Friday, November 30, 2007

Zander Out: “Mom, Who’s That Guy in Our Living Room?”


The funniest headline you will read today is on Bloomberg, under Motorola, and, yes, it concerns the sudden departure of Ed Zander as CEO.

The headline is this:

“Motorola’s Zander ‘Anxious to Spend Time With Family’”

Puh-leeze!


A hyper-aggressive marketing guy who’s been running pedal-to-the-metal at five different technology companies since 1973 (Data General, Apollo, Sunsoft, Sun Micro and Motorola) is voluntarily leaving the company he nearly brought to its knees while RIMM and Apple stole its soul, in order to kick back and watch Jon Stewart with his kids?

I mean, do they even know what he looks like in daylight?

“Mom, who’s that guy in our living room?”


“Oh my God—a home invasion! Grab the cat, Timmy and run—I’ll call the police!”


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 investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Wednesday, November 28, 2007

Restore Sears First



Five years ago, when Sears was buying Lands’ End—the Wisconsin-based catalogue company whose high quality wares uniquely suited the wealth-building baby boomer generation that was abandoning Sears left and right—I wrote a letter to Lands’ End founder Gary Comer.

Having met Mr. Comer—who was as straight and genuine as they come—a few times over the course of Lands’ End tenure as a public company, I congratulated him on the $1.9 billion price and also expressed condolences that he was selling such a franchise to Sears.

At the risk of coming across like a wise-guy, I also suggested he keep some of that well-earned money for the day when Sears decided they’d ruined a good thing and wanted to get Lands’ End off their hands, and he could get it back for pennies on the dollar, or at least nickels.

It took a few years, but, sure enough, rumors of just such an event began to fly when it had become increasingly apparent that Sears’ original notion wasn’t happening.

Sears, it might be recalled, had expected Lands’ End to pull into Sears’ stores precisely those up-and-coming boomers who otherwise would not be caught dead in a Sears store—no offense to Sears or its own particular franchise, which was once mighty and is now slowly withering to what may eventually be a large footnote in retailing history.

We're acquiring a great brand, [and] introducing it into our stores...it will attract new shoppers...who will connect with our apparel departments better than they would have in the past…

That’s what then-CEO Alan Lacy said at the time of the deal, and he couldn’t have been more wrong.

Lands’ End today, as far as I can see when I visit a Sears, has become nothing more than yet another private label in the pantheon of Sears private labels, barely distinguished from any other Sears brand.

Yet now, apparently, the company wants to repeat the mistake on a slightly smaller scale by buying Restoration Hardware, the upscale and snooty vendor of whatever anybody needs to make their McMansion look, well, upscale and snooty, for $269 million.

Sears Holdings, which operates the Kmart and Sears, Roebuck chains, disclosed last week that it owned a 13.7 percent stake in Restoration and had initially proposed a $4-a-share bid after being informed in late October that Restoration was weighing a management buyout.

Sears, based in Hoffman Estates, Ill., asked a special committee of Restoration’s board for confidential information to submit a binding proposal, but the request was denied, according to the letter to a special panel of Restoration’s board attached to the S.E.C. filing.—The New York Times

Now, who’s to say Eddie Lampert, the genius who created billions of value by buying the cast-offs of American retailing—Sears and K-Mart—and shmooshing them together, can’t do the same with Restoration Hardware?

Well, I will.

I can’t imagine a Sears customer, who’d normally pay $79.99 for a Carrington comforter set “where America shops”, consider for a nanosecond buying the Restoration Hardware “European Goose-Down Comforter” for 389 smackers.

And I would bet money that the Restoration Hardware customer who’d otherwise have thought nothing about paying $389 for a European Goose-Down Comforter at that cute little wood-paneled store on Greenwich Avenue or in the Stanford Mall would, once they learned Sears owned the joint, think twice or three times before eventually not buying there altogether.

