Archive for February, 2006

• Failure Never Felt So Good
  Eddy Elfenbein, February 27th, 2006 at 11:21 am

  Attention corporate weasals. Don’t try to get anything past Michelle at Footnoted.org. It just ain’t gonna fly.

  And speaking of former executives, there was also this little snippet buried in Morgan Stanley’s (MS) proxy, which was also filed late Friday. Again, while the broad-brush details were known, such as Philip Purcell’s $44 million bonus, the blow-by-blow was included in the proxy (do a search for CEO settlement to find it quickly). Among the pearls are that Purcell’s secretary, which the company has agreed to pay for as long as Purcell lives, will cost the company $1.8 million and that donations to Purcell’s favorite charities (again for life) will cost the company $2.9 million. And there’s another $3.1 million for benefits the company will provide the former executive, again for the rest of his life.
  Indeed, failure never felt so good.

  And it pays well too.
  Can you order Michelle’s book? But of course. I’ll be here when you get back.

• Owning a Toll Booth
  Eddy Elfenbein, February 27th, 2006 at 11:15 am

  GroovyStocks on Intel (INTC):

  According to Yahoo Finance, shares of Intel are now trading at 14.7 times trailing earnings and 14.1 times forward earnings with an EV/EBITDA ratio of 6.7. We think these are very reasonable multiples to pay for such a high quality company.
  Sticking with Yahoo’s numbers, INTC has an operating margin of 31.1% and a profit margin of 22.3%. Return on assets is 15.7% and return on equity is 23.2%. The balance sheet has $12.8 billion in cash and $2.4 billion in debt, or over $10 billion in net cash. If you know another place where we can buy such high profitability and returns with balance sheet strength even half as good, please let us know!
  Intel’s size gives it a huge competitive advantage. Here’s a quote from Columbia Business School professor Bruce Greenwald that sums the matter up:
  “When Intel goes after the next generation chip, because it’s got some degree of customer captivity — which is crucial to scale advantages — Intel can expect, if it’s successful, to get 10 times as many customers as AMD. That means Intel can spend 10 times as much on developing and marketing the new chip. That’s the advantage of scale. So who’s going to win that race every time? Intel.” (Related Post)
  We view owning Intel as owning a toll booth: (almost) every time somebody buys a computer you collect a fee. Sounds like a good business to us!

• Back Where We Started
  Eddy Elfenbein, February 27th, 2006 at 10:34 am

  Price chart of Intel (gold line) and Microsoft (black line) over the last eight years:
  

• Confessions of an Economic Hit Man
  Eddy Elfenbein, February 27th, 2006 at 9:44 am

  The latest offering from the Grassy Knoll gang is “Confessions of an Economic Hit Man” by John Perkins. The book has become a bestseller. In it, he claims that the world is governed by big, evil corporations who use “a combination of bribes, assassins and seductive women to enslave the poorest countries.” In contrast, Sebastian Mallaby uses a combination of facts, reason and logic to expose this nonsense.

  Perkins likes to say that of the world’s 100 biggest economies, 51 are companies. This old chestnut is based on a fallacious comparison of companies’ sales to countries’ gross domestic product: Whereas GDP measures the amount of value added in an economy, sales lump together a firm’s value-added with inputs bought in from suppliers. According to an apples-to-apples comparison done by the United Nations, just two of the world’s top 50 economies were companies in the year 2000. Of the top 100 economies, 29 were companies.
  That may still sound like a lot, but remember that companies compete against each other. In the world as Perkins dreams it, the top 100 or so firms are joined in a shadowy conspiracy. But the reality is that Exxon Mobil schemes to undermine BP and Shell, and General Electric plots against Siemens and Hitachi. Countries don’t face a united corporatocracy. They play firms off against each other.

