Thursday, January 31, 2008

An Analyst Scorned



Wall Street’s Finest—the men and women who toil in the “equity research” vineyards of the major brokerage firms attempting to make sense of thousands of public companies for their clients—are nothing if not eternal optimists.

Just this morning, for example, one of that peculiar tribe—of which yours truly used to belong—downgraded his opinion of luxury goods proprietor Ralph Lauren months after that particular horse had broken down.

Not that there’s anything wrong with that: we all do make mistakes. It's the nature of this business.

No, it’s simply the analyst’s old “price target” that demonstrates the infallible optimism of sell-side research. Yesterday, that price target was a fancifully ebullient $90 a share for a stock that currently changes hands at $60.73. Today it is a more hittable $63.

Not that investors should pay any attention to price targets in the first place, subject as they are to a peculiar magnetic effect that causes them to eerily parallel the actual price of the stock in question, such as Ralph Lauren, which peaked at $103 during the bucolic “what happens in sub-prime stays in sub-prime” era of this particular cycle, a mere two bucks away from the analyst’s peak price target of $105.

Optimists though their Wall Street cheerleaders may be, woe be the management team that shakes an analyst's faith by failing to do the only thing Wall Street’s Finest particularly want from a company: hit the numbers.

And just last night, a company called Accuray, which makes the CyberKnife—a whiz-bang radiosurgery device used to treat solid tumors with accurately aimed doses of radiation—failed to hit its numbers.

In a guide-down worthy of Sears Holdings, Accuray missed not just revenues and earnings, but also lowered its all-important backlog number (the CyberKnife is a large, expensive piece of equipment requiring radiation-proof bunkers to be installed before the machine itself).

None of this should have surprised anybody: Accuray hasn’t hit too many numbers in its brief span as a public company. But the CyberKnife is a great product, and medical products analysts can’t fathom why it is not taking off like the iPod.

Of course, iPod’s don’t cost $4 million to get up-and-running.

Be that as it may, the conference call got quite ugly, and included this one-for-the-ages exchange, courtesy of the indispensible StreetEvents:



Amit Hazan – Oppenheimer & Co, Analyst

Okay. Just moving to, I guess, new orders. Even if we assume your $100 million in new orders, that's flat year-over-year, and if we think about the $40 million you just removed and with some of your comments, get a sense that that $40 million in backlog that you just removed was new orders over the last six months or so, I've got two out of the last three quarters that were flat in terms of new orders. I've got $40 million that are coming out of new orders. I'm not seeing much growth here at all, but you're painting a picture as if there's some robust growth going on in terms of interest in your product. What am I missing?


Dr. Euan Thompson – Accurary Incorporated – President and CEO

I'm not really sure where you're coming from, Amit, which is not unusual….


But this morning, Hazan is returning the favor with the following—one of the most unusually blunt assessments of a company by one of Wall Street’s Finest ever to make it into print:

For those expecting some clarity into the most unnecessarily complicated one-product company in our sector, forget it. ARAY has just put up what we consider the weakest, most confusing and most concerning quarterly results since its IPO one year ago….

Naturally, Hazan cut his price target on the shares—from $15 to $10.

The stock went out at $14.98 last night. And while we never comment on, express an opinion of, or predict stock prices in these virtual pages, we suspect the new price target will prove more accurate than the old one would have this morning.



Jeff Matthews

I Am Not Making This Up

© 2008 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Friday, January 25, 2008

New Fed Policy: 'No Rogue Trader Left Behind'

.

French Bank Says Rogue Trader Lost $7 Billion

The bank [Société Genéralé] uncovered his scheme last weekend. It was selling off its positions during Monday’s market turmoil in Europe that led, in part, to the Federal Reserve’s history-making rate cut of three-quarters of a percentage points.

—The New York Times


That’s right: i
t turns out that at least a part of the reason Ben Bernanke’s Federal Reserve Board hit the panic button this week was the forced selling of shares by a bank closing out the positions of a single, errant, 31 year old trader.

So, you see, Citibank and Merrill combined can lose $20 billion in one quarter with no response from the Fed...but stocks start getting hit one weekend because a guy in France lost $7 billion over the course of a year's worth of bad trades, and Bernanke & Friends snap into action immediately.

Well then, now that the Fed appears to be responding strictly to stock market jitters as opposed to, oh, inflation and other monetary stuff, what’s next?

Will the Fed be cutting rates every time a trader loses money?

In order to be prepared for that eventuality, we here at NotMakingThisUp are happy to provide a handy set of headlines designed to make it easier for newspaper editors and fellow bloggers to respond to whatever move the Fed makes next.

Simply cut-and-paste according to the situation:


Rogue Trader Loses Billions on Market Open; Bernanke Cuts 75 Basis Points, Urges Calm; Stocks Firm

Rogue Trader Makes Billions Back in Early Trade; Bernanke “Not Sorry About, Won't Take Back” Rate Cut; Stocks Rally

Rogue Trader Losing Millions Again; Bernanke Cuts Another 5 Basis Points “Just in Case”; Stocks Steady

Rogue Trader Recovers Millions by Mid-Morning; Bernanke “Pleased”; Stocks Climb

Rogue Trader Now Down Slightly in Late-Morning Trading; Bernanke “Concerned”; Greenspan Consulted: Wall Street Cheers; Stocks Extend Gains

Rogue Trader Flattens His Book, Eats Lunch; Bernanke “Monitoring Situation”; Dow Steady

Rogue Trader Losing Again in Afternoon Trade; Bernanke “Anguished, Ponders Further Action”; Greenspan Pays Fed a Visit; Wall Street “Encouraged”

Rogue Trader Down $10 Billion into the Close; Bernanke Asks Greenspan to Assist, Weeps on Camera; Wall Street Elated: “Ben’s Found His Voice!” Stocks Soar

Rogue Trader Loses All; Bernanke Missing; Greenspan Declares “I’m In Charge Here”; Traders Hugging, Dancing in Wall Street, Say “We Knew It All Along!”; Stocks Up Limit

And, finally:

Greenspan Cuts Rates to Below Zero; Street Hails ‘No Rogue Trader Left Behind’ Policy; Errant Trader Makes All Back as Dow Jones Average Hits Infinity, Quits Bank to Start Hedge Fund; Bernanke, Britney Discovered in Vegas During ‘Lost Weekend’, Tells CNBC “I Can’t Believe How Much Things Cost.”




