Tuesday, December 28, 2010

But What Would Eric Think?

Brett Arends is steamed.

He’s had it up to here with the Cult of Apple, and he’s decided to do something about it: what he’s doing is he’s not getting an iPad for Christmas.

This is how the Wall Street Journal columnist began his pre-Christmas diatribe against the latest must-have invention from Steve Jobs’ North Pole Magic Factory:

Why I Don't Want an iPad for Christmas

Everyone wants an iPad this Christmas, right?

Apple's tablet computer is this year's hottest adult toy. Sales are booming. James Cordwell, an analyst at Atlantic Securities, expects the company to sell six million this quarter, half of them here in the U.S. It's driving the company toward what will probably be yet another blowout Christmas period.

But you can count me out. I don't want an iPad for Christmas, thanks very much.

—Wall Street Journal, December 21, 2010

Arends’ reasons—there are ten in all, thus fulfilling the journalistic requirement for “Top Ten” lists at this time of year—include a few a rational ones (“The cost of the add-ons,” for one) and quite a few more irrational head-scratchers that, in the main, remind me of something Paul Hulleberg used to say.

Paul was a childhood best-friend, and a serious music-head in those days when serious music came on LPs (look it up, kids) packaged in fancy sleeves (look that up too, kids), which we would dissect along with the music (“Magical Mystery Tour,” with its 24-page color booklet, was a particular fave), debating everything from who-sang-what to what was the song about, anyway? (“Drugs,” we usually decided).

There was, however, one album from that period that we did not dissect.

It was “Layla” (technically “Layla and Other Assorted Love Songs”: look that up too, kids), courtesy of the post-Cream guitar hero Eric Clapton, but released under the assumed name of Derek and the Dominos.

Now, because Clapton’s name was not on the cover, and because the title song clocked in at seven minutes, the album failed to find an audience when it was first released, despite having both Duane Allman and Clapton playing together.


It was only a year later, when “Layla” was included on a Clapton ‘Greatest Hits’ compilation, that the year-old album became popular.

And therein lay the problem: Paul refused to buy “Layla and Other Assorted Love Songs” after the album became popular, because the whole point of us being music-heads was that we were supposed to find this kind of stuff before everybody else knew about it—not when Layla had become as close to a hit record as was possible on WNEW FM, which back then was the leading-edge New York music-head station, home to the likes of wispy-voiced Alison Steele (“The Nightbird”) and gravely-voiced Scott Muni.

“What would Eric think?” Paul would say. “I can’t buy it now that it’s popular.”

I’d throw an album cover at him and yell something like “Eric would say ‘Thank you for the five bucks.’”


My reaction, of course, made him say it every chance he got.

Which brings us back to Arends’ “Top-Ten” reasons not to buy an iPad: he seems less interested in what the thing actually does—which is a lot—and more concerned about what it represents—which to him is a slavish devotion to the Cult of Apple.

Let’s take the first five of his so-called reasons:

1. It’ll be cheaper next year.

That may be true, but it may not be true. While the painfully slow first-generation iPhone soon became, as Arends writes, “a paperweight,” the iPad is no such thing: it is fast, easy to use, and excellent value for the money.

2. It’s going to be better next year.

“The next iPad will have new features—allegedly including video conferencing and maybe a better screen. This year’s model will be so over,” he writes. This may also be true—but it probably won’t, since not many people are a) sitting around waiting for video conferencing, and b) unhappy with the iPad’s gorgeous screen.

Unless Steve Jobs is going to attach a working personal jet-pack to the next generation iPad, it’s hard to see a reason the average user will care to wait.

3. Apple’s profit margins are too high.

This is the biggest head-scratcher. First, Arends gets the margins wrong. He cites Apple’s year-old 41% gross margin and says “Me, I don’t want to support someone else’s 60% markups with my own dollars.”


But Apple’s gross margins are now running at 37%, down significantly from last year thanks in no small part to the lower margins Apple gets on the iPad compared to the iPhone, the price of which is subsidized by the wireless phone carriers.

Second, the issue shouldn’t be what Apple’s margins are, unless, of course, like Microsoft’s margins they result from a monopolistic business model in which the consumer has no choice when seeking an Intel-compatible computer. The issue should be value-for-money.

And the iPad is terrific in that department.

4. Competitors are coming.

This is true, as far as it goes. Arends unfortunately cites the Samsung Galaxy Tab, which means he apparently has not seen a Galaxy Tab, nor used one, because the Galaxy Tab is the least of the iPad’s potential concerns, in our opinion. It has a surprisingly small screen, for starters; and based on hanging around the repair desk at Verizon stores, we are told the thing tends to seize up and need rebooting, which may explain why a friend’s 22 year old daughter recently called the Galaxy “an iPad for losers.”

5. No flash.

By this, Arends refers to Steve Jobs’ famous decision to leave Adobe’s Flash Player for video and animation off the iPad. This was a very a big issue when the iPad first came out, because most web sites used Flash at that point, and it was about the only thing competitors could talk the iPad down with.

But today, an increasing number of web sites (MLB, for example) that were Flash-only last spring now accommodate the iPad, and do so beautifully.


Of the remaining five issues on the list, one is merely list-expanding padding (“It’ll get boring”), while another regurgitates mainstream fluff (“The whole Apple cult is starting to creep me out”).

But what it all seems to come down to is, like Eric Clapton’s “Layla” those many years ago, the iPad has become too popular for some people to admit they want one.

Our own advice is, don’t listen to “Top-Ten” columnists, whatever newspaper they write for, and don’t listen to virtual columns like NotMakingThisUp: try it yourself and make up your own mind.

Meanwhile, I’ll have to call Paul and see if he’s got an iPad, or if he’s holding out like our Wall Street Journal columnist. Besides, it’ll give me a chance to find out if he ever, finally, bought “Layla and Other Assorted Love Songs,” too.

Paul had excellent taste: I’ll bet he’s got them both.



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, December 20, 2010

Conference-Gate Revisited

Well, what goes around comes around.

Barron’s is recommending Sallie Mae, the fallen-angel student loan servicer (the Feds have taken over the task of actually lending the dough) which had a near-death experience during the financial crisis and is now being resurrected as a value stock.

As the article notes, Sallie Mae’s “formal name” has been replaced, like Prince’s once upon a time, by a symbol. In this case, the symbol is “SLM,” the company’s stock ticker symbol.

The obvious reason for the name thing is that “SLM” has no desire to be associated with the “Sallie Mae” that provided one of the most entertaining conference calls in the history of conference calls, as the Financial Bubble of Our Time was just beginning its Great Unwind.

Now, we have no opinion to the positive or negative on the stock itself these days, but we couldn’t help think back to those dark days, and thought it be worth a stroll down memory lane through the archives of NotMakingThisUp:


Thursday, December 20, 2007
Expletives Deleted! Tapes Erased! It’s Conference-Gate!


“How (inaudible) is this? Steve, let’s go. There’s no questions, let’s get the (expletive) out of here.”
—Al Lord, CEO Sallie Mae Corporation


Call Woodward and Bernstein—it’s Conference-Gate!

That’s right: the official replay of Wall Street’s most famous conference call has been tampered with!

I am not making that up.

In a cover-op worthy of Nixon and his Watergate-era tape-erasing scandal, the best part of yesterday’s Sallie Mae conference call—CEO Al Lord’s above-quoted “let’s get the (expletive) out of here” which even the Wall Street Journal highlighted in this morning’s article on Lord’s melt-down—has been deleted.

That is a shame, because yesterday’s call ranks right up there in the upper pantheon of our Patrick Awards, whereby NotMakingThisUp semi-regularly awards Wall Street’s Finest and Corporate Bigs alike for whatever strikes us as particularly outré commentary, in a realm where outré commentary is generally the norm.

In fact, the Sallie Mae call will probably go down as one of the Top Ten Train Wrecks of All Time.

Get a load of this:

Bill Cavalier—Société Genéralé

Can you talk a little bit about the pass-through market? Clearly, there is pretty much no appetite for student loan paper at this point. What are you being told about when you think there will be a market for your pass-through notes so that we can start to do some….

Al Lord—CEO
I’m not sure what you’re talking about. I’ve been talking to whom?

Bill Cavalier—Société Genéralé
When you do a securitization, right, you have a bank that arranges -- that actually does the arranging, right, you have an arranging bank. Somebody must be telling you something about what the market is looking like, what their expectations are for next year…. We're trying to put together projections here, Al. We're trying to figure out what your stock is going to be worth, and you have got to give us some guidance, you've got to give us some numbers. I don't even see a margin number here for the stuff that you've done. Can you give us some handle on what your stock is worth?

Al Lord—CEO
You should give Steve [McGarry, IR guy] a call.

Bill Cavalier— Société Genéralé
But you’re the CEO. You’re the guy who just took over the company.

Al Lord—CEO
Yes, that’s exactly right, I’m the CEO. You should give Steve a call. Next.


Nothing on paper, virtual or hard copy, can replicate the angst, anger and frustration projected in those words as spoken by Mr. Lord and the investors and analysts asking questions: it must be heard to be believed.

Unfortunately, the Big Moment—Mr. Lord’s final blowing-off of the accumulated pressure as head of a company caught up in both the highly public collapse of a private equity transaction of its making and a credit crisis not of its making—no longer exists.

That’s right.

Mr. Lord’s “How (inaudible) is this? Steve, let’s go. There’s no questions, let’s get the (expletive) out of here” has been erased from the conference call replay.

Both Haldemen and Erlichman would be proud.


Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, December 13, 2010

Shazam! From the Boss to the King to John & Paul (But Not George or Ringo, or Keef or Mick), Not to Mention Jessica & Nick...2010 Edition

2010 Editor’s Note:

Back for the third consecutive year by popular demand, we’ll try to keep this year’s update brief—but don’t count on it.

For starters, we’re going to plug a book: Keith Richards’ autobiography, “Life,” which happens to be one of the best books ever written—and we don’t just mean “Best in the Category of ‘Memoirs by Nearly-Dead Rock Stars’.”

