Friday, January 28, 2011

The Fed in La-La Land, Again


Where to begin?

The Federal Open Market Committee’s latest word on the economy was released this week, and to read it you would have no idea we are in the middle of the strongest earnings season since the pre-crisis 2006-2007 boom.

Indeed, the FOMC text is so full of last-year’s-news and rear-view-mirror incantations it would appear that the Fed members who voted to approve it were too busy reading Paul Krugman/Nuriel Roubini end-of-the-world-as-we-know-it wailings to go out and visit some companies and hear what is, in reality, very good news on the hiring front, and some very worrisome news on the inflation front.

So, as a public service, we here at NotMakingThisUp decided to append to the Fed’s painfully misguided missive some actual comments from actual real companies—companies that, to paraphrase Jimmy Stewart’s George Bailey, do most of the hiring and firing and spending and growing in this economy of ours.


FOMC: Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.

ADP (Payroll processing): "I'm a member of the Business Roundtable in Washington, they put out a quarterly survey. And between the third-quarter and the fourth-quarter survey, which came out in December, the number of multinational companies expected to increase employment rose significantly to like 65%-70% from like 50% or whatever the number was in the third quarter.

"So clearly the trends for the larger companies, which have been the ones that have been in the bunker the most during this period of time, is clearly coming back the other way. Unemployment is down almost a point, every prognostication I read from the Economist is projecting another point improvement in the calendar year ahead. We're still seeing great activity in our screening and selection services, it's still up strong double digits over the same period last year. "

FOMC: Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

Pier One Imports (Discretionary chotchkies): "Traffic is up, conversion is up, average unit retail is up, average ticket is up. We continue to enjoy success in all major merchandise categories and all regions of the country…

"I can tell you today that the sales momentum that we have experienced throughout this fiscal year has continued into December. Traffic, conversion and average ticket are all up over December last year on a month-to-date basis. Sales of our holiday merchandise are excellent with good sell-through rates to date."

FOMC: Business spending on equipment and software is rising, while investment in nonresidential structures is still weak.

SL Green (Manhattan office buildings): "Tenants known or rumored to be looking at space 200,000 square feet and above, include such firms as Nomura, UBS, Bank of America, Morgan Stanley, Hovis Advertising, J Crew, Credit Agricole, Oppenheimer and Company, Coach, Wells Fargo, WilmerHale, Morrison Foerster, in addition to many, many others. Anecdotally, I would say this activity is at the highest level I've seen in the market in any January, a traditionally slow month, exceeding anything I've seen and recall since 2006.

"The market momentum, generally, I would characterize as one of declining vacancy, obviously declining sublet availabilities, tenants with real requirements for big blocks, as I mentioned earlier, little to no new inventory being added, and very low interest rate environment and private sector and office-using job growth. That's a great confluence of factors…"

FOMC: Employers remain reluctant to add to payrolls.

Zoll Medical: "Hiring is on track with just over 110 reps…"
OPNET: "We plan on hiring additional quota carrying reps…"

Franklin Resources: "I would expect hiring to pick up."
AT&T: "We are starting to see some hiring."
Canadian Pacific: "[We are] hiring and training a significant number of new running trades employees…"
Norfolk Southern: "We’re continuing our targeted hiring and bringing on new locomotives in anticipation of future growth."
Quest Diagnostics: "We have filled a number of key sales positions…"
CSX: "During 2011 we plan to hire and train nearly 2,900 new union employees to offset attrition…"
Google: "We will invest in hiring even more product managers and engineers."
Union Pacific: "Hiring and training costs were higher as new employees were brought on to prepare for expected 2011 attrition and volume growth."


FOMC: The housing sector continues to be depressed.

[Editor’s Note: this is the one pure unvarnished truth in the statement, but not likely to remain so for very long. As Mario Gabelli succintly told Barron's recently, "Housing is going to recover because we produced roughly 500,000 homes last year, and demand is about 1,200,000."]


FOMC: Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.

