Month: July 2006

Not quite a year ago, in the halcyon days when oil was trading at a mere $65 a barrel, I noted (in “Why We Have an Oil Crisis, Or; Wait ‘Til Chuck Schumer Gets a Load of This,” September 25, 2005) that British So-Called Petroleum was spending more on dividends and share repurchases than on finding oil.

Seven billion dollars more last year, in fact.

I am not making that up. The Investors Relations person of British So-Called Petroleum told a group of investors back then that it made no sense to plan its exploration spending based on $65 a barrel crude oil when everybody knows crude oil prices fluctuate—so BP was using a more conservative oil forecast when calculating where and how to invest its unstoppable cash flow.

How conservative? If you guessed $50 a barrel, you would be wrong. If you guessed $40 a barrel, you would also be wrong. Not even $35 a barrel would have been close.

No, the crude oil forecast British So-Called Petroleum was using in its forecasts was $20 to $25 a barrel.

I am not making that up, either.

I suggested that BP should change its name to “British Dividends & Share Repurchases,” my point at the time being that the energy crisis wasn’t like to end so long as the major oil companies felt compelled to return more money to shareholders than they spent exploring for new sources of crude.

Now, you might think that given, 1) the rising political heat, and 2) the fact that crude oil is now over $70 a barrel, the majors would have re-thought their low-prices-forever forecasts and started pushing the pencil on more expensive projects that would help bring more supply on the market.

But just last week, Exxon Mobil announced earnings, and while the headlines in the mainstream media all focused on the so-called obscene profits now falling into the lap of the world’s largest largest oil company, not much has changed: the world’s largest bank—er, oil company—spent $5 billion on capital projects, including oil and gas exploration.

But it spent $8 billion making its shareholders richer.

Personally, I think the U.S. government’s Detroit-Friendly energy policy of the last 30 years has been dead wrong, and we’re getting exactly what we deserve. The windfall profits tax stuff floating around Washington these days is the usual shoot-the-messenger grandstanding my own Senator Forehead, Chris Dodd, practices every time a crisis comes along.

But with Big Oil getting $70 a barrel and giving more of it to shareholders than to drilling companies…they’re asking for it.

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

When I was a kid, I knew how to be obnoxious—even if I didn’t know what it literally meant.

My sisters, who were both older and physically bigger than I, sat on either side of me in the back seat of the station wagon, and they made life miserable by hitting me whenever I crossed the weird plastic strips that defined the middle seat of those old cars.

This was in the days before SUVs gave everybody their own fully-reclining, climate-controlled entertainment center, with DVD players popping down from the ceiling and satellite radio on the sound system. It was even before seat belts became mandatory.

Hence, it was impossible for a squirmy kid not to cross one line or the other during the normal course of a ride. I was always getting whacked until the long arm of my father reached backwards over his driver’s seat, probing for the perpetrator of whoever was causing the muffled cries of pain.

Then I discovered the power of words, and learned that by being something called “obnoxious” I could make my sisters’ lives miserable for hours on end.

I didn’t actually know what “obnoxious” meant, but I was good at it. The best part was when they would tell me to “stop being obnoxious,” and I would say, “How can I be obnoxious when I don’t even know what it means?”

That especially drove them crazy—so much so that it was even worth the black and blue marks on my arms. Later, when I learned what “obnoxious” actually meant, I realized that as a seven year old I not only embodied it, I had defined it.

But, forty years later, I have discovered a new definition of the term “obnoxious.” It comes not from a seven year old kid in a car—not even from one of the gangly teenage boys with jeans hanging six inches below their Size 24-inch waists who mysteriously appear in my front yard waiting for my daughter to come out and go long-boarding.

It is this: lady sitting in coffee shop dictating notes into her computer.

The lady in question is not sitting in an isolated corner of the coffee shop, nor is the coffee shop itself devoid of other people attempting to work. Three or four individuals come here most mornings when the doors open at 6 a.m. to get coffee, plug in their laptops, connect to the wireless router and begin the day.

And today is no different, except that it is Saturday, and the lady in question is one we had never seen until she came in an hour ago, got a coffee, plopped herself down at a table smack in the middle of it all and opened a Dell laptop—one of the few Dell laptops which, based on the many web-cam videos zipping around the internet these days, are not spontaneously exploding on a desk while some guy who probably lives alone with his cats and writes feverish blogs DISCLOSING IMPORTANT INFORMATION THE GOVERNMENT HAS BEEN SUPPRESSING ABOUT NAKED SHORT-SELLERS AND AREA 59 happens to be filming it for immediate distribution on YouTube.

There was nothing unusual about this lady’s behavior…until she dug out of her briefcase a large air-traffic-controller style headset and put it on her head, and began dictating into her not-exploding-yet Dell laptop.

Now, this coffee shop is not exactly the best venue to dictate things, if for some bizarre reason you feel the need to dictate instead of typing with your fingers, which even Size 24-inch waist teenage boys can do. It is noisy. James Brown plays over the coffee shop speakers, espresso machines hiss and people stand in line talking. So anybody needing to dictate rather than type couldn’t dictate quietly if they had the basic decency to do so, which this lady does not: she must speak LOUDLY so her still-not-exploding Dell can hear her.

