Monday, August 31, 2009

Grumpy Analyst Syndrome, or, “Optimistic, How Dare He!”


A hallmark of any major market rally—like the one we’ve had since the March give-up—is what we here at NotMakingThisUp call Grumpy Analyst Syndrome.

G.A.S. occurs when Wall Street’s Finest—who generally get around to throwing in the towel on their favorite stocks only at the tail end of whatever bear market we’ve just been through—miss the normal head-snapping rally that tends to follow the give-up phrase of that very same bear market they finally caved into.

Not that it’s easy to identify the actual give-up phase while it’s happening, mind you.

After all, so many head-fakes occur along the way that by the time the give-up comes it’s hard to focus on writing buy tickets while you’re you-know-what-ing your guts out and asking yourself “How,” in the words of the famously self-berating former New York Yankee Paul O’Neill, “could anyone be this bad???”

Of course, one excellent indicator of the give-up phase itself is the number of Wall Street analyst downgrades on stocks hitting their all-time lows. It’s a sign that enough of their clients have sold those very same stocks that Wall Street’s Finest finally feel comfortable downgrading the names without fear of backlash—which means things are getting sold out.

Thus it is that once the give-up passes and the rally begins, Wall Street’s Finest always—and we mean always—find themselves in the uncomfortable situation of having thrown in the towel at exactly the wrong moment.

What they do afterwards, naturally, is what any rational human being would do when the facts change: they acknowledge the new reality, re-evaluate their recently adopted negative stance, and change their rating back to “Buy.”

Just kidding!

What they really do is this: they get grumpy, and they look for bad news to support their recently adopted negative stance.

Now, for the record, we’re not speaking here as embittered, disillusioned clients of Wall Street’s Finest looking to get even.

Rather, we’re speaking as a former member of that club, one who made the same mistakes years ago that they’re still making today.

“Been there,” as the saying goes, “done that.”

Thus we believe we are well-qualified to report on one fine example of Grumpy Analyst Syndrome, which occured during last week’s Toll Brothers earnings call.

In this case, a particularly Grumpy Analyst actually told management—i.e. the guys who run the actual business and, presumably, see more clearly what is happening on a day-to-day basis than any outsider, let alone a Grumpy Analyst—that management was being too optimistic about its own business.

Here’s how the conversation all went down, as recorded by the indispensible StreetEvents, starting with the Grumpy Analyst. (
Note how the G.A. treads lightly before all the negative stuff starts to spill out, like Kyra Sedgwick working a suspected murder/rape/carjacking/identity thief on The Closer):

How are you guys? I -- looks like you -- you're feeling better, Bob, and realizing that your overall trends have shown improvement. I sense a little optimism with, I don't want to call it Kool-Aid, but a little concern about the increase in foreclosures at the higher end that are in process right now with option ARMs and Alt-A and overall foreclosures in process up about 90% today year-over-year and just wondering, you mentioned the talk of a double dip but there was certainly views that the high end has been showing activity with more jumbo as a percent of the mix in northern Cal, like you mentioned, Joel, but realistically a lot of those houses are trading at significantly lower than where they were purchased and consumers are under water and there is lots of concerns that are not playing out at the moment, but arguably could be major headwinds and I'm just wondering if your views of stabilization might be a little bit premature and how much risk do you think is out there and are you concerned at all as I am?

Now, unlike most of Wall Street's Finest who come down with Grumpy Analyst Syndrome—i.e. the ones who threw in the towel at exactly the wrong time—this particular Grumpy Analyst had the foresight to jump off the Housing Train before it went clear off the tracks several years ago, t
hus allowing those clients who took her advice to survive most of the carnage.

Unfortunately, however, she then stayed grumpy while most of the homebuilding stocks more or less doubled off their give-up lows.

As always, we offer no opinion on the value of homebuilding stocks. Indeed, they may well be sells at these levels—mathematically speaking, at least, there is half the value in the building stocks that have doubled from their lows.

But in looking at the business itself—as opposed to near-term stock moves—we’d take Bob Toll’s view of the world over somebody with Grumpy Analyst Syndrome.

And after a couple of years of being downright grim, he’s a lot less grumpy than most of that segment of Wall Street’s Finest who make homebuilders their specialty:

I am concerned, probably not as much as you are. There is no doubt the stats are what they are and they are ominous with respect to the increase in foreclosures for prime borrowers and for some of what used to be the higher priced product. Logically you've got to be concerned as to what the impact of that is on our new home -- our new home luxury home market, but in the face of these stats, at the same time, we see increased demand and that makes us feel a whole lot better.

This reasonable response, however, did not mollify our G.A., for she continued in the scolding vein with even more negative data points:

Well, just to keep in mind, Bob, keep in mind before you go there, these are foreclosures in process so they're not yet hitting the real estate for sale side market, so they are ominous statistics and I think that we have seen false recoveries before, like in the fall of '06 where there was a perception things were getting better and what looks like good activity right now and apparently getting better, I'm just wondering what kind of risk are you incorporating into your expectations and concerns as it relates to this subject. But also you're benefiting to some extent, I wonder what percent the market is really incentivized to use the tax credit, because the tax credit right now is pulling forward demand….

To this, Toll management forthrightly pointed out that Toll Brothers houses are too expensive to benefit much from an $8,000 tax credit, leaving our G.A. nothing else to do but wag her finger at both the company and trigger-happy homebuilding investors, by simultaneously advising Toll management how to look at their own business, while also slamming trigger-happy homebuilding investors:

...I certainly appreciate Toll is relative to the market. I guess what I'm just trying to point out and make sure that Toll Brothers is thinking about as well is the headwind that might be fourth quarter 2009, macro fourth quarter headwind or first quarter 2010, not to mention all the unemployment. It just sounded like you guys are very optimistic and I just don't understand why this is not being taken into more consideration and maybe you are thinking about it. So maybe that's one of the reasons you're not projecting 2010 earnings and revenues or revenues and earnings, but it seems like the market is very excited and wondering what your perspective is, generally, if you think the worst is behind us, how do you thing about this in that outlook? So I think I got where you guys are, so I appreciate it.

