Month: May 2005

The second easiest trade in the world might just be keeping a few investors around the world up at night.

I say second easiest, because there is one other macro trade that seems to be more popular than being short the U.S. Dollar. But if there ever was a way to make a guaranteed profit, it would appear to be shorting the Dollar.

After all, the U.S. is, as we all know—putting it in precise macroeconomic terms, based on our horrible trade deficit, bloated budget deficit, broken Social Security system, not to mention our decrepit Medicare/Medicaid/Health Care funding system—totally screwed.

And hasn’t the Oracle of Omaha—Warren Buffett—shorted twenty billion Dollars for his own account? Even Bill Gates, who probably never shorted anything in his life, except maybe Lotus and Netscape and Borland and Novell and Quarterdeck and Software Publishing and…well, he’s probably never shorted a currency before, but even Bill Gates is short the Dollar.

So, if Bill Gates and Warren Buffett—two of the smartest men in the world, let alone the smartest guys in a particular room—are both short the Dollar, how could a big, swinging London-based currency trader lose by putting on that trade?

Well, one way he could lose is this: what if everything the smartest guys in the world already know about the Dollar is priced into it? And what if the Euro—the alternative currency of choice—is overvalued? And what if that imbalance starts to correct itself?

I mean, it’s not as if Europe is rip-roaring along, adding value to the world’s economic well-being.

Germany is stuck in no-growth-land, Italy is officially in recession, and France is a basket case. Half a dozen U.S. companies have missed numbers in recent weeks, and blamed Europe. Drug companies are removing research and development from Germany, and IBM is shutting down high-cost operations all over the continent.

I’m no currency guru, and I don’t particularly admire the fiscal policies of the United States. But what’s so great about Europe? And why does everybody want to own its currency?

I know what some of you are thinking: buy gold. But I’m not a gold bug. My friends who actually are gold bugs tend to be nervous, excitable people who think Alan Greenspan ranks right up there with funeral directors and variable annuity salesmen.

They refer darkly to “The Powers That Be” and watch every tick in Federal money flows as proof of a vast conspiracy to manipulate the price of Amazon.com’s stock price in order to benefit Alan Greenspan’s personal account.

I’m not making that up, by the way—I know people who think Greenspan times his various pronouncements to affect the market, for his own benefit. Last year a guy complained Greenspan had made negative comments about the economy just before option-expiration Friday. He was long Lucent call options, and they expired worthless.

He blamed Alan Greenspan.

I don’t particulary care who runs the Fed, and as far as I can tell gold and silver just sit there and impart no particular value except what other investors ascribe to the desirability of owning gold and silver at any given moment.

So call me an agnostic when it comes to the world’s monetary plight.

But I’d be willing to bet the ranks of the Dollar atheists far outweigh the Dollar believers right now. As I said, it’s probably been the second easiest trade in the world, up until now.

The easiest? Oh, that would be the “market-neutral” convertible arb trade. Which, as we now know, is blowing up all around us.

Just today, The Times of London is reporting some ugly data from the London hedge fund world:

GLG in recent weeks had demands for more than $500m (£270m) from investors wanting to pull out of its $4 billion market-neutral fund…Cheyne is thought to be down by at least 10% in its credit fund after the downgrading of debt at General Motors and Ford. Ferox, another of London’s most successful funds, is thought to be down nearly 20%. Bailey Coates, Polygon, Rubicon, Vega, Moore Capital and Brevan Howard are all nursing heavy losses of about 5% each in April.

Makes you wonder, if that stuff was the easiest trade in the world, how the second-easiest trade is going to work out.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

If there had been a roof over Jones Beach Theater—the 14,000-seat open-air amphitheater on the edge of the Atlantic Ocean where, come spring, bands not big enough for six nights at the Meadowlands start playing in a great venue mixing salt air and good acoustics—Sting would have blown it off Friday night.

It was the last night of his six-week U.S. tour, and he played with a stripped-down band, half the size of last year’s eight-piece, bells-and-whistles (actually synthesizers and bongos) group, ripping through a wide swath of his catalogue, back to early Police and new Sting, with the Beatles thrown in for good measure.

It was the best of him I’ve seen—but I might not have made it without Google.

For some reason this tour didn’t generate much exposure for the man who once led the biggest band in the world before going on to that rare thing in rock music: a long and highly productive career, along the lines of Clapton, Bruce, Bob Marley (until cancer got him) and Van Morrison.

