Friday, December 29, 2006

Forsythias in Bloom


Sell the kids for food
Weather changes mood
Spring is here again…

—Nirvana, “In Bloom”


Spring is here again, at least in one small corner of New England: our forsythia is, as Nirvana sang, in bloom.

I am not making that up.

Just yesterday an odd, misplaced flicker of yellow in an otherwise brown and bare back yard caught my eye. Upon further inspection I discovered half a dozen flowers blooming on the tip of a few slender branches of the forsythia, something I've never seen before March, at the very least.

Forsythia, as any gardener knows, is a harbinger of spring—not New Year’s Eve. It’s even defined that way in the gardening texts:

a shrub belonging to the genus Forsythia, of the olive family, native to China and southeastern Europe, species of which are cultivated for their showy yellow flowers, which blossom on the bare branches in early spring.

I knew it had been a mild winter, but not that mild.


Meanwhile, the Bush administration is finally acknowledging that global warming is, in fact, here and now, by proposing to add polar bears to the list of threatened species. Said our Secretary of the Interior, “the polar bear’s habitat may literally be melting.”

It’s about time somebody charged with our land resources figured this out—too late though it may be to benefit anybody, let alone the polar bears.

In “So, What if the Browns are Wrong?” this past August I raised the point that even the Wall Street Journal, whose editorial page is routinely filled with anti-Green rants, had carried the following headline as far back as December 2005:

“Is Global Warming Killing the Polar Bears?”

Putting polar bears on a mere list will, of course, do nothing to stem their demise. We will dither, and we will debate, and with every cold spell that hits some part of the country the Browns will scoff—all science aside—at the notion that 600 million cars, hundreds of thousands of factories and millions of trucks have anything to do with it.

Yet in the meantime, the forsythia have, for now at least, been fooled into thinking spring is coming.


For they are in bloom. In southern New England. In December.



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, December 27, 2006

Stock Upgrades I'd Like to See



IBM upgraded to Buy From Sell at ThinkEquity


That’s the first half of the headline on Briefing.com this morning, and I am not making it up.

Nor am I making up the second half of the headline:

Tgt raised to $110 from $70

“Gosh,” you might be thinking: “something profound must have changed to account for this $41 per share increase in the fellow’s ‘price target’ for IBM!”

And you would be wrong.

What has changed—let’s be honest about this—is the price of IBM’s stock itself.

As anybody with a Bloomberg machine or even Yahoo! Finance can see, IBM’s shares are 95 bucks, which happens to be much closer to $110—the new price target of the ThinkEquity research gurus—than to $70, which was the previous price target of the ThinkEquity research gurus.

And since it’s close to year-end, and since it doesn’t look like IBM stock is going down to $70 any time soon, what better time to upgrade the shares using some highfalutin excuse like, oh, this:


Increased performance and profitability in IBM’s Global Service segment, together with strong software sales, causes us to reconsider our SELL rating and now recommend it as a BUY for this quarter.

And that’s precisely how the ThinkEquity gurus start their multi-page about-face research report.

However, I believe there is an entirely more straightforward rational, and if I'd written the research report, and had been as wrong about IBM stock as the ThinkEquity folks have been—and believe me, I’ve been even wronger, to coin a word, on more stocks than the poor fellows in this case—it might instead start like this:

We are changing our rating on IBM from “SELL” to “BUY” and raising our price target from $70 to $110 for the following reasons:

1. We’ve been so wrong on the stock that it makes my head hurt when I wake up in the morning and realize “this is not a dream.”

2. My research director thinks I’m an idiot.

3. The sales people won’t make eye contact with me in the hallways—it’s like I’m dead meat. And when we marketed in Appleton last week the sales guy kept rolling his eyes while I talked. And I swear he was making those “he’s crazy” circles twirling his finger around his ear behind my back.

4. It doesn’t look like the stock is going to $70 any time soon. In fact, the chart looks like it blows through $100 and doesn’t stop until $110. At least, that’s what Cramer says. What the hell do I know?

5. Every time I look at the screen I know there are probably sixty or seventy stock tickers up there, but the only ticker I can see is IBM. It’s like my brain can’t focus on anything else but that stupid stock. It goes up every ----ing day.

6. It’s year-end: I can score points with clients upgrading into year-end. So why not?


Why not, indeed?


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.

Tuesday, December 26, 2006

The “Best Ever” Press Release.



No, this is not about the “best ever” press release I have seen in 25-plus years on Wall Street.

