to keep this year’s update brief—but don’t count on it.

For starters, we’re going to plug a book: Keith Richards’ autobiography, “Life,” which happens to be one of the best books ever written—and we don’t just mean “Best in the Category of ‘Memoirs by Nearly-Dead Rock Stars’.”

It is a great book, period.

The story of how ‘Keef’ (as he signs sweet letters to his Mum while rampaging across America), Brian and Mick developed the Rolling Stones’ sound, for example, is worth the price alone (in short, they worked really hard; but the full story is much better than that).

Yet there’s more—much more. Guitarists can soak up how Keith created his own guitar sound; drummers will learn—if they didn’t already know—Charlie Watts’ high-hat trick (and from whom he stole it); while songwriters had better prepare themselves to be depressed at how Mick wrote songs (‘As fast as his hand could write the words, he wrote the lyrics,’ according to one session man who watched him write “Brown Sugar”).

And that’s just the rock-and-roll stuff.

The sex-and-drugs stuff is also there, and the author lays it all out in his unfettered, matter-of-fact, loopy-but-straightforward style, often with the first-person help of friends and others-who-where-there (and presumably of sounder mind and body than you-know-who: the drug and alcohol intake is truly staggering) who write of their own experiences with the band.

Okay, you may say, but how exactly is Keith Richards’ autobiography relevant to our annual review of holiday songs?

Well, while furtively reading snatches of ‘Life’ during a stop at the local Borders (we expect to see the book under the Christmas tree sometime around the 25th of this month, hint-hint), we happened to hear another musical legend perform one of our favorite offbeat Christmas songs in the background, and it occurred to Your Editor that of all the bands out there that could have done that same kind of interesting, worthwhile Christmas song, The Rolling Stones probably top the list.

What with Keef’s bluesy undertones and Mick’s commercial-but-sinister instincts on top, it would have certainly made this review, for better or worse. (Along these lines, The Kinks’ cynical, working-class “Father Christmas” is one of the all-time greats, and doesn’t get nearly enough air-time these days.)

Now, for the record, the offbeat Christmas song that triggered this excursion was “’Zat You Santa Claus?”—the Louis Armstrong and The Commanders version from the 1950’s. (The song was later covered, like everything else but the Raffi catalogue, by Harry Connick, Jr.)

Starting out with jingle bells, blowing winds and a slide-whistle, you might initially dismiss “’Zat You?” as Armstrong’s sadly commercial attempt to get in on the Christmas song thing, except that his familiar, Mack-the-Knife-style vocal comes over a terrific backbeat that turns it into what we’d nominate for Funkiest Christmas Song Ever Recorded:

Hangin’ my stockin’/I can hear a knockin’

’Zat you, Santa Claus?...

One peek and I’ll try there/Uh-oh there’s an eye there 

’Zat you, Santa Claus?  

Please, ah please/ah pity my knees

Say that’s you Santa Claus (That’s him alright.)

It is a delight to hear, and the fact that it is suddenly getting more air-time this season is a step-up in quality for the entire category—or would be, if not for the apparent installation of Wham!’s “Last Christmas” in the pantheon of Christmas Classics.

A 1980’s electro-synth Brit-Pop timepiece, “Last Christmas” combines a somewhat catchy tune with lyrics that make a trapped listener attempt to open the car door even at high speeds to get away:

Last Christmas, I gave you my heart 

But the very next day you gave it away 

This year 

To save me from tears, 

I gave it to someone special

Considering the fact that the songwriter (Wham!’s gay front-man, George Michael) decided to repeat that chorus six times, the full banality of the lyric eventually gives way to incredulity: “Let me get this straight,” you begin to ask yourself. “This year he’s giving his heart to ‘someone special’... so who’d he give it to last year? The mailman?”  

“Last Christmas” does have the distinction of being the biggest selling single in UK history that never made it to Number 1. Furthermore, all royalties from the single were donated to Ethiopian famine relief, the same cause which led to creation of what turned out to be the actual Number 1 UK single that year, “Do They Know It’s Christmas?”  

“Do They Know…” is a song that has received some push from readers to receive an honorable mention in these pages, and while it is certainly an interesting timepiece, with much earnest participation from the likes of Sting, Bono and even Sir Paul, it is not nearly as worthwhile as an album that seems just as prevalent these days: A Charlie Brown Christmas by jazz pianist Vince Guaraldi.  

How a jazz pianist was hired to create the music for a TV special with cartoon characters is this: the producer heard Guaraldi’s classic instrumental “Cast Your Fate to the Wind” on the radio while taking a cab across the Golden Gate Bridge.

One thing led to another, and thanks to that odd bit of chance, future generations will have the immense pleasure of hearing a timeless, unique work of art every year around this time. (A second odd tidbit for our West Coast readers: Guaraldi died while staying at the Red Cottage Inn, in Menlo Park—of a heart attack, however, and not the usual, more gruesome fate of musicians who die in hotels.)

One second-to-last note before we move on: we have been heavily lobbied by certain, er, close relations to include Mariah Carey’s “All I Want For Christmas is You” as a worthwhile holiday song—despite our previously expressed misgivings about her contribution to the genre (see below).  

And we have to admit, her “All I Want…” leaves behind the incessant vocal pyrotechnics that made some of her other Christmas covers (“Oh Holy Night,” for example) unbearable, at least to our ears.

In this case she seems to trust the song to take care of itself, which it does in fine, driving, upbeat style. Now, as Your Editor previously hinted, all he wants for Christmas is Keef’s book. And it had better be there, if, as previously noted, you get our drift.

Finally, and speaking of autobiographies, we happened to read Andy Williams’ own book this past year and must report that our reference to Williams below seems overly harsh. For one thing, his book is as honest as Keef's; for another, as a singer not necessarily born with the vocal equipment of, say, Mariah Carey, the man worked at his craft and succeeded mightily where many others failed.

Which, we might add, is, after all, the hope of this season.

 And so, we wish for a Merry Christmas, Happy Hanukkah and Good New Year to all.

—JM, December 13, 2010   

2009 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.

Indeed, 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 an offset to that cheery development, in the form of a surge in playing time for Barry Manilow’s chirpy imitation of the classic Bing Crosby/Andrew Sisters version of “Jingle Bells.”

For the record, “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, it seems, 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 in fact 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 only slightly more offensive version of this one, see: ‘Simpson, Jessica’ and ‘Lachey, Nick’).

As an antidote to Rod, we suggest several doses of 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 junkie, who probably expresses 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. The good news is it should keep Barry Manilow from 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.

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

Then there’s ex-Beatle Paul McCartney’s “Wonderful Christmastime,” which combines an annoyingly catchy beat with dreadful lyrics, something McCartney often did when John Lennon wasn't around.   (After all, it was Lennon who replaced McCartney’s banal, teeny-boppish opening line for “I Saw Her Standing There”—“She was just seventeen/Never been a 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 “Wonderful Christmastime” even though McCartney actually recorded this relatively new Christmas standard nearly thirty years ago, before Lennon was shot.

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 enormously catchy “Happy Xmas (War is Over)” is played about as frequently as “Wonderful 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 showing off how much of the 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 in the studio is tickling 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.

Thus the major downside of Shazam might be that it can promote distinctly anti-social behavior: having correctly identified who was responsible for this blight on holiday radio music, listeners might decide that if they ever ran across the pair in his car while singing along with the radio too loudly to notice, they wouldn’t stop to identify the bodies.

Fortunately, the bad taste left by that 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.

The second those strings sweetly announce the tune, you relax, and by the time Cole’s smoky, gorgeous voice begins to sing, you’re in a distinctly Christmas mood like no other recording ever creates.

(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”—as if this common misperception was still on everybody’s mind 35 years later. When that news flash did not seem to make the appropriate impression on the audience, 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, because 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 voice in rock and roll, 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”... live.

Yes, this song was recorded live, and despite its age (more than 25 years old), the thing 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, The Boss sings so hard his voice slightly breaks at times. Then he quiets down before roaring back 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 production effects, 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 

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

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.

What ELSE S&P Threatened to Downgrade Today...

2011-12-05T17:51:00.003-05:00

Research-in-Motion

Motorola
Victrola Talking Machines
eToys
Longtop Financial
Greece
Detroit

Solar panel industry
Herman Cain
‘N Sync
Amy Winehouse

Anything else we missed?

Jeff Matthews 

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

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.

His Magical Thinking: "Steve Jobs" by Walter Isaacson

2011-11-11T08:26:00.002-05:00

The NotMakingThisUp Book Review

So how did a guy who was described by one of his closest friends as “reflexively cruel and harmful to some people” and by the mother of his first child as “an enlightened being who was cruel”;

Who honed a “trick of using stares and silences to master other people”;

Who took a bonus meant to be split with his best friend and future co-founder of Apple, Steve Wozniak—which “Woz” had earned for the duo by designing a video game with fewer chips than a preset maximum—and still denied it after he had become a multi-billionaire (Wozniak got paid all of $350 for his efforts);

Who was described as sometimes “abusive” by an early business partner, as “the opposite of loyal…he has to abandon the people he is close to” by a longtime friend and as “frighteningly cold” by another;

Who denied he was the father of his first child and according to the child’s mother “didn’t want to have anything to do with her or with me”;

Who threw a “tantrum” when Apple’s first president gave him employee badge #2 while Wozniak got badge #1, then demanded, and got, badge #0;

Who shouted down strangers at business meetings by yelling “Let’s stop this bullshit!” and wooed engineering prospects by telling them “Everything you’ve ever done in your life is shit, so why don’t you come work for me?”;

Who parked his car in the handicapped spot at the front of his building so frequently that an Apple employee “painted over the handicapped wheelchair symbol with a Mercedes logo”;

Who was described by his first supervisor as “a goddamn hippie with b.o.” and was considered by his first boss at that same company to be “not a great engineer”.…

How, exactly, did Steven P. Jobs become the unstoppable force who, by intelligence, intuition and sheer willpower lead the creation of not one, but two dominant companies of their times, and directly affect the lives of more human beings than any other individual of his generation?