Not only must she speak LOUDLY, she must speak CLEARLY and ENNUNCIATE her words for the computer software program, the designer of which should be forced to sit next to her for the rest of his life, or until the Dell laptop explodes and kills her and him both.

Not only does she speak LOUDLY and CLEARLY and with good ENNUCIATION, she frequently inserts a COMMA or a BACKSPACE into her text. And sometimes she says SCRATCH THAT.

Now, I can get a lot of work done in a crowded coffee shop: the noises all blend together and there’s something about the background buzz that makes it easy to focus. But not when somebody is saying things like COMMA and BACKSPACE and SCRATCH THAT very LOUDLY and very CLEARLY, with very good ENNUNCIATION.

So I quickly resorted to Plan B, which is my version of noise-cancellation technology that always works in a pinch: headphones plugged into an iPod, with Arctic Monkeys played loud.

But if anybody knows the secret code that makes a Dell laptop spontaneously explode while some guy who lives with his cats films it for YouTube, please email me a copy so I can insert it onto her machine while she’s up at the counter getting another blueberry muffin. (Apparently, speaking LOUDLY and CLEARLY and with good ENNUNCIATION for an extended period of TIME causes people to STUFF THEIR FACES with pastries).

Or maybe I’ll sit next to her and start dictating IMPORTANT INFORMATION THE GOVERNMENT HAS BEEN SUPPRESSING ABOUT NAKED SHORT-SELLERS AND AREA 59 into the flower vase on the table.

Yes, that would be obnoxious, wouldn’t it?

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

“What that means for investors is a very consistent, highly margined, very predictable cash-flow stream,” Glenn Christenson, chief financial officer, said in an interview. “We’ve been able to give guidance all the way out to 2007.”

—Barron’s, July 24

Thus the CFO of Station Casinos dismissed Barron’s concerns about whether the business model and share price of Station Casinos could endure a cyclical—or worse—decline in the as-far-as-we-know-still-booming Las Vegas economy, in an article called “Does the House Always Win?” published just this weekend.

When I see or hear that kind of unadulterated confidence in financial forecasts from a guy who ought to know better than to pretend to be able to predict precisely what the future will bring, good or bad, I buy it about as much The Beaver’s mother used to buy it when Eddie Haskell appeared at the door saying:

“Hello Mrs. Cleaver, that’s a beautiful dress you’re wearing. Is Wallace home?”

And sure enough, today I read that the very same CFO of the very same company is revising the “guidance all the out to 2007,” as follows:

Today:
The Company is also reiterating EBITDA guidance for fiscal 2007 of approximately $630 million to $670 million and updating EPS guidance to $2.53 to $2.95. This guidance assumes that the Phase II master-planned expansion of Red Rock opens in early 2007, and further assumes an effective tax rate of 37.2% and 61 million diluted shares outstanding.

May 4, 2006:
The Company is reiterating EBITDA guidance for fiscal 2007 of approximately $630 million to $670 million and updating EPS guidance to $2.65 to $3.05. This guidance assumes that Phase II of Red Rock opens in early 2007, and further assumes an effective tax rate of 37.2% and 63 million diluted shares outstanding.
While not a whopping reduction—EBITDA stays the same—the net earnings per share range declines at both ends, despite the boost from an implied acceleration in share repurchases.

So “Back in the Day” apparently no longer means “6 Months Ago.”

It means 60 days or less.

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

“Back in the day,” as an expression, is making a resurgence the origins of which I can’t fathom.

My daughter and her friends suddenly began using it a month or two ago, and this morning I saw it twice in the same article in one of the major-but-slowly-becoming-minor New York newspapers. (I imagine some character on South Park or Desperate Housewives has been using it as a catch phrase—the way most language gains broad usage these days.)

When my daughter’s friends use the expression they are not, I should point out, conjuring up images from early America or even the Eisenhower era. They are usually referring to as far back as, oh, six months ago.

In teenage-years, of course, six months does seem to pass in an agonizingly slow crawl, such that teens look forward to marking the half-years between birthdays in order to be able to round up their ages—15 plus six months becomes 16, 17-and-a-half becomes 18, and so forth.

Adults, meanwhile, begin to face their own mortality at warp speed, because six months goes by like a weekend. To those of us over 50, “back in the day” really does mean “back in the day.”

In any event, back in the day—and by that I mean 25 years ago—Caterpillar Tractor (“Cat” to Cramer’s Mad Money home-gamers) was what we called a classic cyclical stock in that it was perenially supposedly going to earn $5.00 a share in earnings next year. (Adjusted for stock splits, that old $5.00 earnings number equates to a mere $1.25 today.)

But “next year” never seemed to happen for Cat, at least not for many next years, thanks to persistently high interest rates and the rise in Japan’s Komatsu—which played Toyota to Caterpillar’s General Motors. In the face of eternal optimism from Wall Street’s Finest, Cat’s stock languished for, it seems, ever.

