Friday, April 28, 2006

All in the Family


Lay Says Son Was Among Enron Short Sellers He Blamed


That was the Bloomberg headline yesterday above a story describing how the man who built Enron and took full credit during the halcyon days of that company's rise to power blamed its fall on his own CFO and the dreaded short-sellers's cabal—and I am not making that up.

Former Enron Corp. Chairman Kenneth Lay acknowledged his son was among short sellers of company stock, a group of investors the executive blamed at his fraud trial for destroying the company. Lay was shown a March 2001 Charles Schwab Corp. statement that listed four trades by his son Mark, betting on a decrease in Enron's stock price. Lay agreed it showed his son, 37, a former Enron vice president, had been one of the short sellers he'd criticized as a group.

Mark Lay ran the paper products group, which was—according to friends of mine in the paper industry—a disaster from the day Enron overpaid for its first paper mill and set about changing the way the paper business operated. That initiative was so successful the man in charge shorted his own company’s stock. Meanwhile, Father Ken was letting go shares of Enron while telling Wall Street encouraging things about his company.

You could say short-selling was all in the Lay family.

From what I’ve seen, people seem genuinely surprised that Ken, often described as folksy and avuncular, lost his cool in the courtroom.

I have a suggestion: somebody should ask Lay’s first wife—the wife he left—how folksy and avuncular a guy who rose to the head of a multi-billion dollar enterprise could be.

Me, I think we’re seeing the real Ken Lay.



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, April 26, 2006

Time to Eliminate Asphalt From the Price Index


So gasoline prices are back to $3.00 a gallon all around the country, and without a hurricane or a ruptured pipeline to blame.


From Florida to the Carolinas to California to Rhode Island, the Great American Consumer is paying three bucks-plus for not-even-premium unleaded gasoline—and we’re still not in the summer peak driving season yet.

But it’s not just what you’re putting in your car that’s going up, as consumers already know: it's the price of the car and the price of the car’s own tires...and now it’s the asphalt underneath those tires, too.

This is a price list of performance-grade asphalt, Free-On-Board at New Haven, Connecticut:

Price/Ton
4/24/2006 $305.00
4/17/2006 $302.50
4/10/2006 $297.50
4/3/2006 $280.00
3/28/2006 $280.00
3/20/2006 $280.00
3/13/2006 $250.00
3/6/2006 $250.00

By my rudimentary calculations, that’s a 20% increase in the last two months.


I suppose it's time to eliminate asphalt from the adjusted inflation statistic:

“Ex-Food, Energy, Tires, Houses, Insurance, Rent, Healthcare, Google Ad-Words, United Healthcare CEOs, and Asphalt.”


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, April 24, 2006

Here We Go…


Chávez Plans to Take More ControlOf Oil Away From Foreign Firms
By DAVID LUHNOW and PETER MILLARD

--Wall Street Journal


Long time readers should recall numerous pieces regarding Venezuela’s importance to our oil and gasoline supply and the increasingly unstable nature of that country’s leadership—see “What if Hunter S. Thompson Ran a Country?” from February 7th of this year.

In that piece I discussed the President of Venezuela recent call for a million “well-armed” men and women to defend itself from a U.S. invasion. That might have been funny on a TV show, but it is real-life, and in real-life, Venezuela is our third-largest source of oil imports.

Now, according to today’s Wall Street Journal, the Venezuelan President is upping the ante in his obvious attempt to gain complete control over the largest source of oil reserves outside Saudi Arabia:

Venezuelan President Hugo Chávez is planning a new assault on Big Oil, potentially taking a major step toward nationalization of Venezuela's oil industry that could hurt oil-company profits, reduce production and put further pressure on global oil prices.

Forget Iraq: things could get very interesting, very quickly, right in our own back yard.





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, April 18, 2006

“Employees Have the Upper Hand Again.”


“Employees have the upper hand again,” writes a friend who runs a medium-sized, fast-growing company in Cleveland, commenting on our “No Inflation Here…” report last week.

Specifically, he tells me:

From 2001 to late 2005 if I was looking to hire an engineer or sales person, I could always get them to come for $5,000 to $10,000 less than a comparable shop, with the promise of a quick review and bump if they produce.