Rather, this is about the “Best Ever” press release that Amazon.com’s P.R. minions keep in their Word files for release, like clockwork, the day after Christmas (except in 2004, when they released it the day after the day after Christmas).

I am not making this up.

The following are the post-Christmas headlines from the last five years via my Bloomberg:

12/26/2006 "Amazon.com’s 12th Holiday Season is Best Ever"

12/26/2005 “Amazon.com, Inc. today announced that the 2005 holiday season finished as its best ever…”

12/27/2004 “Amazon.com’s Tenth Holiday Season is Best Ever…”

12/26/2003 “Amazon.com Wraps Up Its Ninth Holiday With Busiest Season Ever.”

12/26/2002 “Amazon.com today announced it has finished its busiest holiday season ever…”

Now, any company is entitled to boast when it achieves a new all-time sales record—especially companies in seasonally-sensitive businesses like Amazon.com, where a few days of bad weather or bad news can disrupt an entire year’s worth of planning and preparation, and, therefore, hurt a years’ worth of sales and earnings.

But unless I am missing something, Amazon.com has been in business all of twelve years.

Furthermore, it is the largest Internet-based retailer on earth, and thus still benefiting from the secular shift of consumer spending online.

Finally, it is based in America, and as we have seen from the morning’s headlines, the entire American economy had its “best ever” holiday season last week, even if the numbers were not quite as spectacular as some had anticipated.

So do we really need yet another press release from Amazon.com boasting of its “Best Ever” holiday season?


Not for nothing, but it seems highly likely that even Amazon’s money-losing competitor Overstock.com experienced its “Best Ever” holiday sales these last few weeks, while poor old Circuit City did in fact just report its best Thanksgiving weekend sales in five years, but at such lousy margins that Wall Street’s Finest couldn’t downgrade the stock fast enough.

So maybe Amazon’s P.R. minions should save their dry powder for the day the company does not experience its “Best Ever” holiday season.

They’ll need all spin they can get when that happens.


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, December 22, 2006

Since When Did “Hedge Funds” Stop Hedging?



“Shorts? Listen, my previous fund got hammered on the short side.”

That is a quote from a fellow sitting at a table squeezed next to me in a major metropolitan Starbucks.

The individual in question, who has a few grey hairs like yours truly, is marketing his fund to two younger men who—based on the sophisticated nature of their espresso drinks as well as the unsophisticated nature of their questions—appear to be fund-of-fund investors.

While I don’t know the man with the grey hairs, I vaguely recognize him from company meetings in years past as a fellow hedge fund veteran.

And what I find interesting about the whole thing is that, based on the quote above as well as snatches of conversation I can’t avoid hearing from three feet away, he is quite vociferously playing down his reputation as a hedge fund guy who actually used to hedge his portfolio with shorts.


He is doing so for the purpose of talking up his current, non-hedged hedge fund to his audience, by which I mean the two fund-of-funds managers who, based on their questions thus far, I frankly would not let invest my dog Lucy’s biscuit money, let alone the millions or billions of fund-of-fund money they appear to be investing on behalf of institutions seeking a slice of the hedge fund pie.

I say this not to disparage fund-of-fund managers as an asset class, but when I hear one of these financial middlemen earnestly explain that “the problem with shorting is that your potential gain is limited to 100% while your potential losses are infinite”—as if that insight just occurred to him, and he had to pass it along before his flash of brilliance got lost in the ether—it does not reflect glory on his peers.

Now, what’s the point of all this? you might well ask.


The point is that hedge fund managers appear to be shedding their short-selling identities in order to attract money, precisely at a time when markets are hitting new highs.

I find this a fascinating, particularly now that Iraq has turned into a full-fledged civil war, whatever the euphemism of the day, while cost pressures are rising around the world and we’ve had a currency panic in Thailand, not to mention the forcible appropriation of multi-billion-dollar natural resources from public companies by a thug masquerading as an elected President in Russia, who not for nothing is probably the single most powerful person on earth.

And since we know that what goes around, as they say, comes around, it seems to me that maybe now that grown men are eagerly disposing of their past life on the short-selling side of the hedge fund equation, we might be closer to a time when it could actually be worth looking for shorts rather than longs.

After all, if “hedge funds” don't hedge, they're not “hedge funds,” are they?



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, December 20, 2006

Gussied-Up Land-Flippers?