Jeff Matthews

I Am Not Making This Up

© 2008 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. Anyone buying or selling stocks on the basis of this commentary is making a mistake. 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, January 23, 2008

The Great Private Equity Cash Robbery of 2007



So, was yesterday morning’s 400-point opening decline the selling climax?

Did it happen that the market, in its infinite wisdom, finally entice all remaining weak holders of stocks to finally throw in the towel at precisely the wrong moment in the months-old downdraft whose smoldering flames caught fire over the weekend and engulfed markets around the world long after the real risks were apparent to anybody with eyes and a subscription to the Wall Street Journal?

Long time readers know that we here at NotMakingThisUp venture no such public opinions about the direction of either stock markets as a whole or the stocks within those markets.

But for anybody with more than a few years’ experience at this peculiar business—particularly anybody who was around that panic-stricken third week of October in 1987—there was something missing in yesterday’s headlines.

Anybody want to guess what that was?

Well, as far as NotMakingThisUp is concerned, the most obvious thing missing in all of yesterday’s headlines was this: no share buybacks were announced by any major company before, during or after the brief morning sell-off.

Not one.

During the panic of October 1987, grey-beards will recall, the tape was clogged not only with headlines of trading-halts amidst the worldwide rush to sell, but also with a steady stream of share buyback announcements by U.S. companies.

Coke, P&G and many others that week and in weeks subsequent to the Crash of ’87 used the substantial cash on their balance sheets to take advantage of the market dislocations that caused even the good stocks to be sold with the bad, and cannily bought their own stock back at deep discounts to its inherent worth.

Why then, were there no share buy-backs announced yesterday?

Could it be that the Great Private Equity Cash Robbery of 2007, in which previously healthy companies either “cleared” their balance sheets of cash—to use the euphemism employed by Steve Odlund, the Chief Cash Clearer at Office Depot—by buying back their own stock at bull-market peaks or faced the prospect of having it cleared for them by the Private Equity Cash Robbers?

We suspect that is precisely the case, and in continuing our look-back here at previous efforts to Not Make It Up, reprint this review of the Great Private Equity Cash Robbery of 2007 through the eyes of a made-up public company CEO ruefully ruminating on the after-effects of his effort to “return value to shareholders”:



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 Stanley 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 feel like we ought to 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

© 2008 Jeff MatthewsThe content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Sunday, January 20, 2008

Been to a Dairy Queen Lately? Part II




Warren Buffett, as we noted at the end of Part I in this series, owns Dairy Queen.

Actually, Berkshire Hathaway owns Dairy Queen—or “International Dairy Queen,” as the well-known purveyor of soft ice cream is officially called—but it was Buffett’s idea to buy the business in the name of Berkshire, which he did in early 1998.

Buffett is a lifelong fan of “DQ” ice cream, having grown up 300 miles from the first plant of ‘Grandpa’ McCullough, who invented the stuff, in Davenport, Iowa. For years Buffett not only ate the ice cream, but kept his eye on the business the same way he keeps his eye on thousands of publicly traded businesses: by reading the company’s annual report each year.

The numbers in the Dairy Queen annual report, as you’d expect for a successful franchise operation with a great brand name, were quite good. Revenues from royalties and the sale of food and paper products to the franchisees grew steadily along with the store base, and pre-tax margins consistently averaged 13% or so, in good years and not-so-good years.

Most importantly, the business generated lots of Buffett’s favorite thing: excess cash flow.

This is due to its franchise model, in which the cost of opening new Dairy Queens, as well as hiring, firing and training employees, and just plain running the business day-to-day, falls on the Dairy Queen franchisees.

That leaves the home office with plenty of cash flow and not much to spend it on—precisely the kind of simple, steady business Warren Buffett wants to own.

Even before coming to the rescue after the death of a car dealer caused a block of Dairy Queen voting stock to come on the market in late 1997, threatening to throw the company to the wolves, Buffett had approached the Dairy Queen Board about buying it.

He was turned down flat…by the same Board of Directors that only one year later would agree to let him buy it for a price that some shareholders—with reason, as we shall see—judged too low.

Ten years later, if the Dairy Queens in our part of the country are any indication, not much has changed about Dairy Queen since the Berkshire deal closed in early 1998. And that’s the way Warren Buffett likes it. He has no interest in managing anything except Berkshire’s capital, and is content to leave the management that built the business up in the first place free to run it as they see fit after it becomes part of the Berkshire family.

Thus, while no detailed financial information on Dairy Queen is published, the business most likely has remained pretty much the same as it was before Berkshire bought it—which is to say, sleepy but profitable.

Hard to believe, then, that Dairy Queen was once the largest and fastest-growing food franchisor in the U.S.

In fact, Dairy Queen was a hyper-growth company in its early days. Founder J.F. ‘Grandpa’ McCullough, who started manufacturing ice cream in Davenport, Iowa in 1927—300 miles east of Omaha on Route 80—experimented with “soft” ice cream until he hit on a formula that proved popular at a friend’s ice cream store in Kankakee, Illinois.

The key to making “soft” ice cream was delivering the stuff at a slightly higher temperature than regular ice cream, and it wasn’t until ‘Grandpa’ found a partner who could manufacture the right type of freezer that the company could begin opening stores.

The first official Dairy Queen opened in Joliet, Illinois, in 1940, and business was very good.

Afraid that Dairy Queen’s popularity could diminish for any number of reasons, ‘Grandpa’ and his family licensed territories with abandon, inadvertently pioneering the franchising model for quick serve restaurants thirteen years before the McDonald brothers began franchising rights to their San Bernardino, California hamburger restaurant.

Sharp-eyed territory owners eventually got together and organized a national business out of Dairy Queen, and began opening lots of units quickly. The new chain grew from less than 10 stores in 1941 to an astonishing 2,600 in 1955—the year Ray Kroc opened his first McDonald’s in nearby Des Plaines, Illinois.

That’s a compound growth rate just shy of 50% each year—and it includes the years during World War II when new stores couldn’t open for lack of materials to build the freezers.

With that kind of torrid growth, of course, comes problems, and “DQ” got caught up in a tangled legacy of territory disputes and franchisee complaints that hobbled the company for a time, as competitors—including McDonald’s—began to grow.

Incorporated rather fancifully as “International Dairy Queen” when local investors took over the business from its founders in 1962 (Starbucks would no more think of calling itself “International Starbucks” than McDonald’s would call itself “Worldwide McDonald’s”), the company also began diversifying into ski-rentals and camping gear until the 1970’s, when ownership changed again, and new management paired refocused on the soft ice cream business.

