Month: October 2005

S.E.C. Accuses Hedge Fund of Deceiving Its Investors

So reads the headline in today’s New York Times, and so the Feds, arriving at the farm in Ketchum, Idaho, prepare to securely close the barn door after the horse has scampered out over the north forty, splashed across the Wood River and made its way to the freedom of the mountains beyond.

“There was no effective oversight of the investment manager and no effective control or checks on his [John Whittier, manager of Wood River Capital Management] actions,” said Peter Bresnan, associate director in the enforcement division at the Securities and Exchange Commission.

As opposed to the effective oversight and effective control at, say, Refco—which had real auditors, unlike the fake ones employed by Wood River (identified by Whittier as “American Express Tax and Business Services” although that firm does not perform audits)—and real investment bankers and real SEC-filed documents detailing everything except what the CEO wanted the auditors and investment bankers and the SEC to find out.

Add Wood River to the list of hedge funds with the bucolic names (Bayou among them) and the hellish business model that no amount of supervision from above could prevent, given bad intent by the likes of John Whittier and Phillip Bennett, and the rest.

How forcing all hedge funds to register with the SEC—the very same entity that missed the massive alleged fraud at Refco and is now searching vainly for what caused the barn door at Wood River to be left wide open in the first place—is beyond me.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

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 question is whether anybody will want to watch videos on a small screen like that.”

Flicking back and forth between the two baseball games last night I chanced upon a news clip of Steve Jobs, pacing a large stage and holding aloft the new video iPod for the adoring Apple fanatics, while a 55 year-old newscaster solemnly reported on some facts and figures regarding yesterday’s stock market reaction to Apple’s earnings report.

Then the solemn 55 year-old newscaster pronounced, quite rhetorically, his question of whether anybody will want to watch videos on a small screen like that.

It cracked me up, having just come from the café of our local Borders, where, in the course of doing some work on my wireless, I had observed a pair of students hunched over a “small screen like that”—in this case, a cell phone—playing some kind of game for an hour while their books (this particular Borders is a mile from the nearest university) sat opened and unused on the table.

And that, oh solemn 55 year-old newscaster, is why anybody will want to watch videos on a small screen like that.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

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.

Microsoft, Yahoo Plan Instant-Message Pact

Quite the dramatic headline in today’s Wall Street Journal. You’d think Microsoft and Yahoo had discovered oil and gas on the Internet.

Internet users have long complained that they can’t get their instant-messaging services to talk to one other. That is about to change.

Isn’t this exciting?

In a competitive realignment of the heated Internet industry, Microsoft Corp. and Yahoo Inc. are expected to announce today that consumers using their free communications services — including instant messaging and computer-to-computer voice calling — will be able to communicate directly with each other for the first time, say people familiar with the matter.

Now if indeed anybody actually used Microsoft and Yahoo’s Instant Message service, this might be big news.

The expected alliance represents a breakthrough in the fractured market for instant messaging…. In the past, consumers using Yahoo’s Messenger instant messaging could communicate only with other Yahoo users and not with those using instant-messaging software from Microsoft or others; the same restrictions applied to those who used Microsoft’s MSN Messenger instant-messaging software.

The fact is, however, I know exactly one person who uses “Microsoft’s MSN Messenger instant-messenger software,” as the WSJ calls it. Just one—compared with the 56 individuals who are, at this moment, working online according to my AOL Buddy List, not to mention the other 64 who are offline at the moment.

But you wouldn’t know that almost nobody actually uses Microsoft or Yahoo’s IM from today’s WSJ story:

The expected linkup of Microsoft’s and Yahoo’s communications services would immediately challenge the leading instant-messaging market share of Time Warner Inc.’s America Online unit.

AOL has a 56% market share world-wide, according to research firm Radicati Group Inc. It has long resisted letting users of other instant-messaging services connect with its own. A combined Yahoo and Microsoft could command 44% of the global instant-messaging market…

That is, as they say, corrupt data, as my daughters and their six million IM-dependant friends could have told the Journal reporter.

