Category: Uncategorized

Google in Talks To Buy YouTube For $1.6 Billion

That’s the front-page story in the Wall Street Journal, which broke the story Friday afternoon during an otherwise relatively quiet day.

Quiet, that is, if you don’t count Jerry York flipping his chin at the General Motors Board of So-Called Directors and resigning from that august collection of individuals who, it should be noted, have overseen General Motors’ decline and fall at the hands of CEO Rick Wagoner.

Seems those same So-Called Directors were more interested in preserving Mr. Wagoner’s tenure than with exploring what Nissan savior Carlos Ghosn might have brought to the table by hooking up Nissan and Renault to GM. Hard to imagine a Nissan/Renault/GM merger could result in anything worse than what Wagoner’s done so far.

Nevertheless, by keeping the Board of So-Called Directors from engaging outside advisors to explore an opportunity which would have almost certainly cost him his job, Wagoner shut down the threat as easily as the Detroit Tigers shut down the $200 million New York Yankees and simultaneously belied the predictions of certain outside observers—including yours truly—that GM would find no better alternative (see “Sonny Makes the Deal,” July 3, 2006) to a deal with Ghosn.

Which is why I hesitate to make any such forecast about the ultimate outcome of the Google-for-YouTube merger discussions whose disclosure swept Wall Street and Silicon Valley late Friday afternoon.

But I will take issue with a central tenet of the Wall Street Journal’s take on the rationale behind the merger, as summed up in the second headline of the story:

Deal Could Put Search Giant In Top Spot for Online Video; A Front Door for Web Visits

The issue I take is this: YouTube is no mere “front door for web visits” by teenagers surfing the web.

Rather, YouTube is the Next TV.

Before you spit out your coffee, or Jamba Juice, or chai tea, or soy latte at that grand statement, consider for a moment what is happening here.

People watch more than one hundred million videos on YouTube every day. Since YouTube accounted for just under half of all visits to U.S. online video sites in September, more than two hundred million videos are viewed every day on U.S. video sites, including YouTube, MySpace, Google and others.

Keep that number—two hundred million a day—in mind.

Now, consider that of the nearly 300 million Americans alive at this moment, roughly 15% are below the age of 10 and roughly 50% are 35 or older, which leaves some 35% of those 300 million within the prime online-video-watching age range of 10-to-35. That is something close to 100 million pairs of “eyeballs,” as they used to say during the Dot-Com Bubble.

But let’s assume that at least two-thirds of those 100 million 10-to-35 year olds have better things to do than watch a video of some poor loner lip-synching “Stop! In the Name of Love” to his pet iguana. If my math is close to reality, then about one-third of those 100 million likely viewers, or 35 million, are watching those two hundred million videos a day.

Which amounts to approximately seven videos per person per day.

Keep in mind these videos aren’t all made by lip-synching losers: there are old Jerry Seinfeld nightclub shows and home-made videos of early Beatles concerts; there are television shows both pirated and, thanks to Fox, which announced last week that it would put shows on MySpace, legit, not to mention stupid “Jack-Ass” type stunts and almost anything else you can think to look for.

And that is why I call YouTube and its ilk the Next TV.

Yes, I know the mantra from the not-dead-yet TV and Movie Establishment—“Who wants to watch a movie or a TV show on their computer?”

Unfortunately, that’s almost exactly what their friends at EMI and Warner Music asked when the iPod came along: “Who wants to listen to music on a computer?”

This notion that people need to sit in a living room to watch moving images is, I think, the opiate of the network TV bosses. If they asked me, I’d tell them precisely who wants to watch television and movies and sports on their computers: my daughters and all their friends and all their friends’ friends.

About 35 million of ’em, for now.

Which is why it makes all the sense in the world to me that the Google guys—whose video service hasn’t gained much traction whatsoever—are looking to buy YouTube (founded February 2005) even though my friend Mark Cuban famously predicted YouTube will get “crushed” owing to the same type of commercial copyright issues that brought down Napster.

In fact, it makes all the sense in the world to me that Rupert Murdoch, the canny Old Media Mogul who saw what was happening and bought MySpace a year before poor old Sumner Redstone realized what was going on, is reported to be in the hunt for YouTube as well.