I remember those days because I had been given the responsibility for following Cat along with other construction and equipment companies, and Cat was the easiest company in the world to keep track of, because all you had to do was take last year’s reports from the Street, cross out the date and replace it with the current year, and you had a pretty serviceable piece on the company.

Then, the world changed—thanks, I think, to the collapse of the Berlin Wall, which set off a decade-plus worldwide construction boom and began to lift many formerly leaky cyclical boats. Cat’s management, sharpened by their battles with Komatsu, did better than most, steering the newly-sleekened vessel into uncharted waters of earnings well above the old $5.00-per-share glass ceiling and rewarding shareholders with a ten-fold increase in the stock price.

All of which came to mind this week on the heels of the Caterpillar quarterly earnings call, during which Cat management unreservedly expressed its view that the boom-times look set to continue, housing slowdown or not.

Said CEO Jim Owens right at the outset:

Bottom-line, we had a suburb second quarter. We raised our outlook for the full year and we don’t see 2006 as a peak.

This was followed by the investor-relations person’s similarly “upbeat” assessment:

Another interesting statistic…ROS [return on sales, or net margin] would be the best…for any full year since 1966.

To put 1966 into perspective — that was three years before man walked on the moon but unfortunately 20 years since the Cubs last appeared in the World Series; and as a Cub fan that’s a statistic I track.

This is the kind of high-fives chatter that makes somebody who remembers what “back in the day” actually means a little nervous.

It wasn’t that long ago—six months, in fact—that the CEOs of certain publicly traded homebuilders were declaring an end to the vicious housing cycles of years past and complaining about the benightedly outdated low P/E multiples Wall Street was according their stocks.

Check out the unadulterated bullishness expressed by D.H. Horton CEO Don Tomnitz in an earnings call “back in the day,” just six months ago…

January 19, 2006:

First, we would like to thank all of our employees for another great quarter. Specifically, we wish to express appreciation for our sales people for a fantastic quarter of sells relative to our competition. Your 19.2% first quarter sales increase is the leader in the clubhouse. D.R. Horton, America’s Builder, the largest homebuilder in America for the fourth consecutive year, continues to distance itself from the competition.

Our first quarter of fiscal 2006 was another record quarter as we once again generated double-digit increases in new sales orders, revenues, net income, and EPS, while continuing to expand our operating margins and growing our bottomline faster than the topline.

Now compare that to his more recent assessment of the company’s prospects, from just last week…July 20, 2006:
We would like to start off by thanking our people for their hard work during a time when the market conditions are more difficult in the homebuilding industry. We’ve experienced a changing home sales environment since the beginning of the calendar year which became much more evident during our third quarter.

The current housing environment is characterized by an increase in the use of sales incentives in certain markets, higher than normal cancellation rates, and an increase in the supply of new and existing homes for sale. It also reflects a decrease in consumer sentiment. As some home buyers are fence-sitters today pending price stabilization and respective markets.

There is more—much more—as follows.Here are comments from Tomnitz on Horton’s expected homebuilding unit sales for 2006…
Back in the day:

…part of the issue is…that we are staffed both on the homebuilding side as well as the financial services side, to close 58,000 units this year. And as Stacey has mentioned before, we will close 35 to 40% of those in the first half of the year and the remainder in the second half of the year.

And it’s not something that we can get day laborers to come in and do our work. We were staffed up to hit that 58,000 target, so we’re telling you at the end of the year when we close 58,000 units, our SG&A will be 10% or less.

Today:
And if you go back to fiscal year ’05 where we closed 51,172 homes, and we’re basically looking forward to this year of 50,000 homes then I think you can sort of back into our SG&A levels and our overhead and that sort of thing that were at fiscal year ’05, and clearly that’s what our goal is to get back to FY ’05 cost levels.
Now, I do not mean to pick on Mr. Tomnitz: his early-2006 bullishness was no more or less wild-eyed than any other homebuilding executive I heard on any conference call or read in any interview.And I do not mean to suggest that, at its current price, the shares of D.H. Horton are not of value. I only mean to point out how quickly things can change in a cyclical business.Here is his assessment of various markets, including California and Florida…
Back in the day:

We believe that if you look at California, that we have strong belief that our California margins will continue to exceed the Company average margins, which makes that a good investment for us. As we move money into that D.C. market and in the Florida market, those companies have consistently, over the last five years, earned a higher than average Company gross margin. And so as a result, we believe that as we move money into D.C. and Florida and the northeast that their margins will be every bit as good as we have been experiencing in California over the last four or five years.

Today:

California continues to get softer and incentives continue to increase. You can see by our sales decrease in Florida which has been a very good market, it’s 25% down. That market is still experiencing increasing incentives and even though our Arizona market, our Phoenix market was up 11 %, I can tell you that market is going to get softer going forward. So we’re looking at this future market with very very clear vision with no rose colored glasses on and we don’t want to paint a picture of anything else other than what we’re actually seeing in the marketplace out there. And if we’re going to get punished and we’re going to get pummeled because of the fact that we’re being more accurate than some people think we need to be, so be it.
Finally, his current overall mood…Back in the day:Right now we’re feeling confident…

Today:

…the market right now is weak. We think the market could get weaker going forward and …we’re going to position ourselves for a flat ’07 over ’06 and we’re going to assume that it even gets tougher in ’07.