For the answer to that question, read this book.

What it mainly comes down to—and we’re not giving anything away here, because you’ll want to read it all—is that Jobs simply used what Apple veterans called his “reality distortion field” to talk people into doing things they didn’t think they could do.

One of the best—among many—stories along this line occurs when an Apple engineer tries to explain why an early beta of the Mac operating system is taking so long to boot up, too long for Jobs:

…Jobs cut him off. “If it could save a person’s life, would you find a way to shave ten seconds off the boot time?” he asked. Kenyon allowed that he probably could. Jobs went to a whiteboard and showed that if there were five million people using the Mac, and it took ten seconds extra to turn it on every day, that added up to three hundred million or so hours per year that people would save, which was the equivalent of at least one hundred lifetimes saved per year. “Larry was suitably impressed, and a few weeks later he came back and it booted up twenty-eight seconds faster,” Atkinson recalled. “Steve had a way of motivating by looking at the bigger picture.”

And Isaacson tells the story of that bigger picture very, very well—mainly by letting other voices do the talking.

They are the voices of those who were there early in Jobs’ career, when the defining impetus of his life—being given up for adoption—was shaping the personality that would alternately fascinate, disgust, energize and terrorize those who encountered that “reality distortion field.”

They are the voices of those who influenced Jobs along the way (Atari founder Nolan Bushnell’s voice is especially delightful, and the simplicity of his instructions for Atari’s first Star Trek game—…uncomplicated enough that a stoned freshman could figure them out… “1. Insert quarter. 2. Avoid Klingons”—became a guiding principle behind Jobs’ own creations).

They are the voices of those who were there when the Apple II, the Mac, the iMac, the iPod, the iPhone and the iPad were born; when Jobs was creating—and failing with—NeXT; when Jobs returned to Apple somewhat older and somewhat wiser, and still a perfectionist; and when Pixar was saved and nourished into an animation powerhouse by Jobs.

Also they are the voices of those with him when he was dying.

The book flows quickly and it flows without a hitch, because even though the author spent a great deal of time with Jobs in the waning days of his life, he does not interject himself, except when absolutely necessary to tell the story.

Also, it’s not written as a straight chronology: it jumps ahead at times—for example, to explain Jobs’ bond with Jony Ive, Apple’s chief design guru, before going back to the ‘aha’ moments that led to the iPod, the design of which Ive and Jobs shaped together—and always to good effect.

And, as you've already figured out, Isaacson sugarcoats very little.

Most important of all, along the way in this great story you’ll learn where Jobs got his love of craftsmanship; how the first product Wozniak and Jobs came up with was in fact illegal; why Apple was named “Apple”; how employees manipulated Jobs to (sometimes) reach the conclusion they thought he should reach; why the first iPod was all-white (even the ear-buds); how Jobs’ work at NeXT and Pixar informed his return to Apple; how Jobs’ exile in Italy after his first Apple career influenced the floors you walk on today in every Apple store; why Jobs wore turtlenecks; what he told Larry Page about how to manage Google, and, more interestingly, what he told the CEO of Corning while successfully persuading him to resurrect a failed Corning glass R&D project into what became the rugged but clear glass screen on your iPhone; and, over and over, how the perfectionist Jobs could obsess over any detail when it came to the design of a product, a hotel room, a business card—even an oxygen mask in the hospital as he lay near death.

Indeed, the word “obsess” appears nine times in this book, the word “tantrum” eight times, and the phrase “Jobs insisted” appears—we are not making this up—28 times in the book.

Jobs’ favorite derogatory term for bad work—“shit”—appears early and often, in various forms (“this is shit” appears four times, “it’s shit” once); while “sucks,” another favored Jobs adjective for bad people or bad things, appears five times, including once when Jobs simply combines the two adjectives into “he’s a shithead who sucks.”

Still, the word that sticks in the mind after reading all of Steve Jobs is neither. In fact, it is in no way negative.

The word is “magical,” and it appears 19 times in the book, including three times when it’s used by Jobs describing a technology or a product.

But the most poignant, and powerful use of the word comes from Jobs’ wife who, in explaining how he at first avoided coming to terms with his initial cancer diagnosis—in a similar fashion to the way he routinely avoided coming to terms with the limitations of fellow human beings, thereby pushing them into making products that literally changed the world—summed up the mindset that nursed Pixar from a struggling graphics design shop into the savior of Disney and, at the same time, pushed Apple onto a path that would make it the most valuable company in the world before he died.

It was, she called it, “his magical thinking.”

So read this book.

If you’re a teenager who “thinks different” and wants to understand how Jobs took that same quality and turned it from a liability to a world-changing asset; if you’re a geek who wants to understand how Jobs identified break-through technologies and made them commercial; if you’re an investor who wants to understand how a company learns less from great success than from failure; if you’re a board member who wants to understand how destructive a creative genius can be, and how to harness that genius without destroying a company; if you’re a CEO who wants to discover what makes a product a flop like Microsoft’s Zune instead of a hit like the iPod; if you’re a design student who doesn’t care about business but wants to understand why the iPad feels so comfortable to pick up (hint: rounded, not square, edges); if you’re an advertiser who wants to understand how two frames can be the difference between a “great” TV commercial and a “shit” commercial; if you don’t care about any of that but just want to understand how all these products came to be…read this book.

It’s great.

Maybe even insanely great.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Apple: For What It’s Worth, Part II

2011-11-07T08:14:00.005-05:00

“All I said was I liked the pen…”

—Jerry Seinfeld, “The Astronaut Pen”

We considered naming this follow-up to last month’s “Apple: For What It’s Worth” column after a different song than the Stephen Stills classic—something more current, more relevant and just plain zippier…something, say, by the Arctic Monkeys (which, as long-time readers know, is the adopted house band for this virtual column).

And the Monkeys’ “D is for Dangerous” would have certainly fit, because, as it turned out, we were treading on dangerous turf merely by pointing out one interesting bit of data regarding Apple that was not going—as all things Apple have been going—“up and to the right,” to use one of Wall Street’s Finest favorite expressions.

Specifically, we highlighted the fascinating, abrupt slowdown in last quarter’s sales growth at Apple’s retail stores, along with the (literally unprecedented, for Apple) year-over-year decline in profits from those stores, plus the fact that not one of Wall Street’s Finest asked a question about either of those facts on the subsequent earnings call (no surprise there, really).

Turns out we probably should have stuck with the good stuff—like pointing out that our August 2010 prediction, reported here, that iPad sales could hit 50 million a year shortly (at a time when Wall Street’s Finest were saying 15-20 million for 2012), looks on target: the 2011 calendar year number should be 40 million; 2012 north of 50 million.

But we did not point out the great iPad sales, because, after all, everybody knows how well the iPad is doing—although there’s something interesting in the Amazon.com tablet rankings…well, never mind about that—and the modest blemish of a shortfall in the retail channel seemed far more interesting from an analytic point of view: we’d never seen numbers shift so quickly at a high-quality retailer.

The reaction here was swift and, in most cases, harsh—mainly along the lines of “Everybody knows Apple missed sales because everybody was waiting for the new iPhone and Tim Cook said so and you don’t get it and who are you to say Apple is falling apart…”

The whole thing called to mind the Seinfeld “Astronaut Pen” episode, when Jerry admires his father’s neighbor’s pen, “the kind the astronauts use” so the neighbor gives Jerry the pen but regrets it so much he later claims Jerry stole the pen, which causes a fistfight at a banquet given in Jerry’s father’s honor, and when Jerry is pushed to the microphone by his mother to calm things down, he finally pleads, “All I said was I like the pen…”

And all we said was, “Apple’s retail stores seem to be losing their mojo.” That’s all.

For the record, we’re big fans of the Apple stores—although initially, when the company began rolling them out in 2001, we would have put money on their being doomed to failure. Running a good retailer is a lot harder than it looks, and Dell had already been taking share from brick-and-mortar operators by going the opposite route—selling direct. In those days, the disintermediation of the Best Buys of the world seemed like a forgone conclusion.

But Apple’s retail stores are, in no way, shape or form, comparable to the Best Buys of the world.

Apple zeroed in on the customer experience like no other retailer since Nordstrom (see a really excellent history here), and as the product set grew from Macs to iPods to iPhones, and as Windows users became reacquainted with the Apple brand thanks to those non-computer products, the stores became Apple’s best weapon in shifting computer market share away from Microsoft: they provided fed-up but hesitant Windows PC users the ability to get comfortable with Macs in an environment that offered terrific, low-key help with no sales pressure.