Because what Rupert knows is this: Cable TV is dead: long live Next TV.

Coming soon to a URL near you.

Jeff Matthews
I Am Not Making This Up
“Next TV” © 2006 Jeff Matthews

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

There’s a company with which I’m familiar that’s been around a long time. It has good management and a nice portfolio of products generating reasonable sales growth at healthy margins, year after year.

On top of that, the business throws off more cash than it requires for plant and equipment, so the management team does what it has been doing for decades: it finds businesses or individual product lines that fit the existing franchise, and buys them at prices which make sense. And if the company can’t find the right fit at the right price, the company doesn’t buy.

Since the stock of this company is owned by the founding family as well as public shareholders, management isn’t pressured to do the wrong thing for a short-term pop in the stock: instead, it has the leisure to think about, and act on, the company’s long-term interest.

So it was a bit of a head-scratcher when a hedge fund showed up a couple of quarters ago suddenly owning almost 10% of the company’s stock and presenting itself as one of those ‘activist’ shareholders who stirs things up by prodding management into making stock-moving business decisions for the benefit of public shareholders.

After all, ‘activist’ hedge funds tend to target woefully mismanaged companies whose executives spend money egregiously on themselves or their own pet projects at the expense of public shareholders. They don’t tend to go after good companies with happy shareholders.

My own view of ‘activist’ hedge funds is that they are—aside from a handful that have been doing it very well for many years (my old pal at Third Point, Dan Loeb, comes to mind on that score)—the “It” Girls of Finance in the Year 2006.

Seems anybody with a billion dollars of nervous, we-will-withdraw-in-a-heartbeat-if-you-have-two-bad-days-in-a-row money, a Bloomberg terminal and a publicist can be an activist hedge fund nowadays.

And, indeed, the shallowness behind the bluster of the activists agitating for change at the company in question was amply demonstrated on the company’s very next earnings call, when the “It” Girl’s Chief Activist queried management what it planned to do about the company’s “incredibly unleveraged” balance sheet.

For those of you not fluent in the code of activist phraseology, “incredibly unleveraged” means the balance sheet is simply too healthy.

The most obvious way to fix this apparent deficiency, in most activists’ playbooks, would be for the company to act like a private equity owner by loading the balance sheet with debt in order to return cash to the shareholders via a share buyback at a fancy price well above the activist’s cost, leaving the company with a crippled balance sheet and reduced growth prospects while the “It” Girl moves on to the next “incredibly unleveraged” target.

Sort of like being a Miami condo flipper, until that game ended last fall.

The only problem in this particular “It” Girl’s case is that the company in question has a Class A/B stock, in which one class of shares has voting power while the other class does not.

Guess which stock the founding family controls? That’s right: the voting shares.

Apparently our “It” Girl activist friends never read the fine print. Or, if they did, they decided that the current environment is so activist-friendly that their powers of persuasion and displays of righteous indignation would cause management to throw forty years of careful stewardship out the window for the sake of a brief pop in the stock and the opportunity for the knuckleheads in question to sell out and move on to the next “incredibly unleveraged”—i.e. healthy—company.

They were wrong.

And having been proved wrong, they are, according to my Bloomberg, selling.

Maybe they’ll read the fine print next time.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

How Merck Saved $1.5 Billion Paying Itself for Drug Patents

Partnership With British Bank Moved Liabilities Offshore; Alarmed U.S. Cracks Down

Those are the Wall Street Journal headlines, and they certainly seem terrible for the folks from Whitehouse Station, New Jersey.

Here are the details:

Thirteen years ago, Merck set up a subsidiary with an address in tax-friendly Bermuda, in partnership with a British bank. Merck quietly transferred patents underlying the blockbuster drugs to the new subsidiary, according to documents and people familiar with the transaction. Merck then paid the subsidiary for use of the patents.

The arrangement in effect allowed some of the profits to disappear into a kind of Bermuda triangle between different tax jurisdictions. The setup helped Merck slash $1.5 billion off its federal tax bills over roughly the next 10 years.

Sounds bad, huh?

Actually, I’d bet the ranks of companies that engage in same kind of offshore asset-shuffling tax-minimization that the Merck guys used include nearly every member of Fortune 500, and a few others too boot.

