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Ben Bernanke, the Fed Chairman currently living the nightmare of the Alan Greenspan’s free-money daydream, has publicly downplayed the immense benefits reaped by the American Consumer from China’s deflationary manufacturing arbitrage, as we quoted in “Fed Big Flunks Eco 101″ back on March 7, 2007:

Globalization hasn’t had a significant impact on reducing inflation in the U.S. and may have raised it, Federal Reserve Chairman Ben Bernanke said.

—Wall Street Journal

Now, Mr. Bernanke may have been a great economist before succeeding Alan Greespan to the head of that class of academic thinkers, but he clearly never shopped at a Wal-Mart, or a Costco, or even a Safeway, for that matter, during the 1990s, when prices across America were falling thanks to the China arbitrage.

Indeed, if he had just wandered into a Best Buy now and then he would have seen what every retail CEO in America knew first-hand: stuff made in China cost a lot less than stuff made anywhere else, and those retail CEOs were pushing every one of their vendors to get with the program.

But not Mr. Bernanke.

Still, he did make it to the top of the economic pile. And, as the saying goes, even a stopped watch is right twice a day. So it looks like Mr. Bernanke’s views on China’s inflationary impact might, finally, be right.

While it is no secret that labor costs, and environmental costs, and energy costs are rising, along with the cost of just about everything else China needs to feed the manufacturing beast that now supplies American with 8 out of 10 everything, according to government statistics I just made up, the magnitude of the overall cost increase is certainly a shock to at least one major retailer of Chinese-sourced goods.

Like, 50% shocking.

I am not making that up: word out of one significant retailer is that some of the China-sourced merchandise they were expecting to cost, for example, $10 a unit prior to packaging, shipping, handling and mark-ups, is coming in at $15 a unit.

Now, after checking with other companies that also source in China, 50% gap-ups is not the norm.

But 10% is not unheard of, making companies work extra hard on packaging and distribution costs to get the entire impact down to a more manageable 5% or so.

Which, last I heard, was more than double Mr. Bernanke’s inflationary “comfort level.”

But, then again, since according to Mr. Bernanke’s view of economic history, China never helped us when it came to inflation, then perhaps China will never hurt us.

It’s a win-win all around!

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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.

June 25, 2007

That makes [State Street] a far different sort of bank than, say, Citigroup…which has struggled to get its multi-faceted global financial supermarket in synch.

—Jack Willoughby, Barron’s


September 3, 2007

The fear — some of it no doubt fanned by hedge funds — is that these [State Street] conduits’ portfolios, full of credit-card, auto, and mortgage loans the bank uses as collateral for selling commercial paper to investors, have undisclosed losses. If spooked buyers were to balk at buying more commercial paper, State Street might have to provide some funding. Obviously, $29 billion is a big exposure relative to the bank’s total capital of $113 billion.

—Jack Willoughby, Barron’s

State Street has a problem.

It seems the bank, which over the years carefully built the best securities processing franchise going, has also accumulated $29 billion worth of off-balance sheet credit exposure to four special investment vehicles known as “conduits.”

“Conduits” is, I think, an excellent term for such financial structures, since what flows through them can be the financial equivalent of anything ranging from spring water to raw sewage.

In the case of certain “conduits” established by a pair of German banks—IKG Deutshe Industriebank and Sachsen—the financial effluent was, as it turned out, a lot like sewage, and would have brought the banks down but for their ignominious rescues.

As for State Street, precisely what is flowing through its “conduits” is not clear except to State Street, which says the assets include credit card debt, auto loans and NOT sub-prime mortgages—all properly priced and liquid as can be.

Mr. Market is not so sure.

After all, $29 billion worth of headline credit exposure to the four measly conduits is a much larger number than State Street’s own shareholder’s equity of just under $8 billion—making those very shareholders understandably nervous.

Furthermore, sentiment towards the company—grandly touted by Barron’s Jack Willoughby as “a far different sort of bank” just weeks before its “conduits” exposure knocked the legs out from under the stock—has not been helped by the fact that one of State Street’s many investment funds was, apparently, so chock full of sub-prime something that it lost enough money in early August to make headlines in the Boston Globe.

Which brings us to Mr. Willoughby’s messenger-shooting.