Contrast the experience at an Apple store, where even grey-hairs wander inside to browse, check their emails or ask for help, with the experience at a Best Buy, whose business model has become so dependent on selling extended warrantees that a mildly non-tech-savvy consumer wouldn’t go inside to ask for help if they were being held hostage by a crazed gunman in the parking lot:

Best Buy Sales Salesperson: “Welcome to Best Buy! How may I help you?”

Hostage: “I’m being held hostage by this crazed gunman.” Best Buy Sales Salesperson: “Do you need an extended warranty on anything?”

Hostage: “No, I need you to call the police.”

Best Buy Salesperson: “I can’t help you there, but perhaps that crazed gunman next to you needs an extended warranty on his sawed-off shotgun?”

Crazed Gunman: “You sell extended warrantees on sawed-off shotguns?”

Best Buy Salesperson: “Certainly, it’s all part of our slogan, ‘Customer Centricity’!”

Hostage: “What do warrantees on sawed-off shotguns have to do with ‘Customer Centricity’?”

Best Buy Salesperson: “‘Customer Centricity’ is about carefully listening to the customer’s needs, evaluating the most relevant options to deal with those needs, and then selling him or her an extended warranty.”

Hostage: “I don’t need an extended warranty. I need the police.”

Best Buy Salesperson: “I can’t help you there, but I can explain the fake benefits of our extended shotgun warranty, which covers any make or model shotgun except those that have been fired, handled, pointed, dropped, dismantled, aimed, loaded, touched, looked at, rented, borrowed, purchased—”

Crazed Gunman, turning gun on himself: “I can’t take this anymore.”

Hostage, grabbing the gun: “Me first.”

Not for nothing Apple stores as small as 4,500 square feet of selling space with a handful of young, mild-mannered Apple enthusiasts outsell Best Buy stores with 45,000 square feet of fire-breathing, warranty-selling salespersons on the prowl.

How then to explain the sudden, one-quarter fall-off in sales growth at those stores? There are three reasonable explanations:

For starters, Apple has been warning for some time that extending its iPhone sales to telecom carriers around the world would affect the growth in Apple’s own retail store sales. And indeed, most iPhone users we know bought theirs at Verizon or AT&T, not directly with Apple. However, this channel saturation has been going on for a couple of years and wouldn’t explain the fall-off from a +36% sales gain to a mere 1% sales gain in one quarter’s time.

Second, as readers noted (and as spelled out in this chart-happy piece here), Apple’s sales were coming up against very tough comparisons thanks to the timing of past product launches when the iPhone 4S glitch occurred. While this is a reasonable mathematical explanation for part of the slower sales growth, it does not explain the sudden drop in profits: after all, difficult sales comparisons on their own don’t tend to lead to significant profit declines for retailers.

Third, as we noted in “For What It’s Worth”—and as many readers reminded us—Apple’s iPhone sales were stunted by as much as $1.5 billion last quarter as customers waited for the “iPhone 5” (expected by many to be the first LTE iPhone) which didn’t hit stores until October as the iPhone 4S. Indeed, we know several people who waited, and now own the 4S.

Still the impact on the retail stores from the delay does not alter the picture as much some might have thought. Apple’s retail stores comprise a bit more than 10% of total Apple sales, and it is a good bet that the stores sell a lower mix of iPhones (after all, you can buy an iPhone or iPad at Verizon and AT&T, but not a Mac).

Therefore, of the $1.5 billion in theoretical “lost sales” from consumers holding off for the iPhone 4S, a maximum of $150 million might have come through the stores. Add those deferred 4S sales back to the reported sales, and the meager 0.8% increase in year/year retail store sales becomes a 5% gain—which is, still, a significant fall-off from the 36% of the previous quarter.

Furthermore, the unheard-of 26% decline in store profits in the quarter would have only been reduced to a 15% drop, adjusting for the lost 4S profits. That’s still a record profit decline at the retail stores—even worse than the 12.8% drop during the heart of the financial crisis.

So, yes, we know Apple’s iPhone sales were up against difficult comparisons; yes we know Apple’s stores do volume that any retailer would kill for; yes we know Apple has the biggest share of smartphone gross profits; yes we know Apple is taking market share like you dream about; yes we know the retail stores are a small minority of the company’s overall sales; yes we know Apple is still growing faster than any peer, whatever the @%#@# some lousy #%$##@#@ says. (Indeed, we’ve had fun over the years highlighting Microsoft’s failed efforts to dent the iPhone juggernaut, here.)

But to a retail analyst, any abrupt slowdown—for whatever reason—matters. After all, no retailer—except, maybe, Sears—plans for a decline in profits. And we’d bet the decline in profits—as well as the flattening out of visitors to the Apple stores—was not in the company’s budget.

As for the current quarter, nobody should expect a further year/year slowdown in Apple retail store sales. For one thing, the 4S is making up for the lost sales right now; for another, there was the “buy one for Steve” mantra of many Apple faithful—including Apple co-founder Steve Wozniak, who was first in line at his local Apple store to buy a 4S as a show of support following Jobs’ October 5^th death.

Furthermore, Apple just opened two more stores in China, and those are among the most productive retail stores in the world, for any retailer (estimates run well north of a quarter-billion in sales each, annually).

And if Apple, as expected, adds China Telecom to the mix…well, the retail store numbers should pick up, and pick up a lot.

So expect nothing but positive updates on Apple in these virtual pages, like the fact that in the last week of October of 2011, the iPad held 2 of the Top 10 tablet spots at Amazon.com, compared with 6 of the Top 10 tablet spots in the last week of October 2010.

Oh, wait a minute—that’s not actually positive, is it?

Nevermind...

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.” So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff. And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management

Apple: For What It’s Worth

2011-10-20T06:59:00.005-04:00

Something’s happening here

What it is ain’t exactly clear

—Stephen Stills, “For What It’s Worth”

Something’s happening at Apple. We’re not sure what, but something’s happening.

Yes, everybody knows Apple’s quarterly earnings report disappointed Wall Street’s Finest. And yes, everybody knows Apple managed to calm the disappointed herd, mainly by using the phrase “we’re thrilled” seven times during the call while pointing out that the big miss in iPhone sales was likely due to everybody waiting around to buy the new iPhone 4S.

But not one of Wall Street’s Finest—not one—asked about the most disturbing pattern coming out of Apple’s earning release: the measly 1% year/year revenue increase at Apple’s retail stores, the 26% year/year profit decline at Apple’s retail stores, and the mere 4% year/year growth in visitors to Apple’s retail stores.

Certainly, there was an impact at the retail stores from the Apple Faithful waiting for the new iPhone. But even before this quarter's jaw-dropping sequential-quarter momentum collapse from up 36% in June to up 1% in September—a downshift we can not recall seeing at any retailer, ever (please come up with one, and we'll highlight it here)—the Apple retail stores had been losing their mojo.

For example, from the December 2009 to the June 2010 quarter, retail visits rose from 51 million to 61 million. This year, visits from December 2010 to June 2011 did not rise at all—from 76 million to 74 million.

Something’s happening here. What it is ain’t—exactly—clear.

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Gawker Gets It Wrong: The Cancer Did It

2011-10-14T07:57:00.001-04:00

Gawker, which is just one of the many excellent reasons the New York Times keeps cutting staff (I have yet to see an article “tweeted” or “liked” by anyone under the age of 30 from the Times) carried the following inflammatory story yesterday which zipped around the blogosphere faster than a Joe Biden expletive moment:

Harvard Cancer Expert: Steve Jobs Probably Doomed Himself With Alternative Medicine

Having established a provocative statement of purported fact in the title, Gawker’s unfortunate story led off with a howler of first sentence:

Steve Jobs had a mild form of cancer that is not usually fatal…

That statement is wrong. How wrong, we wrote about in 2008, here.

In fact, the five-year survival rate on the kind of “mild” islet cell tumor Steve Jobs had been diagnosed with in October 2003 is 42%. Mathematically, of course, that means the cancer is indeed usually fatal. And Steve Jobs survived seven years.

Now, a big part of the problem is that Apple as a company did the medical world—and the blogosphere—no favors by downplaying Jobs’ condition over the years. (And we wrote about that here.)

For example, when Jobs appeared at a conference in 2006 looking like, well, like a cancer patient, Apple actually said, “Steve’s health is robust and we have no idea where these rumors are coming from.” Two years later the company claimed Jobs had “a common bug.”

With all the disinformation spread about Jobs over the years, it is no wonder Gawker got it so wrong; but, having gotten it so wrong, they ought to get it right.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Chatter—Mindless Chatter

2011-10-10T08:25:00.000-04:00

There was “chatter” in the markets on Friday that Wells Fargo—the large US bank of which Berkshire Hathaway is the largest shareholder—was going to make a bid for Morgan Stanley, the currently beleaguered US investment that has been the subject of all kinds of rumors related to its financial health, so much so that last Thursday U.S. Treasury Secretary Geithner took it upon himself to declare there to be “absolutely” no chance of another Lehman Brothers-type collapse when asked at a Congressional hearing about Morgan Stanley.

How the chatter on Friday got started, we have no idea, nor did we bother to find out. After all, desperate investors start takeover rumors for the same reason desperate short-sellers start going-out-of-business rumors: to help their positions in a stock, however fleetingly.

