Month: June 2005

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

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

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

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

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

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

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

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

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

For instance, I was having dinner in Chicago last week, taking my sister-in-law and her husband to check out a restaurant spin-off from the Cheesecake Factory called the Grand Lux Café.

(If you’ve never been to a Cheesecake Factory, you ought to try it, if only to see a restaurant concept so successful the menus carry advertisements. In fact, I know some former National Hockey League players who looked forward to playing in certain cities where they could follow up a hockey game—probably the most physically demanding sport on earth—by heading to the local Cheesecake Factory for a few million carbs.)

This particular Grand Lux Café is three years old, and just off Michigan Avenue. While we ate, my brother-in-law asked me what I looked for in a restaurant. I told him I look at what people order, how quickly the tables turn, the cleanliness and the ambiance and service and yadda yadda yadda. “But actually,” I told him, “before we got here I knew all I needed to know when I saw the line out on the sidewalk.”

Grand Lux Café is a retail concept that works.

As for one that doesn’t, check out your local K-Mart.

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

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

And that’s about it.

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

Registers open? Two.

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

Registers open? Nine.

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

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

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

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

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

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

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

And to get the customers back will require more than bright signs and Kenmore dishwashers.

From what I saw, the score right now stands at Wal-Mart 9, Sears Holdings Corp 2.

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

Jeff Matthews
I Am Not Making This Up

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.

Everybody knows prices of things are rising. At least, everybody but the bond market, which appears to believe the accuracy of the inflation numbers compiled by the government and reported in various indices which, for the moment, show nothing much is going on in the world of consumer prices.

This despite the fact that pretty much every commodity coveted either by homebuilders in the United States or manufacturers in China has been on a tear the last couple of years.

Still, as Jay Fitzsimmons (who is not Wal-Mart’s CFO, as careful readers noted when I identified him thusly in last week’s post on Russia, but is, rather, Wal-Mart’s Senior Vice President of Finance and Treasurer) noted during his question-and-answer session at the William Blair conference, inflation at Wal-Mart stores is pretty tame.

Food inflation, Jay said, is running 1.8-1.9%; general merchandise deflation is about 1.3%; net-net, “there’s not much” inflation that Wal-Mart can see.

Still, anybody who eats food, drives a car, heats a house, pays rent, stays in a hotel, books a vacation, buys a newspaper and pays property taxes knows, costs of things are in fact rising.

So where are all those costs going?

To answer that question, look no further than the transcript of the recent Del Monte Foods conference call.

Del Monte does food—very basic food: canned fruits and vegetables under its own name, as well as StarKist tuna, 9-lives pet food and some other cats and dogs-type businesses.

The company was shmooshed together via a reverse merger with Heinz’s bad-for-our-P/E-Ratio StarKist tuna business a few years ago, and the ensuing equity roadshow presented a fairly compelling case of good management revitalizing long-neglected brands with strong cash flows underlying the whole smorgasbord.

Then, something happened that was not anticipated during the roadshow: costs went up and Del Monte’s earnings and stock price went down.

More specifically, according to Del Monte, it was “the rapid and unprecedented cost escalation in steel, energy and transportation-related costs, which, combined, represent about 40% of our costs of goods sold,” that hurt the company. “These increases, along with higher fish and other costs, resulted in year-over-year cost increases of over $120 million in fiscal 2005…”

Del Monte did what it could to offset the cost increases by raising prices to the tune of around $90 million a year. But Del Monte’s customers did not entirely go along with that idea, so Del Monte lost market share at the likes of, well, Wal-Mart for one.

Thus, Del Monte’s operating profits in the recent quarter tanked 30%. And the pain from higher costs isn’t stopping.

“Let me just give you a range of some cost increases we’re anticipating,” the Del Monte CFO told disappointed analysts last week. “We’re anticipating packaging costs to [increase] $30 to $35 million. We’re looking at energy and logistics to [increase] $25 to $35 million. We’re looking at raw materials to [increase] $15 to $20 million.”

