Thursday, March 29, 2007

This Just In: Wall Street’s Finest Speechless




“I'm speechless right now. On that number. Can you repeat that again?”

—Michael Aberman, Credit Suisse
Alexion Pharmaceuticals conference call


“That number” to which the aforementioned analyst is referring is the wholesale price of a new biotech drug called Soliris, which will be the first and only treatment for a rare genetic blood disorder known as PNH.

PNH, for the record, currently afflicts 8 to 10,000 individuals in the U.S. and Europe. According to Alexion,

Patients with PNH may suffer from severe hemolysis, anemia, chronic fatigue, recurrent pain, pulmonary hypertension and intermittent episodes of dark colored urine, known as hemoglobinuria. Importantly, PNH patients are at increased risk of forming life-threatening blood clots, or thromboses, which are a major cause of death in this disease.

As with, for example, cancer, PNH can be diagnosed at any age, but the median age in a UK study was 42 years. The median survival period after diagnosis was 10 years, although fully one quarter of patients in one study survived 25 years following diagnosis with PNH.

You might think the good folks at Alexion who came up with what looks to be a much-needed and long awaited therapy for a rare disease would be sensitive to the raging debate on health care costs in general, and biologics in particular, now enveloping both politicians and bureaucrats—not just in Washington but in every state capital in the Union.

And perhaps they are.

But the price they came up with for Soliris, which as we have seen shocked at least one of Wall Street’s Finest into speechlessness, was $389,000 per year.

The full excerpt of the above-quoted dialogue, courtesy of the indispensable Street Events, is as follows:


Operator

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Michael Aberman from Credit Suisse. Please go ahead, sir.

Michael Aberman, Credit Suisse - Analyst

I'm speechless right now. On that number. Can you repeat that again?

David Keiser, Alexion Pharmaceuticals - President, COO

The annual cost of treatment on the wholesale level is $389,000 annually.

Michael Aberman, Credit Suisse - Analyst

And can you describe on the wholesale level what kind of cost for distribution and how you maybe compare to some other rare disease drug prices and how you came up with that number?

Vikar Sinha, Alexion Pharmaceuticals - SVP, CFO

Hi, Michael this is Vikar Sinha

Michael Aberman, Credit Suisse - Analyst

Sure.

Vikar Sinha, Alexion Pharmaceuticals - SVP, CFO

Compared to other drugs, we have -- compared to -- you're talking about -- compared to other drugs in terms of pharmacoeconomics, Soliris meets the criteria recommended by the Citizens Council regarding the decision to pay premium prices for ultra orphan drugs. And we have looked at the degree of severity of the disease, the treatment provides health gains, environment stabilizing of the condition, and the disease or condition that is life threatening.

Leonard Bell, Alexion Pharmaceuticals - CEO

Michael, as you're aware probably most other drug for orphan diseases are dosed on a patient weighed basis and certainly Soliris is not. Due to weight-based dosing, the price of other therapies, as you know, can range beyond $1 million per patient per year. For example, the annual cost of a drug recently approved to treat an average size adult with [Pompe's] disease would be over $400,000, and similarly the annual cost for a drug recently approved to treat average sized adults with Hunter syndrome would also be over $800,000. At Alexion, of course we focused on the key criteria that David outlined, that is, the rarity of the disease, the compelling clinical benefit that PNH patients experience with Soliris therapy, now that we have an approved label and we understand what those benefits are agreed to be. The cost of discovery, development, and production. Importantly our costs at Alexion to sustain our ongoing commitment to the PNH community.

Michael Aberman, Credit Suisse - Analyst

Okay.

Leonard Bell, Alexion Pharmaceuticals - CEO

Does that provide you context?

Michael Aberman, Credit Suisse - Analyst

I guess so. It's just surprisingly high. I'll get back in the queue as I think of an additional question. Thanks.



