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Speaking before an antitrust task force of the House Judiciary Committee, Mr. Karmazin said he was shocked by the very idea that anyone would see a monopoly as the logical result of merging the only two satellite radio broadcasters. “There is no monopoly or duopoly,” he told the hearing. “That’s the most bizarre thing I have ever heard.”

—The New York Times



You can’t blame him for trying.

“Him” is Mel Karmazin, the uber-salesman currently attempting to sell the deal of a lifetime to the relevant authorities–the merger of the only two satellite radio companies in America. And Mel is pulling out all the stops—going so far as to unload the following whopper on a rightly suspicious Congress:

Mr. Karmazin’s essential message is that satellite radio is competing with all forms of audio entertainment and information — from commercial radio to iPod jacks in cars to Internet radio….

Anybody ever try sticking a desktop PC in the car and tuning into Internet radio while you’re whaling down a crowded freeway?

Me neither.

And I suspect at the end of the day—this is my opinion only, and for what it’s worth—the XM/Sirius deal will not go through for precisely the same reason the Dish/Echostar deal did not go through.

Still, to test Mel’s own theory, it might be helpful to perform what is called a “Thought Experiment.”

The thought is this: would the Feds allow a single terrestrial radio company—Clear Channel, say—to buy every radio station in America, thereby owning 100% of the terrestrial radio business?

If the answer is “yes, because of all those iPods and Internet radio stations out there,” then one could suppose the Feds might allow a single satellite company to own 100% of the satellite radio business.

But I don’t think Mel is going to encourage anybody at the FCC to be doing that kind of thought experiment any time soon.

Jeff Matthews
I Am Not Making This Up

© 2007 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.

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

During the market swoon early last summer I defended the new Fed Chairman while he was being roundly blamed by frustrated investors for everything wrong with the world, short of global warming (see “Shooting the Messenger,” June 6).

Things settled down shortly thereafter, and until recently Mr. Bernanke was looking pretty good, what with the relentless melt-up in global equity markets and the evaporation of risk premium in the global credit markets.

But a recent speech—quoted above—makes me wonder if Mr. Bernanke has spent too much time reading his press clippings lately and too little time listening to earnings calls from American corporations.

Is there a CEO in America who believes the following?

Mr. Bernanke… said increased trade with China has reduced U.S. inflation, now running at about 2%, by only about 0.1 percentage point. And he noted that while these emerging economies have added to the global supply of manufactured goods, they are also adding to the demand for oil and other commodities.

“There seems to be little basis for concluding that globalization overall has significantly reduced inflation in the U.S. in recent years; indeed, the opposite may be true,” he said.

If you quoted those words to my friend who runs a supplier of office products to Wal-Mart and other Big Box retailers, he’d probably spit out his coffee all over his Wa-Mart invoices.

Those invoices, at least on a per-unit basis, did done nothing but go down for the last decade, after Wal-Mart abandoned its “Made in America” campaign and began to enforce a constant price squeeze on its vendors, aided and abetted by the opening up of dirt-cheap manufacturing capacity in China.

That virtuous circle of Big Box retailers pushing down consumer prices and taking greater market share, thereby acquiring even greater pricing clout and greater market share, was the single biggest driver of disinflation ever witnessed in our lifetime. Wal-Mart executives even make presentations to analysts showing how they’ve helped force down prices of everyday, humdrum products such as vacuum-cleaners and microwave ovens by as much as half over time.

How Mr. Bernanke could dismiss it out of hand is beyond me.

In any event, this is all, unfortunately for our own consumer price index, ancient history. The Chinese labor arbitrage began coming to an end two years ago, and most companies are reporting higher, not lower costs out of that country now.

Which means yesterday’s eye-popping 6.6% unit labor cost increase here in the U.S. might not have been simply a fourth quarter investment banking bonus one-off.

Still, if I were an Economics 101 professor I’d give Mr. Bernanke a D- for this thesis on inflation, or the lack thereof.

Jeff Matthews
I Am Not Making This Up

© 2007 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 investment world is full of surveys.

Every month Wall Street’s Finest conduct surveys of almost anything you can imagine—smartphone trends, cancer drug market share, what teenage girls are buying—all for the purpose of attempting to get a jump on future stock price movements when those trends show up in sales of, for example, cell phones, cancer drugs and even torn denim jeans.

The surveys are sometimes interesting and sometimes not.

My observation is that Wall Street’s Finest frequently get the answers they want to get, rather than the right answer, for the same reason Republicans and Democrats tend to get the answer they want in those voter surveys that for some reason never quite seem to get the actual election results right.

