Testing

Well now he tells us!

Merrill Lynch insurance ace Jay Cohen today lowers his AIG estimates and also cuts his price target…from $80 to $65.

But he retains his “BUY” rating.

Apparently Jay finally got around to reading Friday’s A+ Wall Street Journal story describing the downfall of AIG Strong Man Hank Greenberg…the most pertinent detail being the description of Greenberg yelling, King Lear-like, at his restive, scared directors as they contemplate his ouster: “You couldn’t even spell the word insurance.”

One wonders, given his low opinion of his own board, why Mr. Greenberg chose them in the first place. On the other hand, it explains how AIG finds itself in its very fine mess.

Today’s installment of the unraveling of yet another Wall Street fave finds that Greenberg’s own closely held company (Starr International) has forced off its board AIG executives not a part of Mr. Greenberg’s palace guards. Starrr International not only owns 12% of AIG stock, it controls AIG’s deferred-pay and investment plans for AIG executives. How’d you like to be an AIG veteran trying to sort out the Greenberg mess, knowing King Lear controls your pension!

The plot thickens, but don’t look to Merrill Lynch for guidance. They’re busy shutting the barn door, not realizing the horse is gone.

Jeff Matthews
I Am Not Making This Up

In college I did a rotten thing to the features editor of the Lehigh Brown & White—which was, indeed, the actual name of my college newspaper. (The Lehigh sports teams were called “The Engineers” back then, so I guess the “Brown & White” wasn’t so horrible by comparison.)

Sitting around a table with friends at Smuggler’s Tavern one night, we decided for some reason (drafts were 25c, as I recall, which was probably the reason) that it would be a good idea to create, out of whole cloth, a punk-rocker supposedly giving a concert at a venue nearby.

And I would write a review of the fake concert for the Brown & White.

The idea arose from two facts: one, The Ramones had just taken over the New York music scene with an album, “The Ramones,” that had made Led Zeppelin seem bloated and irrelevant; and two, among the friends sitting around the table was a guy named Mickey who announced his goal in life was to be a punk-rocker like Joey Ramone.

So, in the space of an hour or two, we created a disturbing young individual named “Jus Mick,” gave him a back-story that might seem believable given the out-of-nowhere success of The Ramones, and plotted how to get the whole thing in print, which, unfortunately for my editor at the paper turned out to be a lot easier than we imagined.

All it took was an 8×10 glossy and a press release.

We took pictures of the real Mickey in the alley behind our apartment, wearing a leather Ramones-style jacket, with combed-down hair and a cigarette hanging casually from his sneering lips. I then wrote a fake press release announcing the concert, and we sent the press release and the 8-by-10 black-and-white glossy of the hot new punk rocker “Jus Mick” to the features editor of the newspaper.

Sometime later I followed up with a call to the editor and volunteered to review the concert, and she gladly gave me the assignment.

To this day I have no idea why we went to such extraordinary lengths to conceive and execute a plan that involved more effort than we put into other activities such as term papers, for example, or final exams. There was just something about The Ramones that made people do things, stupid things.

I think it was that picture from the first album cover: they looked impossibly cool, dangerous, hard…and the music sounded exactly the same way.

I never saw them live, but even on film the shows were like nothing else. Joey, the singer with a ridiculous amount of black hair, would say something unintelligible to the crowd (he looked a lot like “Thing” on the Addams Family, and you were never sure what was his front or his back).

Then Dee-Dee would scream “ONE-TWO-THREE-FOUR” (although he might have in fact been screaming “How do I love thee? Let me count the ways,” for all you could hear actual distinguishable words)…then there would be a brief, split-second pause before the music started, and blew the doors off the place.

Two minutes later the song stopped like somebody pulled the speakers—no Zeppelin-style Jimmy Page fifteen minute guitar noodling, no John Bonham shoot-me-please drum solo.

Just stop.

Then a brief mumble from Joey and suddenly, out of the darkness, Dee-Dee again screaming “ONE-TWO-THREE-FOUR” (or, perhaps, “My love is like a red, red rose”), and blam—another two minutes of total Ramones sound.

Which is why, back in 1977, our friend Mickey wanted to be a dangerously cool punk rocker called “Jus Mick.” (The name came about after much intense debate when Mickey himself said, “How about just ‘Mick’?”)

In my review, I gave “Jus Mick” a very dangerous, Iggy Pop-style persona, breaking beer bottles over his own head, crawling around the stage on the broken glass and throwing himself into the crowd (I do not believe the term mosh pit had been created back then). The deception did not merely involve describing “Jus Mick” on stage however—I had to create opening acts as well as songs, lyrics, and the fans themselves.

