Friday, August 31, 2007

Dow Jones Up: Mission Accomplished!



Stocks appeared poised for a strong opening this morning ahead of a speech by Federal Reserve Chairman Ben Bernanke and the introduction by President Bush of policy proposals to lessen the pain for struggling mortgage borrowers.


—The Wall Street Journal


No, I am not making this up: stocks are set to rise in part on news that President Bush is going to announce a plan to help subdue the mortgage crisis.

As further explained in this morning’s online version of the Journal,

Mr. Bush…is expected to introduce a plan to reduce some of the pressure on squeezed homeowners by, among other things, changing the Federal Housing Administration mortgage insurance program to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages, according to media reports. The president is scheduled to speak at shortly after 11 a.m. Eastern time.

While we here at NotMakingThisUp never venture short-term opinions on the direction of stocks or bonds—let alone the ups and downs of pre-opening futures trading—we can’t help but wonder at Mr. Market’s heightened expectations for what the nation’s CEO will do to solve the sub-prime crisis.

Hope that Mr. Bernanke and Mr. Bush's words will calm the waters helped to push shares of mortgage lenders higher early on. Countrywide Financial, the nation's largest home lender and a company that has been hard-hit by the credit and housing turmoil, jumped 6% in overseas trading.

If history is any guide, we suspect tomorrow’s newspapers will report something like the following:

When the President and his team received word of the 100-plus point rise in the pre-opening Dow Jones Industrial Average on their Blackberries on the way to the announcement, they immediately declared “Mission Accomplished,” turned around the motorcade and drove back to the White House.


Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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, August 28, 2007

Miss Teen South Carolina Wants to Thank Biff, Sally and Barf, From the Bottom of Her Heart


The nice thing about being on the road is getting to watch the morning shows.

I am not making that up.

After all, when I’m home—what with dogs to walk and cats to feed and newspapers scattered across the lawn by the delivery guy who drives 80 miles an hour down the street, swerving from one curb to the other like one of those getaway drivers on Bad Boys and tossing out at each swerve a clump of papers held together by nothing more than slim rubber bands that burst on impact—I never get a chance to turn on the television, flip through the perky morning news shows and find out exactly what’s happening in the world that I need to know in order to get through the day.

Thanks to being on the road, however, with no dogs or cats to feed and no newspapers to reassemble, I can find out just what I’ve been missing by tuning into the local Morning Show, with cheery hosts Biff and Sally and Barf all sitting on sofas for some strange reason.

Does anybody sit on sofas any more except people on television?

In any event, what I’ve been missing, according to Biff and Sally and Barf—and I am not making this up—is a “gaffe” that occurred at a recent beauty pageant, when Miss Teen South Carolina had a hard time answering a question.


That's right: that was the lead story.

Seems that when Miss Teen South Carolina was asked why Americans are so stupid they can’t locate the United States on a map, the poor girl said, and I quote from one of the 600 billion blogs that have been written about this important news story:

I personally believe that U.S. [sic] Americans are unable to do so because, uh, some people out there in our nation don’t have maps, and, uh, I believe that our education like such as in South Africa and, uh, the Iraq everywhere like, such as and I believe that they should, our education over here in the US should help the US, er, should help South Africa and should help the Iraq and the Asian countries, so we will be able to build up our future for our children.

And that’s what I’ve been missing, according to Biff and Sally and Barf.

Now, "Miss Teen South Carolina" is, by definition, a teenager. Also, she was on a stage, presumably, in front of an audience.

With television cameras running.

And I don’t know many teenagers who could express a more intelligent answer to the question of why Americans are so stupid they can’t locate their own country on a map than what Miss Teen South Carolina came up with, on a stage, in front of an audience, with television cameras running.

If she'd been running for office, say, or had already been elected to office—now, that might be news.

On the other hand, if she was a former Vice President named Dan Quayle, Biff and Sally and Barf might not have noticed, for Quayle frequently gave incoherent responses to similarly simple questions, as with this gem:

What a waste it is to lose one's mind. Or not to have a mind is being very wasteful. How true that is.

Do we really expect more of our teenagers than we do our Vice Presidents?


Nevertheless, based on my brief, channel-flipping exercise before heading out to get some work done today, the morning shows actually serve a higher purpose than some might suspect.

That’s right, I said “higher purpose.”


And that higher purpose is this: by bringing into our homes each day a set of talking make-up dolls named Biff, Sally and Barf—whose lives are clearly so empty and devoid of meaning that you actually find yourself feeling sorry for them, trapped on that sofa as they are, with a video of the incoherent Miss Teen South Carolina running on big screens all around them—the shows prove that no matter how depressed you are by your lot in life at that particular moment, and no matter what self-destructive thoughts may be passing through your mind at that particular moment, and no matter how much you want to swap lives with somebody else at that particular moment…there are at least three other people on earth whose lives are even less meaningful at that particular moment than yours.

