Tuesday, August 29, 2006

Dear Tom...

.

Mr. Cruise and his production partner, Paula Wagner, say they will finance future films with money raised from unnamed hedge funds.

--The Wall Street Journal


Dear Tom,

Thank you for your proposal regarding a hedge fund investment in your production company, “L. Ron Hubbard Presents…”

But I think we’ll pass.

It’s not so much the heavy up-front spending nature of the movie development business, or the fact that returns are highly dependant on the successful control of artistic variables such as writing, filming, acting and editing, not to mention uncontrollable forces such as audience taste, weather patterns, economic concerns and Acts of God.

Our concern is that you are, in short, a whack.

During the course of an extensive due-diligence process (which consisted mainly of reading Page Six of the New York Post religiously), we discovered a number of disconcerting episodes in which you felt the need to—let’s be kind—inflate your resume with a number of tales of heroics you supposedly performed outside the movie theater.

Like the time you were filming in New Zealand and, according to your publicist, helped a family change a flat tire on a country road—and then “assisted a young girl in catching her runaway horse.”


(What, precisely, did you do? Rope the poor beast from your private helicopter?)

Or the time, a few years before the horse-wrangling episode, you supposedly helped a woman being mugged “on a London street and stopped thieves from making off with more than $150,000 in jewelry.”

Hello, Tom, you’re one of the most recognizable celebrities in the world, with bodyguards 24/7, so what happened—the thieves dropped the jewelry and asked for your autograph?

We hedge funds have enough to deal with in the realm of CEOs who pretend to be something other than they are, and we’re not about to hand over money to yet another guy who, well, makes it up.

And here’s a tip when it comes to your efforts in securing hedge-fund financing: in the future, you might want to play down the fact that your religion—not that there’s anything wrong with religion—touts the use of something called 'electropsychometers' to “locate areas of spiritual distress or travail.”

I am not making that up. As part of our due diligence we also looked at the Scientology web site, and it’s a little scary, pal:

“The E-Meter is a religious artifact and can only be used by Scientology ministers or ministers-in-training. It does not diagnose or cure anything. It measures the mental state or change of state of a person and thus is of benefit to the auditor in helping the preclear locate areas to be handled.”

Now, I’m sure Scientology has done wonders for you and your career, and it’s not like other religions don’t have their share of odd beliefs.

But I think, for now, we’ll pass.

Good luck with it.


Jeff Matthews
This One I Made Up


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Friday, August 25, 2006

Ford Fight


Former U.S. Treasury Secretary Robert E. Rubin has resigned from the board of Ford Motor Co., citing a potential conflict of interest with his duties as a member of the chairman's office at the banking company Citigroup Inc.
—Wall Street Journal


Thus one of the world’s most successful bankers, whose career arc has taken him from the head of Goldman Sachs to the head of the entire United States Treasury Department to the head of Citigroup, has stepped down from his board seat at Ford.

"Citigroup's multi-faceted relationship with Ford could raise a question whether my relationship with Ford and Citigroup creates an appearance of conflict. Although no conflict currently exists and while I would have liked to remain involved, I have with great regret concluded that I should resign from the Board at this time," Mr. Rubin said in the letter.

This comes on the same day the news wires are reporting interest in Ford’s luxury car group, specifically Jaguar—obnoxiously pronounced “Jag-You-Wahr” in TV ads, as if giving it an upscale accent suddenly makes the losing-money-hand-over-fist brand more valuable—by at least two groups, one of which includes Jacques Nasser, the man who, as CEO of Ford, wasted Ford’s cash hoard on not one, but several really terrible acquisitions, including Jag-You-Wahr.

I have no idea how things will shake out at Ford—whether it will turn itself around or whether it will hit the proverbial wall—but if I were a private equity guy, I’d be cranking numbers on the conglomerate like there’s no tomorrow.

For all its problems, Ford has $40 billion in cash on the books, so it’s not like they’re going to file Chapter 11 tomorrow. Further, the current equity value is a modest $14.9 billion, which any private equity guy could match with a few phone calls—one being to Bob Rubin at Citibank, I would think.

Now, what would a private equity buyer get for their $15+ billion?

Well, for starters, they’d get Ford’s 30% stake in publicly-traded Mazda—408 million shares worth $6 each, or $2.4 billion by my calculator.

Second, they’d get the “Premier Auto Group,” which sells over $30 billion of the kind of brand names you’d think anybody would want to own at the right price—Land Rover, Volvo, Aston-Martin and Jag-You-Wahr—yet manages to lose money doing so.

And that’s just scratching the surface. Who knows what other hidden assets—along with the many well-enumerated hidden liabilities—exist within Ford?

After watching Clayton Dubilier (insert euphemism for “steal” here) one of those hidden assets, Hertz, from Bill Ford last December with a mere $2.3 billion equity investment, how many other private equity firms are now lining up behind the scenes to see what else they can (insert euphemism for “steal” here) from the desperate scion of a once-proud family that owns all of 5% of the common shares yet acts as if Ford is their own private employer-of-last-resort?

My guess is, with Bob Rubin resigning from Citigroup’s board in order to avoid “potential conflicts,” there’s a whole bunch of ‘em.