To Alexion’s credit, management spent even more time later in the call elaborating on the logic and assumptions behind the $389,000 annual therapy cost at a time when Presidential politics could potentially make Soliris a Poster Child of Why We Need Cost Controls in Healthcare.

And while at least one of Wall Street’s Finest raised his earnings forecast based on the much-higher-than-expected price, one actually reduced his forecast owing to the concern that the uptake of Soliris would be hindered by thoughts of price-gouging.

Readers interested in Soliris, PNH, Alexion, the controversy surrounding high-priced biologics, or all four topics ought to listen to a replay of the call.

Just don't send a transcript to one of the Presidential candidates.



Jeff Matthews
I Am Not Making This Up


© 2007 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, March 26, 2007

Least Helpful Call Today…So Far



The least helpful call from Wall Street’s Finest thus far today is most certainly the downgrade of Vonage, that Poster Child of Failed Initial Public Offerings whose stock closed at $3.00 on Friday—a rather dramatic discount to its 52-week high and IPO price of $17.25—from “Peer Perform” to “Market Perform” by one of Wall Street's Bigs.

Stated reason for the downgrade? “Too Many Risks.”

No, I am not making that up; and yes, the morning is still young.

Nominations for even less helpful calls than that are welcome.



Jeff Matthews
I Am Not Making This Up


© 2007 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, March 25, 2007

Weekend Edition: Tommy’s Family Values



BEHIND nearly every good bar fight is a beautiful woman - and the epic nightclub clash between Axl Rose and Tommy Hilfiger is no exception.


While some say Hilfiger popped Rose in the eye after the Guns N' Roses frontman moved Hilfiger's girlfriend's drink at The Plumm last Thursday night, Page Six has learned that the combatants have been at odds since Rose started dating Diane O'Connor, the ex-wife of Hilfiger's adopted brother, denim designer Michael H.

One source even went so far as to claim that the Hilfiger brothers had made a "pact" to pummel Rose on sight. While we're not sure we believe that the preppie fashion icon - who just sold his empire for $1.6 billion - would engage in such premeditated thuggery, it might explain his seemingly unprovoked attack on Rose.—Page Six


It was the blandest of puff-pieces.

No, I’m not talking about the above-quoted Page Six report on last May’s bar brawl between the nightclub-hopping fashion icon Tommy Hilfiger and rock mega-has-been Axl Rose.

I’m talking about one of those formulaic he-worked-hard-to-gain-fame-and-fortune-then-met-adversity-and-is-now-making-a-comeback pieces of drivel common to television that appeared last night.

Most channel-surfers wouldn’t have paused more than a split-second before their brain snapped into instant pattern recognition mode, spotted the fashion-model images with the chirpy yet serious Talking Head narration for exactly the pap that it was, and directed their fingers to click onto a different channel.

Yet there was something in the vacuity of the questions and the fake sincerity of the subject's answers so compellingly nauseating that the brain overloaded, synapses blew out, and the fingers couldn't move.

It was a show about Tommy Hilfiger—Tommy building an empire! Tommy watching his empire begin to crumble! Tommy pondering whether to chuck it all for a movie-producing career! Tommy shaking off his doubts and deciding to rebuild his empire!


And it was worth every second.

We learn Tommy’s secret to putting on a successful fashion show. It is—are you ready?—“music.”

Yes, that's the secret. Fashion shows are like concerts. They need great music.

You could almost hear the other fashion designers around the country slapping their foreheads and screaming, “Of course! Music! That’s the ticket!”

We learn Tommy’s secret to creating a successful new line.
It is—are you ready?—they must have a "theme."

"Sacre bleu!," Coco Channel is weeping from the heavens, "Nous n'avons pas des 'themes'! Quel Idiot!"

Tommy proudly tells us how he decided that the theme of his most recent line would be—put down any sharp objects you are holding, or you might injure yourself, it's such a revelation—color.

All the models would be wearing lots of color. Everything, Tommy intones, would be color.