The Brown & White published my review in its entirely, including the picture of a leering, leathered, middle class Junior named Mickey, in an alley a block from campus. We congratulated ourselves that night at Smuggler’s and went about the rest of our college experience, which mainly, to the best of my recollection, revolved around foosball. I didn’t give it another thought.

Then, a week or two later I got a phone call from the editor asking if I could meet her at the cafeteria.

I went. She was sitting at a table, not looking too happy.

“There’s a rumor going around that the review you wrote was a fake, that there’s no such band,” she said. She looked at me the same way she might have looked at her father after hearing from her older, meaner brother that the family dog had been put to sleep, hoping against hope that her father would deny it.

I told her it was true. “I made up the whole thing.” I said it straight out, because I couldn’t figure out how else to say it.

Her face flushed and her eyes brimmed, but she did not cry. “Why?” she said, as if he father really had put the dog to sleep.

I don’t recall what I told her—something along the lines of “It seemed like a good idea at the time,” probably. I then realized what I’d never considered: that what had seemed like a harmless and very cool prank had actually cost her some standing at the paper.

It had consequences, although not for me, except that I felt badly for her and still do.

Looking back on it, I’d like to think “Jus Mick ”paved the way for “Ali G.” (If you’ve never seen Ali G, get the DVD.) In reality, it was stupid, and, in the full sense of the word, sophomoric.

But the Ramones could make you do that.

I thought of Jus Mick for the first time in years while watching “The End of the Century,” the retrospective on the Ramones recently out in DVD form.

It’s fascinating, amazing, terrific stuff, filled with personalities, egos, humor and pathos.

It’s also quite funny at times: interviewed while seated at his home studio drum kit, Marky Ramone wearily recites the old criticisms of the Ramones’ fast-eighth-note drum style being too simple and repetitive to be considered real music…then suddenly launches into a slamming John Bonham-style, everything-goes, over-the-top speed-demon drum solo, stops abruptly and says “See, I can do that.”

It’s perfect: it’s what the Ramones were all about.

I recommend “End of the Century” to all music junkies and newspaper editors…including my old editor at the Brown & White.

As for Jus Mick, I blame it on the Ramones.

Jeff Matthews
Yes, I Made That Up, But…
I Am Not Making This Up


© 2007 NotMakingThisUp, LLC

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

Just two months ago, Abbey Joseph Cohen told Barron’s the following, regarding Goldman Sachs’ oil group forecast:

Over the next 12 months we expect oil to average over $40 a barrel, and that could continue into ’06. But we’re pricing $28 a barrel into our earnings estimates.

This was completely consensus stuff—oil was trading at $42 or so at the time—and typical of the Cohen/Goldman model of forecasting, which is, like all sell-side forecasters with longevity, to not be so far off consensus you open yourself to ridicule, and to never say anything that makes your clients feel bad about what they own or don’t own.

Yesterday, however, Goldman dropped this bombshell on the markets following crude oil’s stubborn refusal to go below $50 a barrel last month:

We believe oil markets may have entered the early stages of what we have referred to as a “super spike” period…. Resilient demand has caused us to revise up our super-spike range to $50-$105 per bbl…”

I don’t know about you, but a $55-a-barrel spread in their target looks like a ridiculous so-called forecast, even for a Wall Street firm. It’s big enough to float a semi-submersible drilling platform through.

After all, is the price target more like $50 or is it more like $105? Why $105 and not $103? Or $108 or $99 or $85?

And if it does go to $105, might not the world economies collapse and therefore oil collapse with them, and therefore might $50 be too high?

Still, The Market heard “Abbey says $100 a barrel crude,” and oil markets got a lift yesterday from what appears to me to be a late-to-the-party recognition by the Goldman Gurus that oil is a problem.

Marc Faber, on the other hand, has been warning of an oil spike for at least two years in the pages of Barron’s. And one full year before Abbey and the Goldman crew woke up and read the headlines, Feliz Zulauf, who along with Abbey and Faber is a Barron’s Roundtable jockey, said this:

The oil industry assumes a long-term price of $15 to $18 to calculate new projects for exploration and production. Because it is so pessimistic about prices, it is not developing new projects. That is one reason why we will run into an energy crisis in coming years. The other is that the size of discoveries peaked in the 1960s, with the discovery of Alaska’s oil field. Since then, discoveries have been smaller and smaller. Sometime in this decade, oil will be $60 or higher per barrel.

Both Marc and Felix were dead right—early enough to help make people money. The Goldman Gurus, despite their sterling reputations, are late to the party, and probably wrong.