But instead of taking that bet, I’d suggest asking Sam E. Antar, the former Chief Financial Officer of one of the all-time great accounting scams—Crazy Eddie.

Sam is a self-described “reformed criminal” who now has a web site (http://whitecollarfraud.com) designed to offer guidance on how to “Protect Yourself against White Collar Crime.”

I know this because Sam posted a comment on this blog recently. (See “Tom Joad’s Truck.”) It had been about twenty years since I’d heard anything about Sam, which was back when Crazy Eddie was the hottest retailer on Wall Street and before the fraud was discovered.

In those pre-Eddie-Antar’s-flight-to-Israel-days, Wall Street’s Finest had been rightly skeptical of Crazy Eddie at first blush, but the company kept blowing out earnings after earnings, which eventually created the kind of momentum that causes suspended disbelief among rational people—so much so that Crazy Eddie himself was the featured luncheon speaker at a giant retailing conference here in Manhattan, hosted by one of Wall Street’s Finest.

The presentation started with an emotional introduction by Jerry Carroll, the pitchman whose radio and TV commercials (“His prices are insane!”) made Crazy Eddie famous. Carroll introduced Eddie, they hugged, and then Eddie began a fast-talking pitch for the company to a ballroom filled with enthralled money managers and jealous competitors.

During the question and answer session, somebody asked Sammy, the CFO, what the company did to keep its tax rate lower than other retailers. This is, usually, a softball question that triggers, usually, a bland and highly generic sort of answer about how ‘we work hard to minimize taxes in a variety of ways…yadda yadda yadda.’ Usually.

But Sam didn’t yadda yadda yadda.

Instead, he launched into chapter and verse about how they registered trade names in low-tax jurisdictions and also, if I remember correctly, something about running products through low-tax jurisdictions in the same sort of way Merck apparently did with its drugs.

I don’t recall all the details, but I vividly remember sitting at a lunch table with the folks at Toys “R” Us, who immediately began making eye contact, shaking their heads and rolling their eyes at each other.

I whispered to the Toys “R” Us guy sitting next to me, “I take it you guys do that too?”

He said, “Yeah, but we don’t talk about it!”

That was twenty years ago. So I have to ask this: why did it take the U.S. so long to get “alarmed” at this kind of stuff?

Sam, you got any ideas?

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

The model you have is wrong because sales were off by a factor of 1000. The associate who input numbers on the revenue line was thinking millions when the model was otherwise scaled to thousands…

We used to do this without computers.

At least, without personal computers, that is. All this stuff—company presentations, research reports, even earnings models—used to be done without the aid of Microsoft PowerPoint or Microsoft Word or even Excel.

Slides were created by graphic artists with sensitive natures who took their creations very seriously.

Word processing was done by secretaries using giant word processors in—consult your Wikipedia on this one, kids—what was, for its time, the wonderfully hi-tech “Wang Room.”

And while most earnings “models” consisted of a fairly basic income-statement projection with numbers obtained by hand on an HP calculator, any analyst with a big, complex “model”—for a North Sea oil and gas producer, for example, with lots of tax and royalty considerations; or a pharmaceuticals company with many new drugs in the pipeline—could take his work to the fellows in the data center.

There, the numbers would be input and later spit out on giant runs of folding paper with perforations along the sides. The analyst would stare at the numbers and make changes if needed and send them back until he got his “model,” which would then be, literally, cut-and-pasted by the graphics people for inclusion in the back of the report.

But the IBM PC and a program called Lotus 1-2-3 changed all that.

With Lotus on your desktop, you could—like a photographer with a digital camera and a one-gig flash card—try as many variations on the model as you wanted. Any oil price, any tax rate, any royalty calculation, any growth rate at all could go in…and out would come a beautiful five-year forecast down to the nearest penny-per-share.

Not that it was any more accurate than the hand-made version. Garbage in, garbage out, as they say.

After all, Enron had a model and eToys had a model and so did WorldCom. In fact, just about every fraud or flame-out ever recommended by one of Wall Street’s Finest has had, at the back of the report, “The Model.”

