Thursday, December 29, 2005

The Business Story of the Year.


Parnell: Yo where’s the movie playin’?
Samberg: Upper West Side, dude.
Parnell: Well let’s hit up Yahoo Maps to find the dopest route.
Samberg: I prefer Mapquest—
Parnell: That’s a good one too.
Samberg: Google Maps is the best!
Parnell: True dat!
Both: Double true!
Samberg: 68th and Broadway—
Parnell: Step on it, sucka…
—“Lazy Sunday” video from Saturday Night Live


The business story of 2005—if I may be so presumptuous as to declare it myself (and, since this is my blog, I will)—can, I think, be summed up quite neatly in the following URL:

http://www.youtube.com/watch.php?v=oZOsgQC8qqM&search=SNL%20

That URL takes you to a web site called YouTube (“Broadcast yourself. Watch and share your videos worldwide!”).

YouTube contains almost any kind of video you want to see—from Ashlee Simpson’s lip synch unmasking on Saturday Night Live to OJ Simpson’s car chase and the Beatles’ final gig on a rooftop in London—and many you don't, particularly the bizarre and highly personal videos posted by individuals you’d rather not have your daughter bring home for dinner, if you catch my drift.

The video you will see at the above URL is a Saturday Night Live-sponsored “digital short,” called “Lazy Sunday,” and it shows two earnest young white Manhattan-ites rapping earnestly about going to see “The Chronicles of Narnia.”

And for those of us who have failed to find anything funny coming out of Saturday Night Live since, oh, Eddie Murphy or Martin Short left, the video is hilarious.

What does a YouBet video have to do with the Business Story of the Year?

Well, it was created, produced, filmed, edited and uploaded digitally, very likely without the use of a single product from Microsoft. Furthermore, it was searched for and downloaded by hundreds of thousands of individuals likewise without the expenditure of a single dollar going to Microsoft.

Finally, and not surprisingly, not one of the products shown or rapped-about in "Lazy Sunday" mentions a Microsoft product.

Which is why, in the category of “Most significant business story of the year 2005,” I nominate the undermining of Microsoft’s monopoly by a band of mostly anonymous individuals who did it with nothing much more than ideas in their head and lines of code in their computers.

Which is, I think, pretty cool.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, December 28, 2005

Upbeat or Upside Surprise?


In the “no surprise to anybody” category, Sirius Satellite Radio yesterday announced it will have added more than one million net new subscribers in the fourth quarter of 2005.

The recent new-subscriber momentum at Sirius is, as we have discussed here, is a result of the “Howard Effect”: the legions of primarily young, primarily white, primarily male listeners now signing up to receive Howard Stern’s radio program when it begins digitally beaming from space on January 9th.

Most analysts expect similar upbeat news from XM Satellite—the Hertz to Sirius’ Avis—shortly, even given the fact that the “Howard Effect” has provided Sirius with a meaningful advantage in the near term. (The historic 3:1 XM-to-Sirius sales ratio at retail locations which I monitor has been reversed in favor of Sirius in recent months.)

But I wonder how “upbeat”—to use one of Wall Street’s Finest’s most hackneyed expressions—XM will really be when they report their Q4 subs.

My rhetorical question is based less on in-store observation of shoppers picking one versus the other and more on an XM email that recently bombarded friends who had purchased a car with the XM radio or just a plain old XM radio, but had not activated it:


If you received or purchased another XM Radio during the holiday season and haven't yet activated the radio with service, what are you waiting for? Activate your new XM Radio online by December 31, 2005 and we'll waive all activation fees (up to a $14.99 value.) Get started with XM today by activating online. Happy holidays from your friends at XM, and happy listening!

Translation: “We want to hit our subscriber numbers really, really badly.”

Now, perhaps I am over-thinking this one. Perhaps XM has its new sub growth in the bag, and the activation-free incentive is merely a way of ensuring what, to Wall Street’s Finest, is even better news than being merely “upbeat.”

Which is to say, “an upside surprise.”

Any first-hand observations of the efforts by Sirius and XM in the market place are welcome.


Jeff Matthews
I Am Not Making This Up



© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, December 26, 2005

A Necessary Correction


Friday's post, “Conspiracy of the Jews?—Part II,” quoted from Overstock.com CEO Patrick Byrne’s mid-December appearance on Christian Financial Radio Network (motto: “Prosperity…For God’s People”).

During that hour-and-a-half interview, Byrne fingered various criminal elements, including “the Israeli mob,” as being “at the bottom” of “every rabbit hole you go down” while pursuing the so-called Naked Short scandal which he believes engulfs his company and others.

I noted in my post with some disgust the fact that a Google web search, which Byrne suggested during the interview would back up a point about the long arm of the so-called “Israeli mafia,” leads to a gaggle of profoundly disturbing web sites from the likes of Al Jazeera, Radio Islam, Lyndon LaRouche and an Auschwitz gas-chamber-denying historian.

Byrne himself responded at length in a Motley Fool post flagged by a reader, and while I am not sure when Byrne’s response appeared it was probably some time after his Friday morning appearance on Bloomberg television, during which he disclosed to the Bloomberg-watching audience “disappointing” revenues for Overstock.com during the holiday season and a “negative” cash flow forecast for the year.

That negative cash flow forecast appears to be sharply at odds with at least one of Wall Street’s Finest (Craig Bibb of WR Hambrecht), whose last model (December 13) shows precisely $42.098 million of expected positive “Cash flow from operating activities” for Overstock.com in 2005.

Thus Byrne’s Friday morning disclosure appears to be a change of guidance compared to Wall Street forecasts, even though such disclosures are, I believe, supposed to be offered in 8-K filings with the SEC and not on Bloomberg TV according to my understanding of Regulation Fair Disclosure.


Regardless, in Byrne’s Motley Fool dismissal of “Conspiracy of the Jews?—Part II”), Byrne claims that he brought up so-called Israeli mob involvement in the ecstasy trade merely in response to a question from the interviewer about the reality of an Israeli mob.

Patrick writes:

Jeff omits precisely the part of the quote that makes the connection, and that is, after I mentioned the Italian, Russian, and Israeli mobs, and discussed the Russian mob, the interviewer said/asked, “I didn't know Israel had a mob?” To which I replied that, yes it does: for example, it is widely thought to control the US ecstasy trade.


And that is where a correction is due: what Patrick wrote is not correct.

You can listen for yourself to the sequence of what Byrne said at
http://cfrn.net/investigates/, but here is an approximate timeline of Byrne’s comments on that broadcast, about 13 ½ minutes into it:

13:35 "The Israeli mob and the Russian mob are the two ones who scare me...I think the Italian mob is part of this, but they’ve gone quasi-legit as far as Wall Street…”

The interviewer concurs with Byrne's comment on the Italian mob going “from concrete to Wall Street,” and Byrne continues by bringing up the ecstasy trade issue:

14:15 “The Israeli mob—in fact I was just reading Ha'aretz, which is an Israeli newspaper, ah, and a very good one, and you can Google this-- If you Google ‘ectasy Israeli mafia’ you’ll find articles that basically the Israeli mob…is thought to control 75% of the ecstasy trade in the U.S.”

It was not until after this, at 14:40, that the interviewer says, “I didn’t know there WAS an Israeli mob,” to which Byrne responds by launching into a bizarre and inaccurate discussion of Israeli extradition laws:

14:45 “Ah, well…in fact they are about to, they are about to, they are considering extraditing someone from Israel, and you know, Israel, I think it’s part of their constitution, or it’s one of their basic laws that if they, if a Jewish person reaches Israel they just never get extradited, and in Israeli history they’ve only extradited two people…”

Byrne compounds this whopper—which is not true—by expounding as follows:

“One is this fellow, I’m blocking his name…he oversaw the smuggling of 30 tons of MDNA, or ecstasy, into the United States…. The last time and only other time they ever did this was Meyer Lansky…”

For the record, it is not true that “if a Jewish person reaches Israel they just never get extradited.” And it is not true that “the last time and only other time they ever did this was Meyer Lansky.”

Eddie Antar—the famous fraudster also known as “Crazy Eddie”—fled to Israel in 1990 but was extradited from Israel in 1993.

Mail-bombers Robert and Rachel Manning were extradited and returned to the U.S. in 1993 after seeking safe haven in Israel.

The fact is that the Israeli law which Byrne claims does not allow extradition actually frowns on those who commit crimes before seeking Israeli citizenship under the “Law of Return.”

How do I know all this? I Googled it. Took ten minutes, max.