Bob Toll, to his credit, declined to take the bait:

Well, the other side of the answer that I gave you is that, notwithstanding our optimism, we haven't changed any of the thresholds with respect to the land that we're willing to buy and we haven't bought much at all, yet, and that's -- and we've been beaten out and that's probably because we are maintaining threshold. So while we're optimistic, we are also -- we're also unwilling to make bets on the future being much different than the current market, which is how we analyzed the land that we purchased.

Now, you might think that a Grumpy Analyst—unable to get under the skin of management and force them to break down like those sociopaths on The Closer, who we suspect are driven to confess their triple murder/rape/carjacking/identity theft crime sprees every week not so much by the force of Kyra Sedgwick’s crack logic, but by prolonged exposure to her weird circus clown lipstick and high school glee-club Southern accent—might resort to bitter irony or sarcasm to win the final point.

But this is not how these calls go. After all, Wall Street’s Finest need to maintain the good graces of the companies they are paid to follow.

Thus it is that our Grumpy Analyst concludes the dialogue by using exactly the words her predecessors with Grumpy Analyst Syndrome have done from time immemorial: a variation on the dreaded “Great Quarter, Guys” cliche:

Well, that's very helpful. Thanks, Bob. Appreciate it. Good quarter, guys.

Whether there will be more such “good quarters” to come for Toll Brothers or any other home builder, we make no predictions. Nor would we expect the stocks to duplicate their March-to-August performances any time soon.

But we’d certainly bet that so long as there are homebuilding followers afflicted with Grumpy Analyst Syndrome this severe, the stocks have seen their lows for this cycle.

Optimistic? How dare he!


Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Tuesday, August 25, 2009

Including the Good Stuff while Excluding the Bad Stuff: Come to Think of It, We Will Get Fooled Again!



One of the first books we bought on our new Kindle was “Bill and Dave,” Michael Malone’s 2007 account of “How Hewlett and Packard Built the World’s Greatest Company.”

Having written a book, and knowing how hard it is to actually do that, we’re not going to say anything remotely disparaging about “Bill and Dave”—it’s a good, readable account of what the title says it’s about.

In fact, whether you agree that HP is, or was, “The World’s Greatest Company,” anybody with an interest in HP—now run by Mark Hurd, the genius who built a sleepy technological has-been known as NCR into a make-the-numbers machine favored by Wall Street’s Finest—ought to read it.

You’ll be reminded how hard it is to not only build and run a business, but how to maintain that business when it depends almost entirely on technological innovations to stay relevant.

Just ask the boys at Eastman Kodak.

Also, it’s an interesting journey back to the beginnings of the electronics era—the very, very beginning—when the two men met in the fertile climate of Stanford University and the San Francisco Bay area, where entrepreneurs were putting up radio antenna and trying to figure out how to make money on this strange idea of broadcasting, while headstrong individuals were quitting one pioneering company to start their own company seemingly every ten minutes.

It’ll remind you of the dot-com boom, in a good way.

But that’s all gone—as are Bill and Dave. Their legacy, however, continues to exist. In fact, just last week “The World’s Greatest Company” reported quarterly earnings.

And, as you might expect, under the earnings-obsessed Mr. Hurd, “The Number” the company reported was exactly 1 penny above the Wall Street consensus: 91 cents per share compared to Wall Street’s Finest’s expectation of 90 cents per share.

“Gosh, how’d they do it?” a reasonable person might ask.

And it’s a great question.

HP is, after all, a $100 billion-a-year company with more than 300,000 employees manning far-flung operations across the globe. Two-thirds of its revenues are derived in foreign currencies that fluctuate every day.

Not only that, but four of the company’s five major businesses experienced sales declines of 20% or more in the quarter.

Of the five businesses, one looks doomed to eventual irrelevance (personal computers), a second looks doomed to brutal competition as far as the eye can see (servers and storage) and a third is exposed to the kind of technology shift that brought about the collapse of the aforementioned Eastman Kodak (printers.)

Oh, and the one business that showed growth in the quarter did so entirely thanks to the fact that the company spent $13 billion buying EDS, in a deal that closed one year ago tomorrow.

With all that going on, one might reasonably wonder how in the world it is possible for anybody, even the heroically numbers-obsessed Mr. Hurd, to beat “The Number” by the requisite penny?

The answer—aside from brutal cost-cutting—is that HP waves “Non-GAAP” earnings of 91 cents a share, up nicely from last year’s 86c a share, in front of Wall Street’s Finest, thus distracting the thundering herd from actual GAAP earnings, which are more of a downer.

Like, 25% more of a downer.

That’s right: HP’s July quarter GAAP earnings were only 67 cents a share—25% below the 91 cent so-called “Number” used by HP management and Wall Street’s Finest—and down, not up, from last year’s 80 cents a share GAAP earnings.

Defenders of “The Number” will note that the 25% difference in HP’s GAAP versus non-GAAP earnings calculation lies mainly in expenses related to EDS. Those expenses include:

1. $379 million worth of amortization relating to purchased intangible assets.
2. $362 million worth of “restructuring charges.”
3. $59 million worth of “acquisition-related charges.”
4. Netted against these are $232 million of book income taxes.