Garbage in, garbage out, as they say.

Along these lines I recently listened to an iPhone survey conducted for one of Wall Street’s better technology analysts by a marketing firm that presented its conclusions via lots of colorful charts and a long conference call.

And while the survey yielded some interesting conclusions, I wondered if those conclusions weren’t completely irrelevant to the question of whether the iPhone fills a consumer need, owing to the way the data was collected.

The way the data was collected was this: consumers who were looking to buy at iPods in stores were interviewed about the iPhone, its functionality, its price and whether it might fit into the lifestyle needs of those consumers.

Seems the marketing firm assumed iPod buyers are the natural potential buyer for the iPhone. Now, I’m no marketing genius, nor am I a survey expert.

But I would guess that by limiting my questions to people who are looking to buy a music playing device many years after its wildly successful launch, the survey results might contain very limited information about the true market potential for an iPhone.

Sort of like interviewing Sony Walk-Man buyers how interested they might be in spending a few hundred bucks on a fancy new music playing device from a computer company back when.

Why, I wondered, did the marketing gurus not ask cell phone buyers, Blackberry owners and Treo users about their iPhone plans? This is, after all, an iPhone with email and web capability, and not merely a music player.

For whatever reason, they didn’t bother.

With that question in mind I offer the third “Not Making This Up” survey of readers’ opinions about a topic that is very timely.

The last time we did such an unscientific survey was in December 2005 (“RIMM versus Palm?”), when Research In Motion was under the cloud of a lawsuit that quite literally threatened to pull the plug out of the Blackberry’s email functionality on which its users, and their lives, almost literally depended.

I was trying to understand how important the Blackberry was to its users, and whether they might consider switching to Palm or some other device. We asked a series of open ended questions and got 37 responses, most of them very intelligent, well thought-out, and quite interesting.

And I have to say, in all modesty, that the survey results had a certain bearing on the investment merits of RIMM versus Palm. In a nutshell, Blackberry users were not going to switch to Palm unless they absolutely had to.

That may seem obvious in retrospect, what with RIMM’s earnings and stock price having gone through the proverbial roof in 2006 following the company’s legal settlement with NTP and the highly successful Pearl introduction.

But in those dark days of late 2005, some of Wall Street’s Finest were not convinced RIMM could survive the fallout of the lawsuit unscathed.

Our readers suggested otherwise, and with that happy result in mind, we put forth the following entirely unscientific questions about the iPhone.

We ask all responders to respond to each question, and add whatever color they like.

Responses will be available for all to see.

1. Do you plan to buy an iPhone for $499 plus calling plan with Cingular the minute it is available, or soon thereafter?

2. Why or why not?

3. Which iPhone feature do you like the best? Which feature bothers you most?

4. If price is the issue, would you pay, say, $299 for the iPhone, plus calling plan?

5. What kind of cell phone do you use every day, and who is your current carrier? Would switch your current cell phone number to Cingular and use it on the iPhone?

6. What kind of email device do you use every day, and who is your carrier? Would you switch your email to the iPhone and get rid of your current device?

7. Did you buy an iPod when it first came out? Do you have one now?

8. Do you need a new iPod? Would you replace it with an iPhone?

Informed responses are welcome. The more the better.

Jeff Matthews
I Am Not Making This Up

© 2007 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.

Early this year, for instance, when a group of 17 Chinese companies was cited by regulators for misappropriating corporate funds, their stock prices all skyrocketed. When the Tianjin Global Magnetic Card Company failed to report quarterly earnings last April, its stock doubled.

—“From Shanghai, Tremors Heard Around the World,” The New York Times.

This week’s, er, fluctuations in the craps table otherwise known as the Shanghai Composite Index may or may not be the pause that refreshes, as most participants appear to believe.

However things go in the short run over there, this week’s New York Times carried another remarkable article about the Shanghai Bubble containing so much of the stuff of Investors Behaving Badly that I thought it imperative to urge readers to find the original story on the Times web site and read the entire story from beginning to end.

As the above excerpt demonstrates, it appears that eager buyers are so anxious to find stocks to buy that they care not one whit whether the company whose name they have heard is involved in something bad: the mere fact that they have found the name of a stock mentioned in the press is enough to generate a green buy ticket for their broker.

“If I hear a stock mentioned on the TV news I will pay attention to it,” says Xu Xiaochen, a 55-year-old retiree.

Now, let’s cut these investors some slack. They’re not buying just any old name: the name itself ought to be “lucky.” I am not making this up.

In any case, many investors here seem to believe that the secret to picking stocks is luck and confidence in the government, not the fundamentals of any particular company.