Columbia Sportswear: "From petroleum affecting a lot of our yarns, our nylon, et cetera, and then of course, cotton…"
Energen: "Yeah cost has certainly gone up in the Permian Basin as demand for services on all levels has gone up."
Caterpillar: "So, yeah, commodity prices there are driving upward pressure…"
Newell Rubbermaid: "While we will look first to productivity to offset inflation, we plan to take targeted pricings as necessary to protect our margins, and, in fact, we have announced selective cost-driven pricing actions in all three operating segments…"
Danaher: "Just in the last 90 days, steel and related products up double-digit, some copper related products are up 20%."
Starbucks: "Increased coffee costs and transition costs…are pressuring margins in this segment."
Cooper: "Price/material inflation and several one-time unusual items impacted our fourth quarter gross margins, obviously."
Albermarle: "Full-year 2010 saw $78 million in raw material cost inflation. Roughly half of that was in metals and rare earths…"
Ethan Allen: "Raw material cost inflation is likely to remain a challenge…"
3M: "Raw material inflation was approximately 3% year-on-year…and we fully expect to offset raw material costs in 2011 with selling prices of our own."
P&G: "Higher year-on-year commodity costs reduced gross margin by 160 basis points. For perspective, on a weighted average basis, spot prices for our key materials and energy inputs are up more than 20% versus last year’s levels."

The Fed in La-La Land? It wouldn’t be the first time.

And, apparently, it won’t be the last.


Jeff Matthews
I Am Not Making This Up

© 2011 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, January 25, 2011

No Brains Attached: King George VI versus Ashton Kutcher…


"R — Restricted. Children Under 17 Require Accompanying Parent or Adult Guardian.An R-rated motion picture, in the view of the Rating Board, contains some adult material. An R-rated motion picture may include adult themes, adult activity, hard language, intense or persistent violence, sexually-oriented nudity, drug abuse or other elements, so that parents are counseled to take this rating very seriously…"

So says the Motion Picture Association of America, and who are we to argue about what constitutes an R-rated movie, as opposed to a G (“General Audiences”), PG (“Parental Guidance Suggested”), PG-13 (“Some material may be inappropriate for children under 13”), and every male teenager’s white whale: NC-17 (“No one under 17 admitted”)?

But argue we will, based on an entirely unscientific viewing of one excellent, R-rated movie (“The King’s Speech”) and a host of violent or raunchy, or violent and raunchy, previews, all from other movies also rated “R,” which preceded it.

The most offensive preview—and we realize this is like calling out the least-productive member of Congress, but here goes—happened to belong to a movie called “No Strings Attached,” starring, well, who really cares, in a plot that revolves around uncommitted sex between the leading male and a bevy of idiotic young women. Through a series of very brief snippets of awkward encounters, the preview alone reinforces the generally held universal notion that young men should be encouraged to pry random sex out of na├»ve-and-willing young women without consequence.

In “The King’s Speech,” however—the movie that followed this and other previews, one of which included a violent car crash, a blood-gushing fight, and random torture—the only “adult material” in 2 hours’ worth of a well-written, well-acted and well-told story, happened to be the use of various words that anyone in the theater under the age of 17 was already using in the car on the way to the theater.

More to the point, the supposedly inappropriate words in this case came forth in entirely appropriate, laugh-out-loud circumstances, very much like the repeated use of the F-word in the first ten minutes of “Four Weddings and a Funeral.”

And that’s it: there is not an eye-gouge, a from-the-point-of-view-of-the-horrified-victim stabbing, or even a mild sex scene in the thing.

So how on earth does a “King’s Speech” deserve the same rating as a “No Strings Attached”? We have no clue. According to the Motion Picture Association,

Ratings are assigned by an independent board of parents with no past affiliation to the movie business. Their job is to rate each film as they believe a majority of American parents would rate it, considering relevant themes and content.