The company began living up to its ambitious name, with stores opening in Japan, South America and the Middle East, and during the mid-1970’s bear market, management cannily bought back more than half the shares outstanding at low prices.

And while Dairy Queen’s store growth remained anemic—from 1955 to the time of Berkshire’s acquisition, the store count grew a bit less than 2% annually—the company hit the jackpot in 1985, with the launch of “The Blizzard,” which mixed OREO cookies and candies with ice cream.

It was a novel idea at the time and proved wildly popular—becoming the ice-cream equivalent of the iPod. Dairy Queens around the world dispensed more than 175 million Blizzards that first year, and the company’s revenues and earnings boomed. Pre-tax income jumped 50% in 1985 and again in 1986, and the stock—which had traded over-the-counter since 1972—went on a five year tear.

The company used the bonanza to buy popcorn and candy shop Karmelkorn in 1986 and a year later the Orange Julius franchise, which was somewhat ahead of its time in offering fresh juice drinks. International Dairy Queen’s stock became a favorite among a small but loyal following of growth-stock investors on Wall Street.

With many imitators and no hit follow-up to the Blizzard, however, and two unappealing acquisitions behind it, growth slowed in the 1990s and Dairy Queen stock price lost its zing. The shares were almost unchanged from 1991 to 1996—an eternity on Wall Street—and grow-fast investors began to question the appeal of a company with a go-slow mentality.

Consequently, by the mid-1990’s, a company which possessed one of the most enduring and familiar consumer brand names in the country, was, ironically, not well known as a public company. Far from representing global domination, the “International” in the name was little more than a quaint reminder of grand ambitions largely unmet, especially by comparison with McDonald’s.

Yet the company was able to stay independent, thanks to the relatively small number of shares outstanding (23 million) and the fact that insiders controlled many of those shares by means of two classes of stock—“Class B” share, which had voting rights, and “Class A” shares, which didn’t. Thus management had the freedom to run the place more or less like a private company, without paying attention to the whims and earnings models of Wall Street’s Finest.

And run it like a private company they did.

While McDonald’s earnestly cultivated Wall Street analysts and became a favorite stock holding among institutional investors and small investors alike thanks to its ambitious growth strategies, new product innovation and quick adoption of new technology, Dairy Queen never strayed far from its slow-and-steady business model.

A timeline on the Dairy Queen web site shows a seven year gap between the introductions of “Mr. Misty” slush treats and the “Buster Bar,” while its first store in Japan opened in 1972—one year after McDonald’s.

And while McDonald’s had started its first national television campaign in 1967, Dairy Queen’s web site notes with pride its first full year of national television advertising…in 2004.

Nor did management make great efforts to grow the shareholder base. In fact, the company continued to shrink the shares in the public market by buying back stock using the surplus cash flow from the business. This made perfectly good economic sense for a company that didn’t need much capital for opening new stores—the franchisees carried that burden—but it was unusual for a public company to buy stock back as consistently as Dairy Queen in those days.

Today, of course, buying back stock is almost as common as declaring a dividend. And while it is true that buying back shares at cheap prices is a great way for a company to spend its money—far better than making an ego-driven acquisition or putting up expensive new buildings—a decade or two ago company managements weren’t easy to sell on the benefits.

For one thing, companies like to grow, not shrink. It’s human nature. Buying back shares and shrinking the capital base tends to go against the built-in wiring of a typical big-company manager. It also can go against their paycheck: management incentives are usually based on growth—growth in revenues, margins, and earnings.

Not only that, but buying in shares—when it’s done as aggressively as the folks at Dairy Queen did it—changes the kind of shareholders a company has. That’s because the fewer the number of shares that trade, the fewer investment funds there are that can own the stock, no matter how great an investment it might seem to be.

This last might strike some readers as odd, even counter-intuitive, but for the average institutional investor, the first consideration when looking at a new stock is not “How profitable is this company?” or “How good is management?”

It is “Can we buy enough stock to matter, and could we sell it if something went wrong?”

I had that lesson drilled into me early in my career, when I came across an exciting little company with a new product that helped oil drillers improve their productivity and was selling like gangbusters. The company hadn’t been public very long, so the stock wasn’t well known on Wall Street—this was before CNBC and “Mad Money,” kids—and I couldn’t wait to get our portfolio managers to buy it.

The very first question they asked, however, had nothing to do with the product, the management, or the earnings.

It was, “How much does it trade?” It wasn’t so much that they wanted to be able to buy a lot of stock: they wanted to be able to get out in case I was wrong.

It seemed like the wrong way to look at a business—asking how big the door was in case you wanted to leave the building—but it’s one reason why, despite a highly profitable business model with large amounts of free cash flow, not many institutional investors owned shares of International Dairy Queen, and only a handful of analysts kept tabs on the company.

Then a Minneapolis auto dealer died in 1997, and everything changed.

Rudy Luther, a Twin Cities car dealer and part of the investor group that had taken over the Dairy Queen in the early 1970’s, had owned 3.2 million voting shares, and his estate was going to sell those shares. This might have depressed the stock price or prompted a hostile bidder to get involved, or both.

So the company asked Warren Buffett—who had approached the company through a Chicago investment bank, William Blair, the year before, only to be rebuffed by the Board of Directors—if he wanted to buy those shares.

Buffett declined to buy anything less than the entire company. A discussion between Buffett and the Chairman of the very same Board that had previously rejected him, John Mooty, apparently had its effect. Mooty and the Board now decided it would be a good thing to sell out to Berkshire.

Why the change of heart?

Despite being a decade old at this writing, the proxy statement laying out the terms of Berkshire’s acquisition of International Dairy Queen is an interesting document when it comes to grasping one of the intangible advantages Buffett has in acquiring businesses coveted by others: he leaves them alone.

I don’t want to manage your business,” Buffett is known to tell the managers of the companies he buys, and he’s not kidding.

Here in the proxy statement, amidst the bland, legalistic prose spelling out the dry financial terms of the transaction, is a discussion of the reasons the Dairy Queen Board of Directors recommended shareholders approve the deal.

Normally such reasons are laid out in strictly financial terms, with a great many words and numbers spelling out the price paid as compared to similar transactions—much the same way real estate agents provide the “comps” to a potential home-buyer—along with a laundry list of future risks that might occur should the company not do the deal.

Very few proxy statements, however, include anything like this reason for approval:

“…that Berkshire’s historical practice has been to retain management, and, in this connection, the stated intention of Mr. Buffett [is] to retain Dairy queen management and to keep Dairy Queen’s general offices in Minnesota…”

In other words, Warren Buffett was going to leave them alone.