The funny (or frustrating, depending on your point of view) side-effect of such “chatter” is that companies routinely call on authorities to investigate negative, stock-dropping, going-out-of-business-type rumors—Exhibit A being, of course, Lehman Brothers executives, who excoriated everybody but themselves prior to the collapse—but never call on the authorities to investigate positive, stock-boosting takeover rumors.

Along the latter lines, Exhibit A would be the investment bank formerly known as Bear Stearns. Prior to its 11^th-hour rescue in early 2008 at the hands of the Feds and JP Morgan’s Jamie Dimon, Bear was the subject of too-many-to-count takeover rumors, starting at multiples of $100 per share in 2007 and stair-stepping down to a $30 per share rumor that went around the Friday before the Sunday of JP Morgan’s actual bid, which, as it turned out, was $2 a share (later upped to $10).

In any event, whether it was deliberate or delusional or merely daydreaming, somebody—we know not who, nor do we care—got the idea Friday morning that Wells Fargo was going to buy Morgan Stanley, and the rumor went around Wall Street even though it shouldn’t have, because anybody who knows the least bit about its largest shareholder, Warren Buffett, and his investment process (see here), would know that the idea makes no sense at all.

For one thing, there’s the “competitive moat” Buffett demands of his acquisition candidates, of which Morgan Stanley hasn’t exactly the widest, as the assets tend to ride up and down the elevator each day.

Then there’s Buffett’s eternal “make or buy” question when he evaluates a business: “How much money would I have to spend to replicate the business?” And it would be reasonable to think that Warren Buffett might expect that he and Wells Fargo—with assets in excess of $1 trillion—could, over time, replicate Morgan Stanley on an outlay of something far less than its current market capitalization of $27 billion.

So count us skeptical...and always amused at what new “chatter” awaits the markets, from whatever anxious shareholders are out there.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Thanks, Steve: Of Apple and iPads, Not to Mention "Layla and Other Assorted Love Songs"

2011-10-06T08:14:00.011-04:00

NotMakingThisUp has produced a number of virtual columns over the years which, tangentially or directly, involved the creations, both physical and corporate, of Steve Jobs.

Those columns mainly, I admit, poked fun at Microsoft's various attempts to duplicate the successes of its heretofore less successful technology competitor in areas such as music players, smartphones and operating systems.

But the last one, which followed a year-end Wall Street Journal column that struck a nerve, had nothing to do with Microsoft and everything to do with Steve's last magic act: the iPad...not to mention an album by Eric Clapton and a friend named Paul.

By way of saying a heartfelt "Thank you" to the man (shown here)who made so much so possible to so many, we're reprinting it below. — JM

Tuesday, December 28, 2010

But What Would Eric Think?

Brett Arends is steamed.

He’s had it up to here with the Cult of Apple, and he’s decided to do something about it: what he’s doing is he’s not getting an iPad for Christmas.

This is how the Wall Street Journal columnist began his pre-Christmas diatribe against the latest must-have invention from Steve Jobs’ North Pole Magic Factory:

Why I Don't Want an iPad for Christmas

Everyone wants an iPad this Christmas, right?
Apple's tablet computer is this year's hottest adult toy. Sales are booming. James Cordwell, an analyst at Atlantic Securities, expects the company to sell six million this quarter, half of them here in the U.S. It's driving the company toward what will probably be yet another blowout Christmas period.
But you can count me out. I don't want an iPad for Christmas, thanks very much.
—Wall Street Journal, December 21, 2010

Arends’ reasons—there are ten in all, thus fulfilling the journalistic requirement for “Top Ten” lists at this time of year—include a few a rational ones (“The cost of the add-ons,” for one) and quite a few more irrational head-scratchers that, in the main, remind me of something Paul Hulleberg used to say.

Paul was a childhood best-friend, and a serious music-head in those days when serious music came on LPs (look it up, kids) packaged in fancy sleeves (look that up too, kids), which we would dissect along with the music (“Magical Mystery Tour,” with its 24-page color booklet, was a particular fave), debating everything from who-sang-what to what was the song about, anyway? (“Drugs,” we usually decided).

There was, however, one album from that period that we did not dissect.

It was “Layla” (technically “Layla and Other Assorted Love Songs”: look that up too, kids), courtesy of the post-Cream guitar hero Eric Clapton, but released under the assumed name of Derek and the Dominos.

Now, because Clapton’s name was not on the cover, and because the title song clocked in at seven minutes, the album failed to find an audience when it was first released, despite having both Duane Allman and Clapton playing together.

It was only a year later, when “Layla” was included on a Clapton ‘Greatest Hits’ compilation, that the year-old album became popular.

And therein lay the problem: Paul refused to buy “Layla and Other Assorted Love Songs” after the album became popular, because the whole point of us being music-heads was that we were supposed to find this kind of stuff before everybody else knew about it—not when Layla had become as close to a hit record as was possible on WNEW FM, which back then was the leading-edge New York music-head station, home to the likes of wispy-voiced Alison Steele (“The Nightbird”) and gravely-voiced Scott Muni.

“What would Eric think?” Paul would say. “I can’t buy it now that it’s popular.”

I’d throw an album cover at him and yell something like “Eric would say ‘Thank you for the five bucks.’”

My reaction, of course, made him say it every chance he got.

Which brings us back to Arends’ “Top-Ten” reasons not to buy an iPad: he seems less interested in what the thing actuallydoes—which is a lot—and more concerned about what itrepresents—which to him is a slavish devotion to the Cult of Apple.

Let’s take the first five of his so-called reasons:

1. It’ll be cheaper next year.
That may be true, but it may not be true. While the painfully slow first-generation iPhone soon became, as Arends writes, “a paperweight,” the iPad is no such thing: it is fast, easy to use, and excellent value for the money.

2. It’s going to be better next year.

“The next iPad will have new features—allegedly including video conferencing and maybe a better screen. This year’s model will be so over,” he writes. This may also be true—but it probably won’t, since not many people are a) sitting around waiting for video conferencing, and b) unhappy with the iPad’s gorgeous screen.

Unless Steve Jobs is going to attach a working personal jet-pack to the next generation iPad, it’s hard to see a reason the average user will care to wait.

3. Apple’s profit margins are too high.
This is the biggest head-scratcher. First, Arends gets the margins wrong. He cites Apple’s year-old 41% gross margin and says “Me, I don’t want to support someone else’s 60% markups with my own dollars.”

But Apple’s gross margins are now running at 37%, down significantly from last year thanks in no small part to the lower margins Apple gets on the iPad compared to the iPhone, the price of which is subsidized by the wireless phone carriers.

Second, the issue shouldn’t be what Apple’s margins are, unless, of course, like Microsoft’s margins they result from a monopolistic business model in which the consumer has no choice when seeking an Intel-compatible computer. The issue should be value-for-money.

And the iPad is terrific in that department.

4. Competitors are coming.
This is true, as far as it goes. Arends unfortunately cites the Samsung Galaxy Tab, which means he apparently has not seen a Galaxy Tab, nor used one, because the Galaxy Tab is the least of the iPad’s potential concerns, in our opinion. It has a surprisingly small screen, for starters; and based on hanging around the repair desk at Verizon stores, we are told the thing tends to seize up and need rebooting, which may explain why a friend’s 22 year old daughter recently called the Galaxy “an iPad for losers.”

5. No flash.
By this, Arends refers to Steve Jobs’ famous decision to leave Adobe’s Flash Player for video and animation off the iPad. This was a very a big issue when the iPad first came out, because most web sites used Flash at that point, and it was about the only thing competitors could talk the iPad down with.

But today, an increasing number of web sites (MLB, for example) that were Flash-only last spring now accommodate the iPad, and do so beautifully.

Of the remaining five issues on the list, one is merely list-expanding padding (“It’ll get boring”), while another regurgitates mainstream fluff (“The whole Apple cult is starting to creep me out”).

But what it all seems to come down to is, like Eric Clapton’s “Layla” those many years ago, the iPad has become too popular for some people to admit they want one.

Our own advice is, don’t listen to “Top-Ten” columnists, whatever newspaper they write for, and don’t listen to virtual columns like NotMakingThisUp: try it yourself and make up your own mind.

Meanwhile, I’ll have to call Paul and see if he’s got an iPad, or if he’s holding out like our Wall Street Journal columnist. Besides, it’ll give me a chance to find out if he ever, finally, bought “Layla and Other Assorted Love Songs,” too.

Paul had excellent taste: I’ll bet he’s got them both.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Hero or Hypocrite? “The Buffett Rule” Then and Now

2011-09-27T08:10:00.003-04:00

“The first rule is not to lose. The second rule is not to forget the first rule.”

—Warren E. Buffett, quoted by Carol J. Loomis, Fortune Magazine, 1988

Having recently celebrated his 81^st birthday, Warren Buffett is not going softly into that good night. He is, in fact, going quite noisily ahead, making new friends—and new enemies—along the way.

His most visible friend, of course, is President Obama, who has gone so far as to name a new tax proposal after him (“The Buffett Rule”), following the Oracle of Omaha’s August 14 op-ed piece in the New York Times calling for higher tax rates for the rich, as follows:

“I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more…I would suggest an additional increase in rate.”