And they are sitting on a sofa together.

In fact, I have no doubt that right now, as you read this, Miss Teen South Carolina is watching her local morning news program with a thankful tear in her eye and a grateful lump in her throat.

And she wants to say, from the bottom of her heart,

“Thank you, Biff, Sally and Barf!”

She’s feeling a hell of a lot better about herself already.



Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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 24, 2007

The Washington Post Says “Global Alpha Male Quant Crisis Over!”



Well, the crisis roiling the “quant” hedge fund community is officially over—or, at least, on hold—according The Washington Post.

No, I’m not talking about the newspaper Washington Post, which I never read, and which I doubt has ventured any opinion about whether or not the quant crisis that forced bizarre, mechanical short-covering and bizarre, mechanical long-selling of individual stocks by computers in the early days of August, the likes of which I’ve never seen, is over.

But the stock Washington Post is certainly looking that way.

Now, for starters, the Washington Post Company (ticker WPO) is not your typical fast-money trading vehicle. In fact, it is probably one of the very last stocks you might ever dream of being caught up in some Goldman Stanley Stearns & Lynch Global Alpha Male Hedge Fund, LLC disaster.

First, there are only 7.8 million shares outstanding, and most of them are owned by Berkshire Hathaway and fans of Berkshire Hathaway—the ‘Never Sell’ crowd we studied in our “Pilgrimage to Omaha” series early this summer.

As a result, average daily trading volume in the Washington Post is a less-than-whopping 16,000 shares. Most publicly traded companies trade 16,000 shares before the lights go on in lower Manhattan.

Second, the business of the Washington Post is sound, if not spectacular, and by no means cyclical. And while you might think the Washington Post would be a good short-selling candidate along with the rest of the newspaper industry, it is in reality not a newspaper company any more.

Just 20% of the company’s business is the old-media newspaper and Newsweek; 80% is television stations, cable TV, and the educational provider Kaplan. In fact, of all major newspaper chains, only E.W. Scripps has moved as aggressively away from its origins as Washington Post.


Consequently, WPO is one of the few publicly traded newspaper chains showing revenue growth and healthy profitability.

Third, WPO’s shareholders—and I have been in this category—tend to own the stock to have and to hold, not to flip. Consequently, the stock itself, thanks to the patient shareholder base and recession-resistant nature of its franchises, has a “beta” of only 0.57.

For perspective on that number, “Beta” is a measure of a stock’s volatility. A stock that moves up and down in line with the overall stock market is said to have a “beta” of 1.00.

A more volatile stock would have a higher “beta” than the market. Google, for example, has a “beta” of 1.24, which means Google’s share price tends to be 24% more volatile than the overall market, thanks to the company’s young, fast growing, risk-taking culture.

Consequently, at 0.57, the Washington Post has the “beta” of a corpse.

Thus, with a reasonable business model, limited float and low “beta,” the short interest in WPO has been virtually non-existent.

Until late last year.

That is when the stock’s short interest began rising steadily—roughly 10% each month—from a mere 50,809 shares in August, reaching 100,000 in June and jumping to 119,193 in July. Thus the shorts more than doubled their position in less than a year.

The stock, meanwhile, went, slowly and fairly steadily from $740 per share to nearly $800 during the early summer months, while the company itself was also doing fairly well, all things considered, despite normal quarterly earnings fluctuations which are to be expected in a company with Warren Buffett—who abhors quarterly earnings management—on the board.

Then, on August 3rd, the company reported earnings that meant nothing much in the scheme of things—and yet the stock made a Google-ish 60-point move to a high of $850 on four-times the normal average volume, closing up 4% $825.50 a share.

The only possible explanation at the time was that since Rupert Murdoch had just won approval from the Bancroft family to buy Dow Jones, he might also pay a stupid price for the Washington Post.

But there was no follow-through in the shares, which settled down the next day and the next, and went back under $800.

They erupted again on August 8th and 9th (a down 350-point day on the Dow) hitting $880 a share on six times normal volume, only to settle back below $800 on the 10th .

Meanwhile, other stocks with similar characteristics—high price/earnings ratios and high short interests—were likewise jumping, and it became clear something other than a Rupert Murdoch rumor was driving the stock.

To whit, some Global Alpha Male Quant Fund, LLC was covering a short position, very badly.

And sure enough, when the short interest data (which for reasons I have never understood, is tallied on the 15th of each month) came out this week, it showed the short interest in the Washington Post had suddenly stopped going up.

In fact, the short interest declined modestly. And I suspect September’s numbers will show a further decline, as whatever Global Alpha Male Quant Fund, LLC finishes its business.

Or perhaps the Global Alpha Male etc. LLC’s computer will decide to look through the Washington Post annual report and see what kind of business it has been short, and who is on the board of directors and what the long-term value of the enterprise might be...and instead of buying high after selling low, will hang onto the shares for the long term?