It is a great book, period.

The story of how ‘Keef’ (as he signs sweet letters to his Mum while rampaging across America), Brian and Mick developed the Rolling Stones’ sound, for example, is worth the price alone (in short, they worked really hard; but the full story is much better than that).

Yet there’s more—much more. Guitarists can soak up how Keith created his own guitar sound; drummers will learn—if they didn’t already know—Charlie Watts’ high-hat trick (and from whom he stole it); while songwriters had better prepare themselves to be depressed at how Mick wrote songs (‘As fast as his hand could write the words, he wrote the lyrics,’ according to one session man who watched him write “Brown Sugar”).

And that’s just the rock-and-roll stuff.

The sex-and-drugs stuff is also there, and the author lays it all out in his unfettered, matter-of-fact, loopy-but-straightforward style, often with the first-person help of friends and others-who-where-there (and presumably of sounder mind and body than you-know-who: the drug and alcohol intake is truly staggering) who write of their own experiences with the band.

Okay, you may say, but how exactly is Keith Richards’ autobiography relevant to our annual review of holiday songs?

Well, while furtively reading snatches of ‘Life’ during a stop at the local Borders (we expect to see the book under the Christmas tree sometime around the 25th of this month, hint-hint), we happened to hear another musical legend perform one of our favorite offbeat Christmas songs in the background, and it occurred to Your Editor that of all the bands out there that could have done that same kind of interesting, worthwhile Christmas song, The Rolling Stones probably top the list.

What with Keef’s bluesy undertones and Mick’s commercially sinister instincts on top, it would have certainly made this review, for better or worse. (Along these lines, The Kinks’ “Father Christmas” is one of the all-time greats, and doesn’t get nearly enough air-time these days.)


Now, for the record, the offbeat Christmas song that triggered this excursion was “’Zat You Santa Claus?”—the Louis Armstrong and The Commanders version from the 1950’s. (The song was later covered, like everything else but the Raffi catalogue, by Harry Connick, Jr.)

Starting out with jingle bells, blowing winds and a slide-whistle, you might initially dismiss “’Zat You?” as Armstrong’s sadly commercial attempt to get in on the Christmas song thing, except that his familiar, Mack-the-Knife-style vocal comes over a terrific backbeat that turns it into what we’d nominate for Funkiest Christmas Song Ever Recorded:

Hangin’ my stockin’/I can hear a knockin’
’Zat you, Santa Claus?...

One peek and I’ll try there/Uh-oh there’s an eye there
’Zat you, Santa Claus?

Please, ah please/ah pity my knees
Say that’s you Santa Claus
(That’s him alright.)

It is a delight to hear, and the fact that it is suddenly getting more air-time this season is a step-up in quality for the entire category—or would be, if not for the apparent installation of Wham!’s “Last Christmas” in the pantheon of Christmas Classics.

A 1980’s electro-synth Brit-Pop timepiece, “Last Christmas” combines a somewhat catchy tune with lyrics that make a trapped listener cry “No mas!” while attempting to open the car door even at high speeds to get away:

Last Christmas, I gave you my heart
But the very next day you gave it away
This year
To save me from tears,
I gave it to someone special

Considering the fact that the songwriter (Wham!’s gay front-man, George Michael) decided to repeat that chorus six times, the full banality of the lyric eventually gives way to incredulity: “Let me get this straight,” you begin to ask yourself. “This year he’s giving his heart to ‘someone special’... so who’d he give it to last year? The mailman?

Last Christmas” does have the distinction of being the biggest selling single in UK history that never made it to Number 1. Furthermore, all royalties from the single were donated to Ethiopian famine relief, the same cause which led to creation of what turned out to be the actual Number 1 UK single that year, “Do They Know It’s Christmas?

Do They Know…” is a song that has received some push from readers to receive an honorable mention in these pages, and while it is certainly an interesting timepiece, with much earnest participation from the likes of Sting, Bono and even Sir Paul, it is not nearly as worthwhile as an album that seems just as prevalent these days: A Charlie Brown Christmas by jazz pianist Vince Guaraldi.

How a jazz pianist was hired to create the music for a TV special with cartoon characters is this: the producer heard Guaraldi’s classic instrumental “Cast Your Fate to the Wind” on the radio while taking a cab across the Golden Gate Bridge.


One thing led to another, and thanks to that odd bit of chance, future generations will have the immense pleasure of hearing that timeless work of art every year around this time. (A second odd tidbit for our West Coast readers: Guaraldi died while staying at the Red Cottage Inn, in Menlo Park—of a heart attack, however, and not the usual, more gruesome fate of musicians who die in hotels.)

One second-to-last note before we move on: we have been heavily lobbied by certain, er, close relations to include Mariah Carey’s “All I Want For Christmas is You” as a worthwhile holiday song—despite our previously expressed misgivings about her contribution to the genre (see below).

And we have to admit, her “All I Want…” leaves behind the incessant vocal pyrotechnics that made some of her other Christmas covers (“Oh Holy Night,” for example) unbearable, at least to our ears.


In this case she seems to trust the song to take care of itself, which it does in fine, driving, upbeat style. Now, as Your Editor previously hinted, all he wants for Christmas is Keef’s book. And it had better be there, if, as previously noted, you get our drift.

Finally, and speaking of autobiographies, we happened to read Andy Williams' own book this past year (for reasons we can't recall), and must report that our reference to Williams below seems overly harsh. For one thing, his book is as honest as Keef's; for another, as a singer not necessarily born with the vocal equipment of, say, Mariah Carey, the man worked at his craft and succeeded mightily where many others failed.

Which, we might add, is, after all, the hope of this season.

And so, we wish for a Merry Christmas, Happy Hanukkah and Good New Year to all.

JM—December 13, 2010


2009 Editor’s Note:

Back by popular demand, what follows is our year-end sampling of the Christmas songs playing incessantly on a radio station near you, and it demands from your editor only a few updates this holiday season.

For starters, we have not heard the dreaded duet of Jessica Simpson and Nick Lachey singing “Baby, It’s Cold Outside” thus far in 2009, and for this we are most grateful.

Indeed, if it turns out that their recording has been confiscated by Government Authorities for use as an alternative to lethal injections, we’ll consider ourselves a positive force for society.

On the other hand, we are sorry to report an offset to that cheery development, in the form of a surge in playing time for Barry Manilow’s chirpy imitation of the classic Bing Crosby/Andrew Sisters version of “Jingle Bells.”

For the record, “Jingle Bells” was written in 1857...for Thanksgiving, not for Christmas. And it’s hard to imagine making a better version than that recorded by Bing and the three Andrew Sisters 86 years later.

But Manilow, it seems, didn’t bother to try.

Instead, Barry and his back-up group, called Expos, simply copied Bing’s recording, right down to that stutter in the Andrews Sisters’ unique, roller-coaster vocals on the choruses, as well as Bing’s breezy, improvised, “oh we’re gonna have a lotta fun” throwaway line on the last chorus.

Sharp-eared readers might say, “Well, so what else would you expect from a guy who sang ‘I Write the Songs’…which was written by somebody else?”

Well, we can’t argue with that, but we will point out another annoyance this year: the enlarged presence of Rod Stewart in the Christmas play-lists.

Don’t get us wrong: we like Rod Stewart—at least, the Rod Stewart who gave the world what your editor still considers the best coming-of-age song ever written and recorded: “Every Picture Tells a Story.”

It’s the Rod Stewart who gave us “Do Ya Think I’m Sexy?” we’re less crazy about.

So too the Rod who chose to cover “My Favorite Things” (for the definitive version of that classic, see: ‘Bennett, Tony’) and “Baby It’s Cold Outside” with Dolly Parton (for an equally offensive version of this one, see: ‘Simpson, Jessica’ and ‘Lachey, Nick’).

As an antidote to Rod, we suggest several doses of Jack Johnson’s sly, understated “Rudolph the Red-Nosed Reindeer,” which seems to be gaining recognition, and anything by James Taylor—especially his darkly melancholic “Have Yourself a Merry Little Christmas.”

Of all the singers who recorded versions of this last—and Sinatra’s might be the best—it is Taylor, a former heroin junkie, who probably catches more of the intended spirit of this disarmingly titled song.

After all, the original lyric ended not with the upbeat “Have yourself a merry little Christmas, let your heart be light/Next year all our troubles will be out of sight,” but with this:

Have yourself a merry little Christmas, it may be your last/Next year we may all be living in the past.”

No, we are not making that up—and it should keep Barry Manilow from be covering it any time soon.

JM—December 19, 2009


Wednesday, December 24, 2008

Shazam! From the Boss to the King to John & Paul (But Not George or Ringo), Not to Mention Jessica & Nick

Like everyone else out there, we’ve been hearing Christmas songs since the day our local radio station switched to holiday music sometime around, oh, July 4th, it feels like.

And while it may just be a symptom of our own aging, the 24/7 holiday music programming appears to have stretched the song quality pool from what once seemed Olympic-deep to, nowadays, more of a wading pool-depth.

What we recall in our youth to be a handful of mostly good, listenable songs—Nat King Cole’s incomparable cover of “The Christmas Song” (written by an insufferable bore: more on that later); Bing’s mellow, smoky, “White Christmas”; and even Brenda Lee’s country-tinged “Rockin’ Around the Christmas Tree” (recorded when she was 13: try to get your mind around that)—played over and over a few days a year…has evolved into a thousand mediocre-at-best covers played non-stop for months on end.

Does anybody else out there wonder why Elvis bothered mumbling his way through “Here Comes Santa Claus”?

It actually sounds like Elvis doing a parody of Elvis—as if he can’t wait to get the thing over with. Fortunately The King does get it over with, in just 1 minute, 54 seconds.

Along with that and all the other covers, there are, occasionally, the odd original Christmas songs—the oddest of all surely being Dan Fogelburg’s “Same Old Lang Syne.”