Which is why I was not entirely surprised to receive the response (quoted at the top) to a question regarding “The Model” I’d been puzzling over. It was for a drug development company we’ve been working on, and I couldn’t understand why the analyst’s numbers showed a massively increasing rate of loss in future years, even assuming the drug under development received FDA approval.

Turns out “The Model” was wrong, “by a factor of 1000.”

There you have it: garbage in, garbage out.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

The 20th century’s 10 warmest years all occurred in the last 15 years of the century. Of these, 1998 was the warmest year on record.

—U.S. Environmental Protection Agency

Richard Branson was, in my estimation, the first “cool” billionaire.

Entirely self-created—he began a student magazine for which he talked Mick Jagger and John Lennon into being interviewed—Branson started Virgin Records and made a splash by signing the Rolling Stones to a mega-contract back when the Stones seemed on the verge of becoming irrelevant.

In fact, the Stones are irrelevant, music-wise. But tell that to the fans who made their “Bigger Bang” the highest-grossing tour of 2005, at $162 million.

What is it about the Stones’ mystique that causes aging boomers to pay top dollar so they can sit in giant football stadiums to watch 65 year-old men play 40 year-old songs on a stage so far away they in fact watch the entire concert on giant projector screens which, for all anybody knows, are showing replays from the 1989 “Steel Wheels” tour?

Is it the infectiously tribal quality of songs like “Sympathy for the Devil” and “Gimme Shelter”? The preening stagecraft of the seemingly ageless Mick Jagger? The delicate interplay between the under-rated Charlie Watts on drums and former Faces founder Ron Wood on guitar?

Personally, I think it’s watching Keith Richards not die year after year that keeps people interested. But that’s just me.

In any event, Branson—long hair, Brit accent, rock star sensibility—seemed like the first cool guy to make a billion dollars for himself. After all, he was (irrelevant Rolling Stones notwithstanding) the guy who signed the Sex Pistols after they’d been dumped by a couple of labels for courting too much controversy.

The irony, I suppose, is that Branson made his first billion by selling Virgin Music in order to start an airline, of all things. Over time, Virgin Atlantic and its various spin-offs have made him more money than the music business, and he is now a full-fledged corporate big, and a “Sir Richard” to boot.

Which brings us to the announcement last week that Sir Richard pledged three billion dollars at the Clinton Global Initiative to combat global warming:

“Our generation has inherited an incredibly beautiful world from our parents and they from their parents,” Sir Richard said. “It is in our hands whether our children and their children inherit the same world. We must not be the generation responsible for irreversibly damaging the environment.”
—The New York Times

Amen to that, right? How can anybody be against irreversibly damaging the environment?

Not lost on anybody, of course, is that this guy runs an airline.

Airlines fly airplanes which run on jet engines that emit carbon dioxide by the ton, a non-trivial problem because rising carbon dioxide concentrations in the atmosphere retain heat—hence the “greenhouse effect” contributing to the above-mentioned warmest years of the 1900s not coincidentally crowding together during the last decade of that century.

Not only do jet engines emit carbon dioxide, but they leave contrails in their wake, which add to cloud layers that likewise trap heat, thus further contributing to the planet’s slow-boil.

Air traffic and, therefore, contrails, are not evenly distributed around the globe. They are concentrated over parts of the United States and Europe, where local warming reaches up to 0.7 watts per square meter, or 35 times the global average.
—American Geophysical Union

The irony of a leading Global Warming Contributor pledging billions to address, well, Global Warming was not lost on even Katie Couric, about whose career, for some reason, people care deeply.

When the perky news gal asked Branson about that very irony following his grand announcement, he responded thusly:

“The only way people can get to London, for instance, is to go on Virgin Atlantic or another airline. And so it’s not — you’re not going to stop that happening. So what we’ve got to do is come up with fuels that Virgin Atlantic can burn that are clean fuels, and that’s where our money is going to go, in trying to develop new fuels that can fuel cars and planes and make sure that the world is a safer place.”

Feel-good prattle from a New Age billionaire? That’s what some are calling it.

But keep in mind this is a guy who’s literally risked his life doing stuff—round-the-world hot air balloon trips, for one—that most people with a billion in the bank would be advised by their advisors against doing.

Not only that, but he signed the Sex Pistols.

