New Financial Inklings

Sirius Radio: Glowing Along or About to Burn Up?

2009-08-24T09:39:00.000-07:00

Lying under the Midwestern night sky—free of light pollution—I watched a satellite pass over and could not but wonder if that brief glimmer of light was but a foreshadowing of Sirius Satellite Radio’s (SIRI) recent run-up in price. SIRI has doubled in the past 3 months—while the broader indices have gained some 14%. Inclinations suggest that SIRI experienced an undervaluing greater than the broader markets.

But did it? The fundamentals are much less free of pollution than the Midwestern sky. With 3.9 billion shares outstanding, the current PPS puts SIRI market cap at $2.93 billion—or 39% SIRI claims that its current assets are worth: $7.5 billion.
The major problem with this (asset value) number is that $1.8 billion falls under the intangible assets of Goodwill (separate and unrelated to FCC licensing fees). For comparison—Google’s (GOOG) intangible Goodwill is $4.8 billion (or 15% total asset value), and Coke’s (KO) Goodwill runs $4 billion (less than 10% total assets)—SIRI’s $1.8, a whopping 24% total assets, runs far outside the realm of acceptability.

Graciously granting SIRI a comparative right equal to Google’s (very graciously!), a grant of 15% goodwill-to-asset value, this brings SIRI’s Goodwill down to $1.12 billion and total asset value to $6.8 billion. But that’s still only half the picture. Outstanding liabilities are $7.3 billion; and total debt currently runs $6.73 billion—the majority of which is at rates of more than 10%. (Outstanding cash obligations for the next 6 months are $749,000, and $871K in 2010, $1 billion in 2011, $900K in 2012, and a whopping $2+ billion in 2013.)

Even if the PPS reaches $1 (a market cap of $3.9 billion, minus further dilution), or even passes that mark, the constant threat of Liberty Media’s conversion of their 12,5 million Class B shares—an option come Feb 2012—looms on the horizon, and would amount to a 40% total ownership of SIRI. This forebodes either a) a necessary reverse split in order to reduce total shares outstanding or, more likely, b) further dilution. Keep in mind—this is a second lien provision.

Could the recent run up in price be a result of the “Cash for Clunkers” program? Unfortunately, the Clunkers program has done nothing to promote long-term economic growth and stability. Other than spend over $3 billion US and increase the amount of trash the US produces—it merely invited people out of a paid-car situation into a payment-plan option. Many US manufactured vehicles come with a 6- or 12-month free subscription to SIRI. But unemployment hasn’t gone down. Even if it’s nearing a bottom, there are still far too many people looking for work than can find it. So we are right to ask—how long will people pay extra for satellite radio, with subscriptions running $11.99 to $16.99 monthly?

Could the increase in price be related to the pending iPhone antenna? It could be—but that’s a lot of hopeful speculation for something that’s just a possibility, especially when one takes into considering the poor response to the SIRI’s iPhone (mobile) app.

Could the increase be due to increased subscribers? Actually—no! Fleet based revenue has declined over the past 3 and 6 months. One shouldn’t expect that to turn around, with comments like this from leading rental companies: “While we continued to face sharply reduced demand for vehicle rentals in the second quarter, rental volumes did stabilize, and the actions we took to keep fleet levels in line with demand allowed us to achieve a stronger-than-expected 7 percent increase in domestic time and mileage revenue per day" (Ronald Nelson, Avis Budget chairman and CEO). The key phrase here is “keep fleet levels in line with demand.” Translation—“reduction.” And I’ll refer you to current US automobile sales to see how that vein is fairing.

Then there is the problem of hardware inventory, which is up significantly over the past 6 months—yet another indicator of less—not more—demand. To add insult to injury, what does it say about SIRI that it is dependent upon a bankrupt company to launch its next satellite? Even SIRI’s recent royalty revenue stream from SIRIS Canada seems little more than a play on the strong Loonie and weak US$. (SIRI owns 49.9% of Sirius Canada, and 23.33% in XM Canada).

Try as I might—I can’t make fundamental sense out of a stock that has doubled in 3 months, is struggling at the core, and has more debt than it knows what to do with. Looking for the bright spot in SIRI’s quarterly report is like…well, like trying to spot a fast-moving satellite in the Midwestern sky. There is always the chance of finding one.

Just be mindful that it’s most visible when burning up in the atmosphere.

Disclosures: no positions (long or short) held.

eBaynk?

2009-04-08T14:40:00.000-07:00

The fallout of leveraged derivatives and CDO’s isn’t over. Some banks may be giving back their troubled asset relief program (TARP) funds, but that doesn’t mean that everybody is out of the woods. The derivatives that investment banks have sold are ticking time-bombs on the balance sheets of everyday, non-financial companies, local and state government retirement plans, and individuals (through unsuspecting mutual funds)—just as in the 1990’s, Proctor and Gamble lost a whopping $157 million in a few days time on derivatives.

How do you find who has exposure to these derivatives? It’s not like corporations are publicly broadcasting their exposure of structured vehicles—based in large part on mortgages. Other companies might not even know—believing that their AAA rated short-term bonds are as safe as the US dollar.

This post is intended as a posited theory. I’m not making any judgment calls on whether someone should or should not own eBay. And yet—there are three things that bother me.

First, eBay seems to be slowing down in the speed of “payout” on funds. I’ve recently made sales at eBay and Half.com. The funds for Half.com are still pending—under their payout policy: “Sellers will receive payment by direct deposit and will be paid twice monthly. Payment periods will end on the 15th and last day of each month. Your seller account balance at the end of each period will be deposited in your personal checking account approximately 7 business days after the end of the period.” While this policy isn’t new, 7 days are an eternity for electronic payments. And 7 business days is really 8 days of interest—when you consider that our Sunday is Asia’s Monday.

Similar issues are happening at Paypal where the fine print states that withdraws will be deposited within “5 to 7 days.” Again, I can have funds wired immediately from one part of the country to another in moments—but it takes a week (9 days if you count weekends) to get money out of Paypal.

Why does it take so long to make these payments? eBay makes millions on the interest. Furthermore, based on the types of investments, these funds very likely are tied up in “cash or cash equivalents.” Whenever we read “cash and…” we need to emphasize the “cash equivalents.” Cash equivalents are not cash. Sure—they are redeemable within three months. But they are not cash.

Second, eBay holds 88% of their “cash” in offshore accounts (according to this report: http://tinyurl.com/d5ggcb). What is the benefit of having funds off-shore? There are several—and eBay might justify this by the fact that they are in the currency exchange business (and they are!). But the strongest are 1) lower tax rates and 2) less regulation. I’m not saying eBay is doing this—but consider what Morgan Stanley did with the Mexican banks back in the early 1990s. They created a “trust” entity that held assets that were valued at less than the bonds issued by the trust—but they got a AAA rating because of the way the bonds were matched, risky Peso-linked assets with Zero-coupon bonds. Cash isn’t cash when it’s a cash equivalent. And it isn’t necessary an AAA bond when its off-shore.

Finally, eBay is sliding out of the generation-one business of asset brokerage. They are in the business of moving money around. Paypal is growing, they acquired Microplace.com (and certainly make something off of it), and more recently purchased “Bill Me Later.” There is no moat on financial exchanges. There is only a lead dog—and that is only so long as he finds a better way to continue to make money on money as it changes hands. People talk about Skype and Criaigslist and the (once) core auction business—but these are secondary (or even tertiary). eBay is in the business of moving money around.

So they can charge fees on the transfer of funds! Great. What happens when someone is willing to do that cheaper? Auctioneers might be limited to using Paypal—in one form or another. But if there is really money to be made in moving around money—it’s only a matter of time before eBay ceases to be the only show in town, and becomes the lead dog in a growing pack.

So what do you call a company that has huge amount of “cash equivalents” on the books, massive off-shore cash holdings, and whose only growing segments are in financial exchange? Normally, we’d call that a bank, or an investment bank, or—in this case—maybe we should call it eBaynk.

That’s really what this once-technology and internet business company has become. And in a world where derivative exposure can be both extensive and hidden—together with a company that is growing more slowly in their release of withdraws—eBay certainly raises some flags of concern.