But that was then, and this is now:

I’ve lost 2 people that had accepted offers from me but after giving notice to their current employer got offers at $10,000 more, and took them.

As for the Greenspan Adjusted-To-Exclude-Rising-Prices Consumer Price Index, he writes:

Forget what’s happened to my rent, my health insurance, my utility bills, which is 20% of my costs—the pressure on salaries is the big deal I’m seeing.

Only yesterday the Treasury market rallied on a lower-than-expected number from the—I am not making this up—National Association of Home Builders/Wells Fargo Index of Builder Confidence. (How is this builder-gloom possible, when all the public home builders express such great confidence in the housing market?)

Seems like investors are looking for any sign of weakness in whatever index-of-the-day might suggest some incremental weakening of the job-creation machine that is the U.S. economy in order to declare a top in yields and an end to the Fed’s endless tightening.

But if a businessman in Cleveland—not San Jose or Phoenix or Fort Myers or Arlington or Manhattan, but Cleveland—is losing new hires to bidding wars, it may take more than a weak number from the 48th Federal Reserve District Prices Paid for Intermediate Raw Materials Third Derivative Seasonally Adjusted Smoothed and Revised Index to slow things down.

Like a few more rate hikes than the bond bulls expect.


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, April 15, 2006

Little Little Man


This boy is no longer a boy. He's a brave. He is little in body, but his heart is big. His name shall be “Little Big Man.”

—Old Lodge Skins, from ‘Little Big Man’


David Rocker announced his retirement last week. After many years in the business and 21 with his own successful hedge fund, David is doing something very few people ever do in the hedge fund world: he is retiring and passing on his business to a new generation.

Hedge funds are notoriously fickle things. Like many entrepreneurial corporations founded by a strong individual—Wal-Mart, for example—they reflect the culture and background of the individual who started them.

But that’s where the similarity ends, because unlike a company with a product or service, or even a mutual fund with a large staff and broad array of services, hedge funds are generally speaking highly focused investment vehicles and therefore very much dependant on the capabilities of their founder. And when that founder decides to step down, there is usually no successor.

Even all-time greats like Julian Robertson and Michael Steinhardt closed their shops and returned the funds to outside investors, although they still run money and their protégés have moved on to, in some cases, even better track records and happier investors.

Still, as a former member of Rocker Partners, I’ve known for years that David had delegated much of the day-to-day responsibilities to his ace partner, Marc Cohodes. So when David called early last week to tell me of his decision to retire, it came as no big surprise. Like the class act he is, however, David wanted me to hear it from him before it came from anybody else.

And now, today, I read in the Salt Lake Tribune—hometown paper of Overstock.com, whose CEO has claimed to practice a “Buddhist non-attachment” to his critics yet nevertheless is engaged in a lawsuit with some of those critics—the following:


Overstock CEO Patrick Byrne weighed in Thursday by referring to a Marin County, Calif., judge's refusal last month to dismiss Overstock.com's libel and unfair business practices lawsuit against the Gradient market research firm.


"Oddly Mr. Rocker's retirement announcement comes just two weeks before the Marin County Court is scheduled to rule on whether we can proceed with our [evidence] discovery requests," Byrne said. "I suspect the only civic duties he will have time for are responding to court-ordered discovery."


And all I could think is what a little man he is.


Byrne may be big in body or brains or checkbook, to paraphrase Old Lodge Skins. But what a little, little 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.

Thursday, April 13, 2006

No Inflation Here…


A month ago I couldn’t get a rental car in Los Angeles from Hertz, Avis, Enterprise, Dollar or Thrifty, not to mention Budget.


So I got one from Ace Car Rental, which operates out of a small office in a dark alley near one of the LAX runways, uses no computers—just old fashioned pens and paper forms—and is, I am guessing, recommended by four out of five leading drug dealers.

Last week New York City was packed—stores, restaurants, sidewalks. Even the guy protesting some sort of stained-glass window situation in front of St. Patrick’s Cathedral (I am not making that up) had to fight to keep his spot on the steps.

This week in Atlanta the hotel was full and I almost lost my room thanks to a mix-up at the front desk, but the guy managed to scrape up something at the last minute.