Buffett’s most visible enemy, now that his long-submerged but never denied personal brand of liberal Democrat politics has burst, full blown, into the open, is a collection of bloggers, politicians, political commentators and billionaires taken to excoriating Buffett for his high-minded, highly visible, and, they say, highly misguided stance on tax policy.

The centerpiece of the criticism is pretty straightforward: if Buffett feels so strongly about paying higher tax rates in the interest of fairness, nothing is stopping him from setting the example by voluntarily cutting a bigger check to the U.S. Treasury.

Buffett’s comeback is, and always has been, likewise straightforward: he simply follows the rules, he says, and the rules currently tax his earnings from dividends and capital gains at a lower rate than regular income.

It’s the kind of by-the-book self-justification that drives those who see Buffett as a rank hypocrite out of their minds, and reassures those who see Buffett as a hero in the current policy wars.

All this is unfortunate, because Warren Buffett, Political Guy had, until yesterday’s unprecedented share-repurchase announcement, largely wiped from the public mind Warren Buffett, Investment Guy—the supremely rational, highly quotable steward of Berkshire Hathaway whose track record for the last four-plus decades is, in fact, unequaled.

How “unequaled” is Warren Buffett’s track record, you may ask? Well, he literally turned his own personal investment of $100—that’s one hundred dollars—into a current net worth of close to $40 billion (and $62 billion at its peak, before he started giving it away).

To see exactly how he accomplished that unequaled feat, you can read “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (available at Amazon.com, here)which explains in plain English what made Buffett the Investor unique while also exploring the upsides and downsides of his extremely risk-averse management style...but we’ll provide one big clue here.

That clue is the original “Buffett Rule,” quoted above, which had nothing to do with raising taxes on the wealthy and everything to do with investing, and is worth repeating:

“The first rule is not to lose. The second rule is not to forget the first rule.”

So well did Buffett adhere to this rule of investing that in his first 46 years managing Berkshire Hathaway’s investment portfolio, Buffett had exactly two losing years (the stock market had 11 in that time), thus allowing Berkshire’s net worth to compound at slightly over 20% a year—an astonishing rate of growth, never duplicated.

But it is a track record that is increasingly underappreciated, because the old “Buffett Rule,” about investing, has been replaced by a new one, about taxing the rich.

The irony here, for anyone who has studied Berkshire Hathaway and Warren Buffett, of course, is that Buffett is as savvy in the taxpaying department as he is in the investing department.

His recent, high profile $5 billion investment in Bank of America, for example, was structured to minimize taxes on the dividends Berkshire will receive (insurance companies can deduct a large portion of dividend income, unlike mere mortals). This drives some bloggers crazy, but the fact is, Warren Buffett, as CEO of a publicly traded company, would be remiss if he did not attempt to maximize the after-tax benefits of all Berkshire’s activities. Shareholders expect and deserve nothing less.

Besides, Warren Buffett himself has always recognized the benefits of paying taxes at lower rates—via the same kind of low capital gains rates he currently criticizes. Indeed, he long ago wrote to his own investors the following:

“I am an outspoken advocate of paying large amounts of income taxes – at low rates.”

—Warren E. Buffett, July 10, 1963

The quote is lifted, verbatim, from a letter Buffett wrote to investors in Buffett Partnership LTD (the hedge fund Buffett managed, prior to taking control of Berkshire Hathaway) and it was Buffett’s way of telling his investors that he would not make investment decisions based on the cost basis of stocks in the portfolio, but, rather “on the basis of the most probable compounding of after-tax net worth with minimum risk,” as he also wrote in that letter, which you can read here.

(We’ve read all of Buffett’s early partnership letters, at least those available on that wonderful tool, the Internet, as well as every one of his Berkshire Hathaway letters, and advise any aspiring investor to do so as well.)

Buffett thus early on identified the minimization of taxes as a key to maximizing long-term investment success, and knew the way to do that was to generate wealth through investments that were held long enough to be taxed at lower capital gains rates—a benefit “The Buffett Rule” would attempt to end—and anyone who has studied his methods knows this.

Unfortunate as the uproar caused by Warren Buffett, Political Guy, has been by blotting out the accomplishments of Warren Buffett, Investment Guy, said uproar is especially unfortunate because it comes at a time when Warren Buffett, Investment Guy, has been busy on many productive fronts.

The Bank of America investment—a no-lose deal in the classic Buffett vein—was just one front. Another was his recent selection of a second investment manager, Ted Weschler, of whom we’ve heard nothing but good things (“a great, smart, smart guy” in the words of a former co-worker). And a third front—yesterday’s share buyback announcement—is literally unprecedented in Buffett’s 46-plus years at the helm of Berkshire.

But the most unfortunate aspect of all, in our view, is this: the original, no-nonsense, invaluable “Buffett Rule” has been replaced, in many investors’ minds, by a new, politically-oriented (and therefore vaporous) “Buffett Rule.”

And that first Buffett Rule was one any investor, no matter what his or her politics might be, ought to have memorized.

So much so we’ll repeat it here, for old time’s sake:

“The first rule is not to lose. The second rule is not to forget the first rule.”

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Ben Bernanke and “The Costanza Effect”

2011-09-23T14:43:00.001-04:00

“This is found money. I want to parlay it. I wanna make a big score!”

—George Costanza, of Seinfeld, on interest income

We were having a back-and-forth via Twitter this morning with a friend of this blog, a very smart reporter who had taken issue with our non-economist-trained view that Ben Bernanke was not saving the U.S. economy by suppressing interest rates at near-zero levels: he was, rather, pushing the U.S. into a depression by killing the interest-rate spread on which the very banks that circulate the life-blood of the system live.

Interest rates, we argued, were not, as Bernanke has believed, too high for the good of the country, they were too low.

Logically, our friend responded that if credit were really as underpriced as we claimed, “Savers would surely use underpriced credit to snap up inflating assets and goods. They’re not.”

And he is right.

However, the reason savers are not jumping out of no-longer-interest-earnings savings accounts and into risky asset pools is not that rates have been too high. We think it is a function of the fact that, at a certain point, low interest rates become counter-productive: they make savers more cautious, not less. Interest rates are, we think, too low.

After all, if you’re not earning anything on the money you have in the bank, your instinct is not to take it down to the track and go bet the whole bundle on Greased Lightening, as Tony Curtis’ character did in “Some Like It Hot.”

No, you’re going to sit tight.

Now, this behavior probably has some fancy economist-type label, but we will hereby declare it to be a reverse-manifestation of “The Costanza Effect,” after George Costanza of Seinfeld fame.

In one episode, George, upon receiving notice of an old passbook savings account with accumulated interest, chooses not to keep the money in the bank, but to gamble it away.

George: “The State Controller’s Office tracks me down. The interest has accumulated to 1,900 dollars. 1,900 dollars! They’re sending me a check!”…

Jerry: “Why don’t you put it in the bank?”

George: “The bank? This is found money. I want to parlay it. I wanna make a big score.”

Jerry: “Oh, you mean you wanna lose it…”

We think “The Costanza Effect” illustrates that people are more willing to risk found money than earned money, and thereby explains precisely the Bernanke dilemma, whereby interest rates have dropped to zero and yet savers have reacted with exactly opposite the intended result.

Far from, as our friend wrote, “use underpriced credit to snap up inflating assets and goods”; they have chosen to sit on what they have.

Kramer for Fed Chairman, anyone?

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

UBS, Connecticut, and The Reverse Protection Syndicate Racket

2011-09-18T17:31:00.003-04:00

I went back to Ohio

But my pretty countryside

Had been paved down the middle

By a government that had no pride…

I said, A, O, way to go Ohio

—Chrissie Hynde, The Pretenders

Well UBS is in the news again, this time for a “rogue trader” who spent three years losing $2 billion of UBS’s hard-earned money before UBS figured out the money was gone. Good thing the Swiss banking giant has friends in government to support it.

We’re thinking specifically of the State of Connecticut, our home state, which agreed to pay UBS $20 million to stick around Connecticut for five years.

That’s $20 million in cash the state’s taxpayers are paying to a company that just tossed $2 billion out the proverbial window.

Now, the reason Connecticut is paying UBS $20 million doesn’t strictly relate to the rogue trader, who was actually located in London: it’s because the state has become so unattractive to business that our governor has to pay companies to stay.

We are not making this up. Here’s how Reuters carried the story recently:

NEW YORK - UBS AG will receive a forgivable $20 million loan for deciding to stay in Stamford, Connecticut, for five years instead of moving some investment bankers to the World Trade Center complex in New York City…

“This project [emphasis added] will retain at least 2,000 high-quality, high-paying jobs in the state, spur capital investment and reaffirm the state's reputation as a leader in financial services,” Connecticut's Democrat Governor Dannel Malloy and UBS Group Americas Chief Executive Officer Phil Lofts said in a joint statement.

Now, this is the first time we have heard a bribe described as a “project.” But never mind that quibble: we have a bigger one: calling it a “loan.”

After all, the term “loan,” when preceded by the adjective “forgivable,” renders the thing not a loan, but a flat-out contribution, because if you think UBS has any intention of paying back a forgivable “loan,” you are either a good-government type who firmly believes that the machinations of local politicians are intended to produce something higher and more useful than gainful long-term revenue for those politicians and their friends, or you haven’t talked to an actual businessperson who has received such a “forgivable” loan.