BBC vs Yahoo, and the Preponderance of the Subjunctive.

2009-02-24T13:12:00.000-08:00

In my afternoon, post-lunch reading, I came across this headline from BBC.com:

And this one from my perusal of Yahoo! Finance:

The lessons we can draw from this paradox of contradiction is that people hear what they want to hear, and those closest to bad news will always hear the best of all scenarios. That said, if this were an EU or British representative reporting on the state of affairs, we can be sure that an outsiders perspective would be more critical, and see through the redundancies of conditional subjunctive modifiers.

Here are a few examples of what I mean:

“US Federal Reserve chief Ben Bernanke has warned Congress that without the right policies from the government, the US recession could last into 2010. But he said if the Obama administration and the central bank can restore some measure of financial stability, 2010 could be a year of recovery.” BBC news.

“Federal Reserve Chairman Ben Bernanke has reassured Wall Street by telling Congress the recession might end this year.” Yahoo! News (How does one reassure of a conditional?)

“In his semiannual report to the Senate Banking Committee, Bernanke predicted the economy is likely to keep contracting in the first six months of 2009. But he also said "there is a reasonable prospect" the recession will end this year.” Yahoo! News

In the Yahoo! source, there are no less than 8 conditionals and subjunctives. Ditto that in the BBC source. On average, news articles are using conditional and/or subjunctive terms at about 2% of the time--or 10 conditionals for every 500 words. Comparing that to articles that hit the news lines in 2007 (like this one, where Harvard researchers assured us of a “sound housing market”)--articles then only had 5 conditional subjunctives for every 700 words, or .7%.

My "truthy" conclusions from such reports? First, the more conditionals or subjunctives used, the more you can trust that the speaker doesn’t really know what effects or conditions current policy will have. However, the fewer conditions and subjunctives, the greater chance the writer/speaker is either completely wrong or completely right.

And yet, these latter articles and reports are of more help in discerning what is happening in the nation, economy, markets, and international world beyond the borders of our nightly news. Yes, the Harvard guys in the report above were wrong. Completely wrong. And Peter Schiff was right—nearly completely so! But both took positions that could be analyzed, examined, and text. (Interesting that these concrete methods of analysis were encouraged of the people of Israel in discerning the nature of a true prophet.)

So whether you sell gold short and take a long position in BAC and GE or cash out even your worst performing assets to acquire oversold commoditiesp--the best way to filter through the noise of confusion is this: read the articles with fewer conditional statements and subjunctive case models used, especially when they are generated outside the context of unfounded optimism.

Follow-Up on Letter to Mr Paulson and Mr. Bernanke

2008-11-18T13:49:00.000-08:00

(you can read the post to which this is a response by clicking here)

Dear Milligram46,

Out of respect, let me see if I can summarize what I hear you saying:
1. That if my own job depended directly (or indirectly) on the Big-3, I would feel differently.
2. That a weak dollar, while allowing for larger exports, hits us more in commodities like oil.
3. That not saving the Big-3 will hurt the economy and would cause the steel industry to crash.

That’s what I got and welcome an expansion if I missed some part.

In response, you are right about the hurt to the economy. Letting one or more of the Big-3 fail would hurt the economy, just as would Wal-Mart, or GE or the other companies you reference. I never meant to indicate that it wouldn’t hurt—but that the hurt is coming one way or the other. The issue before us is how will we respond. A female swimsuit model who is told she has advanced breast cancer, and needs a radical mastectomy to stay alive, will hurt. She has two options—either she can get the procedure and find a new line of employment, or else let the cancer destroy her whole body. (Of course someone will say she has the option of an implant after the procedure, but for the Big-3 there is no implant big enough.)

The American automobile industry is a cancer that has long been left unchecked. The government has been throwing money at it in the way of incentives, tax-breaks, and low-interest or interest-free loans for years. Not keeping the Big-3 out of bankruptcy will hurt right now. But keeping it out of Bankruptcy right now means hurt in the years to come. Many people say, “But Lee Iacocca did it in the 80s?” Had he really saved the industry, we wouldn’t be here today.

You also assume that—because demand in Asia and Russia is growing—the US will be the place these countries will look for their cars. Proximity wise, India stands a much better chance of meeting Asia’s demand—and Tata motors is in a great position to fill that need. In addition to the small, economy vehicles that are to be at the heart of the growing demand (and area that the US has been sorely lacking), Tata now owns luxury lines (Jaguar), and all utility vehicles (Land Rover). Ford used to own these two brands.

Speaking of which, I am glad to hear that Ford has received some positive reviews by Consumer Reports. Still, it has taken far too long for Ford to get there, and it still costs nearly twice the amount in labor—due to the price-fixing of the United Auto Workers (USW) union—as Toyota and Honda. And before we dismiss that to unfair work situations in Asia—of which there are many (I concur and am concerned about these practices)—Honda and Toyota are still able to produce their vehicles more cheaply stateside, where labor laws are in full force (but unions aren’t necessarily).

A temporary shutdown in the steel industry would be immediately offset by the $586 billion that China is going to be spending on infrastructure over the next two years. With Japan capping their export of commodities, and Australia strapped financially, and Russia not having the necessary capacity—China will be looking for reliable sources of steel. Africa, for the most part, is still in the ramp-up cycle of output capacity. China will buy our steel.

All of the “bail them out” assumptions hinge on US auto makers reaching profitability, which given the history, the circumstances of the unions—looking to a similar industry ruled by unions (aka, airline)—and global competition (Tata, etc.)—is nearly impossible. Any bailout merely delays the inevitable—too many people, working for too much money, on too-unreliable products, for too long. Local banks will be hit--this year, or sometime in the next five.

Which brings me to where you started—that somehow if my job depended on it, I would feel differently about this. That if you were the taxpayer being forced to pay for my job security, I wouldn't mind taking your money. This assumes the greatest individualist flaw of our modern society—that my best good is the ultimate end of all my endeavors. That what is “right” is only what is “right for me.” That what is “good” is only what is “good for me.”

Borrowing these words from Thomas Jefferson, “The democracy will cease to exist when you take away from those who are willing to work and give to those who would not”—I suggest the extension is, “The democracy will cease to exist when you take away from those who are willing to work for fair wages in a market-driven economy and give to those who are only willing to work on their terms, at all cost to others.”

I would be ashamed to say that that is the summary of American Democracy.

Joel

Letter to Mr. Paulson and Mr. Bernanke

2008-11-18T13:48:00.000-08:00

Mr. Paulson and Bernanke,

Some are demanding that you “rescue” the failing American automobile industry. But the very word “rescue” assumes there remains life—and even a cursory look at the last 25 years of the American automobile industry shows that this corpse has been dead a long time, though still kept “animate” only by the artificial injections of cash, tax breaks, government loans—in short, life support.

Some suggest that 1-in-10 jobs depend upon the American automobile industry. Looking at the numbers from the DOL, there are approximately 154,853,000 people in the American workforce—suggesting that 15,485,300 people depend upon the auto industry to employment.

You are right now trying to figure out how to “save” these dead and decaying companies—by throwing between $25 and $50 billion dollars at them. Let me suggest you spend the $50 billion dollars this way. Give $4000 to each of these families as a month stipend to begin looking for new work. Or, maybe take half of them out of the “dead” industry and give them each $8000. That’s two months to find something else to do. No—whatever work they find won’t pay $25-$50 and hour for doing what a robot can do for pennies an hour, but neither will it be in an industry that has perpetuated the decay of the economy by mass producing products that might last 10 years (if stretched)—and more often than not need to be replaced in 6 years.

The removal of 7,742,650 people from the auto industry reduces the overhead of the remaining companies by half. Force the three companies to merge (an easy possibility with a workforce half the size) and then demand—not just energy efficient cars—but DABBLASTIT! cars that are reliable for more than 10 years. Toyota can do it, and they’ve been at it half as long. If practice makes perfect—American automobile makers should be able to provide at least that.