Consequently, I went in with no expectations. Since I hadn’t seen a review anywhere of the tour, I figured it was another Sting show, with some new semi-Moroccan noodling alongside the usual mix of old Police and middle Sting.

In fact, I was so out of it I’d forgotten what I’d done with the tickets. Usually I do will-call, but when the time came to get ready to go, I realized there was no record of it on the receipt I’d printed out and stuck on the wall.

Since we were leaving in a half hour, and since I’d invited friends along, I was especially frantic trying to find where the tickets were—had they mailed them? If so, I was dead, because we didn’t get any Sting tickets in the mail. Were they email tickets? Could be, but I had no idea where the email might be.

Enter Google.

I remembered downloading Google’s “Desktop Search” program a few weeks ago. It had taken two minutes to download—none of this “fill out the registration form” and “restart your computer now” and “would you like to receive annoying email updates every three minutes.” Just download and forget.

A couple of days after downloading “desktop search” and forgetting about it, I did a Google search that brought up—along with the usual list of search results—a term paper my daughter had written that contained whatever it was I’d typed into the search bar.

I thought that was pretty cool—an unobtrusive and very logical way of doing desktop search. But I still couldn’t think why I’d use it…until I was trying to find those tickets.

I typed “Ticketmaster Sting” into the search bar, because I had bought the tickets through Ticketmaster, the ticket-selling service that Pearl Jam tried to go around a few years ago, before discovering that Ticketmaster has a monopoly that makes DeBeers and Microsoft jealous.

(Pearl Jam soon realized that Ticketmaster is more powerful than most Government Agencies as well as Russian President/Czar/Dictator Vladimir Putin, and backed down. The bad publicity, however, made Ticketmaster so sensitive to appearances that, in return for taking your order over the internet for tickets that they send to you via email—a process that costs Ticketmaster as much as seven or eight cents to accomplish, what with using up all those electrons—they charge you a “Processing Fee,” a “Service Charge,” a “Delivery Tithe” and an “Enjoyment Surcharge” which in aggregate may by law amount to no more than triple the actual cost of the tickets.)

As I was saying, I typed “Ticketmaster Sting” into the search bar.

(This is a bit off-topic, as we say on Wall Street, but, my solution to the airline crisis in America is to have Ticketmaster handle all airline tickets and rebate half their airline-ticket fees to the airlines. This would give Ticketmaster a monopoly on air travel in the same manner they have a monopoly on concert tickets, and along with the “Processing Fee” and “Service Charge” and “Delivery Tithe,” Ticketmaster could add an “Airplane-Wings-Secured Fee” and a “Pilot-Wearing-His-Contact-Lenses Charge” and “Engines-Not-Inspected-By-English-Majors Surcharge.” Prices would immediately triple or quadruple, and the airlines would be healthy again.)

In any event, after typing in “Ticketmaster Sting” into the Google search bar, up popped the usual search results, plus, at the very top, the email from Ticketmaster containing the PDF file with the Sting tickets.

I clicked on the email, printed out the tickets and we were ready to go. Very slick.

We made it to the venue, got our seats…and Sting and his band ripped through most of the best of his entire catalogue, including a bunch of Police stuff I’d never heard him play—Demolition Man and Voices Inside My Head among them—as well as some terrific newer stuff, including I Hung My Head and a great version of the Beatles’ Day in the Life.

He brought the house down.

And thanks to Google, we were there in time to see it.

Now all the gang in Mountain View has to do is come up with an alternative to Ticketmaster, and they will rule the world.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Poor David Stockman.

One day Standard and Poor’s changes its mind about something, and a week later the former Budget Director of the entire United States loses his job.

Here’s how the linkage worked, as outlined in a brief, insightful article in today’s Wall Street Journal, with background from my own experience following Collins & Aikman, the auto-parts supplier over which Stockman had presided as Chairman and CEO until S&P changed its mind about something.

Dating back to a window-shade manufacturer in 1843 (no kidding), Collins & Aikman makes floors and roofs and door panels for DaimlerChrysler, GM and Ford, in about 100 plants around the world. GM and Ford are, unfortunately, around 50% of C&A’s revenue.

The current incarnation of C&A was shmooshed together by Heartland Industrial Partners, following ownership changes in the 80’s and 90’s that did nothing so well as remove value from the company, for the benefit of private equity partnerships.