The first thing I learned in this business that I had never grasped from the accounting books we “studied” in between games of foosball at Smuggler’s Tavern came during a trip to a furniture plant in Altavista Virginia.

In those days, America actually manufactured quite a bit of the furniture bought by American consumers, much of it in plants in the general vicinity of High Point, North Carolina, where the annual furniture mart is pretty much the whole point of going to High Point in the first place.

Since then, of course, a lot of furniture plants have closed—including, I’ll bet, every one I visited back then, although not necessarily for the reasons put forth each night on CNN by Lou Dobbs in his hysterical, How-America-Is-Prostituting-Itself-to-Foreign-Mercenary-Scum-Sweatshops tirades.

The fact is that some of those plants I saw even in their heyday were so out-of-date and inefficient it was hard to imagine anybody could competitively manufacture anything in them except workers comp claims.


One I remember in particular actually had a multi-story manufacturing line—they moved partially completed wood furniture from floor-to-floor on a big old rickety elevator. Not exactly “world class,” and not long for this world even back then.

Still, the companies in those days were generally pretty smug about their central role in furnishing America’s bed rooms and living rooms and dining rooms—after all, who could possibly make a big, bulky dining room table in Asia and ship it all the way to Los Angeles for profit?
And even if somebody could, who’d want to buy it?

A lot of people, it turns out.

Imported furniture is now more than half the U.S. business, up from next-to-nothing back when I was sitting in an old-fashioned office just off the long-gone production line of the Lane Company in Altavista, Virginia, getting my first real lesson in free cash flow from an actual Chief Financial Officer.

I don’t recall what year this was, but business in general was slowing down after a long period of prosperity, and what surprised me was this: not only was the CFO not upset about the slowdown, he was actually getting pretty excited talking about all the cash he’d be able to generate from inventory and receivables now that sales had leveled off.

Being a slow learner, I asked for specifics, and he gave them so clearly that even I could grasp the mechanics of how, when you collect receivables and work off inventory, the difference goes into the bank. (Back in those days a CFO could talk to you about these things without putting out an 8-K and going on CNBC to explain himself.)

And that was how I learned how much cash a business can chew up when it expands, and how much cash it can generate when it contracts. Not exactly the secret of life, for sure, but good to know at an early age in this business.

Which is why the most puzzling part of yesterday’s conference call with Hovnanian Enterprises—the homebuilder whose business has slowed quickly after a decade or so of non-stop growth—was the discussion of free cash flow, or rather, the lack of free cash flow, now that things are easing up.

“For the full [fiscal] year, we generated adjusted EBITDA of $753 million, which covered interest 4.5 times,” management said on the call. So far, so good. But then:

“Due to the slowing velocity of deliveries…our inventory turnover and thus interest coverage is expected to decline in 2007.”…

Not only will inventory not decline as you’d expect in a slower environment, this company expects inventories to grow in the near future:

“Our inventories are expected to grow through the first two quarters of fiscal ’07 as we invest in new communities and the associated land development and home construction. But for the full year, we expect the net change in inventories to be close to zero, and thus we expect to be marginally cash flow positive for the full year.”

If they're not going to be cash flow positive now, when are they ever going to be? The company can’t even buy shares back beyond the dilution from stock options:

“Although we believe our stock remains undervalued, we intend to maintain only the current pace of share repurchases at this time.”


Somehow, Hovnanian's financial model negates every known benefit of a business slowdown: the ability to reduce working capital and generate free cash flow not needed for reinvestment when growth opportunities are lacking.


How is this possible? I can think of no explanation aside from one.

Could it be that homebuilders—profitable though they may appear to be during a long upturn—are no more than gussied up land flippers?

Informed rebukes are welcome.


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, December 18, 2006

And Beware CEOs Trying to “Hit the Numbers”



Tom Bender might be a great guy, for all I know.

And he might be a great CEO, too, although he does run The Cooper Companies, a contact lens maker whose news flow has been uniformly bad of late—so bad that its stock happens to be one of the only companies in the world trading closer to its 52 week low than its 52 week high.

But if the company’s recent conference call was any indication, the outside observer would not know how great he is.

I say this not because the word “decline” appears nine times in the earnings call transcript—bad things do happen to good people and good companies on occasion.

I say it because, after recounting the litany of woes resulting in the latest earnings miss, Bender says the following about the objectives he’s set for the upcoming year:

Let me talk a little bit about some of the objectives that we have for 2007. Number one, most important and most important to all of you is to hit our guidance.