Jeff Matthews
I Am Not Making This Up


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Wednesday, August 23, 2006

Bobby’s Leading Economic Indicator


The stranger rode up out of the darkness on his bicycle in the quiet of the late-evening that covered the woods in muted darkness, then reached out and held onto our horse-drawn carriage with one hand and started gabbing with the carriage-driver for the rest of the ride back to our hotel.

The bike-rider's name, it turned out, was Bobby, and he is native to this island—“born and raised here, like my parents and their parents.”

And however many statisticians the Fed has in Washington feeding those gajillions of lines of data into whatever number of computers they employ in their seemingly endless effort to figure out what is going on right in front of their faces, Bobby has them all beat: Bobby runs a chicken grill in town.

Without knowing Bobby at the time, a year ago I reported from this part of the Great Lakes (“Report from the Midwest”) on not just the rising cost of everything a businessman like Bobby needs—from the charcoal he uses to cook the food and the staff he needs to help tend the customers, to the diesel fuel that runs the ferries that delivers both his food and his customers—but also on the new-found ability of the restaurants and hotels and ferry lines to raise prices to cover those rising costs. (“They’ve all raised prices,” my report concluded. “Let the bond market beware.”)

What a difference a year makes.

Last night Bobby, the stranger on the bike, expounded in great detail on the factors affecting his very small business...and if Bobby’s business is a leading economic indicator, that indicator is slowing down pretty sharply.

Bobby’s Grill is as basic as it gets: a big charcoal cooker set up outdoors on the lawn near a church in town, with a table for fixings and chairs for the people while they eat. He gets the grill going around 9:30 in the morning, and by 11 he’s ready for the customers that line up every day for his grilled chicken.

On a normal day in a normal summer, Bobby told me he serves 50 to 75 chickens at lunch. Lately it’s down to 25. “I’m not getting the blue-collar workers,” he said. “Still get the higher income people, but not the blue-collars.”

And that’s despite cutting his price from seven bucks a meal to $6.25.

Being in the Midwest, and being a half-dozen hours north of Detroit, what we have here is the real-life impact of those GM and Ford oops-we-make-gas-guzzlers-and gas-is-$3.00-a-gallon headlines, multiplied across dozens of factories and thousands of lives dependent on those companies and their gas guzzlers for work.

(What is GM’s response to all this? Why, GM is bringing back the Camero, a gas-guzzling muscle car, of course! I am not making that up.)

Meanwhile, the Fed’s statisticians, in their infinite wisdom, will certainly ignore Bobby’s Grill as any kind of useful economic indicator for the simple fact that it is what the Fed likes to think of as a statistical aberration—part of those pesky food and energy sectors that get eliminated from the consumer price index in order to “smooth” the data into irrelevance.

But it’s not just GM and Ford that are laying off “the blue-collars,” as Bobby calls them. It’s Toll Brothers and Centex Homes, too.

And pretty soon—this is just a guess, but the food chain isn’t too hard to follow—Lowes will slow down its hiring and Home Depot will put on the brakes…and long after the bond market has begun another bull market on the anticipation of a slowdown and price deflation, one of those computers down in Washington will figure out that back in late 2006 we began to enter something called a “recession.”

But Bobby’s recession began last month.


Jeff Matthews
I Am Not Making This Up


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Sunday, August 20, 2006

Weekend Edition: Say it Ain’t So, Fighting Joe


Joe Biden’s color picture jumped out at readers from the pages of this week’s New York Times.

Wearing a starched, striped, open-necked shirt beneath a crisp grey suit, his longish graying hair catching the breeze, the Senior Senator from Delaware looked passionate, raw, and inflamed with rage and indignation.

Precisely what is it that had gotten the 34-year Senate veteran and ex-Presidential candidate so indignant?

The failure of the Bush administration’s post-war policy in Iraq? No.

The state-sponsored holocaust cartoon exhibit now on display in a country (Iran) whose leader maintains the holocaust is a “myth”? No.

Child pornography, perhaps? No, sadly.

Not even the price of gasoline was on the Senator-who-would-be President’s mind.

What was on the Senator’s mind—what had him really steaming—was Wal-Mart.

Returning to Des Moines (the scene of his infamous “I started thinking as I was coming over here…” speech in which he went on to plagiarize the speech of a British politician; a speech which existed, unfortunately for Joe and his soon-to-be-abandoned Presidential campaign, on a video handily provided to the media by the Dukakis campaign) Biden took to a podium and ranted for a reported 15 minutes against one of the greatest economic success stories in American history:

Biden summed up his problem with the largest non-government employer in the nation as follows, and I am not making this up:

“My problem with Wal-Mart is that I don't see any indication that they care about the fate of middle-class people. They talk about paying them $10 an hour. That's true. How can you live a middle-class life on that?”

Now, I don’t know where in the Constitution it is written that retailers must provide a “middle-class” life for their employees. I don’t imagine the woman who vacuums Biden’s nice Senate office every night is being paid a “middle-class” wage. Nor, I would bet, is the guy who starched Biden’s nice, striped, this-will-look-good-on-camera shirt at the dry cleaners getting a “middle-class” wage.

But that vacuum lady and that dry-cleaning guy don’t concern Biden precisely because they are not employed by a company that has thus far been unsuccessfully targeted for organizing by Big Labor.

And Big Labor wants to unionize Wal-Mart big-time, which is—let’s be honest—the real agenda here.