Consequently, C&S is a highly leveraged company—not a great capital structure for an auto parts supplier—and depends on the kindness of banks as well as on more esoteric forms of debt to keep the lights turned on, not to mention the plants humming.

And one of those forms of debt involves borrowing against the money its customers owe it for the products its plants are producing, i.e. receivables.

Since C&A was already maxed out on its senior credit facility, the company needed to be able to access those receivables—sort of like borrowing against your future hoped-for income tax refund from H&R Block to buy tonight’s dinner for the kids.

Then, S&P changed its mind about something. Specifically, about GM and Ford credit-worthiness.

S&P cut its debt ratings for both companies to junk, which triggered a reduction in the amount C&A could draw on its receivables facility with GM and Ford, which triggered violations in C&A’s own capital structure, for which it had to get waivers to keep buying the groceries.

Hence, the Chairman and CEO of C&A, David Stockman—whose main credentials for those job titles appear to be that he is a founder of Heartland, which still owns a big chunk of C&A stock and had the bright idea of loading up a capital-intensive, highly cyclical company with debt—resigned his positions after the company disclosed that it faces major liquidity issues following the S&P downgrades.

And what about Standard & Poor’s, which triggered the whole mudslide when it downgraded GM and Ford debt?

Well, yesterday S&P helpfully warned that Collins & Aikman itself might have to seek bankruptcy protection, “in the near term.”

In the grand scheme of things, the travails of a relatively small auto parts supplier in Troy, Michigan, do not mean a whole heck of a lot outside the terrible consequences for the employees who are going to get screwed thanks to the short-sighted machinations of the private equity groups that drained the company of whatever liquidity they could find.

But the next time the Fed raises the Fed Funds rate and a talking head on CNBC says “rates don’t matter…”—remember how David Stockman lost his job.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

The theater is full, everyone’s in their seats with a bucket of popcorn in their laps and a soft drink in the holder, and the lights are down.

The movie is about to start.

Ominously, though, the emergency exit signs are on the fritz, and while most of the crowd is oblivious, a few of the more perceptive movie-goers are squirming in their seats, looking for the fastest way out in case somebody shouts “fire.”

That’s the way the convertible arb hedge fund business feels to me, after listening to a Merrill Lynch conference call on the state of that business and talking to friends who would know.

Yes, the rumors have been flying around the Street for a couple of weeks about one or another hedge fund being in trouble, and some big funds are having rough years—even though it’s nothing like Long Term Capital’s infamous collapse.

After all, the Dow Jones Convertible Arbitrage index is down only 7.5% this year (although I did hear of one small outlier down a cool 90%)—hardly enough to cause a hedge fund to turn off the lights.

But these are funds designed to limit volatility by hedging against interest rate risk and market risk and all kinds of other risk—and the fund-of-funds managers that were tossing dollars into these so-called market-neutral pools of money are not used to watching the pool evaporate, even slowly. Especially when there doesn’t seem to be a very good excuse. No collapse in the Thai Baht, no Russian default…not even an Argentina currency crisis.

So they are getting anxious.

That’s how it sounded on yesterday’s Merrill Lynch conference call—even though I didn’t understand more than three sentences in the Merrill analysts’ presentation or in the question and answer session that followed. Being an old-fashioned equity guy, I don’t measure alpha or beta or theta, or even the covariance of the delta. So I don’t have a clue when it comes to this black-box stuff.

But what I did understand is that the questions all had a single underlying theme: where are the exit doors?

What it all smelled like to me was a lot of people trying to figure out how to get out of their positions, or worrying about what other people are going to do to get out of their positions.

I heard a lot of answers from the Merrill convertible rocket scientists that seemed to begin, “well, what they can do is sell the third deviant tranche into the fourth derivative market through a hedged put sub-convertible relaxed-fit jean…” or something like that.

Whatever it was they were saying, it all sounded to me like one question: how to get out.

The basics are this: the convertible arb guys, who had it so good for so long buying converts and shorting the underlying equities with various ratios and various hedges, attracted enough capital to make the business unattractive.

Consequently, volatility compressed so that managers had to put on more leverage to get the returns they’d been accustomed to getting. Plus, as the hedge funds grew in size, they began trading more with each other rather than with the funds that actually own convertible bonds for a living.

End result: nobody left to buy.