The recent conduit-related decline in State Street’s stock triggered a defensive “Follow-Up” column from Barron’s this weekend, in which Willoughby, as quoted at the top, placed blame for State Street’s problems squarely on the shoulders of where it belongs…the management team that elected to accumulate $29 billion worth of credit exposure to off-balance sheet financing vehicles in the first place.

Actually, I am making that up.

He blames hedge funds, in part. I am not making that up:

The fear — some of it no doubt fanned by hedge funds [emphasis added]– is that these conduits’ portfolios, full of credit-card, auto, and mortgage loans the bank uses as collateral for selling commercial paper to investors, have undisclosed losses.

Why a Barron’s reporter should take am at the hedge fund messenger, rather than the P.R. flak who presumably pitched him the State Street story in the first place, is beyond me.

Hedge funds had nothing to do with establishing State Street’s off-balance sheet “conduits,” or loading them with credit card debt, or mortgage debt, or auto loan debt.

Nor did any “hedge fund” that I know of encourage State Street’s Limited Duration Bond Fund to lose enough money in early August to make a story out of it in the Boston Globe.

In fact, I can’t think of anything at all that “hedge funds” have had to do with State Street except use their excellent back-office services, and, perhaps, short the stock.

Perhaps if Mr. Willoughby had called one of those “hedge funds” savvy enough to have shorted State Street when he was preparing his original puff piece, he might have seen what was coming and toned down his glowing company love-fest, which called State Street “a different kind of bank” and contained such cringe-making quotes as this, from State Street’s CEO:

“Revenue growth will separate the men from the boys.”

In fact, had Mr. Willoughby spoken to a hedge fund manager or two about the company’s ballooning exposure to off-balance sheet “conduits” rather than relying, as he apparently did, on the good graces of the company’s own P.R. flaks to make the CEO available for carefully scripted interviews, he might even have given Barron’s readers a useful heads up, instead of cringe-making observations such as this one:

Such a well-informed streak of independence is refreshing in a CEO, even if it doesn’t always make him popular.

Of course, defending a one-sided, rose-colored bit of reporting is easier to do if one blames the messenger without re-examining the original premise of the piece in the first place.

However, if he had indeed chosen the harder way, Mr. Willoughby might have found that he had actually identified the source of State Street’s current dilemma in his original puff-piece, when he stated:

As always, State Street stands ready to exploit the next professional money-management trend.

Trends such as “conduits,” perhaps?

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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.

Stocks appeared poised for a strong opening this morning ahead of a speech by Federal Reserve Chairman Ben Bernanke and the introduction by President Bush of policy proposals to lessen the pain for struggling mortgage borrowers.

—The Wall Street Journal

No, I am not making this up: stocks are set to rise in part on news that President Bush is going to announce a plan to help subdue the mortgage crisis.

As further explained in this morning’s online version of the Journal,

Mr. Bush…is expected to introduce a plan to reduce some of the pressure on squeezed homeowners by, among other things, changing the Federal Housing Administration mortgage insurance program to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages, according to media reports. The president is scheduled to speak at shortly after 11 a.m. Eastern time.

While we here at NotMakingThisUp never venture short-term opinions on the direction of stocks or bonds—let alone the ups and downs of pre-opening futures trading—we can’t help but wonder at Mr. Market’s heightened expectations for what the nation’s CEO will do to solve the sub-prime crisis.

Hope that Mr. Bernanke and Mr. Bush’s words will calm the waters helped to push shares of mortgage lenders higher early on. Countrywide Financial, the nation’s largest home lender and a company that has been hard-hit by the credit and housing turmoil, jumped 6% in overseas trading.

If history is any guide, we suspect tomorrow’s newspapers will report something like the following:

When the President and his team received word of the 100-plus point rise in the pre-opening Dow Jones Industrial Average on their Blackberries on the way to the announcement, they immediately declared “Mission Accomplished,” turned around the motorcade and drove back to the White House.

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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 nice thing about being on the road is getting to watch the morning shows.

I am not making that up.

After all, when I’m home—what with dogs to walk and cats to feed and newspapers scattered across the lawn by the delivery guy who drives 80 miles an hour down the street, swerving from one curb to the other like one of those getaway drivers on Bad Boys and tossing out at each swerve a clump of papers held together by nothing more than slim rubber bands that burst on impact—I never get a chance to turn on the television, flip through the perky morning news shows and find out exactly what’s happening in the world that I need to know in order to get through the day.