Personally, I couldn’t care less if Wal-Mart employees decide to unionize or don’t decide to unionize. Having met Sam Walton and toured any number of Wal-Mart stores with senior Wal-Mart managers and junior Wal-Mart managers and just plain Wal-Mart associates made rich through "Mister Sam's" generous stock grants over the years, I have a hard time believing people with that kind of strong, proud culture will throw in its lot with the work-rules crowd. But anything is possible.

I just think when a guy who’s claim to fame is that he’s been in the U.S. Senate for 34 years decides to pick on the most successful retailer ever created, it bears some looking into.

For starters, Biden is being cute when he says the folks at Wal-Mart “talk about” paying $10 an hour. They don’t talk about it—Wal-Mart actually does pay ten bucks an hour.

And ten bucks an hour is, for the record, double the minimum wage.

Second, Wal-Mart did not exactly act like the British Navy when it came to hiring the 1.8 million individuals who now work there worldwide. (The Brits, in the early decades of their naval history, used press gangs to “recruit” seamen for their ships by, among other techniques, getting poor sods unconscious-drunk onshore and carrying them offshore before they came to.)

In fact, a recently opened Wal-Mart superstore in one of the most anti-Wal-Mart locations—Northern California—had 11,000 applicants seeking 400 of those lousy, non-middle-class-enabling $10-an-hour jobs that Senator Joe finds so problematic.

Here’s the story:


Wal-Mart has accepted more than 11,000 applications from Bay Area job seekers, marking the largest volume of interest it has received at any of its Northern California stores, said Wal-Mart spokeswoman Cynthia Lin.

“I needed a job ASAP, and they had their doors open,” said Virginia Ford, 19, of Oakland, who had applied for 25 jobs in three months before she landed one as a cashier at Wal-Mart in Oakland on Tuesday.

—San Francisco Chronicle, August 2005

Doesn’t sound like Ms. Ford was kidnapped and forced to work at gunpoint: sounds like she just wanted a job; and Wal-Mart provided it, as Wal-Mart has provided 1.799999 million other jobs around the world.

Now, for comparison's sake, let’s look at Joe Biden’s record on creating middle-class jobs, since he's the one complaining about it.


This is what his web site says on the topic:

Recognizing that America's 25 million small businesses employ nearly half of the private work force, generate more than half of the nation's gross domestic product, and are the principal source of new jobs in the U.S. economy, Sen. Biden helped secure an upgrade of Delaware's Small Business Administration branch office to full district office status. Prior to this announcement, Delaware was the only state in the nation without a district office.

So, there you have it: what Joe Biden did to create jobs was he got the Feds to shell out for an SBA “district office,” the web site of which lists five individuals.

Thus by my math one could say Senator Joe has, in his 34 year career, created five jobs that might not otherwise have been created if he had not spent those 34 years in the U.S. Senate.

By comparison, when Joe Biden was sworn in back in 1973, Wal-Mart had just over 3,500 “associates”—the term Sam Walton used for “employees”—and generated $167 million in sales. (If you get a chance, look up one of the old annual reports on the Wal-Mart web site: they are straightforward, earnest and touchingly old-timey.)

Today, Wal-Mart employs 1.3 million associates in the U.S.—and another 500,000 outside the U.S.—which together amount to a very large a number of people who’ve willingly accepted one of those non-middle-class-enabling jobs. For the record, Wal-Mart's U.S. job growth compounds at an astonishing 19% over the 34 years that Fighting Joe Biden has been on Capital Hill.

A little back-of-the-envelope math makes the numbers even larger: assuming turnover (people who leave) at Wal-Mart runs about one-third of total employment each year (and that’s a guess: most low-end retailers run far higher than that) then Wal-Mart has employed, over the last 34 years, an additional 2.5 million Americans on top of the 1.3 million currently working in dead-end, unattractive, non-middle-class jobs at what is now double the minimum wage.

So that means as many as 3.8 million Americans have found employment thanks to Sam Walton’s low-cost retailing model—compared to the five bureaucrats wangled out of the U.S. budget by Fighting Joe Biden.

Clearly Wal-Mart knows a thing or too more about creating jobs than the Senator running for President.


But is $10 an hour a “livable wage,” as Biden and the other Democrats-who-think-they-can-become-President-but-don’t-realize-Hillary-already-has-the-nomination-locked-up clique would argue it is not?

For many Americans, including the reporters—and I count two of them as friends—who despise Wal-Mart, it is not. But for many Americans, it clearly is—otherwise, nobody would work for Wal-Mart.

They’d go to 7-11 or McDonalds or Circle K, or somebody offering a job at minimum wage. But they don’t. Almost 4 million of them—by my calculations—have gone to Wal-Mart for work.

And I haven’t even gotten to the economic benefit accruing to the 100 million Americans who shop at Wal-Mart each week in the form of lower prices than they would otherwise pay if Sam Walton hadn’t revolutionized discount retailing.

Assuming consumers save ten bucks each visit over the pre-Walton era of every-day-low-pricing, that amounts to a $1 billion-a-week benefit to American consumers, or $52 billion a year. Not bad.


How much has Joe Biden or any of his anti-Wal-Mart peers done for the average American? Let’s look at Joe's own self-promoting web site for clues.