We have talked to actual businesspersons who’ve gotten forgivable “loans” similar to the UBS deal, and those “loans” are not viewed as “loans” by actual businesspersons, they’re viewed as capital that has been invested in their business in return for short-term promises—such as not moving that business to another state or another country for a certain period of time.

And while UBS will, we have no doubt, honor the terms of the “loan,” UBS will also, we expect, do nothing above and beyond the specifics of the deal. Nor will it pay back the $20 million—especially now that the firm just lost the equivalent of one hundred $20 million investments at the hands of a trader who, bright though he may be, looks like he just got out of high school.

Furthermore, the $20 million contribution by Connecticut taxpayers to UBS’s pockets will certainly not “spur capital investment” in the state, since any business that was planning to invest capital in Connecticut will see straight through this sort of Reverse Protection Syndicate Racket (in which companies are not coerced into making payments for protection, but are paid to be protected) and ask themselves, and their elected officials, what cash can be extracted in return for threats to leave.

Nor do we see how it will it “reaffirm the state’s reputation as a leader in financial services,” since the deal made it clear to the world the only reason UBS agreed to stay in Connecticut for another 60 months was that the governor paid it to stay.

In fact, Connecticut’s “reputation” is less “as a leader” and more “as a hard place to do business.” It ranks 47^th in the Tax Foundation’s State Business Tax Climate Index; carries the third highest per-capita tax burden of the 50 states; and is notorious for making local businesses wonder why they bother...so much so that UBS was, at the time of its “loan,” preparing to flee Connecticut for New York, which is not much less difficult, business-running-wise.

Nevertheless, Connecticut must be getting something for its $20 million “forgivable loan” to UBS, and indeed, according to the governor, Connecticut will preserve, for the five years of the deal, as much as $70 million a year in tax revenue that could have been lost if UBS had left the state.

Now, probably that figure is an exaggeration. Back-of-the envelope calculations of income taxes, sales taxes and corporate taxes attributable to 2,000 high-earning UBS employees max out at closer to $50 million, even using generous assumptions.

But, so what, you say? Spending $20 million over five years to save even $50 million annually sounds like a good “return on investment.”

The problem is, that is not an investment. It is a bribe—a form of reverse protection in which businesses that threaten to leave the area receive cash collected from individuals and businesses that don’t threaten to leave.

As such, it is impermanent, subject to political pressure and favoritism, and short-term in nature. Worst of all, these Reverse Protection Syndicate deals don’t lower the cost of doing business in the state: they raise the cost for all the other businesses.

It’s no wonder that Connecticut has lost half its manufacturing jobs in the last 20 years, and has had no net job growth in that time. And if the UBS deal is any indication, the bleeding in service jobs has just begun.

A, O, way to go…Connecticut.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

9/11

2011-09-11T11:32:00.003-04:00

It doesn’t matter, but here’s my story.

I was swimming laps in the pool in the Ritz-Carlton in San Francisco, and thinking tech stocks, when the first plane hit. I didn’t know what had happened until I came out of the men’s locker room around 6 a.m. PST and somebody—somebody in the hallway—said a plane had hit the World Trade Center.

There was a Bloomberg terminal nearby—this was a tech conference, and the hotel was full of Bloombergs—and checking the top stories, sure enough, a plane had hit the towers.

So I got in the elevator with another guy and we speculated about whether an airline was involved—with not a thought about the human tragedy—because the mentality of this business, sick as it can be, is to calculate how a given event will affect a given stock. And all we knew was a plane had hit the towers, and the first word was it was a small plane.

When I got in my room and turned on the TV, the second plane had hit. So of course everything changed, and I decided to leave. Since they’d closed the airports, this meant driving cross-country. No big deal—I’d had dinner the night before with a bunch of friends, some from the New York area. We’d drive together.

The strangest part came next: leaving my hotel room (it was maybe 6:30 a.m., California time) to walk to the lobby, I saw nobody else—only the newspapers hanging on all the doorknobs—and so I thought, “Am I over-reacting? Am I the only person here who thinks this is as bad as it is?”

I decided I wasn’t. I’d worked at One Liberty Plaza, across the street from the towers, early in my career, I’d been to meetings at Windows on the World, I’d watched the tall ships from offices in the towers, shown our two daughters the view from those floor-to-ceiling windows. I had to get home.

The hotel lobby was weirdly quiet. I went to the concierge, told him I wanted to rent a car, he said “Certainly, where will you be returning it?” I said “Connecticut,” and he didn’t bat an eye. I waited for him to call and book the car, and then made him make clear that the car was going to get to the hotel, and I was going to get the car no matter what. Then I checked out.

I packed while calling people to tell them I was driving. At the same time I realized I didn’t know where anybody else was staying in San Francisco, so I’d be driving alone. A West Coast trader trying to be helpful told me the market opening would probably be delayed, and I told him he his was out of his mind and this was the worst thing to happen in our lifetimes and the markets wouldn’t open for a week, and I was going to drive home…but I used really bad language.

I left the room and now the hotel lobby was pandemonium, total pandemonium, hotel people rushing around, phones ringing, people talking. A young woman was on her cell phone trying to locate a friend who worked in the towers. I regretted checking out before the car arrived, because there was a line at the concierge desk of people trying to get cars, and the phones at the front desk were now going crazy—people stuck in town by the flight cancellations were looking for rooms.

Waiting for the car, I talked to my wife, our older daughter, friends, while young men and women from the conference huddled together, discussing whether to cancel the day’s events. I couldn’t believe they even thought what they decided would matter: everything was over.

Then the car came—but I remembered Bella.

Bella was my pal who worked in the gift shop. I went in to say goodbye to her: I was driving home. She said, “Do you have water?” I said no. “You need some water,” she said, and went into the back room to get me a bottle of water. It seemed important that day to help others: it was somehow up to her to give me something for the trip. She returned with a bottle and pushed it in my hands, and I gave her a hug and left, got in the car, drove down California Street, turned right and got on Route 80 East and went home.

I drove all day, from darkness to darkness, for three days and never watched TV and never saw anyone I knew. What I heard about 9/11 came from listening to a.m. radio and hearing Rudy Giuliani’s voice, and from calling friends during the day. I bought local newspapers at every stop along the way. There were American flags across every overpass. People were polite, kind, eager to make contact. The drive was easy: nobody tried to cut you off, nobody honked.

On Friday I pulled off Route 80 somewhere in New Jersey, and went to a church for the noon service that was being held everywhere at that time. And that’s when I really saw what it meant: the church was packed, and when the priest called for names to pray for, the names went on and on and on. A woman in front of me who reminded my of my mother-in-law called out, in an anxious, quavering voice, two names, “Ken and Dan.”

A couple hours later I pulled into my office and then stopped by the Greek diner next door to see how everyone there was doing. A friend was standing at the cash register, waiting to pay. Just by the expression on his face he was devastated. I said, “Ed, who did you lose?” He said, “Jeff, we lost our whole New York office.”

When I think of that week, I think of Bella pushing the bottle of water into my hands, of the young woman trying to track down her friend by cell phone from a hotel lobby in San Francisco, of Ed’s face, and of “Ken and Dan.”
God bless them all.

JM
9/11/11

Major Major Major Major: A Book Love Story

2011-09-05T11:45:00.006-04:00

The laziest column being written in the Mainstream Press these days has to be the “Even Though I Own a Kindle/iPad/Nook I Still Like Print Books Better” lament.

Generally written by an aging Baby Boomer, the columns always start with a nod to the convenience of eBooks and the wonder of having thousands of different eBooks at hand with the tap of a button at all times (“I’m with it, I’m hip,” you can hear Dr. Evil insisting).

Having established “street cred” the columnist then moves on to lament the loss of the tactile nature of a paper book being held in one’s hands; the inability to dog-ear pages and underline sacred passages; and, most of all, to reclaim the time and “space” (a revoltingly overused word in these things) the reader occupied when he or she first discovered a particular book, because digital books don’t possess the nostalgic combination of visual and olfactory clues that paper books provide.

“It was ’63 and I was reading On The Road…” is how the last sentence usually begins.

Teeth-grinding and unpersuasive they may be, but these columns are so prevalent that a conspiracy theorist might suspect a concerted rear-guard effort by the doomed printing industry to create a counter-trend among us Baby Boomers’ children and grand-children such that old-fashioned books appear cooler/hipper/trendier/more worthwhile than the electronic kind.

And while I do read the print version of the Wall Street Journal cover-to-cover for the serendipity of finding interesting stories that can be overlooked on the Journal’s iPad app, and have, in fact, published an actual old-fashioned print book, the “Why I Still Love Print Books” stuff strikes me as more like the grumpy manifestation of a certain demographic seeing their lives flash before their eyes than anything else.

After all, the digitization of words is, to our times, what Gutenberg’s printing press was in his times: a radical reduction in the cost of shared knowledge.

That’s because the printed book business has to be—and this is from experience, not casual observation—the least efficient form of production ever created outside Soviet Russia.