Tomorrow we move on to more interesting—but not necessarily more important—topics than setting right these inaccuracies.


Jeff Matthews I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, December 23, 2005

Conspiracy of the Jews?—Part II


When I published “Conspiracy of the Jews?” two weeks ago, I was roundly criticized by many readers for going over the line.

In that piece I questioned why Overstock.com CEO Patrick Byrne had thought to slam the respected New York Times columnist Thomas Friedman for having a pro-Israel bias in his editorials, in a Motley Fool rant about ace financial reporter Herb Greenberg and star "Mad Money" host Jim Cramer.

It was hard to imagine any CEO bringing up an issue in a manner smacking of anti-Semitism, and I was skeptical even Patrick Byrne would have written the following about Greenberg and Cramer:

"They resemble Thomas Friedman's write-ups on the Arab-Israeli conflict: "Let's see, Arabs, Israel, Arabs... Israel, Arabs........ Israel...... okay, I gotta call this one for the Israeli's." In op-ed after op-ed."


What on earth, I asked, did Tom Friedman’s supposed pro-Israel bias have to do with the subject of Byrne’s rant, other than that all Byrne’s targets in the piece were Jewish?

Yet, while Byrne really did write that stuff, readers used the space below to call “Conspiracy of the Jews?” “hysterical” and “claptrap” and worse.

So in case you're one of the hundreds of millions of Americans who do not listen to something called the Christian Financial Radio Network, let me “drill down,” as the analysts like to say, into the religious issue, by reporting here on an interview CFRN did with Overstock.com CEO Patrick Byrne, including a segment about who or what appears to be behind the naked shorting financial scandal he believes to be hurting his company.

The interview took place on Friday December 16th, and it lasted for an hour and a half. (You can listen to it at a speeded-up rate in far less time on the CFRN web site).

In the midst of the usual paranoid-sounding diatribe against the so-called naked short-selling scandal, Byrne is encouraged to get specific about the root causes of the problem. The host asks:

“Are we dealing with the traditional old-boy network or has organized crime gotten involved?”

To this, Patrick Byrne says the following, and I quote him:

“Every rabbit hole you go down leads to either [sic] the Italian mob, the Russian mob or the Israeli mob, and nobody's ever asked about that, and I haven't pressed the issue…but every rabbit hole you go down you end up in one of those three places….

“The Israeli mob and the Russian mob are the two ones [sic] who scare me.”

Those are the words of Patrick M. Byrne, CEO of Overstock.com.
I am not making them up.

Byrne goes on to discuss, briefly, the “Russian mob” as a kind of band of marauders who perpetrate scams and then retreat to their “dachas” on the Caspian Sea for a break before the next scam.

He elaborates in far greater detail on the nefariousness of the so-called “Israeli mob”:

“If you Google 'ecstasy Israeli mafia' you'll find articles that basically the Israeli mob…is thought to control 75% of the ecstasy trade in the United States.”

Now, as with Byrne’s bringing up Thomas Friedman’s supposed pro-Israel tendencies in a Motley Fool rant, I find it hard to understand how Israel’s supposed domination of the ecstasy trade in the United States relates to naked short-selling on the U.S. stock exchanges.

But let’s assume, for a minute, that it does.

And let’s do exactly what Patrick Byrne says: let’s Google 'ecstasy Israeli mafia' and see what we come up with.

Okay, I Googled the phrase and I got 30,600 results in 0.16 seconds.

Hmmm. Patrick Byrne appears to be right: when you type in those three words, you get articles that—this is incredible—accuse Israel of controlling the U.S. ecstasy trade!


Let's look at the first page, one link at a time.

The first two links are to the web site of an author touting a book he wrote about the rise and fall of an Israeli kingpin in the ecstasy trade, but he doesn’t particularly focus on the Israelis-as-uber-mobsters angles that Patrick says “scare me.”

The third listed link resulting from this Google search recommended by Patrick Byrne—and I am not making this up—is to the web site of Al Jazeera.

Yes, you have it right: that Al Jazeera.

For a moment, let’s skip the fourth and fifth links and go to the sixth link of the Google search results: it is a Lyndon LaRouche web site, and it contains what it calls “a contender for the story of the new century: the investigation of the connections between detained Israeli spies and the events of Sept. 11.”

The article explains that the 9/11 attacks were “a coup d’etat” attempt against George Bush involving—you guessed it—Israelis. I am not making that up.

The seventh link on the Google search is to the web site of "Radio Islam," and the web page is headed:
Jews and Crime.

The sub-headings read as follows:


Jewish Gangsters
—Jewish Money Laundering and Counterfeiting
— Jews and Drugs
—Jews and Arms Sales
—Israel a Haven for Jewish Criminals
—Jews and Scandals
—Jews and Slave Trade
—Jews and the Sex Industry

There are more, but you get the picture.

Sick as this these are, it is the fourth and fifth links that are the most disturbing to me, for they lead to a web site for something called “The International Campaign for Real History.”

Recall that Patrick Byrne said, and I quote:


“If you Google 'ecstasy Israeli mafia' you'll find articles that basically the Israeli mob…is thought to control 75% of the ecstasy trade in the United States.”

Well, the article that comes up on “Real History” is called “The agony of the Ecstasy” by one Nathan Guttman, and it starts out as follows:


The most commonly heard estimate is that Israeli criminals control no less than 75 percent of the Ecstasy market in the U.S.

I don't know if this particular web site is the one where Patrick Byrne got his alleged facts about the so-called Israeli mafia. I certainly hope not. Because if the phrase “The International Campaign for Real History” makes your throat tighten a little and your mind start to hope it’s not about what you think it’s about—well, I’m sorry.

That’s exactly what it’s about.

The site is historian David Irving’s, and if you have never heard of David Irving, then the following quote from him, which you can find on the links to this site, explains what he means by 'Real History':

“Until the end of this tragic century there will always be incorrigible historians, statesmen, and publicists who are content to believe, or have no economically viable alternative but to believe, that the Nazis used 'gas chambers' at Auschwitz to kill human beings. But it is now up to them to explain to me as an intelligent and critical student of modern history why there is no significant trace of any cyanide compound in the building which they have always identified as the former gas chambers.”

I am truly sorry to have published this two days before both Christmas Day and the start of Hanukkah, but until yesterday I had not bothered to listen to yet another seemingly trivial rant by the CEO of Overstock.com.


Patrick Byrne is scheduled to be on Bloomberg TV this morning to talk about holiday sales results.

I hope they ask him tougher questions than that.


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.




Thursday, December 22, 2005

If a Tree Falls in the Woods, but Nobody Wants to Hear It…


A tree fell on Wall Street yesterday.

Specifically, Electronic Arts, which has managed its way through the vicious cycles caused by fickle teenagers and rotating game platforms better than any other video game maker such that it has been legitimately accorded “best-of-breed” status by Wall Street’s Finest, guided earnings down by a magnitude normally associated with far lesser breeds of companies.

Citing an “abrupt” shift in the “demand curve” for video games, ERTS management guided this quarter and next quarter revenue and earnings “well below” a forecast given just short of two months ago.

And they weren’t kidding about the “well below” part.

Back half fiscal 2006 earnings (ending next March) got whacked roughly 40%, from the $1.40 area to the 85c a share area.

And First Call earnings estimates for fiscal 2007 began the week at about $1.75 and, depending on whether you deduct stock compensation, are going to end the week anywhere from $1.20 to $1.40 a share.

But a look at the calendar reveals we are approaching year-end, when portfolio managers around the globe focus anxiously on their own performance as well as whatever benchmark (the S&P 500 index, the Russell 2000 index, the R-Tango-Delta Mid-Cap Value-Growth-Dividend-Momentum-Day-Trader index) they are attempting to beat.

Furthermore, a look at the ERTS shareholder’s list reveals 10 and 15 and 20 million share positions among the Janus Capitals and Legg Masons of the world.

And what good sell-side analyst wants to—let’s use the polite word—annoy one of their firm’s largest customers by beating up on a “best of breed” company like Electronic Arts, which, not for nothing, recently announced a large, fee-generating acquisition of Jamdat, this close to year-end?

Answer: none.

And so Wall Street’s Finest put on a good face, called the ERTS announcement a “buying opportunity” because (I am not making this up) of the “reduced uncertainty” now that the bad news—foreshadowed last week when Best Buy reported earnings in which video game sales were an area of notable weakness—was out.

One of them actually said it was time to step up to the plate and buy, because ERTS shares were now trading at their “trough valuation.”