Asked if the “raw materials” portion was just fish costs, or “a whole bunch of different stuff” by one of the analysts, the CFO responded: “That’s a whole bunch of different stuff, including fish costs.”

If you’ve never heard Len Teitelbaum, the veteran Merrill Lynch food analyst, on a conference call, you should try to listen in some time. Lenny, as everyone in the world knows him (our paths crossed at Mother Merrill 20+ years ago, but he would not know me from a can of tomatoes), possesses great enthusiasm for his work and his companies, and he knows just about everything there is to know about the food industry.

But when something goes wrong, Lenny sputters—he can barely get the words out to ask the questions; and yet he will not stop until he has asked the questions and gotten the answers he wants.

And on last week’s Del Monte call, Lenny was sputtering. As is Del Monte’s own business.

Blame it on inflation—inflation for “a whole bunch of different stuff, including fish”—and Del Monte’s inability to get Wal-Mart to pass it all on.

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.

Overall, convertible-bond hedge funds lost 1.5% in May and are down 6.8% since the start of the year, according to data from Hedge Fund Research Inc.

Losses were particularly steep at GLG Partners, London, one of the world’s biggest managers of hedge funds, with more than $10 billion in assets. The firm’s Market Neutral fund, one of the world’s biggest convertible-bond hedge funds, with about $3.5 billion in assets, returned a negative 7% last month, according to people familiar with the matter. The fund is down about 15% for the first five months of the year, these people said.

The firm declined to comment.

–Wall Street Journal

Some people reading that might wonder—what’s so horrible about down 1.5% in a month, or even 6.8% year-to-date?

After all, we’re talking about hedge funds. And in the world of hedge funds, being down 6.8% can happen—depending on the hedge fund’s investment style—before lunch.

Many of the best funds I’ve known have suffered that kind of volatility while accumulating terrific returns over the long haul. Read Jim Cramer’s excellent “Confessions of a Street Addict” to get an idea of what it’s like to be down ten, then twenty, then thirty per-cent, with redemption notices coming in over the fax machine, unable to sleep, eat, think clearly.

Cramer—with the help of his wife, “The Trading Goddess,” and Alan Greenspan’s interest rate cuts—turned his hedge fund around and exited the business on a high.

But innumerable—and I mean that literally—hedge funds have come and gone over the last thirty years, done in by a down 30% year with no hope of climbing back out of the hole. The Granddaddy of them all, Long Term Capital Management, lost 100% of its money and almost took down the entire world financial structure.

So when you see a class of hedge funds down 1.5% in May and down 6.8% year-to-date, you might wonder, “What’s the big megillah here?”

The big megillah is that the convertible-bond hedge funds of which the Wall Street Journal writes are no ordinary hedge funds comprised of “qualified” investors—meaning “rich enough to lose it all”—who accept short term volatility for outsized long term gains.

Rather, these are funds designed to appeal to institutional investors, particularly life insurance companies, seeking consistent, higher-than-the-alternative returns with no capital risk, whether the equity markets are up, down or sideways.

These are funds that aim to provide 1% a month, no strings attached.

I’m not making this up: 1% a month is the implicit promise for many of these “market-neutral” black box Masters of the Universe convertible arbitrage funds. The life insurance companies love them because 1% a month compounds to something nicely above the 4% long bond yield, and since they’re not trading currencies or betting on biotech discoveries, the convertible funds fit the risk profile of a safe, conservative bond portfolio.

But if that 1% a month turns negative, even for half a year…it screws up the entire picture. Suddenly, the capital account is negative, the return calculation goes out the window, and a loss which for many hedge funds—especially the old-fashioned long/short equity funds—might seem like a day at the beach, becomes a crisis.

The life insurance company is going to say “no mas” and yank the capital—especially now that short rates have tripled in the last year, and the risk-free alternative looks a lot better better than a year or two ago.

Which is why down 1.5% in a month and 6.8% for half a year is, as they say, unacceptable.

The markets began freaking out about the convertible arbitrage business two months ago, helping create a short-term bottom in the equity market and a sigh of relief in the Wall Street Journal.