“I don’t know how to choose a stock,” says a 61-year-old retiree who gave her name as Miss Hou at a local brokerage house a few weeks ago. “But I trust those technology companies. Maybe the names of some companies sound lucky to me, so I choose to buy these stocks.”

There is more—much more, including the previously skeptical Peking University finance professor who is now raising a fund to invest in the very stock market he had avoided:

“There’s a huge amount of money in the banking system with nowhere to go,” he said. “I think you’re going to see that money getting out of the banking system.”

For most of those poor speculators, I suspect, the money will get out sooner than anybody thinks.

Jeff Matthews
I Am Not Making This Up

© 2007 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.

Flew in from Miami Beach BOAC
Didn’t get to bed last night
All the way the paper bag was on my knee
Man, I had a dreadful flight
I’m back in the U.S.S.R.
You don’t know how lucky you are, boy
Back in the U.S.S.R.

—Lennon/McCartney

I do realize that a certain portion of our readers may never have come across the word “Kremlinology.”

After all, the notion of studying seemingly minor things such as the placement of officials in photographs of the May Day Parade in order to determine what was going on at the Kremlin—and, therefore, in the government circles of the notoriously secretive USSR—seems ridiculous in light of the fact that:

a) The USSR no longer exists;

b) Vladimir Putin, the President of its Russian successor, simply takes whatever he wants whenever he wants it.

So who needs “Kremlinology” anyhow?

To illustrate how quickly the world has changed, the spell-checker in this word processor, brought to you by the Microsoft Monopoly, doesn’t recognize “Putin,” and insists on underlining his name in a squiggly red line as I type.

That squiggly red line is highly annoying, although compared to something as evil and pernicious as the “Insert Key”—which computer users only discover when they accidentally it hit by mistake and then wonder why their words are being eaten up by the computer—the squiggly red line under “Putin” is nothing.

I know some people who, before they learned what that innocuous little button in the right hand corner of the keyboard actually did, would re-start their notebook computer in order to turn off the “Insert Key.” They would then pray that whatever strange bug had suddenly gripped their system would not re-occur.

When they learned the source of the problem, they were so relieved their machine was not infected by some strange virus created by a twelve year old kid in Uzbekistan that they experienced a sense of relief akin to discovering that a biopsy had come back negative.

Now, the fact that twelve year olds in Uzbekistan and Lithuania are free to create computer viruses is all thanks to the end of the Cold War in 1989, when the Berlin Wall fell and the USSR began to disintegrate.

Which is why the term “Kremlinology” means nothing these days: by the time this year’s college graduate was old enough to read a newspaper, the Soviet Union no longer existed.

In any event, the term itself is a good description of the type of work analysts must do when companies resort to the type of self-deception practiced by the occupants of the Kremlin during the heyday of the USSR.

A prime example is the following press release recently issued by Netflix, the DVD-by-mail service that recently upset Wall Street’s Finest with modestly disappointing subscriber growth, even while reiterating plans to reach 20 million subscribers sometime down the road—video iPods and YouTube notwithstanding.

LOS GATOS, Calif., Feb. 20 …Netflix Inc. (Nasdaq: NFLX – News) today announced that Chief Operations Officer Bill Henderson is planning to become a strategic advisor to the company and that Vice President of IT Development Andy Rendich, an eight-year Netflix executive, has become interim head of Operations. Mr. Henderson is expected to serve as a consultant to Netflix for at least the next two years.

The casual reader might think nothing more of this than what it says: that the Chief Operations Officer is getting a new job title following a job well done. After all, the CEO heaps praise on Mr. Hendersen as follows:

“Bill’s unprecedented operational expertise as former Postmaster General of the United States has contributed to Netflix’s tremendous gains in automation and efficiency,” said Netflix Founder, Chairman and CEO Reed Hastings. “We look forward to Bill’s continued participation in the company’s growth.”

However, the less-casual reader would recall a press release from a little more than one year ago in which the same CEO, Reed Hastings, welcomed Mr. Hendersen to the the COO job with great expectations:

LOS GATOS, Calif., Jan. 18 [2006]…Netflix, Inc….today announced the appointment of former U.S. Postmaster General William J. Henderson as chief operations officer of the world’s largest online DVD rental service. He assumes his new role on January 23 and succeeds Tom Dillon, who is scheduled to retire in April.

Mr. Henderson, 58, was chief operating officer of the United States Postal Service (USPS) from 1994-98 and postmaster general and USPS chief executive officer from 1998 until his retirement in 2001. He was the 71st postmaster general of the United States and the fifth career employee to lead the world’s largest postal system, which processes, transports and delivers more than 650 million pieces of mail to more than 130 million addresses every day.

