Tuesday, August 28, 2007

Zale Corp

Long-time excellent stock picker Jim Garvin noticed this today and passed it along:

Hi Gene, This morning Goldman Sachs highlighted Zale as a "source of opportunity". They recommend that their clients short the stock, and put a target of $18. The reasoning: "...growing macro headwinds, management upheaval, and poor strategic positioning will likely pressure earnings." I've never shorted a stock in my life, but I found this interesting and wanted to pass it on.

I had noticed the downdraft in the stock, but hadn't seen the Goldman analyst report.


I've got a lot to say about this. The Zale board and CEO should have been gone long ago. Apparently they announced that they are looking for a COO. Well, they had an excellent COO - Sue Gove, who knew the business inside and out - and they threw her out about three years ago or so on accounting concerns - which proved to be completely unfounded. As far as I know, they never apologized to Sue after their review showed that there weren't any issues tied to her.

Zale has been up and down since the hostile takeover 20 years ago - when Jim and I worked there. It was one of the last hurrahs for Milken and Drexel Burnham - with tiny People's Jewelers acquiring Zale. At the time, Zale had a strong vertical integration, and leadership positions in Europe - all of which got unwound after the takeover. The company eventually went bankrupt under the failing leadership from Peoples - and languished for years in bankruptcy. It has been a revolving door of CEO's since - I would guess average tenures of less than four years - not long enough to learn the intricacies of a more complicated industry than apparent.

So, let me make a rescue proposal to anyone on the board paying attention: Don Zale, who's family name still adorns most of the doors, is still there in Dallas - bring him back as Chairman - and beg Sue Gove to come back and stop the bleeding...

Jim, Sue and Donald, you are all welcome to comment.

(In edit: Jim - I'm surprised you've never shorted - this is a great time to play on the dark side...)

Monday, August 27, 2007

Villager Cigars - Part 2

Well, the Villager Cigars came in. The little rascals are smaller than I remember. Paul Kavanagh introduced many of us to them. Paul is a successful entreprenuer, exceptionally well-connected in the Irish political scene, the guy to see for restaurant recommendations in Dublin (and elsewhere), but I remember him for one other thing in addition to cigar recommendations.

He was the first person to say that the Euro was going to happen that I know. His statement was met with widespread skepticism by all our European management - but he stood firm that it was going to happen, that companies needed to prepare, and that it would happen largely on the timeframe that the EU was touting.

He, of course, was right.

Paul, this Villager is for you. (By the way, these little things are stronger than I remember).

Sunday, August 26, 2007

Three hundred million dollar lottery

One person won Powerball for $145 mil cash, or $315 annuity. That is a life-changing event.

Ed Rose calls the lottery the tax on the statistically challenged.

Dave Scarangella on the other hand, views it as buying somwhere between 15 minutes and a couple of days of fantasy: reverie about what to buy, where to travel, new houses and telling the boss off....

So, in my case anyway,daydreams over, back to work....

Open Letter to Lee Scott of Wal*Mart

I recently sent this letter to Lee Scott, CEO of Wal-Mart. This is a modification of that letter.

Mr. Scott:
I've been a shareholder of Wal-Mart since the 1980's. For most of that time, it was an excellent investment decision.

However, as the chart below shows, since 2000, holding Wal-Mart has been a bad investment decision

(Click for Chart).

Mr. Scott, I'm tired of the excuses, the whining about our customers being financially debilitated by rising gas prices, aboout our profits being hurt by rising health care costs and the like. Are Target's customers so much more affluent than Wal-Mart's that they shrug off rising gasoline prices and other increasing household expenses and just keep buying? I don't think that is likely. Yet Target's comparable store sales continue to rise, while Wal-Mart struggles to post small positive growth.

The harsh truth is that Wal-Mart has lost its way.

Wal-Mart has issues in fundamental operating standards. There is a Wal-Mart and a Target near my home here in PA, as there were in Leesburg, VA where I recently moved from. I've So, I have current experience with two competitive pairs.

The differences are painfully obvious. I park at the local Wal-Mart, dodge the chewing gum build-up on the parking lot on my way to the front door where I'm met at the front door by overflowing garbage cans. When I make my way to the check out, I'm invariably confronted by long lines and indifferent checkout associates.

At Target, the parking lots are clean, the store is better lit, the aisles seem wider and clearer, and they either have more checkouts open or a better way of managing, because the lines are never as long.