For example, I actually do have Microsoft Messenger on my home computer.

But I never asked for it. Rather, Microsoft Messenger insinuates itself on anybody who uses Microsoft’s email product. Every time my computer boots up, Microsoft Messenger is there, lurking, like an Amway salesman in the driveway.

And I ignore it, like I ignore that Amway salesman, hoping it will go away.

The trouble is I actually know one person who uses Microsoft Messenger, and therefore I keep it there, just in case he pings me, which happens once a week or so.

Meanwhile, at this very moment, my IM icon is flashing with the messages of a half-dozen individuals who, like myself, find instant messaging to be far superior to working the phones.

So Microsoft and Yahoo can combine their two instant-message services, and on paper it might show they command a 44% market share “of the global instant-messaging market” on paper.

But in the real world, this alliance looks to me like another one of those high-tech alliances we read about from time-to-time—like Sun Microsystem’s “alliance” with Microsoft, or Google, or whatever successful company Sun is trying to attach itself to these days.

Which is to say, nothing important.

Why, I haven’t even gotten an instant message about it this morning.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

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.

Office Vacancies Hit 3 ½-Year Low; Rents Rise

Vacancies in the nation’s office market fell to their lowest level in 3½ years in the third quarter while rents rose, a new survey said….

Effective rents — the amount of money a landlord takes in after factoring in concessions to tenants — rose for the third-straight quarter, heading up 0.8% to $20.41 a square foot from $20.24 in the second quarter. That is doubly good for office owners because asking rents went up just 0.6% in the quarter. That means landlords are dropping the concessions, like free months of rent, that they have used to lure tenants for the last four years.


So reports today’s Wall Street Journal, and to the facts it contains I can testify, based on the following excerpts from a letter, just received, from my office manager:


Some of you have had no increase in rent or service charges for three or four years… As I look ahead, I must candidly advise that we will begin implementing periodic rent and service charge increase to offset rapidly increasing expenses in each of the following areas:

1. Base Rent: Our rent to the landlord increases periodically….

2. Building Expenses and Real Estate Taxes: The building’s operating expenses (including electricity) and property taxes have risen rapidly and are likely to increase further…..

3. Healthcare Costs: Personnel costs are now much higher, largely due to increases in healthcare costs….

4. Consumables: Everything from coffee to tissues is more expensive today.

These trends should not surprise anyone…. My plan is to establish a pattern of reasonable periodic increases to stay ahead of rising costs.

I have no complaints: our office manager is both personally a very nice man, and also a very fair and responsive businessman. The letter is, as he himself is, straightforward and plainspoken.

Consequently, it is hard to argue with, so I will, of course, pay the “periodic rent and service charge” increases.

There is no arguing the fact that I have not had to pay such increases in the last few years, nor is there a debate about the rising real estate taxes, higher healthcare costs, and even the price of coffee.

My only argument is in that last paragraph—“These trends should not surprise anyone.”

Surely there is a long bond holder out there who hasn’t yet gotten the memo.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

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.

“Raunchy, but funny.”

That was what my older daughter said last night in answer to my question: “How was the movie?” that she had just seen with some college friends.

What struck me was not that she had seen a “raunchy” movie—I’ve made the mistake of actually going with her to a few of the Ben Stiller/Will Ferrell-gang mega-hit movies over the last couple of years, thinking maybe I’d see something other than a Saturday Night Live sketch stretched into a movie with some gratuitous breasts-popping-up-randomly-during-the-slow-bits action and the inevitable zipper-getting-stuck routine that seems to be the foundation of all teenage humor, but to no avail. I find them occasionally funny and mostly harmless.

And, well, raunchy.

And that is precisely what struck me: that the word she had used—“raunchy”—told me everything I needed to know about the movie. Just two syllables described an entire hour and a half movie in way that I understand exactly what kind of movie she’d seen.