With the dollar headed for certain decline against foreign currencies, now is the time to be firing up the furnaces—not to make more worthless, poorly made, American cars. But to produce steel—steel that can go to China and India, these fast-growing, infrastructure-focused, advancing societies. With a weak dollar, exports rise. And with a rise in exports, maybe—just maybe—we can start paying off the $12 TRILLION dollars in debt that foreign nations and companies are holding on our behalf.

Then, maybe, just maybe, our children will get their part of this once-great (could be great again) country. Maybe, just maybe, America will come out the other side of this depression with some international relevance—and not the bankrupt step-child of an international community ready to lob those long-held complaints against American arrogance and wasteful consumption.

Just a thought— Mr. Paulson and Bernanke. Just something to consider before you write that check to Detroit, before you put a pen to paper on a check that mortgages infinitely more than your reputation and popularity.

Joel

Consequences of an Over-Leveraged Labor Force

2008-09-26T07:34:00.000-07:00

Brief Defense
Fiat money is based on the assets of the issuer. Since governments do not produce but only consume, these assets are actually the assets of the people under said government. The employment of the people’s assets by the government takes place primarily through taxation. In fact, one of the earliest forms of fiat money were “bills of credit” redeemable against future tax payments. So the cycle goes—government taxes the assets of the people and puts those assets into actual or service use. Actual use would be, say, a military airplane. Service use would be, for example, the salary of a mayor. All things being equal, increases in service use of taxes either a) increases taxation among the remaining non-governmental service sector of the population or b) proportionally reduces the compensation of governmental employees.

Evaluation of Current Labor Distribution
According to the US Department of Labor, “With more than 1.8 million civilian employees, the Federal Government, excluding the Postal Service is the Nation’s largest employer.” The USPS employs roughly 700,000 people. Add in the 1.5 million active duty military personnel, and the 6.2 million public educators—and government services accounts for the employment of at least 10 million people. Assuming a 1.25/1 ratio for state & local government employees (12.5 million), and private sector jobs that depend solely upon governmental contracts, and a conservative estimate of total governmental service employees is between 20 and 25 million people. Not that last month, the civilian labor force level was estimated at 154,853,000 (DOL).

Despite having transitioned more to two-income families over the past 40 years—with significantly more women (married and single) in the workforce—we have gone from a 59.2% Labor Force Participation Rate (1969) to a 66.1% rate (2008)—an increase of on 6.9%—and increased our Employment-Population Ratio from 57% (1968) to 62.1% (2008)—an increase of only 5.1%—even though the population has increased 51% over the same timeframe (in large part to legal immigration and longer life spans).

What this means is that—if everybody else is working—then currently 80% of the labor force is supporting 100% of the tax basis—every government project, service, support, program, and employee. Ironically, the BEA reported that of the 3.3% in GDP in the second quarter “primarily reflected positive contributions from exports, personal consumption expenditures (PCE), federal government spending...” Exports are up due to a weak dollar—great. But personal consumption and governmental spending are not production vehicles. Both require the loss of true capital. Furthermore, USA Today reported that “Federal, state and local governments are hiring new workers at the fastest pace in six years. Governments added 76,800 jobs in the first three months of 2008. ...By contrast, private companies collectively shed 286,000 workers in the first three months of 2008!”

These estimates do not factor in the 6.1% unemployment rate, and multi-generational welfare recipients—who may but often do not fall under that 6.1% because of the way they are counted—nor the 15 million illegal immigrants benefiting from aspects of State aid. The real numbers are more like 70-75% of the US labor force is the “asset” undergirding the current (pre-bailout) debt of $9.7 trillion dollars.

The New Leveraged Gamble
The continual decline in the housing market and subsequent decline in consumer-related construction, re-construction, and mass improvement will only continue to increase unemployment. In turn, the imbalance of the labor force in the (private-sector) service industry will begin looking all the more bloated, leading to further layoffs and labor reductions. Government will continue to pick up as many of these as they can (some have estimated as many as 5000 new jobs will be created out of the bailout), for the sake of “softening” the unemployment blow—but this merely triggers the circular effect of government growth at the expense of a decreasing taxpayer population.

For every 1% of the labor force that is unemployed or employed by the government, income must increase among the remaining tax base by a factor of .0101 to the X power (where X equals the percentage the labor force employed by the government. If 10% of the labor force is government employed, the increase jumps to 11%. Such that by the time we reach our current status of roughly 25% labor force employed by the government—income among the remaining base must jump 2-3% for every 1% change in government to non-government employment. In summary, every non-governmental labor-force participant sustains 2.62 people. That is up from 2.5 just a decade ago.

This is our new leveraging—no different from what the troubled banks did. We are ever increasingly leveraging our labor force to the point that—between those retired, unemployed, and employed by the government—everybody else needs to see double-digit increases in income (ignoring for a moment the possibility of inflation) simply to maintain the status quo. This precludes any increases in the living standard of the “asset” (taxpayer) base--and it assumes minimal change in the employable population.

Consequences and Recommended Action
The increase of simply the proposed $700 billion (and not a penny more) is going to result in increased taxes greater than 7%, over past year increases, for the 2009 calendar year. The extent to which taxes are increased will be determined by a) the reaction of foreign governments holding US debt (in the light of greater monetary production—and inflation) and b) to what extent the healthcare industry is subsidized in the coming administration. The artificial dichotomy that has been erected—between the “middle class” and the “rich” (no different from the fictitious “proletariat” classification for which Lenin supposedly launched his revolution)—means that the lion’s share of this burden will first fall on the “rich”—but this will eventually burn into the “middle class” at a rate greater than 5% (over previous year increases) annually. Inflation will begin to show its head within 6 months after the passage of a bailout bill. As such, I recommend:

1. Seek Tax-Sheltered Options – ROTH and HSA accounts are at the top of my list.
2. Reduce Taxable Income – Some of the simplest ways are the sale (or donation) of underused vehicles, and move dividend paying holding to tax-sheltered locations. The more you can put out of reach of government taxation, the better off you will be.
3. Commodities – The decline in oil is temporary—though we can expect to see a general sell-off in commodities following the passage of the bailout. But the re-increase of commodity prices will come within 18 months of the passage, as a result of international reaction to the devaluation of their monetary holdings. I would invest in these resources as possible—noting that US based corporations will also see more of their earnings siphoned into government coffers. International investments of commodities provide some greater stability—in so far as many of those nations, while already democratic-socialistic, are not in the throws of radical transition.
4. Stock-Up on Staples – Inflation will begin creeping up within months after the passage of the bailout bill. Non-perishable food goods can hedge against inflation for a least a year. Also, even intermittent interruptions in supply cause quick (and sometimes severe) shortages--as in the gasoline shortages of several southeastern cities this past week.
5. Have Some Gold and Silver – An EFT is okay, but changes in policy can be quick and decisive—as was the law in China earlier in the year banning further private, individual gold purchases. I recommend having at least 2 ounces in actual bullion for every $1000 of monthly expenditures and 10 ounces of silver for every $100 above that.
6. Government-Beneficiaries – Expect to see corporations that provide products and services to the government to benefit as well. Security is always the defense for the loss of freedoms. Regardless of who becomes president, expect large government contracts to continue to be issued.

Ebay - Anticipating Q308

2008-09-12T09:36:00.000-07:00

In my annual stroll through interesting but-not-yet-owned stocks, I have wandered back to eBay for an update. In this post (http://boards.fool.com/Message.asp?mid=26419350), I predicted that by 2010, eBay would be a subsidiary of Google. I think eBay is a buy for Google at or near the $20 range.

Consolidation and Floors
Looking at the movement of the stock over the past 48 months, there was upward movement peaking at Oct 17, 2007 (with the release of third quarter FY07 earnings). Since then, the stock has been more of less in a perpetual decline—minus a slight consolidation between 1Q08 and 2Q08. Looking at averages, there seems to be potential consolidation around the $21.00 range—a price we can expect to see, warrant any grand surprises in income, within 4 weeks after the next quarterly report (Oct 15).

