Month: November 2009

“People are panicking: This whole process counters everything that the rulers have been saying and the way it has been communicated before the holidays so no one can get any information is confusing,” said one hedge fund manager.

A conference call on Thursday for bondholders of Nakheel, the Dubai-owned property company at the centre of the storm, collapsed after phone lines were swamped with callers.”

—The Financial Times



The bad news is there’s another crisis. The good news is it’s not ours.

That’s right: after two straight years of erupting crises, starting with the subprime mortgage crisis (remember “What Happens in Subprime Stays in Subprime”? Ah, those were the days…) and moving on through the housing crisis, the auto crisis, the Iraq crisis, the fiscal crisis, the Bernie Madoff crisis, and now the heath care crisis, it’s a positive relief that a crisis has erupted 6,859 miles from the eastern shores of the United States.

In Dubai.

The word thus far is that European bankers may have $40 billion exposure to that debt-fueled, island-building, Las Vegas-on-the-Persian-Gulf, while U.S. banks appear to have almost none at all.

And while at least one idiot hedge fund manager, quoted above, is telling the Financial Times that he is shocked—shocked!—to discover that some form of gambling has been going on under the noses of the “rulers” of what was, until this weekend, the world’s last remaining Great Bubble, readers of this virtual column could not have suffered any such surprise.

Here’s how we wrote about it one year ago this month, on Friday, November 07, 2008:

Dubious about Dubai

In Dubai, Show Goes On for Property

DUBAI — Housing crisis? Mortgage meltdown? Credit crunch?

After spending a few hours at Cityscape, this Mideast boom-town’s annual real-estate trade show, you just might forget about the financial crisis gripping much of the rest of the world.—The Wall Street Journal, October 7, 2008



It seems like only a month ago that real estate speculators in Dubai were patiently explaining why their Real Estate Bubble was different from our Real Estate Bubble.



In fact, it was just a month ago!



On Sunday evening before the show, Nakheel, a Dubai-government-backed property developer, invited guests including the acting couple Catherine Zeta-Jones and Michael Douglas to the pink Atlantis hotel at the tip of its man-made, palm-shaped archipelago.



The occasion was the launch of Nakheel’s latest project: a kilometer-tall skyscraper. The $38 billion project is supposed to someday tower above the world’s current tallest building, Burj Dubai, itself nearing completion here.



Hey, with a government-backed developer and Catherine Zeta-Jones on board, what could go wrong with a kilometer-tall skyscraper?



“I’m sure most of you are asking why we’re launching this, and you’d be mad not to question it,” Nakheel’s chief executive Chris O’Donnell said. He added, “The project will be built over 10 years, and we’ll have many more [economic] cycles before then…the world will be a different place by the time it’s built.”



“Mad” is, we think, the exact word for O’Donnell’s assurances, as reported by the Wall Street Journal, that the speculation in Dubai will survive whatever cycles the world will throw at it.



In fact, O’Donnell’s words bring back memories of summer, 2007, when an investment banker stood at a podium in New York City and confidently explained to a group of investors why Bubble-era multiples on peak-cycle EBITDA numbers for deep-cycle, capital intensive businesses like Freescale Semiconductor made sense.



The key, he said with a straight face, was the lack of restrictive covenants on the leveraged loans, which would help Freescale and others survive whatever economic cycles might be thrown their way.



Still, now that the leveraged loans of Freescale and others are going begging, we find that Perini Corp, a builder of mega-casinos among other things, wants to go to Dubai and get in on the game, as management explained on yesterday’s earnings call:



“The current economic climate involving the credit markets has caused some customers delay in certain new project starts, primarily in the hospitality and gaming markets. Some customers have decided to postpone preconstruction activity until financial markets regain their footing and open up credit capacity….



“Overall, we continue to see many opportunities to secure new business in each of our business segments, both domestic and international. Bob will share more details of our prospects in a few minutes, including our strategy to become a significant contractor in both Dubai and Abu Dhabi in the Middle East.



“In Dubai, we have agreements in principle with substantial local and international partners to participate in construction joint ventures which may be awarded within 90 days. These are for large hospitality and mixed-use projects for which we have participated in several design workshops to date….”