I am not making that up.

Now, if Mr. Bender honestly thinks that the “number one” objective of his company should be “to hit our guidance” for the sake of Wall Street’s Finest and their precious earnings models, then he is about as far removed from what really makes a company great as a CEO can be.

Not only can the focus on hitting a meaningless, and often unsustainable, profit forecast result in stupid, short-term decision making; it can also, as in the case of Tyco, Fannie Mae, Enron, and a list of other companies large and small too lengthy to bother with, result in fraud.

As with morons writing blogs, beware a guy at the top whose chief goal is to “hit the numbers.”



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, December 15, 2006

Beware Morons Writing Blogs


[Author's note: the following was posted prior to this morning's announcement that Overstock.com had sold $40 million worth of stock to institutional investors at $14.63 per share.]


Overstock.com (OSTK) leveraged buyout and takeover rumors are fairly recent. We first reported them on December 1, 2006 when the stock was still at $15.00 per share. This takeover chatter has helped drive OSTK over 10% higher in less than two weeks.


So begins a recent entry in a blog (“Stock Rumors”) that does precisely what its title suggests: it passes along rumors about stocks.

How it gets those rumors in the first place is not clear.

One thing that is clear, however, if the above-cited Overstock.com rumor is any example, is that the author of the blog is not exactly plugged into the prop desk at Goldman Sachs or the trading floor at SAC Capital.

For starters, while Overstock.com may very well at this moment be the subject of a dozen private equity investment committee meetings—so vast is the pool of private equity these days—the notion of a “leveraged buyout” as reported by the blogger is, I think, a howler, for several reasons.

Reason number one is that Overstock.com has, thus far, proven unable to report an annual profit since its 2002 public offering.

Reason number two is that Overstock.com has frittered away so much cash in the last few years—among other things by buying back its own stock at something like double the current share price—that it has less cash than convertible debt on its books.

Reason number three—and this is something Mr. Rumor apparently never bothered to check—is that Overstock.com has already collateralized “all or substantially all of the Company’s and its subsidiaries’ assets” towards obligations under a Wells Fargo Retail Finance Loan and Security Agreement, fully described in the latest 10Q. (Page 12, footnote 9.)

The restrictions of said Loan and Security Agreement are spelled out quite clearly, and might appear to the average reader to have some bearing on Mr. Rumor's ideas about Overstock.com's future:

The WFRF Agreement includes affirmative covenants as well as negative covenants that prohibit a variety of actions without the lender’s approval, including covenants that limit the Company’s ability to (a) incur or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or stock of another person, (d) sell assets, (e) change its name or the name of any of its subsidiaries, (f) make certain changes to its business, (g) optionally prepay, acquire or refinance indebtedness, (h) consign inventory, (i) pay dividends on, or purchase, acquire or redeem shares of, its capital stock, (j) change its method of accounting, (k) make investments, (l) enter into transactions with affiliates, or (m) store any of its inventory or equipment with third parties

I can't think of too many other restrictions Wells Fargo could have slapped on Overstock, except, maybe, always saying "please" and "thank you."

Still, all these do not stop Mr. Rumor from putting forth Overstock.com as a “leveraged buyout” candidate.

Nor does it stop him from mentioning Amazon.com as a possible suitor, with such blazing insights as follows:

With a market cap of almost $16B and cash of over $2B, the acquisition of OSTK for $400M or $500M that would [sic] increase its yearly revenue by almost 10% could be quite positive.

Now, maybe Amazon.com really does want to buy a money-losing outfit for “$400M or $500M”—anything can happen in this business. But Jeff Bezos has never bought a direct competitor, and he has never expressed any interest in salvaging turnarounds for the sake of juicing his company’s annual sales pace.

Nevertheless, our blogger warms to the unfettered freedom of rumor-mongering and expands his list of would-be suitors to include Google, Yahoo! and eBay. (Why he didn’t also mention Starbucks, Apple, Home Depot and Circuit City while he was at it is beyond me.)

But the best line of all comes beneath the heading, “Carl Ichan, A Possibility:” and it is written as follows:

Carl Ichan has been rumored as a possible suitor for OSTK. Recently his bid for Reckson (RA) was rejected, and he may be looking for a place to put the $1B in cash he was planning to spend on that deal. OSTK could be a good opportunity for him.

Now, you and I know that Carl Icahn is a famous corporate raider of days gone who reinvented himself as a kinder, gentler corporate activist with a terrific track record.

