Friday, October 19, 2012

The Day the Dow Dropped 3,116 Points


 25 years ago today the stock market collapsed—and I mean collapsed in the full sense of the word: on Monday October 19, 1987 the Dow Jones Industrial Average fell 23%, or 600 points.
 And while 600 points may not sound like much these days, 23% into today’s equivalent is 3,116 points.
 3,116 points.  Get your mind around that, as Warren Buffett would say.
 In any event, I was on Wall Street (figuratively speaking—I worked mid-town) that day, at a money management firm of which I have very fond memories.  It was a great shop, with a great client base (families mainly—this was in the days before fund-of-funds, ETFs and all manner of dis-intermediaries between investors and investments) and money managers with a real eye for investing in companies (as opposed to buying stocks, which is an entirely different mindset).
 Every time I pitched an idea—I was an analyst—one of the portfolio managers would start nodding and say, “Oh, I have a client who used to compete with them,” or “One of my clients sold out to those guys”…and then I would get a lesson in how that particular company actually managed itself behind the fa├žade of quarterly earnings and black-and-white SEC filings. 
 It was a great shop.
 Anyway, by the time Black Monday came, we’d been getting strange vibes about the stresses building up in the market—not because our clients were day-trading types who had been caught up in the pre-Crash mania, but because they weren’t day-trading types, and yet here we were a week or so before the collapse getting hit with all manner of redemption requests.
  The pressure built so quickly that the Friday before Black Monday I heard we’d been selling stocks overnight in Japan to raise liquidity for somebody.  And we weren’t a “sell overnight in Japan”-type place. 
 I thought “Well if it’s this bad for our clients, Fidelity must be a basket case.”
 So Friday afternoon I sat at the Quotron machine (look it up, kids) and began hunting for the highest-multiple, most consumer-sensitive stock I could find.  It turned out to be Home Depot, which was sort of the Lululemon of its day.
 And I shorted Home Depot.  Not alot, but just enough to hedge my own investment portfolio.  Then I went home for the weekend, which is when everything came unglued.

 What I remember about Black Monday mainly was how quiet it was (this was pre-CNBC, pre-Internet, pre-cell phones), at least for those of us in the business not screaming our guts out and waving tickets in a scrum on the floor of the NYSE, like the specialists trying to make markets that panic-stricken day.
 Our trading room (not a big one—we only had three traders) was more like a funeral parlor.  Portfolio managers drifted in, arms crossed, and looked over Roger or Donna or Mary’s shoulder at the screens, shook their heads, muttered something like “What is going on” and left the room to get back to the calls from their clients who were asking the same thing.
  I had lunch with another analyst at a Japanese sushi place in mid-town—it was a nice break from what seemed like the end of our world as we knew it—and tried to think through the implications, secure in the knowledge that, however badly it all ended, I had shorted Home Depot, so my own portfolio was hedged.
 Otherwise, that day and the days after Black Monday are a blur.  NASDAQ broke down—quotes didn’t mean anything—and the shock to the system seemed irreparable.  All manner of strategists came through our offices over the next few weeks and months, trying to explain what had happened and what it all meant.
 The only one I remember—the only one who made any sense—was Larry Kudlow.   Yes, the CNBC Larry Kudlow.
 In those days Larry was a Wall Street economist, and quite a good one.  And Larry sat at the head of our conference table with a group of stunned and scared portfolio managers and analysts, and he said, and I can still quote him because the sentence was the only crisp, clear thing anybody said at the time: “What we had was a good old-fashioned liquidity crisis.  It started with the Fed tightening and was precipitated by portfolio insurance…” 
 And he went on to explain why the Fed was doing the right thing (easing like crazy) and the world would come out in good shape.  He was the only strategist who said that, and even though most of us thought he was a cock-eyed optimist, it turned out he was the only strategist we met that fall who had it dead right.
 In any case, our firm did remarkably well coming out of Black Monday.  The day after the crash, the principals had called a meeting and said to all us analysts, “Give us your single best company.”  And then they walked out of the room and bought each one of those stocks for the firm, at a time when everyone else on Wall Street was too scared to buy anything but hard liquor and a chaser.
 Me, I closed out my Home Depot short, feeling pretty good about it.  The stock fell 25% on Black Monday and bottomed 30% off the price where I’d shorted it.  I bought the stock back some time that week, feeling pretty slick that I’d had the foresight to hedge myself by shorting one of the most popular stocks of that era.
 Of course, Home Depot has come a long way since then.   Last night it closed at $61.80.
 Where did I short it way back in October of 1987? 
 Well, I shorted it at the split-adjusted equivalent of $0.70 a share, and bought it back at around $0.50 a share.
 Which means, genius that I am, I sold Home Depot for less than today’s annual dividend of $1.16 a share.
 And that’s why, when I tell my grandchildren the story of Black Monday, I’ll be leaving out the part about Home Depot.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

© 2012 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.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Monday, October 08, 2012