The snow cover in the Northern Hemisphere and floating ice in the Arctic Ocean have decreased. Globally, sea level has risen 4-8 inches over the past century. Worldwide precipitation over land has increased by about one percent.
—E.P.A.

I think Branson is still the first cool billionaire.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Cablevision Gave Backdated Grant To Dead Official
—Wall Street Journal

That’s the headline, and I am not making it up.

According to the article in today’s Journal,

Cablevision Systems Corp. awarded options to a vice chairman after his 1999 death but backdated them, making it appear the grant was awarded when he still was alive, according to a company filing and people familiar with the matter.

The funny thing is that just the other day, while discussing the recent firing of Bristol Myers’ bad-news-plagued CEO Peter Dolan, a hedge fund friend said, “Maybe the lesson here is never invest in a company whose CEO is named ‘Dolan.’”

The other, non-Bristol Myers ‘Dolan’ my friend had in mind was James L. Dolan, the CEO and President of Cablevision—the “Dead Official” option-granting company of the above headline, which happens to run one of the better cable franchises around. Dolan is also, unfortunately, the Chairman of Madison Square Garden, home to what has to be one of the worst sports franchises around—the formerly storied New York Knicks.

It is in his capacity as boss of MSG that James Dolan—“Jimmy” to his friends among Wall Street’s finest—gets to sit at court-side and watch up-close what used to be a team that won championships implode under whatever new staff he assembled during the off-season to replace the previous season’s fodder for the New York Post.

(Not that I care much for basketball, the object of which is, as far as I can grasp it, to run out the clock by fouling opposing players the nanosecond the ball is put in play, thus causing the final “three minutes” of the game to stretch out so long that players can be traded to other teams and back again before the final “three minutes” is over.)

Any doubts that Cablevision—long accorded a discounted valuation on Wall Street for the perception of being run by and largely for the Dolan friends and family—could have benefitted from the kind of outside, Federally-appointed overseer that played a key part in ousting Peter Dolan after multiple billion-dollar-type mis-steps at Bristol Myers should be erased by yesterday’s SEC filing from Cablevision, as well as today’s Wall Street Journal story.

Cablevision backdated options from 1997 to 2002, according to its SEC filing. In practically all cases the share prices were lower, “sometimes substantially lower,” on the option awards than they were on the actual date options were granted, the filing said.

But here’s the whopper:

“The company’s board of directors and senior management believe that the practices…are contrary to the high ethical standards they believe should apply,” the filing stated.

What makes that amusing, of course, is that “Jimmy” was CEO of the company during the entire five-year stretch of ethical-standards-contrary backdated options.

Wonder if any of the Cablevision “friends and family” have been granted options that date back to before they were born?

Now that would be something.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

The partners began to sense that they might not make it. Their exquisitely wrought experiment in risk management, to say nothing of their fabulous profits, was in danger of unraveling.

—When Genius Failed, by Roger Lowenstein

According to natural-gas investors who traded alongside Amaranth, Mr. Hunter repeatedly used borrowed money to double-down on his bets

—Wall Street Journal. 9/20/06

The most memorable part of Roger Lowenstein’s excellent book on the Long Term Capital Management debacle (quoted above) was when LTCC’s founder, John Meriwether, called a retired, street-wise, market-savvy ex-Bear Stearns confidant for advice.

When he heard LTCC was down 50%, the old-timer didn’t mince words. He told Meriwether: “You’re finished.”

What the old pro was telling the computer-driven “Genius” of the book title was that when the market smells blood in the water, it goes after whatever is bleeding and doesn’t let go.

Now, this week’s blow-up of Amaranth, a Greenwich Connecticut-based hedge fund which appears to have fallen victim to some wild and crazy natural gas trading, does not, as far as anybody knows, rival LTCC’s when it comes to potentially bringing down the system.

After all, LTCC had margined their positions into a nominal exposure close to a trillion dollars, compared to the multiple billions involved at Amaranth.

Nevertheless, the two situations are not entirely unrelated. As happened with LTCC, when word of a problem at a hedge fund hit the natural gas markets last week, those markets appear to have started going precisely the wrong way for the fund most exposed to those moves—Amaranth.