Now, a few people are looking for their money back. And the question becomes where to sell this paper to raise the money to give back to the investor, now that the inflows into the pool have reversed flow.

These situations are not fun. They are not fun for the guys stuck with the paper; they are not fun for the investors stuck in the fund; they are not fun for the brokers stuck with relationships that are starting to come apart; they are not fun for innocent bystanders caught in markets that start to come apart when everyone rushes for the exit at the same time.

But they seem to happen with some regularity, and nobody seems to learn the previous lesson. 1980, when the Hunt Brothers got nailed trying to corner the silver market; 1987 when nearly everybody, including the smartest investors in the world, got caught long the Friday before the crash; 1989, when everybody was going to get rich doing LBO’s…and the United Airlines LBO fell apart; and of course, Long Term Capital Management in 1998, and the dot-coms in 2000.

Does the convertible arb bubble (ironic, isn’t it?: everybody, including me, is screaming about a housing bubble while all the while this huge convertible arb balloon has been slowly inflating right over our heads) have to end badly?

No, it doesn’t. But it probably will.

Right now, the fund-of-funds are watching this pool evaporate slowly and reading the articles and re-thinking their commitment…and probably submitting their notices of withdrawal for the end of this quarter, right now, as I write this.

And the funds themselves are looking at the calendar and evaluating their positions, trying to figure out what they can sell in order to meet the redemptions they know they will have to meet in a month and a half.

And the legit convertible funds and the market makers are watching the whole drama, and waiting. They see a lot of sellers and not a lot of buyers…and they know the opportunity to make money is not now.

It’s when the exits are clogged and people are trying to get out…price be damned.

Jeff Matthews
I Am Not Making This Up

P.S. For those of you following Grandma’s quest to nail down the truth behind the technology “decrapitation” at Overstock.com, and other credibility issues she has with the company…Grandma is hard at work and will report back when she finds out what happened.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Patrick Byrne likes to say he runs Overstock.com not for the satisfaction of the Wall Street “jackanapes” who nit-pick his company’s income statement and question whether his growth now, profits later mantra is good business or just good spin.

Instead, he talks about things around Overstock passing something he’s called “the grandma test”—a sort of What Would Grandma Think? standard of honesty and decency when it comes to reporting the facts behind Overstock.com’s numbers.

He particularly dislikes the notion that “widows-and-orphans” may, when it comes to stock market fluctuations, be at the mercy of “Wall Street criminals” (Byrne’s term), and saves his most potent venom for hedge funds:

“They inject noise into attempts to have adult conversations with our shareholders. And the thought that any widow-and-orphan money gets invested based on the work of such hedge fund lickspittles makes me nauseous.”

If anything should make Patrick Byrne nauseous, however, he might look to the persistent inability of his company to hit targets he has set publicly in shareholder letters and on conference calls—targets for new web offerings (travel, build-your-own-ring, auctions), new ventures (mCommerce), and new technology (“Project Propeller”).

While we explored some of these missed targets in “The Mystery of the 38 Diamonds,” yesterday in Part I of “Patrick and the Amazing Technicolor Dreamcoat” we began looking deeper into the largest Overstock.com mystery of all: whether the company’s growth now/profits later mantra is in fact good business strategy, or merely good spin.

However, since I run a hedge fund, let’s not look at this from the point of view of a lickspittling jackanapes like me. Let’s look at it from the point of view of the “widows-and-orphans” for whom Patrick Byrne expresses such tenderness.

Let’s ask “What Would Grandma Think?”

Well, for starters, just last month Overstock shocked Grandma by announcing a Q1 loss of $4.2 million. Grandma was shocked because only three months before, Patrick Byrne had announced a $2.5 million Q4 profit, using words like “superb,” “brilliant,” and “flawless” in his January letter to Grandma and other Overstock investors.

In that letter, Byrne had written to Grandma: “For several quarters my letters and conference calls have described at length our internal work building an Ark: the waters came, and our ark floated magnificently.”

Burger King, the long-struggling fast-food chain, is struggling no longer. Under smart new ownership and a smart new CEO, the chain has stopped chasing trends and gone back to its core customer—young, male and hungry—with big burgers and fast service. It even brought back the old, famous ad slogan, “Home of the Whopper.”

And the strategy is working: sales are up for the first time in years; franchisees are happy; and an IPO may be in the cards.

Now, speaking of whoppers, here’s a trivia question for those of you who think you know your business facts: “Earth’s Biggest Discounter™” is the trademarked slogan for what discount chain?