But with end of the quarter approaching, expect the headlines to reappear and some strange action in the markets: there will be more than a few life insurance companies, and other institutional investors, looking to get their money back.

Or what’s left of it.

Jeff Matthews
I Am Not Making This Up


NB: The plug for Cramer’s book is no mere logrolling given my past association with TheStreet.com: I think there is no better description of what it is like to be inside the hedge fund vortex during a time a financial crisis than that in “Confessions.” I rank that book right up there with “Reminiscences of a Stock Operator” and the “Money Masters” series by John Train.

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 most interesting thing I heard this week at a conference with a broad range of companies as boring as Home Depot and as comical as TurboChef Technologies was the blunt assessment of the Russian situation by Wal-Mart’s CFO, the sharp, knowledgeable and quick-witted Jay Fitzsimmons.

Jay, like all Wal-Mart higher-ups, has a very broad knowledge of a very large slice of the world’s economies, and he always has something interesting to say about topics far beyond the usual why-were-comps-below-plan-last-week? nonsense that most retailers end up getting asked on their conference calls.

To put Wal-Mart in perspective, sales will top one-third of a trillion dollars this year. It’s adding $30 billion to sales each year—almost two JC Penneys. And for the typical U.S. consumer products companies ranging from giants like P&G and Colgate to little guys like Acme United and Jarden, Wal-Mart is 20-25% of sales.

So whatever Wal-Mart has to say about the world at large, it’s always worthwhile.

For one thing Jay takes the PIMCO side of the bond trade, saying “there’s not much” inflation in the Wal-Mart shopping cart.

In the food category, which is important to Wal-Mart given the successful roll-out of the company’s huge food/merchandise “Supercenters” over the last decade, inflation is running 1.8-1.9%.

General merchandise prices, however, are deflating at a 1.3% clip. Summing up inflation on the one-third of a trillion dollars that Wal-Mart handles, Jay says “it’s flat on average.”

That was interesting, but not as interesting to me as the discussion about Russia. It is impossible to talk about the future of Wal-Mart without talking international—particularly the opportunities in China, which are, of course, huge; as well the two other large and under-developed countries: India and Russia.

Turns out India does not allow direct foreign investment in their retail sector, so Wal-Mart is not going to participate in that country’s growth any time soon.

But Russia is wide open, and Wal-Mart looked closely there, and was about ready to go…but pulled back following Putin’s hostile takeover of Yukos, the country’s largest oil producer.

As Jay summed up the Russian government’s hostile attitude toward capitalism: “they see a good business—they want to nationalize it.”

Putin might get away with taking whatever he wants to take—a couple of weeks ago it was a newspaper; before that it was a TV station and an oil company. He’ll certainly get even more rich and more powerful than he already is.

Meanwhile, great companies like Wal-Mart with the cash and human capital that could have provided an invaluable engine of growth for the poor shlubs who live under Putin (male life expectancy: 59 years) are investing their money and their knowledge elsewhere.

The Russian Crisis of 200X approaches.

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.

Patrick Byrne is one clever fellow.

The voluble, erudite CEO of Overstock.com has a way of presenting himself at conferences that appears reasonable, informed, and responsive to questions—even when he is saying nonsense.

I saw Doctor Byrne two weeks ago at the Bear Stearns technology conference—the summer kick-off for tech investors at the Grand Hyatt in sweltering New York City. I don’t know why, but New York City weather is always especially miserable during Bear Stearns; nevertheless, the conference always brings together a worthwhile variety of interesting companies with plenty of opportunity to for Q&A.

After all, nobody wants to go outside the building in that kind of heat.

Thus it was that I found myself in the Schubert Room of the Grand Hyatt, listening to the CEO of a public company—namely Patrick Byrne—repeat a false rumor about eBay and Yahoo rather than answer a question.

The question he didn’t answer was about what it might mean to Overstock’s faltering auction effort that Yahoo had waived listing and transaction fees on its own auction site.