Thanks to being on the road, however, with no dogs or cats to feed and no newspapers to reassemble, I can find out just what I’ve been missing by tuning into the local Morning Show, with cheery hosts Biff and Sally and Barf all sitting on sofas for some strange reason.

Does anybody sit on sofas any more except people on television?

In any event, what I’ve been missing, according to Biff and Sally and Barf—and I am not making this up—is a “gaffe” that occurred at a recent beauty pageant, when Miss Teen South Carolina had a hard time answering a question.

That’s right: that was the lead story.

Seems that when Miss Teen South Carolina was asked why Americans are so stupid they can’t locate the United States on a map, the poor girl said, and I quote from one of the 600 billion blogs that have been written about this important news story:

I personally believe that U.S. [sic] Americans are unable to do so because, uh, some people out there in our nation don’t have maps, and, uh, I believe that our education like such as in South Africa and, uh, the Iraq everywhere like, such as and I believe that they should, our education over here in the US should help the US, er, should help South Africa and should help the Iraq and the Asian countries, so we will be able to build up our future for our children.

And that’s what I’ve been missing, according to Biff and Sally and Barf.

Now, “Miss Teen South Carolina” is, by definition, a teenager. Also, she was on a stage, presumably, in front of an audience.

With television cameras running.

And I don’t know many teenagers who could express a more intelligent answer to the question of why Americans are so stupid they can’t locate their own country on a map than what Miss Teen South Carolina came up with, on a stage, in front of an audience, with television cameras running.

If she’d been running for office, say, or had already been elected to office—now, that might be news.

On the other hand, if she was a former Vice President named Dan Quayle, Biff and Sally and Barf might not have noticed, for Quayle frequently gave incoherent responses to similarly simple questions, as with this gem:

What a waste it is to lose one’s mind. Or not to have a mind is being very wasteful. How true that is.

Do we really expect more of our teenagers than we do our Vice Presidents?

Nevertheless, based on my brief, channel-flipping exercise before heading out to get some work done today, the morning shows actually serve a higher purpose than some might suspect.

That’s right, I said “higher purpose.”

And that higher purpose is this: by bringing into our homes each day a set of talking make-up dolls named Biff, Sally and Barf—whose lives are clearly so empty and devoid of meaning that you actually find yourself feeling sorry for them, trapped on that sofa as they are, with a video of the incoherent Miss Teen South Carolina running on big screens all around them—the shows prove that no matter how depressed you are by your lot in life at that particular moment, and no matter what self-destructive thoughts may be passing through your mind at that particular moment, and no matter how much you want to swap lives with somebody else at that particular moment…there are at least three other people on earth whose lives are even less meaningful at that particular moment than yours.

And they are sitting on a sofa together.

In fact, I have no doubt that right now, as you read this, Miss Teen South Carolina is watching her local morning news program with a thankful tear in her eye and a grateful lump in her throat.

And she wants to say, from the bottom of her heart,

“Thank you, Biff, Sally and Barf!”

She’s feeling a hell of a lot better about herself already.

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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.

Well, the crisis roiling the “quant” hedge fund community is officially over—or, at least, on hold—according The Washington Post.

No, I’m not talking about the newspaper Washington Post, which I never read, and which I doubt has ventured any opinion about whether or not the quant crisis that forced bizarre, mechanical short-covering and bizarre, mechanical long-selling of individual stocks by computers in the early days of August, the likes of which I’ve never seen, is over.

But the stock Washington Post is certainly looking that way.

Now, for starters, the Washington Post Company (ticker WPO) is not your typical fast-money trading vehicle. In fact, it is probably one of the very last stocks you might ever dream of being caught up in some Goldman Stanley Stearns & Lynch Global Alpha Male Hedge Fund, LLC disaster.

First, there are only 7.8 million shares outstanding, and most of them are owned by Berkshire Hathaway and fans of Berkshire Hathaway—the ‘Never Sell’ crowd we studied in our “Pilgrimage to Omaha” series early this summer.

As a result, average daily trading volume in the Washington Post is a less-than-whopping 16,000 shares. Most publicly traded companies trade 16,000 shares before the lights go on in lower Manhattan.

Second, the business of the Washington Post is sound, if not spectacular, and by no means cyclical. And while you might think the Washington Post would be a good short-selling candidate along with the rest of the newspaper industry, it is in reality not a newspaper company any more.