Net result: ERTS shares closed up 35c yesterday, at $53.46 a share.

Precisely what is the “trough valuation” that makes ERTS shares so attractive?

Well, the shares now trade at 45 times the low-end of the forward earnings range. And this assumes sales grow all of 12% next year, with the help of the Jamdat acquisition.

Google, for what it’s worth, trades at 48x the high-end of next year’s earnings range, with a sales growth more than 5-times that of Electronic Arts. (Divide everything Google-related by 10: it becomes a $43 stock with 90c of earnings in 2006, compared to ERTS at $53 with $1.20 of earnings in the year ending March 2007.)

Yet the general consensus on Wall Street would no more describe Google’s PE as a “trough valuation” than my dog Lucy would accept a piece of broccoli in place of a dog biscuit.

Don’t get me wrong: Electronic Arts is a very very well run company in a very very cyclical, but growing industry.

The fact that a tree fell on Wall Street yesterday and nobody heard it fall, however, has more to do with the calendar on the wall than the fundamentals involved.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, December 21, 2005

Fixing a Hole at GM

Pressure grew on General Motors Corp., with its shares falling to a 23-year low yesterday as rival Toyota Motor Corp. said it would boost production, potentially surpassing GM as the world’s biggest auto maker.—Wall Street Journal.


In the wake of GM CEO Rick Waggoner’s Wall Street Journal op-ed self-defense a few weeks back (described in “General McClellan Awaits Battle…In Detroit”), we now find financier and GM shareholder activist Kirk Kerkorian selling GM stock—12 million shares worth—for tax purposes.

Kerkorian simultaneously annoyed the Feds and spooked investors betting on a Kerkorian-led turnaround of what has been “the world’s biggest auto maker” that perhaps Kerkorian's knees are buckling. Most likely, they are not.

But this fascination with being the “world’s biggest auto maker”—what’s the point? Frequently in today’s Journal article the wordsmiths revert to that sort of language to describe the beleaguered company:

GM, still the world’s largest manufacturer, remains a colossus, with more than $190 billion in annual revenue and 325,000 employees worldwide…

If being “a colossus” matters, however, why is General Motor’s market capitalization less than the $19 billion of cash the company’s automotive business had on hand at the end of last quarter?

In fact, it does not matter.

Perhaps it mattered in the 1960s—the glory years of American manufacturing and the apotheosis of “Man in the Grey Flannel Suit,” when “Made in Japan” held the same derogatory connotation that some now associate with cars made in Detroit.

But it does not matter today, when GM is fighting for its life on many fronts—trying, simultaneously, to lower its cost structure, raise quality, reduce its dependence on trucks and SUVS by introducing fuel-efficient models—and all the while avoiding bankruptcy.

When the Beatles’ uninterrupted string of Number One hits (starting with “She Loves You”) was bizarrely interrupted by the failure of the "Penny Lane"/"Strawberry Fields" single to outsell the reigning Number One, Ringo said it was the best thing that could have happened: it took all the pressure off.

The band went on to do their best work—the White Album—and take their place in history.

("Penny Lane"/"Strawberry Fields" was held to Number Two by an entirely forgettable Number One song. Whoever identifies that song honestly, no Googling allowed, will be rewarded with nothing but their name on this blog.)

Far be it for me to prescribe a solution to the list of GM’s woes. But I suggest they stop worrying about staying “Number One.”

Get over it, already, and move on. The risk to GM, in my opinion, is not losing a few points of unprofitable market share to Toyota: the risk is becoming the Number One Chapter 11 filing in history.


Jeff Matthews
I Am Not Making This Up



© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Tuesday, December 20, 2005

The $3 Billion Haircut


Tyco Nears Sale of Plastics Unit To Apollo Advisors for $1 Billion

—Wall Street Journal

It’s official!

Almost four years after first being promised to Wall Street’s Finest by the now-convicted ex-CEO and CFO of Tyco, the sale of Tyco’s plastics business looks set to happen.

The $1 billion reported purchase price, however, is $3 billion lower than the high end of the range promised by Dennis and Mark on January 22, 2002 at the New York analyst meeting announcing the proposed split-up of the conglomerate they had spent years smooshing together through serial acquisitions, showering millions of dollars worth of fees on the very same firms whose analysts were loudly touting a hodge-podge of unrelated stuff as “The Next GE.”

Current Tyco CEO Ed Breen, the widely hailed ex-Motorola turnaround “star” whose turnaround efforts at Motorola are being quickly undone by his successor Ed Zander, has not gotten very far creating value here.

And if the collapse in the value of the plastics division over the last four years is any indication, he may not get much further.


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, December 19, 2005

“Do No Evil” Pays Off


Moreover, a technical analysis by AOL engineers two weeks ago raised questions about Microsoft’s advertising software…

That’s from an article in today’s New York Times describing one reason Microsoft’s attempt to secure a deal with AOL at Google’s expense appears to have failed.

I’ll admit to being surprised: I thought Microsoft would pay whatever the asking price was for AOL’s cooperation.

In the end, however, it looks like Microsoft’s own technology limitations and jumbled mass of acronym-infested web strategies—plus a billion in cash—are what caused AOL to stick with Google.

The Evil Empire may just have reached its outer limits. Score one for the “Do No Evil” guys.


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, December 16, 2005

Howard: The Best Thing That Ever Happened…to XM?


ON JANUARY 9 THE GLOVES ARE COMING OFF…AND MAYBE SOME TOPS.

That’s the headline for a full page ad running in the newspaper of record—The New York Post—above the image of a clenched fist that is the logo of the new Howard Stern radio show coming soon on satellite radio.

In the unlikely event you haven’t already heard, New York “shock-jock” Howard Stern will start his morning gross-out-o-rama January 9th on Sirius Satellite Radio—and he promises the uncensored setting will allow his inner-deviant to fully reveal itself via not one but two channels on the Sirius network.

Says Howard: “If it's weighing a guy's bowel movement, I can do it. If I want to be gross, I can be gross.”

Now that should be funny.

Financially speaking, Howard has already covered the cost of his five-year, $500 million contract with Sirius by virtue of the fact that at least a million of his 10-12 million Infinity Broadcasting listeners will have signed up with Sirius for its $13-a-month subscription service in order to listen to Howard weigh a guy’s bowel movement and whatever other hilarity he has in store.

$13 a month times twelve months in a year times one million new subscribers approximates $150 million of incremental annual revenue for Sirius. Even adjusting for subscriber churn (the rate at which subscribers drop the service), the deal was worth every penny to the Number Two satellite radio operator—which stumbled out of the gate thanks to being overly dependant on Ford Motor, badly lagging XM in market share.

And now that Sirius has Mel Karmazin as its CEO—Karmazin being the man Don Imus called “The Zen Master” when he was building Infinity Broadcasting into acquisition-bait for Viacom—satellite radio has truly come of age.

Judging by the recent moves in Sirius shares, a lot of people are betting on Howard to be the satellite-equivalent of Milton Berle—the comedian whose popularity drove millions of Americans to buy a television set.

But is Sirius worth the price?

Sirius has 1.3 billion shares outstanding, $1.1 billion debt and $900 million of cash, according to my Bloomberg. At $7.00 a share this yields and enterprise value of $9.3 billion.

That’s roughly $3,100 per subscriber based on Sirius’ stated forecast of hitting 3 million subscribers by the end of this month.

XM, meanwhile, has 222 million shares, $1.1 billion of debt and $750 million in cash, giving it an enterprise value of $7 billion at the recent $30 share price.

That’s $1,160 per subscriber based on the forecasted 6 million subscribers at year-end.

So, right now, Sirius—despite having a higher fixed cost base with the Howard Stern and NFL content deals, plus less desirable satellite coverage than XM (Sirius needs another satellite to ensure complete coverage in event of a failure)—trades at almost three-times the per-subscriber valuation of XM.

Is a Sirius subscriber worth three-times an XM subscriber?


Both Sirius and XM—the Avis and Hertz of the business—present essentially the same service, beaming 100-plus channels of content, mostly interruption-free, to most corners of the country.

And that service is, to use a cliche, a game-changer: you can hear almost anything you want to hear, plus a lot of music you haven’t heard before—but with no commercials, no idiotic disk-jockeys, no Clear Channel-type 20-song computer-selected playlists.

Once you’ve tried satellite radio, regular AM/FM radio sounds hopelessly ancient, and a twenty minute drive in a car without XM or Sirius becomes torture. Five years from now, I expect satellite radio will be standard on all cars and increasingly taking share at home.