At the time, cynical observers scratched their collective heads at the notion that a guy from the Post Office—the Post Office!—could bring anything more dynamic than longer lunch breaks to an operation already honed to a fine tune by the outgoing COO, Mr. Dillon, who as it turns out came from a slightly different background than Mr. Hendersen.

Actually, Dillon came from an extremely different background.

He came from the disk drive industry, which is to the Post Office what a NASCAR driver is to your average Oldsmobile-driving Florida retiree when it comes to speed and efficiency. Mr. Dillon, according to my friends in the business, was the guy who really made Netflix an efficient operation.

But Mr. Hastings, who is nothing if not a cheerleader for his cause—was insistent that this Post Office veteran was the right man for the job:

“Bill Henderson is about the only person on the planet who looks at our volume of mail as a trickle,” said Mr. Hastings. Netflix ships over one million DVDs a day from 37 distribution centers across the U.S.

“Bill is the perfect person to ensure that our operations are inextricably linked with every aspect of the business and that our service levels are a linchpin of the Netflix customer experience,” Mr. Hastings added. “We’ll look for him to extend our current competitive advantages in this area, particularly as our mail volume increases with our forecasted growth to at least 5.65 million subscribers this year and 20 million by 2010-2012.”

“Bill” is gone—at least in Kremlinological terms, having been metaphorically air-brushed out of the May Day parade photo of the top guns at Netflix, and shifted off the platform to a minor post in Uzbekistan.

So what really happened behind the scenes?

Why has a man—of whom so much was expected not 13 months ago—been shifted to the role of “Strategic Advisor” for a company whose strategy has, as far as most observers of the company would tell you, been set and directed by the founder, Mr. Hastings.

And, not for nothing, why in this age of instant communication, Regulation Fair Disclosure and the democratization of the investing class, must we resort to Kreminology here in the first place?

Jeff Matthews
I Am Not Making This Up

© 2007 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.

“I mean, you got the first mainstream African-American who is articulate and bright and clean and a nice-looking guy…I mean, that’s a storybook, man.”

—Three-time U.S. Presidential hopeful and election speech plagiarist Senator Joe Biden, describing fellow Senator and Presidential hopeful Barack Obama

“I take a bath every day.”

—Articulate, bright, mainstream African-American former Presidential candidate Al Sharpton

For the record, I have Al Sharpton’s autograph.

Now, before you spit out your coffee—Al Sharpton is a very divisive character, what with pleading guilty to tax evasion, not to mention perpetrating the Tawana Brawley hoax, which ruined innocent lives and for which he never apologized—let me explain how that happened.

I was leaving a mid-town Chinese restaurant one night shortly after Sharpton had ended his Presidential campaign. On my way out between big glass fish tanks and the red-jacketed waiters I passed by a table where a woman had just excused herself to go to the bathroom and the man who remained seated was exuding an unnatural amount of charisma.

It was Al Sharpton—big hair, big ring and big presence.

I’m a soft touch for celebrity—in particular musical (one day I will relate the Sting autograph story here) and political. So I stopped and asked him to sign my train schedule.

This he did, taking out a big pen of his own and signing with a flourish. As I left to hustle to Grand Central he was being surrounded by a flock of other diners who apparently took advantage of the break in his private dinner to metaphorically kiss his very real, outsized, gold ring. Whatever you think of him, as I said, the guy exuded charisma.

He was also, I can vouch, physically if not ethically quite clean.

So, when Joe Biden seemingly stratified an entire race of Americans into those that are mainstream, clean and articulate as opposed to those that are not, I found the ensuing media and political debate about whether Biden meant what it sounded like he meant to be extremely silly.

Of course he meant it. What else could he mean?

Now, this is not a political blog, although I have written about Joe Biden before (see “Weekend Edition: Say it Ain’t So, Fighting Joe” from August 20 of last year), when he was campaigning against, of all things, Wal-Mart.

Wal-Mart bashing was popular at the time, and Biden had lashed into what is, by any standards, one of the most successful enterprises the world has ever seen—one that has created more jobs and reduced prices for more Americans than Joe Biden could even imagine, if he had the brains to comprehend such things, which he clearly does not.

The fact that Biden has created no jobs himself to speak of despite endless years of seat-warming down in Washington made his remarks even more ridiculous than they were on the face of it, which was the point I made at that time

However, when Biden’s description of Barack Obama—“mainstream” and “articulate” and “clean”—appeared, they surprised even me, given that they are racial code words not usually associated with a liberal Democrat like Biden.