Nah.




Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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 22, 2007

Senator Forehead Saves the World!



"I expressed the need for both the Fed and Treasury to use all the tools at their disposal to keep our markets working and so that the business and consumers can have the funds to prosper," Mr. Dodd said. "Chairman Bernanke agreed," Mr. Dodd added

—The Wall Street Journal


That’s a story?

A senator—who’s also running for President and wants desperately to get his poll numbers above Dennis Kucinich, the Democrats' answer to Dwight K. Schrute, the whacky, lovable character in "The Office"—meets with the Chairman of the Federal Reserve, tells him to do his job, to which the Fed Chairman agrees…and that’s news?

What else was Ben Bernanke going say to the Chairman of the Senate Banking Committee—“No, we think it would be cool to have a crash”?

That Senator Forehead—er, Dodd—would get such press coverage is more a testament to how nervous markets really are than to how much Senator Dodd has going for him.

I know. I once helped his campaign.

Christopher J. Dodd has been a Senator from Connecticut for 27 years, during which time he accomplished just enough to get re-elected and absolutely nothing at all where it really counts—in the state’s inner cities, where separate-and-unequal education has ruled during all of Dodd’s 27 year tenure, and the resulting poverty hasn’t changed a bit.

Yet he is very popular in his state and unbeatable every six years. Mainly, I think, because Don Imus liked having Dodd on his radio show, which is not saying much.

Also, Dodd has terrific hair—a big Kennedyesque shock that has turned a mature white, giving him the look of the prototypical Senator Forehead.

Lest you think I approach the good Senator with a closed mind, I first met him thirty years ago when he was still a Congressman—a young, popular Congressman with a great head of hair that was not yet white.

It was during the Carter Presidency, and a lot was happening in Washington: Jimmy Carter was attempting to decontrol oil and gas prices, which was terrific economic policy and, therefore, extremely unpopular at the time, especially among young populists like Dodd.

Dodd was discussing his “position” on oil and gas decontrol with a group of worshipful high school seniors, and what he said was something about as bland and off-hand as, “I think the oil companies make enough money—they don’t need to make more.”

That was it—the entire sum of his analysis of probably the greatest legacy of the much-maligned Carter Administration: the dismantling of Nixon’s price controls.

And, naturally, it went over very well with the 17-year olds.

Of course, what Dodd and the 17-year olds didn’t grasp was that a big part of the “stagflation” hindering the American economy during the late 1970’s was the fact that oil and gas prices in the United States were still rising to world levels, thanks to Nixon's price controls.

Unlike Japan, which imports virtually all its oil and yet had recovered from the Arab oil embargo in record time, politicians like Dodd were so afraid of angering their constituencies that they refused to do what the Japanese had done: let prices rise and force the economy to adjust.

For all his mistakes on international policy, Jimmy Carter did the country one very big long-term favor: he decontrolled oil and gas prices, no thanks to Chris Dodd and the other Congressmen and Senator Foreheads of the world.

Carter, naturally, lost re-election. Dodd, naturally, won election to the Senate and has been re-elected ever since.

Now, when I mentioned that I once helped Chris Dodd’s re-election campaign, I was not making that up.

It happened in 1992. His opponent was a wealthy Greenwich polo player named Brook Johnson, who had made a good chunk of money doing an old-fashioned leverage buyout of Collins & Aikman, by which I mean piling debt on the balance sheet and taking money out of the business, which was not great for the business but was great for Brook Johnson.

Johnson’s campaign theme was that he had created “thousands” of jobs in his tenure at C&A, which I believed was absolutely not true, and could do the same for the country.

Being one who, even then, distrusted individuals who ‘make it up,’ yours truly dug into the public documents and provided Dodd’s campaign with a basic analysis of where the C&A money came from, and where it went. Whether they actually used the data in any way, was never clear.

Dodd, of course, won the election and continued warming his chair in the Senate long enough to get to the top of the Banking Committee, which is why he is on television demanding meetings with Ben Bernanke even though:

1. The U.S. sub-prime crisis happened during Chris Dodd’s own watch as Chairman of the Senate Banking Committee.

2. The Fed is going to do whatever it has to do to keep the world afloat, no matter what Chris Dodd thinks.

3. Chris Dodd wouldn’t know a CDO from a Dr. Seuss character.


Which is why I think it’s all the more remarkable than anybody could possibly care what Chris Dodd did or didn’t say to Ben Bernanke.


In fact, here’s what we at NotMakingThisUp think was really said when Dodd met Bernanke:


Dodd: “Hi there!” (Reaching out his hand and leaning in, speaking quietly.) “Let’s shake hands while I look into your eyes. You nod as if I’m saying something meaningful.”

