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Don, my car guy, has a pretty good pulse on the economy.

First of all, he fixes cars—and that’s as basic a consumer spending item as it gets. Second, he employs people, so he knows what the labor market is doing. Third, he buys a lot of stuff—auto parts, certainly, but also utilities, office supplies, and new equipment.

So when I get my car fixed, I like to ask Don what he’s seeing.

Now, this may come as less of a shock to bond traders than before the last CPI number was released, and it may not matter to whatever low-level functionary in the statistical collection office of the Federal Reserve spends his day adjusting raw inflation data.

But what I will call “Don’s CPI”—the price of things Don buys for his business—has risen about 5% in the last year. And Don sees more to come.

So Don has raised his own prices 6%, in order to stay ahead of the curve. Last time I checked, that’s higher than any point on the yield curve.

Any resistance, I asked as I paid my bill? (My bill at Don’s—as I have said in the past—is always $700. No matter what gets done. It’s always $700.)

Don shook his head. “Business is booming.”

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.

It’s here.

Panic.

A month or two ago, one of the denizens of the Greek diner where I go for coffee and morning research, approached me about her plan to buy into one of the emerging growth funds that everybody was recommending she jump into with both feet.

Being a technician at a local hospital and entirely unfamiliar with stocks or bonds, let alone the countries in which the respective financial instruments are domiciled, she was unsure of only one thing: which emerging country fund to buy as soon as possible.

I told her I was not a stock broker, I did not speculate in foreign country funds, and I did not advise people on what to do. When she persisted in asking my advice, I did the psychologist routine:

She: “Which fund should I buy?”
Me: “Which fund do you want to buy?”
She: “I’m not sure. Which country should I buy?”
Me: “Which country do you want to buy?”

She gave up and went off to the hospital, and I didn’t hear from her again until last week, when she asked me on her way out the door when this foreign market nightmare was going to end. I shrugged and said her guess was as good as mine.

This morning she decided to end her emerging markets nightmare: on her way out the door, she told me she was going to sell out everything.

Time to buy?

Jeff Matthews
I Am Not Making This Up*

* In today’s case, identities have been altered to save anyone embarrassment.

© 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.

It’s not often Wall Street Research breaks new ground or gets a leg up on investigative reporters, but hitting my email this morning is a Merrill Lynch report that appears to do just that—and I am not, as longtime readers might suspect, being sarcastic.

For the record, I started my career at “Mother Merrill,” and it’s not easy doing timely, groundbreaking, stock-moving research at a vast shop whose constituents include bankers, bond guys, big institutions, small institutions, hedge funds, traders and brokers—not to mention the vast retail account system that feeds the Merrill beast. It’s hard enough keeping those constituents happy and up to speed, let alone finding something new to say about whatever group of stocks you happen to cover.

But the Merrill technology folks today put out a piece examining stock option grant patterns among their companies (“Options Pricing—Hindsight is 20/20”) that adds more fuel to the rapidly spreading fire that the Wall Street Journal, to its eternal credit, sparked some months ago, when it reported that certain company executives had been awarded option grants that had been so timely and profitable that it was extremely unlikely that such grants could have been made without backdating the actual grant date.

In the wake of the Journal’s truly groundbreaking report, at least one CEO has been fired, several executives have quit, and even the SEC (mon dieu!) has stirred into action against several companies.

Being a Merrill client and having plenty else to do, I will not paraphrase the Merrill options analysis or its conclusions here. However, if you are a Merrill client, I’d advise you to get your hands on it ASAP. If not, I suspect you’ll be reading about it soon enough.

Wall Street’s Finest come through!

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.

A distant acquaintance at my previous journalistic affiliation, TheStreet.com, has written extensively of late regarding his love affair with the shares of Overstock.com.

His basic thesis, as I understand it, is that the stock is unduly depressed by bearish sentiment generated largely by short-sellers, and that while profitability is currently non-existent, the price-to-sales ratio renders it attractive to patient, long-term investors.

Indeed, by assuming sales growth picks up and margins go from negative to positive over time, this sober, clear-eyed analyst published a $90 price target some weeks back that sent Overstock.com shares flying—just prior to the company reporting lower-than-expected first quarter sales, a larger-than-expected first quarter loss and a relapse in the share price.

Unlike the analyst in question, I have never expressed an opinion about the valuation of Overstock.com and am not about to publish a price target here. Opinions of value, being in the eye of the beholder, hold no interest to me.

What does hold my interest is the thought-process behind those opinions. And in this case, a cornerstone of the Street.com writer’s thesis appears to be an analogy between the Overstock.com of today with the Amazon.com of 2000-2002, when the latter was losing money and likewise highly controversial.