Biden’s lame attempt at damage control—“I have no doubt Jesse Jackson, Al Sharpton and the rest know exactly what I meant,”—did nothing to assuage the issue, particularly when Sharpton came out with the best line of the whole mess:

“I take a bath every day.”

Destroyed Presidential campaign aside, what does all this mean about Joe Biden? Personally, I think it means he is simply a product of his age.

For Joe Biden was born in Pennsylvania in 1942 and grew up in Delaware, which was one of 17 states whose public schools were officially segregated until the 1954 Brown vs. Board of Education Supreme Court decision forbade segregated schools.

I’m not saying Biden attended a segregated school, nor do I know a thing about his family life; but racism back then was out there in every day American life—not hidden beneath the surface as now.

For those of you too young to know what it’s like when racism is right out front in every day life, I recall my parents stopping at a Howard Johnson’s ice cream counter during a family drive in New England sometime in the early 1960’s.

We got in line and my sisters and I debated what flavors to get when a hubbub arose that I did not comprehend until we got back in the car and my parents explained what had happened. What had happened was, a white man with his family got upset that a black man was served ahead of him, and he made his displeasure known to other people in line as well as the lady behind the counter.

I am not making that up. It was my first lesson on racism in America.

Does this mean Joe Biden and other 64-year olds are, by definition, racist? Not at all. But the fact that he used those code words the way he used them, and was entirely clueless how loaded they would appear at the time he used them, means, in my opinion, he is simply a product of his age.

The good news is things have changed since then—not just about race, but also about personal stigmas. Indeed, the demystification of Biden’s racial code words reminds me of something that took place at my own house just a couple of years ago.

John was a family friend of ours and a State Representative we’d helped over the years; he was a good guy at heart, but extremely insecure and, in private, a macho guy who loved to make fun of gays then serving with him in the legislature. And he always had bad dates with women we set him up with. Naturally, we figured he was gay and urged him to come out of the closet before his next campaign, just to stop the rumors flying around town and to get on with his career.

He insisted he was not gay, and although it didn’t figure into the election, he lost.

One Saturday shortly afterwards, John came over to the house as he had done many other Saturdays, to have tea with my wife. Usually they talked politics. This day, he wanted to tell us something. He wanted to tell us he was gay.

It was, for him, a huge deal. His hands trembled and his voice was husky as he told us. Then he cried, we hugged him, and my dog Lucy, who had always loved John more than any other visitor to our kitchen, put her head on his knee and accepted him as she always had done. When John was ready, we called upstairs to our older daughter, who had known him since she was a toddler.

“John wants to tell you something,” we said. When she came bouncing into the kitchen dressed and ready to go out and meet friends, he said nervously and quietly: “I’m gay.” He was still holding his tea cup, and still trembling with emotion.

“Oh, okay,” she said. She kissed him on the cheek. “I gotta go.” And she ran out the door.

To an eighteen year old, what John had told her had none of the shock, the emotion, the power that it had to John’s peers. Her complete indifference to it amazed him at first—then he laughed. It was for him an enormous relief.

When Joe Biden called Barack Obama “mainstream” and “articulate” and “clean,” I think anybody of a certain age, who grew up before the mainstreaming of African-Americans, does, despite Biden’s insistence to the contrary, know “exactly” what he really did mean by those words even if they do not agree with him.

The good news is that those who grew up after that time, particularly since the falling of borders across the world and the tremendous globalization of the world’s economies, most likely reacted as our eighteen year old did to the news that her former state legislator was gay: they didn’t get what those loaded words meant once upon a time.

That’s even better news than this: Joe Biden has no chance to be President.

Jeff Matthews
I Am Not Making This Up

© 2007 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 least helpful research report any investor will likely read today comes from the folks at Friedman, Billings, & Ramsey—a firm that hitched its financial star to the sub-prime market and is now experiencing the downside of that affiliation.

FBR, it should be noted, helped manage equity offerings for New Century Financial, a company that was, until last night, the Poster Child of the sub-prime lending debacle now unfolding across this highly leveraged land of ours.

What happened last night—specifically, four seconds after the market closed—was that Novastar Financial took New Century’s crown by announcing one of the most horrific operational 180’s in Wall Street history.

Novastar, it should be noted, is structured as a Real Estate Investment Trust, and as such paid out its earnings to until-recently happy shareholders who were woefully oblivious to the Ponzi-like nature of Novastar’s earnings stream.

The earnings stream itself depended on the company’s ability to package and sell sub-prime loans into a marketplace eager for yield, allowing Novastar to book largely non-cash gains up front on those sales as income, and to pay out that income to those formerly happy shareholders as dividends.