You could almost see Calvin Klein hurling his Blackberry at the nearest assistant's forehead: “Good God, man! He’s done it to me again! Now he’s using colors!”

We learn how Tommy—he’s such a humanitarian—actually sewed the seeds of his own company's crisis, by showing P. Diddy how to start an urban clothing line, just the type that would appeal to Tommy’s own hip, urban base.

And, because these superficial biographies always end on a reflective-yet-upbeat tone, we learn how Tommy faced the new competitive environment, when his multi-million paycheck from royalties paid by the public company bearing his name apparently veered dangerously close to single-digits, shook off thoughts of retirement, rejuvenated his management team and now occupies a good space in his life.

What did it? What sustained him? What brought him through such—hold your nose—adversity?

It is, we are told with a straight face, the “family values” that Tommy learned growing up in a large family with eight siblings.

I am not making that up.

The no-longer-married father with the “great girlfriend”—his words, not mine—and the Axl Rose grudge, owes it all to “family values.”

Let's go back to that Page Six story on the Tommy/Axl dust-up last May:

A spokeswoman for Hilfiger declined repeated requests for comment yesterday, and Rose's manager did not return calls.

But Rose told Page Six in an exclusive interview after the brawl that Hilfiger may have been angry because the designer - whom Rose described as "foaming at the mouth" - had been told to move to make room for the rock god and his entourage.

Other witnesses said Hilfiger went nuclear after Rose moved a drink belonging to Hilfiger's girlfriend.—Page Six

From now on, I'm getting my celebrity news strictly from Page Six.


Jeff Matthews
I Am Not Making This Up

© 2007 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, March 23, 2007

Whose iPhone is This, Anyway? Answers Forthcoming.



We here at Not Making This Up strive to not make it up; and with that in mind we sometimes survey readers on topics of interest, such as the new iPhone (“Whose iPhone is This, Anyway?” March 4).

I am pleased to report that thus far we have received 41 thoughtful, intelligent responses to our eight-question survey.

I’m even more pleased the responses as a whole give some insight into the iPhone and its place in the “smartphone” marketplace. In fact, serious investors may learn something.

We are still compiling the results and will present our conclusions shortly, meaning, whenever we get around to it.

In the meantime, last-minute entries are welcome.


Jeff Matthews
I Am Not Making This Up


© 2007 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, March 21, 2007

Counterparts



THE bell rang furiously and, when Miss Parker went to the tube, a furious voice called out in a piercing North of Ireland accent:
"Send Farrington here!"

Miss Parker returned to her machine, saying to a man who was writing at a desk: "Mr. Alleyne wants you upstairs."

The man muttered "Blast him!" under his breath and pushed back his chair to stand up. When he stood up he was tall and of great bulk. He had a hanging face, dark wine-coloured, with fair eyebrows and moustache: his eyes bulged forward slightly and the whites of them were dirty. He lifted up the counter and, passing by the clients, went out of the office with a heavy step.

—“Counterparts” by James Joyce



There is a man being fired from his job, just three tables away from me at the Starbucks.

It took a while for the conversation of the two men, one facing me, the other with his back to me, to penetrate the general hum of the place, but that is what is happening.

Their body language tells the story: the man facing me is dressed like a mid-level manager—not sharp, not sloppy. His shoulders are hunched over; he has a hanging face, blank yet grim; and his hands are clasped together between his knees.

His counterpart, though I can’t see his face, is dressed like a man with power—his jacket is off, he’s wearing a crisp white shirt with French cuffs, and he is speaking quietly but forcefully.

The peculiar acoustics of this room are just enough to allow the rest of us working nearby to hear what none of us wants to hear.

We can hear about forms that are going to have to be filled out; about the two weeks’ severance the man will be receiving; and about the health insurance coverage he is eligible for while he is, as the euphemism goes, “between opportunities.”

Worse, for it seems as if the man is not to be trusted, we can hear a question about the status of his computer, and any other office equipment belonging to the company which he has not turned in. And whether he has keys to any of the company offices around the state.