“I’m surprised” at Yahoo’s moves, Byrne told the small room of investors, before cleverly shifting everybody’s attention away from the actual question—that is, how Yahoo’s moves might affect Overstock—by saying the following:

“The scuttlebutt in the industry is that there was a private understanding” between eBay and Yahoo, “where eBay would leave Yahoo alone in Japan and Yahoo would leave eBay alone in the U.S.”

Having grabbed everybody’s attention with a fake rumor that had no bearing on the actual question, Byrne repeated the rumor that there was some kind of illicit under-the-table deal between Yahoo and eBay, and concluded the non-sequitur by saying, “The rumor is that goes back five years or so.”

Then it was on to the next question, and yet another non-sequitur—this time intimating that Overstock is an acquisition target, even though the next question wasn’t about Overstock itself being acquired (it was, as I heard it, about whether further eBay-for-Shopping.com-type acquisitions are likely in the industry):

“The number of phone calls I get where it sounds like that’s what’s on people’s minds [acquisition of Overstock] is starting to pick up…” Byrne said. “But I’m not interested in selling at anywhere near this price.”

All in all, during both his Ballroom D presentation and his Schubert Room Q&A session, Byrne made a money-losing hodge-podge of backwater technology (“We got to where we are on a shoe-string”) supporting me-too jewelry/auction/travel offerings sound vaguely sexy, alluring, and ripe for a takeover—while deflecting one of the better questions by repeating a false rumor.

Meanwhile, he casually dropped a bomb that nobody in the Schubert Room seemed to grasp—probably because they were still fantasizing about the takeover inquiries Byrne intimated he was starting to get.

The bomb being Overstock’s cost of acquiring new customers—which is, to continue the metaphor, exploding.

Overstock’s cost of attracting new customers (called CPA), hit $21 in the first quarter of 2005: asked about this, Byrne—who has always focused Wall Street’s Finest on Overstock’s low CPA—talked about the rising costs of attracting customers and said:

“I don’t want to chase it [CPA] over the mid-$20’s.”

This is the same man who 24 months ago bragged, “we basically have the lowest customer acquisition cost on the internet,” when the CPA was $8.69 per customer.

This is the same man who explained away an $18.30 per customer CPA in October 2004 by saying “remember, we’re coming into the fourth quarter…I suspect that you see it drop.” The same man who called that $18.30 CPA “the high end of respectable.”

Now he says he doesn’t want to go over $25?

As usual, Byrne had a ready comeback to the notion that maybe $25 a customer is not economic:

“We’re getting a lot more lifetime value in a customer.”

Right. Okay, Patrick. Whatever. I didn’t want to disturb the fantasy by reminding Byrne that large catalogue retailers view $2 a customer as a reasonable CPA.

Oh—one thing more.

Shortly after the Overstock Q&A broke up, I had the chance to ask somebody about Patrick’s “rumor.” That somebody was Rajiv Dutta.

Rajiv is the CFO of eBay, and he happened to be conducting a Q&A about an hour after Doctor Byrne. So I asked Rajiv about Doctor Byrne’s rumored illicit agreement between two of the most successful companies in the world.

After smiling with incredulity as I read him Byrne’s absurd remarks, Rajiv became sober and firm: “There is no agreement, tacit or otherwise,” he said.

His face hardened: “this is an extremely competitive market,” he went on, getting very sober and very firm. Leaving no doubt that eBay and Yahoo were engaged in a high-stakes internet version of Mortal Kombat, Rajiv added, “If we see them doing something well, we will look at it.”

I left the Grand Hyatt for the hazy, hot and humid streets of New York, debating which guy to believe: Patrick Michael Byrne of the tripling customer acquisition costs and the “decrapitating” technology and the $7 million diamond “steal of a lifetime” and Project Ocean and Project Rocket and Project Whatever…or the CFO of one of the most successful Internet companies ever.

It wasn’t much of a debate.

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.

“It seemed to us he [ex-Tyco CEO Dennis Kozlowski] told a few lies.”–Tyco juror.

What they told analysts about distractions caused by the break-up plan:
2/6 “A nickel or so” per share from “distractions.” Ship is in “good” shape. “Now back to spending time with people and customers, to crank out earnings and cash flow.”
2/13 “Other sides of business [outside electronics] have recovered and are doing well.”
2/19 “No incremental adverse competitiveness seen from any [healthcare] competitor.”