Seems to me Sears might instead take that $269 million—which is almost exactly half the company’s annual capital expenditures—and make its own aging store base at least presentable before stuffing it with brands its own customers can’t afford.

Still, that’s what makes a market.

Gary Comer—who gave much of his fortune to help the less fortunate in the South Side of Chicago, where he grew up—is no longer with us.

But I’d love to know what he’d say about this deal.


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 investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Friday, November 23, 2007

How to Fix Starbucks: Rip Out the Speakers!


It took a few days of contemplation and a three hour, post-Thanksgiving dinner session of Risk, The Game of World Domination, but I think I’ve figured out Starbucks’ problem.

What could Risk, The Game of World Domination, have to do with Starbucks’ problem?

Very little, actually.

It’s just that a few hours spent on nothing but the task of accumulating armies, defending the wonderfully hard-to-attack Australia against all comers, and contemplating how best to destroy brothers-in-laws before they destroy you leaves one’s mind clear to resolving bigger issues, such as what is wrong with Starbucks.

And what is wrong with Starbucks has nothing to do with the taste of the coffee, the rising price of milk or the fact that there are so many Starbucks around the country that Wall Street’s Finest are muttering the word “saturation.” (I think the last word on this topic came from The Onion, which once carried the banner headline: New Starbucks Opens In Rest Room Of Existing Starbucks).

No, the problem with Starbucks is Paul McCartney. At least, I’ve come to believe Sir Paul is driving customers away.

This is because I’ve been trapped beneath a speaker for the last couple of hours at our local Starbucks during which time Sir Paul’s latest album, “Memory Almost Full of Lousy Songs,” which Starbucks released under its own music label, has been playing and re-playing to the point that I am ready to pay them to turn it off.

Well I was found in the transit lounge
Of a dirty airport town
What was I doing on the road to ruin
Well my mama laid me down
My mama laid me down

Those are actual lyrics, and I am not making them up.

Whatever happened to “Blackbird singing in the dead of night/take these broken wings and learn to fly” or “Penny Lane there is a barber showing photographs/of every head he’s had the pleasure to have known”?

Put these new, dreadful lyrics together with old, familiar riffs ranging from the worst of Wings, which was pretty bad, to his “Your Mother Should Know” period with The Beatles, which was awful, and it’s not a stretch to believe that Dave Barry was right: some time during the decade after the Beatles broke up Sir Paul must have been taken over by a Pod Person.

How else to explain lyrics that sound like they were copied from a Hallmark card for the recently widowed?

At the end of the end
It’s the start of a journey
To a much better place
And this wasn’t bad
So a much better place
Would have to be special

Hey, why not just put on a double album of Yoko Ono imitating cattle being prodded in a shopping mall on Black Friday, and really drive away the coffee-drinkers?

Come to think of it, perhaps I could have defended Australia in our epic battle of Risk, The Game of World Domination had I been humming a little post-Beatles McCartney, which surely would have driven my brothers-in-laws quite mad. More likely, though, it would have invited even more aggressive attacks than I suffered, possibly involving blunt objects, just to get me out of the room.

The only thing worse than standing in line for five minutes at a Starbucks must be standing behind the counter mixing coffee drinks for five hours while Sir Paul sings:

Only mama knows why she laid me down
In this God-forsaken town

Only mama knows not only why he wrote not only those God-forsaken lyrics, but then decided to record them, and why Starbucks management decided to cut a deal with Sir Paul that requires them to actually play “Memory Almost Full of Lousy Songs” in a room full of people looking anxiously at the exits.

Starbucks baristas unite! Rip out the speakers! Help turn around Starbucks today!


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 investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.


Wednesday, November 21, 2007

Attention Target Management: Pay No Attention To Analysts Begging for Buybacks



Big Buybacks Begin to Haunt Firms
More Cash on Hand Might Have Protected Freddie, Fannie Shares
—By GREGORY ZUCKERMAN, KAREN RICHARDSON and JUSTIN LAHART



Driven by billions of dollars in share buybacks, record-setting buyouts and a wave of mergers, the amount of stock in the market shrank by hundreds of billions of dollars in the past four years.