When Dairy Queen announced it was selling out to Berkshire Hathaway one fine October day in 1997, not a few shareholders were miffed that the offer was probably not the best that could have been obtained.

After all, Berkshire paid $585 million for a company with approximately $50 million of cash on the books, doing over $58 million a year in pre-tax income—a modest transaction price of only 9-times the value of the income stream. (Just recently, Campbell Soup came under fire from some of its shareholders for selling the Godiva chocolate business to a Turkish company for more than 15-times the value of the income stream—an earnings multiple 50% higher than what Dairy Queen got from Berkshire.)

Even Dairy Queen’s proxy statement for the transaction revealed that values of deals recently completed at that time (late 1997)—compiled by Dairy Queen’s own investment banker—were 20% higher than the price paid by Berkshire (a median of 12.25-times pre-tax, pre-interest income).

Public shareholders squawked—with one going so far as to sue, unsuccessfully, to block the deal. Buffett did offer a choice of either $26 a share worth of stock in Berkshire Hathaway for each share of Dairy Queen or cash in the amount of $27 per share of Dairy Queen.

Either way, the fact that management controlled the voting stock made the outcome, as they say, a “done deal.” In a remarkably straightforward letter to investors, DQ Chairman Mooty gave his reasons for voting his family’s 35% share with Berkshire:

"Our family will vote our entire 35% of the voting shares of Dairy Queen in favor of the merger and will elect to receive Berkshire Hathaway Common Stock for all the Dairy Queen shares owned by us. We are not interested in trading our Dairy Queen shares for any other securities. I personally consider Berkshire shares to be one to the finest investments that our family could make and we anticipate holding the shares indefinitely."

It is a paragraph that could have been written by Warren Buffett.

In the end, slightly more than half the $585 million was paid in stock, slightly less than half in cash.

Those shareholders of Dairy Queen who took only the cash—in return for the extra $1 a share—undoubtedly avoid reading the stock pages these days. The shares of Berkshire they would have received on January 8, 1998 were valued at $47,400. Last trade: $131,000.

Given that roughly half the price paid for Dairy Queen was in Berkshire stock, which has nearly tripled, the original purchase price of $585 million is closer to $1 billion at today’s prices.

Whether it was a worthwhile transaction for Berkshire Hathaway, as well as Dairy Queen shareholders, is a question we will explore in our next installment.


To be continued…

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.

Tuesday, January 15, 2008

So Far, It’s More Like a Shutout



We expect to be within our previously stated guidance of $0.99 to $1.03 for earnings per share from continuing operations for the fourth quarter of fiscal year 2008.


—Wal-Mart Stores, 1/10/08

As a result of the lower sales and gross margin rates, we currently expect that net income for the fourth quarter ending February 2, 2008 will be between $350 million and $470 million, or between $2.59 and $3.48 per fully diluted share. In the fourth quarter of the prior year, the Company reported net income of $820 million, or $5.33 per fully diluted share.


—Sears Holdings Corp, 1/14/08


In the back catalogue of NotMakingThisUp there is no lack of selection when it comes to reporting on Sears and the efforts of Eddie Lampert to turn around what many of the smartest retail analysts I’ve ever known have widely considered unturnaroundable, to coin a word—at least, without a lot of money and some great retail management.

It’s not that we consciously picked on Sears, or even K-Mart for that matter. It’s just that it’s so easy to walk into a store and judge with your own eyes whether Wall Street’s Finest are getting it right, or not.

The respective press releases from Sears and Wal-Mart in the last week, quoted above, seem to confirm that, at least so far, NotMakingThisUp has not been making up the difficulties of turning around not just one, but two gigantic retailers.


June 30, 2005

Wal-Mart 9, Sears Holdings Corp 2


Yogi Berra might have said “you can see a lot just by looking,” or he might not. But it’s still a wise notion.

Which is why yesterday I found myself in a newly re-merchandised K-Mart store—sorry, a “Big K”—a few towns away from home, just looking.

Visiting stores is the fun part of investing in retail stocks. Unlike a lot of businesses that do things nobody can possibly get a handle on even by visiting the field operations—oil companies, for example, or software companies—when you study retailers, you can actually see with your own eyes whether the company is doing what the management says they’re doing.

The trick, however, is to see a lot of stores, at different times of the day and in different parts of the country, if possible.

Stores can be as empty as an Art Garfunkel concert or packed like they’re giving away shares of Google, just depending on the time of day and the day of the week and the season of the year.


Also, talking to employees is not always the best way to find out what’s really going on, because store clerks don’t think in terms of year-over-year-change-in-comparable-store-sales the way Wall Street types do.

When you ask the kid behind the counter, “How’s business?” and he says “Really slow,” he’s talking about the previous half hour. And, since employee turnover at that level averages probably 50% a year, it's likely he's only worked there a few months anyway.

So you go to stores and look at what people are actually buying, and try to talk to the store manager or someone who runs a department to find out what’s selling and what’s not, and see if anyone in a position to know can tell you how business has been for that store in recent weeks. And you do it as often as you can.

All that said, it’s usually pretty easy to see when a retail concept really works—and when it doesn’t—without a whole lot of effort.

So, after watching from the sidelines while Eddie Lampert built his own version of Berkshire-Hathaway buying up the remnants of two once-great retail chains—Sears and K-Mart—and combining them into a single once-great retail chain, I was interested in seeing how the nearest "Big K" was faring.

This particular “Big K” is off Route One, in a C+ location next to an Ocean State Job Lot, a Dollar Tree and a Fashion Bug, and it certainly looks a lot better than it looked during the the K-Mart Chapter 11 when the vendors weren’t shipping: the shelves are full, the signs are cheery, the lighting is good and the floors are clean.

And that’s about it.

“Big K” had that curiously soul-less feel of a decent-looking place with no particular franchise, nothing driving people in and little to keep them there. One ancient clerk moved slowly around the racetrack, putting up signage from a shopping cart when he wasn’t stopping to chat with other clerks. A few customers lurked in the aisles, but the only crowd was at the service desk.

Registers open? Two.

I then drove a few miles down Route One to the nearest Wal-Mart, which is in an A+ location next to a supermarket and a Home Depot. It was a typical Wal-Mart, bustling even at 11:30 on a Wednesday morning. The demographics of the shoppers were probably thirty years younger than the “Big K,” with mothers dragging children through the apparel section, kids roaming the DVD aisles and men in the tool area. Overall, it had the energy of a store doing a lot of business.