Just 20% of the company’s business is the old-media newspaper and Newsweek; 80% is television stations, cable TV, and the educational provider Kaplan. In fact, of all major newspaper chains, only E.W. Scripps has moved as aggressively away from its origins as Washington Post.

Consequently, WPO is one of the few publicly traded newspaper chains showing revenue growth and healthy profitability.

Third, WPO’s shareholders—and I have been in this category—tend to own the stock to have and to hold, not to flip. Consequently, the stock itself, thanks to the patient shareholder base and recession-resistant nature of its franchises, has a “beta” of only 0.57.

For perspective on that number, “Beta” is a measure of a stock’s volatility. A stock that moves up and down in line with the overall stock market is said to have a “beta” of 1.00.

A more volatile stock would have a higher “beta” than the market. Google, for example, has a “beta” of 1.24, which means Google’s share price tends to be 24% more volatile than the overall market, thanks to the company’s young, fast growing, risk-taking culture.

Consequently, at 0.57, the Washington Post has the “beta” of a corpse.

Thus, with a reasonable business model, limited float and low “beta,” the short interest in WPO has been virtually non-existent.

Until late last year.

That is when the stock’s short interest began rising steadily—roughly 10% each month—from a mere 50,809 shares in August, reaching 100,000 in June and jumping to 119,193 in July. Thus the shorts more than doubled their position in less than a year.

The stock, meanwhile, went, slowly and fairly steadily from $740 per share to nearly $800 during the early summer months, while the company itself was also doing fairly well, all things considered, despite normal quarterly earnings fluctuations which are to be expected in a company with Warren Buffett—who abhors quarterly earnings management—on the board.

Then, on August 3rd, the company reported earnings that meant nothing much in the scheme of things—and yet the stock made a Google-ish 60-point move to a high of $850 on four-times the normal average volume, closing up 4% $825.50 a share.

The only possible explanation at the time was that since Rupert Murdoch had just won approval from the Bancroft family to buy Dow Jones, he might also pay a stupid price for the Washington Post.

But there was no follow-through in the shares, which settled down the next day and the next, and went back under $800.

They erupted again on August 8th and 9th (a down 350-point day on the Dow) hitting $880 a share on six times normal volume, only to settle back below $800 on the 10th .

Meanwhile, other stocks with similar characteristics—high price/earnings ratios and high short interests—were likewise jumping, and it became clear something other than a Rupert Murdoch rumor was driving the stock.

To whit, some Global Alpha Male Quant Fund, LLC was covering a short position, very badly.

And sure enough, when the short interest data (which for reasons I have never understood, is tallied on the 15th of each month) came out this week, it showed the short interest in the Washington Post had suddenly stopped going up.

In fact, the short interest declined modestly. And I suspect September’s numbers will show a further decline, as whatever Global Alpha Male Quant Fund, LLC finishes its business.

Or perhaps the Global Alpha Male etc. LLC’s computer will decide to look through the Washington Post annual report and see what kind of business it has been short, and who is on the board of directors and what the long-term value of the enterprise might be…and instead of buying high after selling low, will hang onto the shares for the long term?

Nah.

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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.

“I expressed the need for both the Fed and Treasury to use all the tools at their disposal to keep our markets working and so that the business and consumers can have the funds to prosper,” Mr. Dodd said. “Chairman Bernanke agreed,” Mr. Dodd added

—The Wall Street Journal

That’s a story?

A senator—who’s also running for President and wants desperately to get his poll numbers above Dennis Kucinich, the Democrats’ answer to Dwight K. Schrute, the whacky, lovable character in “The Office”—meets with the Chairman of the Federal Reserve, tells him to do his job, to which the Fed Chairman agrees…and that’s news?

What else was Ben Bernanke going say to the Chairman of the Senate Banking Committee—“No, we think it would be cool to have a crash”?

That Senator Forehead—er, Dodd—would get such press coverage is more a testament to how nervous markets really are than to how much Senator Dodd has going for him.

I know. I once helped his campaign.

Christopher J. Dodd has been a Senator from Connecticut for 27 years, during which time he accomplished just enough to get re-elected and absolutely nothing at all where it really counts—in the state’s inner cities, where separate-and-unequal education has ruled during all of Dodd’s 27 year tenure, and the resulting poverty hasn’t changed a bit.

Yet he is very popular in his state and unbeatable every six years. Mainly, I think, because Don Imus liked having Dodd on his radio show, which is not saying much.