Voila! Thus does $0.67 a share in standard GAAP earnings become $0.91 a share in non-standard, non-GAAP “earnings.”

And a poor-looking GAAP operating margin of 8% becomes a healthier looking, non-GAAP operating margin of 11%.

Now, defenders of the faith, and Wall Street’s Finest, will no doubt defend the non-GAAP number-jiggering by noting that HP’s acquisition of EDS resulted in many “non-recurring” expenses, in addition to the non-cash amortization charges that don’t have a bit of impact on the economics of the underlying business.

And they would be absolutely correct.

But if HP is going to exclude those EDS-related expenses, shouldn't they also exclude EDS-related revenues and profits?

How is it that companies get to include the good stuff, and exclude the bad stuff?

After all, EDS is the whole key to HP’s recent mirage of growth: without EDS, revenues would have been down 20% or so, and the company is not shy about bragging about EDS.

Paragraph four in the press release begins by trumpeting “Record profit in Services”—the EDS portion of the business. A bit later the company begins the individual segment reporting by noting with pride the benefit from EDS:

“Services revenue increased 93% to $8.5 billion due primarily to the EDS acquisition.”

So how is it that HP gets to brag about newly acquired revenues from EDS, yet at the same time delete from “The Number” newly acquired expenses from EDS?

Like “Bill and Dave,” all this reminds us of the Dot-Com boom, only in a bad way. This is, after all, precisely the kind of thing Dot-Com companies used to do.

And it is precisely the kind of nonsense Wall Street’s Finest swore off after all that came to grief—vowing never to be fooled again.


Meet the new boss…same as the old boss!




Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Friday, August 21, 2009

Aussies Down Underwater


Macquarie Model Makeover Continues
Infrastructure Fund Weighs an Asset Split, Separation From Its Parent

Meanwhile, MIG has cut the value of its global toll-way portfolio, including two U.S. projects, amid the economic downturn. The fund cut the value of its leases on the Chicago Skyway -- the first privatized U.S. toll road -- by 37%, to A$148 million as of June 30, compared with a year ago, and it cut the value of its leases on the Indiana Toll Road by 72%, to $A98 million; the Indiana road is shared with Spain-based Cintra SA.
—The Wall Street Journal



Well, John Corzine’s moment has passed.

Three and a half years ago we here at NotMakingThisUp urged the then-newly elected Governor of New Jersey to start hitting bids on every toll road he could scrounge up in his troubled state.

Those bids on toll roads, airports, and anything else with a long-lived annuity stream, were coming largely from one investment bank: Macquarie Bank Ltd, which we described as the “It” Guy of the leveraged financial cycle.


Unfortunately, it was the denouement of the cycle that nearly took down an entire developed world, and Macquarie has not escaped the damage unscathed, thanks to the fact that the bids Macquarie was making on the toll roads and airports were utterly absurd.

Hence our suggestion that Mr. Corzine look into selling the New Jersey Turnpike.

That he did not was no surprise, given the peculiar attachment American voters have to aging infrastructure. Nor is it a surprise that Macquarie now finds itself writing down the value of its leases by up to 72%.

After all, Macquarie was—well, instead of regurgitating the gist of the original virtual column, we’ll reprint it below.

But before readers get the impression that we have some sort of institutional bias against denizens of the Australian continent, we’ll state for the record that some of our best friends are Australian—at least, one of our favorite analysts and blog writers is.

His name is John Hempton, and he writes a blog called Bronte Capital, at the following URL:
http://brontecapital.blogspot.com/

(If you haven’t paid attention to the Bronte analysis of the Australian healthcare system—in light of our recent musings on the current healthcare debate here in the United States—you should. It’s called “Health Care Reform and the Single Payer – An Australian Perspective,” and it was published yesterday.)

In the meantime, here’s what we advised Mr. Corzine one big long financial cycle ago:


Tuesday, March 28, 2006
How to Solve the New Jersey Budget Crisis

Until last year…few had heard of [Allan Moss] or his investment bank, Macquarie Bank Ltd. That’s when Moss, 56, decided to go on a $14 billion acquisition spree.—Bloomberg LP.

Every cycle has a financial star—the “It” guy whose name is sprinkled throughout serious Wall Street Journal articles and whose picture graces breathless Fortune Magazine cover stories about whatever current finance craze is fattening the bonuses of Wall Street bankers.

Now, Macquarie seems to engineer a new international deal every month—most of them purchases of public utilities…. The plan has helped the bank deliver 14 successive years of record profits….

Frank Quattrone was the “It” guy during the Internet Bubble of the late 1990’s—the most powerful investment banker in Silicon Valley—and only recently made the news for getting both a guilty verdict and a lifetime ban from the securities industry overturned.

Michael Milken was the “It” guy during the Leveraged Buyout Bubble of the late 1980’s—the most powerful junk bond financier of hostile takeovers in history—and has successfully resurrected his reputation through smart business deals and aggressive funding of results-oriented cancer research.

Both Quattrone and Milken had unique insights which they used to exploit market inefficiencies on a scale nobody else had dreamed of doing before. Eventually, of course, everybody else woke up from their nap and decided they wanted a piece of the action—and pretty soon everybody was doing it—sparking asset inflation, irrational behavior and collapse.

Macquarie’s success has also lured much bigger investment banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., into planning their own multibillion-dollar “infrastructure” funds.

What Macquarie figured out was this: it could buy public utilities such as airports, bridges and toll roads, package and resell those assets to Australian asset managers looking to redeploy the cash being accumulated by that country’s far-sighted and highly successful public pension plan, and take out fees along the way.