• 1040 Tax Mistakes
  Eddy Elfenbein, February 27th, 2006 at 12:15 am

  MarketWatch looks at the lines on the 1040 Form that stumble most folks. Here’s a sample:

  Line 6
  This year, you may trip as early as Line 6 because that’s where taxpayers enter their dependents, and the rules for who qualifies as a dependent have changed.
  “Now, instead of determining whether you provided half this person’s support, the test is did they provide over half of their own support,” said Cindy Hockenberry, tax information analyst with the National Association of Tax Professionals, a trade group. See this IRS page for more information on the new definition.
  The rules for a qualifying dependent “have changed to such an extent that it has left people really scratching their heads. If you can get past that, you’re doing good,” Hockenberry said.

• Hedge Fund Manager Splits
  Eddy Elfenbein, February 26th, 2006 at 11:33 pm

  Good news: Investigators have finally tracked down missing funds of a hedge fund.
  Bad news: Except for $150,000, $150 million is still missing.
  More bad news: So is the CEO.

  Kirk S. Wright, founder and CEO of Atlanta-based International Management Associates LLC, said the firm was beset with redemptions but had about $150 million of client assets in the bank, during a Feb. 15 interview with The Wall Street Journal. Two days later, a Georgia state justice froze the assets of the firm and its three principals, including Mr. Wright, after several current and former professional football players (who? tell me!). who invested more than $15 million with the firm accused the company of fraud, forgery and refusing to meet redemption requests.
  Other International Management clients quickly made similar allegations, kicking a regulatory inquiry into high gear. Over the past week, the Securities and Exchange Commission and a receiver (possible pun, not sure) appointed to mind International Management’s assets have scoured the hedge-fund firm’s offices, records and accounts, but found only crumbs (crumbs??). To date, investigators have only tracked down a tenth of one percent of the money Mr. Wright claimed was in the bank on Feb. 15.
  A warrant was issued for his arrest in Georgia state court late Friday. Mr. Wright, who claims an investor has threatened his life, hasn’t been seen for more than a week, according to people close to the situation. He postponed a visit to the SEC’s Atlanta office to answer questions last week, saying he needed time to hire local counsel.

  Let’s assume it was a player who made the threat, which one could it be? I mean, there are so many possible suspects.
  According to the Rocky Mountain News:

  The former Denver Broncos players liked the investment pitch, pouring millions of dollars into the Atlanta-based hedge funds.
  Now they say they were burned.
  Steve Atwater, Terrell Davis and Ray Crockett, along with other investors including current Broncos wide receiver Rod Smith, have filed a lawsuit in Georgia against International Management Associates, saying the firm and its fund managers committed fraud and forgery and failed to return their money.
  Clyde Simmons, who played with the Philadelphia Eagles and the Chicago Bears, among other teams, and Blaine Bishop, a former Eagle and Tennessee Titan, entrusted money to the firm, too, the lawsuit said.

  Here’s what they had:

  Atwater, a former safety, and his family had $4.5 million in the funds, the lawsuit said. Davis, a star running back in the late 1990s, had investments valued at $2.2 million, while Crockett, an ex-cornerback, had a total of $3.7 million. Smith, meanwhile, had $1.5 million.

  If anyone needs me, I’ll be scanning eBay for Super Bowl rings.

• SEC Subpoenas Herb Greenberg & Carol Remond
  Eddy Elfenbein, February 25th, 2006 at 4:03 pm

  Omigod, the SEC subpoenaed two journalists! Herb Greenberg and someone else. This is government repression. Oh, wait. The Feds have backed off. The NYT:

  The abrupt about-face was an unaccustomed victory for a news organization, as journalists have found themselves under increasing pressure in recent months from law enforcement authorities for information and testimony. In several notable instances over the last two years, including one involving The New York Times, the journalists have gone to jail rather than cooperate with law enforcement officials.