Bernanke Aide: “But I’m—”

Dodd: “I know, I know—you’re busy, I’m busy. We’ll get this over with in a second. Just nod and look at me thoughtfully. I’ll keep talking while you nod thoughtfully. When the camera clicking starts do die down, that’s when we can stop shaking hands.”

Aide: “But, Mr. Bernanke is—”

Dodd: “So you talk about yourself in the third person? Me too! ‘Chris Dodd wouldn’t agree with that!’ ‘Chris Dodd thinks a grave injustice has been committed.’ ‘Chris Dodd will have another, but without so much vermouth this time—’”

Aide: “No, no, no, Senator—”

Dodd: “Hey, pal, don’t tell me ‘no.’ Nobody tells Chris Dodd ‘no.’ You just shake hands with Chris Dodd until the CNN guy over there gets a good shot in and we’ll be fine.”

Aide: “But I’m not who you think I am!”

Dodd: “‘That’s what she said!’”

Aide: “But I’m not Chairman Bernanke!”

Dodd: (Dropping the handshake.) “What?”

Aide: “I’m not Chairman Bernanke! He is on an emergency conference call with the heads of six major Wall Street firms and is running several minutes late. He asked me to tell you he'd be late.”

Dodd: (Considering this news.) “Well, then let me ask you something.”

Aide: “Certainly.”

Dodd: “What exactly is a CDO?”






Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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 20, 2007

Northwest Airlines 15 Minute-Time



The nation's fifth-largest airline by traffic [Northwest] is taking steps to ensure that it is able to operate reliably in the future, Mr. Steenland [the CEO] said. One important component is a new tentative agreement with its pilots union that would reinstate time-and-a-half premium pay if the pilots fly more than 80 hours a month.
—The Wall Street Journal, August 4, 2007.


“The mechanic doesn’t have the right tools to fix the problem, so they’re going to have to fly a mechanic in with the right tools. This flight is postponed indefinitely. Please come to the ticket counter and we will help you find alternatives.”

—Northwest Airlines ticket agent, Pellston MI, August 17, 2007.


While the CEO of Northwest Airlines—advertising slogan “We Haven’t Been Bankrupt Since May!”—was telling the Wall Street Journal about his plans to make the Northwest pilots feel better about showing up for work, he neglected to discuss what he was doing to perk up the mechanics who help the planes get off the ground, not to mention the flight attendants who actually interact with the paying customers.

I bring this up because less than two weeks after Mr. Steenland’s mea culpa to the press and his declaration of a fresh new start at the old Northwest, we here at NotMakingThisUp ran into the same old problems with the new Northwest that we seem to have every summer on the way to our annual mid-west vacation along the upper reaches of Lake Huron.

Now, when I am asked by people on the East Coast why we vacation in Northern Michigan in the first place, it’s as if I'd said we were going to Jersey City, say, or Elko, Nevada—no offense to either place.

In the minds of East-Coasters who, if they think of the Great Lakes at all, think of the industrial waters of Lake Erie rather than the vast, clear waters of Lake Superior or Lake Huron, the word “Michigan” conjures up images of shuttered Ford factories and poverty-stricken Detroit, not dune-covered shorelines and crisp, cool summer nights with late sunsets and dramatic moon-rises over quiet pine woods.

And that’s fine with me, because a week away from the getting and spending of the “two-and-twenty crowd”—as Warren Buffett calls the hedge fund quant wizards whose antics nearly brought the financial world to its knees early this month—does wonders for the mind and soul.

The trick, of course, is getting there and back without undue stress, which has proven nearly impossible given the fact that Northwest Airlines, despite having been run by leveraged buyout artists and taken into bankruptcy in 2005, still has a lock on the small airports of the Upper Midwest.

This means that if you want to fly from somewhere on the East Coast to somewhere in Minnesota, or somewhere in Michigan, or somewhere in Indiana, chances are good that at least one leg of your trip will require you to fly on Northwest.

By “to fly on Northwest,” of course, I mean “to be trapped on a grounded plane for extended lengths of time in between long periods in a holding pattern.”

In fact, our most recent trip on Northwest was our third consecutive summer trip disrupted by both the weather and the seeming inability of Northwest to get its act together, which I believe is a legacy of Northwest's heritage as one of the first leveraged buyouts in the airline business.

Any time somebody wants to tout the merits of private equity, tell them to fly Northwest.

Weather disruptions, for example, shouldn't be a big deal for an airline—after all, the entire airline industry pretty much operates in weather—except that Northwest apparently hires only those human beings who have lost the ability to speak with regular human beings as opposed to airline-related individuals.

Curious about the holding pattern you've been in for a half hour? Wondering about the mechanic scratching his head out on the tarmac? Anxious about whether you'll make the connecting flight?

The rule on Northwest appears to be, if you don't ask, they won't tell you.


Furthermore, Northwest operates on a unique time system I refer to as “Northwest Airlines 15 Minute-Time.”