So when this morning I hear a Deutsche Bank analyst is reporting that “RevPAR”—revenue per available room, the standard measure of strength in hotel room rates—was up 10% in the first quarter and could be stronger the rest of 2006 given booming business travel and strong vacation bookings, it comes as no surprise to me.

But somebody ought to tell the Fed that whatever inflation statistic they’re using has gone, as they used to say about well-intentioned experiments in 1950’s sci-fi flicks, horribly, horribly wrong.


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.

Sunday, April 09, 2006

Over-Share from Dr. Evil’s Hideaway


Ladies and gentlemen, welcome to my underground lair.
—Dr. Evil


Another year, another fawning article about the way Bill Gates runs Microsoft.

Last year it was the Wall Street Journal’s turn to describe Mr. Gates’ near-mythic visits to a cottage on a lake in order to Think Big Thoughts about the Future of Technology, all alone—no friends, no family allowed—with only a caretaker who “slips him two simple meals a day.”

As I pointed out at the time (see “Bill’s Hideaway” from March 28, 2005), perhaps if Bill had instead merely spent a couple of hours each morning at the local Starbucks watching how real people actually use technology, he might have come up with something more in tune with what human beings want or need—a great search engine, perhaps; or a simple wireless email device—instead of a tablet PC and a word processor with an “Insert Button” that you use only when you accidentally touch it and it begins deleting things while you type, so that you have to touch it again to get it to stop deleting things.

But he does not. And thus we have the Insert Button—a technology only Dr. Evil could admire.

Now, almost a year to the day after the insider's view of Bill's Hideaway by the lake, Fortune Magazine has apparently been cajoled by Gates’ PR people to publish yet another insider’s story, this time written by Gates himself.

“How I Work: Bill Gates,” it is called, and sure enough, technology’s richest monopolist describes how he actually manages a company that has been sliding into irrelevance ever since the internet came along and allowed consumers to bypass its stranglehold on personal computing.

It is, I think, a sad read. Gates’s words come across not as insightful and informative in the Jack Welch how-I-get-things-done management style, but as the self-impressed noodlings of a man in control of a very large, very rich and very powerful organization who appears to have lived almost frozen in time—the Doctor Evil of the software business, who sees the world the same way he saw it thirty years before without wanting to believe how radically it has changed.

An overstatement, you say? Well, Gates begins the article by describing—and I am not making this up—the three computer screens on his desk.

These three magical screens are “synchronized to form a single desktop” which allows him to drag items “from one screen to the next.” This, he solemnly declares, “has a direct impact on productivity.”

Yes, the CEO of the world’s largest software company begins “How I Work” by lovingly describing a desktop computer setup that sits on every trading desk in every high-rise office building from Wall Street to Moscow by the hundreds: multiple screens linked to the same computer.

Bizarrely, there is no mention of his key managers, software engineers, or any other people in his opening paragraph: just a description of how he has three computer screens all tied together.

Gentlemen, I have a plan. It's called blackmail.... Either the Royal Family pays us an exorbitant amount of money, or we make it look like Prince Charles, the heir to the throne, has had an affair outside of marriage.
—Dr. Evil

Moving on, Gates describes how each screen has a different function, and here you might imagine you are reading a parody of how a brilliant, nerdy, lines-of-code-centric guy would manage a large enterprise:

“The screen on the left has my list of emails. On the center screen is usually the specific e-mail I’m reading and responding to. And my browser is on the right-hand screen.”

I am not making that up, either. Nor am I making up sentences such as:

"We’re at the point now where the challenge isn’t how to communicate effectively with e-mail, it’s ensuring that you spend your time on the e-mail that matters most." (As opposed to, say, ensuring that people actually want to use your products. )

All in all, we learn much, much more than we ever need to know about the way Mr. Gates Runs His Company.

My daughter calls this kind of stuff “Over-share.”

We learn he’s “not big on to-do lists.” We learn he likes to “check the folders that are monitoring particular projects and particular blogs.” We learned he’s “very disciplined about ignoring” a “little notification box that comes up in the lower right [of Outlook] whenever a new e-mail comes in.”