Bill and Dave…and Dilbert


 There’s a Dilbert cartoon in which a frazzled staffer tells the Pointy-Haired Boss, “Our numbers are way down.  What should we do?” to which the Pointy-Haired Boss calmly responds, “Reorganize the department so there’s no valid history for comparison,” before adding, almost as an afterthought, “Then we’ll fire a few people and give ourselves awards for saving money,” while the incredulous staffer mutters “El Diablo!”
 That cartoon is not far from the reality of what has been going on the last few years in one corner of Silicon Valley—specifically the corner of Page Mill Road and the Foothill Expressway, home of a once proud, and mighty company founded by two pioneering engineers: Bill Hewlett and Dave Packard.
 You can probably guess which company that is.
 In any event, Dilbert came to mind as we were listening to the recent meeting at which the management of that company finally admitted what everybody who more or less paid the least bit of attention to what was going on out there in Palo Alto already knew: that things weren’t good.
 At all.
 Now, readers of this column can’t say that anything that happened at last week’s meeting surprised them, excepting the fact that for one, brief, shining moment the scales seemed to fall from the eyes of Wall Street’s Finest: for some reason we do not quite grasp, the bright, shiny object—“non-GAAP Earnings”—the company has been waving to distract them from reality suddenly stopped working.
 But last week’s analyst meeting did have at least two whoppers that go beyond earnings puffery, recurring “one-time” charges and—our biggest beef—including only the good stuff from acquisitions like EDS (i.e. revenues) while excluding all the bad stuff (i.e. all the costs associated with turning EDS around…which appear endless, thus far).
Whopper #1
 “In addition, another challenge is that HP has too many areas of focus, whether it's products or services or geographies. When Todd Bradley took over the Printing and Personal Systems business, he was surprised to find that we made more than 2,100 laser printers. In every business, we're going to benefit from focusing on a smaller number of offerings that we can invest in and really make matter.”
—Meg Whitman, CEO
 Thus we have a Dilbert-esque situation in which anybody who’s ever tried to accomplish the maddening task of downloading the correct driver for a particular HP printer knows what a company veteran apparently, somehow, did not.
Whopper #2
 Autonomy has—as we showed you here, this was an Autonomy technology. It has tremendous technology, second to none, and has a lot of potential to it. Where we are struggling with right now, and I'll use that word even, is the sales model was very non-scalable…”
—George Kadifa, EVP Software
 In this case, one year after closing on a $10 billion acquisition (remember, that was 11-times revenue), and eleven months after telling Wall Street’s Finest that “The integration is going well thus far, and we are focused on enabling our global sales force to ramp on the Autonomy product line-up, so they can begin selling Autonomy software in Fiscal 2012,” the world is now told Autonomy’s sales model “was very non-scalable” in the first place.
 Not somewhat non-scalable.
 Very non-scalable.

 We’re not sure what the truth behind both assertions may be, but it does seem time for somebody to be held accountable at the house of Bill and Dave—Ha!  We’re joking. 
 It’s time for another reorg, of course. 


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

© 2012 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.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Wednesday, October 03, 2012

This Just In: “HP Not Doing Well”


 In a shocking turn of events, Hewlett-Packard executives today disclosed at a very long analyst day with Wall Street’s Finest that the company—which makes printers that nobody really needs anymore, PCs that nobody really buys anymore, sells outdated services offered by the former EDS, which nobody liked in the first place—is not doing well.


 Coming up next: “Bobby Valentine Off to Rocky Start In Boston.”  

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

© 2012 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.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Monday, October 01, 2012

This Just In: Netanyahu Deemed Scarier Than Ahmadinejad


 This fake headline/story is from The Onion.
 We are big fans of The Onion. 
 If the Arctic Monkeys are the official house band of “NotMakingThisUp,” and the New York Post is the newspaper of record, then The Onion would be our alter ego.
 But what is scary about this fake headline is that, somehow, it is deemed funnier and more pertinent than “Ahmadinejad Feeling Like Trip to the US to start World War III Went Pretty Well.”
 What would The Onion make of Kristallnacht?
 JM

Netanyahu Feeling Like Trip To US To Start World War III Went Pretty Well


SEPTEMBER 28, 2012 | ISSUE 48•39 | MORE NEWS IN BRIEF  
NEW YORK—Following his speech to the United Nations General Assembly this week, Israeli Prime Minister Benjamin Netanyahu announced Friday that he is “pretty satisfied” with his trip to the U.S. to instigate World War III. “All in all, I think I accomplished my goal of pushing humanity toward the brink of complete and utter annihilation,” said Netanyahu, adding that his implicit calls for international military action against Iran, which would ultimately escalate the conflict to an Armageddon-level of death and destruction, went “fairly well.” “I think I did a good job laying the groundwork for a nuclear holocaust that will kill billions of people and eventually end the world as we know it. Sounded like everyone really liked it, too.” When reached for comment, Iranian President Mahmoud Ahmadinejad told reporters that he was “equally happy” with his own efforts to nudge the world slightly closer to a full-blown apocalypse.Description: http://www.theonion.com/static/onion/img/icons/terminator.gif