Here’s how print book publishing works in the real world:

1. A book publisher bets on a bunch of books in the form of advances to various authors whose book proposals have passed muster: the bigger the advance, the more confident the publisher is in the ultimate payoff—the distorting effects of which will be felt at the time of publication, for reasons that will be made clear later on here;

2. The authors set about writing their books, with the help of editors, meeting or missing various deadlines along the way;

3. Meantime, the book covers must be printed because the publisher has to line up production slots ahead of time, so even though the books are not finished, and in some cases are not even mostly written, blurbs praising the books must be obtained (think about that next time you read a blurb on a brand new book);

4. All during this phase, the publisher’s sales force is running around trying to interest various book sellers in its books based mainly on the authors’ reputations and short summaries of what the books will say, none of which matters anyway because none of the book sellers can take risks on a book whose author they never heard of;

5. The books continue to take shape through a series of edits and corrections, none of which will prevent mistakes or typos from getting into the final printed copies because of the back-and-forth nature of the work;

6. The book is finished, but a year or more has gone by, and publishers discover that the world has changed: stuff has happened, national moods have changed…and while you would think publishers would adjust marketing plans based on which books now seem more timely than they did a year ago, the fact is publishers hate to do that because they are mainly interested in recouping the advances they already paid to the authors (the larger the advance, the more marketing the book will get, no matter what); thus the books will be published and marketed based mainly on the basis of how much of a sunk cost each book represents;

7. The books are printed, the covers are added, and the finished product is boxed and shipped to stores based on orders that have no bearing on the likely demand for the books given the swings in national moods, current events etc.;

8. Oh, and the books, which have been printed after a maddening series of corrections and edits, nearly always have typos and errors in the final copy anyway.

That’s just the way it works. It’s amazing great books by then-unknown authors (classics like Catch-22 and A Confederacy of Dunces, to name just two that almost never saw the light of day) ever make it into the hands of a single reader.

Now, this is not a criticism of the individuals involved in the book publishing industry. For one thing, they universally love language, and they know good writing when they see it.

And they really, really love books—printed books. They care about what the cover looks like, how the text appears on the page, and what the final product feels like in their hands.

But their business model is the functional equivalent of going down to the track and placing bets on a bunch of horses that won’t race for a year, in track conditions that nobody can imagine yet. (In fact, it’s more like placing bets on horses that haven’t even been born, because most advances are paid before the books have actually been written.)

So along comes the eBook model, which not only democratizes the demand for books by making them available to anybody with an Internet connection, but also democratizes the supply by lowering the cost of production and speed to market.

In fact, an eBook (a good one, on a meaningful topic—not one of those “Death of a Legend” hurry-up books that get churned out after some Hollywood star gets killed by a drug overdose) can be conceived, written, edited and published—mistake free, because it costs nothing to correct the text—in one tenth of the time, start to finish, of an equivalent print book, merely by reducing the friction of the printed book process.

So, yes, I’ve kept the old blue paperback English Lit 101 copy of Catch-22, which I re-read every few years just to get to the Major Major Major Major bit (“I have named the boy ‘Caleb,’ in accordance with your wishes...”) not to mention a cool, thin, beautiful Great Gatsby and a fat, funny Confederacy of Dunces, plus my first Thurbers and all those Dave Barry collections.

But I have ‘em all on the iPad, too, just in case I want to read one of them, wherever I happen to be.
I love books, period.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Buffett, Berkshire, BYD and The Greater Fool Theory in Practice

2011-08-25T09:23:00.001-04:00

BYD, the Chinese automaker whose name stands for “Build Your Dreams,” couldn't be more aptly named.

A Chinese rags to riches story, its shares were given the good housekeeping seal of approval several years ago when Warren Buffett bought a 10% stake after his notoriously dour, skeptical (and brilliant) business partner, Charlie Munger, convinced Buffett that the company was not just a car company, it was an engineering marvel with a shot at world domination thanks to breakthrough battery technology.

Here’s how Munger defended the unusual investment—unusual for Buffett, who prefers low-technology to high-technology, and closer-to-home rather than halfway around the world—at the Berkshire Hathaway annual shareholder meeting two years ago:

“BYD, while its founder is only 43 years old, it’s not some early stage venture capital company, it’s one of the world leaders of rechargeable lithium batteries… From a standing start of zero he created the best selling model in China. This is not some unproven, highly speculative activity—it’s a damn miracle….”

And Munger, whose distaste for con artists and unproven business models is as well known as his dry wit (read “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” for some fun examples, didn’t stop with encomium for BYD—he applied it to the entire country:

“You get a remarkable aggregation of human talent, which when unfettered by the wrong kind of government, they succeed mightily—when they came to this country as coolies, slaves, they would leave and become the most important people in the town, so these are a remarkable people.”

Of course, Munger was speaking two years before a likewise remarkable number of Chinese scams went public in the U.S., thus paying back, it might be said, some small part of the debt owed by the American railroads to their ancestors.

But if Munger’s naïve-sounding enthusiasm was premature, it was earnest, and based in large part on the chance for BYD’s supposedly revolutionary battery technology to help solve the great problem of how to store wind and solar-powered energy so it can be used when and where it is actually needed, as opposed to the Mohave Desert:

“These lithium batteries are a remarkable technology, we need them. I know it looks like Warren and I have gone crazy, but I don’t think we have…

“It may be a small company but its ambitions are large, and I don’t wanna bet against 17,000 Chinese engineers led by Wang Chuanfu I would be amazed if great things don’t happen here.”

Now, great things did indeed happen at BYD. In this decade alone, sales grew almost 40-fold, gross profits 20-fold, and pretax income 15-fold.

And the share price really took off after Berkshire invested a quarter-billion U.S. dollars in the company in 2008.

Technically, of course, it was MidAmerican Energy Holdings that acquired the stock, buying 9.89% of BYD for $8HK per share. And in what might now look like a giant red flag for Berkshire shareholders, it was MidAmerican’s CEO at the time, David Sokol, who went to China to look the company over before Buffett approved the investment (Munger recused himself—appropriately—from the decision-making, because his family had owned BYD shares for some time, a fact Sokol later tried to use, lamely, in his own defense after making undisclosed purchases in Lubrizol shortly before Berkshire announced a deal to acquire that company).

Unfortunately, Sokol may have done Buffett no favors in encouraging the BYD investment, for while BYD shares soared immediately after the announcement, reaching $88.40HK—10 times Berkshire’s cost—they have since returned to earth ($15.40HK last sale) after a series of missteps, including missed sales forecasts in the bread-and-butter car business, an 88.6% profit drop in the most recent half-year results, and a series of missed deadlines for delivery of the company’s revolutionary electric car.

This last is most worrisome for Munger’s optimism, which he maintained when asked about BYD’s setbacks at the most recent Berkshire shareholder meeting:

“Any company that tries to move as fast...is going to have its glitches...I'm quite encouraged...”

But we would not be so sure, particularly after asking an acquaintance from a large and prosperous US-based company, which has been making car batteries for almost 100 years, about BYD’s so-called revolutionary technology.

The acquaintance shrugged. “We don’t know much about it.”

“You guys make batteries. How come don’t you know?”
“We don’t work with them. They make everything themselves. Everything. We don’t know what their technology is.”

“Well, what do you think it is?”

Another shrug. “Batteries hold a charge. It’s how you put them together that makes them better or worse. We don’t know what they do.”

“Well, what do you think they do?”

He speculated that part of the answer lies in the fact that the expected life of a car battery in China is shorter than in the U.S. “They might only get five years out of it. We build ours to last 10 years, which means they’ll last 15. But what they’re doing in lithium, we don’t know.”

Thus far, the “margin of safety” by which Warren Buffett lives (read “Secrets in Plain Sight” for the meaning behind this phrase), has protected Berkshire Hathaway from an embarrassing loss on its BYD investment.

But while speculation rages that Berkshire will up its stake in the company, the speculation is dead wrong.

Warren Buffett is no fool: he can read a balance sheet, and he can read a cash flow statement…and he could have easily bought all the new BYD shares he wanted when the company offered them recently on the Shenzhen stock exchange, supposedly for “research and development.”

Against all odds—the weak sales, the State Department cables describing BYD’s alleged copycat cars, and the delayed electric car introduction—the BYD offering was 21-times oversubscribed.

The greater fool theory lives.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Buffett Takes Off the Gloves? He’s Getting Worried.

2011-08-15T11:02:00.001-04:00

Stop Coddling the Super-Rich
Our leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.
While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks….
These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places….

—Warren E. Buffett, New York Times, August 12, 2011

Warren Buffett’s politics have always been a surprise to first-time Berkshire observers. “How can a billionaire like that be such a liberal?” is almost always one of the questions I get after a speech, or before a speech, or during a speech, about Buffett.

But as anybody who’s followed Berkshire for a few years knows—or who’s read “Secrets in Plain Sight—Business and Investing Secrets of Warren Buffett”— Buffett’s Democrat credentials go as far back as 1968, when he supported anti-war candidate “Clean Gene” McCarthy in the presidential primaries.

And Buffett’s strident stance on the inequities in the U.S. tax code is nothing new: he’s been talking about the tax advantage accruing to so-called “unearned” income versus wages for years, even testifying before Congress on behalf of “fairness,” at least as he sees it.

Still, Buffett doesn’t—as readers of “Secrets in Plain Sight” also know—mention that while running what was, for all practical purposes, a hedge fund during the late 1950s, he took advantage of an even greater disparity in the tax code (the top marginal tax rate was 91% back then)—one of those ‘Do as I say, not as I do’ aspects to the Buffett PR machine that drives some investors crazy.