I have no idea how the situation will unwind, and I certainly hope there isn’t the kind of second and third-derivative damage in other markets of the type that caused LTCC’s demise to force an emergency session of the Federal Reserve. Those were very dark days.

But the lesson is obvious: for all the confidant talk about how derivatives off-load risk and therefore create a safer financial world, there is something to the notion that what we are building up here is the potential for a liquidity crisis that brings the system down.

Before you scoff at this, try to guess who told the Wall Street Journal the following less than three weeks ago:

“Spreads and options are of their very nature instruments for positions which are designed to allow the user to capture upside with a much clearer understanding with respect to downside exposure.”

Give up? It was the CEO of Amaranth.

Three weeks after that statement, reports the Journal, institutional investors in Amaranth are now trying to sell their interests in that hedge fund to a firm that provides secondary markets in such things. Says the market-maker:

“Sellers want 30 to 40 cents on the dollar, but buyers are only willing to pay 10 cents to 20 cents on the dollar.”

When sharks smell blood…

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

…one of the biggest changes I’ve seen as a result of the Way Forward plan is a new culture of candor and honesty in both our decision-making and our communications. We remain dedicated to honest, open, two-way communications throughout the business even when we have tough news to deliver. And today is no exception.


So began Friday’s conference call held by the Ford Motor bigs charged with turning around the company that Ford family management has done their inadvertent best to drive into the ground.

The “honest, open, two-way communications” did not appear to make Wall Street’s Finest feel any better: Ford’s stock dropped as soon as the market opened midway through the call, and continued dropping, especially when the Q&A session began.

Ford stock finished the day down just over a buck a share on nearly two hundred million shares traded. Now, a buck may not seem like much until you consider there are only eight more of those to go before the stock reaches zero.

“Open” and “honest” management may be, Ford shareholders would probably take “ruthless” and “hard-nosed” any day.

I should make clear that “Way Forward” is the appellation given to the restructuring plan introduced by then-CEO Bill Ford early this year—a clever publication relations means of spinning a large, ugly restructuring plan into a kind of rallying cry.

After all, “Way Forward” certainly sounds more upbeat than other, possibly closer-to-the-truth alternatives, such as, for example, “Failure is Not an Option at This Juncture.” Or my own personal favorite twist on the kind of sappy, eye-rolling motivational slogans you see on posters near the vending machines of cubicle-oppressed drones, which is “If at First You Don’t Succeed, Skydiving is Not for You.”

But I digress.

After noting “a lot has changed since January,” Ford’s President of the Americas, Mark Fields, delivered a laundry list of issues leading to Friday’s updated “Way Forward” plan, the first being gasoline prices:

In April, gas prices rose $0.40 a gallon to $2.90 and they hit $3.00 a gallon this summer, the first time since Hurricane Katrina. This triggered an acceleration in demand away from less fuel efficient vehicles and it hit the full-size pickups, our bread and butter, particularly hard.

A cynic might note that Hurricane Katrina and $3.00 gas occurred before the first Way Forward plan. Furthermore, our cynic might note gasoline prices have collapsed lately, thanks to the resumption of refinery capacity taken offline for maintenance earlier this year precisely at the same time the summer driving season is winding down.

Nevertheless, Fields moved on to the second burden:

In addition to gas prices commodity costs are up substantially this year. That has put even more pressure on the business. Rhodium and copper are up about 60%. Platinum and palladium are up about 30%. And steel has risen another 15%.

Our cynic might note here that prices for rhodium and copper, as well platinum, palladium and steel, have presumably risen for every car maker, not just Ford.

Nevertheless, so far, it all seemed clear to this listener until Mr. Fields put forth an analysis of changing automobile demand patterns supposedly being caused by the aging of us Baby Boomers.

See if you can spot the non-sequitur in Mr. Fields’ speech:

Added to this are the demographic changes that will accelerate over the next decade and dramatically affect the types of vehicles we produce.

Just as the largest buying groups, baby boomers, are downsizing every other aspect of their lives, including their homes, they are moving to smaller cars, crossovers, small SUVs and small premium utilities.

Does anybody out there besides Mr. Fields see baby boomers “downsizing every other aspect of their lives, including their homes”?