Call us cynics, but if we were building “large hospitality and mixed-use projects” in an overbuilt, Bubble-ridden market like Dubai, we’d want the cash up front, in the bank.

—JeffMatthewsIsNotMakingThisUp, November 9, 2008

Just three months after that conference call, in February 2009, Perini management told Wall Street’s Finest that the Dubai projects “are now on hold.”

Good thing, too: everything in Dubai is now on hold.

Jeff Matthews

I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

A new “risk factor” is cropping up in company conference calls: healthcare legislation.

Before the Securities Litigation Reform Act came along in 1995, companies could—and would—be sued for things that influenced their stock prices, even if those things were beyond management’s control.

Nowadays, so long as a company starts off its earnings call or conference appearance with a long-winded disclaimer of “risks and uncertainties”—to the effect that “Anything we say today might turn out wrong”—the company is somewhat safe from tort lawyers with nothing better to do than trolling for companies to drag down like wolf packs.

Usually, the “risks and uncertainties” covered by these disclaimers relate to demand, supply, pricing, margins, currency fluctuations, tax rates, inflation, earthquakes, patents, intellectual property and, of course, litigation from tort lawyers—among much else.

We are here to report that this “much else” now includes a new “risk factor,” healthcare legislation, as management of Dick’s Sporting Goods—a well-run retailer currently suffering at the hands of a retrenched consumer—highlighted on last week’s conference call:

We believe there is much uncertainty around the consumer’s attitude towards spending this holiday season, driven in part by the potential impact of healthcare legislation, possible new tax legislation, and the recently-announced 10.2% unemployment rate.

Dick’s management did not elucidate on the legislation coming out of Washington, but David Farr, the CEO of Emerson Electric Company, did, at a presentation on November 11 at an RW Baird Industrial Conference.

In fact, “elucidate” is too sedate a word for what Farr did: in fact, he unloaded.

Now, David Farr is not your normal grumpy CEO. He does not, for example, preside over a market-share-losing, money-losing, possible-NASDAQ-listing-losing enterprise like a certain irascible, finger-wagging, conspiracy-spewing CEO we could think of.

Nor has he done a discreditable job guiding his worldwide, industrial-sensitive enterprise through the financial crisis: indeed, despite a $4 billion sales drop (on a base of $24 billion), Emerson generated near-record cash flows in its just-ended fiscal year.

And since Emerson has its fingers in almost every aspect of the global economy, from chemicals to climate controls, attention ought to be paid.

Thus we thought it noteworthy to pass on Farr’s passionate, but informed, views on the current healthcare legislation and much else coming out of Washington, thanks to the indispensible StreetEvents. (Farr’s words in bold.)

“A Whole Different World”:

[This has been] a very drastic downturn.

And the key issue is how fast is it going to recover? I’ll give you some ideas in a second on this. But I don’t think it’s going to be as fast as people believe. There’s a lot of stress in the world today.

As I look at the Company and I look at the last two recessions, I just started my 10th year as CEO and I have had my second recession. It used to be ten-year cycles. We’re going to five-year cycles now, it looks like.

And so if I look at the last downturn in ’01 and ’03, we took a 14% reduction in the headcount. We closed 75 facilities worldwide. We spent about $440 million restructuring, got the Company going and we grew quite rapidly.For five years, underlying growth rate of 8.5%, earnings growth close to 20%, certainly a lot of cash, the returns at an all-time high, close to 22% return on total capital for us at the endpoint. And then the shock came.

I look at this cycle and what’s happening to us different than anything we have seen before. The world is definitely changing.

You’re going to see a whole different world emerge in my opinion over the next five to 10 years as the mature markets — the US, Japan and Western Europe which are highly stressed, highly increasing debt levels and basically restricted of what they can do; if you don’t have a major play in the emerging markets, you will not see the type of growth that we have been seeing for the last four or five years.

“Definitely Getting Better”:

We are dealing with a very difficult environment. It’s not going to change. It’s going to get a little bit better. But we are still dealing with a very weak global manufacturing industrial environment, though not as bad as it was two or three months ago as you’ll see.

So as I look at that this right now, we’re looking at a very challenging year again; not as bad as last year. I mean, down 12% is the worst we have ever seen but it’s definitely getting better and you’ll start seeing this trend line coming. You will see that our orders will follow that very quickly….