You’ve heard it: the singer meets his old lover in a grocery store, she drops her purse, they laugh, they cry, they get drunk and realize their lives have been a waste…and, oh, the snow turns to rain.

So how, exactly, did that become a Christmas song?

Then there’s ex-Beatle Paul McCartney’s “Wonderful Christmastime,” which combines an annoyingly catchy beat with dreadful lyrics, something McCartney often did when John Lennon wasn't around.

(After all, it was Lennon who replaced McCartney’s banal, teeny-boppish opening line for “I Saw Her Standing There”—“She was just seventeen/Never been a beauty queen” is what McCartney originally wrote—with the more suggestive “She was just seventeen/You know what I mean,” thereby turning a mediocre time-piece into a classic.)

But Lennon was not around to save “Wonderful Christmastime” even though McCartney actually recorded this relatively new Christmas standard nearly thirty years ago, before Lennon was shot.

It rightfully lay dormant until the advent of All-Christmas-All-The-Time programming a couple of years ago. Fortunately, by way of offset, Lennon’s own downbeat but enormously catchy “Happy Xmas (War is Over)” is played about as frequently as “Wonderful Christmastime.”

Who but John Lennon would start a Christmas song: “And so this is Christmas/And what have you done...”? Of course, who but Paul McCartney would start a Christmas song, “The moon is right/The spirit's up?”

If anything explains the Beatles’ breakup better than these two songs, we haven’t heard it.


Now, we don’t normally pay much attention to Christmas songs. If it isn’t one of the aforementioned, or an old standard sung by Nat, Bing, Frank, Tony, Ella and a few others, we’d be clueless.

But thanks to a remarkable new technology, we here at NotMakingThisUp suddenly found ourselves able to distinguish, for example, which blandly indistinguishable female voice sings which blandly indistinguishable version of “O Holy Night”—Kelly Clarkson, Celine Dion, or Mariah Carey—without any effort at all.

The technology is Shazam—an iPhone application that might possibly have received the greatest amount of buzz for the least amount of apparent usefulness since cameras on cell phones first came out.

For readers who haven’t seen the ads or heard about Shazam’s wonders from a breathless sub-25 year old, Shazam software lets you point your iPhone towards any source of recorded music, like a car radio, the speaker in a Starbucks, or even the jukebox in a bar—and learn what song is playing.

Shazam does this by recording a selection of the music and analyzing the data. It then displays the name of the song, the artist, the album, as well as lyrics, a band biography and other doodads right there on the iPhone.

Now, you may well ask, what possible use could there be for identifying a song playing in a bar?

And unless you’re a music critic or a song-obsessed sub-25 year old, we’re still not sure.

But we can say that Shazam is pretty cool. In the course of testing it on a batch of Christmas songs—playing on a standard, nothing-special, low-fi kitchen radio—heard from across the room, without making the least effort to get the iPhone close to the source of the music, Shazam figured out every song but one (a nondescript version of a nondescript song that it never could get) without a hitch.

And, as a result, we can now report the following:

1) It is astounding how many Christmas songs are out there nowadays, most of them not worth identifying, Shazam or no Shazam;

2) All Christmas covers recorded in the last 10 years sound pretty much alike, as if they all use the same backing track, and thus require something like Shazam to distinguish one from the other;

3) Nobody has yet done a cover version of Dan Fogelburg's “Same Old Lang Syne,” which may be the truest sign of Hope in the holiday season;

4) None of this matters because Mariah Carey screwed up the entire holiday song thing, anyway.

Now, why, you may ask, would we pick on Mariah Carey, as opposed to, say, someone who can’t actually sing?

Well, her “O Holy Night” happened to be the first song in our mini-marathon, and it really does seem to have turned Christmas song interpretation into a kind of vocal competitive gymnastics aimed strictly at demonstrating how much of the singer's five-octave vocal range can be used, not merely within this one particular song, but within each measure of the song.

In fact Mariah's voice jumps around so much it sounds like somebody in the control booth is tickling her while she’s singing.

More sedate than Mariah, and possibly less harmful to the general category, The Carpenters’ version of “(There’s No Place Like) Home for the Holidays” comes on next, and it makes you think you’re listening to an Amtrak commercial rather than a Christmas song (“From Atlantic to Pacific/Gee, the traffic is terrific!”), so innocuous and manufactured it sounds.

Johnny Mathis is similarly harmless, although his oddly eunuch-like voice can give you the creeps, if you really think about it. Mercifully, his version of “It’s Beginning to Look a Lot Like Christmas” is short enough (2:16) that you don’t think about it for long.

Now, without Shazam we never would have known the precise time duration of that song.

On the other hand, we would we never have been able to identify the perpetrators of what may be the single greatest travesty of the holiday season—Jessica Simpson and Nick Lachey, singing “Baby it’s Cold Outside.”

“Singing” is actually too strong a word for what they do. Simpson’s voice barely rises above a whisper, and you cringe when she reaches for a note, although she does manage to hit the last, sustained “outside,” no doubt thanks to the magic of electronics. Lachey’s vocals are like what people do in the shower, or in their car—as opposed to what professionals do in a recording studio.

Thus the major downside of Shazam might be that it can promote distinctly anti-social behavior: having correctly identified who was responsible for this blight on holiday radio music, your editor decided that if he ever ran across the pair in his car while singing along with the radio too loudly to notice, he wouldn’t stop to identify the bodies.

Fortunately, the bad taste left by their so-called duet is washed away when Nat King Cole’s “The Christmas Song” comes on next.

Thanks to Shazam, we learn that this is actually the fourth version Nat recorded. The man worked at his craft, and it shows. This is the best version of the song on record, by anyone, and probably one of the two or three best Christmas songs out there, period.

The second those strings sweetly announce the tune, you relax, and by the time Cole’s smoky, gorgeous voice begins to sing, you’re in a distinctly Christmas mood like no other recording ever created.

(Unfortunately, the song’s actual writer, Mel Tormé, had the personality of a man perpetually seething for not getting proper recognition for having written one of the most popular Christmas songs of all time. We did not learn this from Shazam: we once saw Tormé perform at a small lounge, during which he managed to mention that he, not Nat King Cole, wrote “The Christmas Song”—as if this common misperception was still on everybody’s mind 35 years later. When that news flash did not seem to make the appropriate impression on the audience, he later broke off singing to chew out a less-than-attentive audience member, completely destroying the mood for the rest of the set.)

Like that long-ago performance by the "Velvet Fog," the pleasant sensation left behind by Cole’s “Christmas Song” is quickly soured, this time by a male singer performing “Let it Snow, Let it Snow, Let it Snow” in the manner of Harry Connick, Jr. doing a second-rate version of Sinatra.

Who is this guy, we wonder?

Shazam tells us it’s Michael Bublé. We are pondering how such a vocal lightweight became such a sensation in recent years—the answer must surely be electronics: his voice, very distinctly at times, sounds like it has been synthesized—when John Lennon’s “Happy Xmas” comes on.

It’s a great song, demonstrating as it does Lennon’s advice to David Bowie on how to write a song: “Say what you mean, make it rhyme and give it a backbeat.” The fact that Lennon had the best voice in rock and roll also helps.

Unfortunately, his wife had the worst, and a brief downer it is when Yoko comes in on the chorus like a banshee. (Fortunately she is quickly drowned out by the children’s chorus from the Harlem Community Choir.)

The other songs in our Shazam song-identification session are, we fear, too many to relate.

Sinatra, of course; Kelly Clarkson, an American Idol winner who essentially does a pale Mariah Carey impersonation; Blandy—er, Andy Williams; and one of the best: Tony Bennett.

Then there’s Willie Nelson, who has a terrific, understated way of doing any song he wants—but sounds completely out of place singing “Frosty the Snowman.” One wonders exactly what kind of white powder Willie was thinking about while he was recording this, if you get our drift.

Oh, and there’s Coldplay’s “Have Yourself a Merry Little Christmas,” which pairs the sweetest piano with the worst voice in any single Christmas song we heard; Amy Grant, a kind of female Andy Williams; the Ronettes, who are genuinely terrific—a great beat, no nonsense, and Ronnie singing her heart out with that New York accent; and then Mariah again, this time doing “Silent Night” with that same roller-coaster vocal gargling.

Gene Autry’s all-too-popular version of “Here Comes Santa Claus” would be bearable except that he pronounces it “Santee Closs,” which is unfortunate in a song in which that word appears like 274 times. ‘N Sync is likewise unbearable doing “O Holy Night” a cappella, with harmonies the Brits would call cringe-making, and Mariah-type warbling to boot.

Hall & Oates’s “Jingle Bell Rock” is too easy to confuse with the other versions of “Jingle Bell Rock”—thank you, Shazam, for clearing that up—while Martina McBride manages to sound eerily like Barbra Streisand imitating Linda Ronstadt singing “Have Yourself a Merry Little Christmas.”

Winding things down is Dan Fogelburg’s aforementioned “Same Old Lang Syne,” and here we need to vent a little: something about the way he sings “liquor store”—he pronounces it “leeker store”—never fails to provoke powerful radio-smashing adrenalin surges.

Fortunately, we suppress those urges today, because the Shazam experiment concludes with one of the best Christmas songs ever recorded. Better than Bing, and maybe even better than Nat, depending on your mood.

It’s Bruce Springsteen. The Boss. Doing “Santa Claus is Comin’ to Town.”

And even though this version was recorded live more than 25 years ago, it still jumps out of the radio and grabs you.

Now, as Shazam informs us, this particular recording was actually the B-side of a single release called “My Hometown.” (Back in the day, kids, “singles” came with two songs, one on each side of a record: the “A” side was intended to be the hit song; the “B” side was, until the Beatles came along, for throwaway stuff.)

Fortunately nobody threw this one away.

Springsteen begins the familiar song with some audience patter and actual jingle bells; then he starts to sing and the band comes to life. Things move along smoothly through the verse and chorus...until ace drummer Max Weinberg kicks it into high gear and the band roars into a fast shuffle that takes the thing into a different realm altogether.