Most Americans first heard of Macquarie last year, when they led a group which paid $1.83 billion—approximately 40-times revenue—for the 7.8 mile Chicago Skyworks. As Bloomberg quotes an admiring fan of Macquarie:

“Macquarie is usually able to bid more aggressively for assets because they have more sophisticated financing capability.”

More recently, Macquarie won the bidding for a 157-mile toll road in Indiana, paying $3.85 billion for an asset that generated $95.6 million in revenues in the 2005 fiscal year. That’s also 40-times revenue. As Bloomberg’s admiring fan says:

“They finance with debt. I don’t know how they do it, but they’re able to finance at lower cost of capital than other people.”

The impetus behind Macquarie’s willingness to pay 40-times revenue for an asset that could be rendered obsolete by any variety of means—acts of God, acts of State Legislatures, or drivers’ unwillingness to pay tolls when they can drive for free elsewhere—comes from the very brilliant notion that such long-lived assets neatly match the long-lived nature of Australia’s pension liability.

As insights go, that’s a powerful one—and ranks right up there with Mike Milken’s discovery that, contrary to popular perception, junk bonds provided better returns, on average, than non-junk bonds, because the default rate on junk was, on average, lower than generally assumed by bond investors at that time.

Like Milken, Maquarie has revolutionized a source of financing which others now seek to emulate and exploit.

And, like junk bonds, internet stocks, and all financial fads that start off from a logical premise, it will get out of hand.I am sure the Maquarie folks are as brilliant as their reputation, and that they know what they’re doing. But I’m not convinced that everybody else who wants to get in on the action now, by buying toll roads or airports or bridges or whatever else bankers decide to monetize, knows much more than the simple fact that it is, for the moment, a highly profitable way to leverage up the public infrastructure.

If I had a bridge to sell, I’d sell it right now.

And if I was John Corzine, the ex-banker and new governor of New Jersey dealing with a massive budget problem, I'd be getting the Goldman Sachs bankers working on a deal book for every road in the state.

Suddenly that New Jersey Turnpike is looking mighty valuable.

© 2006 NotMakingThisUp, LLC



Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, August 20, 2009

Legal Payoffs in Healthcare, but Who’s Complaining?


Medicis Pharmaceutical is a small dermatology drug company with a big problem: its lead product, an anti-acne tetracycline called Solodyn, is losing its patent protection, allowing other, larger drug makers to introduce cut-price generic versions of the stuff.

Oh, and Solodyn is roughly half the company’s sales, which means, as far as profits go, it's a big deal to Medicis.

So what's a company to do in this capitalist system of ours? Will it compete its way to prosperity?

Well, sort of—Medicis recently launched a Botox competitor that has potential to capture a slug of that highly profitable business.


But mainly it’s been buying off the generic Solodyn competitors by way of entirely legal “settlements” with the erstwhile cut-price drug makers.

Specifically, Medicis has sued and then “settled” with Impax, Teva and, just last week, Sandoz, allowing Medicis to keep the generics off the market for a few years.

The winners, of course, are Medicis, which keeps its big fat mark-ups on the Solodyn franchise intact for now, as well as Impax et al, for whom the settlement reduces litigation costs both now and down the road, when they can introduce licensed generic versions of the drug at presumably higher mark-ups than if a raft of generics were to immediately take down pricing to where old-fashioned Economics 1 would tell you it should go: the marginal cost of production.

The losers, of course, are the consumers who can't buy generic Solodyn, but must instead continue paying the big fat mark-ups.

This is all entirely legal, of course.

And, like so much of our healthcare system—particularly when it comes to lawyers getting involved—bizarre.

But don’t expect Congress to do a thing about it. After all, they’re mostly lawyers.



Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, August 17, 2009

The Opportunity Cost of Thinking like Everyone Else



Back in the day—that would be nine months ago—when the once-bright world had gone dark for millions of home-flipping Americans and second-property-in-Spain-buying Brits, one significant repercussion of the housing collapse was being felt on American stock exchanges: corporate treasurers at literally hundreds of publicly-held companies who had once thought nothing of paying irrational premiums for their own shares in the name of Returning Value to Shareholders were suddenly watching those same share prices flicker by on their computer screen at half or more off the price they’d willingly paid with all the abandon of an Inland Empire home buyer not many months before.

And the reaction of those corporate treasuries was—like the Inland Empire home owner suddenly underwater on their mortgage—to freeze.

We pointed out one such example, a specialty chemical maker called Lubrizol that had purchased its own stock at $52.63 a share during the September 2008 quarter, but refused to touch the stock when it was being offered, in size, in the vicinity of $37 a share one month later, as we pointed out in a virtual column called “
Companies Bought High, But Won’t Buy Low” (November 3, 2008).

At the time, Lubrizol’s Treasurer, Charlie Cooley, explained the strange logic behind the company’s “Buy High, Don’t Buy Low” repurchase strategy as follows:

Fair question….we have been asked this question during the course of the year, asking why our share repurchase program has been as kind of methodical and systematic as it has been.


We have never viewed the share repurchase program as primarily being a tool of making a call on our share price. Rather we see it as a way of balancing our use of cash and adjusting [our] capital structure….This is all about maintaining the strong financial help that we have enjoyed for years.

So it is suspended temporarily and we will look for an opportunity to get back into a share repurchase mode.

Far from being “methodical and systematic,” Lubrizol’s share repurchase program appears to have been more on the “mercurial and arbitrary” side, given the fact that a share repurchase was decidedly more attractive with the stock at its “suspended temporarily” conference call valuation of less than 6-times trailing EBITDA than at its “methodical and systematic” share repurchase valuation of nearly 8-times trailing EBITDA.