There are two rules governing this unique time system:

First, everything is always going to happen in about 15 minutes. As in, “We should pull away from the gate in about 15 minutes.” Or, “We should be in a holding pattern for only another 15 minutes.” Or, “We should be on the ground in about 15 minutes.”

Second, “15 Minutes” actually means “At least an hour.”


When the kids were young and diapers needed changing, we drove the 900-plus miles from the East Coast to the Upper Midwest. After our experience flying Northwest Airlines the last three summers running, I decided to look into whether we should start driving again.

I did my own calculations, based on an estimated average driving speed of 65 miles an hour and allowing for stops every five hours.

And, based on Northwest Airlines 15-Minute Time, I think we could make the trip in only about, oh, 15 minutes.


Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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 15, 2007

When the Gamma of the Beta Begins to Lose its Alpha


"No, let me just clarify. This is not a rescue. This is two things. First, given the dislocation in the markets, we believe that this is a good investment opportunity for us and the other investors that we have brought in. We also think at the same time this will be very helpful to the current fund investors because it will give the fund the wherewithal to also take advantage of these market opportunities.

"And so we think it is both of those things but not a rescue."

—David Viniar, Goldman Sachs CFO


“Look at you. You used to be so cocky. You were going to go out and conquer the world…. What are you, but a…miserable little clerk crawling in here on your hands and knees and begging for help.”

—Lionel Barrymore (“Henry Potter”) to Jimmy Stewart (“George Bailey”), “It’s a Wonderful Life.”



Well the cocky folks whose leveraged “quant” funds have helped bring the current crisis upon the world’s capital markets—Goldman Sachs—held a conference call Monday to describe some steps they’re taking to alleviate the very same crisis which their leveraged “quant” funds helped trigger.

Just don’t use the word “rescue” to describe Goldman’s moves.

No, the wonderful folks at Goldman are not “rescuing” the troubled Global Equity Opportunities fund. They’re simply taking advantage of what Sam Wainwright—the greedy government-contract profiteer and boyhood friend of “It’s a Wonderful Life” hero George Bailey—might have described as “the opportunity of a lifetime.”

At least that's how Goldman Sachs CFO David Viniars described the $3 billion weekend-organized emergency propping-up of the Global Equity Opportunities (“GEO”) fund:

Goldman Sachs is partnering with various investors, including C.V. Starr & Co., Perry Capital and Eli Broad to invest $3 billion in GEO. This investment reflects our collective belief that the value of this fund is suffering from a market dislocation that does not reflect the fundamental value of the fund's positions.

Since we here at Not Making This Up strive to, well, not make things up, we here at Not Making This Up will indeed use the term 'rescue' no matter what the folks at Goldman want to call it.


For that is precisely what it is.

Now, the fund being rescued—the Global Equity Opportunities fund—ought not be confused with Goldman’s other big “quant” funds, including the Global Alpha fund, the North American Equity Opportunities fund or even the Global North American European Alpha Phi Beta What Happens in Sub-Prime Stays in Sub-Prime fund which we just made up but sounds about as good as anything else out there.

No, those other Goldman funds are so highly differentiated from the Not-Being-Rescued Global Equity Opportunities fund that they have generated completely non-correlated positive results that have fully offset the losses at the Not-Being-Rescued Global Equity Opportunities fund.

Actually, I’m making that up.

Those other Goldman funds have also, unfortunately, gotten crushed, which calls into question,

1. What differentiated strategies were they pursuing that yielded such a highly correlated co-efficient of returns?

2. What is a co-efficient of return anyway, and when did the gamma of the beta begin to lose its alpha?

3.Why do these funds all have different names in the first place?

Whether the other funds will need to Not Be Rescued like the fund that is Not Being Rescued remains to be seen, although the Goldman team somewhat bizarrely stated on their conference call that the reason they rescued—er, invested in—the “Global Equity Opportunities” fund as opposed to the “Global Alpha” fund and the “North American Equity Opportunities” fund is because they prefer “global opportunities.”

As if the “Global Alpha” fund is not a “global” fund.

Now, we here at Not Making This Up tend to give Wall Street’s Finest a hard time for their deferential manner on conference calls, by which I mean their incessant use of the phrase “Great quarter guys” as a substitute for “Hello,” not to mention their preference for asking “housekeeping” questions about the tax rate as opposed to business questions that actually matter.

So it is only fair to call out Susan Katzke of Credit Suisse, who showed on the Monday call why asking good questions makes a difference, during an interchange with Goldman CFO David Viniar about the stupendous leverage still residing in the Not-Being-Rescued fund as of Monday morning.

Note how Viniar tried to downplay the leverage in the Not-Being-Rescued fund, and actually understated it by half before Katzke forced him to cough up the truer picture of just how much trouble the “quants” had gotten into, when the gamma of their beta lost its alpha.