No, it’s not Wal-Mart’s—that would be, “Always Low Prices. Always.” Nor is it not Costco’s—Costco has none. (The customer knows what Costco stands for, and Costco wouldn’t waste the money registering something anyway.)

If you guessed eBay, you were close (eBay calls itself “The World’s Online Marketplace®”)…but wrong.

In fact, it is Overstock.com that has trademarked “Earth’s Biggest Discounter™”. As Overstock CEO Patrick Byrne gloated to shareholders, “Now that we have occupied the ground of Earth’s Biggest Discounter, we are making it prohibitively expensive for any of our would-be competitors to aim for the same space.”

In case you never heard of it, Overstock.com is an Internet seller of closeout and other merchandise that generated just under a half-billion in sales last year— at a negative operating margin. Half of those sales don’t even “belong” to Overstock, being pass-through sales for merchants who list their wares on Overstock’s site and deliver the goods themselves.

To put in perspective those $250 million of annual sales Overstock makes directly to its customers, Wal-Mart generates three-times that amount each day. Costco generates that amount every two days. Even Big Lots, a publicly traded closeout retailer ranking low on the list of Earth’s Biggest Anythings, generates $250 million roughly every 20 days.

So how, you might ask, does Overstock.com get away with calling itself “Earth’s Biggest Discounter™”?

Well, for one thing, as we have already seen, “Home of the Whopper” was taken.

For another, and based on an extensive review of the company’s conference calls, shareholder letters, interviews and earnings reports, it would appear that CEO Patrick Byrne has at times demonstrated a fairly elastic notion of the bounds of plausibility, going back even before Overstock came public in 2002.

Asked in June 2001 by the Wall Street Transcript, “Where would you like to see the company in the year 2004?” Byrne said: “I would want to see us well over $400 million and as profitable as hell. Making a ton of money. I want to see that next year.”

When the books actually closed on 2004, Overstock had seen only two profitable quarters in the intervening three years, neither of them “profitable as hell,” and both of them followed by a return to red ink.

That a CEO who misses such a big target by such a wide mark, and then has the notion to brand a relatively insignficant web site “Earth’s Biggest Discounter™”—and receives little apparent scrutiny from Wall Street’s Finest or even his own Board of Directors, owes itself to several factors, in my view.

First, even the most skeptical observer would acknowledge that circumstances change in this world, and goals which looked both worthwhile and obtainable in 2001 might no longer be obtainable or worthwhile in 2004. As emphatically as he declared his desire to be “profitable as hell” back in 2001, Byrne now emphatically declares his desire to grow as fast as possible while leaving profits to come later. This change may be either appropriately flexible business management, or good spin, depending on your point of view.

If it’s good management, Byrne has an indefinite length of time to make good on becoming “profitable as hell.” If it’s merely good spin, however, Byrne’s growth-over-profits mantra may be masking underlying issues at Overstock.com, as we shall explore later.

Second, there is Patrick Byrne’s pedigree. Not only is he the son of Jack Byrne, a legend in the insurance business and longtime favorite of Warren Buffett, but he once worked for Buffett, running one of the smaller Berkshire companies.

Byrne wears his association with the Oracle of Omaha like Joseph’s Amazing Technicolor Dreamcoat, frequently quoting not only Buffett, but also Charlie Munger, the less-heralded of the Berkshire duo, and mimicking the Berkshire “Owner’s Manual” as well as Buffett’s folksy, direct letters to investors.

Since Buffett is a famously decent, honest and brilliant investor, it may stand to reason that any ex-employee/son-of-a-friend-of-Buffett may be decent, honest, and brilliant.

Third, of Overstock’s five-person Board of Directors, three have strong connections to Patrick Byrne. One being the Chairman of the Board (Patrick Byrne); the second being the Vice-Chairman of the Board (Patrick’s dad, Jack Byrne); the third being Gordon Macklin.

Who is Gordon Macklin? Macklin, who served from 1998 to 2002 on the Board of Worldcom (yes, that Worldcom), also served on the board of Jack Byrne’s insurance company, White Mountains Insurance Group. At the same time as Patrick Byrne.

That a majority of the Overstock Board is related either by blood or by company affiliations goes a long way to explaining why the Board has apparently never seriously asked itself why a company generating one one-thousandth the sales of Wal-Mart is going around calling itself “Earth’s Biggest Discounter™”.