Now, if Lubrizol management had decided to “get back into a share repurchase mode” during the early March 2009 market panic, with its stock trading briefly at $25 a share, just below 4.5-times trailing EBITDA, we’d be nominating Lubrizol’s Treasurer for a spot in the Warren Buffett pantheon of Rational Investing.

But they did not.

Thanks to a sharp-eyed reader with something of a rooting interest in the stock, we returned to Lubrizol’s most recent earnings call—specifically the part where Mr. Cooley discussed the sources and uses of Lubrizol’s ample cash flow—via the indispensible StreetEvents:


Based on these assumptions, we project our year-end cash balance will be in the range of $800 million to $900 million. While our strong operating cash flow and first-quarter financing activities have provided us with increased liquidity. We plan to remain cautious in our approach to the use of our available cash.


It is reasonable to assume that we will hold excess cash for the foreseeable future, especially in light of the current environment of volatile commodity prices and uncertain demand. We do have the ability to pre-pay as much as $150 million of debt without incurring a penalty.

In fact, the company actually increased its estimated shares outstanding, thanks no doubt to management option grants bloating the share count.

As for share repurchases, Mr. Cooley said:

At this time, we have no plans to reinstate our share repurchase program.

Hey, having missed the stock at $35, and $30, and $25—and the last trade occurring at $61.69 a share—who could blame them?

But we’ll make a bet here.


In the currency of one of our old hedge fund friends, we’ll bet dollars to donuts the next time Lubrizol buys stock, it’s not at $25, $30, or $35—rational as those prices proved to be. We’ll bet it’s at a multiple of one or all of those prices.

And Wall Street’s Finest will applaud them for “Returning Value to Shareholders.”

Ah, the opportunity cost of thinking like everyone else!




Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, August 13, 2009

We Still Have a Long Way to Go (With Apologies to Alice Cooper)


***System Administrator Warning***

The Following Column Contains Positive Statements about

the Economy in General
and the Housing Market in Particular…
Cranky Individuals Who Think America Hasn’t Suffered Enough to Justify a Recovery
Should Avoid Sharp Objects While Reading.

***System Administrator Warning***



That’s right: this is going to be another positive piece about housing.

Only this time we've included a warning, because the last couple of times we highlighted a positive data point on the housing markets we got bombarded with virtual scoffing, snorting and downright hostility from some readers—particularly those who weren’t around when we were writing about the housing bubble back in 2005 (see in particular “The Last, Best Hope For Prosperity,” from June of that year)—who perceived us to be wearing a Pollyanna-ish set of rose-colored glasses.

Still, we here at NMTU are data-driven, not consensus-driven, and the consensus seems to be that while maybe this housing thing seems like it’s stabilizing, we still haven’t seen “The Bottom.”

After all, goes the Roubini-led thinking, how can it be a bottom with all the foreclosures yet to come, plus the unemployment rate still going up, not to mention the budget deficit that will keep us forever in hock to the Chinese and that rigged American Idol contest?

Well, it can be a bottom because—looking at the demand side of the equation for starters—it’s now cheaper to buy than rent for first-time home buyers, and
because housing prices, which peaked at close to 4-times median family income during the glory days are now down to a bit under 3-times income.

That's a level not seen since the early 1980s.

Looking at the supply side of the equation, it can be a bottom because we’re only building new houses at an annual rate of a little over half a million units, compared to an average rate of about a million and a half annual units from 1991 to 2007.

The result, a non-interested observer might conclude, is the potential for some sort of housing rebound, if only consumer confidence might be restored.

And listening to the Toll Brothers call yesterday, we’d say the confidence-restoration process is fully underway, for home buyers if not for Wall Street’s Finest—those analysts so burned by the housing collapse that they refuse to acknowledge clear signs of a housing recovery.

Toll Brothers, as anybody watching the tape yesterday knows, came out with what The Market considered surprisingly good numbers in its preliminary third quarter press release: orders up 3% versus an expected decline of 20% by Wall Street’s Negative Finest; and a net loss of 77c a share instead of the $2.50 or so loss foreseen by WSNF.

Most important, in our view, was that on a per-community basis—the homebuilders’ equivalent to the retailers’ “same-store-sales” numbers—Toll’s orders jumped 32% year over year.

That kind of increase is very good for everything: sales, margins, and future profits. It also heralds good things to come from other American businesses that have similarly slimmed down to meet reduced expectations.

But you wouldn’t know it, based on yesterday’s call.

Wall Street’s Negative Finest, clearly shell-shocked by the sharp improvement in business for a company whose key product—McMansions—was viewed as a dinosaur in a dying industry, seemed not to want to hear about it.

Here’s how one analyst framed the question, courtesty of the indispensible Street Events:

I was hoping you can comment a little bit about the high end market in general. I think there has been a lot of -- a lot written out there that the entry level is performing pretty well given the tax credits that are out there and some other stimulus and the perception is that the high end has been performing much weaker and your order results this quarter seem to refute that.

So I am curious if you attribute it more to share gains either from private builders that simply can't afford to compete or from publics that have, seemed to have kind of exited the high end market in general and made an exodus towards entry level. Or if you think this is more a sign of a stabilization in the high end.

Bob Toll, the CEO of the eponymous company and about as straight-shooting a CEO as they come—in lush times as well as non-lush times—said simply, “I think it is the latter.”

Then he elaborated:

[The] stock market has been going up. Most of the upscale luxury home is impacted one way or the other with the stock market. There's a better feeling about jobs, better feeling about the economy. Six months ago…maybe it goes all the way back to a year ago. Yes, it was [when] Lehman crashed… we were all scared...that the end was near….