Also, Dodd has terrific hair—a big Kennedyesque shock that has turned a mature white, giving him the look of the prototypical Senator Forehead.

Lest you think I approach the good Senator with a closed mind, I first met him thirty years ago when he was still a Congressman—a young, popular Congressman with a great head of hair that was not yet white.

It was during the Carter Presidency, and a lot was happening in Washington: Jimmy Carter was attempting to decontrol oil and gas prices, which was terrific economic policy and, therefore, extremely unpopular at the time, especially among young populists like Dodd.

Dodd was discussing his “position” on oil and gas decontrol with a group of worshipful high school seniors, and what he said was something about as bland and off-hand as, “I think the oil companies make enough money—they don’t need to make more.”

That was it—the entire sum of his analysis of probably the greatest legacy of the much-maligned Carter Administration: the dismantling of Nixon’s price controls.

And, naturally, it went over very well with the 17-year olds.

Of course, what Dodd and the 17-year olds didn’t grasp was that a big part of the “stagflation” hindering the American economy during the late 1970’s was the fact that oil and gas prices in the United States were still rising to world levels, thanks to Nixon’s price controls.

Unlike Japan, which imports virtually all its oil and yet had recovered from the Arab oil embargo in record time, politicians like Dodd were so afraid of angering their constituencies that they refused to do what the Japanese had done: let prices rise and force the economy to adjust.

For all his mistakes on international policy, Jimmy Carter did the country one very big long-term favor: he decontrolled oil and gas prices, no thanks to Chris Dodd and the other Congressmen and Senator Foreheads of the world.

Carter, naturally, lost re-election. Dodd, naturally, won election to the Senate and has been re-elected ever since.

Now, when I mentioned that I once helped Chris Dodd’s re-election campaign, I was not making that up.

It happened in 1992. His opponent was a wealthy Greenwich polo player named Brook Johnson, who had made a good chunk of money doing an old-fashioned leverage buyout of Collins & Aikman, by which I mean piling debt on the balance sheet and taking money out of the business, which was not great for the business but was great for Brook Johnson.

Johnson’s campaign theme was that he had created “thousands” of jobs in his tenure at C&A, which I believed was absolutely not true, and could do the same for the country.

Being one who, even then, distrusted individuals who ‘make it up,’ yours truly dug into the public documents and provided Dodd’s campaign with a basic analysis of where the C&A money came from, and where it went. Whether they actually used the data in any way, was never clear.

Dodd, of course, won the election and continued warming his chair in the Senate long enough to get to the top of the Banking Committee, which is why he is on television demanding meetings with Ben Bernanke even though:

1. The U.S. sub-prime crisis happened during Chris Dodd’s own watch as Chairman of the Senate Banking Committee.

2. The Fed is going to do whatever it has to do to keep the world afloat, no matter what Chris Dodd thinks.

3. Chris Dodd wouldn’t know a CDO from a Dr. Seuss character.

Which is why I think it’s all the more remarkable than anybody could possibly care what Chris Dodd did or didn’t say to Ben Bernanke.

In fact, here’s what we at NotMakingThisUp think was really said when Dodd met Bernanke:

Dodd: “Hi there!” (Reaching out his hand and leaning in, speaking quietly.) “Let’s shake hands while I look into your eyes. You nod as if I’m saying something meaningful.”

Bernanke Aide: “But I’m—”

Dodd: “I know, I know—you’re busy, I’m busy. We’ll get this over with in a second. Just nod and look at me thoughtfully. I’ll keep talking while you nod thoughtfully. When the camera clicking starts do die down, that’s when we can stop shaking hands.”

Aide: “But, Mr. Bernanke is—”

Dodd: “So you talk about yourself in the third person? Me too! ‘Chris Dodd wouldn’t agree with that!’ ‘Chris Dodd thinks a grave injustice has been committed.’ ‘Chris Dodd will have another, but without so much vermouth this time—’”

Aide: “No, no, no, Senator—”

Dodd: “Hey, pal, don’t tell me ‘no.’ Nobody tells Chris Dodd ‘no.’ You just shake hands with Chris Dodd until the CNN guy over there gets a good shot in and we’ll be fine.”

Aide: “But I’m not who you think I am!”

Dodd: “‘That’s what she said!’”

Aide: “But I’m not Chairman Bernanke!”

Dodd: (Dropping the handshake.) “What?”