My online dictionary shows over fifty alternatives to the word raunchy, ranging from “awkward” to “vulgarian,” as follows:

Rude:
base, bawdy, blue, boorish, brutish, cheap, common, crass, crude, dirty, earthy, filthy, foul, foul-mouthed, gross, gruff, immodest, impolite, improper, impure, incult, indelicate, inelegant, loutish, low, lowbred, mean, nasty, obscene, off-color, offensive, raffish, raunchy, raw, ribald, rough, roughneck, rude, scatological, smutty, tacky, uncivil, uncouth, uncultivated, uncultured, unrefined, vulgar, vulgarian

Vulgar:
awkward, backward, barnyard, boorish, cheap, cloddish, clumsy, coarse, crass, dirty, earthy, filthy, foul, grody, gross, ignorant, ill-bred, indecent, indelicate, inelegant, insensible, lewd, loud, loud-mouthed, loutish, lowbred, obscene, raunchy, raw, rough, rude, savage, smutty, tacky, tactless, uncouth, unpolished, unskillful

— Roget’s New Millennium™ Thesaurus, First Edition (v 1.1.1)Copyright © 2005 by Lexico Publishing Group, LLC. All rights reserved.

Now, “crude” and “foul-mouthed,” along with “smutty” and “coarse” might have been accurate, but would imply the movie had nothing else going for it.

And “filthy” would be too strong for a college student’s experiences, while “dirty,” “raw” and “rough” would have implied a harsh quality the movie clearly did not possess.

“Rude,” on the other hand, would suggest the movie gave offense, which it clearly didn’t—likewise “indecent” and “obscene.”

“Inelegant,” “insensible” and “loutish” are not even close, suggesting as they do that the movie-goer expected to find some sort of redeemable feature in the flick, which is clearly not the case.

No, I don’t see a single word out of those fifty-plus that could have described the movie’s entire sensibility the way “raunchy” does.

Which is, in and of itself, interesting, or notable, or just kind of cool.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

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 appears to be true: as reported elsewhere on this blog by a sharp-eyed reader, Shawn Schwegman, “the best CIO in America” (according to Patrick Byrne), is no longer listed as part of the “Management Team”on the Overstock.com investor relations web site. This comes exactly three weeks after the $30 million “inventory upload” because oops-we’ve-had-an-undisclosed-IT-problem press release.

Also, Patrick’s “Sith Lord” rant has been removed to a separate “lawsuit” URL on the site, for some reason, along with the CNBC appearances in which Patrick quoted from affadavits that appear not to have actually been filed in court yet.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

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.

Bain’s Fault or Bad Luck That KB Toys Failed?

That was the headline above an excellent Wall Street Journal article earlier this week, asking whether it was fair-play for private-equity firms to extract cash in the form of special dividends, funded by debt, out of companies whose business models don’t stand a chance of making it when their capital structure is loaded with that very same debt used to pay off the private-equity guys.

The article explained:

Bain Capital, a private-equity firm, took control of KB Toys in 2000 by putting up just $18 million. It financed much of the rest of the $302 million purchase price by loading up the company with debt.

KB Toys, as anybody who accidentally went into one of their stores remembers, was a mall-based retailer that had the misfortune of selling pretty much the same toys you could buy at Wal-Mart, only cheaper.

Debt-wise, the toy business is tough to manage, being highly seasonal—hence cash flows are not steady throughout the year, and if you miss the Christmas season, you die. In other words, it’s not the kind of business you want to leverage up.

Which is exactly what Bain Capital did.

It all worked out well for Bain Capital, which in April 2002 collected a $121 million dividend — a tenfold return on its investment in just 16 months, according to a court filing made by an unhappy holder of KB Toys debt.