Feeding off the audience, The Boss sings so hard his voice slightly breaks at times. Then he quiets down before roaring back again into a tear-the-roof-off chorus, sometimes dropping words and laughing as he goes.

This is real music—recorded in 1975 during a concert at the C.W. Post College—with no retakes, no production effects, and no electronic vocal repairs, either.

Try doing that some time, Jessica and Nick.

Actually, come to think of it, please don’t.

Merry Christmas, Happy Hanukkah and a Good New Year to all.


Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, December 06, 2010

Memo to Steve Jobs: “It’s Warm Inside the Herd”


“It is warm inside the herd…but then, of course, you go off the cliff.”
—Jean-Marie Eveillard, First Eagle Funds

What the heck: we’ve written an open letter to Ben Bernanke, the most powerful central banker in the world, so why not write a memo to the most powerful CEO in America?

The genesis of today’s virtual memo is the recent spate of articles in financial publications revolving around the topic of what Mr. Jobs’ company—Apple—ought to do with the growing cash hoard on which that company now sits.

The articles stem from the fact that everybody outside the actual company that created the cash hoard has an opinion on what to do with that cash. And what everyone is recommending is this: Apple should spend the cash—and sooner rather than later.

Here’s how a recent Bloomberg story led off the discussion:

Apple Piggybank Earns 0.75% Return as Investors Ask for Payback

Apple Inc.’s piggybank, stuffed with $51 billion in cash and investments, is earning a lower return than a typical U.S. savings account. Some investors say Steve Jobs should put that money to better use….

Apple got a 0.75 percent return on the investments in the past fiscal year, according to a regulatory filing last week. The gain pales next to the roughly 10 percent investors would have earned from the Standard & Poor’s 500 Index and the Dow Jones Industrial Average over that time. Apple’s stock itself also was a much better investment, rising 60 percent….

—Adam Satariano, Bloomberg, 11/2/10.

For the record, the cash hoard that seems to be burning a hole through the pockets of everyone except the folks at Apple is mainly the result of two facts, both of which have nothing to do with the outside observers now indignantly calling for it to be put to ‘better’ use:

Fact One is the outsourced manufacturing model Apple began implementing a decade or so ago when the first iPod was launched. Under the careful watch of Fred Anderson, the CFO at the time, Apple abandoned the asset-intensive, factory-owning high-tech business model common to Silicon Valley, farmed out production to low-cost Asian companies, and so began turning inventory into cash in a way that forever changed the way Silicon Valley looked at where value was really added.

Fact Two is the success of those products themselves, starting with the lowly iPod—a mere music player that morphed into the all-purpose “internet in your pocket” iPhone, which itself begat the notebook-threatening iPad, whose “instant on” capability is something Intel hoped to do with PCs for at least a decade and never got close.

Combined, those two facts have created a business model from Nirvana that requires none of Apple’s capital dollars—none—to be tied up in chips, circuit boards and manufacturing lines, thus allowing Apple to generate gross profit margins that are half-again higher than commodity box builders such as Dell and HP, and gross profit dollars that don’t need to be plowed back into plant and equipment.

Instead, they can be plowed into R&D, sales and marketing, with the leftovers sent to the bank.

So successful is this model that Apple, as has been widely noted, now finds itself with the aforementioned $51 billion worth of leftover cash sitting in the bank.

And that $51 billion, as those same articles point out, is earning almost nothing, thanks to Apple’s conservative investment policy and the low interest rate environment of the moment.

Here’s how the Bloomberg story continued the critique:

For some shareholders, the cash hoard is overkill, especially considering Apple added about $17 billion to its balance sheet last year, though they don’t want a big, overpriced acquisition either.

“That amount of cash is way above what’s needed to have a prudent war chest,” said Keith Goddard, CEO of Tulsa, Oklahoma-based Capital Advisors Inc., which has $822 million under management, including Apple shares. “It would be a real shame for them to do an acquisition to get into another line of business or dilute something they already have going on.”


Now, it is true Apple’s cash return of 0.75% has significantly lagged the broad stock market, and Apple’s own shares, in the last twelve months.

It is also true, however, that Apple’s cash earned significantly more than the stock market, and Apple’s own shares, in calendar 2008, when all those years of Americans living dangerously came home to roost, and investors sweated out a 37% market decline and a near-death experience for the world’s financial system.

Have those investors already forgotten about 2008 and early 2009?

Did the “Flash-Crash” never happen last spring?

Will there never be another Asian crisis, as in 1997-8? Another Internet Bubble, as in 2000? Another “Black Monday”…or “Black Tuesday,” for that matter?

Indeed, we suspect that Apple investors—including, we would bet, all those quoted to the effect that Apple’s $51 billion cash hoard violates some sort of hidden magic cash figure learned in Financial Analysis 101—took immense comfort in the company’s $25 billion September 2008 cash cushion during the panic-stricken days of 2008 and early 2009, when Apple’s market capitalization plummeted to under $100 billion and investors around the world were wondering whether anyone would have enough money to cough up lunch money, let alone enough cash for an iPod or iPhone.

More to the point, we also suspect that some of those same voices also once applauded similar “return value to shareholders” exercises that other companies pursued to their ultimate detriment.

Exhibit A in this category is Dean Foods, purveyor of milk and other dairy-related products, which in early 2007—that’s three and a half short years ago—decided to “return value to shareholders” by paying a whopping big dividend to shareholders.

Now, Dean Foods didn’t have the balance sheet Apple does, but that didn’t stop the company from listening to the siren song of its investment bankers and other “return value to shareholders” mavens.

Here’s how the company justified its actions on a conference call with Wall Street’s Finest:

We announced this morning that we will return approximately $2 billion in capital to our shareholders through a special dividend of $15.00 per share. Before Jack walks you through the details of the recap and the dividend, I would like to discuss with you the factors that make this transaction the right step for Dean Foods' shareholders at this time.

Given our internal focus, our strong cash flows, and the incredible liquidity and flexibility of today's debt capital markets, the appropriate finance decision for Dean Foods today is to increase our utilization of the debt markets and return equity capital to our shareholders. We believe we can do so without diminishing our capacity to grow or foregoing appropriately-priced, strategically-sound acquisitions. Our robust growing cash flow should allow us to de-lever our balance sheet over the next few years….

But clearly from our perspective it was an opportunity that it would have been, in our view, a significant mistake in judgment not to take advantage of the markets that present themselves today. These are extraordinarily liquid markets; they are extraordinarily flexible; and they're extraordinarily well priced.

—Gregg Engles, Dean Foods Chairman and CEO, March 2, 2007


Readers can imagine the huzzahs such a “shareholder-friendly” announcement generated at the time—and, indeed, the analyst from Bear Stearns said “Congratulations…obviously a good announcement” on the triumphant conference call.

(We will pause while readers digest the irony of an analyst with a firm that didn’t survive the financial crisis congratulating a company in a low-margin, highly cyclical business leveraging up just months before the crisis hit.)

Alas, Dean Foods’ shareholders are nowadays wondering all what the congratulations were about. The 'significant mistake in judgment' turned out to be the dividend itself. Dean Foods' balance sheet has not been de-levered since that balance-sheet-destroying event, and the shares, which closed at $34.50 that day ($19.50 adjusted for the $15 a share dividend), traded at $8.50 the day after the company announced yet another in a string of disappointing earnings reports last month.

Oh, and the “Jack,” the Dean Foods CFO referenced by Mr. Engles in the 2007 call touting the special dividend has resigned.


All that said, what, you might wonder, does Steve Jobs say about Apple’s cash?

Again, from Bloomberg:

Jobs, Apple’s chief executive officer, said last month that the company has a good track record of using cash, saying it’s holding money for one or more “strategic opportunities,” rather than a dividend or stock buyback.

Indeed, Steve Jobs and the Apple management team do have a good track record of using cash, if the iPod, the iPhone and the iPad are any indication of what they have been doing with it.

So why not let them worry about the cash hoard?

And if, for some bizarre reason, Steve Jobs ever feels himself moved by the writings of various individuals who have never met payroll, let alone created a product like the iPhone that literally changed lives, to blow all that cash on some special dividend or massive share buyback or some otherwise cash-dispensing activity euphemistically labeled “shareholder-friendly,” we would urge him and his board to consider the examples of other company CEOs who have likewise been so moved.

It is, indeed, as investment genius Jean-Marie Eveillard warned a group of students at a recent San Francisco State FAME investment conference, “warm inside the herd.”

But that is cold comfort when, as he said, the herd goes off the cliff.


Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, November 29, 2010

1,359 Words for “Caveat Emptor”

“We’re nothing but a mirror of our consistent thoughts. You tend to manifest what you focus on. If you look around for what’s wrong, you’ll find it. But as all we know up here in San Francisco, when you focus on what’s right, you see it all around you. … There is absolutely nothing wrong with California that can’t be fixed by what’s right with California. … If you’re from another state, you’d love to have the problems of California.”

–California Lieutenant Governor-elect Gavin Newsom

Leaving aside the new-age psycho-babble, as well as the fact the more than a few states do have “the problems of California,” we couldn’t help think of the San Francisco Mayor’s recent election-eve musings as we listened to the earnings call of a company that, we submit, gave a pretty good demonstration, if inadvertently, of something that is wrong not merely with California but with all of America.

Now, this large retailing success story has its detractors—zillions of them, if you were to believe the mainstream media, although when you scratch the surface of that mistrust, you find mainly disgruntled union bosses and superficially populist politicians (including our current Vice President, who once actually campaigned against the company’s expansion), scared by the company’s hyper-efficient operating methods, not to mention the fact that it isn’t a union shop.

Thus do people with one agenda look for whatever dark clouds they can find in the silver lining of a company that brings, by our brief calculations, more than ten billion dollars worth of reduced living costs to the American consumer each year.