And you and I know that it is Carl Icahn whose “bid for Reckson was rejected.”

But Carl “Ichan”? I don't think so.

Still, the fact that he did not even get the man’s name right did not stop Mr. Rumor from the aforementioned Leveraged Buyout speculation of a company whose main lender has a rather substantial say in whatever outcome Mr. Rumor foresees from the array of takeover possibilities that appear to be sweeping the Overstock.com chat rooms.

As I say, anything can and could happen to Overstock.com and any other public company in this takeover-happy feeding frenzy of a market.

But Jim Cramer advises home-gamers to do their own homework, and I suggest both the readers of Stock Rumor.com, as well as its author, to take that wise advice.

And beware morons writing blogs.



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.


Tuesday, December 12, 2006

Fings Break in Russia, Don't They?

.


Shell May Cede Control of Project To Russia's Gazprom


The “project” to which that headline in today’s Wall Street Journal refers is the Sakhalin-2, part of a 4.5 billion barrel-equivalent sub-Arctic oil and gas development off the coast of the former Soviet Union.

Sakhalin is a large island: look it up on a map and you will see it actually appears to be an extension of the islands which constitute Japan.

And that’s exactly how Japan thought of Sakhalin, too, until the Russians—pay attention here, I am making a point—forced out the Japanese at gunpoint after invading the island on August 11, 1945. Sharp-eyed readers will recognize that date as coming the week after Hiroshima and Nagasaki had been obliterated by atomic bombs.

That Joe Stalin really knew how to hurt a guy when he was down!

And so, it seems, does Vladimir Putin, today’s Strong Man at the Kremlin, who appears to have successfully muscled his country’s way into majority ownership of a major LNG project now that Shell has done much of the heavy lifting.

Readers may recall that Royal Dutch Shell could certainly use its 55% stake in Sakhalin-2 to replenish so-called “proved” reserves that became distinctly unproven several years ago after it was discovered Shell's engineers had been using Fannie-Mae-like juggling of its oil and gas reserves. Which is to say, Royal Dutch’s bookkeepers were making them up.

Smelling desperation, Putin’s men cleverly used a cost overrun for the Sakhalin-2 project as a device to muscle Shell out.

Like all good citizens with their backs to the wall in a dark alley and no recourse to either a gun or a passing officer, Shell is putting a very good face on the situation:

Shell has proposed ceding a controlling stake in the Sakhalin-2 project in Russia's far east to state-run OAO Gazprom, an official close to the situation said. Another person close to the talks stressed they are continuing and an agreement hasn't been reached. Such a move would underscore the Kremlin's opposition to foreign control of large energy projects in Russia at a time when an increasingly confident Russian state, buoyed by high oil prices, is determined to restore its domination of the country's oil and natural-gas industry.

So this is what it’s come to in a country with the largest untapped reserves of energy in the world: muckraking journalists get shot, anti-Putin KGB veterans get poisoned, and major oil companies like Royal Dutch Shell get squeezed out of large energy projects in the manner of the old Monty Python “Army Protection Racket” bit, in which Luigi and Dino Vercotti pay a visit to a starchy old colonel:

Dino: ‘Ow many tanks you got, colonel?

Colonel: About five hundred altogether.

Luigi: Five hundred! Hey!

Dino: You ought to be careful, colonel.

Colonel: We are careful, extremely careful.

Dino: ‘Cos fings break, don’t they?

Cononel: Break?

Luigi: Well, everything breaks, dunnit colonel?



Fings are breaking in Russia too.



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.

Thursday, December 07, 2006

Watch What the Dollar Does, Not What the Fed Says



We all know the joke about “adjusted” inflation numbers.

I’m referring to the fact that in an effort to find a “core” rate of inflation unencumbered by the ups and downs of volatile commodity prices, the Fed (and its pals in the bond market) routinely strips away the costs of the two most essential staples of human life: food and energy.

Not to mention the other adjustments the Fed makes, such as the “rent-equivalent” housing cost calculation that bears so little relation to the reality of home-ownership in America that the accounting scam artists at Fannie Mae, who we now know inflated the profits at that mortgage buyer by precisely $7.9 billion, would blush. (Fannie Mae's new slogan: “Buy a House on Us, What the Hell”)

Still, I’m not sure how the Fed will adjust away other real-world numbers now hitting my email inbox, such as the basic cable television price increase going through in one major Midwestern city that amounts to double the current “core” CPI of 2.5%.