It turns out he still has a key to one office.

“That will have to be turned in,” says the man doing the firing.

Everybody in this room—it is a big room, with hard floors and echoing walls—can hear about the key, and what comes next.

The man pushes back his chair. “I’ll get you that key,” he says, then he leaves, quickly.

His counterpart sits for a few more minutes, looking out the window contemplatively while drinking the rest of his coffee.

Then he leaves, and we are all back to work.



Jeff Matthews
I Am Not Making This Up


© 2007 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, March 19, 2007

Random People Creating Value



"I don't think anyone has proven that a random collection of people doing their own thing has created value."

—Steve Ballmer, Microsoft CEO, on Google
The Wall Street Journal


“The lady doth protest too much, methinks.”

—Queen Gertrude
Shakespeare’s Hamlet


In previous columns touching the repeated failures of Microsoft, Bill Gates and his Strong Man, Steve Ballmer, to keep up with—let alone lead—the online transformation of the technology world, I have nevertheless heaped praise on Mr. Ballmer as a marketing powerhouse who helped a geeky technology company become the monopolistic underpinning of the modern-day computer age.

And I take back none of those compliments here.

But the more I read of the iPod-avoiding, Google-bashing Mr. Ballmer’s pronouncements on Where the World is Heading and How Microsoft Plans to Get its Mo Back, the more I think Mr. Ballmer is the obstacle rather than the solution to Microsoft’s problem.

Microsoft’s problem, as I see it, is simply this: its desktop operating system monopoly—which provides not just the cash but the mindset behind all its product development efforts—is increasing irrelevant in a wireless, digital world.

And the more Mr. Ballmer protests otherwise, the more it makes me wonder how much longer the shareholders of Microsoft will put up with a CEO who won’t allow his children to use an iPod or do a Google search.

Such a blinders-on, head-in-the-sand, not-invented-here mindset has heretofore been more closely associated with Detroit, where auto executives drive only their own company’s best cars. Small wonder the bigs at GM, Ford and Chrysler failed to grasp, before it was too late, the quality and innovation that allowed Toyota and other imports to eat their collective lunch.

Apparently, Redmond is now the New Detroit.

How else to take Ballmer's dismissive comments about the folks at Google, who not for nothing have done more than any other organization in the world—IBM, HP, and Oracle included—to neuter the Colossus of Redmond?

The Wall Street Journal’s full quote on the subject is this:

He [Ballmer] went on to criticize Internet competitor Google Inc. for failing to achieve significant traction in ventures beyond its online search business. The company has been trying to double its staff in a year, he added.

"That's insane in my opinion," he said. "I don't think anyone has proven that a random collection of people doing their own thing has created value."

Now, the last quarter I saw, Microsoft had 71,000 employees, whose efforts generated about $3.5 billion in operating income.

Meanwhile, Google’s “random” collection of not quite 11,000 employees generated $1 billion in operating income in the same quarter.

Sharp-eyed readers will have already done the math, which is this: Microsoft generated only slightly more than three times the profit of Google despite having almost seven times as many employees as Google’s random collection of hipster do-good engineers.

That lack of productivity does not speak well of Ballmer’s aging time-card-punchers who, you might recall, now require dinners-to-go from Wolfgang Puck to keep them from seeking greener pastures than Redmond. (See “Microsoft Brings Back…The Comfy Chair” from May 31, 2006.)

Yet Ballmer retains complete confidence in his demonstrably less productive crew's ability to turn back the encroaching tide—or at least he expresses such confidence—despite all evidence to the contrary:

"I like to think of us as a two-trick pony" with the company's desktop and server software businesses providing those tricks, he said. "The third trick we're trying to do is online."

The fourth trick, he added, is mastering consumer products, such as the new Zune music player. "In a sense, I see kind of a "positive" in all of these areas," Mr. Ballmer said during an on-stage discussion with Robert Joss, dean of Stanford Business School.