The company is Wal-Mart, and fully 60% of American adults shop at one of their stores at least once a month. (By way of comparison, Target is shopped by 25% of American adults monthly).

It goes without saying that those 120 million or so monthly visitors to Wal-Mart are hardly a uniform picture of American poverty, as the mainstream media would have us believe. But, then, mainstream media types—not to mention Vice Presidents—don’t shop there, so what would they know?

If they did shop at Wal-Mart, however, what they would know is that a basket of typical good purchased at Wal-Mart costs anywhere from 2% less than the competition in the company’s original mass merchandise business (think Sears), to 10% less than the competition in the case of groceries, which now account for half the company’s U.S. sales.


Applying those savings to the company’s $300 million-plus in U.S. sales, you arrive at roughly $18 billion in savings Wal-Mart provides its customers. Each year.

Now you would think that a company that helps consumers save $18 billion a year would be justly celebrated and encouraged to flourish—within the bounds of legal competitive behavior and the rule of law.

But this is America, and America is now governed by trial lawyers—and that’s one thing that’s wrong with America, which Wal-Mart’s latest earnings call illustrated as well as anything we’ve seen since Congress passed so-called healthcare “reform” legislation without bothering to reform the tort system.

(Hey, when 56 Senators are lawyers—not to mention the President, Vice-President, and 36% of Congresspersons—while only two Senators are doctors, well, the fix on tort reform was in from the start.)

Now, it wasn’t so much the earnings discussion, which involved, as it usually does, Wal-Mart’s extensive retail operations—from Bentonville to Leeds—that shed a light on the trial lawyer problem in America.

It was the preamble—the so-called “Reg. FD” disclosure statement that public company executives make before launching into a discussion of business.

For the record, we’ve long thought Reg. FD was one of the really good rules promulgated by the Feds, eliminating, as it did, the kind of selective disclosures companies used to make to Wall Street’s Finest.

(We remember well the pre-Reg. FD days when conference calls were restricted to specific Wall Street analysts and specific buy-side investors. The chosen few would, for example, get on the Hewlett Packard earnings call not because they cared a whit about Hewlett Packard: they got on so they could find out what was happening to DRAM pricing—this was in the days before DRAM prices were instantly available on what Tracy Jordan calls “The Interweb”—and then would, while the HP call was still ongoing, trade shares of Micron and other various memory makers.)

The one downside of Reg. FD is that companies use part of the discussion to point out—strictly for the legal record—the obvious: that stuff they are going to talk about on their earnings call could change down the road, thanks to the fact that, well, stuff changes.

You might think this notion is fairly obvious, but whenever a public company announces a sudden, unexpected negative situation, like bad earnings or a lawsuit or an investigation of some sort, the company is invariably hit with lawsuits from trial lawyers looking to dredge up some cash flow.

Just last month, for example, Green Mountain Coffee Roasters was hit with lawsuits from a whole batch of trial lawyers a few days after announcing an SEC investigation into the company’s accounting.

Green Mountain made its announcement on Tuesday, September 28. On Friday, October 1, seven law firms announced “investigations” or “securities fraud class action lawsuits.” On Monday, three more jumped into the lottery sweepstakes, and by week’s end a few more joined in, including one firm that issued a press release with the following headline, which we are not making up:

“….Encourages Investors Who Have Losses in Excess of $500,000 From Investment in Green Mountain Coffee Roasters, Inc. to Inquire About the Lead Plaintiff Position in Securities Fraud Class Action Lawsuit Before the November 29, 2010 Lead Plaintiff Deadline”

Now, we’re all for good corporate governance, and for companies keeping things on the up-and-up. Short-selling is an investment tool we employ frequently, so it is a part of our business model to find companies that may not be doing all the things they like to say they’re doing on earnings calls. Few things in this business are as satisfying as spotting a public company masquerading as something it is not—and making money when the chickens come home to roost and things go kablooey.

The problem with trial lawyers, of course, is that they rarely spot frauds before the frauds go kablooey. They spot the frauds after they go kablooey.

Thus it is that public companies feel pressured to offer Reg. FD “disclaimers” that can be a few short sentences or can verge into Gravity’s Rainbow-length missives, and Wal-Mart, being a target anyway, thanks to its fantastically successful non-union operation, goes to great lengths to cover all the bases.

To such great lengths does Wal-Mart go, in fact, that the disclaimer goes on for more than a few minutes: it goes on for more than ten minutes.

We are not making that up: of the 11,369 words spoken on the recent Wal-Mart earnings call, 1,359 of them—12%—came in the disclaimer section.

And if there was ever an example of something wrong with America, we think it is the notion that one of the world’s great corporate successes must waste 12% of its time on a prophylactic, legalistic mush of words, not one of which contributes to the general welfare of anyone.

But judge for yourself! Here’s the entire legal disclosure, thanks to the indispensible Briefing.com:

Welcome to the Wal-Mart earnings call for the third quarter of fiscal year 2011. The date of this call is November 16, 2010. This call is the property of Wal-Mart Stores, Inc. and intended solely for the use of Wal-Mart shareholders. It should not be reproduced in any way.

This call will contain statements that Wal-Mart believes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act.

These forward-looking statements generally are identified by the use of the words or phrases anticipate, are anticipating, are expecting, assume, could be, expect, forecasting, goal, guidance, guided, is expected, is planning, may affect, plan, will accelerate, will add, will be, could save, will drive, will ring, will be growing, will come, will continue, will cost, will experience, will generate, will grow, will improve, will not continue, will remodel, will see, will spend, will take, would represent, or a variation of one of those words or phrases in those statements or by the use of words and phrases of similar import.

Similarly, descriptions of our objectives, plans, goals, targets, or expectations are forward-looking statements. The forward-looking statements made in this call discuss, among other things, management's forecasts of our diluted earnings per share from continuing operations attributable to Wal-Mart for the fourth quarter of fiscal year 2011 and for all of fiscal year 2011; the assumption underlying those forecasts that currency exchange rates will remain at current levels; management's forecasts for the comparable store sales for our Wal-Mart U.S. segment and comparable club sales, without fuel, for our Sam's Club segment, in each case, for the current 13-week period; management's expectation that the comparable store sales of our Wal-Mart U.S. segment will be positive for the holidays and the fourth quarter of fiscal year 2011 and that the fourth quarter of fiscal year 2011 will be another quarter of sequentially improving comparable store sales for our Wal-Mart U.S. segment; management's expectations as to our anticipated tax rate for fiscal year 2011, quarterly fluctuations in that tax rate and factors that will affect that tax rate; management's forecasts for Wal-Mart's capital expenditures in fiscal year 2011 and fiscal year 2012; management's goal for return on investment being maintaining a stable return and management's expectations that Wal-Mart will continue to manage its inventory to be in line with its current business needs; although Wal-Mart will see year-over-year pressure from higher inventories in the fourth quarter of fiscal year 2011, that our Wal-Mart U.S. segment will be the price leader throughout the holidays; that inventory levels at our Wal-Mart U.S. segment will stabilize and Wal-Mart will once again generate even more cash flow; that our operations in Brazil will improve, growth in Wal-Mart's operations in China and India will accelerate, growth in Wal-Mart's Mexican operations will continue and supercentres will be added in Canada; and that the sales momentum of Wal-Mart's Sam's Club segment will continue into the fourth quarter of fiscal year 2011 and into fiscal year 2012; and the Sam's Club segment will leverage expenses in fiscal year 2012.

Those forward-looking statements also discuss management's expectations for the Wal-Mart U.S. segment relating bake centers driving the segment's sales in November and December 2010; supplier recalls in the health and wellness category remaining a headwind in the near term for the segment; a new Medicare Part D prescription drug plan driving incremental pharmacy traffic for the segment; the sales of Straight Talk by the segment in fiscal year 2011; and how the sales of that item could affect comparable store sales of the segment if the full transaction value for those sales was includable in the calculation of comparable store sales; the sales of Straight Talk and third party gift cards will ring through the Company's registers more than $2 billion for the full fiscal year; continued strong online sales in the 2010 holiday season for the segment and the factors to drive those sales; the number of new supercenters and other formats, including new units, to be opened in fiscal year 2012 by the segment; the number of the segment's stores to be remodeled in fiscal year 2012 and changes in the cost and time of those remodels; and the timing of Christmas spending in 2010.

Those forward-looking statements also address management's expectations that our Wal-Mart International segment will experience a very competitive fourth quarter in some of its markets; that such segment's sales will grow, although the segment will experience pressure on its overall gross margin; that the sales of that segment's operations in Mexico will grow by certain means; that such segment's Brazilian operations will continue to see pressure on those operations' results from the operating structure in Brazil, changes thereto and the effects of a conversion to an everyday low price approach, and regarding product offerings by that segment's ASDA subsidiary and the addition of new stores and square footage to that segment through an acquisition by ASDA and the timing for conversion of those new stores to a different format.

Those forward-looking statements also discuss management's expectations that Wal-Mart's Sam's Club segment will not continue to feel the effects of a credit card processing fee in the fourth quarter of fiscal year 2011; that such segment's small business memberships will continue to pressure net membership income in that fiscal quarter and regarding the occurrence of promotional events in the segment's units relating to the holiday season.

The forward-looking statements also discuss the anticipation and expectations of Wal-Mart and its management as to other future occurrences, objectives, goals, trends and results. All of these forward-looking statements are subject to risks, uncertainties and other factors, domestically and internationally, including general economic conditions; geopolitical events and conditions; the cost of goods; competitive pressures; levels of unemployment; levels of consumer disposable income; changes in laws and regulations; consumer credit availability; inflation; deflation; consumer spending patterns and debt levels; currency exchange rate fluctuations; trade restrictions; changes in tariff and freight rates; changes in costs of gasoline, diesel fuel, other energy, transportation, utilities, labor and health care, accident costs, casualty and other insurance costs, interest rate fluctuations, financial and capital market conditions; developments in litigation to which Wal-Mart is a party; weather conditions; damage to our facilities resulting from natural disasters; regulatory matters; and other risks.