Or the healthcare coverage increase being asked of a small business in a different major Midwestern city that is likewise somewhat greater than the current “core” CPI.

In fact, the proposed price increase is multiples of the current “core” CPI: it is a 30% proposed increase.

I am not making that up.

Now, this number is a starting point in a negotiated rate increase that will likely be lower than 30%, but even so it will still be significantly above the “core” CPI.

And while individual claim experience can and does affect the healthcare coverage quotes for businesses large and small, such that 30% is not likely to be the standard asking price of the HMO in question, the small-business emailer who flagged this writes as follows:

“I can tell you there is a complete disconnect between the government statistics and my real world costs.”

That last—about “real world” costs—is key: the Fed can run and it can hide from inflation statistics that don’t tell the right story, but those who buy and sell our currency in the real world aren’t so easily fooled.

A friend recently pointed out that the 30% decline in the U.S. Dollar over the last five years amounts to a 6% annual adjustment in the value of our currency, and 6% seems like a much more realistic notion of the actual underlying decline in purchasing power of assets based in this country than any “core” number the Fed might come up with.

So watch what the Dollar does, not what the Fed says.

And get started on those healthcare negotiations ASAP.


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, December 04, 2006

Lincoln Would Be Nervous


News traveled slowly during our Civil War, especially if the telegraph wires had been cut, which frequently was the case during that all-out conflagration between the well-equipped, poorly led Northern troops, and the poorly-equipped, well led Southerners.

And that was unfortunate for President Lincoln, because the telegraph was his main source of news and information about events in fields ranging from central Virginia to the bluffs above the Mississippi River at Vicksburg.

Lincoln retreated to the telegraph office frequently, both to get away from the hangers-on looking for jobs and to read first-hand the reports that clicked off the wires. (In fact there is a new book on precisely this topic, "Lincoln in the Telegraph Office.")

Lincoln learned the hard way that bluster and over-confidence from his commanders always—always—preceded disaster.

It happened so frequently under McClellan, Pope and especially “Fighting Joe” Hooker in the Wilderness surrounding Chancellorsville that Lincoln began to predict imminent defeat whenever a telegram predicting imminent victory from anybody but U.S. Grant crossed the desk from the telegraph operator.

And he was, in nearly every case, right.

It depressed him mightily—both the expectation of impending defeat, as well as the fact that the generals never seemed to learn that overconfidence left them blind to the dangers in their front, which is why they always got whipped.

And I think Lincoln would have had the same visceral reaction to the ultra-confident words from the Ralph Lauren flak in this weekend’s Barron’s, who was responding to a skeptical question about insider stock sales:

Polo senior vice president Nancy Murray says most of the transactions are programmed and tax-related selling. "We think the stock is just beginning to enter its appropriate valuation level," she says. "And I stress 'beginning.' "

That kind of ultra-confident spin, however justified based on the track record of one of the best-run consumer product franchises in the world, might well have given Lincoln one of his famous bouts of depression, were he running the company today.

After all, he would know, Pfizer’s entire management team hosted Wall Street’s Finest in Groton Connecticut on the last day of November...i.e. last Thursday.

And the result was a batch of optimistic assessments of Pfizer’s ability to renew its cholesterol-drug franchise, as well as increased earnings forecasts...both of which came to grief Saturday afternoon.

Almost as fast as “Fighting Joe” Hooker in the Wilderness.


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, December 01, 2006

Around the World in 20 Minutes



The Tiffany conference call earlier this week was instructive, if not merely for illustrating in hard numbers the widening income gap between the fortunates in this country and the less-fortunates (Tiffany’s fastest growing items last quarter were in the $20,000-and-up range—eat your heart out, Wal-Mart), then for likewise demonstrating the impact of the worldwide liquidity bubble causing bull markets in stocks, copper, oil, gold and labor, among other things, on consumers outside our borders.


Meanwhile, the bond market expects Fed Chairman Bernanke to start slashing interest rates merely because Miami condominiums are in surplus.

Rather than paraphrase and summarize management’s own, excellent discussion of the situation, I thought it better—not to mention easier—to simply reprint the key portions of the call, especially the discussion of sales growth in Asia ex-Japan (up 17%), Europe ("strong") and at new stores in the U.S. ("robust").