What they said upon announcing how distractions hurt earnings (4/25)
“We had many concerns by customers and employees… And, as I saw this first-hand and spent most of my time visiting with customers, visiting with employees, the shock, the dismay that we were putting the organization through made us recognize we did make a mistake here….Many units suffered productivity declines due to volume issues as well as just simply losing a bit of focus.”

3. Healthcare Business
What they told analysts about the strength of the healthcare business:
1/15 “Revenue growth [in healthcare] is not sensitive to the economy.”
1/15 Margins for healthcare “will go up.”
2/6 “All other businesses continue to show good growth, particularly healthcare…”
4/2 “Our healthcare business and fire and security continue to perform well.”

What they said upon announcing weaker-than-expected healthcare results (4/25):
“Our major competitor had played some havoc within the healthcare customers…We did lose some business at the same time.” “We had difficulty within the last quarter and some pricing pressures in order to hold on to customers.” “Our competitors…charged in and tried to take advantage. We certainly lost business.”

4. Goodwill Impairment

What they told analysts about not taking a goodwill charge, particularly in telecom:
2/19 “Impairment review should be done…end of March. We are not expecting impairment.”
3/19 “We are not looking at an FASB 142 impairment charge on goodwill.”
3/16 “I continue to believe there will not be a charge…”
4/2 “I will reaffirm…that there will not be an impairment charge on goodwill… The reason for that…we paid very reasonable purchase prices for those businesses, and the same can be said looking at even the electronics business.”

What they said upon announcing a large goodwill impairment charge (4/25):
“The vast majority of the [$3.3 billion impairment] charge is the result of the fierce decline in the electronics and telecom markets.”

5. FY 2002 Free Cash Flow Guidance

What they told analysts about FY 2002 Free Cash Flow:
1/15 “Free cash flow exceeding $4 billion [in 2002].”
2/19 “As we look here right now we’re able to make very clear we’re able to get to the $4 billion.” “We’ve always been conservative on the guidance we’ve given on cash flow, regularly we have far exceeded the guidance we’ve given.”
4/2 “As I have said over the past few weeks, based on January and February’s numbers, we see no need to revise earnings or cash flow guidance for the quarter.”

What they said upon announcing weaker than expected free cash flow guidance (4/25):
“We do believe that our free cash flow estimate for the full fiscal year of ’02 is $3 to $3.5 billion.”

6. FY 2002 EPS Guidance:

What they told analysts about FY 2002 Earnings Guidance:
1/15 “Committed to full year earnings guidance of $3.70 per share.”
1/22 “We foresee strong earnings growth through then [2003]…”
4/2 “As I have said over the past few weeks, based on January and February’s numbers, we see no need to revise earnings or cash flow guidance for the quarter.”

What they said upon announcing weaker than expected earnings guidance (4/25):
“Including the impairment charge and other unusual items, I expect [FY 2002] earnings to total around 98 cents to $1.08 per share. Excluding these items…$2.60 to $2.70 per share.”

Like barking seals clapping their flippers when fed baitfish by their trainer, the Wall Street analysts have, for the most part, accepted the steady diet of disappointing news with remarkable aplomb and sustained zeal for Tyco stock.

“We reiterate our buy” is a phrase that appears in the First Call notes of the analysts following Tyco with almost as much regularity as “We reduce our price target.” Bob Cornell of Lehman takes the cake: after steadily reiterating his buy while taking numbers down, he recently cut his price target on Tyco stock from the nicely round $100 per share to the equally clean $50 per share, just like that. Overnight. Oh, by the way: Lehman Brothers is acting as an underwriter of the CIT initial public offering.

These professionals don’t seem to understand the lessons of Enron. It is no longer enough to accept at face value the numbers typed into a press release or the soothing, upbeat words of a conference call, nor is it deemed “analysis” to repeatedly recommend a stock whose management the bankers are courting for a deal and whose fundamentals are deteriorating. Enron bull Curt Launer of CSFB appeared before Congress and said, in effect, “I can’t do my job if the company doesn’t give me the right numbers.” And he was laughed at, for he is supposed to be an analyst, not a stenographer.