We discuss certain of these matters more fully in our filings with the SEC, including our most recent Annual Report on Form 10-K and our most recent Quarterly Report on Form 10-Q, and the information on this call should be read in conjunction with that Annual Report on Form 10-K and Quarterly Report on Form 10-Q, and together with all our other filings, including current reports on Form 8-K, which we have made with the SEC through the date of this call. We urge you to consider all of these risks, uncertainties and other factors carefully in evaluating the forward-looking statements we make in this call.

Because of these factors, changes in facts, assumptions not being realized or other circumstances, our actual results may differ materially from anticipated results expressed or implied in these forward-looking statements. The forward-looking statements made in this call are made on and as of the date of this call, and we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstances.

The comp store sales for our total U.S. operations and comp club sales for our Sam's Club's segment and certain other financial measures relating to our Sam's Club segment discussed on this call exclude the impact of fuel sales of, and other amounts for, our Sam's Club segment. Those measures, our return on investment, free cash flow and amounts stated on a constant currency basis as discussed in this call may be considered non-GAAP financial measures. Reconciliations of certain non-GAAP financial measures to the most directly comparable GAAP measures are available for review on the Investor Relations portion of our corporate website at www.Wal-Martstores.com/investors, or in the information included in our current report on Form 8-K that we furnished to the SEC on November 16, 2010.


In other words, “Caveat Emptor.”


Which we already knew.



Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, November 22, 2010

A Very Palpable Hit


We poke fun at many companies in these virtual pages, but there is one in particular that we tend to poke fun at more often than most. It is a company that has been immensely successful in its field and in a financial sense, and has certainly added more value to the human condition than any hedge fund or virtual column such as this.

Unfortunately, that value-add has been derived mainly from a now-fading monopoly that has also imparted so much frustration on its choice-hampered customers that the poking of fun is easy.

We speak of Microsoft, whose rigid devotion to its Windows operating system has resulted over the years in such a mind-boggling array of feature-rich, user-unfriendly product families that we wouldn’t be surprised to find that there exists, somewhere in a far-off Staples, several copies of “Microsoft Vista Home User Release (Version 2.1) Model-Train Enthusiast Edition™” gathering dust.

Our general contention has been this: so complete is Microsoft’s reliance on its Windows monopoly that whenever it ventured outside the confines of that monopoly, it brought the same feature-rich, user-unfriendly approach to everything it touched, yielding one dud after another.

For the genesis of this Windows-obsessed, customer-indifferent mindset, we pointed no further than CEO Steve Ballmer, who famously enjoined his children from using iPods made by Apple and search engines created by Google, thereby running the company more like a Big Three car company from the 1960s rather than a technology company in the 2000s.

How else to explain “Bob” (look it up, kids), the WebTV debacle (look that one up, too), the “Kin” black hole, not to mention a tablet PC operating system that will likely be dead on arrival in a market pioneered by Apple’s slick iPad and soon to be invaded by products using Google’s Droid OS, which has already taken the smart-phone market by storm.

Nevertheless, the title of this virtual column is “Not Making This Up,” and longtime readers know that we are more partial to facts of a case—whatever that case may be—than to the sentiment of the moment.

(Indeed, this is why we do not brook any Yahoo-Message-Board-style of crass, mindlessly lazy and grammatically incorrect comments to make their way into these pages—to the frequent astonishment of those same message-board-trained elements who cry foul when we do not publish inarticulate, sloppy, strident messages, no matter which side of the issue they come down on. We do not apologize for that: in free-market economies, bad money drives out good money; and in free discourse, sloppy commentary drowns out the helpful.)

And given the facts in this particular case, it would be a disservice to let pass without comment something that is happening under our very noses. What is happening is this: Microsoft has a hit product on its hands.

The hit product is “Kinect,” the Wii-style add-on to the X-Box video game player that doesn’t require physical controls.

Released around the same time as the much-hyped Windows Phone 7 for smart-phones, Kinect flew under the Windows Phone 7 radar until recently, when, in addition to the generally friendly press coverage of the thing, we began hearing distinct rumblings about the Kinect—that it had sold out in two days at a local Best Buy despite the lack of a fully-functioning demo, for example—and went to investigate.

It was a quiet weekday afternoon at a non-descript strip-mall where we came across an otherwise empty electronics store in which the three customers were a father watching his two young children, who were standing in an octagonal pen, facing a large screen, hooked up to a Kinect.

Uncertain at first, the children began participating in the soccer game playing on the screen. They learned quickly—as kids do—how to control the movements of the players with their feet and body movements. Soon the boy was playing goalie and his sister forward. They shed their overcoats and settled in, mesmerized.

A brief talk with the store manager—yes, Kinect is flying out the door; yes, the technology is fantastic; yes, it’s easy to set up; yes, it’s taking share from the Wii (and, in fact, some customers are trading in their Wii to buy Kinect)—prompted follow-up calls elsewhere to determine whether what we were seeing with our own eyes was being replicated elsewhere.

And it is.

Now, we do not write this column to encourage readers to think highly of Microsoft as an investment. After all, no amount of Kinect sales—whether hardware or software or both—will make more than a meaningful impact on Microsoft overall.

But facts are stubborn things, as John Adams once said. And in the Kinect, as Shakespeare once wrote, Microsoft has scored “A hit, a very palpable hit.”



Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Sunday, November 14, 2010

This Just In: Tenured Professor Blasts Monopolies


The most incomprehensible treatise on business monopolies that we have read since…well, ever, appears in today’s online Wall Street Journal.

The treatise appears not, however, courtesy of an English professor—as one suspects when reading the half-baked argument that appears to originate more from a deep-seated distrust of the Internet and its most successful progeny, including Google and Facebook, than from an understanding of monopolies—but, as we find at the end of the column, “a professor at Columbia Law School.”

And a tenured professor at that.

For the moment we will leave aside the supreme irony that a tenured professor—i.e. a teacher who has been granted a monopoly on his or her area of expertise within a specific institution—hereby seeks to define the current leaders among the extremely competitive meritocracy otherwise known as Silicon Valley as “New Monopolists,” and reprint gist of the article itself:


In the Grip of the New Monopolists
Do away with Google? Break up Facebook? We can't imagine life without them—and that's the problem

By Tim Wu

How hard would it be to go a week without Google? Or, to up the ante, without Facebook, Amazon, Skype, Twitter, Apple, eBay and Google? It wouldn't be impossible, but for even a moderate Internet user, it would be a real pain. Forgoing Google and Amazon is just inconvenient; forgoing Facebook or Twitter means giving up whole categories of activity. For most of us, avoiding the Internet's dominant firms would be a lot harder than bypassing Starbucks, Wal-Mart or other companies that dominate some corner of what was once called the real world.


The Internet has long been held up as a model for what the free market is supposed to look like—competition in its purest form. So why does it look increasingly like a Monopoly board? Most of the major sectors today are controlled by one dominant company or an oligopoly. Google "owns" search; Facebook, social networking; eBay rules auctions; Apple dominates online content delivery; Amazon, retail; and so on.

Let’s start with the obvious howler—that “Google ‘owns’ search.”

While it is undisputable that Google dominates search, Google had, at last count—as anybody with a computer and an internet connection can find—66.1% of the U.S. search market, with Microsoft, Yahoo, Ask and AOL splitting the remaining 34%.

As anybody with a computer and an internet connection can find the definition of a monopoly, and as that definition includes “Exclusive control of a commodity or service in a particular market”; “the exclusive possession or control of something”; and “the market condition that exists when there is only one seller,” it is exceedingly clear to anyone with a computer and an internet connection that Google’s two-thirds share of the search market does not constitute a “monopoly.”

After all, nobody has to use Google to search for something online.

They can use Bing, or Yahoo!, or AOL, or Safari…. It’s just that Google works better for most people in this part of the world. (In China, on the other hand, Baidu is the preferred search tool, with 73% of the searches, while Google—the “New Monopolist”—straggles behind with 25%.)

Indeed, Google does not have “exclusive control” of search any more than Facebook has “exclusive control” of social networking: the professor seems to forget that people network socially every day—via MySpace, or Google Chat, or AOL Instant Message, or Twitter.

Why, people even network socially by telephone and standing in line at the Safeway, for that matter.

How is it, again, that Facebook has a “monopoly” on our social networking?

But our tenured professor doesn’t leave well enough alone and end his missive on this somewhat frightening—for a Law School professor—perspective on what constitutes a “monopoly.”

He instead aims his case to at even higher level—or lower level, as the case may be—by first arguing that monopolies would be okay if they could be “somehow restricted to, say, 10 years,” and then missing exactly the point of this entire exercise in brutal free-market competitiveness—i.e. that Google and Facebook and the rest are only as good as their technology platform, and that they will die when their advantages no longer attract the free choice of consumers:

We wouldn't fret over monopoly so much if it came with a term limit. If Facebook's rule over social networking were somehow restricted to, say, 10 years—or better, ended the moment the firm lost its technical superiority—the very idea of monopoly might seem almost wholesome. The problem is that dominant firms are like congressional incumbents and African dictators: They rarely give up even when they are clearly past their prime. Facing decline, they do everything possible to stay in power. And that's when the rest of us suffer.

African dictators and congressional incumbents do not get booted out of power when their “technical superiority” is lost: internet-based companies do.

Hence Amazon.com improved on eBay’s sales model and prospered; Google improved on Overture’s key-word bidding model and prospered; Facebook improved on MySpace’s social networking model and prospered...the list is too long even for this virtual column.

Nevertheless, while this survival-of-the-fittest world is a reality that even a tenured professor should grasp, he fails to grasp it.