And as you and I have talked privately one thing that I know, every time we’ve gone into a downturn in the homebuilding industry they’ve always been longer and deeper than we’ve all imagined so we’re preparing for the worst, and we think this one will be longer and deeper than just the last six months.

Which is why the unbridled confidence expressed by Caterpillar management on that equally cyclical company’s recent conference call would, if I owned the shares, make me nervous:

Well, certainly we have some of the strongest order backlogs we’ve had in modern history in the larger end of our machine and engine and turbine product line. So we like all of our products….

And the key market segments that we serve that we have been highlighting that we think have continued strength — like mining, global oil and gas and other energy sectors like coal and the Canadian tar sands — all tend to be relatively large end of the line oriented.

It seemed like it was only six months ago—that is to say, according to my teenager, “back in the day”— the homebuilders had the largest order backlogs in their history, too.Hey, it was only six months ago!

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Dell Expects Lower Revenue and Earnings Per Share in Q2
Friday July 21, 7:30 am ET

That’s the headline on the press release that hit the tape this morning, and it pretty much says it all: Dell, as we Wall Street types like to say in our sophisticated technical financial lingo, just puked the quarter.

Call me an irrelevant data point in a vastly larger scheme of things, but I can’t help think the root of the problem goes back not merely to the resurgence of HP under Mark Hurd, but to the collapse of Dell’s customer support—discussed in “Dell Screws Up a Good Thing” this past January.

The funny thing about that piece—aside from the huge volume of similar tales of woe from readers—was the call I received from a guy named Rob at Dell who wanted to make up for the whole experience by reimbursing me the hundred-plus bucks I’d spent getting the technical support Dell no longer wanted to provide, as well as giving me his direct phone number in case I needed any help in the future.

Rob was very nice, and it was very kind of Dell to reimburse me for the expense, but, not being a dog, I found it impossible to feel kindly toward Dell even after Rob’s nice call and follow-up emails.

Fellow dog-owners know that if Dell’s tech support people had abused my dog Lucy for five hours—keeping her on hold, switching her to another line, asking her to pay for tech support she’d already paid for—Rob would have only had to offer Lucy a Milk-Bone, or scratch her back, or smile, and Lucy would have instantaneously gone from Sulking Dog to Euphoric Dog, wagging her tail, rolling over, licking Rob’s face and generally promising her love forever and ever and ever until the end of time and beyond.

But people, unlike dogs, don’t forget so easily, and while I appreciated the hundred bucks and the direct phone number, it didn’t change a thing about my feelings towards Dell.

Interestingly enough, Dell’s efforts in adding people like Rob are mentioned in today’s release:

Dell continues to make significant investments in customer service and support capabilities. The company is seeing positive results and will continue to invest to drive a superior customer experience.

One more thing: unspoken in the press release is any impact from the current option-related problems engulfing many Silicon Valley companies. While Dell is not based in Silicon Valley, it has used options extensively as a key component of its employee compensation.

According to my Bloomberg, Dell spent more than $15 billion in the last four fiscal years buying back stock—yet fully diluted shares declined a mere 200 million shares over that time, thanks to the company’s willingness to dilute its shareholder base with large option grants. This is all perfectly legal, of course, but as options lose their place in the hearts and minds of investors, Dell may have to figure out a better way to keep costs down.

I suspect Dell’s problems are not over—no matter how many Robs they bring in.

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Also, on the Project Panama, I was wondering if you could talk about specifically what’s changed since the analyst day, when it seems like you were pretty confident in the timing, to now.

So asked one of Wall Street’s Finest on last night’s Yahoo! earnings call.

Or, I should say, lack-of-earnings call, because earnings per share for Yahoo! net of stock-based compensation—meaning real, live, actual, after-tax, after-employee-related expenses—increased a whopping penny from last year’s 10 measly pennies of real, live, actual, after-tax, after-employee-related expenses earnings per share.

That’s right: Yahoo!—which trades at a hyper-growth P/E multiple of 67—grew net earnings per share by 10%.

But the point of this is not to rehash the flakey “non-GAAP adjusted net income” measure preferred by the dot-coms, both those still alive and those long dead. It is to follow up on yesterday’s “Reading Between the Lines” by pointing out a more timely opportunity to read-between-the-lines, which was presented to us on last night’s Yahoo call.

It came early in the Q&A, when UBS’s Ben Schachter asked the question posted above, about the announced one-quarter delay in Yahoo’s “Project Panama,” the so-called “next-generation user experience” in search that had been expected shortly.

To Schachter’s question, the company’s Chief Operating Officer Dan Rosensweig responded with a hilariously “upbeat”—as Wall Street’s Finest love to describe things—assessment. Note how “extremely pleased” everybody at Yahoo! appears to be about the project:

On the question of Project Panama and the timing, Terry did mention today that we are going to move it a quarter away. We are two months further into the process. We’re actually extremely pleased with the process. We’re extremely pleased with the product, the stability, as you saw from the 175 advertisers who have a chance to see it and comment. We think we have picked the right feature sets; they are extremely pleased with it.