But with a $55-a-barrel spread in their so-called forecast, they’ve wisely given themselves plenty of room to be considered right no matter what happens, like all good sell-side analysts should.

Jeff Matthews
I Am Not Making This Up

PricewaterhouseCoopers (I’m not making that name up—that’s what they call themselves now) has determined that China Aviation Oil, the Singapore company which filed Chapter 11 last year after disclosing massive oil trading losses, suffered some basic problems.

Among other things, “CAO valued its crude-oil options incorrectly, misunderstood the risks it was taking, ignored its own internal controls and failed to report accurately its positions to shareholders,” according to today’s Wall Street Journal.

Nice to know, now that the horse is already out of the barn and across the North 40.

The CAO story looks remarkably similar to the Enron story, as detailed in the excellent new book “Conspiracy of Fools,” by Kurt Eichenwald, including the inability of the auditors to understand what was going on beneath their noses.

Perhaps the funniest—and saddest—story in the Enron saga is when the company paid double the nearest bid for a Brazilian pipeline company and then failed to hedge the currency risk.

The Brazilian episode—one of many eye-popping examples of hubris, greed, incompetence and corporate chest-thumping—reads like a sort of billion dollar, high stakes version of two guys leaving a restaurant arguing over whose responsibility it was to leave a tip.

Having known at a least one of the players in the Enron saga fairly well, the Eichenwald book strikes me as the most accurate portrayal thus far of the players and their role in the Enron debacle. I recommend it not only as a good general read, but more importantly as required reading to anybody planning to work on Wall Street, to manage money, or simply to buy a stock.

We’ll have to wait a few years for the full China Aviation Oil story to emerge, but I imagine it’s as interesting as Enron.

Jeff Matthews
I Am Not Making This Up

The real estate bubble is here and now.

But don’t take my word for it–read carefully the excellent article at the following link:

http://www.latimes.com/news/printedition/la-na-property27mar27,1,6368859.story?ctrack=1&cset=true

The stories are hair-raising to anyone with a memory longer than three years; but more importantly, they put flesh and bones on a story whose skeleton has been constructed by dry data from the National Association of Realtors and Fannie Mae.

And they remind you why cycles happen, over and over, no matter what.

Jeff Matthews
I Am Not Making This Up

Well now we know.

A breathless Wall Street Journal article today discloses that Microsoft founder Bill Gates spends two weeks a year completely alone in a cottage, thinking Big Thoughts about the Future of Technology.

Bill even has a name for it: “Think Week.”

According to the article, out of twenty years worth of these “Think Weeks” have come such brilliant Microsoft innovations as “plans to create Microsoft’s Tablet PC, build more-secure software and start an online videogame business,” and Bill’s decision that the internet was a Big Thought and therefore Microsoft ought to crush Netscape while the crushing was good.

Careful readers will grasp immediately that, aside from copying what Netscape had already done and distributing it for “free,” none of the so-called “plans” ever came to much—not the Tablet PC, and not, yet, the online videogame business.

And certainly not a “more-secure” software.

Still, we read with high drama how Mr. Gates starts each Think Week with a helicopter or seaplane visit to a “two-story clapboard cottage on a quiet waterfront,” from which “all outside visitors” are barred—even family. Only a caretaker “who slips him two simple meals a day” is allowed near.

Then, Mr. Gates reads papers. You know—the kind of white papers that make your eyes roll up into your head? Papers that companies like IBM and Digital Equipment and Lotus Development and Storage Technology used to lovingly reprint and mass-mail, and quote during Keynote Addresses while techno-geeks were stuffing their goody bags with free coffee mugs and pens and t-shirts, and the hung-over salesmen slept soundly in their chairs?

Right, those kinds of papers.

Well, according to the Journal, Bill reads those kinds of papers eighteen hours at a stretch, when he’s going strong, and his “record” is 112 papers in one Think Week. Sometimes he gets “goofy” he tells the reporter, and begins “reading aloud words.” After a week of thinking Big Thoughts he will have sent emails to “hundreds of people and also have written a Think Week summary for executives.”

And out of twenty years of doing all of this two times a year, he has come up with “a more-secure software” and the Tablet PC. Oh, yeah—and copying Netscape and driving them out of the market. Perhaps “Bob” and “.Net” and “MSNBC,” not to mention the mysterious “insert” key on your keyboard, also came out of this fecund swamp of dried pulp and ink.

But, hey, Bill set a “record” by reading 112 papers in one week.