How does eBay fair in 3Q?
A stroll through the stock response leading up to and just after the reporting of the last 3 years shows (where gain and loss represent the price of the stock and not the actual earnings):

4Q04 (1/19/05) – loss ($58 to $43)
1Q05 (4/20/05) – gain ($31 to $36)
2Q05 (7/20/05) – loss ($43 to $38)
3Q05 (10/19/05) – gain ($35 to $41)
4Q05 (1/18/06) – loss ($46to $40)
1Q06 (4/19/06) – loss ($35 to $31)
2Q06 (7/19/06) – gain ($24 to $28)
3Q06 (10/18/06) – gain ($30 to $33)
4Q06 (1/24/07) – gain ($29 to $32)
1Q07 (4/18/07) – loss ($33 to $33)
2Q07 (7/18/07) – gain ($33 to $36)
3Q07 (10/17/07) – loss ($39 to $33)
4Q07 (1/23/08) – loss ($29 to $26)
1Q08 (4/16/08) – loss ($33 to $30)
2Q08 (7/26/08) – loss ($28 to $23)

Some things to Note
1. Three of the last four 4Q have resulted in significant stock value decline.
2. Only one of the last four 1Q have resulted in a gain.
3. Last four 2Q are split gains and losses.
4. Two of the last three 3Q have been gains with the latest being a loss.

Summer – 2Q
Summer is often a good time for eBay. Though losses (in stock value) have continued since then. In June, eBay gave away a 10% coupon (up to $1000) to many of its users to encourage purchases. We will have to wait until Oct-15 to see what this did to generate return users—meaning by that, folks who came back with repeated purchases, not just the coupon redemption. Additionally, I am intrigued to see the hit that eBay takes for these coupon redemptions. I redeemed mine for a $960 item, costing eBay $96 on the purchase—essentially wiping out whatever income they made on the Finale Sale of the item. Did these coupons increase listings and or sales? As a buyer and seller—historically, there have been slight positive impact of coupons, but nothing that lasts.

Disgruntled Sellers
Netflix might be called stupid but it can’t be called unfriendly—after the recent shutdown of its distribution system, it has offered a 15% refund on existing subscriptions. I wish the same could be said for eBay. The “cheaper list price” has been consumed by the increased “final value fee.” Add in credit card fees through Paypal (now one of two, or the ONLY acceptable payment methods allowable) and you are eating up between 9% and 12% of your sale price. eBay can boast that 80% of their auction income comes from their top 20% of sellers. But what does that say? That eBay is becoming little more than a hosting site for several top selling sites, like Dell, Avon, iTunes, Hasbro, and other commercial sites (click here and go about 2/3rds of the way through the presentation for these “top sellers”: http://tinyurl.com/538q6h). This leaves a ton of their mom-and-pop sellers out in the cold. To say that you depend upon 20% of your sellers for 80% of your profits is putting a lot of eggs in one basket. The withdraw of just a few of these top sellers—for cheaper or more diverse partnerships—would result in a major hit to eBay’s bottom line. (And don’t think Amazon and Google aren’t recruiting)

Paypal
In the last quarter, we saw a rise in Paypal earnings directly resulting from the decline of the dollar. With the subsequent rise of the dollar by 4 points, we can expect to see Paypal take a hit here. Sadly, the reality of Paypal will remain consistently tied to rise and fall of the dollar. If the dollar continues to slide—which I expect to see at least through the winter and early Spring of next year—this will have a positive impact upon Paypal. A weak dollar equates to cheap goods (for internationals). Foreign buyers will pay in local currency and Paypal will pocket the difference (buying more dollars). Even eBay admits it, stating, “Net revenues for the three-month period ended June 30, 2008 were positively impacted by foreign currency translation of approximately $121 million compared to the same period of the prior year. Net revenues for the six month period ended June 30, 2008 were positively impacted by foreign currency translation of approximately $231 million compared to the same period of the prior year. On a sequential period, net revenues for the three-month period ended June 30, 2008 were positively impacted by foreign currency translation of approximately $35 million.”

This means that of the $361 million increase over last year, $121 million (or 33%) is due to the impact of a weak dollar compared to a basket of currencies. This amounts to $.09 per share. In the past three months, the dollar has gone from 72.372 to 76.329—an increase of 4 points. We can expect this to negatively impact foreign currency rates for the coming quarter by an estimated $53 million dollars.

In fact, of the 33% increase in Paypal income in 2Q08, all but $77 million was the result of exchange rates. This is in line with eBay's on reporting, which states that, "Third quarter 2008 — eBay expects...GAAP earnings per diluted share in the range of $0.30 to $0.32." In short, what benefit exchange rates gave in the last quarter will not help eBay this coming quarter. This reflects flat growth, before backing out loss in revenue from coupons and incentives.

As the 2Q08 report also states, “Global active registered accounts increased to 62.6 million, representing 19% year-over-year growth.” This is good, at least as long as the dollar remains weak to other currencies. The real question is—can investors count on a weak dollar from driving the growth of Paypal’s revenue? Maybe it will help eBay just long enough to figure out what the next big thing is—shy of being consumed by Mr. G.

eBay bragged in their AR07 that “Paypal is growing on and off eBay.” The “off eBay” is where investors should focus their attention. The “on eBay” is a result of eBay taking the step to make it impossible for me (as a seller) to accept Checks or Money Orders. This too will increase eBay’s share of the take, at least in the short-term.

Earnings Stock Buybacks
I find it interesting that in 2Q07, eBay reports that it earned “$0.35 per diluted share.” Compare that to this time last year, where in 2Q06 they reported, “GAAP net income in Q2-06 was $250 million, or $0.17 earnings per diluted share.”

Good…right? Well, except for the fact that this time last year they had 1.47 billion shares outstanding. In 2Q08, there was the repurchase of approximately 19 million shares—and there are today 170 million fewer shares than there were a year ago. Retained earnings from the past year of buybacks accounts for about 4 cents of the increase in earnings. This means that less can be divided into fewer parts and still look like more. Taking that into consideration, earnings per diluted share are $0.31.

Free Cash Flow
eBay definitely has this going for it. Currently, eBay has about $3.15 per share in cash, short-term, and long-term investments. I ignore the “customer accounts” line completely, and for the sake of sale am ignoring goodwill and intangibles. In a credit-crunched pinch, the value of these are completely inestimable. Back that cash out and you have a share price of $19.88. This is the non-cash value of the company—brand, potential, and growth.

Summary
Earnings aren’t great—when you consider that $.04 comes as a result of share buyback and $.09 comes as a result of foreign currency translation—they were pretty weak. eBay is predicting lower earnings in 3Q08 reported Oct-15. Frankly, the sustainability of their current policies regarding their core business is under scrutiny. I believe this is a large part of why Meg Whitman stepped down at the beginning of this year. Stock buyback is only a temporary solution to the massive slowdown of the key business areas. With the giveaways of coupons and promotions, and change in dollar valuation, I expect we could see a fairly substantial decline in Paypal earnings. eBay’s reliance on a handful of top sellers isn’t something to be praised as much as something to be watched (Yahoo! could make the same claim several years ago). Seeing no potential surprises in income, I expect we’ll see a slight rise in the price leading up to the quarterly report, with a 8-10% decline in the stock price. For those holding the stock long (long), good luck to you. For those looking to get in, I would say a price of $20 would be a reasonable entry point.

**I do not own shares of eBay***

Ken Fisher, Where Do I Start?

2008-08-07T10:17:00.001-07:00

Okay, I did it. I clicked on the “Surprising Prediction by Forbes Columnist” and gave out my personal information for the Motley Fool advertised report (AND YOU CAN GET YOURS TOOOOO! http://tinyurl.com/6355g3). I don’t even know where to start with the nonsense—and this from a Forbes columnist.

Good News!
Ken writes, “The Economy is growing, yet it’s people’s moods that are recessionary… Start with personal income, consumer spending, exports, and corporate earnings (ex-Financials). All are tracking well ahead of gloomy expectations. In fact, the whole US economy grew by an annualized 1% in the first quarter.” Now why didn't anybody tell me that--now I can go out and start spending again?