“I’m Not Going to Hire Anybody in the United States”

Now, to tell you how bad this is and tell you what I think Washington is doing right now, Washington is doing everything in their manpower capability to destroy US manufacturers, fundamentally destroy US manufacturers.Cap and trade, medical reform, labor rules, whatever they want to do, raise taxes. They’re just going to destroyed jobs. We have already reached 7.3 million jobs in this downturn. We’re going to 8. That is a summation of the last four downturns.So what do you think the recovery is going to be in jobs? It ain’t going to be very good. I listen to everything Washington is doing — wasting money, raising the deficit to 10, $12 trillion — the debt level to 10, $12 trillion, going to $23 trillion; raising taxes; putting regulations and requirements on me as a manufacturing company.What do you think I’m going to do? I’m not going to hire anybody in the United States. I’m moving. So they’re doing everything possible to destroy jobs, in my opinion. That’s my opinion as a manufacturer and we employ 125,000 people worldwide. So I do know what the (expletive) I’m talking about.We used to employ a lot more in the United States and we will continue to move [all this]. When I see guys like this, Wall Street bailouts, car bailouts, I’m looking — what are these guys doing with our money? They’re wasting trillions of dollars, trillions of dollars.So what they are going to do, they’re going to pass a new medical healthcare, raise my costs, jobs will go. Cap and trade, tax me, jobs will go. It’s pretty straightforward. What they’re doing right now ain’t working. 8 million jobs, summation of the last four downturns….

“Where the Opportunity Right Now Is”
Why do you think we’re moving our companies into the emerging markets? Because that’s where the growth is. That’s where the jobs are going to be. That’s where we can create value. Share of this market is going to get less. It’s going to go down to 45%.So this is where we’re making our investments because this is where we are going to grow. This is what is going to happen in the economy. And so if you look at where the opportunity right now is, it’s not in Rhode Island. It’s not in Connecticut, it’s not in Illinois.It is in India, it’s in China. I’m taking another trip to China on Saturday. I go there seven, eight times a year. I go to Latin America, I go to the Middle East. That’s where the growth is going to be, international.Since I’ve been CEO, we’ve added close to 19 points of emerging market sales. We’re up to 33%…..

If you look at the last 10 years…73% of our growth has been in emerging markets. We have invested aggressively.

Where “The Degree of Freedom” Lies:

I lived over there, I ran Asia for a long time, for almost five years. I see the next five years an underlying growth rate of 5 to 7%. We’re going to have over 60% of our growth in emerging markets, maybe 70% again.The trend lines are there. Mature market growth will be a lot less just because the economics and the degree of freedom and the overcapacity issues we face in these countries.So we as a Company today are putting our best people, our best technology and our best investments in these marketplaces to grow. Because my job is to grow that top line, grow my earnings, grow my cash flow and grow my returns to the shareholders.My job is not to shrink and roll over for the US government. That is not my job. That’s not what I get paid to do.

“Expletive Deleted”

You talk about in renewable and alternative, we have $50 million this year. We’re going to go to over $800 million in five years. We created wind converters for China. We have pitch controls, electronic controls for the windmills.At the bottom, we have solar products, both the systems and power conversion. So we have created a whole portfolio of products for this. But you’re not going to see Emerson going out there with fancy commercials or sitting at the right hand of some president talking about this (expletive). We do it. We (expletive) do it (expletive).I don’t need to be told, I don’t need to get government handouts, I can do it without them.

Before dismissing Farr as somewhat unhinged, recall that he employs 125,000 human beings and knows a thing or two about global competition—having lived in Asia himself, and more than doubling his company’s international business in ten years.Also, companies do not call out items as “risk factors” just for the heck of it: clearly Dick’s Sporting Goods sees a potential problem looming with its own customers.

And by way of coda, we’ll share a quote on the subject of healthcare reform from the calm, deliberate CEO of a small US-based company that manufacturers nearly all its product in China.

When asked if the recent drop in the US Dollar would hurt his price advantage versus US-sourced competitors, the CEO noted that, for one thing, dollar-priced raw materials consumed in China are paid for in a strong currency, keeping his cost of goods lower than for a US producer importing the same raw materials.