And since the ferocious and wide-open technological meritocracy that dominates Silicon Valley today would not back up his weird theory, Our Tenured Professor must go all the way back to the telephone system founded by Alexander Graham Bell to attempt to prove his point—which he then backs up with an only slightly-more modern example from the Hollywood movie studio system of the 1930s:

AT&T's near-absolute dominion over the telephone lasted from about 1914 until the 1984 breakup, all the while delaying the advent of lower prices and innovative technologies that new entrants would eventually bring. The Hollywood studios took effective control of American film in the 1930s, and even now, weakened versions of them remain in charge. Information monopolies can have very long half-lives.

AT&T, of course, is no comparison to Google, Facebook or anyone else cited by Our Tenured Professor: AT&T was a true monopoly because there was no way to make phone calls other than on an AT&T line.

In other words, AT&T had 100% market share.

As for the Hollywood studio analogy—well, a quick perusal of the top movies of 2010 reveals seven movie studious splitting the top ten grossing movies thus far in 2010—hardly constituting anyone being “in charge.”

Thankfully, Our Tenured Professor concludes his dark, error-riddled vision with a relatively upbeat coda—albeit one that only serves to highlight the banality of his case:

The Internet is still relatively young, and we remain in the golden age of these monopolists. We can also take comfort from the fact that most of the Internet's giants profess an awareness of their awesome powers and some sense of attendant duty to the public. Perhaps if we're vigilant, we can prolong the benign phase of their rule. But let's not pretend that we live in anything but an age of monopolies.

Indeed, the internet is young. Facebook was founded all of six years ago. Google, 12 years ago.

Oh, and the dominant—one might say, monopolistic—search methodology (it was not precisely a search engine in those days) the year Google was founded happened to be Yahoo!

And as of September of 2010, Yahoo!’s “monopoly” had shrunk to 16.7% thanks to nothing so enlightened as a benevolent government or “sense of attendant duty to the public.”

Yahoo!’s decline was, in fact, due to fierce, ferocious, free competition in which one group of human beings dreamed up, built, executed and perfected a meaningfully better mousetrap that appealed to other human beings.

That is something tenured professors, who have jobs for life and no accountability to any bottom line, don’t seem to grasp.


Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Wednesday, November 10, 2010

Don’t Tell Ben


Google to Give Staff 10% Raise
—Wall Street Journal, November 10, 2010


That is the headline and this is the story, which we are not making up:

Moving to plug the defection of staff to competitors, Google Inc. is giving a 10% raise to all of its 23,000 employees, according to people familiar with the matter.

The raise, which will be given to executives and staff across the globe, is effective in January.

According to the Journal, there is a competition for talent in Silicon Valley that is forcing Google’s hand:

Chief Executive Eric Schmidt disclosed the raise in an email to employees, saying the company wants to lift morale. "We want to make sure that you feel rewarded for your hard work," Mr. Schmidt wrote. "We want to continue to attract the best people to Google."

Mr. Schmidt has apparently not been reading the same, backward-looking economic statistics that recently prompted Fed Chairman Ben Bernanke to announce a second round of quantitative easing, by which he intends to buy Treasury notes yielding less than one-tenth the raise now being showered on Google’s rather hefty employee base of 23,000 souls.

What with Kellogg’s recent price increase on 40% of its U.S. product lines and a host of positive earnings announcement from railroad companies to watch makers, not to mention Google’s voluntary increase in employee compensation at 5x the backward-looking CPI, one might deduce that the outlook for employment is a tad better than Bernanke believes it to be.


And that buying Treasuries at all-time low yields will go down as folly.

But, as is usually the case with officials living in Washington DC, it may be best not to confuse him with the facts. This is, after all, the same Fed Chairman who said—as late as March 2007—the subprime housing crisis was "likely to be contained"....



Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, November 01, 2010

An Open Letter to Ben Bernanke


Dear Mr. Bernanke,

Ours is not an economics column, nor do we profess to grasp the mechanics of how it is, exactly, that you do what you do.

Indeed, the truth is, Macroeconomics was, for us, a snooze-fest—and a fairly literal one at that.

Our impression of the dismal science from those, er, hazy days from 30 years ago, if you get our drift, includes mainly random lines on charts—red lines and green lines and blue lines—and equations of the “GDP = C+ I + G” type, which as best we can recall means Gross Domestic Product equals Consumption plus Ingestion plus Gastronomy, or something.

Nonetheless, while we admit to not being schooled enough to grasp the finer points of your job as Fed Chairman, we do have a strong opinion about your persistence in bemoaning the state of the current unemployment rate, as well as your determination to plow ahead with the purchase of billions of dollars of Federal debt at negligible interest rates in order to, somehow, cure that high unemployment rate.

Our opinion is that your plan it is doomed to look foolish thanks to an impending rise in employment, and corresponding drop in unemployment, that we think will happen even without you buying a single government bond.

How, you may ask, do we dare argue given our own lack of schooling in your own chosen field?

Well, we listen to a lot of earnings calls with companies that do business all over the world. And we think if you bothered to do the same, it would change your mind about the inevitable persistence of that “stubbornly high unemployment rate,” to quote the well-worn phrase.

The conference calls we speak of comprise the earnings calls that publicly-listed companies routinely hold on a quarterly basis with investors to review the previous three months’ worth of their business activities.

They are free of charge—your minions can find them archived on corporate websites—and only take an hour or so apiece.

If, however, you’re in a hurry and don’t have an hour to spare, you can fast forward past the usual CEO patter about “executing our strategic plan” and the frequently mind-numbing financial report from the CFO, and get right to the Q&A.

And if you did this, you would hear a few things you are not seeing in the muted employment numbers that seem to have your kickers in a proverbial twist.

For example, you would hear the CEO of one of the world’s largest outplacement firms, Manpower, say:

As I've stated before, as early as a year ago, we believed that the, slow but steady, demand for our clients' goods and services, coupled with uncertainty and a will to change the flexibility of their workforce, is creating sustainable positive secular trends for us. The growth we experienced in September, and to date in October, is also very important. As we stated in the past, the ability to see growth after the August break in Europe and the Labor Day break in the US was an extremely important indicator for us, for the health for the rest of the year.

For the most part, we picked up where we left off, with growth rates across all geographies quite strong.


And the CEO of the world’s largest private equity firm, Blackstone Group:

Our current portfolio is benefiting from the recovery. It's been underway in commercial real estate. We feel very good about the $15 billion of investments we made during the 2004 to 2008 period, which are now valued above cost including realized proceeds.

Our office markets have generally stabilized. And certain markets such as New York and London are seeing improvements in both leasing activity and asking rents.

New supply remains extremely limited with construction starts 80% below historical averages. In hospitality, RevPAR has been positive for six straight months, benefiting from both improving occupancy and more recently, higher room rates.

Indeed, you’d also hear the CEO of the world’s largest advertising group, WPP PLC, say:

So just in terms of summary of the regional growth, United States was the first to recover, and it has had five quarters of improving like-for-like revenues, with 9.7% in quarter three, more like an emerging market status.

Western Continental Europe is our second-largest region, with significant improvement in like-for-like growth, with quarter three up 4.7%. The UK and Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe were both up well over 7% on a like-for-like basis in the quarter.

And in Asia Pacific, Mainland China and India lead the region with like-for-like revenue growth of over 22% and 15%, respectively. Australia has recovered with like-for-like growth of almost 7%. And Japan was up in this quarter, as it was in quarter two. So we've had two quarters of growth from our Japanese business.

And the Chairman of a little railroad called Union Pacific:

As for the third quarter we are reporting record results….our most profitable quarter ever. Similar to last quarter, we achieved volume growth across each of our six business teams. Total third quarter car loadings were up about 14% to more than 2.3 million. That's our highest level in two years but still 9% below our peak in 2007.

Yes, it is a fact that business at the UP is still below peak levels, as is US employment. But things do not seem to be slowing down there, as the company’s head of marketing made clear:

Let me give you a quick overview of some the specific growth drivers that we expect to see in the fourth quarter. Our industrial products business look to have the most upside with the best opportunities in markets that are benefiting from improved product production, increasing drilling activity and hazardous waste disposal. International and domestic intermodal segments will continue to drive growth with some indication that the international peak may be slightly longer than we thought. Fall demand for fertilizer is expected to be stronger than last year and petroleum should post gains with crude -- growth of crude oil shipments to St. James and increased residual fuel oil moves.

Also looks like industrial chemicals and soda ash will hold their current run rates and that will close the rate stronger than a year ago. Increased electrical demand and expectation of inventory replenishment following a hot summer are expected to keep our coal trains moving and while feed grain exports will likely not be able to match last year's near record levels, wheat exports should supply a nice boost to our ag products business as we close the year and move into next.

Finally we expect our automotive run rate to hold -- our automotive run rate to hold steady but sales forecast to stay in the mid-$11 million range through the end of the year with production slightly ahead of the fourth quarter of last year. That's how we see the quarter shaping up…

Exactly how, Mr. Bernanke, do you expect to do push the Union Pacific to higher heights than it is achieving without your bond purchases?

Now, the good times are not limited to the western side of the country, from which the UP hails: its eastern counterpart, the Norfolk Southern, is also seeing good things in the heartland:

Volumes in the third quarter improved 15% year-over-year and 2% sequentially from the second quarter. We also posted 52-week highs in several commodity groups …. Against this strengthening economic back drop, we continue to improve productivity as we safely handled increasing traffic levels. As compared to the 15% volume increase, crew starts were up only 8% and total employment up a modest 2%.

We know what you’re thinking. You’re thinking: ‘See! There’s the problem! Employment at Norfolk Southern has not risen in line with revenues.’

But, again, we wonder, how exactly would your bond purchases make the good times any better than they are?

If two railroads that cover most of the United States can’t convince you that fundamental business conditions are quite decent, let’s look at one of the nation’s largest industrial distributors—W.W. Grainger:

All segments were up versus the prior year quarter. Specifically, reseller was up in the high 30s related to the Gulf of Mexico oil spill cleanup. Heavy manufacturing was up in the low 20s. Light manufacturing was up in the low double digits. Retail was up in the high single digits. Commercial was up in the mid-single digits. Government and contractor were up in the low single digits.