This is serious stuff—this is people’s retirement accounts and pension plans. It is college educations going up in smoke. The analysts who can, with a straight face, accept the kind of spin practiced by so many companies—and recorded above—are risking severe professional liability by accepting spin at face value, without due diligence of their own.

For we have seen that “spin”—the art of putting a good face on potentially bad news—can become what lawyers and Attorneys General regard as “lies.” And this usually happens when the spin stops working—as when Enron’s stock fall triggered the hidden liabilities which blew apart what good spin and a thousand press releases had kept together.

Thursday’s conference call should be interesting. Let’s see if Tyco’s spin is still working.

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’ve never understood “The Lady is a Tramp.”

The lyrics to that brassy Rogers & Hart tune made famous by Frank Sinatra, if you actually listen to them, ascribe to “The Lady” such qualities as one associates with a person of some social standing and breeding—not actual tramp-like qualities:

“She loves the theater, but doesn’t come late…” “She’d never bother with people she’d hate…” “Doesn’t like dice games with sharpies and frauds…” “Won’t dish the dirt with the rest of those broads….”

Seems to me the lady is a class act.

Nevertheless, those are the lyrics that Frank Sinatra made famous, and that is the song he sang for the first record printed on The Beatles’ brand new Apple Corps label back in mid-1970.

The story, as told in Tony Bramwell’s “Magical Mystery Tours: My Life With The Beatles” (which is a must-have book for Father’s Day, assuming you are a father and a Beatle’s guy), goes like this: one of the Beatles’ people decided it would be fun to have a new version of “The Lady Is A Tramp,” with lyrics slightly altered, sung by Frank Sinatra himself and presented as a birthday gift to Ringo’s wife, Maureen.

I’m not sure how Maureen felt about it, but since, back in those days, anything The Beatles wanted they could pretty much make happen, it happened exactly that way: Sammy Cahn rewrote the lyrics, Sinatra himself recorded the song, and one copy was pressed using the very first Apple Corps label and presented to Maureen.

Which makes “The Lady is a Tramp” the first printing of a record on Apple, before “Hey Jude.”

With important issues like this out of the way, on Monday we will return to current events—including an office furniture company that appears to offer good long term value, and the latest antics of our favorite CEO-of-a-money-losing-Internet-company, who used the recent Bear Stearns conference to repeat a false rumor about his two biggest competitors.

In the meantime, is it just me or does it seem pathetic that Washington is debating the existing of global warming while—as reported in today’s Wall Street Journal—glaciers in the Peruvian Andes are melting away at a thirty-feet-a-year rate—and they’ll be gone as quickly as 40 years from now?

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 you’re a father and a Beatle’s guy, there is no better book to ask to get on Father’s Day than Tony Bramwell’s recently released “Magical Mystery Tours: My Life With The Beatles.”

Bramwell grew up with George Harrison and worked for Brian Epstein during the years Epstein discovered and managed the group, and stayed on with them through the break up—doing tasks as grand as handling radio promotion for new Beatles songs and as mundane as being asked by John to go fetch his belongings from Yoko’s flat when John had determined to break off their affair. (Yoko wouldn’t let Bramwell in the building; John eventually returned to her.)

Bramwell saw it all, from beginning to end, which makes this book much more interesting than all the other Beatles books out there.

“The Sun Also Rises,” this is not: repetitive, longer than necessary, and written more in the manner of a guy sitting in a pub telling the stories…nevertheless, “Magical Mystery Tours” has a tremendous amount of stuff in it that you never knew.

What’s really interesting is how the band became a sensation in the first place. This was no “boy band” put together by some impresario and given a TV contract and vocal lessons. These guys worked like dogs, and before they broke in America they had created a buzz at every gig they played.