Reality Check: Back out government spending and government jobs, and the economy is not only not growing but it’s shrinking. Unemployment is at the highest it has been in 6 years. Any view of government that sees that institution as a creator of jobs, wealth, and provision is either totalitarian or else ignorant. Government cannot produce. Redistribute—yes. Consume—yes. Use and abuse—absolutely. Create—NEVER.

And On the Bright Side…
Ken sighs, “June lacked novel negative stories. Instead, pundits rehashed familiar fears: housing, credit, Iran, inflation, oil, Obama. We think each is overblown. For example, the higher inflation many fear is highly illusionary today. Yes, energy and food prices have skyrocketed, but these make up less than a quarter of consumer spending. Housing, autos, apparel and technology make up more than double that. And as we all know, prices of homes, as well as cars, computers, and clothing have been falling, helping offset rising. prices elsewhere.”

Where does one start. First, the fact that consumer spending was so lopsided toward discretionary spending in the past 15 years doesn’t change the fact that non-discretionary spending--AKA, food and energy--is increasing. Yea, we sure did buy a lot of iPods and SUVs. But all the major car companies have declining sales. Another dozen retailers have filed for Chapter 11. Cheaper cars and iPhones hasn’t increased sales proportionally. Technology spending is down (individual and corporate). All this does is re-distribute the bloated-to-discretionary personal budget. But it doesn’t help sell more cars, more shirts, more iPhones, or more houses. The real question: should discretionary spending have been half our income? Can an economy sustain that? Can incomes? Can communities or corporations? Can families?

Come on America—“As we all know, prices [of these goodies] has been dropping” so rush out and get you one, two, or more. Whatever!

Second, speaking of houses—why are there so many housing foreclosures right now? We can blame the lenders and the speculative buyers—and both are culpable—but the fact remains that too many people bought too much house and quickly became “house poor.” If a moderately-wise individual purchased a home at 90% his potential maximum payment—increases in heating oil, electricity, and natural gas have eaten up that other 10%. He is now at his maximum possible payment. But food and gasoline have also gone up and there is no cushion to draw from. Add in excitable municipalities that jumped at the opportunity to reassess as many homes as possible near the peak and you add another 10-30% on the property tax. Great—so houses are cheaper. Good luck being able to sell the one you are in to buy the one you want. Good luck getting a good loan at a reliable rate. Rates are pushing back toward 6.5% despite a 2% Fed Rate. That discrepancy is significant. The pinch is on. Some are in a fine place and have money to draw from. Others—even a moderate increase in any of the above categories and the delicate balance is toppled.

What might a “moderate increase” be? Humm—maybe taxing dividends and capital gains at a higher rate. But thanks again, Super Ken is on the scene with encouraging words, “While many fear severe negative consequences should capital gains and dividend taxes revert upwards in 2010, our analysis shows such tax changes rarely have the toxic economic effects many expect.” Could it be Ken, that your analysis doesn’t have a comparable scenario where overspending, a weak dollar, inflation of food and energy, and taxation culminated as we do today?

And finally--what would Ken consider a non-novel negative story? Dr. says, "I'm sorry sir. You have ten kinds of cancer all over your body and it's a miracle you're standing here today." Patient responds, "So--you told me that last month. Give me something novel." The point--there comes a point at which "novel negative news" is utterly irrelevant.

Quit Selling Trash (like your books)
Just as “bubbles” last longer than most contrarians insist, so recovery tends to last a lot longer than…well, Ken Fisher wants to pretend. (But you have to BUY the book to see just how RIGHT he is?!?)

I am still investing in the stock market on a month basis. I am looking for value in a weakened economy. I haven’t sold out everything and stashed it in gold and oil (though I have some there also). I’m not gloom and doom and the world is over because some American’s made stupid mistakes. But the financial twaddle in the Executive Summary of Ken Fishers report shows just how far analyst will go.

Thanks Ken. I needed that timely reminder that the best way to deal with all these things is…

LIVE BELOW YOUR MEANS!

The Specialization-Conglomeration Continuum

2008-07-23T06:51:00.000-07:00

The Specialization-Conglomeration (SC) continuum, a reality among all institutions (corporations, governments, nations, companies, educational structures, etc.) is a significant factor in determining the SWOT—Strengths, Weaknesses, Opportunities, and Threats—that face a particular institution.

The common posture of institutional evaluation asks, “Is this institution a specialist or a Conglomeration?” The problem is that this static (punctiliar) snapshot is, in most cases, utterly unhelpful. The better and more revealing insight seeks to answer, “Where along the SC continuum is this institution and what is its trajectory?”

Case Study: Pepsi
Consider the case of Pepsi. It began as a soft drink company (1903) and is still largely involved in this “original endeavor.” But notice the progression along the SC continuum. In 1965, Pepsi joined with the Frito-Lay’s company, which moved it toward Conglomeration (I do not mean by “Conglomeration” simple diversification, which is a action that moves an institution along toward greater Conglomeration; which is contrasted by divestiture, or an action which moves an institution back toward Specialization). Again, moving toward conglomeration, Pepsi acquired Pizza Hut (1977), Taco Bell (1978), and Kentucky Fried Chicken (1986). Then in 1997 it spun off all the restaurants—which was an action that moved it back toward Specialization. Recently, Pepsi acquired Quaker—primarily for its Gatorade brand, though whether the commodities (i.e. oats) tailors into Pepsi’s snack/chip offerings well enough is yet to be determined (will they end up spinning off the Quaker parts—just as Coke did years earlier—while keeping the Tropicana juice section?)

We could actually show this progression for any company. Ceradyne, which was once only a developer of ceramic parts bought out the main producer (ESK Ceramics) of the raw materials that it uses —a diversifying action that moved it toward greater Conglomeration. McDonald’s got into the movie rental business with Redbox (still owns 47%). Walgreens has only continued to expand into more and more areas of consumer products—toys, seasonal clothing, and frozen foods—despite the fact that it began primarily as a pharmacy.

SC Continuum History and Application
The speed with which an institution can move along the SC continuum is inversely proportional to its size. It took approximately 100 years for England to move from the largest world Empire—“the sun never sets on the British Empire”—to the small island-country (with a loose bond of affiliation with many other countries) that it is today. If the 18th century was the apex of (empiric) colonization Conglomeration, the 19th century was primarily a turn toward greater Specialization, culminating in the self-determinism of the early 20th century. And where the 20th century saw a rise in new empires—the US and Russia—then the 21st century (at least in this first decade) is the wane of Conglomeration toward Specialization. I recognize the simplicity of this list for in fact, different institutions (e.g. Empires, nations, companies) are moving in opposite directions along the SC continuum simultaneously. So while 1945 to 1985 roughly saw the US and USSR moving in the same direction (Conglomeration), and while from 1986-1999, the US and Russia moved in opposite directions (the US toward Conglomeration and Russia toward Specialization)—we are now in a period completely opposite, with Russia gaining in world power and influence and the US slowly losing its dominance in a move toward Specialization.

No institution is truly stationary on the continuum—either it is expanding toward greater Conglomeration or else shrinking toward greater Specialization. MMM could probably afford to move toward greater Specialization (and often does in selling off units of manufacture), as could Pepsi. Blockbuster cannot. As an institution approaches the Conglomeration terminus (extreme) of the continuum, it risks losing focus and becoming ineffective. As an institution approaches the Conglomeration terminus (extreme) of the continuum, it risks becoming irrelevant and worthless.

Institutions of extreme Conglomeration will either divest itself of incongruent segments, or else risk collapse to internal fragmentation (like what happened with AOL/TW, and is happening with Yahoo! in recent years). Institutions at the extreme end of Specialization will either move toward Conglomeration, become irrelevant, or be taken over (by force or freewill).

It is of benefit to note that in order for an institution to move toward Conglomeration, it has only one of four options before it: take over the competition (e.g. buy out, bomb out, invade, or merge with—depending on the realm), take over the provider, take over the distributer, or take over some complementary institution. (The policy of the US , as an institution, of late has been to invade countries whose oil bourse threatens the US dollar).