Perhaps Mr. Gates should—rather than closeting himself in a cabin reading Microsoft papers—have been spending a few days at a Starbucks near a college campus, watching what future customers were doing on their computers, their iPods and their cell phones.

He might have figured out a few more things than how to copy Netscape, incorporate it into his operating system monopoly, and take over the internet access business.

He might have figured out that not every electronic device and every piece of software ought to be stuffed with a clunky, spam-prone Microsoft Monopoly Operating System that does six million things, all poorly, and only twelve of which customers actually use.

Heck, he might have figured out the iPod and iTunes and the Blackberry and Google and Mozilla and all kinds of cool things none of his executives bothered to write up for him to take to a cabin on a lake and read about them, eighteen hours at a stretch.

And he might then have developed a business model that would endure for another twenty five years, instead of an irrelevant monopoly that the world is passing by, as quickly as it can.

Jeff Matthews
I Am Not Making This Up

The home run is the most singularly dynamic achievement in all of North American sport.

Thus begins the web site introduction to The McFarlane Collection of home run balls.

A batter uses discipline, knowledge, speed and power to launch a ball into the seats and beyond, thrilling a home crowd and driving opposing fans to their knees.

Babe Ruth did it consistently, never hitting fewer than 40 in ten full seasons played from 1920 to 1932. He retired with a career slugging average of .690.

In 1961 Roger Maris’ 61st homer conquered Babe Ruth’s all-time record, but that mark has been surpassed three times in recent years.Maris, of course, was a fluke. A decent home run hitter caught up in a home run race with Mickey Mantle, Maris had a career year in 1961 and went downhill from there.

Sammy Sosa, Mark McGwire and Barry Bonds have eclipsed the former record with homers number 66, 70, and 73.

We now know, of course, how they did it. In addition to “discipline, knowledge, speed and power,” they have been found to have used anabolic steroids. Each virtually doubled his annual home run production to break the record—Bonds went from 34 to 73 in two years. Sosa went from 36 to 66 in one year. McGwire went from 39 to 70 in three years.

All three saw a drastic fall-off in home runs shortly after their peaks. And none of them—even Bonds, with his jacked-up 73 homer year included, approached Ruth’s career slugging average.

The baseballs they [Bonds, McGwire, Sosa] hit to earn a piece of baseball immortality all rest in the possession of Todd McFarlane.

Todd McFarlane is a cartoon creator who paid through the nose ($3 million—the most ever paid for a sports artifact) for Mark McGwire’s 70th home run baseball. He is a sports nut who built a collection of steroid-juiced home run balls, including, according to “The McFarlane Collection” web site, “six of the ten highest priced baseballs ever purchased.”

Whatever the actual current market is for those six steroid-inflated baseballs, it is in my view likely to be far below cost.Jeff MatthewsI Am Not Making This Up

“It just seems like everyone is doing it.” Thus says a 26 year old Manattanite playing the real estate game—this year’s version of the New New Thing—in today’s New York Times.

After describing the eerie parallels between today’s Real Estate mania and yesterday’s Internet Bubble (for example, houses being bought and re-sold on the same day), the article quotes the scariest sentiment of all, from the president of a Miami real estate outfit predicting boomer demand and cheap foreign dollars will overwhelm the shrinking supply of land to create a nirvana for real estate investors:

“South Florida is working off of a totally new economic model than any of us have ever experienced in the past.”

The man was obviously not around in 1926, when Florida had the first of many real estate busts, following a boom based on the very same conditions underlying today’s bubble: cheap money and a get-rich-quick certitude that a Greater Fool exists out there for any property you can grab.

Thus the “New New” Thing—real estate speculation—is actually a New New Old Thing.

And it’s not just in Manhattan and Miami that people are snapping up properties almost as quickly as the Fed raises interest rates: in February, new home sales around the country had their biggest monthly increase—9%—in four years.

Buyers ought to consider one thing before plunking down those deposits: the cost of money. While long bonds yields have not risen very much in the last year, 2 year treasury yields have spiked from a bit above 1% to nearly 4%.

And that takes a good chunk of the “Greater Fool” buying power out of the market.

Everyone seems to be debating the question of whether we are or aren’t yet in a “Housing Bubble.” But we’re there already.

The real question is, how do we get out?

Jeff Matthews
I’m Not Making This Up

Patrick Byrne is nothing if not bold.

The Overstock.com CEO has built a tiny money-losing internet-based surplus reseller into a large internet-based surplus reseller that made money in Q4 of 2004. Wall Street’s hopes for sustained profitability have been damaged in recent weeks, however, by costs associated with the company’s $1 March shipping promotion and a sudden step-up in marketing that caught most of the analysts by surprise.