Aide: “I’m not Chairman Bernanke! He is on an emergency conference call with the heads of six major Wall Street firms and is running several minutes late. He asked me to tell you he’d be late.”

Dodd: (Considering this news.) “Well, then let me ask you something.”

Aide: “Certainly.”

Dodd: “What exactly is a CDO?”

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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 nation’s fifth-largest airline by traffic [Northwest] is taking steps to ensure that it is able to operate reliably in the future, Mr. Steenland [the CEO] said. One important component is a new tentative agreement with its pilots union that would reinstate time-and-a-half premium pay if the pilots fly more than 80 hours a month.
—The Wall Street Journal, August 4, 2007.

“The mechanic doesn’t have the right tools to fix the problem, so they’re going to have to fly a mechanic in with the right tools. This flight is postponed indefinitely. Please come to the ticket counter and we will help you find alternatives.”

—Northwest Airlines ticket agent, Pellston MI, August 17, 2007.

While the CEO of Northwest Airlines—advertising slogan “We Haven’t Been Bankrupt Since May!”—was telling the Wall Street Journal about his plans to make the Northwest pilots feel better about showing up for work, he neglected to discuss what he was doing to perk up the mechanics who help the planes get off the ground, not to mention the flight attendants who actually interact with the paying customers.

I bring this up because less than two weeks after Mr. Steenland’s mea culpa to the press and his declaration of a fresh new start at the old Northwest, we here at NotMakingThisUp ran into the same old problems with the new Northwest that we seem to have every summer on the way to our annual mid-west vacation along the upper reaches of Lake Huron.

Now, when I am asked by people on the East Coast why we vacation in Northern Michigan in the first place, it’s as if I’d said we were going to Jersey City, say, or Elko, Nevada—no offense to either place.

In the minds of East-Coasters who, if they think of the Great Lakes at all, think of the industrial waters of Lake Erie rather than the vast, clear waters of Lake Superior or Lake Huron, the word “Michigan” conjures up images of shuttered Ford factories and poverty-stricken Detroit, not dune-covered shorelines and crisp, cool summer nights with late sunsets and dramatic moon-rises over quiet pine woods.

And that’s fine with me, because a week away from the getting and spending of the “two-and-twenty crowd”—as Warren Buffett calls the hedge fund quant wizards whose antics nearly brought the financial world to its knees early this month—does wonders for the mind and soul.

The trick, of course, is getting there and back without undue stress, which has proven nearly impossible given the fact that Northwest Airlines, despite having been run by leveraged buyout artists and taken into bankruptcy in 2005, still has a lock on the small airports of the Upper Midwest.

This means that if you want to fly from somewhere on the East Coast to somewhere in Minnesota, or somewhere in Michigan, or somewhere in Indiana, chances are good that at least one leg of your trip will require you to fly on Northwest.

By “to fly on Northwest,” of course, I mean “to be trapped on a grounded plane for extended lengths of time in between long periods in a holding pattern.”

In fact, our most recent trip on Northwest was our third consecutive summer trip disrupted by both the weather and the seeming inability of Northwest to get its act together, which I believe is a legacy of Northwest’s heritage as one of the first leveraged buyouts in the airline business.

Any time somebody wants to tout the merits of private equity, tell them to fly Northwest.

Weather disruptions, for example, shouldn’t be a big deal for an airline—after all, the entire airline industry pretty much operates in weather—except that Northwest apparently hires only those human beings who have lost the ability to speak with regular human beings as opposed to airline-related individuals.

Curious about the holding pattern you’ve been in for a half hour? Wondering about the mechanic scratching his head out on the tarmac? Anxious about whether you’ll make the connecting flight?

The rule on Northwest appears to be, if you don’t ask, they won’t tell you.

Furthermore, Northwest operates on a unique time system I refer to as “Northwest Airlines 15 Minute-Time.”

There are two rules governing this unique time system:

First, everything is always going to happen in about 15 minutes. As in, “We should pull away from the gate in about 15 minutes.” Or, “We should be in a holding pattern for only another 15 minutes.” Or, “We should be on the ground in about 15 minutes.”

Second, “15 Minutes” actually means “At least an hour.”

When the kids were young and diapers needed changing, we drove the 900-plus miles from the East Coast to the Upper Midwest. After our experience flying Northwest Airlines the last three summers running, I decided to look into whether we should start driving again.