Wall Street, however, has no such excuse—and yet that very basic question appears not to have occurred to the half-dozen analysts who participated in its recent conference call.

To give Patrick Byrne credit where it is due, this gullibility among Wall Street’s Finest may owe itself to the fact that Overstock did hit one of Byrne’s long-stated goals over the course of 2004—to raise gross margins from the 10% range to the 15% range.

Skeptics would point out that the company managed to lose money when those margins were 15% just as easily as when they were 10%, but I am trying to explain Byrne’s credibility with Wall Street analysts—and hitting one target goes a long way towards doing so.

Yet even upon reaching the margin milestone, Byrne dug his own credibility gap to careful readers of his shareholder letters. For in the final quarter of 2004, he told his shareholders emphatically that “15% is the right level” for margins; and shareholders “are not going to see” further margin improvement:

Yet just three months later, following a surprisingly large first quarter loss, Byrne retracted the 15% “right level” of gross margin and claimed it was “a misinterpretation”:

We think there are still basis points to be added in shopping margins [above 15%]…. To correct a misinterpretation from three months ago: I said we might pass some of these dollars to consumers in the form of lower prices if it saves us more dollars in marketing than we pass on…

Readers will see that Patrick Byrne in fact did not write “we might pass on some of these dollars to consumers.” He wrote “we will.” And not a soul on Wall Street called him on either the flip-flop itself or his attempt to blame it on “a misinterpretation.”

But does it matter?

Does a CEO looking for good news somewhere in a press release of negative surprises—an electronics deal “I blew” that cost $600,000; a $2.6 million “binomial [sic] marketing experiment that failed”; a highly touted yet unsuccessful $1 shipping promotion—deserve scrutiny for trying to spin something his way?

As somebody who’s watched executives spin their companies into the wall over the last 25 years, I think so.

I have noted in past postings that Byrne is one of the more aggressive CEOs when it comes to attacking short-sellers—and in my experience, CEOs who obsess about short-sellers tend to be the ones who have something worry about.

What is interesting is that Byrne himself pretends not to obsess. He tells his shareholders thusly in one letter:

“Well my research says…you’re short us and he [reporter Herb Greenberg] is out there writing articles like that. …I think it’s clearly very incestuous and it’s a little disingenuous of him to be saying he doesn’t have a position while he’s writing an article like that. It sounds to me that you ought to be — ought to be more careful about what you post publicly, Mr. Rocker.”

And for good measure, Byrne even comes up with a name for the one of the barkers:

“Greenberg of course, Lapdog Herb we call him…”

Indeed, for a guy who practices “Buddhist non-attachment,” Patrick Byrne can curse with the best of them:

“Out there are three investment banks that are the back offices of the real short selling… Last night someone called me and told in particular , there’s a guy out there…who is spreading this rumor from one of these banks…. You know, A) it is total bullshit; B) anybody who even wouldn’t know that is bullshit on the face of it should sell this stock….”

In sum, while Patrick Byrne quotes Chinese proverbs and Buddhist philosophy to Overstock shareholders, he spends a portion of each conference attacking the barking dogs:

“The tools of Satan are among us. They are trying to ruin things….”

So, under the old Shakespearan rule of thumb that the lady who doth protest too much might be worth keeping an eye on, let’s look more closely into this question of growth versus profits, and see if the facts mesh with the spin. It is not so hard to do, given the extensive record of conference calls and shareholder letters.

For example, on the January 2004 earnings call, Byrne rapturously described his ability to analyze so-called “repeat” customers—those customers that buy more than once. He said:

We are getting a lot better at the analysis of repeat [customers]…. There were wonderful monotonic relationships we are discovering between frequency of buying, length of time between buying, categories that people are buying…. I am not sure we will release that [information] because that is the colonel’s secret recipe.

Despite his caution at revealing the “colonel’s secret recipe,” only six months later Byrne volunteered precise data about Overstock’s repeat customers on the July 2004 call:

One metric we look at is if somebody spends a dollar in month X what do they spend in the remainder of month X and month X plus one. That number has over 3 or 4 years trended from 19 to 31 cents.