In the meantime, however, the subscriber base of nine million is relatively low, though growing quickly. Both XM and Sirius lose money and lose a lot of it—thanks to the high up-front cost of putting up satellites and building the systems architectures and chip designs for the receiving units.

But the ongoing capital expenditure is remarkably small. There is no Cable Guy who needs to drive out to your house and string cable and drill holes to set up the service. So at some point down the road, the satellite radio business—unlike cable—should turn actual real no-pro-forma-type-nonsense cash profitable, and, later on, might actually generate earnings for shareholders.

So, is Sirius really worth three-times XM? Only if you believe that Howard will continue to accelerate Sirius’ subscriber growth rate and allow Sirius to, over time, become three-times as profitable as XM.

But that is doubtful, for three reasons.

First, XM dominates the factory-installed automobile market.

Second, Howard Stern is probably as big as Howard Stern is going to get—a point lost on many retail accounts now buying Sirius stock to “play Howard.”

Third, and this is more speculative, but the headline in the Sirius advertising campaign, plus Howard’s own interviews, indicate Howard is turning towards a much darker direction than maybe even Howard’s fans are going to be comfortable with.

He appears to rule out only bestiality and torture: “I'm not comfortable with somebody killing someone, I don't want people being hurt.”

Most parents, given a choice of two satellite radio systems with essentially the same music, news and entertainment offerings for their car, will probably opt for the one that does not offer the sounds of human beings copulating, crack-addicted prostitutes debating sex, drugs and world events, and whatever else the uncensored Howard plans to broadcast on two Sirius channels, 24 hours a day.

That is not morality speaking, just practicality.

My guess—and I have no stake in the outcome—is that Howard’s value to Sirius has already peaked. In fact, he may be the best thing that ever happened to XM.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Thursday, December 15, 2005

Ask the Polar Bears about Global Warming


Well, the temperature reads nine degrees outside right now, and yesterday it was ten degrees before sun-up, and the snow that fell a week ago Friday remains frozen in place on lawns and sidewalks across New England—just the kind of weather that brings out hokey newspaper cartoons and morning-radio weather-report blather contrasting fears of global warming with the unseasonably cold weather outside.

Those disk jockeys and cartoonists wouldn’t be joking, however, if they bothered to read the article in yesterday’s Wall Street Journal about the fate of polar bears.


Scientists for the first time have documented multiple deaths of polar bears off Alaska, where they likely drowned after swimming long distances in the ocean amid the melting of the Arctic ice shelf. The bears spend most of their time hunting and raising their young on ice floes.

In a quarter-century of aerial surveys of the Alaskan coastline before 2004, researchers from the U.S. Minerals Management Service said they typically spotted a lone polar bear swimming in the ocean far from ice about once every two years. Polar-bear drownings were so rare that they have never been documented in the surveys.

But in September 2004, when the polar ice cap had retreated a record 160 miles north of the northern coast of Alaska, researchers counted 10 polar bears swimming as far as 60 miles offshore. Polar bears can swim long distances but have evolved to mainly swim between sheets of ice, scientists say.

Hmmm. The polar ice cap is, in fact—no matter what the thermometer reads in southern New England on an early December morning—retreating.

Does it matter? I guess that depends on your point of view.

You could take the shorter-term view, as expressed by Thomas Schelling, a Nobel Prize winning game-theory economist, who told the Wall Street Journal last month:

In the U.S., if you don't worry about ecological damage, species extinction and things of that sort; if you don't worry about what happens in Bangladesh or Indonesia or Brazil; if you figure air conditioning will always take care of your weather problems; then I would say with one or two exceptions, you probably don't have to get too scared.

In that case, you might look at the fact that polar bears are drowning and, therefore, the ice cap is retreating, as an opportunity to make money buying the oil drilling stocks that will eventually benefit from the opening of the Arctic oil deposits to exploitation as the ice cover recedes.

Or you could take the longer term view that Professor Schelling also provided—although I warn that it might make you spit out your morning coffee:

One exception is there is a body of ice in Antarctica called the West Antarctic ice sheet. It is anchored by some islands, but warming the water surrounding it might cause it to slide into the ocean. The estimate is that that would raise sea level by as much as 20 feet. That means to go from the White House to the Capitol, you go by boat.

In other words, the movement of one ice sheet could make the Berkshires beach-front property.

“In the long run,” John Maynard Keynes famously quipped, “we’re all dead.” The industrialized nations of the world are making sure the human race doesn’t go down alone.


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Tuesday, December 13, 2005

Earnings Breakage?


Gross profit dollars increased 16% to $1.8 billion, fueled by revenue growth and a 120-basis-point improvement in the gross profit rate. The improvement included a 30-basis-point benefit (or $0.04 per diluted share) related to the initial recognition of gift card breakage (gift cards sold but not expected to be redeemed). The gift card breakage was recognized in revenue [emphasis added].


Thus reads today’s earnings press release from Best Buy, which—surprise, surprise—matched the Street’s 28c a share earnings expectation to the penny.

Followers of the retail sector—and anybody who’s ever received a gift card themselves—know that a certain percentage of those cards are never redeemed. They get lost or forgotten—or they’re from stores you never get around to visiting.

But without this up-front inclusion of assumed income from credit card “breakage” it looks like Best Buy would not have been close to the $0.28 a share earnings expected by Wall Street’s Finest.

Sounds more like earnings breakage to me.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, December 12, 2005

“Only the Leftovers…”


Microsoft May Give Consumers a Share in Advertising Revenue

Thus reads the headline in today’s Wall Street Journal above an article describing the Evil Empire’s plans for beefing up its not-even-close search business, with the following detail:


"We'll actually go to users and say instead of us keeping all that ad revenue, we'll actually share some of it back with the user," said Mr. Gates, according to a transcript supplied by Microsoft.

"The user essentially will get paid, either money or free content or software things that they wouldn't get if they didn't use that search engine."

Not that Microsoft’s plans don’t matter, but with just 12% of searches (compared to Google’s 45% share), and a deteriorating base of unhappy Microsoft Hotmail users (including yours truly) migrating daily to other email platforms—Google’s own Gmail among them, Microsoft has to do something to become relevant.

But paying customers to use the service is not likely to be that something.

Search users want speed and accuracy—and they don’t want to feel like chum for the shark that is Microsoft’s efforts to expand its tenuous grip on internet users.

The most interesting thing about today’s Wall Street Journal story, in my opinion, is that according to Google’s own spokesperson, Google itself has considered sharing revenue with consumers, but, at the moment concluded that this is not the way to go.

That flexibility, and willingness to consider all approaches to its business model, is one of the things that to date has made Google so successful. Microsoft, on the other hand, is famously inflexible, because it has a desktop operating software monopoly to protect.

Lest you think I am being too harsh on Gates and Company, a New York Times article related to the ongoing AOL negotiations with Microsoft and Google quotes an advertising executive, who sums up the need for Microsoft and AOL to get together with perhaps the harshest judgment of all:


"Today, you can't do search without buying Google. If you want to do a large brand communication, you need Yahoo. Only the leftovers go to AOL and Microsoft. If they combine, they can become a viable competitor to Yahoo for the branded stuff and could become second to Google for search."



Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Saturday, December 10, 2005

Weekend Reading: Conspiracy of the Jews?

The following was brought to my attention by an alert reader.

It purports to be a recent posting by Patrick Byrne, CEO of Overstock.com, on the Motley Fool web site.


Long-time readers know that when it comes to Patrick Byrne and the company he runs, I follow the old Gurdjieff-Ouspensky philosophy: “believe nothing that you cannot verify yourself.”

After all, this is a man whose company calls itself “Earth's Biggest Discounter,” yet generates one one-thousandth the sales of Wal-Mart.

Furthermore, unlike, for example, the founders of Google, who make no promises about anything but have delivered $1.7 billion in accumulated profits in that company’s brief lifespan; Patrick Byrne has promised much and delivered $94 million of accumulated losses to date.

But Byrne is very, very good at one thing: attacking people (“tools of Satan,” he has called them) who point out his company’s faults, despite telling shareholders he practices a “Buddhist non-attachment” towards his critics and “ignores the barking dog.”

Readers will recall that during a bizarre August conference call (see “I'm Not a Cokehead and Other Truths from Patrick Byrne, CEO”), Byrne claimed his company was the victim of a coordinated attack by a group of hedge fund louts, myself included, plus veteran journalists and Attorney General Eliot Spitzer, all masterminded by a “Sith Lord” with the tacit blessing of the SEC.