I did my own calculations, based on an estimated average driving speed of 65 miles an hour and allowing for stops every five hours.

And, based on Northwest Airlines 15-Minute Time, I think we could make the trip in only about, oh, 15 minutes.

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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.

“No, let me just clarify. This is not a rescue. This is two things. First, given the dislocation in the markets, we believe that this is a good investment opportunity for us and the other investors that we have brought in. We also think at the same time this will be very helpful to the current fund investors because it will give the fund the wherewithal to also take advantage of these market opportunities.

“And so we think it is both of those things but not a rescue.”

—David Viniar, Goldman Sachs CFO

“Look at you. You used to be so cocky. You were going to go out and conquer the world…. What are you, but a…miserable little clerk crawling in here on your hands and knees and begging for help.”

—Lionel Barrymore (“Henry Potter”) to Jimmy Stewart (“George Bailey”), “It’s a Wonderful Life.”

Well the cocky folks whose leveraged “quant” funds have helped bring the current crisis upon the world’s capital markets—Goldman Sachs—held a conference call Monday to describe some steps they’re taking to alleviate the very same crisis which their leveraged “quant” funds helped trigger.

Just don’t use the word “rescue” to describe Goldman’s moves.

No, the wonderful folks at Goldman are not “rescuing” the troubled Global Equity Opportunities fund. They’re simply taking advantage of what Sam Wainwright—the greedy government-contract profiteer and boyhood friend of “It’s a Wonderful Life” hero George Bailey—might have described as “the opportunity of a lifetime.”

At least that’s how Goldman Sachs CFO David Viniars described the $3 billion weekend-organized emergency propping-up of the Global Equity Opportunities (“GEO”) fund:

Goldman Sachs is partnering with various investors, including C.V. Starr & Co., Perry Capital and Eli Broad to invest $3 billion in GEO. This investment reflects our collective belief that the value of this fund is suffering from a market dislocation that does not reflect the fundamental value of the fund’s positions.

Since we here at Not Making This Up strive to, well, not make things up, we here at Not Making This Up will indeed use the term ‘rescue’ no matter what the folks at Goldman want to call it.

For that is precisely what it is.

Now, the fund being rescued—the Global Equity Opportunities fund—ought not be confused with Goldman’s other big “quant” funds, including the Global Alpha fund, the North American Equity Opportunities fund or even the Global North American European Alpha Phi Beta What Happens in Sub-Prime Stays in Sub-Prime fund which we just made up but sounds about as good as anything else out there.

No, those other Goldman funds are so highly differentiated from the Not-Being-Rescued Global Equity Opportunities fund that they have generated completely non-correlated positive results that have fully offset the losses at the Not-Being-Rescued Global Equity Opportunities fund.

Actually, I’m making that up.

Those other Goldman funds have also, unfortunately, gotten crushed, which calls into question,

1. What differentiated strategies were they pursuing that yielded such a highly correlated co-efficient of returns?

2. What is a co-efficient of return anyway, and when did the gamma of the beta begin to lose its alpha?

3.Why do these funds all have different names in the first place?

Whether the other funds will need to Not Be Rescued like the fund that is Not Being Rescued remains to be seen, although the Goldman team somewhat bizarrely stated on their conference call that the reason they rescued—er, invested in—the “Global Equity Opportunities” fund as opposed to the “Global Alpha” fund and the “North American Equity Opportunities” fund is because they prefer “global opportunities.”

As if the “Global Alpha” fund is not a “global” fund.

Now, we here at Not Making This Up tend to give Wall Street’s Finest a hard time for their deferential manner on conference calls, by which I mean their incessant use of the phrase “Great quarter guys” as a substitute for “Hello,” not to mention their preference for asking “housekeeping” questions about the tax rate as opposed to business questions that actually matter.

So it is only fair to call out Susan Katzke of Credit Suisse, who showed on the Monday call why asking good questions makes a difference, during an interchange with Goldman CFO David Viniar about the stupendous leverage still residing in the Not-Being-Rescued fund as of Monday morning.

Note how Viniar tried to downplay the leverage in the Not-Being-Rescued fund, and actually understated it by half before Katzke forced him to cough up the truer picture of just how much trouble the “quants” had gotten into, when the gamma of their beta lost its alpha.