And we learn that he’s “getting ready for Think Week,” the cabin-by-the-lake sojourn where Mr. Gates will “read 100 or more papers from Microsoft employees” about “issues related to the company and the future of technology.”

Finally, we learn Bill still keeps an old-fashioned whiteboard in his office with “nice color pens.” It is, he tells us, “great for brainstorming when I’m with other people, and even sometimes by myself.”

Over-share!

After reading the entire piece, which contains much more of this kind of stuff, you begin to wonder how a company can survive management-by-email. Of course, as Microsoft-watchers know, the reality is that Gates does not manage the company by himself.

Finally, I come to my Number Two man. His name: Number Two.
—Dr. Evil

Ex-Procter & Gamble assistant product manager Steve Ballmer is “Number Two” to Gates’ Dr. Evil. Ballmer is a smart, funny, loud, in-your-face promoter of all things Microsoft—the first business manager ever hired at a company founded by software nerds, and crucial to the company’s rise to power.

Oddly enough, the previous edition of Fortune Magazine contained an interview with “Number Two,” which provided a fascinating insight into why Dr. Evil and his Evil Henchmen sitting around the shiny Evil Conference Table in Microsoft’s underground lair appear so out of touch with the Austin Powers-ish free-swinging technology innovation pouring forth from upstarts in Mountain View, Cupertino and elsewhere.

In a story titled “The Sleeping Giant Goes on the Offensive,” Ballmer is asked by the Fortune reporter if he has an iPod:

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

There you have it: the key business manager of the most important technology company ever created (by people far smarter and richer than yours truly) deliberately excludes from his household two of the most important technology innovations of the last decade.

Next thing you know, we’ll hear Dr. Evil's Evil Henchmen have kidnapped the Google boys and are holding them for a ransom of...

One…million…dollars.



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, April 06, 2006

Three Words You Never Saw in the Same Sentence


U.S. office vacancies fell to 14.1% in the first quarter, the lowest level in five years, allowing landlords to increase rents.

Thus in today’s Wall Street Journal we read that in the first quarter of 2006, office vacancies around the U.S. had the largest percentage drop in seven-plus years, thus allowing the biggest occupancy price increase in over five years.

Later in the same paper we read that steel prices, after spiking in late 2004 and having what chart watchers call a “retracement” that bottomed in mid-2005, are on the rise:


Steel prices are returning to last year’s high levels, as economic growth fuels demand.

Seems that steel makers from Charlotte, North Carolina (Nucor) to Shanghai (Shanghai Baosteel Group) are raising prices on all manner of steel-related products, from the hot-rolled to the cold-rolled to the coated-sheet kind.

Further along in the A-Section, we find that Venezuelan strong-man Hugo Chavez, who nationalized two oil fields this week about as casually as a bartender skims cash during a busy Saturday night shift, is mismanaging the world’s largest crude oil reserves outside Saudi Arabia:

Venezuela is becoming a less-reliable source of crude, due as much to poor management as political choices. Rather than respond to current high prices by boosting output, the country has reduced its oil output since Mr. Chavez took power in 1998....

Most interesting of all in these tales of an emerging global resource squeeze might have been Tuesday’s front page story in the New York Times, the headline of which married three words that I believe have never appeared in the same sentence together: “labor” and “shortage” and “China.”

According to the story, headed “Labor Shortage in China May Lead to Trade Shift”:

The shortage of workers is pushing up wages and swelling the ranks of the country's middle class, and it could make Chinese-made products less of a bargain worldwide. International manufacturers are already talking about moving factories to lower-cost countries like Vietnam.


At the Well Brain factory here in one of China's special economic zones, the changes are clear. Over the last year, Well Brain, a midsize producer of small electric appliances like hair rollers, coffee makers and hot plates, has raised salaries, improved benefits and even dispatched a team of recruiters to find workers in the countryside.

That kind of behavior was unheard of as recently as three years ago, when millions of young people were still flooding into booming Shenzhen searching for any type of work.


A few years ago, "people would just show up at the door," said Liang Jian, the human resources manager at Well Brain. "Now we put up an ad looking for five people, and maybe one person shows up."