This is from the indispensable Street Events:


Susan Katzke, Credit Suisse:

Okay. And just I don't know if you covered this with Roger -- I might have missed it -- but in terms of the leverage in the funds, what are the leverage parameters, and where do you expect them to be going forward? Were they in retrospect a little bit higher than you would have liked them to have been or will be going forward?

David Viniar, Goldman Sachs CFO:

They were higher than we wished they were given how fast the market moved, but they were right in line with what had been expected. And the leverage at GEO as we sit here now is around 3.5 times, which is actually a little bit under where we had told people we would operate but probably around where we will operate going forward.

Susan Katzke, Credit Suisse:

Okay. And the 3.5 times just to clarify is with the $3 billion equity investment?

David Viniar, Goldman Sachs CFO:

With the equity investment.

Susan Katzke, Credit Suisse:

Okay. So closer to 6 times before that.

David Viniar, Goldman Sachs CFO:

That is correct.



Ah, those cocky quants who were going to go out and conquer the world!



Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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 13, 2007

What’s Happening at Barclay’s?



It began innocently enough.

A few odd stocks started collapsing—falling really hard for two or three or four days in a row—on no apparent news.

The first such stock I noticed was Teleflex (TFX), a fine, New York Stock Exchange-listed industrial conglomerate whose share price hit a 52-week high of $85 one fine day in July, and then dropped almost 25 points in the next two weeks on absolutely no news.

Now, Teleflex happens to be buying a medical products company called Arrow International, with which I am quite familiar.

And reasonable people might argue that Teleflex is paying an exorbitant price for Arrow, given the fact that Arrow’s core product line (something called central venous catheters—basically fancy straws that allow doctors to inject fluids into the body) are losing share to other types of catheters, thus calling into question Arrow’s ability to grow revenue in line with other medical products companies.

Furthermore, Teleflex plans to sell one of its existing businesses to help fund the Arrow transaction. Given the seize-up in the credit markets and the swift reduction in the number of private equity firms able to buy businesses on margin the way people used to buy houses in Orlando, Vegas and Sacramento, reasonable people might worry that Teleflex will get a less-than-super price for its existing business.

Thus, the market might be spooked into thinking that Teleflex was buying high and selling low, simultaneously.

At least, that was my best guess as to why shares of Teleflex had begun to crater.

But along came more Teleflexes—stocks suddenly dropping as though somebody’s life depended on it.

Ashland, Computer Sciences, Office Depot, CIT and Robert Half, among others, all experienced sudden, sharp drops under relentless selling pressure—most of them on absolutely no new news.

Sure, Office Depot had missed earnings, and yes Computer Sciences had been juiced upwards on private equity takeover speculation. But the decline in these and the others was quite sudden, in tandem and without let-up.

What on earth, then would a chemical company have in common with a high-tech computer services outfit, an office products retailer, a finance company, a headhunter and a diversified conglomerate?

In every case, their single largest publicly disclosed investor is identified as Barclay’s Bank.

Now, Barclay’s is as big as a bank can get—a little volatility in the credit markets is not likely going to cause a problem leading to the wholesale liquidation of assets, and certainly not assets that presumably belong to investors in Barclay’s equity funds, not the bank itself.

Still, Barclay’s is seeking to buy ABN Amro for what is widely considered to be a ridiculous price. And it would appear that Barclay’s has been selling stocks out of its funds in a get-me-out fashion.

Is it all an innocent coincidence, or is it one of the following:

1) Some trader on Barclay’s equities desk hit the wrong button on their computer;
2) The portfolio managers at Barclay’s all decided to sell stocks they had owned in size for a long time into a weak tape.
3) Something else is going on at Barclay’s that hasn’t come to light.

I’m willing to bet the answer is Number 3.

Any informed observations would be most welcome.


Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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 10, 2007

Quotes You Don’t Want to See at a Time Like This



Those of you looking for solace in today’s Wall Street Journal—some sign that the current melt-down in the sub-prime mortgage-backed fiction of a debt market is near an end—may want to skip the C-Section of the Journal, go straight to the "Weekend Journal" and look at all those nice houses in Vail seeking a buyer.

More specifically, readers should avoid the following quote on the front page of the C-Section from one Ann Rutledge, who is identified by the paper as the principal of a structured finance consulting firm.

Here’s what she said:

“No one really knows how to price asset-backed securities and CDOs and that’s a real problem in the market now.”

You think?


Me, I made the mistake of reading Ms. Rutledge’s quote. So now I’m looking at all those nice houses in Vail in the "Weekend Journal."

Is it my imagination, or are a lot more of ‘em for sale than last week?


Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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 08, 2007

The Shareholder Letter You Should, But Won’t, Be Reading Next Spring



Dear Shareholder:

Well, it seemed like a good idea at the time.

I am referring to your board’s decision to approve a massive share buyback and huge special dividend last summer, when the buzzwords going around Wall Street were “returning value to shareholders.”