Netflix
What does this have to do with Netflix? Namely, that we understand this company best when we know where it is on the SC continuum and know in which direction it is moving.

Blu-ray offered Netflix an extended lease on its current business model. VOD partnerships with TiVo and Microsoft are proving a slight movement toward Conglomeration. But beyond that—Netflix is in a precarious position. As no institution makes large and unrelated leaps up the continuum toward Conglomeration (though drops can appear suddenly) without risk of “de-worsification”—so there are not a lot of options for Netflix. Considering the four options for upward movement toward Conglomeration, Netflix can either—

1. Get into the production—or further secure exclusive distribution—of original material: Acquiring the provider isn’t cheap and comes with its own issues; and as for exclusive distribution—it has done this already—but as more and more material becomes exclusive, this will be a hit-and-miss venture at best.

2. New offerings of different forms of entertainment: What would this be—books, music, games? In each case this would be entry into an entirely new area where large players are already established (e.g. Amazon which purchased audible.com; iTunes; and as for games, Netflix has ruled them too expensive).

3. Buy out complementary companies: Jones Soda? Orville Redenbacher? After all, soda and popcorn go well with movies…but either is a leap. I think there is opportunity for limited partnership with both, but beyond that…

4. Partnership with a Fast-Food Distributor: Netflix missed their best opportunity like this when McDonald’s launch/ partnered in at 47% with Redbox. I proposed in this article (downloads PDF: http://tinyurl.com/5wsmc7) that Netflix pursue a partnership with McDonald’s for a number of reasons. Could something like this work with Burger King, Qdoba, or Chipotle? Maybe—but not as cleanly or lucratively.

5.Partnership with Educational Institutions: Sure, you can get a movie, but what about a course on diagramming motherboards, or rebuilding an engine? Whether this is a partnership with the University of Phoenix, or with multiple educational institutions, it doesn’t really matter—so long as it effectively advances their opportunities and inroads to move upwards on the Conglomeration continuum.

6. Make itself attractive enough to warrant a high buyout: I’m thinking of Pixar right now. Originally, I was opposed to Job’s sale of Pixar to Disney, but after consideration—and the ever growing number of digitally produced films hitting the market—I recognized that he was wise to sell at a high point for Pixar (I wrote about it here: http://boards.fool.com/Message.asp?mid=23603835 ). Likewise, Reed is no dummy. He didn’t keep his last business independent just to say he did it, or to show he could. This fact alone sets precedence that—given the right market conditions, the right price, the right timing—Hastings will sell. And since he isn’t sitting on Google’s board, unless Bezos steps in with its own attempt to buy out Netflix—there is really only one institution at the Conglomeration end of the continuum to make sense to a thoughtful CEO like Hastings.

Conclusion
The world, and her companies, are (constantly) changing—perhaps more so today with the shift in the SC continuum taking place on the geopolitical front—(i.e. Russia, Iran, China, and India on the upward movement; the US, Ireland, and Japan on the downward movement). Careful evaluation of where Netflix is and in what direction is has been trending on the continuum leaves me to conclude that—to now, it has done well alone (as more of a Specialization) with the limited partnerships and ventures that have projected it toward greater Conglomeration. But the short-lived reality of options before Netflix are declining and it will either begin a descent on the SC continuum or be acquired by an institution higher up. And shareholders like it or not, that will by necessity be Microsoft.

Is Free WiFi Good for Starbucks?

2008-06-25T15:08:00.000-07:00

As a Starbucks shareholder, I follow closely both recommendations and changes to and implementations by the company. One of the most regular recommendations I hear is that Starbucks should have free WiFi. After all, McDonald’s has it (in some locations, paid in others), and Panera Bread has it (everywhere, to my knowledge).

But is McDonald’s or Panera the way that Starbucks wants to go? Both tend to be noisy, either uncomfortably empty or unbearably full. The types of items being consumed in these establishments means that larger spaces are needed—but larger space is exactly the potential poison that Starbucks “third place” is inherently opposed to.

So too the bodies-behind-screens scene only to become commonplace if Starbucks opens up it’s WiFi for free. I am writing from a Starbucks, on a computer no less. But I am one of only a dozen customers with a computer. The rest—they are visiting, reading, and savoring the non-office feel of the “third place.” Collage boy eats his Scone while reading an obvious textbook. Silver hair is also reading, but he is less engaged—and has paused no less than four times to greet other customers (he is certainly a regular). Pretty boy and Wanna-be sit by the door immersed in a conversation while two people stand waiting for their drinks to order (they obviously aren’t staying).

The point is, Starbucks isn’t trying to be the Office Depot + Coffee that so many other places have become. Starbucks depends upon the ability to have branded music (not Muzak) playing softly in the background adding to the softened earth tones of the tables, chairs, paintings, and tile. This is a business that was crafted on consistency and continuity. And I hate nothing more than stumbling into a Panera or McDonald’s that has become little more than the Country Libraray made over with the smell of French fries.

Starbucks doesn’t need free WiFi. In fact, if it goes that route, you can expect that plenty will come, but many wills stay well beyond their refills. Conversations will die off. The place of familiarity will become too familiar and many (myself included) will have to find a warmer place for community—and a hot cup of coffee.

eBay…ah, gBay in 2010

2008-02-26T15:09:00.000-08:00

Unlike those who have been time-traveling by outdated Delorean—powered by a Flux Capacitor generated by banana-peel and beer-can energy (http://tinyurl.com/create.php)—I chose the more civilized TARDIS for my recent trip to 2010 (itty-bitty outside; infinite inside). I just had to know, what was the future of eBay.

For you guys—ah, em, 2008—eBay is facing significant challenges, not least of which is the most recent Exodus of sellers amid rising closing costs and a change in seller-feedback policy (before now, only the USPS thought that the solution to declining revenue was to prices). Amazon, Overstock, and Craig’s List were quick to pick up those guys. Sure, eBay owns part of Craig’s list today, but unfortunately for eBay, in 2010 free still means “no revenue.”

While it may come as a surprise, eBay is now part of Google. It is appropriately called gBay. Google began to see significant challenges to its ad revenue and continued its steep decline to the mid-$300s in 2008. eBay, in it’s own stead, took a significant hit in revenue from declining listings and sales through the middle part of ’08. Meanwhile, a weaker dollar, spiraling credit issues, housing foreclosures, and increasing personal bankruptcies, all contributed to the 08-09 US recession. Only as the US finally got out of Iraq, left Kosovo for the EU to figure out, and reduced UN spending by half, did the dollar finally rebound in recent—ah, em, 2010—months..

But all this was too much for eBay and Google. Baidu.com benefited from the significant shift of ad revenue to it’s platform—as foreign companies used more loopholes (created during the Beijing Olympics)—to find consumers in the world’s largest nation. But this hurt Google—who lives and dies by ad revenue. Oh sure, Google’s “Green” efforts, X-project participation, and ideas for world-wide peace are still on the table…but let’s say that they aren’t any closer to making money on these than eBay does on Skype.

Which is where Google finally came down? Google figured they were making a hand-held phone unit that would be an ad-based system, using Skype-like features, to sell everything from new to used items, and allowing payment to be done through the push of a phone button and an automatic transfer from Google checkout. And eBay—well, they had lots of auction sellers, and Skype users. The harmony was…well, at least sensible. When eBay hit the low $20s, Google jumped. Seeing the fool-hearty effects that a gracious offer of partnership (from Microsoft) did to Yahoo! (circa 2008), eBay accepted the 50% price-per-share offer and joined “the Monster.” This was just part of the Internet 2.5 constriction as we moved toward true 24-live-Access.

Immediately, Google incorporated Paypal and Google Checkout—now being offered by over 70% of all online retailers. On the blog front—feedback from auctions bought and sold, or second-party transactions all showed up as comments on a user’s blog as part of his profile. The gPhone became the standard platform for Skype, and while units are selling in the 100Ks, it still does little to threaten Apple’s iPhone. Google also began using Paypal as a micro-loan platform—where users can borrow small amounts of money from other users, with interest, for a fee—which has also helped to offset declining ad revenue.