Here’s Senator Joe fighting drugs:

As Co-Chairman of the International Narcotics Control Caucus, Sen. Biden has a long record of accomplishment in passing bills to combat drug use and help drug addicts kick their habit. He wrote the 1988 law creating the nation’s “Drug Czar,” who oversees and coordinates national drug control policy. Today, Senator Biden continues to work to stop the spread of new drugs such as Ecstacy, Rohypnol, and Methamphetamines.

Given the current meth epidemic sweeping the American middle-class, I’d say not much has changed since Joe “wrote the law” creating a “Drug Czar.”


As for the environment…

Sen. Biden believes we should strengthen the Clean Air Act to cut cancer-causing emissions. He also helped lead the effort to make polluters pay for the clean up of toxic waste sites. When polluters don't pay, taxpayers do. That's why Sen. Biden wants to restore the Superfund Trust Fund and force corporations to take responsibility for their actions.

“When polluters don’t pay, taxpayers do.” Tough talk from Delaware’s Senior Senator! However, I see no record of how Joe has ever applied that tough talk to two of the largest employers in his state, DaimlerChrysler and General Motors, whose main product happens to pollute the atmosphere.

Perhaps it’s because he’s been spending so much effort “fighting for”—to use a favorite phrase of the Senator Forehead-types of all parties and persuasions—education. Here’s what his web site says about that:

Investing in education is one of Sen. Biden's top priorities. To better prepare today's students to meet the technology challenges of tomorrow, he has undertaken bold initiatives in the Senate to close the "digital divide" and ensure that all students have access to the on-ramp of the information super highway.

Talk about your controversial stance! It’s like my own Attorney General, Dick Blumenthal, bragging about “taking on the tobacco companies,” as if that was somehow a risky thing to do.

And here’s how Joe spins his vote to go to war in Iraq:

As a longtime member of the Foreign Relations Committee, Senator Biden knows that no foreign policy may be sustained without the informed consent of the American people. And of all the mistakes the Bush Administration made in Iraq, perhaps the biggest was they never leveled with the American people.

If Senator Joe honestly believes Bush’s “biggest” mistake of the war in Iraq was that Bush “never leveled with the American people,” rather than, for example, “they never planned for how they'd run Iraq after the war,” then he is even less insightful than I imagined from his Wal-Mart diatribe.

But with Biden, as with most Senators, whatever their party, the issue is not intellectual honesty. The issue is “What can I do to get elected to something bigger?” And since Biden is one of those poor souls—whose ranks include Chris Dodd, Mark Warner, John Kerry and John Edwards—who believes he stands an actual chance to become the Democratic Presidential nominee over Hillary, then he is going to do stupid, short-sighted stuff like castigate the country’s largest private employer.

Or plagiarize speeches from British politicians.




Jeff Matthews
I Am Not Making This Up


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.





Wednesday, August 16, 2006

When Was the Last Time You Read Something Like This?


I give “Wall Street’s Finest” a rather hard time on these virtual pages, and, I think, for good reason.

Having been one once, I know the drill: work hard, know your companies, schmooze with your clients, and above all, don’t upset anybody—bankers, brokers, and buy-siders, not to mention CEOs and CFOs.

Cynic though I may be about the process, it ain’t as easy as a bystander might think, and the ones who do all those things well while at the same time picking good stocks are few and far between.

So my metaphorical hat goes off to the folks at my alma mater, the Merrill Lynch equity research department, for their continued in-depth work on the options back-dating scandal now spreading through Silicon Valley like ammonium perchlorate through an aquifer.

In a report that hit my email this morning, called “Risks of options irregularities at Apple (and Pixar),” Merrill’s Richard Farmer details the various issues involved in possible instances of back-dated stock options at both companies—and quantifies them, including the size of potential earnings restatements.

But Farmer goes further, and discusses as well the potential that Steve Jobs’ job is at risk, particularly owing to his presence on the board of Pixar, where “Statistical analysis suggests [option] grant pattern [is] unlikely due to chance.”

I won’t get into the details, and please don’t ask for them—ask your friendly Merrill rep.

But you will not find many analysts with the intellectual integrity—not to mention guts—to write something like this:

“…our review of Pixar disclosures does not allow us to rule out the possibility” that key Pixar executives, including Jobs, “might have been involved in creating options irregularities at Apple or Pixar.”

I can tell you that that sentence is much easier said than it was written.


Jeff Matthews
I Am Not Making This Up


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Sunday, August 13, 2006

So, What if the Browns are Wrong?


Greenland Ice Melt May Be Faster Than Thought

That headline is not from the New York Times or the Boston Globe or Rolling Stone or the Village Voice or any other bastion of liberal thought you might expect. Nor is it a press release from Al Gore or John Kerry, or even Ned Lamont.

It is, rather, from a newspaper whose editors frequently dismiss the fact that the earth is warming unnaturally quickly—which any human being who has lived more than forty or fifty years has observed first-hand—as a crackpot theorem being used as political propaganda by drug-addled softies led by Al Gore and various Hollywood starlets.

Indeed, this newspaper’s editors are so skeptical that global so-called warming is anything more than a politically-engineered scare-tactic designed to recapture Congress for the Democrats that they regularly host, on their op-ed page, scientists for the purposes of explaining why glaciers which suddenly decide to melt after five thousand years is an entirely normal event and not the harbinger of impending doom.