With the supply of stock down and demand strong, the market rallied. Now, as the economy slows and credit markets buckle, high-profile companies are cutting back on buybacks, and some wish they held on to the cash they gave back to shareholders.

—Wall Street Journal, November 21, 2007


So says today’s Wall Street Journal, although this is not news to readers here at NotMakingThisUp (see “The Shareholder Letter You Should, But Won’t, Be Reading Next Spring” from August 8, 2007.

Nevertheless, lest anyone think the Journal is making much ado out of nothing, I would say the Journal goes too easy on those Captains of Industry who chose to pump up their stocks for short-term gain and fleeting kudos from Wall Street’s very fickle Finest.

After all, today’s story politely leaves out one of the all-time great admissions of regret—ranking right up there with Chamberlain after Munich, business-wise—which came yesterday morning from one of the most aggressive practitioners of the “return value to shareholders” school of balance sheet destruction: Steve Odland, the CEO of Office Depot.

A sober Mr. Odland, formerly hailed as the savior of that once-proud office products retailer following a highly successful stint spent largely buying back stock and occasionally running stores at AutoZone, told Wall Street’s Finest:

We are very disappointed in our third-quarter results and remain concerned about the economic environment over the next few quarters. We are also very unhappy with our stock price.

Unfortunately, we have cleared the balance sheet of cash, and our operating cash flows declined, so we don't have the opportunity to buy back shares at a time when we believe they are a huge value. [Emphasis added.]



Specifically, Office Depot “cleared the balance sheet” of $200 million this fiscal year by buying 5.7 million shares at $35 a share.

While that doesn’t sound like much, it came after “clearing the balance sheet” of $971 million in fiscal 2006 by buying 26 million shares at an average price of $37 per share. (Last trade--you don't wanna know.)

Where this leaves Office Depot as a stock, we express no opinion, but management at Target ought to think twice about listening to the barking seals otherwise known as Wall Street’s Finest—the analysts who applaud companies such as Office Depot for giving short-term oriented shareholders short-term rewards such as high-priced stock buybacks without any notion of the kind of painful long-term consequences now being suffered by Office Depot’s shareholders:

Nov. 20 (Bloomberg) -- Target Corp., the second-largest U.S. discount chain, posted an unexpected decline in quarterly profit after consumers facing higher mortgage payments and gasoline expenses cut spending. The retailer also said today it will buy as much as $10 billion of its stock, which lost almost a quarter of its value since reaching a record in July….

``It's the right thing to do to leverage up their balance sheet and buy back stock in the face of slowing overall sales growth,'' [emphasis added] said Jeffrey Klinefelter, an analyst at Piper JaffrayCos. in Minneapolis, who recommends investors hold their shares.


I’d like to see Mr. Klinefelter tell that to a room full of Office Depot shareholders, and get out alive, or, at the very least, with his flippers still attached.

Our metaphorical hat goes off to the Wall Street Journal for flagging a timely and important topic...but how they left out the best part of the Office Depot call is beyond us.


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 investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Sunday, November 18, 2007

'The Undertaker' and His Economic Doobie Brothers


Greenspan Says Dollar's Decline Has No `Real' Impact

—Bloomberg, November 18, 2007


Anybody else out there think the original title of Alan Greenspan’s recent memoir of his time as Federal Reserve Chairman (“The Age of Turbulence”) must have been something closer to “Purple Haze, All in My Brain, Rainy Days You Don’t Seem The Same, One Pill Makes You Larger and One Pill Makes You Small, but I Get High With a Little Help From My Friends so Why Does it Feel Like They’re All Staring At Me???”?