In the end, I guess you could say eBay shareholders came out okay. I mean, $31.15 per share is nothing to laugh about, when facing declining auction & business listings, an exodus of quality sellers, and stagnant performance on the money-transfer side. But there are those who bought at $60 and hoped for $100. Now those hopeful holders are part of the Monster that is Google. And what it will be by 2015, nobody knows.

So there’s the future—2010 for eBay…ah, em, I mean gBay. I’d love your thoughts. Could you g-Skype them to me on my handheld? Oh, wait, that’s still to come.

HD-DVD vs Blu-Ray? So what!

2008-02-25T15:10:00.000-08:00

I mean, isn’t digital distribution the next big thing. Right? It’s all VOD—death to the DVD and Netflix and Blockbuster and Redbox and everybody else that has anything to do with hard-copy entertainment.

Actually, the very heated and intense nature of the competition between these two formats, and the positive impact of Toshiba’s bow-out proves one thing: Netflix has a lot of life left. Most of the affronts and negative analysis of Netflix rests on the fact that the DVD is going away and VOD is coming to town in a big way.

What the HD-DVD Blu-Ray battle shows is that people don’t trust “fiat entertainment.” Yes—like fiat money—with “fiat entertainment” there is nothing intrinsic to be held, stored, protected, and guaranteed. One computer crash, one change in “end user agreements” and we all become infringers with no recourse or recompense. People still want to hold it, to put it on the shelf, to show it off.

With changes in the patent system (good summary here: http://tinyurl.com/356jx6) and litigation on infringement actually taking away “fair use” and “second rights” (just Google: infringement second rights)—an electronic copy means nothing. There’s no ability to re-gift, re-sell, donate to charity, or easily claim in cases of loss or fire. For example, many auto insurance policies cover items in the car—a laptop, radio, MP3 player CDs or DVDs. But I know of no policy (my own included) that will replace AT TRUE COST the “data” (unless I can prove I actually purchased the software/DVD in a hard-copy format) on the laptop or MP4 player. If my house burns down and I lose my computer and 30 DVDs, insurance will replace them all. If my movies are on a computer, proof of loss of material possessions becomes much more difficult.

The victory of Blu-Ray proves that the entertainment industry and users alike put great value in capacity. Sure, Blu-Ray disks cost more to make, but they can hold up to 5 times as much as HD-DVD. So what? For the consumer, it means more “value added.” Now, I’m not just getting the “Spiderman 3” but I’m getting it in two formats (widescreen and full-screen) with outtakes, interviews, trailers, and another 50GB of stuff (which, the entertainment industry will pack on). Is that “stuff” a short, independent film that is put on at minimal cost but used as a sampler—where consumers are given the option of buying a pre-shooting ticket to the full, feature-length movie? After all, what company wouldn’t like the ability to lock in some percent of committed ticket sales before filming begins?

On the industry side, the increase in cost—justified by “value” added—also increases revenue. Where it may cost just 10% more to make a HD-DVD disk, companies would be hard pressed to justify at 20% price markup. But, where it could cost 50-60% more to make a Blu-Ray disk, a 100% markup isn’t unreasonable in the early phases of the technology—and people will pay for it. Why? Because they are getting 10 times the content as if they bought the DVD, 20 times more content than downloading it by VOD, and they actually have something hard-copy that can be insured in loss, fire, or theft.

And don’t think Blu-ray is the end either! Toshiba has given this round to Sony, but bet your grocery money they are back at it with Gen-3 advances. Maybe Gen-3 is more like a Compact Flash card. If I knew, I’d know where to put my money. Regardless, I know that there will continue to be hard-copy distribution of entertainment media for at least the next 15 years. That’s a long time for Netflix to make money.

Keep it up, Netflix. Keep it up.

Why Apple can’t with Movies what it can with Music?

2007-07-31T15:13:00.000-07:00

In a cupboard in the basement, beneath my neglected VHS tapes and just to the side of my records (music records, not dental or medical), is a case of audiotapes. Later historians might wonder why each of these contains only one song. These “one-song” tapes were called Singles: that is, for the price of two or three iTunes, one could purchase a favorite song. Three dollars sounds like a lot, but in a day where full albums cost upwards of $15, it was a small price to pay.

So perhaps you can picture me now, sitting in my 1986 jet-black, hard-top…Ford Ranger with 220,000 miles on it, getting ready to enter the gym—and my dilemma: which ONE song to take with me in my Sony brand Walkman. Sure I could take others, and be that way un-cool guy who carried a butt-pack full of audiotapes, or I could content myself with listening to the same song over, and over…and over…and yes, over again throughout my hour long workout. “Waiter, I’ll take option number 2 please!”

Enter Apple and the success of the iPod (exit heavy box of single audiotapes). Now here’s ingenuity: buy a single, put it on your MP3 player and take them all in on the now-cool arm-tied iPod. Not only does a song cost as third as much, but you can take them ALL with you, minus the butt-pack. It’s affordable, portable, accessible, and just makes sense.

But can it work with movies? For some portion of the population who’s disposable income is equivalent to the rest of the nations pre-tax paycheck, I see it flying. But I’ve never been in a situation where I’m trying to decide whether to pack along the whole 6-movie saga of Star Wars or the extended version of the Lord of the Rings trilogy—and exasperating, “Why can’t I just cram them all into an iPod?”

People want to watch movies; among these people are the At-the-Movies folks, the Rent-the-DVD folks, and the Own-the-DVD folks (ignoring the I’ll-wait-for-the-TBS-airing folks). Digital downloads only work for group 1—in the event that they own a theater quality digital television and surround sound—and group 2. Digital ownership for group 3 doesn’t work. Most people who want to own a DVD like to show off that they own the DVD. Maybe they have a wall-to-wall collection that they like to give tours of. Maybe they play the borrow-and-loan game. But there is nothing impressive about saying, “Yes indeed, I have over 200 terabits of movies on my computer.” And how would you go about backing that up?

Digital downloads are quick and convenient for those with accessibility, network speeds, hard drive space, and for whom second-right ownership doesn’t apply. For many of the people that I talk with, ownership is about knowing the movie is there the next time you want to watch it, or pawning it off on eBay, or swapping it out on Peerflix, or donating it to the local library for a $8 tax break. With digital downloads, the first isn’t a guarantee (“Daddy, what does D-E-L-E-T-E spell? “) and the others are not even possibilities.

So Netflix rents me two movies a month for $4.99. Amazon Unbox gives me one for $3.99—and it’s good for 24 hours after I start playing it the first time. Apple lets me download a movie for $9.99 but there’s no (legal) swapping, trading, or donating the film—and there’s always the issue of crashes and backups. So I can rent the Astronaut Farmer from Amazon for $3.99, buy a digital copy at $14.99, buy the DVD for $19.99; get it used from Peerflix for $14.00, or eBay for $10.98 plus shipping; rent it from Netflix for $2.50 (assuming I also rent something else in the same month in my 2-per plan); or…

I can NOT get it from Apple and say that I did (being as it’s not available). But the point isn’t that they don’t have the Astronaut Farmer. It’s that what is simple and makes sense for music doesn’t compute for movies. We can say that the movie industry will have to get on board eventually. Maybe, but then I don’t know of any music album that cost $60 million to make. In short, there’s a lot more ridding on it.

I admit that showing how Apple isn’t currently a threat to Netflix doesn’t prove that Netflix is viable. Nevertheless, identifying the flaws in perceived competition is one way of identifying misperceived strengths in another.

Next (post), I want to take a look at Blockbuster and, finally, put myself in Reed Hasting’s shoes.

All TALX. All Action!

2006-10-02T15:15:00.000-07:00

Unhappy+misplaced+change=LOSS
Quick: What is one of the largest drains on resources within companies? Yes, energy is huge. Safety and security; there's that too. Wasted time; getting warmer. Would it surprise you that employee-turnover can rank up as one of the largest expenses a company can have? Reports show that the cost of losing and replacing an employee is roughly 2 times annual salary for that position. So, lose a $25K employee. Pay $50 to replace him. Lose a $200K employee and pay $400K.