Unfortunately, given the non-cash nature of the up-front gains on those mortgage packages, and the Ponzi-like need to keep amassing—and selling—more sub-prime mortgages, Novastar borrowed money to pay the dividend income to those formerly happy shareholders.

A lot of money.

In fact, from 2001 until last year Novastar shelled out over $500 million in dividends to those formerly happy shareholders, while its debt went up by four billion dollars.

Which is why last night’s disclosure—that the company as a REIT wouldn’t likely generate any taxable earnings through 2011—shouldn’t have been much of a shock to anybody who even casually read the newspapers lately.

But it was, apparently, to the folks at FBR.

For this morning their analysts downgraded Novastar’s stock from “Market Perform” to “Underperform,” and cut their price target from $27 per share to $10 per share.

Unfortunately for those formerly happy Novastar shareholders—whose ranks used to include much of the “Naked Short-selling Conspiracy Theory” crowd with whom Patrick Byrne associates and from whom he apparently derived his most bizarre notions regarding naked shorting by hedge funds—Novastar’s stock closed last night at $17.56 and looks to open closer to $11 a share this morning.

Seems the shorts were right all along.

Also seems the FBR report announcing their downgrade and $17 per share price target reduction will almost certainly be the least helpful research report anybody will read this morning.

Jeff Matthews
I Am Not Making This Up

© 2007 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.

Satellite-Radio Rivals XMAnd Sirius Agree to Merge
By DENNIS K. BERMAN and SARAH MCBRIDE
February 19, 2007 3:42 p.m.

To absolutely nobody’s surprise, the satellite radio duopoly is going to become a monopoly, if Sirius Satellite’s Mel Karmazin and XM Satellite’s Gary Parsons have their way.

As today’s online Wall Street Journal summed it up,

XM Satellite Radio Holdings and Sirius Satellite Radio Inc. are merging into a single satellite-radio giant, the companies announced Monday.

Mel Karmazin, currently chief executive of Sirius, would be chief executive of the combined company, and Gary Parsons, currently chairman of XM, would be chairman of the new entity. The companies would merge as equals, with both companies getting the same share of the new company. The company would keep offices in both New York, where Sirius is based, and Washington, D.C., home to XM.

Anybody who has ever listened to satellite radio knows this: aside from the fact that Howard is available only on Sirius and Major League Baseball is available only on XM, the two satellite services are virtually indistinguishable.

They each have channels devoted to rock hits arranged by decade; they each have the entire spectrum of talk-radio, from right-wing to left-wing; and they each have so many channels devoted sub-categories of rock, classical, jazz, and country music that, for example, the thrash-metal aficionado does not have to settle for mere heavy-metal music.

If you’re in a car and don’t have CDs or an iPod, satellite radio is indispensable. Five minutes with Clear Channel Corporate So-Called Radio and its three distinct formats—“Easy Listening,” “Classic Rock” and “Mostly Ads”—will leave you driving on sidewalks to get through traffic and out of the car.

(In fact, I think a terrific graduate thesis would be to investigate the statistical correlation between the rise of Clear Channel Corporate So-Called Radio and the proliferation of road rage on our nation’s highways: I’d bet the correlation is almost one-to-one.)

It is precisely the broad overlap in their content that makes the two satellite networks attractive merger partners: why have duplicate satellites beaming near-duplicate content to cars equipped with two different receivers? Why have two sets of broadcasting facilities, customer-acquisition programs, call centers and billing operations?

The savings, as Mel Karmazin himself has said in his quite-public lobbying for a deal, would be enormous.

In fact, today’s press release from the two companies notes that Wall Street’s Finest have estimated a range of savings between $3 billion and $7 billion, enough to turn the two money-losing enterprises into one extremely profitable enterprise.

So why not shmoosh the whole thing together?

The one and only negative answer to that question is this: just last month, Federal Communications Commission Chairman Kevin Martin said such a thing was not possible, as reported thusly in Bloomberg.

“There is a prohibition on one entity owning both of these businesses,’’ Martin said.

Mel Karmazin, however, is nothing if not persuasive, and today’s coverage suggests the two companies see a way to get around the prohibition:

…the two sides are likely to argue that the proliferation of Internet-based radio, digital music players, and new HD-radio formats creates a vigorous competitive market for such media. Indeed, in surveys, consumers rarely can differentiate between the two companies, which have spent hundreds of millions trying to appeal to them.

So the worst-kept secret in corporate deal-making has finally been made public, but now the hard part begins: getting the deal approved by all the relevant regulators.