Not a weak spot in the joint.

Still, after listening to the repeated use of the term “up,” you may well wonder why, then, companies have been so slow to hire.

Caterpillar, the heavy equipment maker, sheds some light on that very question:

….we are seeing growth in the developed countries of North America and Europe, albeit off depressed levels from 2009. With weak economic recoveries in the US and Europe and with depressed construction activity, I know it is tough to understand why sales of Cat machines are up so much. And new machine sales in the United States are a good example that illustrates the point.

Here is what is happening - First, sales to users peaked in 2006, then declined in 2007, declined again in 2008 and then declined even more significantly in 2009. From the peak quarter in 2006 to the bottom in late 2009, dealer machine sales to end users in the US declined nearly 80%.

That’s right: Caterpillar equipment sales to end customers were off 80% from their peak at the apocalyptic bottom.

Is it any wonder that hiring has not come back as quickly as in years past? Wouldn’t you be a little gun-shy about adding FTEs until you were convinced things were trending in the right direction?

Here’s how advertising giant WPP PLC described the downdraft during the crisis, and the slow rebound in hiring:

On the other side, taking the headcount down by 12% in 2009 was very severe, and there had to be some bounce-back from what we had done. I think people responded to the challenge very well, but there probably -- there was too much tightness, if that is the right word, in the system. So it had to be -- we had to invest a bit more, particularly when we started to see revenue growth, not so much in the first quarter, but we saw a five-point shift in the second quarter, and we've seen another three-point shift upwards in the third quarter.

And it is not only advertising agencies and equipment makers that are hiring—the Union Pacific is hiring, too:

In terms of employees we have 1100 on furlough while recall rates have averaged better than 80% this year, the current furlough pool has been out of work since late 2008. So we expect only about half of these to return to service. Because of this we were ramping up our hiring efforts systemwide for 2011.

So is Norfolk Southern:

Turning to the next slide, train and engine employment increased by 501, or 4.8%, in the third quarter as we continue to strategically hire to support traffic growth where we had let attrition decrease in employee counts in 2008 and 2009. As I stated last quarter, all T&E employees have been returned from furlough status. To date we have authorized the hiring of 1,550 conductor trainees with the first of those trainees now starting to come off training program ready for placement.

And Manpower as well, albeit slowly:

We're continuing to see the benefits of strong momentum, as we moved into the third quarter. Across all areas our infrastructure is intact and we are quickly filling in the capacity. As you would suspect, not all areas are filling in at the same pace. So, even with excess capacity, we had to increase our staff in areas, adding just over 600 people in the third quarter.


Now, with all this business going around, you’d think hotels would be seeing more business—and they are. Here’s the CEO of Marriott International:

The business traveler is back. We're excited to see demand so strong in so many places with prices moving up. But we know what you want to know, essentially where do we go from here? According to the National Bureau of Economic Research, the recession officially ended in June 2009.

Notwithstanding that, many seemed to wonder whether the economic recovery has any strength and about the risk of a double dip. Let's be clear. There is nothing in our business which indicates that sort of weakness. Both business transient and leisure travel remain strong.

If travel is strong, airlines must be better—and here’s how Delta described things:

Turning to revenue, our revenue for the quarter was $9 billion, up $1.4 billion, or 18%, on a year-over-year basis against a 2% increase in capacity. Our consolidated passenger unit revenues increased over 16% year-over-year, driven by a higher corporate revenue and international mix. Corporate revenue was up 35% year-over-year, driven largely by a 27% increase in corporate volumes. Our domestic unit revenues increased 10% over the prior year on a two point increase in capacity. Our domestic yields were up 12%.

Turning to international markets, we are seeing continuing strength with unit revenues up 29% year-over-year, with both yields and load factors showing significant improvement. The Transatlantic business is above its 2007 run rates, with unit revenues up 25% year-over-year on a one point increase in capacity. Our Pacific routes have performed very well and we're seeing especially strong results in the beach markets, particularly between Japan and Hawaii. Our overall Pacific unit revenues have increased 45% year-over-year on a six point growth in capacity. Our Latin unit revenue increased 16% on an 8% increase in capacity. South America's performing well driven by the recovery of business traffic.

What is it, exactly, Ben, that are you so panicked about?

If it’s deflation, well, outside of the housing market, you won’t hear about that. Here’s what the Union Pacific had to say about your deflation:

As we close out the year, we continue to feel very positive about our future pricing opportunities and are committed to achieving real pricing gains that will drive higher returns. Let's discuss the expense details starting with compensation and benefits at $1.1 billion in the third quarter, a 9% increase versus last year. Roughly half of the higher year-over-year expense relates to wage and benefit inflation. We also seeing higher costs as train starts increase generating more starts per employee as well as paying more for overtime and training expenses. In addition, equity and incentive compensation was a little higher year-over-year driving about 10% of the increase. Offsetting a portion of these higher costs is our strong employee productivity…

In fact, the UP is starting to see exactly what you’d expect to see at this point in the cycle: upward wage pressure as existing employees work overtime:

We had a lot of overtime. We have been pushing the overtime curve here in terms of absorbing some of the volume. That's out of here. Our health care costs have jumped up pretty substantially here in third quarter. You look out to the future. Our inflation number that we look at is in that 3.5% to 4% range. That's what you have to think about.

Norfolk Southern is seeing higher labor costs:

Slide five reflects the components of the 14% increase in compensation and benefits. First volume related payroll increased $34 million including $18 million for train and engine employees. Second, medical benefits increased $20 million largely related to higher agreement employee health and welfare premiums coupled with increased retiree medical costs. Third, incentive compensation was up $13 million due primarily to stronger financial results. Pension expenses were $8 million higher and payroll taxes increased $7 million. Finally, increased agreement wage rates and other compensation expenses were offset by lower stock based compensation which reflected last year's strong improvement in performance metrics.

And so is Caterpillar:

Before I move on to the full-year outlook, I would like to cover employee incentive compensation in just a little more depth. As you may be aware, a portion of the compensation for management support and some of our hourly employees is at risk and it varies based on the financial performance of the Company. Given the economic environment in 2009, the profit target related to our short-term incentive plan was aggressive and it did not trigger.

Financial performance in 2010 has been much better and based on the newly-revised and higher profit outlook for 2010, we expect incentive compensation to be higher. Our practice is to accrue the expense as we go through the year based on our full-year expectations. That means when we change the outlook, we have a year-to-date catch-up in the provision. And that happened this quarter.

The outlook we provided with our second-quarter release included $600 million in incentive compensation. $300 million of that was in the first half and we had an expectation of about $150 million in each of the third and fourth quarters.

And so is Marriott:

Our corporate G&A spending increased 4% in the third quarter, reflecting higher incentive compensation. There isn't much more to cut but we continue to look for ways of doing things more efficiently.

In fact, we’re hearing more about inflation than deflation. Here’s what Marriott said:

The recovery is here and we're doing things differently. First, we're reducing discounting and improving our mix. For example, in the third quarter the Marriott Hotels and Resorts brand reduced the availability of rooms at discount and transient rates such as packages, wholesale, government and other similar programs. While we reduced these room nights by 16% in the quarter, they were more than replaced by a 16% increase in corporate and special corporate guests paying $57 more on average than the discounted business. We expect to continue to improve our mix in 2011. And we're raising room rates.

Even in the capital markets, inflation is back. Here’s how serial-acquirer WPP PLC put it when discussing acquisition targets:

But I think pricing is an issue. There is a lot of aggressive dealmaking. Investment banking advisers and brokers are being very aggressive on process, and that's a little bit disturbing. It would make the Guy Hands' Citibank-EMI process look relatively pedestrian.

“Disturbing” indeed—especially when a certain Fed Chairman wants to buy half a trillion in Treasury paper at all-time high prices.


Now, we are well aware that you may perceive that the quotes above have merely been selected to prove a point, and thus are likely to view them with suspicion, especially since they do not seem to gibe with months-old economics statistics.

So we wondered if there was a way to somehow put numbers on what we heard.

After minutes of tinkering with our Bloomberg, we came up with the following statistical summary of this conference call season that might help put a less subjective face on the previous body of evidence: it is the first ever NotMakingThisUp Conference Call Survey.

The results of this survey, we think, are illuminating.

For example, in the previous nine weeks (the heart of third quarter earnings season), the phrase “Very weak” appeared in 91 earnings calls—a 29% decline from last year, when the phrase appeared during 150 earnings calls.

Furthermore, the phrase “Very strong growth” appeared in 132 calls this year compared to 112 last year—an 18% increase.

As far as your concern about deflation goes, well, the term “deflation” was used in 61 calls this year, compared to 101 calls last year—a 40% drop.

Meanwhile, “inflation” was spoken of on 399 conference calls, compared to 385 last year—a modest and perhaps statistically insignificant gain of nearly 4%, but more than six-times the number in which “deflation” reared its ugly head.

Encouragingly, too, the use of “layoffs” collapsed, from 78 last year to 48 this year—a 38.5% drop.

Finally, we note with absolutely no surprise that the use of the phrase “executing our strategic plan” did not materially change this year versus last. If you read “My Dog Charles, Executing His Yadda-Yadda”
(http://jeffmatthewsisnotmakingthisup.blogspot.com/2010/08/my-dog-charles-executing-his-strategy.html)
you would know there is always a bull market in, well, bull.

And so, Mr. Bernanke, we here at NotMakingThisUp sincerely hope you skip today’s reading of statistical reports at your quiet lunch in some nuclear-attack-protected bunker deep within the bowels of Washington, and get out and listen to real people discuss real business, before you go and “execute your strategic plan” of buying half a trillion in Treasuries to somehow make employment start to go up at the very moment it looks like it may well start to be moving that way anyhow.

If, however, in the course doing so, you become nauseous at the recurring use of the phrase “executing our strategic plan” by America’s CEOs, well, don’t say we didn’t warn you.


Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only 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 investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.