I mean, how else to explain the following statement by the man Ayn Rand used to call “The Undertaker” ostensibly because of the dark suits and sober demeanor he wore during their smoke-filled late-night debates, although I am coming to believe both his demeanor and the smoke actually owed more to some lethal Maui Wowie he must have kept stashed in the lining of his Brooks Brothers’ vest pockets, if you get my drift:

Nov. 18 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the dollar's decline hasn't affected the global economy and is a ``market phenomenon.''


``So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it's a market phenomenon, which aside from those who travel the world, has no real fundamental economic consequences,'' he said today.

Huh?


Did he really say a falling Dollar has no real fundamental economic consequences?

What’s with Fed Chairmen these days?

First Greenspan’s successor flatly denies the deflationary impact of the Chinese labor arbitrage (see “Fed Big Flunks Eco 101” from March 7, 2007) of the last decade, and now Greenspan himself claims to see no link between the falling value of the U.S. Dollar and inflation in the United States.

Regarding the former issue, readers may recall that I offered to put Mr. Bernanke in touch with an American businessman who experienced first-hand the massive and deflationary impact of China’s manufacturing policy throughout the last decade.

I now offer to put Mr. Greenspan in touch with an American businessman who is currently experiencing first-hand the massive and inflationary impact of the recent collapse in the U.S. Dollar.

His name is Ron Moquist, and he is the CEO of Raven Industries Incorporated.

Now, Mr. Moquist wouldn’t know me from Alan Greenspan, but I do listen to enough conference calls during the week to stay current on companies such as his.

And his company’s recent earnings call provided just the sort of real-world insight into the real-time economic impact of the weak Dollar that Mr. Greenspan seems unable to see—perhaps owing to the lingering after-effects of all those days “discussing economic policy” with Ayn Rand and the rest of the Economic Doobie Brothers in those smoke-filled rooms:


You would think that with weak U.S. demand for plastic resin, prices would be -- resin prices would be soft, but with the cheap U.S. dollar, a lot of the product is being shipped to foreign markets, which keeps the demand high, and with those higher material costs we haven't been able to pass along all those increases, just because of the competitive pressures.

And that pressure is being driven by the dramatic drop in construction activity, not just residential construction but commercial and manufactured housing as well. These various construction markets currently add up to almost 40% of our total sales volume in Film, so it is a big factor.

—Ron Moquist, Raven Industries November 15, 2007


Maybe, technically, those Doller-related cost increases aren't getting into the Fed's computation of the Producer Price Index, adjusted as it is to exclude everything people actually use; but the impact on businesses such as Raven Industries is as real as the 4.9% price increase UPS just announced for next year.

Ironically, Greenspan made his Dollar comments at the “Learning Annex Wealth Expo” in New York City. No doubt The Donald was also there, and possibly Tony Robbins, giving their sure-fire get-rich-quick methodologies.

I wonder if David Crosby and Keith Richards were also in the wings, anxiously waiting to score some, er, Bolivian Marching Powder, if you get my drift, from the man they call “The Undertaker”...



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 investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.


Friday, November 16, 2007

Memo to Corporate: Always Be “Upbeat”



GWW held its annual analysts meeting on Nov. 14th at its HQ in Lake Forest, IL. The meeting was well attended by the buy and sell sides and was upbeat despite the company's expectation for slower economic growth in the balance of '07 and through '08…


GWW hosted a well attended (55 investors +) annual analyst meeting at its opulent headquarter in Lake Forest, IL. The tone was quite upbeat…


—Two of Wall Street’s Finest


For the record, “GWW” is the stock ticker for WW Grainger, the industrial distribution giant founded in 1927 with an eight-page catalogue, which today handles nearly a million products and has moved across borders into Mexico and Canada, as well as across the sea in a more recent and somewhat experimental effort in China.

Now, think not we make fun of Grainger itself, despite the “opulent” headquarters building referenced above.

Grainger is a well-run purveyor of anything you might need in the course of operating a production line, maintaining an industrial boiler, or keeping the lights on and the air conditioning running in an office building. Finance-wise, the business generates a healthy return on capital and grows steadily if not heroically.