Sam's Club vs. Costco is more of the same. The products are basically identical - the stores are laid out largely the same way, and the prices seem the same to me. But, again, Sam's has concluded that it is OK to make me wait in a slower-moving line than Costco management believes is the appropriate way to treat a customer.

These operational problems are being compounded with an obsession with unit growth. While it appears that you are finally slowing down new U.S. openings, I think that you should freeze them altogether for at least a year. Take that capital and employ it in remodeling and updating those tired and rundown stores. There is plenty of unit growth available in China, where you don't have to waste resources on battling zoning boards and anti-growth city councils.

Let's summarize: clean 'em up, paint 'em up, fix 'em up, staff 'em up. No more whining.




That concluded the letter.

While it's hard to understand how Wal-Mart got this far off course, they still dwarf everyone else, and to achieve 3% comparable store sales requires delivering an $9 billion increase. Said differently, growing 3% requires adding enough revenue that the increase would rank about 265 or so on the Fortune 500.

However, I'm still skeptical of K-Mart and Sears resurrection - I would think that Wal-Mart could peel a billion or two from that. And, despite the hoopla, it doesn't look like Macy's is exactly taking share from anyone - so another place to go grab some growth.

Finally, Lee Scott has got to be as tired of watching Target grow faster than his business....

Saturday, August 25, 2007

Dennis Bereford and FASB

In an event too ironic to describe, apparently Dennis Bereford, long-time chief mandarin of the FASB, but now serving on a couple of audit committees, told a group that some business people described the rules emanating from the FAS as rules that don't make any sense, but if you violate them you go to jail.

The statement is of course correct - but the irony is that the FASB began issuing those increasingly recondite rules under his direction. Further, Bereford stridently defended those rules - I particularly remember the protracted battle over the totally goofy rules for accounting for stock options - which essentially all of industry opposed - but not the less eventually enacted as FAS 123R.

Denny - you created Frankenstein - now he is your creature....


I've been a user of LinkedIn for years. And, while I won't call it indispensable, I have found it quite useful.

But in the last two weeks, I've gotten more invitations to join others' LinkedIn networks than I got all of last year.

I believe this means something, but I'm not sure what. Most of the people who have pinged me are employed - so it isn't as simple as a declining economy driving a need to network. Several are European contacts - so perhaps LinkedIn is making more penetration there.

I don't know...

Tuesday, August 21, 2007

Lotus and IBM

IBM recently announced new releases of Lotus Notes and Domino. A key mystery to me has been why IBM hasn't taken Microsoft on more directly with Lotus products. Perhaps it is just shame from the debacle of their original acquisition of Lotus, and the ass-kicking that they got from MSFT.

Current day users wouldn't know, but not that many years ago Lotus 1 2 3 was the dominant spreadsheet, Harvard Graphics the dominant presentation manager and Word Perfect the leading word processing software.

As soon as the non-competes expired, the Lotus leadership, enriched by IBM, bailed. And the products, other than Lotus Notes, drifted. It would seem to me that it wouldn't be that difficult to update 1 2 3 to be as good or better than Excel, and with Mr. Softie's prices, one would think that their would be plenty of profit to be had and still price below Office.

So, every time I see a big splash announcement from IBM, I think that they've decided to get back in the game. I checked Paul Greenberg's excellent CRM and related blog, where I think he has periodically covered Lotus, but haven't seen anything to indicate that big blue is doing anything other than working on Domino servers and some moderate updates of Lotus....

Sunday, August 19, 2007

Keith Urban Concert Continued

Mr. Urban ws nice enought to pose with the whole gang - Gille, me, Pam, Keith, Ellen, Pat and Dwight.

Could not have been a nicer guy.

Again, if you can catch his concert - do it.

Keith Urban concert

We went last night to the Keith Urban concert.


Gille Mills, Pam's cousin and noted set designer/wardrobe consultant, set us up with tickets and a backstage pass "meet and greet". Gille is working as Mr. Urban's wardrobe consultant during this multicity tour.

Urban is far more rocker than country. He has assembled a band of himself, four guitar players and a drummer. The band and stage is much more of a rock set up than country - and Keith Urban is a very talented guitar player in his own right - so, much more of a five slashing guitar players kind of concert than country. At least three of the four guitarists can sing - and sing well, strong high note range, and some nice harmony parts.

If you have a chance to catch a future date - jump on it, even, or maybe, in particular, if you aren't a country and western purist. His show is a long way from Hank Williams and Porter Wagoner.

Backstage, he could not have been more personable. So, we are doing our part now to help his CD sales....