[Note that Tiffany conference calls do not include the usual Q&A session, so in order to get yourself in the mood, just say to yourself (while you read it) things like “great quarter, guys,” “congratulations on a great quarter,” and my all-time favorite, which usually comes after a rambling, nit-picking dissection of something inane, like a sixteen-basis point delta in the reported gross margin versus the analysts’ so-called models: “how should we think about that?”]



Sales rose nicely throughout the quarter with comps increasing 6% in August, 7% in September, and 4% in October. For comparison, you should note that U.S. comps in last year 's third quarter had increased 5% in August and 8% in both September and October. From a geographical perspective, sales in the New York flagship store rose 13% on top of a 12% increase a year ago. We were pleased to finally complete the multi-year renovation of our New York flagship store during the quarter, and the reaction of our customers has been quite favorable.


In addition, comps in the seven New York area branch stores rose 6%. Branch store comps around the U.S. rose 4% and there was no particular geographical concentration of strength. For example, a few stores with the largest percentage increases were in Seattle, Palm Desert, Houston, Coral Gables and Charlotte with varying degrees of change in other markets. However, the softest region was in the Pacific, where we continue to experience sales declines in Hawaii and Guam.

Our price stratification analysis for the U.S. indicated that the greatest growth occurred in sales and transactions over $20,000 and over $50,000 which as many of you know, occur at lower gross margins.

In terms of customer mix, the majority of the comp store sales growth came from higher sales to local market customers, which was also true for the New York flagship store.

Lastly, we are experiencing robust performance in the new U.S. stores we've opened in 2006 in Indianapolis, Nashville, Atlantic City and Tucson. We will wrap up our U.S. store expansion for the year when we open a beautiful store on the big island of Hawaii tomorrow.

Also in the U.S, sales in the direct marketing channel rose 11% in the third quarter which was slightly above our expectations and was on top of a 4% increase last year. Growth was generated by increased numbers of orders and increases in the amount spent per order....


Let's now look at international retail sales which rose 9% in the third quarter but included some very divergent results. The 9% growth was on top of a 7% increase last year and was pretty much in line with our expectations. There was minimal currency translation effect in the quarter, and on a constant exchange rate basis which excludes the effect of translating local currency results into U.S. dollars, international retail sales also increased 9% in the quarter while comparable international store sales rose 4%.

My following comments will refer to sales on a constant exchange rate basis. The international retail channel is composed of several distinct regions with approximately half of the channel sales in Japan while the other half includes the rest of Asia Pacific, Europe, Canada and Latin America.

Total retail sales in Japan in the third quarter declined 3% as a decline in unit volume was only partly offset by an increase in average price and mix….

Recent economic reports confirm that the Japanese economy is growing, although it appears that the environment for consumer spending is challenging....

Sales growth was notably better in the other half of international sales, continuing the strong trends from the first half of the year. In the Asia Pacific region outside Japan, a 17% increase in comparable store sales in the third quarter was above our expectations and was on top of a 4% increase last year with notable strength in Hong Kong and Australia. We're also pleased with Tiffany's growing presence in China, with new stores opened this year in Beijing and Macau and a second store in Shanghai opening in December. Asia Pacific comps have gained 21% year-to-date.

Sales in Europe were also strong. Comparable store sales rose 21% in the quarter, which compared with a 1% decline last year and was above our expectations. London represents more than half of our European sales and we noted considerable strengthen all four stores there, as well as strength in our stores in Italy, France and Germany.... European comps have increased 20% in the year-to-date.

Rounding out international sales in the third quarter were solid increases in Canada and Latin America, and we are very much looking forward to opening a prominent Tiffany & Co. Store in Vancouver next week.

Finally, Tiffany's other channel of distribution, which has several components, posted a 23% sales increase in the third quarter. More than half of that growth came from a meaningful and expected increase in wholesale sales of diamonds that are below our quality standards. As you know, our objective for these wholesale sales is to simply recoup our cost....

From an overall merchandising perspective, the sales strength in the quarter was concentrated more toward higher-end jewelry. There was substantial growth in diamond statement jewelry as well as in fine jewelry such as our Swing and Legacy collections with diamonds and colored stones; and, we saw double-digit growth in engagement jewelry in the U.S. and many international markets except Japan.


“Great quarter guys!”

“Congratulations on a great quarter!”

“Mr. Bernanke, Tiffany saw strong growth in Europe, robust performance in new U.S. stores and 17% sales growth in Asia, while the bond market expects you to cut interest rates—how should we think about that?”


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.