Registers open? Nine.

Now, Eddie Lampert is smarter, and richer, than 99.9% of the money managers on the planet. He found value in AutoZone and Sears and K-Mart, and extracted billions. A couple of other big investments didn’t work out so well, but that’s still a remarkable batting average for anyone in any line of work—and right up there with his role model, Warren Buffett.

But people forget that the original Berkshire Hathaway—the New England textile company Buffett acquired and turned into the conglomerate we all know and admire—failed.

Even Warren Buffett couldn’t make a New England-based textile company successful in a world of cheap southern mills and, later, offshore producers; so he liquidated that business, put the money into insurance, and used the float from the insurance business to buy high-return businesses with “moats,” as he calls their competitive advantages.

I have no doubt Sears Holdings Corp will be an even more successful investment vehicle for Eddie Lampert than it already has been.

But in its base business, with Wal-Mart adding more sales every two years than the combined annual sales of Sears and K-Mart together, I also have no doubt that whatever Sears Holdings Corp is making money at twenty years from now, it will not be making money from its motley collection of stores without billions of dollars of newly invested capital.

Yes, I know the “story” of Sears Holdings—just shut down a few hundred more lousy locations, start selling Sears appliances in the K-Mart locations, and get store productivity up to the level of Target. Voila! The incremental EBITDA and earnings are mind-boggling.

But there are no moats around those Sears stores and K-Mart stores with their lousy merchandising and old clerks and the ratty fixtures and 1980’s-era technology—only streets leading to better-looking, better-run, lower-priced Wal-Marts and Targets and Costcos and Sam’s Clubs.

And to get the customers back will require more than bright signs and Kenmore dishwashers.From what I saw, the score right now stands at Wal-Mart 9, Sears Holdings Corp 2.

If Yogi were watching, he might just say “it’s deja-vu all over again.”

Jeff Matthews
I Am Not Making This Up

© 2008 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Sunday, January 13, 2008

Weekend Edition: Lovebirds on a Plane



I am flying on a JetBlue Airbus moving 618 miles an hour across the heartland of America.


In and of itself this flight is not a bit remarkable, inured as we have become to what any traveler a hundred years ago or more would have found astonishing—the ability to travel across a continent in half a day.

But what is remarkable is that we are literally traveling 50% faster than on the flight out to California, thanks to now having at our tail the heavy winds planes like ours were fighting on the way out when a series of Pacific storms moved across California, dumping multiple feet of snow on the Sierra Nevada Mountains and causing airlines to divert flights, miss connections and lose baggage even more rapidly than usual.

And it’s a good thing we’re going as fast as we are, because the flight can’t get to JFK soon enough as far as I’m concerned.

Normally I look forward to cross-country flights—six hours without cell phones, email and internet is abnormally productive time—but on this particular flight I have been stuck next to two middle-aged lovebirds treating Flight 644 as a sort of idyllic journey to the soul of their beings.
I am not making that up, or even exaggerating.


The couple in question have already consumed an elaborate picnic dinner, engaged in fervent political discussion and followed all that by a sort of shared television viewing punctuated by loud exclamations over dogs, The Cosby Show and, most obnoxiously of all, scenes of Marseilles.

Not particularly wanting to share either the journey or their innermost yearnings, and being separated from the female and more demonstrative of the pair by a thin armrest, I’ve employed my iPhone and trusty Sony noise-reduction headphones nearly non-stop. The voice of Alex Turner (see “Monkeys Over America” from March 6, 2006 for some background on this comment) has made things reasonably manageable and fairly productive, although even the Arctic Monkeys couldn't drown out the Marseilles exclamations.

Mercifully, the male lovebird is fast asleep, while the female lovebird is slumped forward with her face scrunched into a blanket on her tray table.


She appears to be either praying to some sort of God—a Gender, Faith and Morality-Neutral Divine Presence, if her previous conversation with her partner is any indication—or trying not to throw up from all the food consumed during the picnic portion of their outing, or both.

Whatever it is, she’s not moving or talking, and that’s a major improvement over the last three hours.

It all started before they even took their seats, she alternating between excusing herself to me in American English, and chattering in fluent but text-bookish French to her partner as they tried to wedge their gigantic picnic dinner underneath the seats in front of us for take-off.


That done, her partner began pestering the JetBlue flight attendants—politely, in heavily accented English—for two blankets, as if this was the red-eye and the lovebirds were going to hit the sack as soon as the cabin door was shut.

I braced myself for the worst, but the blankets, as it turned out, were merely to keep them warm during a picnic which began as soon as the flight leveled off—he bringing out a massive sandwich on a baguette, she bringing out a pair of chopsticks and digging into a plastic cup filled with some kind of aromatic chicken.

This was, apparently, the French portion of the flight, for most of the conversation was in that language, he speaking fluently and unaffectedly, she speaking in her textbook-fluent manner, with lots of hand-waving.

Still wary of what the blankets might ultimately be intended for, I managed to keep track of where the conversation was going, thanks to having lived overseas as a kid. Mercifully, it mostly revolved around wine and the lack thereof, and what labels would have gone well with her chicken and his cheese, with plenty of giggles in between food bites.

The food portion of their adventure over, it was time for the television segment, and I can tell you far more than I care to about their television viewing habits, because the woman apparently does not realize that when wearing headphones, one tends to speak much louder than normal.

Thus, her heartfelt “oohs” and “ahhhs” at particularly charming points in “Dog Whisperer,” as well as sudden bursts of laughter during an apparently hilarious Cosby episode, sounded more like barks, yelps and shouts of alarm.

Things neared a tipping-point when she and her partner suddenly began shouting, “Ah! Marseilles!” and finger-pointing at the television screen. The people near us sat bolt-upright, tore off their headphones and looked around to see what was happening—no doubt expecting oxygen masks to drop and the plane to start a barrel-roll.

Nothing else happened except that as the cabin got warmer, the woman began removing layers of furry outerwear and the man called on the flight attendant coming down the aisle collecting empty food containers and other garbage to “please turn down the temperature,” as if we were in a small restaurant with a faulty heater.

The attendant deserves a raise just for not dumping the garbage bag on their heads. Instead, he said he'd look into it.


Mercifully, with the temperature steadily rising, the lovebirds soon fell asleep.

Trapped next to overly-chatty individuals in this kind of situation always reminds me of “Strangers on a Train,” Alfred Hitchcock’s spooky film about a Mother-obsessed, Father-hating young Misfit with major emotional problems, including wanting to kill his father and marry his mother.