And for another thing, he added matter-of-factly, “When this healthcare bill passes, nobody’s going to want to manufacture in the U.S. anyway.”

Expletive deleted, indeed.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

“When all else fails we can whip the horses’ eyes,
And make them sleep
And cry.”

—“The Soft Parade,” The Doors

Okay so we’re not exactly sure what Jim Morrison’s “Soft Parade” lyrics have to do with the central message of today’s virtual column—except that the dead poet’s gloomy words came immediately to mind while reading what we here at NotMakingThisUp believe is the single most important story in today’s Wall Street Journal.

The story is titled “A Tough ‘Sell’ for Jefferies Analyst,” and reporter David Armstrong starts it off thusly:

Jefferies & Co. analyst Brian Kennedy made the best call of his fledgling career when he slapped a ‘sell’ rating on shares of CardioNet Inc. earlier this year.

Then he quit his job.

Our sharp-eyed, long-time readers will know precisely where this story is going before it gets there.

But to spell it out for any less-than-sharp-eyed readers out there—i.e. Congresspersons, especially those on Important Financial Sub-Committees—the story of Brian Kennedy and CardioNet is the story of every Wall Street analyst who didn’t go along with the crowd in recommending a company otherwise universally touted by Wall Street’s Finest.

Kennedy was snubbed within his own firm and investigated by its own attorneys, and he was blacklisted by CardioNet management, who decried him as a tool of short-sellers and filed a complaint against him with the SEC.

That he was right in the end—CardioNet blew up for exactly the reason he put a “Sell” on the stock to begin with—didn’t help Brian Kennedy at all.

Thus the story of CardioNet is the story of Citigroup and Fannie Mae and WorldCom and Enron and every other bad investment idea whose cheer-leaders steamrolled whoever tried to raise a factual dissent of “The Story.”

As such, it ought to be required reading in every research department where Wall Street’s Finest practice their craft, not to mention in the hearing committee rooms of Congress, where short-sellers—rather than bad lending, bad borrowing, bad management and bad regulators—are routinely trotted out as “Exhibit A” in the Causes of the Financial Crisis.
Having recently visited the Rock and Roll Hall of Fame and Museum in Cleveland—which has, among its many mind-numbingly detailed displays, a fascinating collection of childhood memorabilia of a surprisingly innocent Jim Morrison, including a grade-school report card and a polite thank-you note written to his mother years before he became a fall-down drunk—Morrison’s dark exhortation at the end of “The Soft Parade” simply seems to fit the mood of the Journal’s article

“When all else fails we can whip the horses’ eyes,” indeed.

But so as not to end on a down beat, we are happy to report that, when asked to name the nicest guy she’d met at the Rock and Roll Museum thus far, the grey-pony-tailed ticket-taker said “Alice Cooper” without missing a beat.

One day, as promised, we will tell the story of How Jed Drake and I Stole Alice Cooper’s Mailbox.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

In “Grumpy Analyst Syndrome, or, ‘Optimistic, How Dare He!’” from August 31, we noted the uncanny tendency of Wall Street’s Finest—of which we were one, once—to throw in the towel on their favorite stocks at precisely the end of whatever bear market has caused those stocks to collapse.

This makes WSF look doubly-dumb: first for stubbornly keeping “Buy” ratings on stocks that collapse, and then for stubbornly keeping “Sell” ratings on those same stocks as they begin to recover.

As we pointed out, Grumpy Analysts often take out their ensuing frustrations on earnings conference calls—sometimes in the manner of radio call-in conspiracy theorists who seek to dump As Much Vital Important Information As Possible on their hosts Before Government Agents Pull The Plug.

By way of example, we quoted from the Toll Brothers earnings call that triggered our initial musings on Grumpy Analyst Syndrome, when one such GA actually warned CEO Bob Toll of “ominous statistics” that he would be wise to keep an eye on:

Well, just to keep in mind, Bob, keep in mind before you go there, these are foreclosures in process so they’re not yet hitting the real estate for sale side market, so they are ominous statistics and I think that we have seen false recoveries before…

When the CEO attempted to point out that his company had seen a recovery in housing demand despite the rise in foreclosures, the GA, rather than being mollified, continued to wag a finger with this warning about Toll’s fourth quarter results:

I guess what I’m just trying to point out and make sure that Toll Brothers is thinking about as well is the headwind that might be fourth quarter 2009…

That was in August, and apparently the world has not taken heed of such “headwinds,” for when Toll Brothers reported its fiscal fourth quarter 2009 results last week, orders were up 42% in units and 62% in dollars from the year before.