Anybody seeing “kind of a ‘positive’ in all these areas” might require a stronger pair of reading glasses.

The Zune is an unmitigated nothing—not even a failure, because that would imply the expectation of success, of which I believe there was none outside the Redmond city limits.

For the record, at this very moment not a single Zune appears until the rank of 21 on the Amazon.com MP3-player bestseller list, behind 11 iPods, five SandDisks, three Creative Labs and a Samsung.

And the second Zune on the list does not appear until number 58.

As for the Microsoft operating system franchise, the much-hyped new-age Vista operating system has had about as much impact as the Wall Street Journal’s experiment with front-page advertising and thinner layouts.

How bad of a let-down is Vista? I went to a Best Buy to play around with a Vista PC and see how it was selling…and after a couple of minutes of clicking icons on a Toshiba notebook I actually had to check with a blue-shirted Best Buy expert to make sure the notebook was running Vista.


Despite the much-hyped “translucent” pages and dispensing of toolbars, the thing looked and worked like only a slightly modified Windows XP computer.

Meanwhile, the random collection of hipster do-gooders in Mountain View are releasing web-hosted spreadsheets that work a lot like Excel, only much easier and without all the junk 80% of the world never uses, as well as web hosted calendars that work a lot like Outlook only much easier and without all the junk 80% of the world never uses.

And it appears only a matter of time before everything else the Microsoft Monopoly offers will be available online, only much easier and without all the junk 80% of the world never uses.

Yet Ballmer appears oblivious to it all—perhaps because he has never played around with Google Calendar or Google Spreadsheet:

"Leaders really do need to hit the right balance on the optimism-realism curve," he [Mr. Ballmer] added.

He said Microsoft has come up with a list of 70 technologies that will "change the world" in coming years.

While Microsoft is compiling “lists” of such technologies, Google’s random collection of hipster do-gooders has been spitting out real products that, if they don’t change the world, then they are certainly changing the way millions of Americans are using technology.

Google Earth, for example, and Google Maps, not to mention Google Mail.

If Mr. Ballmer believes the Google Boys are “insane” to be hiring so many randomly creative, inspired individuals, perhaps he should keep in mind Hamlet’s admission to his erstwhile friends, Rozencrantz and Guildenstern:


You are welcome; but my uncle-father and aunt-mother are deceived....

I am but mad north-north-west: when the wind is southerly I know a hawk from a handsaw.



The Google Boys know a hawk from a handsaw.



Jeff Matthews
I Am Not Making This Up


© 2007 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, March 15, 2007

Talk is Cheap, Unless You’re a Shareholder


On July 1, 2005, we acquired all the outstanding capital stock of Ski West, Inc. (“Ski West”), an on-line travel company whose proprietary technology provides easy consumer access to a large, fragmented, hard-to-find inventory of lodging, vacation, cruise and transportation bargains…. We paid an aggregate of $25.1 million (including $111,000 of capitalized acquisition related costs) for Ski West, and we may be subject to additional earn-out payment…

As part of this program to reduce our expense structure and sell non-core businesses, we decided during the fourth quarter of 2006 to sell the Company’s travel subsidiary (“OTravel”)…. As a result, OTravel’s operations have been classified as a discontinued operation and therefore are not included in the results of continuing operations.

—Overstock.com 2006 10K


Well that was fast.

Seems Our Man in Salt Lake City, a self-described “value investor” and Warren Buffett disciple, decided to hit the bid on Ski West, a business he’d bought a mere 18 months before the decision to sell.

And to sell at a discount to his cost basis, no less.

Just a year ago, Our Man in Salt Lake City was talking up the operating trends at that operation, as follows:

Ski West did okay. The business we bought made money through the second half of the year. We, on top of that, we already had started development of a travel business that we sort of integrated -- we spent six months integrating into Ski West and writing off, we wrote off all the development costs of code and different things we have done, we wrote to zero.