Did he mention that they are all “extremely pleased”?

You can imagine what went on during the pre-call prep among the top Yahoolians:

“Now, how should we spin this delay?”

“I was thinking, ‘We are disappointed but remain upbeat’?”

“‘Upbeat’ is good, but ‘disappointed’ is bad. Very bad.”

“Right. ‘Disappointed’ is extremely bad. How about ‘We are cautiously upbeat’?”

“No—‘cautious’ is bad.’ They hate ‘cautious.’”

“Right. Hate ‘cautious.’ And ‘upbeat’ sounds trite. How about ‘Pleased’?”

“Better yet, ‘Extremely pleased….’”

“‘We are extremely pleased…’”

“And repeat it at least three times, just so they get it.”

After using “extremely pleased” the required three times, Rosensweig then got down to cases, which is that Project Panama isn’t yet ready for prime time:

But as we got further along in the process, we wanted to make sure that we did it right. We don’t manage the company for a particular quarter, so we focused on making sure that we did all the necessary testing. We’re going through testing now. Things seem to be looking good. But we do, for example, over 20,000 different tests to make sure that these things are right, stable, it’s the right advertiser experience, the advertisers get what they expect. We would rather take the extra time to make sure that we do it right, rather than try to rush into a quarter. This, of course, remains our top priority.

Reading between the lines, I’d say the most interesting single qualifier is “things seem to be looking good.” Worse, this is followed by the factoid that Yahoo! is performing “20,000 different tests” on it.

If I had to make a bet, I’d bet Project Panama doesn’t happen even in the revised time-frame.

Is this life-threatening to Yahoo!? Maybe to the stock’s P/E multiple (and there has been at least one downgrade this morning), but not to the business. After all, nothing in life or in business goes as planned—stuff happens.

Stuff happens to Joe Blow and it happens to Wall Street’s Finest; it happens to bad companies I won’t name and it happens to great companies like Yahoo!

But why can’t anybody just ever come right out and say it?

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Barron’s had an unusual cover story not long ago. Instead of an interview with a hot-shot money manager or yet another story about the housing bubble, the paper asked, “Is Your CEO Lying?”

Given that Congress seems more focused on helping troubled CEOs shift the blame for self-inflicted problems onto short-sellers, Barron’s question was a helpful reminder that at the heart of the Enron, Worldcom, Tyco, Lernout & Hauspie and Media Vision collapses—just to name a few—were CEOs who blamed their declining stock price and negative news flow on, among other things, short-sellers.

And in each of those particular cases that CEO landed in jail.

The Barron’s article describes how some enterprising money managers are going beyond the classic forensic accounting techniques pioneered by shorts, and analyzing the “body language” and “non-verbal cues” of CEOs and CFOs to discern whether execs are telling the whole truth and nothing but.

That notion is not quite as groundbreaking as it sounds—hedge fund types and fast-money mutual fund managers especially used extensive, close-up Q & A sessions in their offices and at conferences to gauge management’s “body language” as long as I’ve been in this business.

Some friends think Reg. FD has made it useless to meet with management, owing to the fact that management is expressly forbidden to disclose any material information in private that is not shared publicly. In fact, some investors—and they get written up in Barron’s once in a while—say it’s better to invest strictly by numbers, instead of visiting their companies and looking the CEO and CFO in the eye, because management always sugar-coats the truth anyway.

Still, I find it still useful, for all the reasons Barron’s mentions. After all, Enron’s numbers looked great for a while. (I know a long-only money manager at a firm which puts prime importance on management meetings; he never owned a share of Enron because he had met Jeff Skilling twice, and didn’t trust him as far as he could throw him.)

So anybody who thinks it doesn’t pay to sit in a room with a guy and take his measure is not only missing one of best parts of this business—meeting the interesting and brilliant along with the scummy and the devious—but also the chance to read what’s going on behind the mask.

Now, it is entirely coincidental that Barron’s produced its “Is Your CEO Lying?” cover story two days before a product-recall conference call from Boston Scientific—the former high-flying institutional fave now lurking on the new-low list, owing to several not-meeting-the-number-related disappointments, an 11th-hour bidding frenzy for problem-plagued cardiac care giant Guidant, and product recall announcements that seem to be dropping like errors from the glove of A-Rod.

In light of the latest Guidant recall, I thought it might be interesting to apply some of Barron’s guidelines to the recent conference call. So let’s parse the highly regarded BSX CEO Jim Tobin’s opening comments on that call—courtesy of the indispensable Briefing.com—to see we can see.

Thank you, Larry. I appreciate everybody’s joining us this morning. What I’d like to do is just sort of give you kind of my impressions at the eight-week plus mark of sort of how we are doing here and how things are coming…

I guess basically the question that I get asked the most often is, are you surprised at some of the issues you are finding and are things going with way you expected them to? Are you having buyer’s remorse? You know, those kinds of things. Essentially, here is the deal.

Lots of qualifiers and verbal tics in there. “Sort of” appears twice, along with “just,” “I guess,” “basically,” “essentially” and “you know.”