Oddly enough, in April 2005—nine months after this to-the-penny analysis of repeat customer purchasing—Byrne declined to provide that type of analysis on the grounds that he couldn’t do it. Indeed, he makes it sound as though Overstock never could do it:

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

How’s this for desperate? On Friday, Microsoft sent out the following email to its Microsoft Network users…i.e. the poor shlubs who got hooked on Microsoft’s email product and wish we hadn’t:

MSN Music: Buy 1 Song, Get 5 Free. How do 5 free songs sound? MSN® Music is giving you 5 free songs when you buy 1. At MSN Music, you’ll get more than you’d expect from a music service. To make sure you get the music you’re looking for, you can preview any song from major and even independent labels. Choose from hot new songs, time-defying classics, and rare, hard to find recordings from old radio shows [emphasis mine].

Plus watch music videos, read bios and even get concert tickets. Buy only the songs you want for 99¢, or buy the full album for less than you’d pay in a retail store or other online music services. And legally burn all the CDs you want from what you buy, too. And now the deal is even sweeter because you can get 5 songs for free.

What do you think? Makes you want to rush right out and sign up for “MSN Music,” eh? No? Well, me neither. I was being ironic.

You’d think that maybe, just maybe, given $35 billion in cash and a desktop operating system monopoly, Microsoft could figure out that people looking for music might want to know exactly what bands we’re talking about, and what songs are available.

But, no. In typical Microsoft throw-everything-we-got-and-see-what-sticks fashion, they offer not just music, but music videos, “bios” and even concert tickets…without identifying what music, or music videos, or “bios” or concert tickets we might be talking about.

End result: I hit the delete button.

Meanwhile, Apple sends me an iTunes update with all kinds of new music identified right there in the email.

End result: I download an old Monty Python album, “Matching Tie and Handkerchief,” that I haven’t heard in twenty years. Great stuff.

I don’t know about you, but I’m betting that anybody interested in “old radio shows”–as Microsoft proudly offered in its desperate buy-one-get-five email–is not surfing the net for their music.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

I was wrong: Tony Blair did not lose his bid for a third term as Prime Minister. He did not, however, “beat the number”…and in that respect, he loses.

Pre-election, Blair’s Labor Party held a 166-seat majority in Parliament. The betting was on how big a majority he would keep, with the general consensus–in Wall Street parlance, “the whisper number”–being 100 seats.

It’s looking closer to a 66-seat majority, and that is not a good thing for Blair. As in the U.S., a reasonable slice of the majority party’s representatives never go along with their leaders. In the UK, this amounts to about 50 members. So a 66-seat majority is uncomfortable enough to make it likely Blair’s third term will be his last, and his new government will have a tough time getting its agenda passed into law.

The press says “it’s all about Iraq.” I heard that on the radio this morning and read it in the New York Times, too. But based on five days in London (Labor country) and surrounding environs, I would say that’s wishful thinking on the part of the U.S. press.

Not a single person, from whatever slice of the UK’s highly stratified life that I experienced–cabbies who called me “Guv’nah,” professionals who called me “Mr. Matthews,” Pakistani hotel clerks who called me “Sir,”–not one person complained about the war. But I heard plenty on both sides of the immigration debate.

The spin on Blair’s election isn’t half as interesting, however, or important, as the spin on Venezuela’s oil production decline–worthwhile reading in today’s Wall Street Journal.

Since that country’s totalitarian/socialist/whacked President Hugo Chavez began looting the oil sector for his own socialistic wealth-redistribution program–firing 19,000 workers and installing his own pals in management–Venezuela’s oil production has declined far below the fake numbers issued by the government.

Instead of producing over 3 million barrels a day, as the official statistics show, actual production is closer to 2.5 million barrels a day. Not a good thing for a country with little else in the way of exportable resources, and not good at all for the U.S.–the major importer of that resource.

Chavez’s solution? No, it’s not the rational one: to hire competent managers and reinvest in the oil infrastructure. It’s the whacky one: to blame “sabatoge.”

Yes, that’s right.

“So (according to today’s Journal) the military has launched Operation Black Gold, in which military staff will work with industry specialists to protect oil installations, pipelines and power stations.”

Just what those fields need: another layer of corrupt bureaucracy.

In any event, we’re going to need all the oil those anti-saboteurs can find, if this commodity price inflation keeps going. Did anybody else notice what Clorox blamed its earnings miss on yesterday?

“Intense commodity price pressure.”

And did anybody else notice how much they’re raising prices on Clorox Bleach?

9%.

That’s triple the Fed Funds rate.