This good news was, apparently, too much for our Grumpy Analyst, who did not bother to ask questions on the ensuing conference call.

Instead, the GA spoke truth to power by appealing directly to the New York Times, in a Sunday column by the redoubtable Gretchen Morgenson, called “Home Builders (You Heard That Right) Get a Gift.”

Morgenson’s column concerned the latest Tax Break for Businesses that Don’t Need Tax Breaks: a $33 billion gift to, among others, homebuilders.

And in it, Morgenson makes the plain point that providing more government assistance to companies that contributed to the housing bubble at the center of the crisis in the first place makes no great amount of sense—especially since it merely encourages the same mindless growth-for-growth’s sake that caused the problem we’re now coming out of.

Besides, as she rightly points out, having come through the down-cycle relatively intact, homebuilders don’t exactly need more dough.

Still, you might wonder why one of Wall Street’s Finest would bother commenting in that article, since government policy isn’t exactly what Wall Street’s Finest are paid to evaluate.

Investors live in a world as it is—not as they wish it to be. If the government decides to throw more money at one particular interest group, well, so be it.

But not to our Grumpy Analyst, who sniffed to Morgenson as follows:

“I AM surprised that home builders are getting hundreds of millions of dollars given that many have very strong balance sheets,” said Ivy Zelman, chief executive at Zelman & Associates, a research firm. “We question the public policy decision to gift home builders with capital that many will not use to create jobs, since they admit that job growth will be dependent not on capital, but on improving demand.”

Hence do Grumpy Analysts become Really Grumpy Analysts.

And stocks do what they will.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Well, what the heck: why not use a great line, slightly altered, to make a point?The point being that what Pink Floyd once called “what the fighting’s all about” (at least as far as capital markets go) is not, strictly speaking, the economy.

Sure, everybody has an opinion on whether we’re going to have a V-shaped, U-shaped, W-shaped or L-shaped recovery (what happens in China: do they have sinographic recoveries?).Even my dog Charles has an opinion: he thinks it’s going to be shaped like his giant plastic red dog bone. But the issue that will determine the near-term course of the economy is simple enough, and has nothing to do with letters or ideographs or even giant red dog bones: it’s the inventories, stupid.

And inventories are probably as low as they are ever going to go.

Here’s how the CFO of 3M put it on their October 22 earnings call:

Heading into 2009, in the face of such a significant economic collapse, we set very aggressive cash flow targets for each of our businesses. Ground leaders and their teams have responded with great results. Third quarter free cash flow is $1.6 billion, up $769 million versus last year’s third quarter. This represents a 97% year-on-year increase. The improvement was driven by many factors, but most notably by lower capital expenditures, improving that working capital, lower cash tax payments and also reduced cash pension contributions. Net working capital declined by $415 million year-on-year, with inventory down $443 million….
Lest anyone think we cherry-picked a particular industrial conglomerate in the form of the famous Post-It notes maker, we did not. Pick any company in the same SIC code as 3M and you ’ll hear pretty much the exact same story.And it is not just old-line conglomerates that have brought inventories down to can’t-go-lower levels.Bob Wachob, the CEO of Rogers Corporation, which makes, to be technical about it, stuff that goes into cellphones, told listeners last week that his company’s hi-tech customers have not much in the way of surplus inventory:

Our customers are continuing to order with a request for extremely short lead times. That is a good indication they don’t have any inventory.

As for Rogers’ own inventories, Wachob said, without mincing words:

I think we are as low as we can go without impacting our customers.

Even a homebuilder as bruised and battered as Beazer has begun running low in inventory at the very moment orders are increasing, as reported earlier today:

As of September 30, we had only 270 unsold finished homes and 417 unsold homes under construction representing declines of 34% and 27% respectively from year-ago levels. With a cautiously optimistic outlook, we do not contemplate further significant reductions in our unsold home inventory levels but rather the resumption of more normal seasonal patterns.