I see tiny 2,000 square-foot Colonials on half-acre lots being bulldozed and replaced with 6,000 square-foot McMansions, cathedral-ceilinged and three-car-garaged to boot. I see boomers whose parents rented beach cottages by the day buying, leveling and supersizing those cottages for their weekend getaways. I see Starbucks serving espresso drinks in twenty-ounce “Vente” cups instead of Greek diners serving plain old coffee in six-ounce cups.

And I see zero evidence that Baby Boomers are practicing anything remotely close to the ascetic behavior Ford Motor puts forth in order to justify doing what they should have been doing when oil prices broke above the $40-a-barrel all-time-record a few years back: which was building quality, fuel-efficient cars instead of bigger trucks.

Still, the hands-down strangest part of the conference call came at the end of the company’s presentation and before the Q&A, after Mr. Fields had tried to impart to Wall Street’s Finest the company’s sense of urgency:

Now, to be clear, a lot has changed since January. And it’s required us to take another look at the industry and our business in light of the significant changes we’ve seen externally. The conclusion has been very clear — we need to go further and faster and accelerate our pace.

Yet after the company’s presentation a Ford Investor Relations came on to announce the following:

“We’ll now take a short break for 10 minutes and then will begin the Q&A session.”

A ten minute break in the middle of a crisis-induced conference call! I am not making that up.

Maybe they needed a vente espresso to get through the Q&A.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

One of Wall Street’s Finest is today reiterating a “Buy” rating on Dollar General, mentioning, among other things, ‘store environment enhancements’ according to the summary email I received this morning.

Dollar General, as you may know, is a former high-flyer retailer and one of the original so-called dollar stores that blanket the country—in particular, the south. Yet the company’s stock price has done nothing for a decade.

(I do not exaggerate. At $13.67 last sale, shares of DG trade precisely where they traded ten years ago this month, with a brief visit to $25 and an equally brief stop at $10 in between.)

Whether DG is a value here is anybody’s guess, but I will wager the analyst in question and her one or two other fellow Dollar General bulls on the Street have not seen the half a dozen stores I recently viewed in the heart of Dollar General Territory.

To quote Mick Jagger, they’d make a grown man cry.

Now, “Dollar General” is a misnomer: the company does not sell “everything for a dollar.” Rather, it sells a mix of general merchandise and basic apparel that a lower-income family would need. I do not derogate DG’s customer base—the company’s self-described mission is to serve “the basic consumable needs of customers primarily in the low and middle-income brackets and those on fixed incomes.”

And the company isn’t kidding: its customers have an average annual income of $30,000; a quarter of them earn less than $20,000 annually. Most items in the store cost $10 or less; a third cost a buck or less. And the average ticket per shopper is nine bucks.

Despite longstanding fears of Wal-Mart’s dominance of the lower-income customer in DG’s territory, the company grew and thrived, with a good return on capital, a 20%+ return on equity and years of sales growth.

Turned out, some of the good numbers owed themselves to flakey accounting rather than great management, which revelation and subsequent SEC investigation knocked the stock off analyst “Buy” lists a few years ago. Nevertheless, the scandal triggered a change at the top much anticipated by investors eager to buy a growth stock on the cheap, assuming the ‘store environment enhancements’ would have the desired effect.

The results under new management have, so far, been mixed. Sales growth has slowed and recently net margins have been chopped nearly in half. For all the share buybacks and new initiatives, the stock has languished and Wall Street by and large is on the sidelines, except the aforementioned, buy-reiterating, bull.

Which brings me back to my recent tour of Dollar General—and other—stores in the south.

I can’t say it was scientific, being a random collection of stores in random small towns in random areas of Mississippi and Tennessee. And I certainly wouldn’t make an investment decision on the basis of a small sampling of a few stores.

But after seeing the same old ‘enhanced’ Dollar General stores with the same old stuff in the same old displays and on the same old shelves, what came to mind—particularly as I skipped the last store because a sorry array of rickety tables had been set up in the parking lot piled high with sale items—was Tom Joad’s truck loaded with his family’s every earthly belonging, in the Grapes of Wrath.

As poor Tom once said, “Sure don’t look none too prosperous.”

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.