No, we make fun of the word “Upbeat.”

“Upbeat” is a term much misused by Wall Street’s Finest, who seem to have an actual “Upbeat” key on their computer keyboards, somewhere between the “Enter” and “Page Down” keys.

In the peculiar language of that particular tribe of human beings constituting Wall Street’s Finest, “Upbeat” can mean anything from “Wildly optimistic” to “Grinning and bearing it.”

The trick is to read between the lines, ignoring the adjectives and focusing on the numbers.

In the case of Grainger, the two members of the analytical tribe quoted above are saying that, despite a less optimistic outlook for overall economic growth—something Grainger offers unusually good insight into, thanks to its business as the veins and arteries of the American economic lifeblood—the company actually gave better guidance for its own business in 2008 than the tribal elders might have expected.

Hence, “Upbeat.”

Other coded words and phrases in the tribal language of Wall Street's Finest, with translations provided by NotMakingThisUp, include:

1. “Management was cautiously optimistic” (management has no clue)

2. “Earnings were in-line” (the company barely made the number)

3. “We are tweaking our estimates” (we will be slashing our numbers next time)

4. The much-dreaded mother of all loaded phrases, “Our thesis is still intact” (sell every share you can, right now)

As for us, we remain “upbeat” in our expectations that Wall Street’s Finest will continue to provide fodder for these pages.



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 investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Thursday, November 15, 2007

Blackstone Group: Talking, Not Buying




I do think that the tax risk that we in particular face has been fully discounted in the stock price.

—Tony James, The Blackstone Group, President, COO


Companies that comment on their stock valuation generally run towards single-digit NASDAQ shooters, not NYSE-listed mega-caps—or, in the case of Blackstone Group, a company whose IPO at a total market value close to Lehman Brothers, which certainly marked the peaked of the Private Equity Bubble back in June, former mega-caps.

Which is why the Blackstone comments on its own stock valuation were so interesting.

Here is the context and the full quote from Mr. James, courtesy of the indispensible StreetEvents:

Just a word on taxes and Washington, DC, because I am sure I will get that question too. I don't think there has been any real change since we talked last quarter. The taxation of most publicly-traded partnerships and carried interest continues to be actively debated. There is no consensus that has emerged and it is really not predictable as to what ultimately will happen in the areas of particular interest to us, because there are powerful forces on both sides of this issue.


It is clear, I think, in general that taxes are going to go up and our goal remains just to see that we are treated consistently and fairly with other people. I do think that the tax risk that we in particular face has been fully discounted in the stock price [emphasis added].

How, precisely, would he or anybody else know exactly what has been discounted in the stock price of Blackstone?

More importantly, assuming he is correct, then why isn’t he buying?



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 investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Saturday, November 10, 2007

Thoughtful Readers and “The Mother of all Bubbles"




Jeff,

With all due respect, I think you are a bit off the mark with your comments about ACCO's management.

So begins a well written, thoughtfully considered response to a NotMakingThisUp column by a reader identified as “Cadamyale.”

“Cadamyale” was responding to “An Inflationary Spiral Out of China,” in which we offered a back-handed slap at the management and business model of ACCO Brands—actually two such slaps—in the course of making a more pointed commentary about the inflation wave eminating from China.

China’s influence on the domestic inflationary scene, as readers will recall, was once downplayed by the current Fed Chairman, who, all evidence to the contrary, cast a skeptical eye on the importance of China’s role in keeping American consumer prices under control via the massive labor arbitrage of the 1990s and early 2000s—by which manufacturers such as ACCO substituted low-cost Chinese labor for high-cost US labor and regulatory constraints—as follows:

"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 [Bernanke] said.

—The Wall Street Journal.


Now, in our opinion, Bernanke’s comment was as astonishing as it was plainly wrong, and we said so (in Fed Big Flunks Eco 101, March 7, 2007):

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 Wal-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

—JeffMatthewsIsNotMakingThisUp.