Net new home orders of 1012 for the quarter represented an increase of 2.4% year-over-year.

Most striking of all, however—just as far as being emphatic about it goes—was Jeff Siegel, the CEO of Lifetime Brands, a kitchenware maker that sells to the Bed, Bath and Beyonds of the world, when he was asked by one of Wall Street’s Finest to size up the inventory reduction at that firm’s major customers:

It’s shocking. Honestly, it’s sometimes a shocking number. And I don’t — I can’t get at the numbers by retailer, but we do get it from — like one retailer we’re down about 6% on point of sale at one retailer. Our inventories are down over 30%.

In other words, while sales of Lifetime’s products at this unnamed retailer are running 6% below last year, inventories of those same products at that same retailer are down by one-third.

The response to Siegel’s comment from the member of Wall Street’s Finest who asked the provocative question?“Wow.”

Wow indeed.

So what happens when somebody actually needs to order a pallet of new flexible circuits for a rush order of cell phones, or an extra gross of Post-It notes not available on the loading dock, or a set of kitchen knives not sitting in the warehouse…or, heaven forbid, a whole new house?

Now, we’re well aware that Warren Buffett doesn’t make short-term bets on markets or economies.But given the fact that he stands at the center of an economic supply chain that stretches from a candy maker in South San Francisco to a high-tech machine tooling supplier in Israel, we think it’s no wonder Warren Buffett decided the time was right to buy the rest of Burlington Northern.There’s going to be a lot of—to be technical again—stuff that will need to be getting moved around in the next twelve months.It’s the inventories, and Buffett isn’t stupid.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

There are a lot of ways to describe a stock that goes down a lot in a brief period of time.

These include “tanked,” “dived,” “collapsed,” “got crushed,” “got smoked,” “got murdered,” and many others—including some unprintable adjectives we’ll leave to the imagination.

Yesterday, shares of CVS Caremark did all of those things and more, after the company disclosed bad news in the form of contract losses in its not-long-ago-acquired Caremark pharmacy benefit management business.

What made matters worse was the way in which CVS management announced its problems.

In a press release issued at 7 a.m. E.S.T., titled “CVS Caremark Reports Record Third Quarter 2009 Results,” CVS boasted about “record third quarter revenues, operating profit, and net income,” with not a word about the contract losses in the PBM business.

Indeed, the initial reports from Wall Street’s Finest—before the 8:30 a.m. management conference call—included no hint of a problem.

“PBM held in, retail pharma did better. Revs were in line. Profitability was higher…” was one such recap; “CVS reported Q3 eps of .65, a penny better,” was another.

And even after the call started, first with the normal “forward looking statement” preface by the IR woman, and then with a hearty “Thanks Nancy and good morning, everyone” from CEO Tom Ryan, not a hint of a problem came in the first 21 paragraphs of his commentary.

“We reported another excellent quarter this morning,” Ryan began. “And I’m certainly pleased with our results across the Company…”



Ryan then spent 14 paragraphs discussing the retail business—including the opening of the 7,000th CVS in a place called Little Canada, Montana (“Who knew?” Ryan joked)—before getting to the PBM business itself.

“Now, let me turn to the PBM business, which also had a very good quarter,” Ryan began.

Give the guy credit for nerves.

He then spent seven paragraphs describing various “innovations” and “new products” that were “gaining traction” in the PBM business, before dropping the bomb in the 21st paragraph of his remarks:

“So let me talk about the selling season. We had some good wins…. Having said that, we had some big client losses….”

And thus began the deluge.

Wall Street’s Finest reacted, as you’d expect, with surprise, annoyance, and not a little bit of anger: the question-and-answer session was not at all pretty.

And while CVS management did allow the call to go well beyond the normal one-hour time limit for these things, the commentary itself—from Ryan’s first “Thanks Nancy,” to his concluding “I know this was obviously a difficult call”—it is instructive for anyone wanting to learn how not to deliver bad news.

As an anatomy of a murder on Wall Street, in fact, it doesn’t get more gruesome than this.

Jeff Matthews

I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.

Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Democrats Confront Coalition Strains

Elections this week left Democrats scrambling to renew the coalition that elected President Barack Obama after independent voters, whose power to determine U.S. elections is rising with their numbers, broke heavily toward Republicans.
—The Wall Street Journal, November 5, 2009

First, who is Jim Himes, and why does he matter?

Himes is a freshman Congressman from the 4th Connecticut district, who defeated a moderate Republican incumbent in last year’s Obama sweep.

He is also an ex-Goldman banker—hey, who in Washington isn’t an ex-Goldman banker?—and he matters to investors because he is your basic party-line freshman Congressman, and a staunch supporter of health care reform.

A friend of ours who happens to be a doctor traded emails with Himes recently, and while you’d think an ex-Goldman banker would be more thoughtful than your average Congressperson—and solicitous of the real-world views of an actual doctor, as opposed to a lobbyist for Big Pharm or Big Hospital or Big Ambulance Chasers—Himes dismissed our doctor-friend’s views as being the product of watching “cable TV.”

But that was then, and this is now.

However the Talking Heads and party hacks—whatever their party—are spinning yesterday’s election results, what Jim Himes is thinking right now is this: “Holy cow. It’s not just cable TV.”

The reason Himes is thinking this—at least, he ought to be—is that in his 4th Congressional District, the voting was so anti-incumbent—not just anti-Democrat, mind you: anti-incumbent—that anybody with a suit and tie and a web site at house.gov has to be looking at the numbers and worrying about next year.

The numbers are these. Twelve months ago, Himes beat the Republican incumbent by 2,500 votes, out of a few hundred thousand cast. Himes did this by winning big the three cities in his district—Bridgeport, Norwalk and Stamford—while the Republican won the suburbs.

But yesterday—lost in the feeding frenzy over the New Jersey and Virginia governor races, and Mayor Bloomberg’s $110 million squeaker against a no-name in New York City—the city of Stamford, Connecticut, which Himes won by 6,300 votes, elected a Republican mayor.

It hasn’t happened there in 14 years.

And it wasn’t just Stamford where the discontent was expressed.

Leafy Trumbull kicked out a popular, competent, moderate Democrat, longtime First Selectman, for a first-time 29 year old—and the vote wasn’t even close.

Meanwhile, the Representative Town Meeting in Fairfield, a quiet suburb of 50,000 souls, went, overnight, from 28 Democrats/22 Republicans to 38 Republicans, 12 Democrats.

Politicians don’t know how to count money, but they do know how to count votes.

And Jim Himes—not to mention Chris Dodd, the state’s “Senator from Countrywide”—is surely counting yesterday’s votes.

For the record, we care not a bit who gets elected as far as these virtual pages go. Being investors, we must take the world as it is, not as we wish it to be.

And that world just changed, as today’s Wall Street Journal accurately reports.

Healthcare reform may not be dead—something will be passed. But it will be different, and it won’t be what the House has proposed.

Jim Himes, and his fellow ex-Goldman bankers, will see to that.

Let’s just hope they start listening to real docs and real nurses, instead of lobbyists, and cable TV.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Easily the weakest link in the Wall Street Journal’s Op-Ed page is Thomas Frank, who also happens to be the Journal’s token liberal.

To be sure, at least one of Frank’s political opposites at the Journal writes about as much nonsense as Frank—particularly on the subject of fiscal responsibility. That would be Karl Rove, who encouraged his Presidential boss to ignore fiscal responsibility for eight long years, and yet now has the nerve to complain about what those eight years are bringing us.

But Rove is at least intelligent and writes well, even if you spit out your coffee reading his stuff.

Thomas Frank, on the other hand (not to be confused with Frank Thomas, the White Sox’s lifetime .300 hitter, deservedly known as “The Big Hurt”), writes with such ham-handed wordsmithing it’s hard to grasp how he became the Wall Street Journal’s liberal conscience, except as part of a plot by Rupert Murdoch to undermine Frank’s fellow left-wingers by presenting as inarticulate a representative as he could find.

Here, for example, is how Frank began his most recent editorial effort, called “Obama Is Right About Fox News”:

Journalism has a special, hallowed place for stories of its practitioners’ persecution. There is no higher claim to journalistic integrity than going to jail to protect a source. And the Newseum in Washington, D.C., establishes the profession’s legitimacy with a memorial to fallen scribes, thus drawing an implicit connection between the murdered abolitionist editors of long ago and the struggling outfit that gave you this morning’s page-one story about cute pets in Halloween costumes….