Nevertheless, the newspaper in question reported the facts of the Greenland ice-melting case without so much as a single snide reference to Al Gore or the environment whack-jobs whose desire to protect what remaining species we have would spell almost certain doom for an entire generation of California real estate developers who are living the good life thanks to their God-given abilities to cut the tops off of worthless, lizard-infested hills along Interstate 5 and put up thousands of homes for speculators whose trips to Vegas would be endangered if the environmentalists were allowed to have their way:

Greenland's ice sheet is melting more rapidly than expected, according to data obtained from two National Aeronautics and Space Administration satellites that measure the gravitational pull of the earth's rivers, mountains and glaciers.

The finding, reported today in the journal Science, adds to concern that global warming may cause faster sea-level rises than predicted, potentially increasing risks to coastal cities and areas.

According to the new satellite measurements, Greenland lost about 57 cubic miles of ice in 2005.

That figure is more than double some previous annual estimates, and the rate of melting appears to be increasing, said Jianli Chen, a researcher at the Center for Space Research at the University of Texas at Austin, and the lead author of the study.

Added to other recent observations, Greenland appears to be "losing ice significantly faster now than just a few years ago," said Jonathan Overpeck, director of the Institute for the Study of Planet Earth at the University of Arizona. While scientists have long predicted changes to the immense ice cap, "it is disquieting to see how fast they are taking place," said Dr. Overpeck, who wasn't involved in the Chen study.

“Disquieting” may not be the right word for what R.E.M. referred to as “the end of the world as we know it.”

Even after the usual qualifying statement that scientists disagree about the cause and effect of global warming, the article continued reporting the “disquieting” facts of the Greenland ice-melt:

Scientists say it is important to understand the ice loss because Greenland holds enough snow and ice to raise sea levels by 20 feet, were all of it to melt.

Current predictions are that sea levels will rise between a few inches and three feet in the next century. However, some researchers think those predictions may underestimate the effects of global warming and the speed of future sea-level increases.

"I think what is happening in Greenland right now is not predicted by any of the models," said Eric Rignot, a senior research scientist at the Jet Propulsion Laboratory in California, who earlier this year reported estimates of Greenland ice loss similar to Dr. Chen's. "Sea-level rise of one meter over one thousand years is a lot different than one meter over a hundred years," Dr. Rignot said.

Sea levels have been rising slowly since the end of the last ice age, more than 10,000 years ago, as glaciers and snowpack have melted, and because warmer temperature causes ocean water to expand.

Currently, the average height of the oceans is increasing by about 1/10th of an inch a year.

The paper’s editors offered no commentary on this “disquieting” news. Not even so much as an anti-Gore dig.

Perhaps that has to do with the accumulating evidence of global warming’s accelerating impact on the real world, already reported in the same newspaper as recently as July 18 in “For Icy Greenland, Global Warming Has a Bright Side”:

Stefan Magnusson lives at the foot of a giant, melting glacier. Some think he's living on the brink of a cataclysm. He believes he's on the cusp of creation.

The 49-year-old reindeer rancher says a warming trend in Greenland over the past decade has caused the glacier on his farm to retreat 300 feet, revealing land that hasn't seen the light of day for hundreds of years, if not more. Where ice once gripped the earth, he says, his reindeer now graze on wild thyme amid the purple blooms of Niviarsiaq flowers

Lest you think this newspaper is presenting Mr. Magnusson’s cock-eyed optimism as the only prism with which to view the current warming trend, the newspaper reported a similar story, except from the point of view of the loser rather than the winner, in “Is Global Warming Killing the Polar Bears?” on December 14, 2005 (which I have quoted in a previous piece that drew much skeptical howling from the global-warming-is-a-statistical-aberration crowd):

It may be the latest evidence of global warming: Polar bears are drowning.

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.

The newspaper in question which has reported such disquieting facts regarding global warming is none other than the Wall Street Journal.

And whatever the Journal's editors think about the cause and effect of global warming, the central problem with the entire scientific debate over cause and effect is, in my view, as follows.

If the greens are wrong, and if global warming is no more than a temporary and self-correcting blip well within the bounds of statistical fluctuations, and if we spend zillions of dollars attempting to mitigate and reverse a normal self-correcting blip in the weather, well, we’ve spent a bunch of money unnecessarily and crimped the lifestyles of a lot of real estate developers and land speculators, to boot.

But if the browns are wrong, and if global warming is in fact the product of more than 600 million motor vehicles screwing up the works, and yet we do nothing about it now, then our grandchildren will be dealing with issues of unfathomable catastrophe—literally, the end of the world as we now know it.

So I sure hope the browns are right, although after reading my Wall Street Journal about shrinking ice caps and dying polar bears and retreating glaciers and happy Greenland farmers, I wouldn't bet on it myself.

It's a bet nobody, even the editors of the Wall Street Journal, can afford to lose.




Jeff Matthews
I Am Not Making This Up


© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Friday, August 11, 2006

General McClellan Senses a Change in the Weather


GM to Slow Production of Big SUVs
Inventory Buildup Illustrates Risk of Near-Term Strategy As Gasoline Prices Stay High


—Wall Street Journal



That’s the headline, and I am not making it up.

Back in December ("McClellan Awaits Battle…in Detroit"), I compared the slow pace of General Motors CEO Rick Wagoner’s movements to Abraham Lincoln’s most stubbornly lethargic senior general, George McClellan.