It is hard to believe that actual human beings with children could prefer their under-17s watch a randy moron cavorting with various randy moronettes, as opposed to the painful efforts of a decent man to overcome physical and emotional handicaps when he is thrust into the national spotlight on the eve of a world war. But that’s what they’re telling us:

Children under 17 are not allowed to attend R-rated motion pictures unaccompanied by a parent or adult guardian. Parents are strongly urged to find out more about R-rated motion pictures in determining their suitability for their children. Generally, it is not appropriate for parents to bring their young children with them to R-rated motion pictures. —the Motion Picture Association of America

On the contrary, we could think of nothing more appropriate for a young child to see than “The King’s Speech.”

And leave “No Strings Attached” for the remainder bin at Wal-Mart.



Jeff Matthews
I Am Not Making This Up

© 2011 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, January 19, 2011

A Sense of Humor on Wall Street!

In the week or two since “Say What?”—a three paragraph call-out of one of the most unintentionally amusing pieces of Wall Street triple-speak we’ve ever come across—generated the biggest response per paragraph this virtual column has ever seen, we have been considering the idea that perhaps there is a direct, inverse correlation between length and readership.

So here’s another brief call-out, but of a most intentionally amusing comment buried within an otherwise dry note discussing the implications of Apple’s iPhone launch at Verizon.

See if you can spot it:

The availability of the iPhone 4 at Verizon has been long considered a risk for Motorola Mobility and RIM. While it is widely expected to impact both vendors, we believe both Motorola and RIM have appropriately accounted for the risk. Motorola of course has given 1Q guidance already, which included a material downtick at Verizon. RIM has successfully mitigated the iPhone risk by cleverly ceding most of its Verizon market share to Android first.


Finally—a sense of humor on Wall Street!



Jeff Matthews
I Am Not Making This Up

© 2011 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, January 07, 2011

Say What?


From an actual Wall Street “research” report this morning—and, before you ask, no, this is not from “The Onion”:

We are upgrading 3M to Neutral as capitulation on the growth story and 2011 estimates should limit relative downside and make 3M once again somewhat of a defensive stock. While the negative dynamic of positive sentiment has turned modestly more favorable, stubbornly bullish consensus estimates for ’12, along with risks at Healthcare, keep us from moving to Overweight.

Anyone care to venture what this means?


Jeff Matthews
I Am Not Making This Up

© 2011 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, January 06, 2011

Meet the ‘New Normal,’ Same as the Old Normal! Goldman Invents the Non Public-IPO

In “Meet the ‘New Normal,’ Same as the Old Normal” (April 9, 2010), we described a recent spate of earnings announcements from retailers across America as being surprisingly reminiscent of every other economic recovery we ever recalled.

'Surprising,' that is, to those too busy proclaiming the death of the “Old Normal” and the rise of the so-called “New Normal”—a new American era of dashed expectations, vanished hopes, reduced living standards, “Two and a Half Men” reruns in perpetuity, and just generally the decline and fall everything we once held dear—to notice that things were, in fact, improving.

And although it took a few more months than we expected to see the “Old Normal” begin returning in earnest, yesterday’s ADP payroll data made clear the “New Normal” is, in fact, looking pretty much like the ‘Old Normal.’

Today we are happy to report one more sign that the “New Normal” looks a lot like the “Old Normal”: Goldman Sachs is back, center stage, in all its canny rule-avoiding supremeness.

How else to describe the Goldman-managed, Goldman-led, Goldman-directed Non-Public Initial Public Offering (what we will abbreviate as 'NP-IPO') of Facebook—in what surely must be the hottest Initial Public Offering since the very public Initial Public Offering of Netscape 15 years ago?

The rules being avoided here are those set by the Securities Exchange Act of 1934, since amended by SEC rules, that a company with more than $10 million in assets and 500 shareholders ought to register its shares with the SEC, and file quarterly and annual financials.

Goldman, for the record—according to the Wall Street Journal—is selling what is believed to be $1.5 billion worth of Facebook shares to a bunch of Goldman clients for a minimum investment of $2 million a person.

And the deal is, in the parlance of IPOs since time immemorial, oversubscribed.

So how is Goldman getting around the $10 million asset/500 shareholder hurdle, since, after all, Facebook certainly has more than $10 million in assets and, even before the Goldman Non-Public IPO, more than 500 shareholders?