Or was that “Psycho”?

Come to think of it, that’s what all Hitchcock’s movies are about, with the possible exception of “The Birds,” although most likely the motivation of the birds was that they all wanted to kill their fathers and marry their mothers.

In the “Strangers on a Train” version of Hitchcock’s obsession, an unhappily-married tennis star is seated with a chatty, Mother-loving, Father-hating Misfit who tries to recruit to the tennis player to kill his old man, in return for the Misfit murdering the tennis star’s wife, whose philanderings have made the gossip columns.

Your wife, my father. Criss-cross,” says the Misfit, explaining the scheme, which the tennis star dismisses as the goofy rantings of an off-kilter nut-job.

Still, the tennis player could have gotten up and left the Misfit at any given time, but doesn't, which leads to the usual Hitchcockian plot-lines. In my case, however, there's been no alternative, being 33,000 feet above sea level in an aluminum tube going 633 miles an hour above Topeka, Kansas.

Careful readers will notice that we have speeded up a little, and that is a very good thing.

In “Strangers on a Train,” of course, everything goes horribly wrong. The Misfit thinks the tennis star has agreed to his plan for swapping murders—the Misfit’s father for the tennis star’s wife—and strangles the woman in an amusement park. The Misfit, naturally, expects the tennis star to murder his Father.

You’re as much in it as I am. We planned it together. Criss-cross.”


The tennis player becomes a suspect in the murder. After the usual twists and turns, including a dramatic scene on an out-of-control merry-go-round, he is cleared and, in the usual Hitchcockian happy ending, gets the girl.

So far, nothing in “Lovebirds on a Plane” has gone horribly wrong, yet.

But you never know.

After the third request by the lovebirds to “turn down the temperature,” I thought I overheard two of the flight attendants on my way to the bathroom talking and vigorously nodding in the general direction of the temperature-obsessed, picnic-happy, Marseilles-loving couple.

Cross-cross,” I thought I heard one who had been dealing with a rude passenger say to the fellow who had retrieved the extra blankets for the now-near-shirtless couple protesting the heat.

The blanket-retriever smiled oddly, and I could swear I saw him slip an extra-large plastic garbage bag into his pocket before heading back down the aisle.

.

Jeff Matthews
I Am Not Making This Up


© 2008 Jeff MatthewsThe 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, January 09, 2008

You Want Wrong? You Got It



Lest anyone think our recent look back at the NotMakingThisUp files is intended solely to republish the notions which we got right, here’s one we got quite wrong.


Like, completely wrong.

It was a “Weekend Edition” of NotMakingThisUp, when we sometimes venture outside the investment world, and it speaks for itself...but it does go to show that in politics, anything can, and frequently does, happen.

Full disclosure: a family member serves as a volunteer organizer for the campaign of Barack Obama, and was doing so before he shook things up in Iowa.

Also, sadly, 'My Dog Lucy' is no longer with us. But we just picked up a friendly, middle-aged mutt from the pound who goes by the name Charlie, and if he harbors any political ambitions you won't read about it here.

***

Sunday, January 21, 2007

Weekend Edition: Mandatory Dog Treats for All


• HILLARY CLINTON SAID she was forming an exploratory committee for the 2008 presidential race, embarking on a widely anticipated campaign for the White House. (Clinton's statement) 9:49 a.m.

• New Mexico Gov. Richardson Sets Committee

• Sen. Brownback Declares Presidential Bid

• Road to 2008: See Who's in the Race

— Wall Street Journal, online edition

I appear before you today to announce that yet another newcomer has formed an exploratory committee to investigate a potential candidacy for the 2008 presidential race.

The candidate is my dog, Lucy, and the committee consists of her sibling, Rosie, and three cats: Marvin, Ralph and Kitty.

I admit to being somewhat surprised by this development: Lucy is a mutt whose major concern in life has been, until today, primarily limited to the Universal and Unrestricted Availability of Affordable Dog Treats to all canines regardless of age, creed or mixed heritage.

She also supports getting scratched on the rump once in a while.

Nevertheless, Lucy wants me to tell the world, to paraphrase the memorable words of Senator Dole when he quit his Senate seat to prepare for his doomed Presidential bid,

"I sit here, more or less still except when one of the cats walks by and swats my nose, just a dog."

Lucy apparently reached her courageous decision after hearing about the inordinate number of politicians who have likewise announced their plans for the World’s Most Powerful Office without having the faintest chance of making it to the first meaningful party caucus—Iowa—yet for some reason feel compelled to call the press together and make an announcement such as this:

"Search the record of history. To walk away from the Almighty is to embrace decline for a nation… To embrace Him leads to renewal, for individuals and for nations."

That comes from Senator Brownback, a Kansas Republican who may in fact be the best candidate of any candidate who ever threw his or her metaphorical hat into the ring for any political office ever created...but if it's any indication of how he plans to run for President, I can’t see how the good Senator from Kansas has any better shot at reaching the White House than my dog Lucy from the Humane Society.

Certainly, not being electable to an office doesn’t mean a person shouldn’t try for it. This is, after all, America: Abe Lincoln famously tried and failed many times before his moment came, and he's one of the two or three greatest Presidents we've ever had.

Still, one would think a savvy pol such as Bill Richardson, the politically ambitious Governor of New Mexico whose main claim to fame is that he could not get the streets plowed after a recent snow storm hit his state, would know that Hillary Clinton is going to be the Democratic Presidential candidate in 2008—period, end of story.

Yet here he is, announcing the formation of yet another Committee to Yadda-Yadda-Yadda:

"I am taking this step because we have to repair the damage that's been done to our country over the last six years…. Our reputation in the world is diminished, our economy has languished, and civility and common decency in government has perished."

I will go on record here and say that as highly as they may think of themselves, there is not a declared or undeclared Democratic candidate, Mr. Richardson included, who has a chance of beating Hillary for the nomination.

Not “Fighting Joe” Biden, nor our own “Senator Forehead”—Chris Dodd—or the earnest John Edwards, the curiously bloated Al Gore, the humorless John Kerry, the oddly amusing Dennis Kucinich, or the I-don't-know-enough-about-him-to-precede-his-name-with-a-remark Tom Vilsack.

Not even—and I say this strictly as a matter of political reality—Barack Obama has a chance to win the nomination, although I would put money on Obama to be Hillary’s Vice Presidential candidate, which is, I imagine, what the current the posturing is about.