McClellan, as Civil War buffs know (WARNING: Civil War buffs are not normal human beings—mentioning “Civil War” to them is like making eye contact with that guy in the subway who looks sort of glassy-eyed and eager to tell you something IMPORTANT about THE FBI: you will regret it the rest of the day, if not your life) could not bring himself to fight.

With McClellan, it was always something: he didn’t have enough troops, he didn’t have enough equipment, the weather was bad (I am not making that up), or there was too much pollen in the air (okay, I made that up).

And so with Wagoner. Seems he just recently discovered that rising gas prices and heavy dependence on SUV sales do not make for a profitable company.

As today’s Wall Street Journal reports:

General Motors Corp. Chief Executive Rick Wagoner said the company will slow production of its new lineup of large sport-utility vehicles during the second half of the year to cope with rising inventory as average U.S. gasoline prices stay at more than $3 a gallon.

Gasoline prices higher, SUV sales lower—D’oh!

Three months ago my pal who works in the drum shop at the local Guitar Center told me he was ditching his used SUV for a used Camry, owing to the fact that it was costing him $60 to fill up his used SUV. “Can’t afford it, man.”

Now, you would think that somebody in Detroit—particularly a major executive who is highly paid to deal with changes in the economic environment in which his company operates—would have sensed this sort of thing coming when gasoline prices first hit $3.00 a gallon a year ago, after the hurricanes.

But apparently at least one major executive did not—or could not, or would not. As the Journal says:

GM's earnings have benefited from building and stocking the new line of SUVs, which it has said would do well despite high gasoline prices because the vehicles are more fuel-efficient than competing models. But sales of the large SUVs to consumers haven't kept pace with production. Large-SUV sales overall fell 22% through the first half, according to Ward's Automotive Reports.

According to Ward's, GM built 106,334 Chevy Tahoes in January to June. According to Autodata Corp., 84,933 were sold in the same period, a 4.2% increase from a year earlier.

As of the end of July, GM and its dealers had 82 days' supply of unsold Tahoes, 89 days of unsold GMC Yukons and 75 days of unsold Chevrolet Suburban ultralarge SUVs. Historically, auto makers have aimed for a 60- to 65-day supply, or less, to avoid resorting to profit-draining discounts to clear stock.

I realize that not everybody—even highly paid executives at Ford or Chrysler or Toyota—anticipated $3.00 a gallon gasoline prices, and that it’s not their fault that crude oil hit prices never anticipated by anybody except maybe Mark Faber, of the Barron’s Roundtable, who called for $80 oil years ago.

But, as Lincoln pointed out to McClellan whenever the general complained about the weather, generally speaking the weather is bad for everybody, not just McClellan.

According to the 2005 GM proxy statement, Mr. Wagoner was paid $5.5 million in total compensation in 2005. And $10 million the year before. And $12.8 million the year before that.

My guy in the drum shop was advising GM to stop making so many SUVs three months ago.

And his advice came free.


Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Wednesday, August 09, 2006

When Bad Things Happen To Bad Companies


“It looks like a much smaller generic private company completely outmaneuvered two of the giants of the pharmaceutical industry,” said Gbola Amusa, European pharmaceutical analyst for Sanford C. Bernstein & Company. “It’s not clear how or why that happened. The reaction from investors and analysts has ranged from shock to outright anger.”

—New York Times

Thus says one of Wall Street’s Finest in reaction to this week’s news that Barry Sherman, the CEO of a no-name company (named Apotex), had figured out a way to blow the doors off one of Big Pharma’s most profitable franchises five years ahead of nearly everybody’s estimates by using a deal he negotiated with Bristol-Myers that was subsequently nixed by the government.

Here’s how he described his coup:

Mr. Sherman, in a telephone interview, all but ridiculed his two big rivals, saying they had naïvely agreed to conditions that allowed his company to bring its product to market even though the deal was rejected by regulators.

“I think they acted foolishly in a number of ways,” said Mr. Sherman, a Toronto billionaire who amassed his fortune in the generic drug business.

Mr. Sherman said that he had never expected the American government to approve the deal, but that he had conducted the negotiations in a way to let him push the Apotex drug onto the market.

Mr. Sherman said Apotex was engaged in an “all-out launch” and has already shipped most of its inventory while manufacturing continues.

Now, I could have spared the Sanford Bernstein analyst quoted at the top—and any other of Wall Street’s Finest—all that “shock” and “outright anger” at the latest in a long string of bad news from Bristol-Myers, if anybody had asked, by pointing out that there is a reason bad things keep happening to Bristol-Myers: look at the track record of the man in charge.

Oh, sure, I know the latest spin—the company has a amassed a great cancer drug pipeline under its CEO, the MBA-trained Peter Dolan, who has to his credit been working feverishly to bring the company back from the brink of a channel-stuffing disaster that resulted in an SEC investigation, a fine, and subsequent earnings restatements.

But Mr. Dolan was—and I merely point this out as a fact—President of Bristol-Myers during the time period (“from the first quarter 2000 through the fourth quarter 2001” according to the SEC) that it was found by the SEC to have been doing what was described by the SEC as follows:

…improperly recognizing revenue from $1.5 billion of such sales[“excessive” amounts “ahead of demand”] to its two largest wholesalers and using "cookie jar" reserves to meet its internal sales and earnings targets and analysts' earnings estimates.