I not only stand by those remarks, but I make the following offer: I will provide Mr. Bernanke the telephone number of the office supplier in question, in case he ever wants to test his China Thesis.

I believe it would do our Fed Chairman good to brush up on his practical economics, for while he might know everything there is to know about “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression” (a 1983 Bernanke thesis available on Google Scholar), I think he is a bit out of touch when it comes to “The Mother of all Bubbles: How Communist China’s Deflationary Policy of Ravaging its Natural Resources, Enslaving its Farmers and Underpricing its Currency Allowed Alan Greenspan to Inflate the Heck Out of American Housing Prices” (a thesis I believe somebody, some day, will write).

Now, the office products supplier I am offering to hook up with Mr. Bernanke is not ACCO Brands.
.
It is, in fact, a small competitor that has been at the forefront of the production shift to China and, unlike ACCO, has seen its profitability rise while it has reduced costs to its customers, which include many of the same customers to which ACCO has been charging more and selling less.

The fact that it has been possible for at least one office products manufacturer to successfully transition its business model while ACCO has struggled to do the same tells me that the difference is not in the business itself, but in the management at the top, which is why I came down rather harshly on the ACCO folks in “An Inflationary Spiral Out of China.”

Nevertheless, we here at NotMakingThisUp encourage and admire informed opinion, and appreciate the fact that at least one reader—the aforementioned “Cadamyale”—was moved to offer not merely a negative reaction to our commentary, but an informed observation that adds some value to the issue at hand.

I quote from “Cadamyale” who clearly is not some inflamed Yahoo-message-board-stalking shareholder of ACCO Brands, but somebody with more than a rooting seat in the corporate stadium:

Without passing judgement on the merits of acquiring GBC (I think it is a bit early to determine whether or not this was a success), ACCO's management rightly chose to shed some unprofitable business and raise prices on some GBC products.

Prior to acquisition, and on the front end of the current inflation cycle, GBC guaranteed its customers' pricing for two years. ACCO raised prices this year. The resulting sales attrition has been more than expected, but buyers will come to see that ACCO offers a better product and value-added service than private label whiteboard suppliers and competing "laminating solutions"

The new product development cycle is coming. It includes a document finishing system that will allow the hapless assemblers of pitchbooks to change out pages without disassembling the entire book. It ain't sexy, but it is a better product.

GBC is a major restructuring and integration project that management has always targeted for completion in 2009. It took the same tack in assembling the legacy portfolio, which, while not the sharpest knife in the drawer, does generate 20%+ returns on tangible assets.

In my opinion, this is more a case of lack of investor/WSF patience than incompetent management.


While I appreciate these observations, I respectfully stand by our previous statements on ACCO. The company’s sub-1% return on assets—whether those assets are tangible or not—tells the story well enough, as does the following quote from the latest 10-Q, which makes it clear the company’s problems are not merely restricted to the woeful General Binding acquisition:

“The [sales] decrease was driven by the previously-planned divesture of non-strategic business…and volume decreases in all but the Commercial Laminating Solutions segment…partially offset by the positive impact of $16.3 million in currency translation as well as price increases implemented in North America and Europe in early 2007.”

Nevertheless, if the denizens of Yahoo message boards engaged in the kind of thoughtful and reasonable commentary as that of “Cadamyale,” we wouldn’t have readers like that to thank.
Informed opinion is always 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 investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Thursday, November 08, 2007

“An Inflationary Spiral Out Of China”



ACCO Brands is not, as they say, the sharpest knife in the investment drawer.

After all, any company that calls one of its business units the “Laminating Solutions Group”—you know, binding reports nobody reads with nice plastic covers so they can’t go directly into the recycle bin?—has got to have a sort of Dilbert thing going on deep within the corporate culture.

And, indeed, ACCO has been of the over-promise, under-deliver category for quite some time, at least in the eyes of Wall Street’s Finest, who bought the ACCO “story” without doing the appropriate due diligence.