As for the Republicans, I’d be likewise willing to bet Mitt Romney is the candidate in 2008. Not for nothing, but Bill Clinton and George Bush before him were each great at raising money, and also were Governors, which seems to be best starting point for The White House. Plus I hear Mitt gets people excited...and this is from people who don't usually get excited about politicians.

Unfortunately, when it comes to the chances for my dog Lucy, I must tread lightly on these pages, for while I admire her stance on Mandatory Dog Treats for All, I must admit the rest of her platform is pretty thin.

Still, Lucy has promised to flesh out her positions on Iraq, global warming, energy independence and tax-code reform…so long as I give her more treats, and keep scratching that itch.



Jeff Matthews
I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Friday, January 04, 2008

Turned Out the “Only Place to Go” Was Actually Down



An old adage on Wall Street is that by the time a fad, trend or national pastime gets plastered on the front cover of a major publication, that fad, trend or national pastime has peaked.

And so it was that NotMakingThisUp highlighted—during the bright, booming summer of 2005—what seemed to have all the earmarks of a mania-marking “Cover Story” courtesy of Time Magazine.

We continue our New Year's look back at past chronicles of NotMakingThisUp to determine whethere we have, in fact, not been making things up. You be the judge.



Sunday, June 12, 2005

The Last, Best Hope For Prosperity


I bought Time Magazine today for the first time since…probably since 9/11, when I bought every newspaper and magazine available with a cover story on the World Trade Center attacks. The relevance of a weekly “news magazine” these days is, after all, right up there with “Book-of-the-Month” clubs and the Sears Catalogue.

Nevertheless, I bought this new issue of Time Magazine because the front cover is titled “Home Sweet Home” (stamped in large letters, the “S” converted into a Dollar sign) with an illustration showing a man covetously hugging a house. The sub-title reads: “Why we’re going gaga over real estate.”

I bought it, quite simply, because this Time Magazine is as good a “cover story” kind of market-mania, surely-we-are-approaching-a-top indicator as I have ever seen.

Now, careful readers who’ve been asking about the promised follow-up to last Thursday’s piece on internet-jewelry retailer Blue Nile will have to excuse me. As fun as it is to chronicle the bizarre public musings of Overstock.com CEO Patrick Byrne and his company’s failure at pretty much every new venture he touts to Wall Street—the latest being a Blue Nile knockoff—the current issue of Time is both fecund and worth a good look.

After all, when a Time Magazine comes along declaring “Record home prices are inflaming passions—and pocketbooks—as never before,” well, as Willy Loman’s wife said, attention must be paid.

This is still a magazine with a circulation of something like four million, and its sole function in the world is to sell as many copies as possible before they get recycled into cat litter or something else.

Obviously, the editors of Time believe that a feel-good article about the joys of home-ownership—actually, more precisely, about the ability of average people to strike it rich by buying, flipping, or just putting down deposits on as-yet-to-be-built condos—will sell a lot of copies. Making it, of course, red meat to anyone who’s seen more than one cycle on Wall Street.

So let's take a look.

Opening the “Home Sweet Home” cover, one finds an article titled “America’s House Party” which begins with the Siren Song of all bubbles, whether the South Sea Bubble of the 1700’s or the Internet Bubble of the late 1990’s or the Tulip Bubble of the 1600’s or the Oil & Gas Bubble of 1980: the guy who sees his friends doing it:

“I saw so many friends and colleagues getting rich,” John Williams, a disc jockey from Long Beach, tells the magazine, “I wanted to get rich too.” So Williams is buying houses, fixing them up and, according to the article, “flipping them for a quick profit.”

Furthermore, unlike most of the Housing Bubble stories recently appearing in various newspapers and magazines, this article is a straightforward encomium to the financial rewards of buying, selling, trading or owning a house:

The stock market may be dragging, but home prices are soaring, fueling a national obsession with real estate.

Your house is now your piggy bank.

House gawking is a hobby; remodeling, both entertainment and an investment.

Folks brag about having bought their home in the ‘90s the way they used to brag about having bought Microsoft in the ‘80s.

Real estate isn’t so much about nesting today as it is about nest feathering.

And—I’m not making this up—that’s just in the first two paragraphs.

The article goes on, with the usual Time Magazine-ish snappy quotes from newly-minted tycoons; weirdly all-encompassing-yet-inane statements (“It’s about the giddy tabulation of how many plasma TVs your house’s appreciation could buy and the embarrassment of feeling too poor for your neighborhood as houses around you are torn down for McMansions…”); and, of course, simplified, happy graphics.

However, as in all manias and bubbles, lurking within the happy graphics are some potentially disconcerting statistics, if you really look at the Time Magazine charts.

They show, for example, that the number of second homes purchased in America stayed within a range of 300,000 to 400,000 a year from 1989 to 2002—then suddenly doubled to over 800,000 in 2003 and broke 1 million in 2004. Home equity loans have also spiked, at the same time that rates appear to have bottomed and are moving higher. And in several non-sexy, non-condo, non-second-home-inflated states, mortgage foreclosure rates have tripled.

But you will not read about all that in the article itself, for Time readers presumably do not want to read about anything except how much fun this house flipping thing is.

There’s a trivia “test,” although it is not designed to test the reader’s knowledge of issues that might have a bearing on whether they are familiar with ARMs and IOs and transaction costs—knowledge that might be useful as they toss their chips into the game.

Rather, it asks things like “Which of these entertainers has sold at least seven homes in the past 10 years?” (Answer: Courteney Cox, although why anybody would care about that is beyond me.)

More interesting than the graphics or the cute quotes is a look at a single block in a Chicago neighborhood, detailing how the real estate boom has affected seven different houses:

House 1 has a middle aged owner who did a tear-down/rebuild on the house, and is reinvesting the equity in other properties, the profits from which “will put my kids through college.”

House 2 has a long-time owner “using it as a piggy bank,” via home equity loans.

House 3 is an eventual tear-down whose long-time owner hates what has happened in her neighborhood.

House 4 was sold by its previous owner after property taxes rose 1,059% in 10 years.

House 5 is being sold by its long-time owner to support her retirement.

House 6 has been flipped twice in seven years.

House 7 was inherited; the owner did a recent tear-down/rebuild.

Further on, and like the dot-com stories from the late 1990’s, the article is chock-full of real-world people throwing off the shackles of benighted thinking and plowing their worldly savings into housing.