Mr. Dolan was—and I merely point this out as a fact—both Chairman and CEO of Bristol-Myers in 2004 when the company settled with the SEC and paid a $150 million fine for the above.

Mr. Dolan was also—and I merely point this out as a fact—President of Bristol-Myers in 2001 when the company spun off its orthopedics business, Zimmer, in order to ‘focus on its pharmaceutical business’ (the one with the channel-stuffing problem), thereby freeing Bristol-Myers from the distraction of owning one of the great growth businesses in medical device history.

Likewise, Mr. Dolan was—and I merely point this out as a fact—Chief Executive Officer in 2001 when the company spent $7.8 billion to buy DuPont’s drug business, which left most of Wall Street’s Finest scratching their heads at the time, and still does.

And he was also—and I merely point this out as a fact—Chief Executive Officer when the company paid $70 a share for 20% of the about-to-become-scandal-embroiled biotech company Imclone in 2001 (Imclone trades under the ticker IMCL, and is currently $32.78 bid, $33.11 offered).

And here is how the Times described the situation by which Mr. Sherman has apparently outfoxed Mr. Dolan, Bristol-Myers, and its Plavix partner, Sanofi:

As part of the federal investigation, the F.B.I. recently searched the offices of Mr. Dolan and Dr. Andrew Bodnar, his close adviser. Dr. Bodnar visited Mr. Sherman’s Toronto office twice to personally negotiate part of the deal, according to Mr. Sherman.

The Justice Department is believed to be investigating whether Bristol and Sanofi tried to conceal a so-called side deal with Apotex that would not have passed regulatory muster. Both companies have denied doing anything improper.

“Bodnar kept saying that he was in contact with Peter Dolan and Dolan was 100 percent behind whatever he was negotiating,” Mr. Sherman said yesterday. “Whatever he was doing, whether or not there were side deals that were not reported to the F.T.C, I cannot comment on.”…

In the telephone interview yesterday, Mr. Sherman declined to comment on what Apotex had or had not told the government. But he said he never expected the deal to clear regulatory review and went along with it simply to position his company to enter the market with its generic. Mr. Sherman said he viewed efforts by brand-name companies to extend monopolies through settlement negotiations as “outrageous.”

“Our focus was to get the concession that would enable us to launch, when the F.T.C. turned us down,’’ Mr. Sherman said.

Now, somebody please explain to me why Wall Street is “shocked” that Bristol-Myers was, as today’s New York Times article says, “completely outmaneuvered” by a no-name generic drug maker?



Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Monday, August 07, 2006

The Wrong Man


“Cuban dictator Fidel Castro is still in the hospital with a serious medical condition. Castro said that a half century of Communist rule seemed like a good idea right up until the point he was rushed to the hospital in a '55 Oldsmobile.”
—Conan O'Brien

“A message delivered on Cuban Television today said that Fidel Castro's condition is listed as stable, which in Communist countries means he'll be dead by Friday.”
—Jay Leno


The headlines (and the jokes) these days are all about Fidel Castro, the appears-to-be-dying Cuban strongman who also ranks as the favorite dictator of Connecticut’s own version of “Senator Forehead,” Chris Dodd.

Back in 2002, Dodd went on a “fact-finding” mission to that country, which is such a land of opportunity, equality and social progression that thousands of Cubans every year risk sharks, starvation, and other ways of dying in order to sail to freedom across the Straits of Florida. Dodd’s “fact-finding” mission apparently gleaned some very interesting “facts” courtesy of the thugs in control, because Dodd later gave a speech on the Senate floor criticizing not the Castro regime; but the “bullying tactics” of the United States government.

(In the interest of full disclosure, I should note that one of those who did escape from Cuba across those shark-infested waters on a raft is now a friend of mine, who found freedom, raised a family and built a successful small business in return. He does not, to put it mildly, like Castro. Nor is he a fan of our Senator Forehead—er, Dodd.)

Nevertheless, while the intense speculation regarding Castro’s fate is interesting and even exhilarating, considering the potential for the freeing of 11 million people from dictatorship, there is, south of our border, a far more ominous development in a far more important country—and that is the destruction of Venezuela's oil producing capacity under its strongman, Hugo Chavez.

Venezuela, as I have mentioned before, has the biggest oil reserves outside the Middle East. Also, as I have mentioned before, it is the fourth largest oil supplier to the United States.

And it is run by Mr. Chavez, who has publicly declared that in order to counteract an impending U.S. invasion of his country, he is buying Soviet fighter jets:


“Do you all know from what distance the Sukhoi (Su-30MK2) can launch?” Chavez asked at a news conference last month. "Two hundred kilometers -- that's to say, an aircraft carrier that stops in the Caribbean. They (the United States) like to stop aircraft carriers in the Caribbean to invade."


—from the San Francisco Chronicle.

In other words, he’s a mad-man.

And he’s a mad-man who controls a very large and important oil-producing nation—which Cuba is not.

Consequently, the health of an aging dictator in Havana is of far less import to the United States that the ongoing collapse of the Venezuelan oil company (known as PDVSA), upon which rests the entire social policy of the Chavez government. According to a recent and excellent Wall Street Journal article on the issue:

Since Mr. Chávez took power in 1999, he has become PDVSA's de facto CEO, steering the oil company into political, economic and philanthropic ventures that have distracted it from its core business of finding and producing more oil. The consequences for PDVSA are stark: Output has fallen to an estimated 1.6 million barrels a day from nearly 3 million barrels in 1998.