So travel as a whole showed a loss for the second half of the year but the business we bought made money, made a nice little chunk of money. And then on top of that, we have gotten everything we think fixed and together in travel, so even in January, the whole business made money not just the business we bought but now everything worked together is making money. It made a nice little sum in January.


The only problem with that statement, which occurred on the February 7, 2006 conference call, is that Our Man in Salt Lake had hinted at far greater things on an earlier call, from August 2005.

Specifically:


SkiWest. I'll give you some numbers on SkiWest and let me walk through the numbers and then I'll give you sort of the footnote at the end. Last year Ski West revenue was $30 million. And that means from April 1 until March 31 was $30 million. And then for this year they plan to do at least $60 million. Last year on 30 million of revenue they made a $1 million. This year, meaning from April 2005 to March of 2006, they figure that they would be able to do 2 million, 2.5 million of income operating profit.

A few footnotes on that. If a company is growing that fast, and its April to March number is 60 million, then its July number will be higher. It will be 70 million, 75 million. In addition, they're growing now at faster than 100% pace. So it's possible to be talking about maybe 80 to 90 million in the July to June period, July of this year to June of next year period, 80 to 90 million. In which case, it looks more like something that could make 3.5, 4, something like that.

It looks like Ski West came nothing close to “something like that,” at least according to the following disclosure in the latest 10K.

The loss from discontinued operations for OTravel was $6.9 million for the year ended December 31, 2006, including a goodwill impairment charge of $4.5 million.

The lesson?

Talk is cheap—although it can be very expensive for shareholders.



Jeff Matthews
I Am Not Making This Up


© 2007 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, March 12, 2007

No Thought Experiments for Mel



Speaking before an antitrust task force of the House Judiciary Committee, Mr. Karmazin said he was shocked by the very idea that anyone would see a monopoly as the logical result of merging the only two satellite radio broadcasters. “There is no monopoly or duopoly,” he told the hearing. “That’s the most bizarre thing I have ever heard.”

—The New York Times



You can’t blame him for trying.

“Him” is Mel Karmazin, the uber-salesman currently attempting to sell the deal of a lifetime to the relevant authorities--the merger of the only two satellite radio companies in America. And Mel is pulling out all the stops—going so far as to unload the following whopper on a rightly suspicious Congress:

Mr. Karmazin’s essential message is that satellite radio is competing with all forms of audio entertainment and information — from commercial radio to iPod jacks in cars to Internet radio….

Anybody ever try sticking a desktop PC in the car and tuning into Internet radio while you’re whaling down a crowded freeway?

Me neither.

And I suspect at the end of the day—this is my opinion only, and for what it’s worth—the XM/Sirius deal will not go through for precisely the same reason the Dish/Echostar deal did not go through.

Still, to test Mel's own theory, it might be helpful to perform what is called a “Thought Experiment.”

The thought is this: would the Feds allow a single terrestrial radio company—Clear Channel, say—to buy every radio station in America, thereby owning 100% of the terrestrial radio business?

If the answer is “yes, because of all those iPods and Internet radio stations out there,” then one could suppose the Feds might allow a single satellite company to own 100% of the satellite radio business.

But I don’t think Mel is going to encourage anybody at the FCC to be doing that kind of thought experiment any time soon.



Jeff Matthews
I Am Not Making This Up


© 2007 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, March 07, 2007

Fed Big Flunks Eco 101



Globalization hasn't had a significant impact on reducing inflation in the U.S. and may have raised it, Federal Reserve Chairman Ben Bernanke said.
—Wall Street Journal

During the market swoon early last summer I defended the new Fed Chairman while he was being roundly blamed by frustrated investors for everything wrong with the world, short of global warming (see "Shooting the Messenger," June 6).

Things settled down shortly thereafter, and until recently Mr. Bernanke was looking pretty good, what with the relentless melt-up in global equity markets and the evaporation of risk premium in the global credit markets.