Bramwell describes nitty-gritty you never knew, including the disguises they wore and deceptions they used merely getting into and out of the theaters they were playing in Britain, without being torn apart by screaming girls—and this was years before Ed Sullivan made them bigger than Elvis.

The other interesting stuff here is how the boys actually lived after they stopped touring and were cranking out albums in Abbey Road. Girls camped out on the sidewalks in front of Paul’s house for months on end, climbing in unlocked windows and making themselves available (many eventually worked at Apple Corps, The Beatles’ own record label); while John holed up in his house—a fairly miserable character, knowing not much else besides getting high and writing and recording songs.

And for those of you who always blamed Yoko for breaking up The Beatles, even after these twenty-plus years of sympathetic revisionist history since Lennon’s killing, well, you were right.

Yoko does not come off well here—I’ll leave it at that.

But I do not want to spill all the beans, so I’ll just leave you with a trivia question to which you will not know the answer, unless you read this book or you’ve in fact spent evenings sitting in a pub with Tony Bramwell:

“Hey Jude” has always been called the first record printed and released on Apple Corps, The Beatles’ record label. But it was not. It was actually the second record printed under the Apple label.

What was the first record printed by Apple, and who sang it?

Jeff Matthews
I Am Not Making This Up

We have plenty of evidence there’s a large amount of speculative activity going on in the real estate markets. The issue is where.

Like the Internet Bubble of 1998-2000, the real estate speculation is concentrated in certain markets—Las Vegas being the most visible, but also Phoenix, Austin, and anything near water, on either coast.

The best example of this tale of two markets comes from one reader, who tells of how lousy the housing market appears to be in her home area of suburban St. Louis—with “New Price” (real estate-eze for “Lower”) signs sprouting up outside stale homes for sale…

Meanwhile, on the Carolina coast, a piece of land she purchased two years ago went up something less than 50% the first year…and more than doubled in the last twelve months.

There was a time in 1999 and 2000 that you couldn’t pay enough for a money-losing internet stock, and you couldn’t give away a highly profitable monopolistic newspaper stock, because newspapers were part of the “dead-tree press” that was going to be made obsolete by those internet companies.

In fact, one newspaper chain—Central Newspapers—put itself up for sale precisely because the Trustees that controlled the voting shares of the company, had decided the internet represented precisely the threat to the business that was the sole reason the Trust could allow a sale of the company, and Gannett bought it for a huge price.

(Ironically, now that the newspaper stocks have all recovered from those “dead-tree press” fears, the newspapers are in fact being driven slowly out of business by the internet.)

There was a lot of value outside the dot-com “space” in those years, just as there are housing markets unaffected by the speculators crowding the tables at Vegas, Phoenix, Atherton, Charlestown, West Palm and other real estate casinos.

When raw land in a sweltering environment with mosquitoes the size of small dogs goes up 50% in one year and then doubles the next …that is 1999-2000 dot-com blow-off type stuff.

Keep your wits about you even while Time Magazine encourages others lose theirs.

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’m not going to leave the Time Magazine “Home Sweet Home” story just yet: the feedback is still coming in, and it is interesting.

We have this from the California Association of Realtors: the percentage of San Diego County households able to afford a median-priced home was 10% in April. Statewide, just 17% of California households are able to afford a median-priced house.

And there is this from a downsizing family having trouble selling their house in an enclave of Connecticut: the house is, they are finding, too nicely maintained to be a tear-down, but not up-to-date enough with all the modern conveniences (granite counter-tops, cathedral ceilings, Sub-Zero freezers) that the McMansion Crowd has come to expect.

They’ve had more than twenty lookers and no bids, while, just down the street, poorly built McMansions are going like, well, eToys in 1999.

Finally, a glance at the NASDAQ chart in the months following Time Magazine’s other hair-raising mania-marking cover story (on the dot-com frenzy in September 1999) reminds us that the NASDAQ stood at roughly 2,700 the week Time published “Get Rich.Com” on the front cover…and proceeded to nearly double before peaking out at 5,000 the following spring.

We may yet have a long way to go before the greater fools in the real estate frenzy have gone “all in,” so keep those cards and letters coming!

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.