But Warren Buffett is the most successful investor of his times, possessing not only one of the most rational minds in the business but also the uncanny ability to frame the cloudiest issue in a crisp, clear frame that makes whatever he’s talking about sound, well, pretty rational.

And while today’s op-ed piece sounds pretty rational, the more interesting aspect is that it unleashes a new aspect to Buffett’s tax “fairness” campaign: he takes off the figurative gloves and talks about what he would do if he ran the joint.

Among these are “pare down some future promises that even a rich America can’t fulfill,” “leave rates for 99.7 percent of taxpayers unchanged,” “continue the current…reduction in the employee contribution to the payroll tax,” and “raise rates immediately on taxable income in excess of $1 million…”

Whether Buffett’s prescription is what America needs, let alone whether it will work, we make no judgment on here.

We’re more interested in why he’s taking off the gloves now.

And the reason—at least based on a close reading of “Stop Coddling the Super-Rich”—is that Warren Buffett is getting worried:

Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances. They’ve been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

The emphasis above—“That feeling can create its own reality”—was added by your editor, but having been written by a man born ten months after the Crash of ’29 who happens to be the head of a company with 260,000 employees making everything from chocolate candy to wind farms, and who is the overseer of insurance businesses holding tens of billions of dollars of exposure to financial markets through stocks, bonds, and the same kind of derivative contacts he once called “ticking time bombs,” the words fairly jump off the page on their own.

Sounds like Warren Buffett is getting worried.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Standard & Poor’s: Welcome to Our World!

2011-08-13T10:13:00.000-04:00

SEC Examines S&P’s Math

Italian Town’s Prosecutors Probe S&P, Moody’s

White House Challenges S&P Decision

—The Wall Street Journal

“The fact is, we didn’t need a rating agency to tell us that we need a balanced, long-term approach to deficit reduction.”

So said President Obama the other day.

Unfortunately, on that matter, the President is dead wrong: the fact is, we did need a rating agency to remind us that 40% of what our Federal Government spends is borrowed; that this is unsustainable; and we better do something about it before it’s too late.

Otherwise, nobody in Washington would have paid attention to that fact until it was too late.

But our point here is not about our Japan-style budget policies, or the 11^th-hour budget deal, or dis-function in DC or even the S&P downgrade itself.

It is about the fact that Standard & Poor’s is now being attacked—by Congresspersons who wouldn’t know a balance sheet from a tomato; by White House staffers whose paychecks and generous healthcare benefits are paid by the taxpayers S&P is looking after; and even by prosecutors in the Italian village of Trani, which, as Stacy Meichtry and Nathania Zevi of the Wall Street Journal noted, “hasn’t played much of a role in the global economy since the Crusades”—for merely evaluating what it is paid to evaluate and saying in plain English what it has concluded.

Granted, S&P didn’t cover itself in glory during the downgrade, switching its math at the last minute and rewriting its premise to accommodate the use of a different, less-than-worst-case scenario, and thus opening itself up to political hacks eager to shoot the messenger.

But the message is right: after all, America has, as PIMCO’s Bill Gross points out, $66 trillion worth of entitlement liabilities—and that’s present value—amounting to half a million dollars per household.

Still, that fact won’t stop those who benefit from our lousy, unbalanced budget from screaming the loudest at the downgrade, and using every lever at their disposal—Congressional hearings; lawsuits; bought-and-paid-for “60 Minutes” so-called ‘investigative’ stories—to discredit and disable the folks at Standard & Poor’s.

After all, this is what CEOs do when intellectually honest analysts, short-sellers and just plain folks criticize, publicly, their companies for flaky accounting, serial restructuring charges and worse.

Which is why so few people bother any more.

So welcome to our world, Standard & Poor’s, and keep speaking your mind.

It may be the thing that saves us from ourselves.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

The Most Important Call of the Year: “I’ve Got All The Clarity I Need”

2011-08-03T08:21:00.000-04:00

We have, in the past, highlighted in these virtual pages the comments of David Farr, the outspoken and common-sense-laden CEO of Emerson Electric Co.

Readers not familiar with Emerson should become familiar with it, for in its long history (it was founded in 1890) Emerson has outperformed its more famous relative, General Electric (founded two years later), by a wide margin…and never needing taxpayer dollars to bail itself out from bad decisions like Jack Welch’s bad decision to turn GE from a company that made stuff for Main Street to a company that ‘made the numbers’ for Wall Street, using GE Finance as a perpetual motion machine that lasted only as long as the credit cycle lasted.

We once talked to an ex-executive at Emerson about the GE comparison. He said to us: “You know we used to have a finance operation like GE, right?” We said, “No, what happened to it?” He said, “We shut it down.” We asked “Why?” He said, “Because our CEO decided it was too risky.” That’s the kind of CEO the ‘beat-the-numbers’ folks at GE could have used.

In any event, Farr runs one of the most value-added earnings calls of the season, offering frank and unvarnished observations about not only Emerson’s far-flung operations, but also about the operating environment in which the company lives.

And that environment is not getting any prettier, if yesterday’s call is any indication. Indeed, we think yesterday’s call was the single most important this season, and perhaps this year-to-date.

Now, for a full flavor of Farr’s comments, readers ought to get a hold of the full earnings transcript—or, better yet, listen to a replay of the call itself.

But the heart of the call came two-thirds of the way through the Q&A, when he was asked by one of Wall Street’s Finest what triggered Emerson’s recent warning that growth was slowing, and whether it stemmed from the need for greater clarity out of Washington.

Here’s what Farr said:

“I just look at the order pace. I think the biggest issue that I'm watching right now is they're not really -- either in the US or Europe really addressing the gut issues. The US have enormous regulations coming at us right now.

“There's -- the incentive to invest in the United States is negative and from my perspective.

“People talk about ‘we want clarity’. I've got all the clarity I need. They're spending, they're regulating us, the tax rates, they're talking about raising the tax rate.

“Our tax rate this year will be around -- in the US will be around 36%. We'll pay in US taxes this year over $500 million, actually pay the US government over $500 million, and they say they want to raise it even more. And so I'm looking at that as a -- I run a Company, I have a lot of money to invest and I look at that and I say I'm not going to invest it here and I think customers -- I think a lot of customers have the same concern.

“And then when you have a company like Boeing, you're talking about one of the iconic US companies gets sued by the federal government. If that doesn't get your attention, nothing will. They get sued for investing $2 billion in South Carolina. Last time I saw South Carolina was a part of the United States of America and you get sued for that. I tell what you, the CEO, you get my attention.”

Let’s hope Farr’s comment get some attention where it matters.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

The Least Reassuring Headline You Will Read Today

2011-08-01T08:16:00.001-04:00

The least reassuring headline you will read today—and it may not get much attention with all the budget talk going on—is from our friends at Reuters:

White House Not Worried About Double Dip - White House economic adviser Gene Sperling said on "Fox News Sunday" he was "not worried the U.S. will have a double-dip recession" – Reuters

The reason this is not as reassuring a headline as it might appear is that it comes amidst an earnings season that, aside from a few leading lights (mainly in the technology field and those companies doing significant businesses in Asia), has yielded news from the ground which is not nearly so perky as the ‘30,000 foot view’ preferred by lofty economics advisors such as Mr. Sperling.

Pepsi, for example, had the following to say recently about its U.S. business two weeks ago:

“Of the three factors impacting North American beverages—inflation, consumer demand and pricing—the consumer demand picture is the most concerning to us at this point. In fact, the modest pickup in total consumer sending almost all U.S. businesses saw earlier in the year has reversed in the past several months.”

And it isn’t just North American where things are wobbly. Newell Rubbermaid warned last week:

“Unfortunately we are seeing a softer economy in the US and Europe than we would hope for.”

Indeed, this morning, Armstrong World Industries added its voice to the chorus:

“We now expect our residential and commercial end markets opportunity to be slightly lower as the domestic economic recovery appears to be delayed.”

There are many more examples of the sudden bloom of cautious commentary from businesses. HSBC, no slouch in the world of global banking, this morning announced plans to cut 25,000 jobs—only a few days after the FT leaked that the company was going to “trim 10,000 people.”

One might say HSBC “beat the number”…but in a double-dip sense.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Memo to Jeff Immelt: When is an Apple Store NOT an Apple Store? When It's in China...

2011-07-22T08:29:00.000-04:00

We kick off the return to non-Berkshire Hathaway topics here at NotMakingThisUp in the simplest way possible: by referring readers to a different blog.

That different blog, which was brought to our attention by John Hempton, the ace proprietor of yet another blog, the Bronte Capital blog (which happens to be one of the best in the world), needs no introduction, no commentary, no elucidation from us..but after you are finished reading it, you might want to just think for a bit about what it means:

http://birdabroad.wordpress.com/2011/07/20/are-you-listening-steve-jobs/

And if you are Jeff Immelt, who is prepared to put half the vaunted GE jet engine business into a joint venture with the Chinese--the same crowd that thinks nothing of copying Apple Stores down to the shirts and name tags worn by the staffers--you should really think very very hard for a long time about what it means.

What it means, we think, is you are putting your company's future at risk.

Jeff Matthews
I Am Not Making This Up