He must do serious voice training along the way. No breaks, and he sings every song. While there are some very brief rests while guitar solos take place, or stages move around, they are momentary. And most of the songs have him reaching high in the range - I was very surprised there weren't any breaks...

Again - check it out.

Villager Cigars

I saw in the Thompons catalog that they are now carrying Villager cigars. I had a flashback to meetings in Europe where Paul Kavanagh would bring Villagers in and we would fight over them. (I understand that Paul has now retired to the south of France - but not sure...).

So I ordered a box - Thompsons - you guys are great - but I don't smoke that many - so please just take my order and don't try to sell me fifty other things.....

I'll let you know if they live up to my memory.

Saturday, August 18, 2007

Econorama - mortgage crisis

The Wall Street Journal published an article by financial markets sage Henry Kaufman on Wednesday Aug 15, 2007. Kaufman has a hard-earned reputation for understanding money, money supply, credit, etc., on a global scale that few others can claim.

Even though he has been retired from his chief economist position at the old Solomon Brothers for years, he still has a firm grasp on economic data. His view is insightful - that many companies traded confidence in financial strength from holding cash and liquid assets for confidence in access to liquidity of lending markets. And, when a credit crunch occurs, they simply have no access to cash, leading not to a downward spiral, but a kamakazee dive.

It has been widely reported that hedge funds and others have had to sell what they could to raise cash, not what they wanted to sell. And, equally widely reported that the hedgies, mutual funds, quant funds and the like ended up owning too many similar assets, meaning that they were all dumping the same assets at the same time....crashing prices.

Since most of these guys went to the same schools and studied under the same professors it wouldn't be surprising to learn that the models they program ending up producing very similar buy, sell, hold, short, straddle etc. recommendations. The appropriate remedy for this is more difficult to divine.

And us small investors watch the Dow swing hundreds of points in a half hour, and have to ask what this has to do with investing or the real economy....

Fortunately, steady hands at the Fed prevailed, possibly saving the jobs of hundreds of thousands, and maybe even millions, of bricklayers, electricians, tile layers, carpenters, roofers, real estate agents, loan officers, landscapers, cabinet makers, HVAC installers, insulation makers, workers at plywood factories, workers at bath and sink plants and so on who would be out of work if even the highly paid, low credit risk can't get mortgages. I'm not worried about quants or hedge fund guys - if they've been making seven figures for the last few years and haven't put some away for a rainy day - shame on them. I am worried about the guy who works every day at a job site....


The market rallied on the cut in the discount rate.

But this morning's business report included the news that First Magnus Financial Corp laid-off 6,000 of their 6,100 employees. First Magnus reportedly originated $30 billion of mortgages in 2006. Now, I don't know anything about them, or their employees. And, perhaps some of their brokers pushed some limits on customer applications - again, I don't know.

Magnus is suspending operations because there are no buyers willing to purchase their bundles of mortgages.

The talking heads on the Saturday morning financial television shows included many moaning that the Fed was bailing out wealthy hedge fund managers and the like with the lowering of the discount rate. Those talking heads are stupid. The Fed is smartly trying to prevent a recession, because if no one can sell their home, that is where we are heading....

Cigars III

Dwight brought over some Cohibas last night. But before dinner, we smoked a couple of Cohiba minatures - I'm not exactly sure what Cohiba calls them, but cigarillo size.

Delicious, burned evenly, lit and drew perfectly.

After dinner, we lit Dwights Churchill size Cohibas. While his was fine and he thoroughly enjoyed it, mine was treated with fire retardent, and absolutely refused to stay lit, burn evenly or even close.

Eventually I gave up.

China trip part 2

One additional point: while riding in the back seat of a car cruising down a highway somewhere in China that could have been a U.S. Interstate, back when they were new and could handle the volume as opposed to the run-down overcrowded mess they've become, two of us were whining because we couldn't get our emails to download..

Then, suddenly, voila! Blackberries synced and here are all our messages, loaded from anywhere to anywhere.....anyone who says the more things change the more they stay the same hasn't awoken from the coma yet...

Friday, August 17, 2007


I've been watching economic developments and financial markets for over thirty years now (yikes!) and I'm certain I've never seen anything like the last two weeks.

As I noted before, 2003 and early 2004 were unprecedented investment times. Every asset class went up: gold, silver, oil, farm commodities, residential real estate, commercial real estate, stocks and bonds. Anything one invested in prospered. In the last two weeks, essentially the opposite has occurred - so much for the benefit of a diversified portfolio.