I can’t take credit for knowing this was imminent, but I did suspect something was up just three weeks ago when I saw Mel Karmazin at the Four Seasons Hotel on 57th Street. I was leaving an IPO roadshow lunch and noticed Mel standing along in the hallway outside a room where a Sirius Satellite Radio lunch was in progress.

Mel was talking not on his cell-phone, but on a regular land-line phone, and he looked very very very serious.

I wondered why the CEO of a public satellite radio company would be using something as ancient and outmoded as a land-line for a serious conversation—one urgent enough to disrupt his appearance at a company-sponsored lunch with investors. It seemed obvious the call had to have something to do with the hoped-for merger Mel himself had been pushing in the press for months.

I flirted briefly with the idea of going back and whispering something like, “What does Howard think of the deal?”

But I resisted the temptation. Mel looked like he wanted to hit somebody.

I suspect he’ll be a lot cheerier tomorrow on the conference call.

Jeff Matthews
I Am Not Making This Up

© 2007 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.

Merck & Co. will pay the federal government $2.3 billion to resolve roughly a decade of disputed back taxes, in one of the largest publicly disclosed settlements between a U.S. corporation and the Internal Revenue Service.
—The Wall Street Journal

It’s not every day you see a big U.S. company cave in to the I.R.S. with a multi-billion dollar settlement, but White House Station, New Jersey-based Merck did just that.

In “Where’s Sammy Antar When You Need Him?” last September 28, 2006, we looked into a Wall Street Journal report on how Merck had transferred patents for certain blockbuster drugs to offshore entities in low-tax jurisdictions, shielding itself from $1.5 billion in federal taxes.

I pointed out at the time that such tax-avoiding asset-shuffling is quite common among all companies with good tax departments; now it seems the folks at Merck are admitting as much.

After all, when was the last time you saw a company fork over $2.3 billion to the I.R.S. without a real fight? ExxonMobil is still fighting a multi-billion punitive damage suit from the Exxon Valdez oil disaster—which happened eighteen years ago.

Speaking of ExxonMobil, that’s another company which also caved recently…on global warming.

After years of fighting the rather common-sense notion that the presence of 600 million gas-guzzling cars, not to mention millions of diesel-guzzling trucks and hundreds of thousands of coal-guzzling factories, might have something to do with the melting ice cap, ExxonMobil has taken full page ads stating its new, if highly nuanced, position on global warming:

Much has been said recently about ExxonMobil and our views on climate change. So we’d like to take this opportunity to set out, clearly and concisely, our position on this important issue.

* The earth’s climate has warmed about 0.7C in the last century
* Many global ecosystems are showing signs of warming
* CO2 emissions have increased

However grudging the ExxonMobil Bigs’ admission that there just might be some link between the stuff they make and the suddenly-receding glaciers in Switzerland, Greenland and Bolivia, corporations don’t usually cave like that.

Governments, on the other hand, cave every day, and India is a case in point. See if you can detect the flaw in the logic of the latest attempt by that government to both ameliorate inflation and stay popular: NEW DELHI — The Indian government Thursday cut the price of gasoline and diesel, the latest in a string of measures aimed at containing inflation, and said more steps will be taken to ease the pressure on supplies of key commodities.—The Wall Street Journal Correct me if I’m wrong, but I can’t recall a single instance when “pressure on supplies of key commodities” has ever been “eased” by decreasing the price of those commodities. Still, the lack of historical examples is not stopping the pols in New Delhi from trying:
The announcement came after the government released data that showed the wholesale inflation rate rose to 6.73% for the week ended Feb. 3, the highest in more than two years and well above the central bank’s comfort zone of 5.0% to 5.5% for the fiscal year ending March 31.
Reacting to the price cuts and latest inflation data, Finance Minister P. Chidambaram said the price cuts will moderate inflation.
It may take longer than Merck took to give in to the I.R.S. for the Indian government to realize the errors of artificially cutting prices in the face of rising demand, and it may even take as long as it’s taken ExxonMobil to pay up for the Valdez verdict—which is to say a long long time.

But I suspect at the end of the day, the Indian Government will figure it out.

Jeff Matthews
I Am Not Making This Up

© 2007 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.

Thelma Dickinson: OK, then listen, let’s not get caught.
Louise Sawyer: What’re you talking about?
Thelma: Let’s keep going.
Louise: What do you mean?
Thelma: Go.
Louise: You sure?
Thelma: Yeah, yeah. Let’s.

—Thelma and Louise
Written by Callie Khouri

Seems to me the world’s credit markets have found their Inner Thelma and Louise.