By “appropriate due diligence” I don’t mean traveling to China to visit ACCO’s plants or counting ACCO branded SKUs at Staples.

I mean, just listening to the earnings calls and deciding whether they make sense.

And in the case of ACCO, the earnings calls haven’t made much sense for quite some time—at least to the more skeptical listeners.

For example, the main thrust of the company’s turnaround efforts, which date back to a disastrous merger with General Binding (the aforesaid “Laminating Solutions Group”) has been to raise margins.

Now, that’s not a bad idea. But the way ACCO chose to raise margins was not the usual route—i.e. by slashing costs and turning out new products at higher mark-ups. No, they had a different strategy:

The real news this quarter is the continued substantial improvement in gross margin. This is the third consecutive quarter of gross margin improvement and continues to give me confidence of the steady long term improvement of operating margin after we are able to work through the SG&A investment cycles that we now have underway. The improvement in gross margin was largely driven by the price increases implemented in Office Products and Document Finishing, coupled with cost synergies partly offset by negative volume in all segments.

—ACCO Brands, May 2, 2007


You would think a company experiencing “negative volume” in a screamingly strong economic environment might have given a thought or two as to the wisdom of those “price increases,” and wonder what would happen should things slow down.

Apparently, however, nobody at ACCO asked the question, because management spent a great deal of time on yesterday’s call verbally head-scratching and finger-pointing every which way but at themselves:

In our third quarter July and August started out well. With the continuation of a strong second quarter performance. But September sales proved to be slower than we expected for our sales and across the industry. Our subsequent analysis tells us the underlying markets softened in both North America and Europe during the third quarter. Based on our own analysis and multiple conversations with customers as well as comments from industry analysts, there is a clear consensus that office product sales in September were down essentially for everyone.

—ACCO Brands, November 7, 2007


Unfortunately for ACCO’s shareholders, management seems not at all ready to give up on the price-raising-our-way-to-glory strategy now that business had turned emphatically down:

We see this downturn as part of a broader consumer trend which appears to be particularly affecting the retail and small business sectors. While we see ourselves as well-positioned, ACCO Brands is not immune to the economic forces pressuring American and European businesses. Nevertheless, we are holding firm to the fundamentals of our business strategy…

As I said in yesterday’s preview, ACCO is not the Hope Diamond of the office products world.

Nevertheless, the company did provide a fascinating first-person view of the inflationary trend in China, and it is no prettier than we here at NotMakingThisUp have been discussing for months:

There is a shortage of ocean freight capacity coming out of China which has driven up ocean freight rates particularly to Europe where, again, maybe you we don't perhaps realize this, but, Europe became a bigger customer for China than the United States at the end of last year and that's causing freight rates going to Europe, particularly, to go up.

And within China, what you are seeing is all the way down the coastal area of China which is a more developed area, we've seen significant labor inflation, coupled with a reduction of what used to be what I'll call start-up incentives that were given through Chinese VAT. Those -- elimination of those start-up incentives plus the significant labor inflation in that area is starting to cause an inflationary spiral coming out of China which you can then couple with the flotation of the Yuan with the U.S. dollar.

So, my biggest concern from a price pressure point of view right now, is China followed by oil and its trickle down effect to all the other commodities and energy….


So the only price pressures ACCO is seeing are:


1. “An inflationary spiral coming out of China”
2. Oil
3. “All the other commodities”
4. Energy
5. Ocean freight.

Other than that, I guess the Fed has it all under control!


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 investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

Wednesday, November 07, 2007

The Most Interesting Sentence Fragment You Will Read Today


The most interesting sentence fragment you will read today—at least, in our eyes—comes from a large U.S.-based company that sells its products around the world.

While this particular company would not qualify for one of Warren Buffett’s “Hope Diamond” type gems (“It’s far better to own a significant portion of the Hope diamond than 100% of a rhinestone”), it’s big, it’s important, and it’s suffering from a confluence of events not entirely of its own making.