And I think that fear has gone away from the public, which has taken the -- taken the public for the luxury market, especially, from coming back six to -- six to nine times continually asking the same question, do you have any additional incentives, do you have any additional incentives, would you accept an offer of 425 for a home that we wanted to get 650 for. I think the mood has changed and we are making our sales instead of six to nine, probably three to six visits.


Straight-talker that he is, Toll bluntly added, “Our traffic still stinks compared even to those lousy days of '89, '90, '91, but those people that are coming in are more serious.”

As you’d expect, Wall Street’s Negative Finest latched onto the “traffic stinks” comment, and asked for clarification, which Doug Yearley, a Regional President, provided:

Traffic has not increased in numbers. The quality has increased significantly. The people are not coming in looking for a public restroom asking the name of the decorator, asking the name of the deck builder, they're coming in -- they're coming in asking good questions that show us that they're seriously interested in buying.

This prompted one of Wall Street’s Not-so-Negative Finest, who’s been recommending Toll stock of late, to ask the unknowable:

First question, Bob, is about what really makes you comfortable that this isn't just kind of hanging out on the ledge for a while and that we don't have another leg down versus it seems like you think this is probably close to bottom and things are getting better and that leaves you comfortable in opening new communities and putting some more money to work in the housing market. I mean, how do you know this isn't just a blip on the radar at this point?

To this, Mr. Toll reasonably responded, “We don’t,” and expanded on this, about as frankly as possible:

We are as scared of a 'W' recovery as the next man. However, the number of weeks of improvement that we have had, as I said in the monologue, are certainly more than anecdotal. You are talking about a whole lot of communities in 40, 50 markets in 20, 22 states. So we are getting – we’re getting pretty deep information and we are going to react not on the basis of a month or two, but we have got about a quarter and a half.

All of which is why we offered our apologies to Alice Cooper right at the top, for as we listened to the Toll Brothers conference call—in which undeniably good facts were being regarded with suspicion, fear and some denial even by those reporting the undeniably good facts—a song lurking in the dark recesses of our brain came to mind.

The song, “Long Way to Go”, is an old Alice Cooper semi-hit (look him up, kids).
And by “old” we mean nearly forty years old.

Why we can still conjure up the melody of a really terrible song—not to mention half the stupid lyrics—from forty years ago, is beyond comprehension, although it did bring back one good memory. (That memory,The Time Jed Drake and I Stole Alice Cooper’s Mailbox, is, however, a story for a different column.)

In the meantime, with even the CEOs still scared—not to mention Wall Street’s Negative Finest—of another dreaded collapse in housing, we here at NMTU think the housing market still has a long way to go.



Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Tuesday, August 11, 2009

Let Congress Fly With the Riff-Raff


Lawmakers on Recess Take Wing for Distant Shores
By Brody Mullins and T.W. Farnam
—The Wall Street Journal


Rep. Nick Rahall (D., W.Va.) is island-hopping this week in the Pacific. Rep. Keith Ellison (D., Minn.) is tweeting from Kenya. Sen. Richard Shelby (R., Ala.) is preparing for a three-week trip to Europe with his wife.

These are among more than a dozen taxpayer-funded trips by lawmakers during Congress's monthlong summer recess. Financial reports on lawmaker travel expenses aren't due for 30 days. Even then, details on hotels and meals don't have to be disclosed….


Ah, the hypocrisy of Congress in the morning!

After abusing the CEOs of three then near-bankrupt auto companies for their appalling lack of propriety in taking private jets to Washington to ask for a bailout, Congresspersons of all political denominations jet across the globe on military jets…their wives and who knows what significant others in tow.

And they don’t even have to tell us where they stayed and how much they paid for that great bottle of wine.

But it is not the amoung of time that Congresspersons spend outside Washington to which we here at NMTU object.

In fact, we think Congresspersons should spend as much time as possible outside of Washington D.C. in order to actually understand what happens when they decide to pass a law.

Anybody in the investing business—at least, anybody who makes a living as an investor rather than as a trader—knows that the way you find great investments is not sitting in an office staring at a screen talking to other people sitting in offices staring at screens.

It’s getting out and seeing the world.

Back in day, for example, it was hard to see why Wal-Mart at 30-times earnings was a better investment than Sears at 10-times earnings—unless you met Sam Walton and his crew of wildly enthusiastic and unabashedly penny-pinching managers, and then spent time with the buttoned down bureaucracy that was Sears...and for good measure visited a few stores, compared prices and watched the traffic.

After that, you got it.

Today, for example, so low are their approval ratings that certain Congresspersons are calling for another stimulus plan—even though the last stimulus plan hasn't done much of anything to date except pave a few roads.

Yet they might not be so worried if they got out of town more frequently, or at least paid attention to some of the conference calls from the recent batch of quarterly earnings—such as Packaging Corporation of America.

What Packaging Corp does is make, well, packaging—most especially corrugated boxes. Your order from Amazon or eBay or Sears or Williams-Sonoma comes in a corrugated box, as does nearly everything shipped anywhere in this country.

Thus PKG, the stock ticker it goes by, is about as good a proxy for the economy as any company in America.

And here’s what CEO Paul Stecko had to say a few weeks ago:

As we reported on our first quarter earnings call, our corrugated products volume had increased significantly during the first half of April over our first quarter shipments. The question at that point was, would this pick-up in volume be sustained? Well, it was sustained, not only in April, but also through the entire quarter.

Our corrugated products volume was up 10% or 40,000 tons over the first quarter, which was much higher than our normal seasonal demand pickup of 2.5 to 3% over these two quarters. This pickup in demand has carried into July….

Not one given to hyperbole or fancy language, Mr. Stecko elaborated later in the call when pressed to identify the source of the demand pickup:

The overwhelming majority of our increase in volume is more business from existing customers. They have had more business, they need more boxes, we sell them more boxes.