KB Toys…couldn’t recover with so much debt on its hands. Its financial troubles worsened, and the company filed for Chapter 11 bankruptcy protection in January 2004.

So why rehash a days-old WSJ story?

Actually, I’m not rehashing an old story: I am previewing a story that I expect will appear in the Journal one fine day, perhaps a year or two from now—but maybe sooner.

The story that will be told is about how Orchard Supply Hardware Stores, an 84 store, California-only hardware chain acquired by Sears in 1996 (giving Sears a full nine years to screw it up), was loaded with debt, KB Toys-like, in order to pay a big fat dividend, Bain Capital-like, to the parent company at the behest of the controlling shareholder of that parent company.

To whit, Eddie Lampert.

If you’ve never been in an Orchard Hardware store, think of Orchard as the Sears or K-Mart of the hardware business, but operating solely in California.

During its public existence the company never quite managed the transition to the Home Depot-era of home centers, and was languishing when Sears came along in 1996 and paid about a quarter-billion in cash for it.

Thus, for the last nine years, Sears has been managing Orchard Supply about as effectively as it has been managing itself…which is to say pretty badly.

For some time, word has been that Orchard was on the block, and today we read that Eddie Lampert’s Sears Holdings is extracting a $450 million dividend from Orchard Hardware—funded by $405 million of debt and a $58.7 million investment in Orchard by Ares Management LLC, an LBO group out of Los Angeles.

The Sears Holdings press release reads, in part:

David B. Kaplan, Senior Partner of Ares Management, said “We are delighted to partner with Sears and the management team of Orchard Supply in this transaction which provides the business with both capital and sponsorship. We all share the collective vision that Orchard Supply is an exciting retail concept with strong growth prospects…”

As far as I can tell, the “capital” that “this transaction provides the business” is in reality all of $13.7 million, as follows:

$405 million New Orchard Debt + $58.7 Ares “Investment” – $450 million Dividend to Sears Holdings = $13.7 million of new “capital” for the aging Orchard store base.

That is hardly enough “capital” to give the all stores a fresh coat of paint, let alone make them competitive with Home Depot and Lowes.

If there are any people left in the Sears PR operation after Eddie’s house-cleaning, they could save themselves some time by preparing the future press release on the sad dénouement of Orchard Supply transaction, by which Sears Holdings loaded a pile of debt onto an aging retailer with a deteriorating market position simply because it could.

And the Wall Street Journal might want to keep that Bain Capital/KB Toys article handy, as a reference for past deals-gone-bad.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

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.

La-Z-Boy…today announced that one of its key suppliers of polyurethane foam has put its customers, including La-Z-Boy, on notice of allocation, due to the lack of availability of TDI (toluene diisocyanate), a key chemical component of polyurethane foam which is used throughout the upholstery and bedding industry.

—Company press release.

La-Z-Boy is not what it used to be.

The former champ of America’s den has been floundering for years, the result of a let’s-try-what-everyone-else-is-doing diversification outside the beer-drinking-and-football-game-watching demographic it once owned, and the rise of better run competitors such as Ethan Allen.

The company also said that this situation, coupled with the continued soft retail environment and damage to one of its plants by a tornado spawned from Hurricane Rita, will have a significant adverse impact on its results for the fiscal 2006 second quarter and potentially beyond.

The “soft retail environment” is understandable, what with the rise in the Fed Funds rate from 1% a year ago June to 3.75% today. But you wouldn’t think one little chemical compound could have such a huge impact on a company as this.

Kurt Darrow, President and CEO of La-Z-Boy said, “Several TDI suppliers have communicated that because of the effects of Hurricanes Katrina and Rita they have had to declare Force Majeure, a condition which allows companies to depart from the strict terms of a contract because of an event that cannot be reasonably controlled. As a result they will be limiting the amount of TDI they will be supplying which will limit the amount of polyurethane that can be produced.