There are a number of root causes of this, but it mostly stems from the grinding deterioration of the U.S. housing market, which put large numbers of various kinds of mortgages upside down. In turn, we've learned that these mortgages were held by a wider range of investors than one would have guessed, and some of those investors had borrowed money to buy the mortgages...so the over leveraged home supported and over leveraged hedge fund.....generally, this should have worked its way out - but there was a buyers' strike for mortgages until buyers were confident any mortgage they were about to purchase was adequately secured and underwritten - so all of a sudden, high -quality, credit worthy home buyers couldn't find a mortgage.

This is creating a calamity. This morning on CNBC Allen Sinai, an economist who grew up in the legendary think tank Data Resources years ago, put the odds of a recession at 35% and rising. (http://www.leadingauthorities.com/17101/Allen_Sinai.htm ) In a most remarkable event - the Fed cut rates this a.m. - realizing that failure of the markets to underwrite mortgages means layoffs at home builders, bankruptcies of over-leveraged homeowners, spiraling job losses for real estate brokers, continuation of the wave of bankruptcies at mortgage brokers, cutbacks at banks, plant closings at factories that make plywood, bath tubs, showers, sinks, kitchen cabinets, roofing tiles, carpet, glass, hardwood flooring, lighting fixtures, insulation - well, just huge pieces of the economy.

We'll see if it is enough. The Fed needs to engineer the purchase of mortgages as well. While a number of private equity/leverage deals seem to be in trouble, the economy can plug along - after all, First Data is still processing, and Dollar General is still waiting on customers - just the ownership change hasn't been completed. And the private equity players are big boys and girls and can handle themselves just fine - in fact, have probably already figured out how to take advantage of the market turmoil.

Not too long ago I made two investment moves - playing a fibonacci series retracement on the NASDAQ QQQQ and buying the Canadian I-Shares (EWC). At the moment it looks like I played the Q's backwards - should have shorted - but EWC still looks decent (combo play on weak U.S. $ and commodities. I played the Q's despite my concern about U.S. economic weakness because all the technical factors I watch seemed to be positive. Next two weeks after today's rate cut should tell whether I'm going to stay on the losing side of that trade...

Thursday, August 16, 2007

elections continued

To be honest, I've now lost count of how many candidates there are. Tommy Thompson is out, Huckabee is up, Fred Thompson is almost in but already fading. (But, the longer he waits, the more residuals he accumulates - and the other members of the cast lose out on equal time rules as innocent bystanders as soon as he announces..).

Dem's seem to be down to two already - Hilary and Obama - but I still think that Al Gore may be running the most brilliant election campaign in history. Appear in award winning movies, write a book, save the world, rescue the party from about the only candidate they could run that the Republicans might actually be able to beat.....I still consider him a serious stealth candidate.

Dems are also beginning to reposition as it appears that the surge may actually be working. Who knows, by election, the party of Henry "Scoop" Jackson, Sam Nunn and John Kennedy may re-emerge....The war has been a mess, Bush/Rumsfeld screwed up, but the military may prevail despite all that, and I don't believe that Americans really want to see us lose and slink out a la Viet Nam.

So, I don't think running on lose and withdraw is a proposition that draws votes.

China visit

I recently returned from Hong Kong and a couple of quick trips into the mainland.

More to report than I've got time to blog. The Chinese and Hong Kong economy are growing and creating wealth in an unprecedented way. Obviously, a billion people moving to a market economy is unprecedented. Given the number of people, the virtually unlimited opportunity to improve the skills and productivity of those people, an expanding pool of capital, and the absence of any effective anti-growth vehicles that hamstring the U.S. economy, I don't know why China can't grow at 10% per year indefinitely.

Key impression still comes from a quick visit to Shantou: simultaneously on the road were: pedestrians, bicycles, scooters, motorcycles, some motorcyles converted to a kind of small truck-like three wheeled vehicle, trucks, cars, and buses. Lanes were more like general guidelines, and left turns across oncoming traffic were a type of guts poker.

Also from Shantou I noticed a couple of what appeared to be brand new, but totally empty, condo apartment towers. Overbuilt???

Hong Kong has the achievement of looking even newer as it grows. Some amazing architecture - HSBC's downtown office is a nighttime showplace.

But, you don't have to go very far for China to be very third world....


It isn't exactly clear to me what the Mandarins at the Fed are thinking....if high credit score individuals and families can't get a mortgage it will create a recession, period.