This is from the indispensable Street Events:

Susan Katzke, Credit Suisse:

Okay. And just I don’t know if you covered this with Roger — I might have missed it — but in terms of the leverage in the funds, what are the leverage parameters, and where do you expect them to be going forward? Were they in retrospect a little bit higher than you would have liked them to have been or will be going forward?

David Viniar, Goldman Sachs CFO:

They were higher than we wished they were given how fast the market moved, but they were right in line with what had been expected. And the leverage at GEO as we sit here now is around 3.5 times, which is actually a little bit under where we had told people we would operate but probably around where we will operate going forward.

Susan Katzke, Credit Suisse:

Okay. And the 3.5 times just to clarify is with the $3 billion equity investment?

David Viniar, Goldman Sachs CFO:

With the equity investment.

Susan Katzke, Credit Suisse:

Okay. So closer to 6 times before that.

David Viniar, Goldman Sachs CFO:

That is correct.

Ah, those cocky quants who were going to go out and conquer the world!

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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.

It began innocently enough.

A few odd stocks started collapsing—falling really hard for two or three or four days in a row—on no apparent news.

The first such stock I noticed was Teleflex (TFX), a fine, New York Stock Exchange-listed industrial conglomerate whose share price hit a 52-week high of $85 one fine day in July, and then dropped almost 25 points in the next two weeks on absolutely no news.

Now, Teleflex happens to be buying a medical products company called Arrow International, with which I am quite familiar.

And reasonable people might argue that Teleflex is paying an exorbitant price for Arrow, given the fact that Arrow’s core product line (something called central venous catheters—basically fancy straws that allow doctors to inject fluids into the body) are losing share to other types of catheters, thus calling into question Arrow’s ability to grow revenue in line with other medical products companies.

Furthermore, Teleflex plans to sell one of its existing businesses to help fund the Arrow transaction. Given the seize-up in the credit markets and the swift reduction in the number of private equity firms able to buy businesses on margin the way people used to buy houses in Orlando, Vegas and Sacramento, reasonable people might worry that Teleflex will get a less-than-super price for its existing business.

Thus, the market might be spooked into thinking that Teleflex was buying high and selling low, simultaneously.

At least, that was my best guess as to why shares of Teleflex had begun to crater.

But along came more Teleflexes—stocks suddenly dropping as though somebody’s life depended on it.

Ashland, Computer Sciences, Office Depot, CIT and Robert Half, among others, all experienced sudden, sharp drops under relentless selling pressure—most of them on absolutely no new news.

Sure, Office Depot had missed earnings, and yes Computer Sciences had been juiced upwards on private equity takeover speculation. But the decline in these and the others was quite sudden, in tandem and without let-up.

What on earth, then would a chemical company have in common with a high-tech computer services outfit, an office products retailer, a finance company, a headhunter and a diversified conglomerate?

In every case, their single largest publicly disclosed investor is identified as Barclay’s Bank.

Now, Barclay’s is as big as a bank can get—a little volatility in the credit markets is not likely going to cause a problem leading to the wholesale liquidation of assets, and certainly not assets that presumably belong to investors in Barclay’s equity funds, not the bank itself.

Still, Barclay’s is seeking to buy ABN Amro for what is widely considered to be a ridiculous price. And it would appear that Barclay’s has been selling stocks out of its funds in a get-me-out fashion.

Is it all an innocent coincidence, or is it one of the following:

1) Some trader on Barclay’s equities desk hit the wrong button on their computer;
2) The portfolio managers at Barclay’s all decided to sell stocks they had owned in size for a long time into a weak tape.
3) Something else is going on at Barclay’s that hasn’t come to light.

I’m willing to bet the answer is Number 3.

Any informed observations would be most welcome.

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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.

Those of you looking for solace in today’s Wall Street Journal—some sign that the current melt-down in the sub-prime mortgage-backed fiction of a debt market is near an end—may want to skip the C-Section of the Journal, go straight to the “Weekend Journal” and look at all those nice houses in Vail seeking a buyer.

More specifically, readers should avoid the following quote on the front page of the C-Section from one Ann Rutledge, who is identified by the paper as the principal of a structured finance consulting firm.

Here’s what she said:

“No one really knows how to price asset-backed securities and CDOs and that’s a real problem in the market now.”

You think?

Me, I made the mistake of reading Ms. Rutledge’s quote. So now I’m looking at all those nice houses in Vail in the “Weekend Journal.”

Is it my imagination, or are a lot more of ‘em for sale than last week?

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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.