Woof!

Frank should have studied his rock music history—in particular what John Lennon said to David Bowie, when Bowie asked the ex-Beatle how to write a song: “Say what you mean, make it rhyme, and give it a backbeat.”

Lennon’s simple, precise advice applies to writing just about anything, but unfortunately Frank’s first paragraph accomplishes none of those three things, while the remaining ten paragraphs of “Obama is Right” aren’t a whole lot better.

Indeed, when Frank finally does say what he means—i.e. that Obama’s black-listing of Fox News was merited—he does so in the slightly unhinged manner of a Hugo Chavez or a Fidel Castro, or the revolutionary in Woody Allen’s “Banana’s.”

To wit, he calls Fox “a grand electronic homage to the Nixonian spirit,” then attacks the CEO of Fox for long-ago offenses, then complains that that Fox once “impugned the motives of the New York Times” (and we’re not making that one up).

But something else Frank says goes beyond the typical knee-jerk defense of Obama’s Fox freeze-out.

Way beyond it.

Frank sums up his case with a statement more chilling than anything out of the Chavez/Castro/Banana’s playbook. In fact, if you really think about it—something Frank himself likely didn’t—he makes a statement out of the Mahmoud Ahmadinejad playbook:

To point out that this network is different, that it is intensely politicized, that it inhabits an alternate reality defined by an imaginary conflict between noble heartland patriots and devious liberals—to be aware of these things is not the act of a scheming dictatorial personality. It is the obvious conclusion drawn by anybody with eyes and ears.

Now, you may agree with Obama’s White House that Fox News is “a wing of the Republican Party.”

And you may believe it is no skin off anybody’s nose for the White House to snub Fox News.

And you are perfectly within your rights to put aside what Psych 101 grads will recall as “cognitive dissonance” by ignoring the obvious fact—obvious to anybody, as Frank would say, “with eyes and ears”—that MSNBC is no less biased to the left than Fox is to the right.

But whatever your personal political persuasion might be, just think about what Frank is really doing here. What he is really doing is saying that because Fox News “is different,” it is okay to discriminate against “this network.”

Just replace the words “this network” with “this African-American” or “this Native American” or “this female,” or any other category in the Census form that American law has at one time or another considered “different,” and the slippery slope in Frank’s brand of logic is self-evident.

Indeed, substitute the word “this Zionist regime” for “this network,” and you can almost hear a bearded whack-job who runs an emerging nuclear nation riffing on the “myth” of the holocaust and why Israel should be “wiped off the map.”

But Frank, not being the sharpest blade in the left-wing drawer, doesn’t grasp the slippery slope he has endorsed one bit. In fact, the only regret he admits to is not in Obama’s freeze-out itself…it’s that he wished the White House “had taken on Fox News with a little more skill.”

Now, freedom of the press is not, to quote Kris Kristofferson, “just another word.” It’s the whole deal. And we can’t help but think that the Obama White House, with the cooperation of the other networks and journalists like Thomas Frank, has just made the American press a little less free.

Left-wingers who chortle at the snub might pause long enough to recall how a few years back their right-wing counterparts chortled at Don Rumsfeld’s freeze-out of “Old Europe”—as he slyly styled France and a few other countries that refused to jump on the Iraq bandwagon.

Oh, it was fun for the right-wingers, and it felt good for a while…and then it came back to haunt old “Rummy” and his boss, and their country.

So before chortling too long, think about that, and then ask yourself who’s next? Who else is “different”?

When the anti-Obama gets elected, in 2012 or 2016 or 2020 or whenever, and refuses to deal with MSNBC or ABC or all of ‘em, because they’re “different,” the anti-Obama can rightly tell the outraged Thomas Franks of the world that he himself gave permission for the suppression of whatever is “different” in the United States of America.

Freedom—to paraphrase the famous song—is now just another word for “thinks like us.”

Wonder how Frank would feel if the Wall Street Journal kicked him off the Op-Ed page because he’s “different”?

Nah, he’s too useful!

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.