Of course, Congresspersons have no time to listen to earnings calls—they’re too busy holding hearings about things that happened two years ago.

Still, we think they should be encouraged to travel outside Washington as much as possible.

But they should do it the same way their constituents do it: schlepping to Reagan National or Dulles, going through security and getting asked to step out of line once in a while for a bag search, then buying their own food to eat instead of the free bag of potato chips on the flight before waiting on the runway for five hours...and—when they finally get to the hotel—finding stuff was stolen out of their luggage at the airport.

And then, just maybe, the next time somebody decides to create a Department of Homeland Security, for example, somebody in Congress will raise their hand and say, “How will this make what we do any better?”

Let the military fly military. And let Congress fly with the riff-raff.



Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, August 07, 2009

The Least Helpful Call Today



Actually, this call came out yesterday—but we doubt you’ll find a less helpful call awaiting you this morning.

It seems our friends at what is now called Bank of America Merrill Lynch needed to do a bit of housecleaning, price-target-wise, on a batch of stocks that long ago got completely away from them.

Why Wall Street’s Finest bother with price targets is beyond us: most of the time the price target is a few dollars above whatever the most recent closing price happens to be—assuming the analyst has been recommending the stock.

If not, the price target always seems to be a few dollars below the most recent close.

This bit of gamesmanship and self-delusion has been going on at least 30 years...and we should know: we used to do the same thing in our brief stint at what was then plain old Merrill Lynch. (Poke fun at it though we do in these virtual pages, "Mother Merrill" is a firm whose passing, at the hands of a bunch of cowboys, we still mourn.)

By way of example, look no further than yesterday’s price target changes on a batch of “Underperform”-rated stocks from Bank of Etc, compared with the most recent closing price (take a particular gander at American Express):

Alcoa—old target $8; new target $10. Last sale: $12.82.

American Express—old price target $15; new price target $18. Last sale: $31.31.

Boyd Gaming—old target $7; new target $8. Last sale: $9.32.

Century Aluminum—old target $6; new target $8. Last sale: $10.85.

Concur Technologies—old target $20; new target $24. Last sale: $36.97.

Garmin—old price target $17 a share; new price target $30. Las sale: $31.64.


Where else but on Wall Street can somebody whose job it is to recommend the purchase or sale of an item continue to discourage the purchase of that item while belatedly raising the price target on that item by as much as 75%?

Where else but on Wall Street can somebody still get paid for that kind of job?

Well, sure, in Washington D.C. certainly. And Pyongyang, yes. Tehran, sure. Caracas, definitely....


Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Wednesday, August 05, 2009

Whatever They’re Smoking, We’d like to Try Some


BHP Gets Jac of All Trades
—The Wall Street Journal, August 5, 2009


The “Jac” being referred to in the headline from today’s “Heard on the Street” is, of course, Jacques Nasser, the Ford veteran whose brief stint behind the wheel at Ford Motor Company helped put that once-venerable company in the break-down lane.

But you wouldn’t know that to read today’s Wall Street Journal.

Or, more accurately, you wouldn’t know it reading the online version of this morning’s article, which came out yesterday and differs slightly but materially from that which you read today.

The difference is the sentence we highlight in bold, which was deleted from the print version of today’s article:

Boardroom succession planning has been a problem for the global mining industry this year. Following botched processes at Rio Tinto and Anglo American, BHP has shown how it should be done. Jacques Nasser is a good choice to succeed Don Argus as chairman of the Anglo-Australian miner.

Mr. Nasser, on the BHP board since 2006, is best known for a stormy three years as chief executive of Ford Motor Co. earlier this decade. Mr. Nasser was ousted after falling out with Chairman Bill Ford Jr. But history has cast a more favorable light on his controversial efforts to modernize the car company given its subsequent near-death experience.



Exactly what that “favorable light” now shining on Mr. Nasser’s “controversial efforts” at Ford might be, we here at NMTU don’t have a clue.

When Nasser became CEO on the first day of 1999, Ford had $25 billion in cash and short-term investments, $78 billion in long term debt and $21 billion in retained earnings.

On the last day of 2001, the year he left, Ford had $18.5 billion in cash and short-term investments, $120 billion in long term debt and a mere $2 billion in retained earnings.

How did “Jac the Knife,” as he was known for his cost-cutting, help put Ford—then a 96 year-old company—in the fiscal emergency room in less than three years?

Well, paying almost $3 billion for Land Rover, for one thing. Buying Volvo for $6.5 billion for another. And then there was the $1.6 billion he spent for Kwik-Fit auto repair centers for a third.

Not to mention doing one of those dreadful “returning value to shareholders”-style $5 billion share repurchases consummated back when Ford’s stock was trading in the mid-to-high $20’s.

If those are the “controversial efforts to modernize the company” Heard on the Street was thinking of while drafting last night’s online version of the story, it must have been some pretty primo bud going around the newsroom when the original got drafted.

Thankfully—at least for the Wall Street Journal’s journalistic reputation—that sentence was deleted before it reached the print version, probably by a more thoughtful editor who wasn’t strictly taking his or her cue from Jacque Nasser’s C.V.

After all, every one of Nasser’s “efforts to modernize” Ford has likewise been deleted: Volvo is on the block; Land Rover was sold, along with Jaguar, for half the price after years of losses; and Kwik-Fit was blown out for a cool third of what Ford, under Nasser, had paid for it.

Oh, yes, and the company recently raised $1.4 billion by selling shares of stock.

At $4.75 a share.

As far as we can tell, Nasser wasn’t so great in “modernizing” Ford. But he was very good at buying high and letting others sell low.