We knew when we did our due diligence that the CRM business of Guidant had not had its last recall; we know that coming in. And to date we have seen issues that have arisen that were anticipated to arise…. This is not unexpected; actually, this is not our last recall, probably not anybody’s last recall. So from that point of view I would say that we are no better off, no worse off, than we expected to be.

Here he goes with a double-negative “not unexpected” and more qualifiers: “probably,” “to date” and “I would say,” which also starts off the next sentence:

I would say, though, the biggest surprise I’ve had has been around the people at Guidant and how many good ones there are…

Nice, patriotic, cheerleading—entirely setting up the heart of the matter, in my view:

I think the Guidant organization, and for that matter the world, seems to have bought into the idea that the events of last year [product recalls and FDA flaps] were essentially a communications problem, and that all we had to do was communicate better and that would be the end of it. In truth, there are deeper issues than that that will require time to address that lead to the problems that then have to be communicated.

Despite the qualifiers and double-negatives in the setup, Tobin identifies a deep-seated problem, and makes it very clear this is going to take time, although without getting into specifics of how the company will address the “deeper issues.”

So the program that we’re implementing here is aimed at getting to the foundation of those kinds of issues so they don’t recur and so that we can not have to be so good at communicating because we won’t have anything to communicate….

And I think that was somewhat of a new perspective to the Guidant organization, at least to large chunks of it. …

An interesting comment, aimed squarely at Guidant, which speaks volumes about the Guidant culture versus his company’s own.

But he attempts to answer the core question—‘if you could do it over…?’ with an upbeat assessment, as one would expect:

And last but not least, we like the technology, we like the market, we like the people, and we’ve got the technology it takes to be a leader in this space, and that is what we intend to do. So from my perspective we are about where we would have thought we would have been at this juncture.

Hardly a ringing endorsement for the deal—qualified as it is with “from my perspective,” “about where we would have thought,” and “at this juncture”—but what you’d expect from a man who recently committed $25 billion-plus for a fixer-upper.

Then Tobin veers from his straight-ahead approach and flips the blame from his shoulders to Wall Street’s Finest:

And that is not good news for people who were optimistic that I had a magic wand, but it is not bad news either. We are right where we expected to be…

That last—“we are right where we expected to be”—must have come as a surprise to more than a few listeners, because BSX shares sold off during the call.

Still, Tobin wraps up with a characteristically upbeat spin:

So I guess basically at the end of the day, I would say that Boston Scientific remains as optimistic and as confident that this is going to, in the long run, turn out to be a major positive strategic move, that it does all the things for us that we expected it would, and that people will wake up two or three years from now and wonder what they were worried about.

He ends as he started—with a lot of qualifiers: “So I guess,” “basically,” “at the end of the day,” and “I would say” right up front, not to mention using the institutional, impersonal pronoun, as in “Boston Scientific remains as optimistic…” rather than the more urgent and personal pronoun, as in “I remain as optimistic….”

Does Tobin’s language fit the skeptical question of Barron’s cover story? I don’t think so. I think his assessment is about as frank—without going into all the dirty details Wall Street might like—as could be expected from a man trying to meld two organizations while at the same time cleaning up what appears to have been a long-festering mess.

And, stock-wise, he may in the end be right: in two or three year this could look like a great buying opportunity.

But anybody who thinks it’s going to be easy getting from here to there isn’t reading between the lines.

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Courage!

What makes a king out of a slave? Courage! What makes the flag on the mast to wave? Courage!

What makes the elephant charge his tusk in the misty mist, or the dusky dusk?

—The Cowardly Lion

So Bert Lahr, in the guise of the Cowardly Lion, begins his famous self-motivational speech from the Wizard of Oz—the laugh-out-loud portion of a movie that otherwise scares the daylights out of kids and provides enough bizarre imagery to make adults wonder what kind of potent substances the director might have been using.

Which is probably why that scene came to mind yesterday while reading the latest press release from Patrick Byrne, the CEO of internet-based, negative operating margin-achieving Overstock.com, also known as an Anti-Naked Short Jihadist whose public obsession with a back-office administrative problem turned into a full-blown conspiracy theory involving hedge funds, journalists, and the so-called Israeli mafia, among others.

Byrne’s movement culminated recently in a highly publicized Senate committee hearing targeting all manner of supposed naked shorting manipulation, not to mention dire warnings of purported unchecked hedge fund “power” and “abuse.”

About the only thing the Senators and their star witnesses didn’t blame on hedge funds, to borrow a line from Peter Falk’s character in “The In-Laws,” was atonal music.

But the SEC knows where its bread is buttered, so to speak, and this week its Chairman, Christopher Cox, announced new rules designed to further curb so-called naked short-selling. According to Cox:

“There are still persistent failures to deliver in the marketplace, and some of that is undoubtedly attributable to loopholes in our rules. Today, what we’re moving to do is to close those loopholes.”

Now I am all for eliminating those loopholes. But, as far as I can tell, it won’t change a thing about the way every hedge fund I know handles its short sales.

That’s because, as I have written here before, every hedge fund I have ever known borrows stock before they short it.