But a recent speech—quoted above—makes me wonder if Mr. Bernanke has spent too much time reading his press clippings lately and too little time listening to earnings calls from American corporations.

Is there a CEO in America who believes the following?

Mr. Bernanke... said increased trade with China has reduced U.S. inflation, now running at about 2%, by only about 0.1 percentage point. And he noted that while these emerging economies have added to the global supply of manufactured goods, they are also adding to the demand for oil and other commodities.

"There seems to be little basis for concluding that globalization overall has significantly reduced inflation in the U.S. in recent years; indeed, the opposite may be true," he said.

If you quoted those words to my friend who runs a supplier of office products to Wal-Mart and other Big Box retailers, he'd probably spit out his coffee all over his Wa-Mart invoices.

Those invoices, at least on a per-unit basis, did done nothing but go down for the last decade, after Wal-Mart abandoned its “Made in America” campaign and began to enforce a constant price squeeze on its vendors, aided and abetted by the opening up of dirt-cheap manufacturing capacity in China.

That virtuous circle of Big Box retailers pushing down consumer prices and taking greater market share, thereby acquiring even greater pricing clout and greater market share, was the single biggest driver of disinflation ever witnessed in our lifetime. Wal-Mart executives even make presentations to analysts showing how they've helped force down prices of everyday, humdrum products such as vacuum-cleaners and microwave ovens by as much as half over time.

How Mr. Bernanke could dismiss it out of hand is beyond me.

In any event, this is all, unfortunately for our own consumer price index, ancient history. The Chinese labor arbitrage began coming to an end two years ago, and most companies are reporting higher, not lower costs out of that country now.

Which means yesterday’s eye-popping 6.6% unit labor cost increase here in the U.S. might not have been simply a fourth quarter investment banking bonus one-off.

Still, if I were an Economics 101 professor I’d give Mr. Bernanke a D- for this thesis on inflation, or the lack thereof.



Jeff Matthews
I Am Not Making This Up


© 2007 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, March 04, 2007

Whose iPhone is This Anyway?


The investment world is full of surveys.

Every month Wall Street’s Finest conduct surveys of almost anything you can imagine—smartphone trends, cancer drug market share, what teenage girls are buying—all for the purpose of attempting to get a jump on future stock price movements when those trends show up in sales of, for example, cell phones, cancer drugs and even torn denim jeans.

The surveys are sometimes interesting and sometimes not.

My observation is that Wall Street’s Finest frequently get the answers they want to get, rather than the right answer, for the same reason Republicans and Democrats tend to get the answer they want in those voter surveys that for some reason never quite seem to get the actual election results right.

Garbage in, garbage out, as they say.

Along these lines I recently listened to an iPhone survey conducted for one of Wall Street’s better technology analysts by a marketing firm that presented its conclusions via lots of colorful charts and a long conference call.

And while the survey yielded some interesting conclusions, I wondered if those conclusions weren't completely irrelevant to the question of whether the iPhone fills a consumer need, owing to the way the data was collected.

The way the data was collected was this: consumers who were looking to buy at iPods in stores were interviewed about the iPhone, its functionality, its price and whether it might fit into the lifestyle needs of those consumers.

Seems the marketing firm assumed iPod buyers are the natural potential buyer for the iPhone. Now, I’m no marketing genius, nor am I a survey expert.

But I would guess that by limiting my questions to people who are looking to buy a music playing device many years after its wildly successful launch, the survey results might contain very limited information about the true market potential for an iPhone.

Sort of like interviewing Sony Walk-Man buyers how interested they might be in spending a few hundred bucks on a fancy new music playing device from a computer company back when.

Why, I wondered, did the marketing gurus not ask cell phone buyers, Blackberry owners and Treo users about their iPhone plans? This is, after all, an iPhone with email and web capability, and not merely a music player.

For whatever reason, they didn't bother.

With that question in mind I offer the third “Not Making This Up” survey of readers’ opinions about a topic that is very timely.