I am not making that up.

Now, the following Motley Fool post contains enough of the Patrick Byrne-style paranoid-attack-dog DNA to make me think he really did write it.

Calling Herb Greenberg a “crooked reporter,” for example, may appear reckless and manifestly non-Buddhist, but Byrne obsesses about Herb the way Nixon obsessed about Woodward and Bernstein. (For the record, Herb Greenberg is no more a “crooked reporter” than Patrick Byrne's father, legendary insurance ace Jack Byrne, was a crooked CEO.)

But it’s the apparent anti-Semitism that makes me wonder whether this is a legitimate post.

For mid-way through it, Byrne’s rant makes a bizarre and gratuitous jab at the supposed pro-Israel bias of the New York Times' excellent and highly respected Middle East reporter, Thomas L. Friedman.

I can think of no clear reason for making the analogy to Friedman and Israel except one: the enemies cited in the post (Herb Greenberg, David Rocker and Jim Cramer) are all Jewish.

Even for the CEO of Overstock.com, hints of a Jewish conspiracy would represent a rather disturbing twist in the ongoing saga.

***

Dear Fools,

For those of you who don't know, Herb Greenberg is a crooked reporter who formerly worked at thestreet.com, then moved to MarketWatch, where he makes a living doing hatchet jobs on whatever companies David Rocker is short.

Sometimes for variety he goes on Mad Money with Jim Cramer (founder of thestreet.com), and together they do hatchet jobs on companies David Rocker is short. (Did I mention that Rocker has been the #1 or #2 owner in thestreet.com, owning as much as 15% of thestreet.com through various on-shore and off-shore entities, such as Helmsman and Compass Holdings ...?)

Cramer and Greenberg's hatchet jobs take an unusual form. They resemble Thomas Friedman's write-ups on the Arab-Israeli conflict: "Let's see, Arabs, Israel, Arabs... Israel, Arabs........ Israel...... okay, I gotta call this one for the Israeli's." In op-ed after op-ed.


Similarly, when Greenberg adn [sic] Cramer attack me together, it generally takes the form of Cramer saying, "Byrne might be a good guy," Greenberg saying something like , "No no, he's a bad guy," "Are you sure? 'Cause I thought he might be a good guy..." "Oh no, he's definitely a bad guy." "Well...OK OK, he's a bad guy."

Oh, did I mention that Cramer founded thestreet.com, Greenberg cut his teeth there, and Rocker has been the most significant owner outside of Cramer himself?

Anyway.... Herb came to his end of year piece on worst CEO's of the year. I think he must have written a couple dozen on me in the last two years, but I did not mind, except for the creepy ones (complaining about how I don't always answer his email promptly? Geeesh: he reminded me of a scorned woman.)

And yet,after all this love, he left me out. I did not even the [sic] make the #1 spot here! I'm hurt. Of course, maybe he is getting some legal advice at the moment that explains his ducking his pat writings now....

Best,
Patrick

***

Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, December 09, 2005

45 and Counting.

That's how many headlines appear right now (9:16 p.m. Thursday night) on my Bloomberg regarding Intel's revenue guidance press release and conference call.

By Friday morning, this number will surely expand, what with the morning research commentary from Wall Street's Finest, as well as the CNBC-related talking-head piling on.

Precisely what earth-shaking, paradigm-shifting, time/space continuum-warping announcement did Intel make that merits such attention?

The company said, and I am quoting the headline of the press release itself: "Business Consistent with Expectations."

That's it.

The news was so bland, in fact, that the mid-point of the updated revenue guidance Intel announced last night ($10.5 billion) was exactly the same as the mid-point of the revenue guidance it replaced.

Is that really worth 45 headlines on the Bloomberg machine?

Yes, I know the drill: Wall Street was hopeful Intel would, in Street lingo, "raise guidance" and therefore give the traders and tape-readers who have been bidding up the stock in recent weeks on nothing more than the hope that Intel would "raise guidance" the ability to sell their stock at a profit.

And I know too that, as the saying used to apply to General Motors (see "McClellan Awaits Battle...In Detroit" below), what's good for Intel is good for technology--and therefore Intel's pronouncements about the state of its own business are taken as a barometer of the entire techno-food chain.

But I am reminded of our dog, a Jack Russell, and its most endearing feature.

By way of preface, this Jack Russell's least endearing feature is its complete inability to share space, food or attention with our aging mutt Lucy, not to mention the three cats that live in mortal terror of being caught by a dog whose miniscule brain is wired to do nothing more than hunt down and kill small, moving, long-tailed mammals.

Its most endearing feature, on the other hand, is far less lethal: this involves countless hours in the back yard, sniffing out and digging up pieces of slate from an old, long overgrown patio, and carrying those pieces of slate--which can be the size of Frisbees--in its mouth to some other part of the yard and burying them in a furious display of rapidly moving paws and flying dirt.

Days or weeks later, the Jack Russell will sniff out those very same pieces of buried slate and dig them up with great relish and immense satisfaction, as though they are priceless gifts unexpectedly bestowed upon it by the God of Dogs.

The net gain, of course, is zero: she is finding dirty pieces of rock that she herself buried.


But it makes her happy.

And I suppose this fascination with Intel--a company that for all practical purposes manufactures automobile engines--gives great comfort to those who enjoy speculating on whether a company will sound "upbeat" or "downbeat" or have "good body language" on the call.

But at the end of the day, Intel told us nothing we didn't already know: the computer business is doing okay, but AMD is taking market share and the company that really matters in this business is neither one.


It is Apple.


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, December 07, 2005

McClellan Awaits Battle…in Detroit


In the early years of the American Civil War, President Lincoln’s greatest frustration was his inability to find the right commanding general for the Union Army.

Lincoln went through generals the way George Steinbrenner used to go through baseball managers—one after the other. And like Steinbrenner, Lincoln even hired the same general twice, and fired him twice.

That general was George McClellan.

Vain, self-righteous, arrogant, and supremely competent at organizing and outfitting an army, McClellan was loved and admired by his troops almost as much as he loved and admired himself. In his first term as leader of what came to be called the Army of the Potomac, McClellan did a terrific job of organizing, drilling and molding into soldiers what had been a disorganized and dispirited bunch of raw recruits.

McClellan had just one big flaw: he couldn’t bring himself to fight.

Every time Lincoln expected “Little Mac,” as he was known, to finally move against the poorly equipped, ill-clad and undersupplied Army of Northern Virginia (brilliantly handled by Robert E. Lee), “Little Mac” protested that the troops weren’t ready or he didn’t have enough wagons or the roads were too muddy or his plans needed perfecting or the Confederate Army was too strong.

With McClellan, as the expression goes, it was always something.

I got to thinking about Little Mac while reading a remarkable op-ed piece by Rick Wagoner, the man at the center of perhaps the nation’s greatest current economic crisis—the melt-down of the U.S. automobile industry—in yesterday’s Wall Street Journal.

That piece is called “A Portrait of My Industry,” but it might just as well have been titled “It’s Always Something,” and its author could have been a corporate ancestor of Little Mac himself.

Mr. Wagoner sets up his premise—that GM is not merely suffering from self-inflicted wounds, but is, along with Ford and Chrysler, the victim of an uneven playing field—with the following howler of a statement:


Despite public perception, the answer [to the question of why GM is in trouble] is not that foreign auto makers are more productive or offer better-quality or more fuel-efficient vehicles. In this year's Harbour Report, which measures manufacturing productivity, GM plants took three of the top five spots in North America, including first and second place.

This is written by the CEO of a car company whose dependence on gas-guzzling SUVs caused its sales to collapse 24% in September, while sales for Toyota—led by the Prius hybrid—rose 10%; Nissan rose 16%; and Honda rose 12% the same month.

Mr. Wagoner compounds his McClellan-like obsession with self-justification in the very next sentence:

In the latest J.D. Power Initial Quality Study, GM's Buick and Cadillac ranked among the top five vehicle brands sold in America, ahead of nameplates like Toyota, Honda, Acura, Nissan, Infiniti and Mercedes-Benz.

Read that carefully: Mr. Wagoner cites the Buick and Cadillac brands, but leaves out Chevrolet, Pontiac, Saturn—in fact, he leaves out 85% of GM’s vehicle sales from the quality comparison.

Thus, like Little Mac, who, before complaining about his lack of horses, guns, blankets, and whatever else was keeping him from marching, was careful to lard his dispatches to Lincoln with encomiums about his soldiers’ parade-ground capabilities, Mr. Wagoner puffs up his own situation with meaningless statistics.