  Um, the SEC is looking into stock manipulation. I’m sorry, but isn’t in the same league as leaking classified national security information. Actually, since it involves Salesforce.com (who else), one could argue that this is in the interests of national security, but that’s for another time.
  The problem with this article is that journalists see the issue as being themselves. That ain’t it. The real issue is campaigns launched in order to drive down a stock’s price. It’s illegal to manipulate a market, but it’s certainly legal (and ethical) to air criticisms of a company. As long as they’re accurate.
  Sure, investors go to Greenberg and others with an agenda. As long as they have valuable and accurate information, that shouldn’t be a problem. The sticky point is when others know that a resulting article will move a stock.
  I honestly don’t know what the answer is.
  Update: Here’s Greenberg’s response:

  For those following the saga: a Dow Jones representative said Friday that the SEC has decided not to seek production of any documents “at this time” related to a subpoena I had received. “The SEC may come back in the future,” the representative said.
  But bottom line is that I’m no longer being asked to provide the SEC all of my “unpublished” communications, including emails and phone records, between me and people and organizations I’ve quoted — and at least one I’ve never quoted.
  To repeat what I wrote earlier Friday: The subpoena was part of the SEC’s investigation into Gradient Analytics — a research outfit that has served and continues to serve as a valued source for this column. It appears the investigation stems from the recent publicity surrounding Overstock.com Inc. and its controversial CEO, Patrick Byrne.

  Gary Weiss takes aim at the SEC:

  So today we have the SEC, in full flower of stupidity, chasing down the private vendettas of Overstock Inc.’s CEO, Patrick Byrne, whose principal problem is that his company just isn’t a very good investment. Who is to blame? Well, I don’t have to tell you, it certainly isn’t him! Why, he is just the CEO of the company. Not his fault. It’s them! The conspiracy! Joe Nocera’s column today in the New York Times is the definite article on this one-ring corporate circus. It’s impossible to mock or parody Byrne, because he does such a great job himself.
  Enter the SEC. Instead of consigning his rants and conspiracy theories and private vendettas against shorts and the press into the round file, it launches an investigation. In other words, the pinnacle of our self-regulatory system did precisely what it did with the naked shorting conspiracy nuts.
  Don’t get me wrong — this is serious business. Herb Greenberg of Marketwatch, one of the subpoena recipients, is correct in saying that the SEC’s action will have a chilling effect on financial journalism. He and Carol Remond of Dow Jones News Service, the other subpoenaed reporter, are two of the toughest financial reporters around. They and others have paid the price for good work by being regularly smeared by Byrne and his lowlife sidekick, an Internet nutjob who goes by the phony name “Bob O’Brien.” The latter is the naked shorting cult’s Cowardly Lion, roaring against real and imagined enemies while carefully guarding his identity to avoid being held accountable for his constant barrage of lies and smears.

  If you’re not familier with Patrick Byrne, he’s truly the Lyndon Larouche of Wall Street. Here’s more from Joe Nocera:

  For some time now, Mr. Byrne has been saying that his company is the victim of a Wall Street conspiracy intended to drive down its stock, which has fallen to the mid-20’s from the mid-70’s since the fall of 2004. Last August, Overstock sued Rocker Partners, a short-selling hedge fund that has been openly negative on the company, and Gradient Analytics, an independent research firm that has written consistently bearish reports on Overstock’s mounting business problems.
  The lawsuit asserted that the two firms were acting in concert to hurt the company and manipulate its stock price. Both Donn W. Vickrey, who runs Gradient Analytics, and David A. Rocker, the managing partner of Rocker Partners, have been sources for Mr. Greenberg over the years. And Mr. Greenberg has written about Overstock and Mr. Byrne from time to time, in his typically tough-minded fashion.Which of course makes Mr. Greenberg a charter member of the Overstock conspiracy. To hear Mr. Byrne tell it, Mr. Greenberg’s role is to do the bidding of Rocker Partners and Gradient Analytics; when asked last year by Ron Insana of CNBC whether he was accusing Mr. Greenberg of “helping others front-run or trade illegally in the shares of your company’s stock,” Mr. Byrne replied, “That’s correct, that’s what I am doing.” He described Mr. Greenberg to me as a “lapdog.”
  Although Mr. Byrne says he did not know about the subpoena, he clearly knew something was afoot. (He later told me that he had “just come from an interview with certain law enforcement people” who had been asking about Mr. Greenberg.) “As I take a sip,” he taunted in his e-mail, “I find myself curious: do you guys know? Are you sitting somewhere, blithely oblivious, still chuckling about Whacky Patty, and all that? Or do you understand now that this is going to end badly for you?”
  If you know anything about Patrick Byrne, it’s probably his famous “Sith Lord” conference call. Held last summer, it was an hourlong monologue during which Mr. Byrne laid out a vast, overarching conspiracy, made up of dozens of Wall Street players — including the New York attorney general, Eliot Spitzer! — all under the thumb of an mysterious puppet master, whom Mr. Byrne labeled the Sith Lord. He titled the conspiracy “The Miscreants’ Ball,” an obvious reference to Michael Milken’s old Predators’ Ball.
  Although Mr. Byrne told me that his Sith Lord speech ranked among “the 10 proudest moments of my life,” most people, including me, thought it was loony beyond belief. Roddy Boyd of The New York Post recalled hearing about it from someone on Wall Street. “When he described it, I thought he was embellishing,” Mr. Boyd said. But when he listened to the replay, “my jaw dropped — you cannot make up what occurred on that phone call.”In addition to his conspiracy-mongering, Mr. Byrne talked about Stinger missiles, Wayne and Garth, a mysterious Spanish phone message, stuttering and cocaine. (“I’m not a coke head,” he said, unprompted.)

• Deconstructing TheStreet.com
  Eddy Elfenbein, February 25th, 2006 at 3:19 pm

  Ed at Daily Dose of Optimism does a thorough analysis of TheStreet.com (TSCM). Here are parts one and two. (Preview: He’s not a fan of their Web design.)
  Ed sold the stock for a 75% gain in two years. My advice: Sell, Sell, Sell!

• Q&A: Small-Cap Stocks
  Eddy Elfenbein, February 24th, 2006 at 4:11 pm

  Hi Eddy,
  I think that your article regarding the “weak case” for better returns small caps doesn’t make a lot of sense. If you or I got our legs amputated, we’d be a lot shorter too. But we don’t – nor can you exclude January as a return month. Last time I checked the calendar, it was still on there. 🙂

  
  You’re right.
  Although it’s not my article, it’s Mark Hulbert’s. He cites a finance professor who claims that the January returns for small-caps are illusionary. But if that’s true, there should be a corresponding correction in February. There isn’t. February is also an up month.
  The January returns may be odd or abnormal, but they still count.

• Danish Embassy Rally
  Eddy Elfenbein, February 24th, 2006 at 2:35 pm

  A small, but spirited crowd rallied in support of Denmark today outside the Danish Embassy in Washington.
  The festive crowd of about 200 broke into chants of “We’re All Danes Now!” Lots of flag-waving and Danish-eating.
  Here are a few photos:
  Notice that unlike the mobs in Syria, this was an orderly, well-behaved crowd. Nothing was on fire (well…except for Andrew Sullivan).
  
  Free Speech in Legos
  
  Here’s Christopher Hitchens confering with a police officer. The officer was asking him about his permit. I heard Hitchens say that he had downloaded the form and faxed it in. I’m guessing this is a long way from Chicago ’68.
  
  Cop: What’s your group’s name?
  Hitch: We don’t have a name.
  Cop: You need a name.
  Hitch: Um, Citizens for Denmark.
  (I’m quoting from memory.)
  Here’s Bill Kristol with Hitchens. The truck symbolizes the working class.
  
  Tony Blankley
  
  Some Bad Puns
  
  All in all, it was a fun rally.
  Here’s some more coverage from other bloggers:
  Vital Perspective
  The Political Pit Bull
  Vodkapundit
  Corsair
  Andrew Sullivan
  Amerikanere demonstrerer til fordel for Danmark
  Speech By Hitchens