The last time we did such an unscientific survey was in December 2005 (“RIMM versus Palm?”), when Research In Motion was under the cloud of a lawsuit that quite literally threatened to pull the plug out of the Blackberry’s email functionality on which its users, and their lives, almost literally depended.

I was trying to understand how important the Blackberry was to its users, and whether they might consider switching to Palm or some other device. We asked a series of open ended questions and got 37 responses, most of them very intelligent, well thought-out, and quite interesting.

And I have to say, in all modesty, that the survey results had a certain bearing on the investment merits of RIMM versus Palm. In a nutshell, Blackberry users were not going to switch to Palm unless they absolutely had to.

That may seem obvious in retrospect, what with RIMM’s earnings and stock price having gone through the proverbial roof in 2006 following the company’s legal settlement with NTP and the highly successful Pearl introduction.

But in those dark days of late 2005, some of Wall Street's Finest were not convinced RIMM could survive the fallout of the lawsuit unscathed.

Our readers suggested otherwise, and with that happy result in mind, we put forth the following entirely unscientific questions about the iPhone.

We ask all responders to respond to each question, and add whatever color they like.

Responses will be available for all to see.


1. Do you plan to buy an iPhone for $499 plus calling plan with Cingular the minute it is available, or soon thereafter?

2. Why or why not?

3. Which iPhone feature do you like the best? Which feature bothers you most?

4. If price is the issue, would you pay, say, $299 for the iPhone, plus calling plan?

5. What kind of cell phone do you use every day, and who is your current carrier? Would switch your current cell phone number to Cingular and use it on the iPhone?

6. What kind of email device do you use every day, and who is your carrier? Would you switch your email to the iPhone and get rid of your current device?

7. Did you buy an iPod when it first came out? Do you have one now?

8. Do you need a new iPod? Would you replace it with an iPhone?



Informed responses are welcome. The more the better.




Jeff Matthews
I Am Not Making This Up


© 2007 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, March 02, 2007

Required Reading for Investors in China


Early this year, for instance, when a group of 17 Chinese companies was cited by regulators for misappropriating corporate funds, their stock prices all skyrocketed. When the Tianjin Global Magnetic Card Company failed to report quarterly earnings last April, its stock doubled.


—“From Shanghai, Tremors Heard Around the World,” The New York Times.

This week’s, er, fluctuations in the craps table otherwise known as the Shanghai Composite Index may or may not be the pause that refreshes, as most participants appear to believe.

However things go in the short run over there, this week’s New York Times carried another remarkable article about the Shanghai Bubble containing so much of the stuff of Investors Behaving Badly that I thought it imperative to urge readers to find the original story on the Times web site and read the entire story from beginning to end.

As the above excerpt demonstrates, it appears that eager buyers are so anxious to find stocks to buy that they care not one whit whether the company whose name they have heard is involved in something bad: the mere fact that they have found the name of a stock mentioned in the press is enough to generate a green buy ticket for their broker.

“If I hear a stock mentioned on the TV news I will pay attention to it,” says Xu Xiaochen, a 55-year-old retiree.

Now, let’s cut these investors some slack. They’re not buying just any old name: the name itself ought to be “lucky.” I am not making this up.

In any case, many investors here seem to believe that the secret to picking stocks is luck and confidence in the government, not the fundamentals of any particular company.

“I don’t know how to choose a stock,” says a 61-year-old retiree who gave her name as Miss Hou at a local brokerage house a few weeks ago. “But I trust those technology companies. Maybe the names of some companies sound lucky to me, so I choose to buy these stocks.”


There is more—much more, including the previously skeptical Peking University finance professor who is now raising a fund to invest in the very stock market he had avoided:

“There’s a huge amount of money in the banking system with nowhere to go,” he said. “I think you’re going to see that money getting out of the banking system.”

For most of those poor speculators, I suspect, the money will get out sooner than anybody thinks.



Jeff Matthews
I Am Not Making This Up


© 2007 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.