In a recent follow-up post, he expanded on this analogy. After walking through the numbers, he catalogued a host of negative comments from various sources during the dark days when Amazon appeared to be in a barrel-roll a little to close to the ground. ‘Look at Amazon now,’ seems to be the analyst’s Overstock rallying cry—’the nattering nabobs of negativism were proven wrong, and the shareholders who stuck it out were richly rewarded.’

Ergo, how can Overstock.com miss?

Having been one of those Amazon nabobs of negativity, I can recall the issue that made me bearish on Amazon shares back in the late stages of the Internet Bubble quite clearly: it was a slowdown in the company’s core book business, masked by new ventures into music, video and international sales, which got my attention.

As I pointed out in at least one piece for TheStreet.com at the time, Amazon’s core book business growth had actually slowed down to brick-and-mortar-type low single digit rates. I believe it even grew less than Sears’ at one point—although this fact was hard to see for all the other “get big fast” non-book projects which inflated Amazon’s overall sales growth.

I recall fielding a Silicon Valley-based reporter’s incredulous questions about my analysis one afternoon in early 2000 while fighting off a stomach-clearing flu in bed. This reporter (I believe he was with Business Week) simply could not believe anybody could be negative about Amazon.com. In the patois of the day, he seemed to think I “just didn’t get it.”

Still, while Amazon was a controversial stock and had its share of short-sellers, to the credit of Jeff Bezos he never included me or any other nattering nabob of negativism in a conspiracy theory involving Israeli mobsters and Eliot Spitzer. In fact, Bezos did what great CEOs do when business gets tough: he ignored the shorts and focused on fixing his business.

Sometime after that Business Week conversation, the stock bottomed out in an avalanche of bad numbers and bad press. Momentum investors bailed out when the sales growth slowed, but beneath the sales line, book numbers began to improve and losses began to shrink. I covered my short at $12.50 a share, and wrote about it on TheStreet.com.

The funniest part was getting a call from the same Business Week reporter, who had by then joined the nabobs of negativism and could not believe I was no longer negative on the stock—since everybody by that time knew that the Internet Bubble had burst and Amazon wouldn’t make it. Once again, he seemed to think I just “didn’t get it.”

Amazon did, of course, make it. My only regret about covering my short at $12.50 was, of course, not going long the stock at $12.50.

As for my former acquaintance at Street.com, he may well prove right about Overstock.com—and today’s nattering nabobs of negativism may well be proven wrong. But his survey of bearish commentary on Amazon.com from the dark days of that Internet pioneer left out one particularly negative nabob—not a stock analyst or a hedge fund manager, but the CEO of a company.

In 2004, a Fortune Magazine reporter quoted this CEO saying the following about Amazon.com:

“They don’t have a wonderful business, and the stock is way overvalued.”

She also reported he called Amazon an “800 pound hamster.”

This was no one-off dissing of Amazon.com: in 2005 this same CEO said he thought Amazon was “the Ottoman Empire of the Internet,” and repeated the “800 pound hamster” crack.

I’m not making that up. Here’s the full paragraph from the January 28, 2005 conference call:

I think that Amazon is the 800-pound hamster. I think that Amazon is the Ottoman Empire of the internet. And it may just drift along as the sick man of Europe for 200 years or one day you may wake up and it’s gone. I don’t think Blue Nile faces much of a threat from Amazon. I view us as competitive with Blue Nile. I view them much more as a competitor, but I’m not worried about Amazon.

This nattering nabob of negativism’s name?

Patrick M. Byrne, CEO of Overstock.com.

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.

Given the bond market’s shocked—shocked!—reaction to yesterday’s “core” inflation news, you’d think nobody on Wall Street does any of the following:

1. Buys gasoline, food or clothing.
2. Rents cars.
3. Buys airline tickets.
4. Stays in hotels.
5. Eats out.
6. Eats in.
7. Pays college tuition.
8. Goes to a doctor, a dentist, or a lawyer.
9. Has life insurance, health insurance, or property and casualty insurance.
10. Pays property taxes.
11. Goes to a psychiatrist.

There are more examples of the bond market participants’ apparent lack of participation in the real world than I can fit here, and this is especially true in the so-called “services” sector of the economy—which, according to the papers, is what particularly freaked-out the bond market’s former vigilantes.

Item Number 11, for example, is just one of those services where the cost is now taking off after years of flat-lining—at least according to a psychiatrist-friend who tells me she has raised her standard hourly fee from $200 to $250, without a problem. (You can do the math on that percentage increase. Hint: it’s more than the thirty-year bond yield.)

Indeed, she may have some new customers soon—if the bond market’s Homer Simpson-esque reaction to what had been visible to anybody with eyes is any indication.