We have been advised by one of our significant polyurethane suppliers to the La-Z-Boy® branded product of their industry-wide notice of an allocation of 50% of normal polyurethane supply. This situation will have a greater impact on us relative to the rest of the furniture industry given the higher percentage of upholstery in our overall product mix.”

Just two short weeks ago the bond market was screaming higher on jubilation (the bond market is a very dark beast, delighting as it does in horrendous economic news such as corporate layoffs and high oil prices and such) that the back-to-back hurricanes would surely cause the Fed to ease up on the interest rate pedal.

But to no avail.

Greenspan went ahead and raised rates for the 11th time in a row, and the two year treasury, which had dropped from a 4.15% yield pre-Katrina to a 3.75% yield post-Katrina, now stands at 4.18%.

Darrow noted, “Polyurethane foam, because of the volume of storage space it requires, is shipped on a just in time inventory basis and therefore our inventories of this raw material are very minimal. Each of our divisions has a different mix of polyurethane suppliers and finished goods inventories and thus will be individually impacted.

“We anticipate that the price of polyurethane will increase and that our production schedules at various plants will also be modified according to availability of supply. We will therefore work judiciously to minimize the potential interruption to our customers in all effected divisions by closely communicating with them to assess and balance their product needs to the degree possible.”

A friend of mine who runs a small consumer products company tells me how difficult it can be to run a “just-in-time” operation: a single supplier can screw up the entire operation—as it has in the case of La-Z-Boy.

It will be interesting to see who else is being hurt by lingering supply disruptions from two hurricanes which, according to the bond market, were going to diminish economic activity and, therefore, keep inflation at bay.

Just today somebody downgraded Lear, the large auto-seat supplier, on the same polyurethane concerns affecting couch potatoes around America.

Somebody should tell the bond market. This non-inflationary inflation could really start to snowball.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

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.

Microsoft Corp. has broken off licensing negotiations with the four global music companies, raising questions about the Redmond, Wash., software maker’s plans to start a subscription-based music service, according to people familiar with the talks…

According to the people briefed on the discussions, the negotiations broke down Friday over what Microsoft considered unduly high royalty rates [emphasis added] sought by the labels….

—Wall Street Journal

Yes, that’s right. Microsoft is complaining about “unduly high royalty rates.”

This from a company that has been earning “unduly high” margins on hacker-prone operating software that nobody actually likes to use from Day One—and getting away with it.

Now, I know a lot of people disagree with my view that Microsoft has a monopoly, and that Microsoft abuses that monopoly whenever a competitor introduces a better product—which is almost always—by either incorporating the offending function into its operating system or by coming out with a half-baked clone and giving it away at cut-rate prices.

(Just today I was writing a document in Microsoft Word and made the mistake of trying to switch the page numbering from the upper right header to the lower right header. I ended up with page numbers at both the upper right and lower right of each page. I could see no way to change this—the “help” function in Word is like a computerized version of the so-called “instructions” found on the back of an IRS tax form, but even more useless. I had to find an earlier version of the draft lacking the duplicate page numbers and rewrite the stupid thing. So much for Alan Greenspan’s famous computers-as-magical-productivity-tools theory.)

Still, I don’t begrudge Microsoft its monopoly. It was easy, and quite profitable, to short stocks of companies Microsoft was targeting back in the 1980’s and early 1990’s.

But those days are gone. Microsoft began losing its mojo along about the time the internet began changing the way people used their computers. Search, mapping, instant message—all these features have been pioneered by non-Microsoft companies. And the amazing thing is they remain the domain of non-Microsoft companies, because Microsoft can’t underprice free.

The lousy search function built into Microsoft Network, and the even worse instant-message function Microsoft keeps trying to foist on its users, are fooling nobody.

And now that Microsoft has clearly become an also-run in the department of downloadable music, the company is left to complain about the “unduly high” royalties being demanded by the music owners.

It’s like Darth Vader complaining about Luke Skywalker’s sword.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews 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.