Jeff Matthews
I Am Not Making This Up

There’s a fine line between “spin” and “lying.”

That notion–so important to the investment process–came to mind as I was writing the following piece about two executives I once kept a close eye on. Those two executives are Mark Swartz and Dennis Kozlowski, and the company they used to run is Tyco.

The reason I’m thinking about them is that Swartz, the CFO during all those years when he and Dennis were, um, adding value to both Tyco itself and to their own bank accounts, has taken the stand in his own defense against government charges of “grand larceny” and other things. Swartz’s move follows on the heels of Dennis himself testifying before the jury.

Being out of the country, and thus unable to procure The Newspaper of Record in these types of juicy trials (the New York Post) I haven’t seen any take on the testimony itself. So I have no idea how Dennis came across to the jury, nor how Mark is doing.

But I’d love to know, because I always thought they were two of the best spin-doctors I’ve ever seen in 25 years on Wall Street.

Dennis with his awe-shucks manner, his weird, high-pitched voice and dead earnestness; Mark with his Velvet-Fog demeanor and drench-them-in-data-and-make-them-feel-stupid-for-asking-the-follow-up modus operandi.

Tyco, as it happened, was a major short for me back in the days when the bloom began to come off the rose at the “Poor Man’s GE”: specifically, the very day Dennis and Mark held the analyst meeting at the Plaza Hotel to discuss their surprise plan to break-up the company.

If I recall the sequence correctly, that analyst meeting was announced the Friday before Martin Luther King weekend, and its stated purpose was to put to rest the various assertions of accounting gimmickrey allegedly used by Dennis and Mark to prop up Tyco’s earnings and stock price.

It was to be, as I took it, a sort of a “Mark and Dennis explain it all” session, to get the company back in Wall Street’s good graces.

That press release caused at least one hedge fund–mine–to buy options to hedge a short position in Tyco the minute it hit the tape. (I saw the release, figured, “we’re dead,” and immediately bought some insurance via the calls; others did likewise, because, as I remember it, Tyco stock reversed upward almost immediately.)

So, when I arrived at the Plaza after the long weekend, I was short Tyco stock and long Tyco calls, ready to see how the company dealt with the accounting issues which Jim Chanos had correctly identified and had continued to harp on during conference calls, despite both Mark’s assurances that all was above-board at Tyco, and the impatience of the Barking-Seal Wall Street analysts–most of them thoroughly taken in by the Swartz/Kozlowski spin–with anybody who raised such boring, off-topic, hopelessly naiive questions. “This is the Next GE,” they told themselves and their clients: “who cares about the goodwill amortization?!!”

Thus the stage was set for a knock-down, drag-out battle between Jim Chanos and the Shorts, and Dennis, Mark, the Barking Seals and the Longs.

The Plaza was in fact a madhouse when I got there–shorts, longs, and the press all packing a crowded hallway, trying to get their hands on the thick press release. But when I finally got a copy, instead of an accounting primer on why Tyco was not doing anything funky when it came to loading the balance sheet with goodwill-heavy acquisitions, I found myself holding a break-up plan being proposed by Dennis and Mark.

Everybody was scratching their heads–shorts, longs and even the Barking Seals–trying to understand why two guys who had built a company through relentless, ever-bigger acquisitions, would suddenly–just like that–do a 180 on the whole “Dennis-as-Jack-Welch” routine.

Oh, and there was not a word in the document about the accounting issues.

When I read it through, I remember thinking: “This is it–Chanos is right. They have no answer to the accounting stuff–they’re just trying to hide the problems by selling the good stuff and taking the leftover garbage private.”

Sure enough, during the meeting itself, when Jim asked an accounting question, Old Mister Velvet Fog–instead of explaining for once and for all the accounting issues at hand–did his usual smarmy, you-don’t-get-it-everything’s-fine tap-dance. I sold out our calls on the open and bought puts instead.

During all the sturm und drang which ensued over the next couple of years, the most remarkable aspect to the entire situation, in my opinion, remains the pronouncement by David Boies, the hotshot attorney Tyco hired to look into the mess left behind by Mark and Dennis, that there had been “no major fraud” committed at Tyco.

This is, after all, a company that wrote off over $6 billion in impaired goodwill and other assets during the 1992-1993 fiscal years.

Yes, Dennis and Mark were very very good indeed at spinning their story to Wall Street.

I wonder how it will play on Main Street.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.