For those not familiar with that movie of “lady fugitives on the run,” the quote above is from the final scene in which the pair of sympathetically-depicted criminals in their getaway car decide—police behind them and canyon in front—to “keep going” over the cliff.

Which is, it seems to me, exactly what the world’s credit markets have decided to do en masse, so inexorable is their drive to lend to anybody with title to an asset—any asset—and a pulse.

The head-scratcher, of course, is that it was precisely the same type of non-existent credit standards that got America’s home-buyers, and their lenders, in trouble not so long ago.

And by “not so long ago,” I mean, “like, last week.”

For that is when HSBC announced a $1.76 billion dollar sub-prime debt impairment charge, blowing the collective minds of HSBC shareholders and U.S. sub-prime mortgage lenders alike.

Here’s how last week’s Wall Street Journal described the errors of HSBC’s ways:

When the U.S. housing market was booming, HSBC Holdings PLC raced to join the party. Sensing opportunity in the bottom end of the mortgage market, the giant British bank bet big on borrowers with sketchy credit records.

Yet according to my Bloomberg, the lessons learned are not, apparently, stopping anybody from throwing money at leveraged buyouts the way HSBC was throwing money at the Thelmas and Louises of the sub-prime mortgage market.

Univision Seeking Record “Covenant-Lite” Loan for LBO — By Harris Rubinroit, Bloomberg

Feb. 13 (Bloomberg) — Univision Communications Inc., the largest U.S. Spanish-language broadcaster, is asking potential lenders to forgo restrictions on a $7 billion loan to fund its leveraged buyout, according to investors who may participate.

Now, you might think that those “potential lenders” would have second or third thoughts before committing to such terms, what with the sub-prime blow-up still reverberating on the Wall Street Journal’s front page this very morning:

Rising defaults are prompting some lenders to clamp down on the use of “piggyback” mortgages, a risky type of loan that allows borrowers to finance up to 100% of the purchase price.

Yet according to the Bloomberg story it would appear that sub-prime commercial borrowers are being courted with as much fervor as the sub-prime Thelma and Louise-type home buyers during the housing boom of, oh, eighteen months ago:

Univision is seeking a covenant-lite loan, which has no quarterly limit on the borrower’s amount of debt relative to cash flow. The Los Angeles-based company also wants no quarterly requirement for the minimum amount of cash flow it must generatein proportion to interest expense, said three investors, who declined to be identified because the terms aren’t public.

Correct me if I’m wrong, but that looks suspiciously like a sort of corporate version of the “no documentation” loans described in the HSBC report just last week:

To speed up these purchases from other lenders, HSBC accepted loan paperwork that didn’t verify whether borrowers made as much as they claimed. Mortgages that rely on the borrower’s word about that are called “stated-income” loans. (More conservative lenders might demand full documentation of income.)

More conservative lenders than HSBC are not taking $1.76 billion charges for their fully documented loans.

And more conservative lenders will probably shy away from deals like Univision. But that is not stopping Univision from demanding the virtual equivalent of “stated-income” loans for its multi-billion dollar buyout from the HSBC’s of the commercial markets:

The seven-and-a-half year covenant-lite loan would be the largest loan of its type. The money is part of $10.2 billion in financing to be used to help pay for Univision’s $12.3 billion takeover by a buyout group that includes Madison DearbornPartners LLC, Providence Equity Partners Inc., Texas Pacific Group, Thomas H. Lee Partners LP and Saban Capital Group Inc.

And despite what you heard Mick Jagger sing growing up in the early 70’s, Univision will probably get what it wants.

The Univision loans are a “function of excess liquidity in the market driven by institutional investors,” said Neal Schweitzer, a senior vice president in corporate finance at Moody’s Investors Service in New York. “The loans are structured to weather a potential hiccup.”

As with HSBC and its sorry tale of woe, however, I suspect we will find in the not too distant future that the Univision loans are structured for nothing but the simple blind faith that the worldwide asset bubble will continue to expand—the same kind of blind faith that blew up HSBC:

“There was very little data on loans to subprime borrowers where the borrower put very little down,” says Thomas Lawler, a housing economist in Vienna, Va.

Chris Freemott, president of All American Mortgage Inc. in Naperville, Ill., says it was a time when “everyone lowered their credit standards” in what he refers to as “a race to the bottom.” Adds Mr. Hamilton at Lime Financial: “People got way too aggressive in pricing, and they weren’t pricing for the risk.”

And so the commercial credit markets, as did the sub-prime mortgage market once upon a time, “race to the bottom.”

While Thelma and her pal have already driven off the cliff.

Jeff Matthews
I Am Not Making This Up

© 2007 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.