Why we did it was this: a smart banker from Goldman Lehman Lynch & Sachs came in, all gussied up and looking sharp, and made a terrific PowerPoint presentation to the board with multi-colored slides that showed how paying a special $10 a share dividend, plus buying back a bunch of our stock at the 52-week high, would “return value to our shareholders.”

We should have thrown the fellow out the window, along with his PowerPoint slides, but what happened was, my fellow board members and I were so busy deleting emails from our Blackberries that we just didn’t notice the last slide showing (in very tiny numbers) the “Trump-style” debt we would be incurring to do so.

We also missed the footnote showing the fees that would go to Goldman Lehman Lynch & Sachs for the courtesy of their showing us how to wreck our balance sheet.


Those fees, I am embarrassed to say, amounted to more money than we made the quarter before we “returned value to shareholders.”

But the fact is, we’d been getting so much pressure over the last few years from the hedge fund fellows who own our stock for ten minutes tops, not to mention the so-called “analysts” on Wall Street (around here we call them "Barking Seals"), to do something with the cash...well, the truth is we just couldn’t stand answering our phones any more.


So, in order to finally start getting things done instead of spending all day explaining to these hedge fund fellows and the Barking Seals on Wall Street why we weren’t “returning value to shareholders,” we decided to do the big buyback and the big dividend.

And for a few weeks there, it was pretty nice.

The stock jumped, the phones stopped ringing, and the Barking Seals started congratulating us on the conference calls instead of asking us when we were going to get rid of our cash.

Unfortunately, not only did getting rid of our cash and taking on a huge debt load NOT “return value” to you, our shareholders, it actually crippled the company for years to come.

For starters, as you know, the aftermath of last summer’s sub-prime debt crisis is forcing perfectly fine companies to liquidate businesses at fire-sale prices…but we can’t take advantage of those prices, because we have no cash. And thanks to the debt we incurred “returning value to shareholders,” the banks won’t loan us another dime.

Secondly, as you also know, we’ve had to lay off hundreds of loyal, hard working employees to pay the interest expense and principal on all that debt, because unlike Donald Trump, we actually repay our debts.

Furthermore, as you probably don’t know, we’ve also scaled back some interesting research projects that had great long-term potential for the company, but were deemed too expensive to continue in light of the fact that we have no cash.

Now, I’d feel a heck of a lot worse about all this if we were the only company suckered into buying our stock at a record high price and paying a big fat dividend on top of it.

But I’m happy to report there were others who also did the same stupid thing.

For example, Cracker Barrel, the restaurant chain that depends on people having enough money for gas to get to its stores along Interstates across America, spent 46 bucks a share for 5.4 million shares of its stock early last year to “return value to shareholders.”

Cracker Barrel’s stock now trades at $39.

And Scott’s Miracle-Gro, whose business is so seasonal it loses money two quarters out of four, put over a billion dollars of debt on its books with the kind of special dividend and share buyback we did.

Health Management Associates—a healthcare chain that can’t collect money from about a quarter of the patients it handles—paid shareholders ten bucks a share in a special dividend to “return value to shareholders” and then missed its very next earnings report because of all those unpaid bills and all that new interest expense it was paying.

Oh, and Dean Foods, a commodity dairy processor with 2% profit margins, returned all sorts of value to shareholders early last year—almost $2 billion worth—just before its business went to hell in a hand basket when raw milk prices soared.


So, you see, everybody was doing it.

And boy, do I wish we hadn’t.



Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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 06, 2007

What Happens in Sub-prime…Gets to Spain Really Quickly



“How does this happen?” somebody asked me this weekend.

That somebody was my wife, and she was wondering out loud how a financial institution such as Bear Stearns could get caught in a sub-prime debt crisis that pretty much everybody in America, including my dog Lucy, knew was coming.

It’s a great question.

On the one hand, it’s inexplicable. How could grownups decide that buying paper written by unscrupulous mortgage brokers with no documentary evidence that income or assets or creditworthiness are as stated would be a good way to invest their client's money?

What makes a well educated veteran who lived through the Long Term Capital melt-down ten years ago think nothing of leveraging forty-to-one a portfolio of sub-prime paper backed by overpriced houses next to Interstate 80 in Sacramento?

How does a wise-guy bond maven—who as recently as April 12th got a fawning article (“Prospering in an Implosion; Subprime Market's Fall Plays to the Strengths Of a Bold Contrarian”) and a photo of himself, his wife, his children and his yacht, in the New York Times—hit the wall in June, freezing investor redemptions and putting the yacht up for sale?

The complex answer involves newer age MBA-type concepts such as alpha and beta coefficients and bond strategies beyond my comprehension, along with older-fashioned realities such as leverage and margin calls.