That’s a 50% drop in less than 10 years, which works out to almost 8% a year. At that rate, Venezuela will be producing less than a million barrels a day in five years—not enough to export anything to the United States, and certainly not enough to feed Chavez’s hungry entitlements programs.

According to the Journal:

The company [PDVSA] must spend at least 10% of its annual investment budget on social programs worth about $1 billion a year. But that figure doesn't include other spending by the oil giant on projects such as building roads and the government's subsidized food program. That kind of economic aid totaled $8 billion last year alone, the company says. Palmaven, the PDVSA unit that oversees social spending, is the company's fastest-growing division.

How much does that leave the Venezuelan oil company for, oh, finding oil? Not very much:

Such attention to economic development, however, gives the company less time and money to devote to its oil business. It spent just $60 million on exploration in 2004, compared with $174 million in 2001, according to the company's recently published 2004 financial results.

$60 million worth of oil exploration is, almost quite literally, nothing.

Consider this: Venezuela is producing about 1.6 million barrels a day, and it is spending $60 million on exploration. Meanwhile, Apache Corporation, your basic independent oil and gas company, produced 450,000 barrels a day last year—one-third of Venezuela’s output.

Yet Apache spent $3.4 billion—with a “b”—on exploration and development, or 55-times what Mr. Chavez deems necessary.

As the Journal says:

That's bad news for Venezuela, where current wells are so old that their output falls at an average rate of 23% a year, forcing the company to drill new wells just to keep production steady.

Yes, that's bad news for Venezuela, but it’s even worse news for the United States, which relies on Venezuela—think about that for a second—for a healthy chunk of its daily needs.

And with this morning’s news about "British So-Called Petroleum" shutting down the North Slope oil field for repairs to the aging pipeline, Mr. Chavez is the guy we want to see being rushed to the hospital “in a ’55 Oldsmobile.”

Not Fidel Castro.


Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Wednesday, August 02, 2006

Burger King Flippers Toast New Buyers: Who’s Next?


Burger King Posts Loss, Tepid Sales
Results Underscore Concerns
Owners Took Big Payments And Left Investors in a Pickle

KKR Appears to Win Philips Unit
Deal With Silver Lake May Exceed $10.25 Billion For Semiconductor Division


What, you might be wondering, do those two headlines have in common? Well, both appeared in today’s Wall Street Journal. And they are both, in my view, two sides of the same coin.

On one side of the coin, Burger King, in its first quarter as a newly public company, missed sales targets set by Wall Street’s Finest—not the thing to do your first quarter out of the gate. The stock traded as low as $12.50 a share, which is something the poor shlubs who bought 25 million shares at $17.00 a share just 77 days ago were not expecting.


As the Journal notes:

The [sales] results underscore concerns that Burger King's private-equity owners took huge payments while leaving investors with a struggling company that has yet to turn the corner.
Dragging down the earnings was a $30 million management-termination fee that Burger King paid out during the quarter to owners Texas Pacific Group, the private-equity arm of Goldman Sachs Group Inc. and Bain Capital.


That $30 million was not the only vig the private-equity owners skimmed here. As the Journal noted in a previous story on the Burger King deal:

According to company filings, the three firms collected a total of $448 million in dividends and fees from Burger King -- approximately what they initially invested. All that took place before the May stock sale, which valued their remaining stakes at $1.8 billion -- more than triple their original investment.

Now, in case you’re wondering precisely what these savvy flippers of Burger King bequeathed to that company in return for that near-half billion pre-IPO cash-out—great strategic initiatives, far-sighted new agendas, insightful management ideas—I refer to the story in today’s Journal, which quoted CEO John Chidsey:

Mr. Chidsey told investors Burger King is trying to persuade franchisees to open one hour earlier in the morning and stay open one hour later in the evening while pushing its omelet sandwich to lift breakfast sales. Mr. Chidsey says Burger King plans to more aggressively court children through movie and game promotions.

Wow! Talk about out-of-box thinking! Movie tie-ins! Game promos! Omelets!

Props to Chidsey!

I am being sarcastic, of course. But let’s soberly move on and see where the KKR/Silver Lake story fits in here. Where it fits is this: it is the other side of the private-equity coin, and again I quote today’s Journal:

The bidding for the Philips unit "was brutal," says one lawyer who represented one of the unsuccessful groups in the bidding. As the rivals bid the price up, "everyone lowered their expectations on returns" they were willing to accept from the transaction. The private-equity business "is really stretching now" to do deals, this person said.

So, we have private-equity buyers “really stretching” to make deals work. And we have at least one of the largest of the recent crop of already-done deals groping for customers by adding omelet sandwiches to its menu and trying to get franchisees to open the doors an hour earlier.

Lower margin of error + lower deal quality = recipe for disaster.

A year or more ago I wrote about the impending energy crisis of 2006. I’m not claiming any particular smarts here—the math (84 million barrels a day worldwide demand + declining supply = crisis) was easy enough that even I could grasp it.

But now I’ll go out on what I think is an even stronger, sturdier limb and call 2007 The Year of the Private-Equity Crisis.

Let the buyers beware.



Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.