That it was caught by surprise is not entirely the analyst community’s fault. Byrne ended his Q4 conference call in January—a few weeks before the $1 shipping promotion appeared—by proclaiming the company had “passed through the tipping point.” “People’s expectations for this year are becoming more confident,” Byrne noted approvingly in his concluding remarks, saying “we can crush” those expectations. “We are really on a roll here,” he said.

In fairness, the sudden downshift from profits back to losses appears to be a part of Byrne’s flexibility in managing Overstock.com. He has, in the past, taken what he calls “Patrick Fliers,” in the form of new ventures and experiments with the basic model of selling overstocked, surplus merchandise. A laudable trait, for the history of business in America is that companies failing to innovate end up being overtaken—particularly in the fast-paced world of the internet.

Such “Patrick Fliers” include the “sprinkling” of $2 million in bonuses “around the company,” in the last quarter of 2004; acquiring online distribution rights to a movie that “answered” Fahrenheit 911, on which the company lost $700,000 in Q4; and $2 million to start an Overstock.com auction site which Bryne, on his conference call, compared repeatedly to eBay.

Indeed, Byrne claimed the new auction site was already “getting better results than they do on eBay” in certain, unidentified areas. He based this on “feedback” from “the eBay power selling community.”

Based on the data at hand, however, it appears to me the Overstock.com auction site is a “Patrick Flier” not achieving liftoff.

“Part Two” of this series detailed the paltry bidding in various Overstock auction categories. Let’s now examine the travel business on Overstock.com, which Bryne described as demonstrating such improvement that “Somebody showed up here from Latin America… [saying] it’s just that we want to liquidate all of our airline tickets through your site. I mean a well-known Latin American airline.”

Indeed, he claimed “we actually had to hire people to answer the phone for the hundreds of contacts we are getting from people in the travel industry, offering us unique deals.”

Unfortunately, those “hundreds of contacts” have yielded, at this moment, all of 278 items for auction in the “Travel” section of Overstock.com Auctions. And of those 278 items, 44 are listed under “Airline.” And just 4 of those 44 have more than 1 bid.

Furthermore, I cannot identify the “well-known Latin American airline” that wants to “liquidate all our airline tickets” through this site, unless that airline happens to offer hokey-looking deals using the handles “4salebyowner” and “sinbad42” and “homeauctionbiz” and “1goodfind” and “freeitemsandmore” and “gailsgoodies.”

Of all the “hundreds of contacts” that beseiged the Overstock phone lines offering “unique deals” there are six entities listing 44 airline deals, of which only 4 attracted more than a single bid. That’s it.

But don’t take my word: check it out yourself. And if you happen see that well-known Latin American airline liquidating all its tickets somewhere on the site I haven’t found, let me know. The snow is falling yet again here in New England, and a nice, cheap ticket south of the border might be just the thing.

http://auctions.overstock.com/cgi-bin/auctions.cgi?PAGE=BROWSE&CTG=433&SORT=7

Jeff Matthews
I Am Not Making This Up

“Oil’s Surge Ignites Cost Increases,” the Wall Street Journal reports alarmingly today, “For Products From Plastics to Shoes.” Not only has Mattel raised Barbie Doll prices, the Journal reports, but “rising oil is boosting the cost of raw materials for diapers, pantiliners, Swiffer dusters and other consumer products….”

Gee, who’d have thought the tripling in oil prices would have such an impact? Alan Greenspan certainly didn’t–I suppose his infinite faith in the power of productivity prevented him from seeing beyond the fake “ex-food and energy” inflation calculation both the Fed and Wall Street like to use.

Today’s CPI won’t help either–whatever way you look at the data–and the bond market finally gets it: the 2 year yield has spiked to 3.87% this morning…a far cry from the “1” handle on the 2 year not so very long ago.

Perhaps its distance from Wall Street and Washington is what allowed a certain very smart commercial real estate landlord, the privately held Shorenstein Company, to see through the fake CPI data of yore and be a seller of San Francisco real estate for the last year and a half.

Quoting the New York Times: “Prices are staggeringly high relative to the returns and the underlying fundamentals,” said Douglas W. Shorenstein, the chief executive of his family business, in an interview in his 49th-floor corner office at the Bank of America Center overlooking San Francisco Bay. “If somebody is willing to pay a lot more than I would pay, then we’re a seller.”

Yesterday’s Fed moves, today’s CPI and tomorrow’s bond yields will likely prove the Real-Estate-Happy-Little-Guy, who got left holding the dot-com bag, wrong again.

Jeff Matthews
I Am Not Making This Up