Then, like Little Mac, he proceeds to the it's-always-something that he regards as the real problem—in this case, the uneven playing field upon which GM finds itself.

First, Mr. Wagoner blames the “social contract” made by “traditional manufacturers” to provide good benefits to American workers, which have left a staggering legacy of health-care costs on domestic auto companies.

Second, he decries the explosion of litigation abuse made possible by an irrational American judicial system.

Third—and I am not making this up—Mr. Wagoner decries a deliberate effort by Japanese policy makers “to artificially weaken the yen.”

I’m no expert in the car business, but I do rent a wide variety of automobiles when I travel, in order to see what is happening in the world of automobile market share.

And I always find it profoundly depressing to open the door of a Ford Taurus or Chevrolet Whatever and feel—just opening the door and getting behind the wheel—the poor quality of a Big Three automobile, compared to a comparable Toyota.

Mr. Wagoner's protests aside, The Problem has nothing to do the Japanese currency or the health care burden with which Mr. Wagoner finds himself saddled. And the last time I checked, lawsuits do not directly impede the ability of any company to assemble a great car.

I have a brother-in-law in the auto business. I know how it works: everybody gets a nice car as part of their work. They drive it for a while and then they get another, newer model.

And I imagine Mr. Wagoner gets the pick of the GM litter—not a Chevy or a Saturn, but an Escalade or a Hummer.


And I don't doubt that he honestly believes GM's problem is not in the cars themselves, but in all the other problems his top lieutenants blame their troubles on at every monthly sales meeting.

But if the CEO of General Motors wants to learn something about the quality of the 85% of GM’s production that is being systematically replaced by better-built cars with foreign nameplates—many of them assembled right here in America—he ought to be given a Toyota to drive around for a month.

Then I believe he would stop wasting time writing self-justifying op-ed pieces and more time trying to fix what’s broken at GM: the cars.

Like “Little Mac,” whose organizational abilities were unsurpassed, I imagine Mr. Wagoner is a very good executive for handling certain aspects of a large automobile business.

But not, if his Wall Street Journal piece is any indication, during wartime.

And while I know nothing about the politics within GM, I suspect that, like Lincoln, whose search for a general “who fights” only ended when he brought in U.S. (“Unconditional Surrender”) Grant from the western theater to get down to the bloody but necessary business of fighting Bobby Lee on the battlefields of Virginia, the GM board has not yet found its wartime commander.



Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Monday, December 05, 2005

No Haircut to the CPI Here


FedEx will increase 2006 standard list rates for FedEx Ground and FedEx Home Delivery by an average of 3.9%...


Thus reads a headline that came across my screen late Friday afternoon.

Lest it be dismissed as a mere “energy-related” price adjustment and, therefore, dismissible as a “one-time” item to be stricken from the “ex-food and energy” Consumer Price Index, or the “core” Producer Price Index, or whatever adjusted, reconfigured, massaged or otherwise made-up Price Index the bond market wants to look at in order to feel better about owning short term notes that just barely cover the FedEx price hike—keep in mind that the correlation of the U.S. GDP to the index of air cargo activity is 70%.

Consequently, when FedEx and its brethren raise prices, attention, as Mrs. Loman once said, must be paid.

Furthermore, the FedEx headline happened to come on the heals of a Del Monte Foods company conference call in which it was disclosed that unexpected increases in logistics, packing and energy costs added $40 million to cost increases over and above previously anticipated cost increases in the quarter.

The good news, at least for Del Monte? That consumers did not appear to mind the price increase, because volumes held up better than feared.

Perhaps the American consumer is ready for some good old fashioned everything-goes-up inflation, at the very moment that the government has trained the bond market to focus solely on stripped-down, “ex-food and energy and housing and packaging and FedEx and healthcare and insurance and haircuts” number.

I added “haircuts” to the stripped-down CPI based on a very personal experience this weekend: I visited my local barber for my usual $17 haircut.

Only he is no longer charging $17, as he has for the last seven or eight years that I have been using him.

He now charges $22.

Hmmm. $22 divided by $17 is…well, it’s a lot more than whatever the so-called CPI number would like to pretend it is.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, December 02, 2005

RIMM versus PALM


So what is it—Blackberry or Treo?

That’s the question before the house, and I am looking for informed commentary, which is to say you actually own and use one or the other wireless device, and are willing to share what you like about it, what you don’t like, and whether you plan to switch from one to the other (or to a third).

Blackberry dominates the Wall Street world, but I have found the Treo in heavy use in all kinds of places I hadn’t expected to—radiology conventions, for one.

I am not a fan of PALM—I think management is, well, let's just say that while they're not as out-there as the Overstock crew, they don't inspire confidence. But if the product works at its basic mission, which is delivering email to busy people around the country, then perhaps the company is worth a harder look.

The biggest complaint I hear about the Treo is the phone being clunky to use. With Blackberry I get some complaints about the phone and other complaints about back-office issues.

So let me know, if you will, the following:

1. How did you get your device—is it company supplied?

2. What do you use it for—email, phone, calendar, contacts?

3. What do you like best about it? What do you dislike about it?

4. Are you/your company staying with it or planning to switch?

We’ve done this before—audience participation—and it worked pretty well in sorting out the satellite radio companies (Sirius versus XM).

The more feedback, the better for everyone.


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Thursday, December 01, 2005

Whither Lexmark?


When Lexmark pre-announced a truly horrific quarter the first week of October—on a $100 million revenue miss (out of $1.2 billion in revenue) the company guided operating income down by, well, $100 million.

In other words, every dollar of lost sales cost the company a dollar in operating income.

And it would have been worse if the company hadn’t gotten a $35 million pre-tax benefit from some inventory shuffling within its supply chain that was not disclosed until the 10Q came out November 1.

I can’t recall a company—at least since the dot-com days—that reduced net income guidance by more than its revenue shortfall.

At an analyst meeting on November 15, Lexmark management was long on buzzwords (“distributed output market” “vertical integration” “cost and price performance”) and short on specifics, although, to be fair, the company had warned ahead of time that it was not going to "address business conditions" at the meeting.


.
Which was probably wise, because "business conditions" for Lexmark aren't too perky.
.
A look at Amazon’s Top Sellers in the inkjet printer category brings up no Lexmark product in the Top 10 or even the Top 50 sellers. The first Lexmark appears at number 58, behind pretty much every other brand in the business.

As for the brick and mortar side of retailing, Lexmark’s performance during the crucial holiday season won’t be known for a few more weeks—but Target was selling a Lexmark model for all of $17 on Black Friday.

Hardly the mark of a hot product.

Why then has Lexmark’s stock price risen 15% from its get-me-out-before-I-have-to-show-this-pig-on-my-sheet-at-the-end-of-the-month late October low?

Because talk of a leveraged buyout has been making the rounds.

On November 10, Sanford Bernstein analyst Toni Sacconaghi (who, for the record, was recommending Lexmark strongly prior to the blow-up) raised the notion that an LBO of Lexmark “appears economically viable,” citing the company’s “strong cash generation” and the potential for a divestiture of the money-losing inkjet business in order to “milk the supplies annuity on its existing installed base [of printers].”

At yesterday’s close of $47.62, Lexmark shares are approaching the price Sacconaghi had derived when he expressed his opinion that an LBO buyer might pay a 20% premium to the $42 stock price, despite a total absence of decent news regarding Lexmark, the printer business, or consumer electronics outside of iPods and plasma television sets.

Clearly somebody in the this-cash-is-burning-a-hole-in-our-pockets world of private equity is doing some serious homework on Lexmark.

Anybody with an informed opinion on what the answers might be would be welcome.


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, November 30, 2005

Da Radiologists


Preparing to leave Chicago—home of “Da Bears”—after two days of stalking the floor of the McCormick Place Convention Center along with 60,000 doctors, salesmen and investors at the annual radiology show, one scene that sticks in my mind illustrates better than any what makes Chicago, well, Chicago.

It did not occur during the Bulls game that I attended at the United Center (Bulls beat the Magic by 9)—although the legacy of Michael Jordan that still grips this city hangs from every rafter in the joint.

It did not occur at the McCormick Center itself, being, as it was, inundated with about as diverse a population from around the world as you could find under one roof, all talking animatedly and in great detail about those areas of the human body that most people do not talk about—radiologists deal with breasts and colons the way auto mechanics deal with brake pads.