Those events are of the making of Alan Greenspan’s free money policy of years past, combined with the get-rich-quick economic policy of the Communists who still run China, and the sentence fragment came during the course of a discussion about cost pressures arising at a time when sales pressures are intensifying—an unhappy combination for any business.

It is as follows:


“…an inflationary spiral coming out of China…”


We’ll have more on this at a later date: it just seemed unlikely we’ll see anything more interesting today….



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, November 05, 2007

CitiSmorgasbord: Another One Bites the Dust


Citigroup CEO Plans to Resign As Losses Grow

Bank's Board to Meet With Prince on Sunday; SEC Queries Accounting


—Wall Street Journal


Ah, here we go again.

Another corporate big gets the axe, weeks after promising to right the foundering ship and receiving assurances of full support from key shareholders—in this case a Saudi prince—and his board of directors.

Citigroup Inc. Chief Executive Charles Prince is planning to resign at a board meeting on Sunday, according to people familiar with the situation, as the bank faces big new losses from distressed mortgage assets.

—The Wall Street Journal

No doubt Citibank shareholders will feel better, as Merrill Lynch shareholders did after their former star CEO got the axe (See “Chipping and Putting While Merrill Burns”).


After all, everybody loves a sacrifice, don’t they?

But who, precisely, is the bad guy in the Citigroup story? Is it really Chuck Prince?

Full disclosure: I’ve met Chuck Prince once, in his role as Citibank’s representative to an inner-city fund foundation fund raiser, and I liked him. Still, I have no idea whether he’s liked at Citibank, which is where it counts, professionally, nor do I know what his peers think of him, or what role he played as Sandy Weill’s legal honcho during the years Weill was pyramiding financial acquisitions into the now-maligned Citigroup.

Still, was Chuck Prince the problem here? Did four years of Chuck Prince do something to Citigroup that destroyed an already-great company?

Today’s Wall Street Journal article contains a hint at the answer:

“We don’t have any culture and that’s definitely the problem,” says one long-time employee who asked not to be identified. That represents a big change from the 1970s and 1980s, when the bank had such a strong culture that other firms routinely raided Citi for top talent.

Hmmmmm… Recall the timeline behind Citigroup's creation:

1. Sandy Weill merges his Travelers Group with Citibank in 1998, shmooshing together two wildly disparate cultures into one financial smorgasbord re-christened as Citigroup.

2. Sandy Weill takes over as sole CEO of Citigroup in 2000.

3. Sandy Weill takes nearly $1 billion in compensation from Citigroup.

4. Sandy Weill retires from Citigroup in 2006.

And poor old Citibank hasn’t been its old self since. I repeat: hmmmmm…

Now, I don’t know Sandy Weill and I am sure he deserved every dollar of the nearly $1 billion he received in his years at Citigroup or CitiBank or CitiSmorgasbord or whatever it was he wanted to call it.

But I think if Citigroup’s shareholders and its board of directors and Wall Street’s Finest are looking for someone to blame, they might study a little more carefully the history of this patchwork of insurance companies, brokerage firms, and banks called “Citigroup,” and ask themselves whether they’ve dethroned the right man.

From the longer view, this looks more like the latest incarnation of the age-old public company shell game in which some fair-haired CEO convinces naive shareholders, gullible analysts and complacent board members that a kabillion dollar company can consistently outgrow the very market it serves quarter-by-quarter-by-quarter …until it can’t.

GE’s Welch, Coke’s Goizueta, Fannie Mae’s Raines, Citibank’s Weill—aren’t these all merely variations on a theme?

Chuck Prince—who ran Citigroup for four years—leaves in a cloud of humiliation and bad press. Meanwhile, Sandy Weill, who created Citigroup out of mergers and acquisitions that left it with “no culture” yet had the good sense to retire gracefully before the fallout, puts his Citigroup-generated stock-option uber-weath-enhanced name on hospital buildings.

Who’s really to blame for the problems at CitiSmorgasbord?


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.