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.

I think I know what Alan Greenspan is contemplating right now in his bathtub.

(Don’t get the wrong idea: Greenspan is famous for spending mornings reading all manner of economic reports while soaking in his tub. Just listen to Don Imus, the no-longer funny ex-shock-jock who likes to ask Andrea Mitchell—a talking head who happens to be Greenspan’s wife—what “Crazy Al” is up to in the bathroom.)

If I’m right, Greenspan is contemplating the fact that U.S. industrial capacity utilization hit 81.9% last month, its highest level since July of 2000.

Why do I think I know that? Well, I happen to know capacity utilization is the sage Mr. Greenspan’s single favorite statistic of all the thousands churned out by government statisticians. It is, in his view, the least volatile and therefore most accurate barometer of economic health, encompassing as it does employment, capital spending and inflation all at once.

I know this because I read it somewhere, probably in a New Yorker profile—one of those endless, detailed pieces that cover everything from what kind of cereal the subject likes to how he or she takes coffee. And the fact the Greenspan relied on one statistic more than all the others was a lot more interesting to me than how he takes his coffee.

But you don’t need a government statistician to tell you that industrial capacity utilization is at the highest level in five years. All you have to do is listen to the earnings calls of companies ranging from teen retailers to coal miners, and you know there isn’t much slack in the system.

Just last night, on Cramerica TV, the CEO of engineering giant Foster Wheeler told a rapt, cheering student audience that business conditions for his company were the best in the entire history of the company. (For the record, that means back to 1884.) The audience of Cramer-mad budding stock jockeys couldn’t have been happier to hear it than if Derek Jeter had appeared on the stage to promise another championship this fall.

Furthermore, the Foster Wheeler CEO also made it clear that his company intends to spend whatever it takes keep up with those all-time-high orders from customers drilling wells in Saudi Arabia and building LNG plants in Asia, and everything in-between.

Which is why, in my opinion, the producer price index might have been ten basis points less than expected yesterday, and the housing market from Boston to Sacramento may be rolling over, and the bond market may find comfort in weaker revenues than expected at Home Depot…but Alan Greenspan’s favorite all-time index is heading up, not down.

The water in that tub is still rising.

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.

Ecuador Revokes Occidental Pact Over Sale of Local Drilling Rights


That’s the headline from today’s Wall Street Journal, regarding yet another hostile takeover of precious energy reserves by a restive Latin American government.

The move by the small, coastal nation, Latin America’s fifth-biggest oil producer, came after a long-running legal dispute over whether the California-based firm had broken local laws in selling some of its local oil-drilling rights to a Canadian firm, Encana Corp., without government approval.

Whatever the specific excuse, the trend is clear: precious energy reserves are moving from private hands to whoever happens to be in power at the country in question.

Ecuadorean Energy Minister Ivan Rodriguez said Occidental’s contract had been revoked and the company would have to hand over its local operations to state-owned oil company Petroecuador.

Meanwhile, Western Bankers including Morgan Stanley are preparing the initial public offering of Rosneft, the Russian state oil company that ranks just beyond Exxon Mobil, reserve-wise.

Potential investors in what is expected to be a very highly anticipated deal might want to consider the fate of companies in Venezuela, Bolivia and, now, Ecuador, before they plunk down their hard-earned US dollars for oil and gas reserves located in—literally—Outer Siberia, among other places.

Occidental has denied wrongdoing, and said in a statement that the company remained “committed to an amicable settlement of this dispute.” The company, which relies on its Ecuador operations for 7% of its global production, said it was reviewing a 33-page document it received from the government and was considering its legal options.

Not many legal options come to mind when a sovereign government decides they want their black gold back.

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.

At 6 a.m. yesterday morning, I noticed the price of regular gas at the local Cumberland Farms was $3.04 a gallon—up five cents from the day before.

When I got to the coffee shop, the first thing the barista asked me was, “Are they going to stop raising rates?” I told him it looked like they were going to raise one more time. He shook his head and made my drink. He’s a real estate broker on the side, you see—he works at Starbucks for the healthcare. And his real estate business has collapsed.

Later, on the way home, the price of regular gas at the same Cumberland Farms had risen to $3.16 a gallon.

The last time I remember a bull market in interest rates and gasoline was, oh, 1979. It was like déjà vu all over again.

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.

Back in junior high school, when it didn’t take much for a classmate to seem funnier than Leno, Letterman and Dave Chappelle combined, I recall seeing the phrase “Bored of Education” written in big block letters on some wiseguy’s notebook and thinking, while not laugh-out-loud funny, it was amusing and vaguely anarchic.