And it certainly wasn’t at Fogo de Chao, the restaurant I went to with a group of radiologists where “The Gaucho Way of Preparing Meat” was demonstrated by a swarm of waiters slicing pieces of lamb, steak, pork and chicken from long metal stakes right onto your place without giving you time to inhale—thereby providing future customers for the radiologists at our table.

It was at a Starbucks.

Early in the morning most Starbucks look the same. Two weeks ago near Carlsbad California, the early morning Starbucks line-up consisted largely of forty-somethingish women weighing all of ninety pounds with their blond hair pulled back beneath a pink baseball cap, just finished with their morning run.

Yesterday in Chicago it was a sixty-somethingish guy who looked like he could have come from watching a football game at Solder Field—leather jacket, cap and a matter-of-fact manner. He got his coffee and joined a couple of friends already sitting down at a corner table, talking about Da Bulls.

Great town.


In a future post we will examine some investment ideas coming out of this conference. In brief, though, think digital.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Saturday, November 26, 2005

Why She Feels Better


One of the more obvious mistakes the mainstream media usually makes at this time of year is to refer to the American Shopper via the male-gendered third person pronoun He.

I guarantee that during some news report about holiday sales this weekend, some Talking Head will use this form when describing the shopping results from Black Friday, as in:


The American consumer is still spending; in fact Wal-Mart stores says he spent 4.3 per-cent more in November than last year…

The fact is that any retailer except maybe AutoZone and online engagement-ring seller Blue Nile will tell you that women drive their business.

Blue Nile, indeed, has made a business out of the fact that men hate to go to malls. More specifically, they hate to look for parking spaces, they hate to walk long distances past kiosks with stupid names, they hate to ask for help from some guy who knows nothing but how much commission he will earn selling this particular ring, they hate that awful fake smile and handshake when they've finally chosen a ring to buy, they hate to wait while the ring is boxed and wrapped, they hate to talk to the lady who takes their credit card and they hate to be smiled at and thanked and wished have a nice day! by the vaguely androgynous guy hanging around the exit…because men know deep down in their guts that they are being ripped off at every step of the way.

Blue Nile’s simple online ring selection converts what had been a shoot-me-please-before-I-have-to-listen-to-another-sweaty-salesman-tell-me-about-the-four-C’s-or-whatever-the-hell-it-is torture session into a sort of paint-by-numbers process that is so simple even a guy can now buy an engagement ring, in his pajamas.

No parking, no salesman, no problem.

Fortunately for most retailers, however, Blue Nile is still a small company with a very limited product line. Walk any mall in America and you will see women, mostly, leading the charge. Even tough guys—including, and I am not making this up, major league baseball managers—let their wives do most of the shopping.

How do I know this?

Well, I once spotted Mike Hargrove, now managing the Seattle Mariners but back then Manager of the red-hot Cleveland Indians, at a shopping mall in downtown Baltimore. It was 1997 and the Indians were in town to play the Orioles—believe or not, the Orioles had a good team back then—in the American League playoffs.

Hargrove was not, as a baseball fan might have expected, leading a bunch of rowdy Indian coaches and players on the late-morning tag-end of an all-night pub-crawl (his great team included a young right-fielder named Manny Ramirez).

No, the manager of the mighty Cleveland Indians was following his wife from store to store around the mall, and he was carrying the shopping bags for her.

I saw immediately that Mike was exhibiting all the signs of Husband Shopping Coma Syndrome (HSCS), in which the male’s arms become strained from carrying various cutesy shopping bags from various cutesy stores such that the blood has drained down into the hands, depriving the brain of vital red blood cells necessary to stay awake, which results in, first, sloth, then lethargy, and finally despondency.

I put Mike in the post-lethargy stage, dangerously close to despondency, though still functional, walking as he was in the staggering steps of a man ready to give up.

Furthermore, it was clear that noxious vapors—probably from the leather purses in the Coach store—had shut off the oxygen flow to his brain, causing his eyes to begin rolling back into his head.

His debilitated condition allowed me to catch up with him as he put the bags down and leaned against a railing overlooking the huge atrium at the center of the mall—looking, I thought, like a man weighing the merits of ending it all right then and there.

It was the first autograph I ever got in which the famous person giving the autograph seemed genuinely relieved to see me. (I will tell the Story of the Sting Autograph some other day.) We even had a nice, brief chat about the playoff game that was happening that very night.

And then his wife came out of the store, with another shopping bag, and I left.

Which is why I say that even major league baseball managers let their wives do most of the shopping, and why the key to this holiday season’s sales is in her, not his, hands.

And since gasoline prices have collapsed in the last month—from over $3.00 a gallon at their post-hurricane peak all the way down to $2.17 a gallon currently, according to AAA, which is up a mere 12% from the same time last year, as compared to up 50% at the end of September—I think she is feeling a little better lately.



Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, November 25, 2005

Raising Charlie from “Out-Perform” to “Strong Buy”


Every business morning my instant message light starts flashing around 7:30 with the first of as many as a dozen morning research summaries from around Wall Street.

These usually take a highly abbreviated form, with stock tickers used for company names and recommendations such as “Strong Buy” or “Outperform” abbreviated to “SB” and “OP”—the goal being to pass along as much information as possible in as few words as possible.

For example, last week this came in one morning:

SNDK overreaction, Samsung and Toshiba not meeting demand, MU better for sale yesterday, prlly same today…

In a nutshell, the broker’s research analyst was saying that Sandisk’s ten-point price drop (following Intel and Micron announcement of a joint venture to manufacture flash memory for Apple) was an overreaction, because currently the largest flash producers—Samsung and Toshiba—could not meet demand anyway. Also, their trading desk saw Micron stock probably being for sale prior to the open, as it had been the day before.

Understand that these things come one after the other, usually about stuff in which I only have peripheral interest (WEBX downgrade to EW from OW—WebEx Communications being a stock I have on my radar screen as an eventual Microsoft casualty) to that which I have no interest in at all (Cont’d seller of SPY & sold 2mm XLE...—having, as I do, as little ability to play index futures as I would a roulette wheel).

What I am looking for is good stuff—anything new, interesting and fundamentally based.

So this morning when the first message popped on my screen from Charlie O’Connor, my ace contact at Leerink Swann, a healthcare research boutique, I clicked on it expecting Charlie’s usual brief, helpful, information-packed, fundamentally based briefing from his analysts.

What I got was the following (keep in mind, “OP” stands for “Outperform”):


TURK-OP-basted with garlic and herbs, was moist and tender...dont want to overload as can cause s-t coma like symptoms.

STUFF-OP-made with brown rice, cracked rye bread, marsala soaked mushrooms...reit the buy rating.

MASH-OP-White and sweet potato blend, sourcream, butter salt and pepper, needs nothing else.

CORN-OP-spoonbread, half cake, half pudding, loaded with corn,onions and spices...new tradition over here

GRAVY-OP-pour over entire plate, garnish with cranberry sauce.

PIE-OP-must have been 5 or 6 to choose, lost count tried em all...


This morning, I am raising my rating on Charlie O’Connor from “OP” to “SB.”


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Wednesday, November 23, 2005

Wal-Mart Gets Serious


Look, if you had one shot, one opportunity to seize everything you’ve ever wanted… “Lose Yourself”—Eminem

Like the Eminem alter-ego in “Lose Yourself,” Wal-Mart—one of the world’s truly great companies—has, thanks to union protests, California Luddites and a consumer base dealing with hurricanes and gasoline prices, been “chewed up and spit out and booed off stage” for the better part of the last two years.

There is an irony, I know, in using Eminem lyrics to describe the world’s biggest retailer, given that Wal-Mart stores do not themselves carry Eminem’s cds—what with the f-words and all.

But that song sprang to mind reading this morning’s articles about Wal-Mart’s plans to, as the song says, “seize everything” this coming Friday on the busiest shopping day of the year.

Despite all the recent bad press, including that very lame CNBC probing of Wal-Mart’s so-called dark side—the low point of which had to be a David Faber interview with the bitter ex-manager of Pillowtex, the former high-flying textile consolidator that crashed and burned, who predictably blamed most of his terrible operating record on his largest customer—Wal-Mart more or less has kept rhyming, adding $20 billion in sales the first nine months of 2005 alone. That amount is, annualized, the equivalent of half the entire Target chain’s full year sales.

And today we see that Wal-Mart is set to tear the roof off.

“According to early copies of Black Friday circulars,” the New York Times reports, Wal-Mart will offer “doorbuster” deals to get customers in the stores—it will match competitors’ circular prices while offering some whopping discounts of its own, such as a 42-inch plasma TV for $997, compared to $1,499 at Best Buy.