The procedure is this: the hedge fund asks their prime broker whether a stock can be borrowed; if the broker locates a borrow somewhere on Wall Street, the hedge fund gives a trader the order to short the stock along with the name of the broker from whom stock has been borrowed. At the end of the day, when the hedge fund reports that short sale to their prime broker, the prime broker won’t book the trade if the stock hasn’t actually been borrowed.

No borrow, no short sale.

Thus, as anybody in this business knows and as the world’s most famous short-seller, Jim Chanos, will tell anyone who bothers to listen, there is no paper trail on Wall Street so clearly marked and so easily documented as the short-sale of a publicly traded U.S. stock.

Which means that the failures to deliver—gall and wormwood to the Anti-Naked-Short-Conspiracy-Theorists, who take them as a sign of hedge fund power, abuse, and market manipulation—must reside somewhere within the brokers themselves, not at the hedge funds who correctly borrow stocks before shorting them.

Nevertheless, the SEC’s belated efforts to tighten its rules generated headline news, including the press release in question, whose heading reads as follows:

Overstock.com Applauds SEC’s Courage in Addressing Naked Short Selling Issue

The body of the release contains the following words of wisdom and encouragement from Mr. Byrne:

“I congratulate the SEC for the courage they showed today, and I am grateful for the leadership of Chairman Cox. It is clear he understands the severity of the problem, and the Commissioners can be proud of the steps they are taking to end the blight of abusive naked short selling upon our capital markets.”

Exactly what sort of “courage” was required for Mr. Cox to tighten up the rules is beyond me. I suspect it is an allusion to the dark forces Mr. Byrne has, in the past, accused of arraying against him and his company.

Those dark forces include—in addition to the aforementioned Israeli mafia—the supposed Russian and Italian mobs, as well as unidentified “miscreants” who are “trying to get the FCC (Federal Communications Commission) to launch an investigation” and “trying to get the DoJ (Department of Justice) to investigate me” as he told Bloomberg television last year.

I am not making this up. “Some of the officials are monsters,” he also declared. “You’ll probably read a headline that I was stopped with drugs or a dead body.”

So I suppose Mr. Byrne thinks the SEC Chairman is taking his life into his hands by suggesting a few new regulations to tamp down naked short-selling, thus “courage.”

Given that the body count of past SEC Chairmen who likewise proposed previous anti-naked short-selling rules is fairly low—zero, by my count—I rank Mr. Byrne’s motivational speech right up there with Bert Lahr in his lion costume:

Courage! What makes a king out of a slave? Courage! What makes the flag on the mast to wave? Courage! What makes the elephant charge his tusk in the misty mist, or the dusky dusk? What makes the muskrat guard his musk? Courage!

What makes the sphinx the seventh wonder? Courage! What makes the dawn come up like thunder? Courage! What makes the Hottentot so hot? What puts the “ape” in apricot? What have they got that I ain’t got?

Whatever it is, it’s not courage.

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Personally, I think my headline is more on target than the one that actually ran in the weekend Wall Street Journal, above a story regarding the latest stock-option scam:

Can Companies Issue Options, Then Good News?

As reported, the story itself is straightforward:

New controversy is brewing over the way companies dole out stock options, this time over the practice of granting them just days before announcing good news — an effort to give executives a quick profit on paper.

Known as “spring loading,” such options grants have generated heat in recent days. While spring loading is different from “backdating,” another type of options timing, corporate critics blast it as a form of insider trading. Defenders call it a legitimate form of compensation — and their ranks include a commissioner of the Securities and Exchange Commission.

That last sentence is what gets me.

The fact that Boards of Directors are allowed, under the current rules, to help their pals in management get to G5 status faster by granting them options in front of good news is not nearly so alarming as the fact that an SEC commissioner sees nothing wrong with it.

The Journal duly reports that SEC commish’s logic as follows:

In a speech Thursday before the International Corporate Governance Network, Republican SEC Commissioner Paul Atkins gave a spirited defense of spring loading, calling it a legitimate and low-cost way for boards to efficiently compensate executives. He rejected claims that such awards amount to trading on inside information.

“Boards, in the exercise of their business judgment, should use all the information that they have at hand to make option-grant decisions,” Mr. Atkins said. “An insider-trading theory falls flat in this context, where there is no counterparty who could be harmed by an options grant. The counterparty here is the corporation — and thus the shareholders.”

I don’t know much about Mr. Atkins except he is a lawyer, and that may be everything you need to know. By focusing on “theory” instead of reality, Mr. Atkins has allowed himself to miss the point: this is insider trading, plain and simple.

But before we get into cases, let’s stop calling them “spring-loaded” option grants, because that makes it sound as if the economic payoff for the insiders is simply a bit more leveraged to a rise in the stock price than the payoff for other shareholders when the company announces the expected good news.

No, what has happened is the insiders have given themselves a larger slice of the shareholder’s pie when they know the value of that pie is about to increase. So let’s call them “front-running” option grants, because that is exactly what they are.

On its face, the ability of management to grant themselves front-running options violates the very SEC regulations Mr. Atkins has been sworn to enforce.