For some reason that silly play on words came to mind when I saw the headline of the press release issued by Overstock.com two nights ago, in which that company’s Chairman of the Board declared himself seemingly delighted to see his company get a government subpoena.

That subpoena requested, among other things, “all documents relating to the Company’s accounting policies, targets, projections, estimates, recent restatement, new technology systems and their implementation, and communications with and regarding analysts,” according to the last paragraph of the press release.

Readers might not have gotten that far down, however, given the preamble in the body of the release from the Chairman of the company’s Board, Patrick Byrne, which I am not making up:

Overstock.com Chairman and CEO Patrick Byrne said, “I may be the first CEO in history to celebrate receiving an SEC subpoena. Some of the requests suggest the whispering of the blackguards, but I remain unconcerned about their hokum….

Not only that, but the headline on that press release read: “Overstock.com Celebrates Receipt of SEC Subpoena.”

Which is why I wondered whether it is Overstock’s Board of Directors—for whom, presumably, the Board’s Chairman speaks—that is delighted with the government subpoena, and “celebrates” its receipt.

Or whether they’re just plain Bored of Directors and don’t pay any attention to what the Chairman of their Board is writing in his press releases.

Merriam-Webster’s Dictionary of Law defines “Board of Directors” as:

A group of individuals elected by the shareholders of a corporation to manage the corporation’s business and appoint its officers

I always believed being a Director was serious business, although there was a time during the lax old days of the dot-com bubble and the telecom frenzy when boards approved mergers, option packages, and off-balance sheet deals with abandon. Those days are over, and being a director nowadays is usually considered a non-trivial position of responsibility.

So who exactly constitutes the Board of Overstock.com?

Just looking at my Bloomberg, I see that—aside from the Chairman who “celebrated” the SEC subpoena, the Chairman/Celebrant’s father, and the Chairman/Celebrant’s self-described “best buddy”—the members of the Board of Directors of Overstock.com include some familiar and non-lightweight figures:

Ray Groves is a former Marsh Mac CEO and a good guy, according to a friend who knows him.

John Fisher is a sober, highly regarded Wall Street guy, according to a friend who knows him.

Gordon Macklin is a former H&Q Co-CEO who also sits on the Chairman’s father’s company’s board.

Allison Abraham worked at a dot-com during the Bubble Years.

After considering the long string of proclamations from their Chairman, from his “Sith Lord” speech to his ‘Celebration’ press release, I wonder: could it be that, like my old high school classmate, these good board members are all simply “bored” of directors?

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.

Actually, I made that headline up.

What Consumer Reports actually says in its current issue is that Dell’s technical support is—as our readers already know (see “Dells Screws Up a Good Thing,” January 24)—bordering on K-Mart quality. Which is to say, it may actually be driving customers away.

“Get the most from tech support,” is what the Consumer Reports cover promises its readers. And based on the results inside the magazine, Dell customers are not getting very much.

In both laptops and desktops, Apple led the tech-support pack, being the only desktop vendor to have even satisfactory ratings for each of three measures—waiting time on the phone, how knowledgeable the support staff appeared to be, and whether they solved the problem. (Lenovo managed to tie Apple in each case in the laptop survey.)

Specifically, in desktops Apple scored 82 (out of 100) in tech-support satisfaction, compared to eMachines at 62, Sony at 57, Gateway and Dell at 54, HP at 53 and Compaq cruising in with a 46.

In laptops, Apple also scored an 82, with Lenovo at 69, Toshiba 57, Dell at 56 and the rest below 55.

Repair history showed the same general trend, with Apple desktops having the fewest repairs by far, according to Consumer Reports readers.

Meanwhile, Dell’s fiscal quarter ended a week ago, and it didn’t take the company’s bean-counters too long to figure out the numbers had come up short—with revenue up less than 10% and earnings per share down more than 10%.

CEO Kevin Rollins put the usual glossy spin on the announcement, saying “We are committee to delivering industry leading value to our customers, which ultimately results in industry leading growth for the company.”

But based on our own informal survey of reader satisfaction, not to mention the Consumer Reports data, Mr. Rollins may want to re-examine the logic behind his bold statement.

A personal computer long ago ceased being a stand-alone box used for calculating spreadsheets or creating slide shows: it is the means to connect to the internet, upon which all businesses now depend.

When the box at one of those businesses goes down, the business—which may be one guy in his basement office in Livonia Michigan or a trader in a glass tower above Canary Wharf—goes down.

And when a business goes down, no amount of pennies saved by buying the box direct from Dell can make up for lousy tech-support-on-the-cheap.

Me, I think Dell needs to do a Microsoft: I think it needs to start spending some serious money to upgrade its customer service. “Delivering industry leading value” is no longer just cheap boxes. It’s great service, too.

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.