Toys “R” Us, which I’ve long thought of as Toys “Aren’t” Selling, dismisses the Wal-Mart onslaught by saying “You can’t match what you don’t have,” claiming that 80% of the discounts Toys “Aren’t” Selling will offer on Black Friday can’t be found at Wal-Mart.

Before it went private, Toys “Aren’t” Selling was a highly seasonal retailer with flat sales growth and awful stores in desirable locations. Despite a 33% gross profit it brought less than 2% to pre-tax profits—implying a cost structure amounting to 31% of sales.

And that was before the company went private.

Wal-Mart—which is still growing 10% a year with a quarter trillion in sales—generates more than 5% in pre-tax profits on a 23% gross profit margin, implying a cost structure of about 18% of sales.

Hmmm....18% cost structure versus 31% cost structure...


I think we know who is going to capture the moment on Black Friday. Like the song says, you can do anything you set your mind to, man.


Jeff Matthews
I Am Not Making This Up



© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Monday, November 21, 2005

When One plus One Equals Not-Quite-Two


It’s not like they aren’t trying.

The Sears Essentials store, a by-product of Eddie Lampert’s ambitious attempt to shmoosh two aging retailers together and come up with a store people actually want to shop, is not, as I have discussed before, all that bad.

Recall that “Essentials” (an appealing but bizarre name, when you think about it: this is not a convenience store we’re talking about, but a big old apparel-to-corn flakes general merchandise store) are refurbished ex-Kmart locations rebranded with the Sears logo and Sears-branded merchandise added to the mix.

Having visited one store in the upper reaches of rural Connecticut (see “Eddie to the Rescue,” September 9, 2005), I wanted to check out its brethren in the freeway-clogged suburbs of Los Angeles.

I found one on the outskirts of Corona off Interstate 15, in a very typical this-used-to-be-a-decent-area old Kmart location. It was a relatively easy store to spot because of the large Sears Essentials sign on the building…and because of the rather desperate looking young Sears employee standing on the sidewalk waving a “Sears Sale!” sign at passing motorists.

Now that I have seen them on both coasts, I think I can safely generalize about them.

For starters, the Sears Essentials stores are clean, well-lighted places with bi-lingual signage and plenty of merchandise—nicer by far than the old Kmart you knew and did everything in your power to avoid entering.

The Sears house brands—Craftsman tools and Kenmore appliances—give the stores a flavor entirely different from the previous failed occupant, while the electronics department is now bigger and more coherent than the old Kmart version, with row after row of flashy TV screens along the wall. And there is plenty of Martha Stewart merchandise everywhere, from towels to $250 artificial Christmas trees.

The theory behind Essentials is that by expanding distribution of widely recognized (and still trusted) Sears house brands into Kmart locations that previously failed to generate enough business to justify the lease payments, Sears Holdings would generate higher sales and transform a liability—a long-term lease in a mediocre location—into an asset. The basic idea being that one plus one would equal three, maybe four.

Indeed, like its counterpart in northeastern Connecticut, this L.A. Essentials store had shoppers—not nearly so many as the clean, well-lighted, terrifically merchandized Target store a few miles away, but it had some shoppers.

Yet as I walked around the store and saw the merchandise placed with its usual Sears cluelessness, I found myself understanding why the whole thing seems so inconsequential: by opening Sears Essentials stores in old Kmart locations, all that has happened is…Sears has opened a bunch of new, mediocre stores.

That’s all.

Meanwhile Target, Wal-Mart, Costco and the rest continue to open well-merchandised stores with great prices where people actually want to shop, without requiring employees to stand on the sidewalk waving “Sale!” signs.

The math behind Sears Essentials? One plus one equals not-quite-two.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Friday, November 18, 2005

Divide By Ten


Google at $400:Is It on Merit Or Just a Mania?

Thus asks the Wall Street Journal this morning, in a rather silly article devoted to a rather silly topic: the meaning, if there is one, of the fact that Google shares hit $400 yesterday.

Don’t get me wrong: I like Google as a business model and a company. And I’m not indifferent to the share price (although I make no recommendations here regarding stocks and never will).

But uncommented on in this morning’s “Merit or Mania?” article is the fact that shares of Yahoo had a much bigger move yesterday than Google—and also reached the same milestone.


Yet nobody seemed to notice.

All you have to do is divide Google’s stock price by ten. Do that, and shares of Google merely rose 53 cents yesterday to close at $40.35.


Yahoo shares, meanwhile, rose over $2.00 and closed at $42.23.

You can also multiply Yahoo by ten to make it comparable to Google: looked at this way, Yahoo shares rose more than $20 yesterday and closed at $422.

Which makes Google's $5.35 pop to $403 a bit less eye-catching, and
in and of itself no big megillah, at least compared to a peer company.

But the fact that Google’s market valuation is larger than Coke, as the article pointed out, is worth looking into.


Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

Thursday, November 17, 2005

Tomorrow’s Headline Today?



Sales of New Homes Plummet

The 40% decline for 3-month period is sharpest in 15 years.

Thus reads the headline over a front page story in yesterday’s Business Section of the Sacramento Bee, the daily chronicler of the economic and social activities in what had, up until several weeks ago, been one of the hottest real estate markets in the country.

As reported by Andrew LePage, a Bee Staff Writer:

Sales of new homes in the Sacramento region dropped 40 percent over the past three months compared with the same period last year, according to the local Building Industry Association.

It's the sharpest decline the group has seen for the August-October period since 1989-1990, when sales plunged nearly twice as much - 79 percent.


The most amusing aspect of the article, if there is one, is that, as explained in banner ads surrounding the story on the Bee website, “The Business Section is brought to you courtesy of Beazer Homes.”

Beazer Homes is one of those aggressively expanding publicly traded homebuilders benefiting from the trees-grow-to-the-skies nature of the housing market.

Beazer’s just-completed fourth quarter earnings reveal a $2.9 billion land and housing inventory, up from $2.3 billion in 2004 and a mere $630 million five years ago.

That 36% compound growth in Beazer’s inventory might be one reason Sacramento in particular suddenly appears to be awash in housing, according to the Bee article:

The 1,388 new homes sold during the past three months marks the lowest total for the August-through-October stretch since 2001, reported the North State Building Industry Association. The group tracks roughly 55 percent of the new home subdivisions in the capital region and reports net sales - the number of escrows opened each month, minus any canceled deals.

Cancellations of pending home sales have spiked in recent months because more buyers, including investors, either got cold feet, couldn't qualify for a loan or couldn't sell another property fast enough, industry sources reported. Also, some builders insist they're strictly enforcing the anti-speculator clause in their sales contracts and will cancel deals if they learn a buyer is an investor, not a primary resident.

But Sacramento's slower resale market may be the biggest reason that sales of new homes are down so much.

"One of the drivers (of cancellations) is people not being able to sell the home they have for the price they expected to get for it," said John Orr, president of the local BIA. "On the resale side ... the sellers aren't in the bargaining position they once were."


But you wouldn’t have gleaned a bit of this from Beazer’s recent (November 2) earnings call. Asked about developments in the Sacramento region, Beazer CEO Ian McCarthy told Wall Street’s Finest not to worry:

We are still seeing pricing power there. We are very focused in that market on being affordable. In fact, our whole strategy in California is making sure that we're affordable. We have not played in the very highest prices there in either Northern California and we are only in Sacramento.... I would say we're not seeing flattening, we're still seeing some price appreciation.


Mr. McCarthy ought to pick up a copy of yesterday’s Bee, or access its web site (complete with Beazer’s own banner ads) and check out the story, which goes on at some length:

Still, there's no disputing the pronounced cool-down in the new home market…. Greg Paquin, head of The Gregory Group, agreed that "it seems pricing may have gotten ahead of itself."…In addition, lenders are beginning to scrutinize loan applications more closely, meaning some marginally qualified borrowers now find it more difficult to use the most aggressive, riskiest forms of financing.

Builders have been using these increasingly lucrative incentives, such as $50,000 toward upgrades on higher-end homes, in lieu of lowering prices.

This last may explain the apparently gaping chasm between Beazer’s optimism regarding Sacramento home prices, which are not “flattening,” and the recent collapse in Sacramento home sales according to Sacramento’s own Building Industry Association: the homebuilders have yet to cut prices.

As anybody on Wall Street knows, price follows volume. And volume in Sacramento is down.


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.