By calling it a private investment and pitching it only to wealthy individuals, that's how.


Here’s how the Journal described Goldman’s sales pitch for the hottest shares on the planet:

Some investors approached by Goldman initially got a 400-word email, offering them a chance to "discuss a highly confidential and time sensitive investment opportunity in a private company that is considering a transaction to raise additional capital."

We’ve heard from our own sources—non-Goldman people—that this is how the Goldman pitch did in fact go down, and that while Facebook wasn’t actually identified in the initial contact, everybody who got contacted seemed to know that Goldman was handling a Non-Public IPO of Facebook anyway, or would when the news broke the next day, so the cloak-and-dagger stuff was for naught.

The Goldman email itself is a doozy—at least, as it has been reported by the Wall Street Journal—and reads as follows:

"When you have a chance I wanted to find a time to discuss a highly confidential and time sensitive investment opportunity in a private company that is considering a transaction to raise additional capital.

For confidentiality reasons, I am unable to tell you the name of the company unless you agree not to use such information other than in connection with your evaluation of the investment opportunity and to keep all information that we reveal to you strictly confidential. All I can tell you is that it is a private company, but that its stock trades in a limited manner on certain private markets. If you are a participant in trading on private markets, you may wish to decline receiving information about this opportunity because of the restrictions that will be imposed on you, which I will now describe.

If you agree not to use information that we reveal to you (including the name of the company and that the company is considering a transaction) other than in connection with your evaluation of the investment opportunity and to keep all such information strictly confidential until the information has become public, I will be able to disclose the name of the company and provide you with more information about the company and the investment opportunity.

In addition, certain information we will reveal to you about the investment opportunity and the related transaction will constitute material nonpublic information about this private company. US federal securities laws impose restrictions on certain securities trading on the basis of material nonpublic information. You must agree that if we disclose to you information regarding the company, the investment opportunity and the related transaction, you will not purchase or sell the company's securities until the earlier of (i) the date when all of the information either has been publicly disclosed or is no longer material and (ii) 6 months after the date on which we provide you the information. However, even after such 6 month period has elapsed, trading in the company's securities will remain subject to federal securities laws and you will need to determine at the time of any transaction, in consultation with your advisors and based upon the prevailing facts and circumstances, whether purchasing or selling the company's securities would be in compliance with such laws.

If you agree to these restrictions either by responding to this email or verbally on any subsequent telephone conversation that we have, I will send you an email confirming your agreement to be subject to these restrictions and, on that basis, will provide you with a summary of the investment opportunity.”

—The Wall Street Journal, January 6, 2011


And so it is that Goldman Sachs, which for one, brief, shining moment was dressed-down in the chambers of Congress for selling the deliberately-packaged, shoddy merchandise of one client to yet another client that was selling the same merchandise short, is already back in action, at the top of its game.

Having wormed its way inside the most popular web site in the world and pried away shares in the most highly valued (relative to sales and earnings) large company in the Free World, it is now offering those shares along with “material nonpublic information” on a take-it-or-leave-it basis to its own most exclusive clients.

No slackers, no Congresspersons, no non-Goldman clients need apply.

“Well what,” you may ask, “is wrong with that?”


Technically, of course, very likely nothing.

But during the heady dot-com Bubble days of the late 1990s, when Silicon Valley companies were routinely distributing millions of shares worth of stock options to employees without being required to expense, for reporting purposes, the expected value of those options—thus inflating the valuation of those companies and the likely cost of those stock options while simultaneously damaging the value accruing to those companies' public shareholders, Warren Buffett asked, rhetorically and correctly, “If the value of the options is not an expense, what is it?”

And if Goldman Sachs’ offering—of what apparently amounts to millions of shares of Facebook worth more than a billion dollars, to hundreds, if not thousands, of outsiders not affiliated with that company—is not an “Initial Public Offering,” what is it?

Why, it's a Non-Public Initial Public Offering!

Goldman end-running the Securities Exchange Act of 1934?

Meet the New Normal, same as the Old Normal!


Jeff Matthews
I Am Not Making This Up


© 2011 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.