After all, Reg FD requires an even playing field for investors: no tips to Wall Street’s Finest; no wink-wink, nudge-nudge to Fido; no nothing to the big hedge funds prior to disclosure of market-moving news, good or bad. So why should management be able to front-run their own news flow?

Using Mr. Atkins’ lawyerly legalese, ipso facto, the thing stinks.

Furthermore, lawyer though he may be, Mr. Atkins’ defense of front-running option grants (that Boards “should use all the information that they have at hand to make option-grant decisions”) is flawed logic.

After all, if Boards are allowed to game option grants based on future news flow, they will give their friends in management option grants in front of good news and only good news. No way will they grant options in front of bad news if they can help it.

So you’ll have companies diluting any windfall accruing to their existing shareholders by granting options prior to all the good news, while forcing existing shareholders bear the full economic loss from whatever bad news comes down the pike.

Res ipsa loquitor, the thing stinks.

A Board of Directors that really wants to do its job and protect the economic interests of all shareholders should allow option grants on a specific date, same time every year, to all employees, no exceptions.

And if that same Board wants to take advantage of good news for the benefit of all, as Mr. Atkins would have us believe it is doing by granting front-running options, there is a much better way to accomplish this that appears to have escaped Mr. Atkin’s lawyerly logic: the company can buy back stock for the corporate treasury ahead of good news.

That’s good for the company, good for shareholders, and good for all the employees who hold options in the equity value of the company.
Anything less, and it becomes lex non distinguitur awop-bop-a-loo-mop alop bam boom.

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

The most amusing—and frustrating—part of watching the World Cup soccer matches is the way the players game the refs.

Two guys go up for the ball and invariably the guy who doesn’t get it collapses on the turf, rolls a few times while clutching some part of his body and screaming in pain, his face a contorted mask of agony that bespeaks a ripped tendon, a fibula snapped abruptly in two, or, at the very least, a painful gouge that has ripped out an eyeball and left it dangling from the socket.

The ref acts like he’s never seen a fake before: he blows the whistle and whips out the yellow card and holds it there like a proud first-grader showing his first report card to his grandparents.

Meanwhile, the chump who just got carded makes a face and pulls his sweaty hair out…while the player with the broken fibula gets slowly up on his feet, stretches once and then starts running downfield in about as much apparent pain and agony as the Road-Runner when he decides he’s had enough messing around with Wile E. Coyote and shoots off down the highway in a blur.

The fans get it—they either cheer or roar disapproval, depending on their team. The announcers—I watch the games on Spanish TV because the ESPN coverage is so lame—actually laugh. And the camera invariably lingers on the coach of the Wile E. Coyote team, who shakes his head in disgust and flicks the back of his hand off his chin at the ref.

During the Portugal-France match, one replay showed the Portuguese guy actually a good six inches from making contact with anybody when he flopped down, rolled over, drew the penalty and got up ready for the kick.

Now, this is not meant to be a slur on the Portugal team or their individual ethnicity, nor is it meant to be a commentary on the inherent athletic abilities a player for Portugal might or might not possess: as anybody who’s watched the World Cup knows, the Italians are the best actors, hands down.

Based on the first 117 minutes of their match against Germany, before they finally decided to concentrate on passing and scoring rather than fake broken-leg-rolls and eyeball-gouges, the Italian players actually spend more time in practice working on fake-broken-leg-rolling and eyeball-gouges than, say, passing and shooting.

(Not to say the American team deserved getting any further than it got—how we tied Italy, even with Italy kindly scoring our only goal of the tournament for us, is still beyond me.)

All this is by way of saying that yesterday’s blockbuster news report that Microsoft is planning an “iPod-Killer” device with wireless downloading capabilities in time for the upcoming holiday season is about as realistic as the approximately 620 broken fibula suffered by the Italian front line in its match against Germany.

Now, I know nothing about Microsoft’s actual plans for this so-called iPod-Killer. Nobody from Redmond bothered to brief me on either the technical details or the impending Congressional legislation that will force all consumers ages 16 to 60 to buy it even though it will be the size and weight of an espresso machine in order to accommodate the CD-player, tape-machine and stereo turntable that have been designed in so as to make it fully compatible with all previous versions of the Microsoft Music Operating System Version 2.803 Model Train Enthusiast Upgrade Pack.

So if you’re looking for any insight into the technology issues or software issues or wireless music download issues involved in the thing—you’re reading the wrong guy.

But I do know a little about retail, and how stuff gets from the manufacturer to the store shelf, and by my calendar, it is early July.

That means the “holiday season” for which this “iPod Killer” supposedly will be ready starts in earnest immediately after Labor Day—less than 60 days from now.

Which, with all the logistical and marketing and packaging and quality assurance issues that need to be resolved before any product can get from press release to store shelf, means that unless Microsoft is ready to ship the finished product, oh, a month ago, there is no chance that Microsoft will be selling any such a concept in time for Christmas.

In the meantime, though, like one of those Italian players screaming and rolling and waving to convince the ref that something happened, Microsoft is doing its best to make it seem like something’s really happening in the battle for the next generation music player. So I’m giving a yellow card…to Microsoft.

Next penalty, they’re gone for good.

Jeff Matthews
I Am Not Making This Up

© 2006 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.