Whatever it was going around “Heard on the Street” last night, we’d like some!


Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Sunday, August 02, 2009

Nobel Freakonomics, Part III: Playing the Race Card—Must We?


“used to love your blog.”

So begins—uncapitalized “used to” and all—a comment submitted to NotMakingThisUp, which we chose not to publish until now.

Long time readers of NMTU know that our primary criteria for not publishing comments to the virtual pages of this blog is whether they have been written with a serious intent in mind, politely and with reasonably good grammar—in which case they are published regardless of even if they happen not to agree with us.


If, instead, they have been written in the popular, sloppy style of debate which we label “Yahoo Message Board-style,” that seems to permeate the largely anonymous online world, they are withheld from our readers, even if they happen to agree with us.

What exactly is “Yahoo Message Board-style” language, you ask?

Well, lazily inconsistent punctuation, for one thing. Profanity, for another—and here we include loose, imprecise, and mildly profane words such as “crap,” which for some reason seems to be the noun most favored by message board aficionados attempting to express their disagreement with a statement.

Now, some commentators here at NMTU have, in the past, bridled at such purported “censorship.”

But this isn’t the public square: this is a virtual column intended to raise interesting, odd, and sometimes very serious topics.


If you want to respond, fine: do so in a reasonable manner. But if you want to yell and scream, you’re not going to do it here. Bad language drowns out reasonable dialogue.

Has anybody ever seen a Yahoo message board with reasonable dialogue?

Which brings us back to the comment quoted above—and why we’re going to highlight it here.

The comment, by an author who preferred to remain anonymous—for reasons that will soon be clear—was written in response to “Nobel Freakonomics, Part II: A Tale of Two Terminals.”

That piece looked at two airline terminals a few hundred yards apart at New York City’s JFK airport, and pondered why each terminal had such remarkably different parking facilities—one extremely well managed, the other extremely poorly managed—even though both are operated by the Port Authority of New York and New Jersey.

We proposed that the contrast between the two terminals provides a case study for the downside of government operations of anything—witness the recent arrests of seemingly half the mayors in New Jersey on corruption charges—and a cautionary lesson against the current headlong rush towards a government-operated healthcare system.

Both Parts 1 and 2 of “Nobel Freakonomics” received fairly heated responses, both for and against our view.
But by far the most heated response was the anonymous comment we’re now going to look at.

We withheld publishing the comment until now, feeling that because of its Yahoo Message Board-style language, not to mention a whopper of a puerile, bullying question directed at the editor of these pages, it deserved to be shared with commentary, as a terrific example of how not to discuss something as sober as healthcare.

Let’s break it down sentence-by-sentence, bad grammar and all:

used to love your blog. Great insights into the economy.

These first two sentences are an artifice if ever we saw one. Readers of NotMakingThisUp know that we rarely provide “insights into the economy.” That would be about as exciting as blogging about subway train schedules.


Had he actually read NMTU for the last couple of years, “Anonymous” would know that what we tend to do is poke fun at short-sighted and self-impressed members of what we refer to as Wall Street’s Finest; at short-sighted and self-impressed CEOs and other Captains of American Industry; and at short-sighted, self-impressed money managers, among others.

Oh, and once a year we delve at length into what’s new at Berkshire Hathaway.

We also write about anything else that strikes our fancy, from good new music—the Arctic Monkeys being our Official House Band, and soon returning to the Paradise in Boston—to bad new car dealers.

Rarely do we provide “insights into the economy.”


But our anonymous commentator does not know this. Since we happened to write about Paul Krugman, he presumes that we’re all about “insights into the economy,” and thus tips his hand as a first-time reader.

Then, after setting up his complaint by pretending to be a disappointed fan, our anonymous commentator moves on, unfortunately mining the same Yahoo Message Board-vein he entered into with those first two sentences:

The crap you have been posting lately makes me wonder what happened?

There’s that word, “crap”: the single laziest word in the English language, meaning nothing and everything at the same time.


This is indeed Yahoo Message Board material.

The next sentence, however, takes the material into a deeper, darker vein, via a non-sequitur as inane as it is out-of-place:

Upset that a black guy is president? Get over it.

The race card!


After assuming someone he disagrees with is as obsessed with race as he, “Anonymous” moves to what would seem to be the germ of an actual argument:

As for today’s rant. So you think the government is qualified to run a trillion dollar military. But when they get involved trying to get the richest country in the world into the top 50 of overall healthcare – that’s not something they are qualified for?

Unfortunately, this is founded on another mistaken belief along the lines that this blog is concerned with providing insights into the economy: that we are an ideological bastion for the Military-Industrial Complex.


Having never commented on the U.S. military in a single one of 625 virtual columns published over the last four years, we hardly know where to begin, except to point out that by using the term “rant,” a label connoting irrational blather, and misidentifying NMTU as the aforementioned ideological bastion, “Anonymous” seems eager to rise above the lazy Yahoo Message Board riff-raff and qualify as a charter member of the Mary Matalin/James Carville-school of reactionary smack-down.

Seen from that angle, the concluding sentence is exactly what you’d expect it to be:

Sad to see another good blog gone.

Of course, since our anonymous commentator appears never to have read NMTU prior to discovering “Nobel Freakonomics” through some Google Alerts email, this last line is quite amusing.

The Race Card, on the other hand, was not.

So if, by pretending to be a disappointed fan, our would-be Matalin/Carville was hoping to stop further writing in these virtual pages on Paul Krugman, healthcare reform, Terminal 4 at JFK, Warren Buffett or even the Arctic Monkeys, he will be sorely disappointed.

And if he wants to comment in the future, he can leave out the Yahoo Message Board stuff, and play the Race Card somewhere else.



Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.