The simpler answer, however, is the fact that these markets of ours vacillate—over seconds and minutes and hours and days and weeks and months and years and decades—from greed to fear and back to greed again

When markets get fearful, no news headline is positive: wars are bad for consumer confidence, Fed rate cuts are proof-positive that the next Great Depression is at hand, and all corporate earnings reports, no matter how strong, seem not quite good enough.

When markets get greedy, however, the opposite holds true. Every headline is positive: wars stimulate the economy; Fed rate cuts feed the liquidity machine; while all earnings reports, no matter how poor their quality, become excuses to bid up the underlying stock.

When greed takes hold, investors become inured to risk and simply make up whatever they want to make up that helps them justify the risks they’re taking.

Lest you think I exagerrate that last point, recall that six brief months ago, when the domestic housing market had frozen solid and the counter on the ticking time bomb that was the sub-prime mortgage mess was fast approaching “zero,” the solace of highly levered bond market players in this particular cycle was a catchy phrase stolen from the Las Vegas advertising slogan, “What Happens in Vegas Stays in Vegas.”

Now, whatever you might think of an entire U.S. city marketing itself as a haven for adulterers, “What Happens in Vegas Stays in Vegas” is one terrific slogan, packing as it does the entire Rat-Pack lifestyle into seven words—not one of which actually refers to smoking, drinking, gambling and, yes, whoring, but which together imply all those activities and more.

And from those seven words came the rather hopeful catchphrase of the market wise-guys whose 40-to-1 leveraged portfolios depended entirely on the continued inflation of the housing bubble in order to bail out all the unqualified buyers whose paper they owned in one form or another:

“What Happens in Sub-Prime Stays in Sub-Prime.”

We heard it on CNBC and read it in bond briefs from Wall Street’s Finest. Hey, it was catchy!

Thus, with a brief, memorable and entirely false sentence did an entire world of bond mavens dismiss the fact that what they owned was upwards of a trillion dollars of garbage that had only temporarily been transformed into something better than garbage by the magic of Wall Street paper-shuffling and the waving of Moody’s Magic Ratings Wand.

Imagine their surprise, then, when National City Corp stopped making stated-income “liar” loans long after the liars had stopped asking for a loan; when IndyMac began charging higher rates on mortgage loans despite lower Treasury bond yields; and American Home Mortgage simply shut down.

But it should have come as no surprise.

The shift from greed to fear had been underway for months, and had already crossed the Atlantic to Spain earlier this spring—around the time John Devaney got his 15 minutes of fame as the “Bold Contrarian” in the New York Times, a mere two months before he would freeze investor withdrawals and three months before he would begin peddling his yacht, called “Positive Carry” but more aptly named “Carried Out,” for needed cash.

Indeed, anybody listening in on the recent General Cable Corporation earnings call—and the company’s previous call in early May—would have heard that what was happening in sub-prime was absolutely not staying in sub-prime.

General Cable (ticker BGC) makes copper cable—about as basic a thing as basic gets. And what General Cable was seeing was that what was happening in sub-prime was, in fact, spreading around the world pretty quickly.

But don’t take my word for it. Hear it straight from the mouth of General Cable’s seasoned, extremely able CEO, Greg Kenny. For the record, I once worked for General Cable’s former parent company.


Greg Kenny – General Cable Corporation President, CEO

As discussed in our last conference call, we have seen some weaker housing in Spain and Oceania directly impact the sale of some products used in new construction. In addition, we have seen a secondary impact in cables used to connect houses to the grid, such as electrical and telecommunications distribution cables in the United States.


Kenny noted positive offsets to the weakness in housing from the United States to Spain and Oceana (Asia Pacific):

We're also happy to report that cabling for wind farms continues to be quite strong. In Europe demand for medium and high voltage cable is very high due to the continuing rebuild of the electric utility distribution infrastructure and increasing investments throughout Europe in wind farm electricity generation. Extra high voltage underground systems continue to be in demand and lead times and now extending out beyond one year. Demand for cabling solutions in the oil, gas and petrochemical markets, particularly offshore exploration and production platforms, remains high and lead times are also extending.

He also described a firming in telecommunications demand:

At the same time, the submarine fiber-optic market appears ready to improve after years of declines....

Unfortunately for General Cable, and bond mavens everywhere, the positives are not enough to offset—in the near-term—the negatives:

The construction market in Spain is slowing after more than a decade of strong growth, and will create some headwind as we move into the next few quarters. As you may remember from our last conference call, cable for housing applications is about 7% of our worldwide revenues. Housing demand also has some impact on small gauge electrical and telecommunications distribution cables.

Kenny expressed hopes that what started in sub-prime will eventually stop spreading:

I would hope that we see the Spanish thing correct. We're watching the government as it begins to try to perhaps come in and build housing for all of the immigrant communities, etc. So we're watching government policy as they try to go through a soft landing there.


He's not the only one. After all, what happens in Spain eventually gets back to Vegas.

Ring-a-Ding-Ding!


Jeff Matthews
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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.