Those are striking observations from a country whose labor surplus provided sustenance to the bond aficionados who confidently predicted that the “labor arbitrage”—the substitution of high-cost American content with low-cost Chinese content—would last until their ten-year bonds matured. Maybe longer.

Put together, the stories being told by Nucor, office landlords, oil producers recently booted out of Venezuela, and even the Well Brain factory in China, suggest the bond market might see the end of the labor arbitrage well before their ten-years mature.

Maybe, even, before their two years do.


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.


Sunday, April 02, 2006

Weekend Reading for the SEC


Now that the SEC has declared open season on journalists and research analysts at the apparent behest of an insecure CEO cleverly shifting the spotlight away from his own money-losing public company track record, it is worth looking back to a time when such brittle, blowhard CEOs were the norm, not the exception, to glean what lessons such eras might teach to investors and regulators alike.

The era of which I’m speaking is the roaring 1990’s—the last bubble period, when companies came public on not much more than a Cool Idea and a slick road show.

And anybody who wants to look back and see what happens when the SEC fails to rein in banking-happy analysts and rule-flaunting CEOs need look no further than “Confessions of a Wall Street Analyst,” a new book by former telecom analyst Dan Reingold.

Reingold’s book describes the arc of his career from MCI number-cruncher to Wall Street star to depressed and disillusioned retiree, and it is not a bad read.

I didn’t know Reingold when he was an Institutional Investor-rated analyst famous for his upgrade of the Baby Bell stocks just prior to their Clinton-era deregulation, but he comes across as earnest and well-meaning, if a little too dependant on “models” and “spreadsheets” for my taste: garbage in, garbage out, as they say.

And man did he hate Jack Grubman.

Although some book reviewers of “Confessions…” disliked the anti-Grubman theme, I think that angle actually gives the book depth and heft, and makes it far more readable than just your average sell-side story. After all, how many times can you read about secret negotiations in a plush Manhattan hotel room with a Wall Street firm trying to hire an analyst away from whatever firm he’d just joined?

Furthermore, it is the Grubman angle that brings back all the excesses of the 1990’s, and provides the lessons that I mistakenly thought we had all learned about how Wall Street analysts and public companies ought not to conduct themselves.

Aside from Grubman’s famous upgrade of AT&T just prior to the AT&T Wireless spin-off, Reingold gives chapter and verse on Grubman’s incestuous Worldcom relationship, especially instances when clients apparently heard takeover stories—and exact prices—from Grubman well before the public announcements.

But the chapter most relevant to today’s climate of fear and loathing in the press and among those who would speak skeptically of a public company is called “Crash and Burn,” in which Reingold describes how the whole house of telecom cards begins to crumble—kicked off in part by terrific research from a Reingold competitor, who knew to look not just at the numbers, but behind them.

Simon Flannery was Morgan Stanley’s telecom analyst, and he downgraded Qwest—once the hottest of the telecom hotties—in mid-2001 “on a bunch of arcane accounting concerns,” as Reingold puts it.

Reingold himself “studied the [Flannery] report carefully” but for whatever bizarre reason did nothing else about it. He didn’t pick up the phone and talk to accountants or industry people, didn’t get on a plane and sit down with the Qwest auditors—nothing but reiterate his “Strong Buy” on the stock and listen to a Qwest conference call in which Qwest CEO Joe Nacchio denounced the report.

On that call, Nacchio 1) claimed there were no accounting problems at Qwest, 2) attacked Flannery, 3) attacked Morgan Stanley, 4) attacked Morgan Stanley’s CEO, and 5) banned the analyst from visiting the company or asking questions on the call.

Nacchio, Reingold tells us, “was apoplectic—and determined to make this guy [Flannery] pay.”

Now, we all know that Flannery was right, and Nacchio was wrong; that Qwest ended badly, and Joe Nacchio’s career at Qwest ended badly.

(The SEC eventually charged Nacchio and others with “massive financial disclosure fraud”—three years after Nacchio resigned.)

But, at the time, Flannery was successfully made out to be the bad guy by a CEO eager to shift the spotlight away from the analysis itself.

It’s a story worth re-reading, to remind ourselves of what happens when CEOs attack the person asking the questions, instead of answering the questions and letting the business prove the skeptics wrong.



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.