Maybe you’re like Mike Oakley, 43, who has poured $100,000 into redecorating his Chicago house, figuring it is already worth $150,000 more than when he bought it. “Rather than invest in stocks,” Oakley says, “invest money in your home.”

You shouldn’t get the impression that you can make six figures in real estate by snapping your fingers. Just ask Max Kaiser. It once took him a whole hour.

“Buildable land here [in Las Vegas] is running out. We have only one place to go, and that’s up.”“We might be riding that wave,” he [a General Mills operations manager considering switching to the real estate business] says. “But the wave is there. So I’m going to get on it.”

And it’s not just Young (and-never-seen-a-down-cycle) Turks grabbing for the gold who are being celebrated here; it’s the old-timers, too:

Of course, you don’t need a portfolio of condos to have made a pile. Average homeowners who bought in the ‘90s…are now, like modern-day Clampetts, sitting atop newly discovered gushers of wealth.

As I recall the “Beverly Hillbillies,” the kids were morons and Granny was a lunatic. The only smart one in the bunch was Jed Clampett, a cagey old redneck, and he had wisely sold his “newly discovered gusher of wealth” and put the money in the bank...giving Jed the right to drive poor Mr. Drysdale insane.

Of course, nobody here in Time-land is doing anything of the sort, except a few renters, as the article notes in a brief piece called “The (Surprising) Case For Renting” appended to the end of the eight-page “America’s House Party.”

Yet buried within the “Case For Renting” is a cautionary paragraph containing the seeds of what will, I expect, mark the germination of the seed containing the eventual reversal in the Housing Bubble:

The Choes aren’t alone in finding value in the rental market. With so many people buying homes in the past few years, landlords in certain frothy markets, like San Diego, Miami, Las Vegas and Washington, have gone begging. Not a few are collecting less rent than they are paying in mortgage expense. Their bet is that in the end, rising values will make up for their losses.

They “will make up for their losses,” of course, because, as we have been told by a Las Vegas player earlier in the article, “We have only one place to go, and that’s up.”

Anybody who reads this article—and I mean anybody, whether they are the last remaining Communist still farming onions on a collective outside Vladivostok, or a jet-setting, highly-leveraged real estate mogul who pretends to be worth more than he is, like Donald Trump—will feel that internal sense of failure, jealousy and greed that they, too, are missing out on something more.

Gushers of wealth…nest feathering…piggy banks…getting on the wave…only one place to go, and that’s up....

It’s all here in Time Magazine, available on your newsstand today: The Case for Owning Real Estate in America.

You have to excuse homeowners for getting a little giddy. When they look at the rest of the economy, they see little else to be excited about. Employment has picked up, but wages haven’t [not true: just last week it was reported that wages rose 6.3% last quarter, the largest first-quarter increase in years]. Inflation has risen from the grave. The stock market is crawling to get back to where it was five years ago [also not true: most stocks are higher than they were five years ago]. Savings accounts throw off barely enough interest to feed a parking meter [also not true: short rates have tripled in a year].

So people see their homes as their last, best hope for prosperity—as not just houses but also lifeboats.

Compelling, is it not?

Very nearly as compelling as a previous Time cover story on a similarly widespread investment mania that also, according to many, looked like the “last, best hope for prosperity.”

You may recall that Time Magazine cover story. It was published in the fall of 1999—September 27th, to be precise. It was titled:

“Get Rich.Com: Secrets of the New Silicon Valley.”

I am not making that up.


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, January 02, 2008

J&J WAS Right!



In a reflective mood as the New Year begins, we here at NotMakingThisUp have reviewed our case files in order to measure the worth, or lack thereof, of whatever it was we’ve chosen Not to Make Up over the months and years past.

Here begins our first in a series of re-prints from those files, and we hope they prove worthwhile to new readers as well as old.

And Happy New Year to All.


Monday, January 30, 2006

Maybe, Just Maybe, J&J Was Right All Along

Having examined a Guidant deal three years ago and passed, the company [Boston Scientific] became intrigued at possibly taking advantage of a lower J&J bid.

“J&J opened the door to us, and we’re gutsy enough to walk in,” said one Boston Scientific executive.

—Wall Street Journal

Thus the Journal reported how it was that Boston Scientific sprung its surprise $25 billion bid for Guidant just a few weeks after Johnson & Johnson had negotiated a price cut with the regulatory-entangled Guidant.

Wall Street loves a good bidding war, of course—what with the duplicate advisory fees, duplicate legal fees, duplicate financing fees, and, in the end, the higher share price upon which so many other sharks in the tank can feed.

But will Boston Scientific shareholders benefit from the company’s self-proclaimed “gutsy” move?

Consider that J&J had agreed to buy Guidant in December 2004. Think about the number of J&J lawyers, finance people, doctors and consultants combing through Guidant, evaluating the business units product-by-product, working out the details of the merger and how the post-merged company would function.

Consider the fact that the deal had to be approved by our Federal Trade Commission as well as the European Union, and think about how many individuals from both companies had to work together to convince hundreds of regulators around the world to approve the deal.

Ask yourself how much J&J was spending on the deal—a million bucks a day? Two million a day?

And consider the detailed due diligence J&J had thereby acquired on every aspect of Guidant during that entire process.

Now, recall that six months after the deal was announced, Guidant reported a flaw in one of its defibrillators, and soon pulled five of the devices from the very market for which J&J wanted Guidant in the first place.

And recall that J&J felt compelled to issue a press release describing these product issues as “serious matters,” but said it was working with Guidant to resolve the issue.

Then think about why it was that J&J eventually lowered its deal price for Guidant—the very act which “opened the door” for Boston Scientific to swoop in with its dramatic, 11th Hour offer and ultimately prevail with the kind of high drama and stretched bid that Wall Street loves and for which it has been cheering on the BSX crew.

And ask yourself who really knows more about Guidant and what it will take to restore its franchise and take advantage of the medical and demographic trends upon which the premise of the deal itself rests?

Is it the folks at J&J who, metaphorically speaking, spent over a year roaming the House of Guidant, peering in the attic, ripping up floorboards, checking the plumbing and inspecting the roof?

Or is it the outsiders at Boston Scientific, who drove by a house they had thought of buying three years ago, before the price tripled, but had passed on it—and now, admiring anew what they saw, found a friendly set of bankers and started bidding?

“Gutsy” may be the right adjective for the bid-‘em-up folks at Boston Scientific—they’ve proved themselves full of that quality in years past.

Time will prove whether “stupid,” “desperate,” “naive” or, perhaps, “brilliant” are better.

© 2005 Jeff Matthews


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.