Another question: How many people in the US workforce are in positions that are misplaced based on skill and giftedness? According to a Gallup Poll, that number is a whopping 83%.

Last question: How long do people remain in a job that doesn't fit them? Truth is, I don't know (and couldn't find out despite my research) but I'm betting the number is very low. Most people leave under two years, if other more narrow reports can be applied broadly.

Add them up: 83% of people misplaced in the workforce. These people turn over every 2 years. One of the largest (controllable) expenses for a company is employee turnover. What is the answer? How about a company that specializes in a variety of HR features—payment processing, W2s and tax forms, and much more—who just added “Talent Management Services” to its menu. Think about it: they process payroll, benefits, and various tax aspects and, oh by the way, they will help identify the type of person you need to hire so that in 18 months you aren't looking for someone new.

Such a service could translate to incredible savings for a company. Even the mid-sized educational institution that I work for has an employee turn-over of roughly 20% annually. If those individuals were paid collectively, their salary's would equal somewhere in the neighborhood of $600,000. Replacing those people costs the institution $1.2 million—or 10% of the annual budget.

Solutions Offered
Enter TALX: St. Louis based HR company that recently acquired Performance Assessment Network, Inc. (PAN), “a provider of secure, electronic-based psychometric testing and assessments.” Translation: what are people good at and where do they fit in.

Followed by only 6 analysts, the company has buys and holds (no sells), with a recent upgrade to “Market Outperform” by JMP on news that “mortgage lenders are increasingly unwilling to take on loans to people who may not be able to repay them.” This is good news for TALX since the company “can verify a mortgage applicant's income and credit to help lenders assess risks” (full report: http://tinyurl.com/k8nsx).

Financials for TALX look pretty good: Despite the fact that TALX shed 30% of its value (market cap) in the last 52 weeks and has been on a steady, unbroken decline until the recent upgrade by JMP—the moderate P/E of 26.6 (FFQ) is estimated to be closer to 21 in the FFQ. Besides that, TALX just raised its dividend 25%, to 5 cents a share.

Insider and MF Activity
If insider activity is any indicator of a company's future, watch out. Despite the 33% decline over the past 52 weeks (currently at 26.6% due to a 7% hike after the JMP updgrade), insiders have been picking up shares all along the long-way-down.

For example, President Stacey Simpson recently purchased 1000 shares directly at $22.759 each. A thousand shares isn't anything to raise eyes over, until one realizes that Simpson now owns 57,979 direct shares. This is a market exposure of $1.31 million. Since a purchase of 1000 direct shares is too little to serve for hype, it seems the only benefit for picking up shares in the low twenty's is a bullish outlook on the coming year.

Then there is Eugene M. Toombs (Director), who also recently acquired 1010 shares for a total shares held of 90,185, or market value of $2.24 million. Finally (for examples, not purchases, that is) CEO William W. Canfield also recently increased his stake in the company, with a direct purchase of 25,000 shares, taking his total shares to 1,409,971 or just shy $35 million market value. Notice as well, Canfield exercised 80,000 shares in options back in June, none of which he has departed with to date. Compare that to insiders at eBay who are exercising and selling out hand-over-fist.

On the Mutual Fund side of things, institutional investment has increased 6.6% over the past six months. For example, Janus Venture (JAVTX) has increased shares of late, and now owns 4% of outstanding shares. JAVTX has a 4 star rating (Morning Star) over the past three years, with TALX as one of the top 10 holdings.

Financials
The financials look strong as well. Total Annual Revenue (TAR) increased 24% from 2004 to 2005. TAR increased 31% from 2005 to 2006. Operating income increased 44% and 80% respectively comparing 04/05, 05/06. Long term debt increased YOY, but this was in large part due to the acquisition of PAN. Gross Revenue is up for first quarter ’07, 41.4% QoQ. All but the newly acquired “Talent Management” segment reported significant double digit growth. Gross Profit also grew by 61.9%.

TALX is operating in 5 business segments: "The Work Number services, unemployment tax management, tax credits and incentives, talent management services, and maintenance and support." Information about the performance and cost of each unit is unavailable due to the fact that the board has “concluded that it is impractical and provides no value to allocate costs of all of these services to the business units or to allocate any of the underlying assets to the businesses” (pg. 14). With everything else in the is double-digits at present time, it’s a good sign.

But How Good are They, Really?
Considering that TALX claims three-fourths of Fortune 500 companies as customers, business is going well. Sure, ADP is a competitor on the HR side, minus the “talent” stuff. H&R competes on the tax side, but the comparisons end there. There are other players in the various segments, but no one else who brings them all together. And with the addition of PAN, I expect the company to show some great strides in the coming years.

And friends, that's not all TALX: That's strong financials and insiders' money where their mouths are.

IMAX: Why I Bought Back In

2006-09-11T14:53:00.000-07:00

I bought at $6 and held till $10.50. I needed some cash, so I liquidated my holdings. But now, back at the $5 range, I couldn't resist and bought in again. And here is why:

While Cash and Cash equivalents decreased 12% YOY in the last quarter, short-term investments, receivables, and total assets all increased, with total assets being flat (to the positive side). Net earnings is 3 times higher that this time last year (further explanation below). FAS rules of stock options hurt trailing revenue for both the trailing quarter of 2005 and the trailing 6 months of 2005. We shouldn't see such restatements in 2006.

IMAX has a vested interest in 4 film producing companies, which means they aren't solely dependent upon the big-players to decide their film is IMAX-worthy. Raw materials has increased (not surprisingly with metals of all kinds, and plastics being at near-all-time highs). Value of “works in progress” has gone up. Does this indicate slowing business? It might, it if weren't for the outstanding backlog of requests. Plus, the value of finished goods has decreased which means that more of what was in inventory has now been put into use.

Now for the nitty-gritty of the last 10K:

DMR FILM REVENUE
Revenues from digitally re-mastering film where third parties own the related film rights are derived in the form of processing fees and recoupments calculated as percentage of box office receipts from the re-mastered films. Processing fees are recognized as revenues as the related re-mastering service is performed. Recoupments as a percentage of box office receipts are recognized as revenue when the contracted portions of box office receipts due to the Company are reported by theater operators, provided that collection is reasonably assured.

This means that IMAX gets paid up front (processing fees) and recoupments (% of box office receipts). This means that the DMR process (of a 3rd party film…e.g. Superman Returns, Batman Begins, V for Vendetta) do not ultimately fall upon IMAX. Sure, they get more if the film does better, which means that IMAX may have to begin flexing its muscles to tell WB, “Sorry, that film just doesn't make the cut.”

INVENTORIES
In establishing the appropriate provisions for theater systems inventory, management must make estimates of future events and conditions including the anticipated installation dates for the current backlog of theater system contracts, potential future signings, general economic conditions, technology factors, growth prospects within the customers' ultimate marketplace and the market acceptance of the Company's current and pending projection systems and film library.

The very presence of a statement like “current backlog of theater system contracts” is indicative to me of current growth factors.

REVENUE
The Company's revenues for the second quarter of 2006 increased 34.1% to $41.4 million from $30.9 million in the same period last year. Systems revenue increased to $24.0 million in the second quarter of 2006 from $20.3 million in the second quarter of 2005, an increase of 17.9%. The Company recognized revenue on 11 theater systems which qualified as either sales or sales-type leases in the second quarter of 2006 compared to nine theater systems in the second quarter of 2005. Revenue from sales and leases increased to $17.6 million in the second quarter of 2006 from $13.9 million in 2005, an increase of 26.4%. This increase was due to the increase in the number and mix of system recognitions and partially offset by a decrease in settlement revenues. The Company recognized $3.9 million in settlement revenue during the second quarter of 2005, compared to $nil in the same period in 2006.

This is better than it sounds, since backing out one time “sales and leases” revenue from settlements of $3.9 million in 2005 reduces actually puts revenue for that quarter at $10.0 million, showing an improvement of $7.6 million, or 76%.

Average revenue per sales and sales-type systems increased in the second quarter of 2006 compared to 2005 due to the four used systems sold in the second quarter of 2005, compared to nil in the same period of 2006, and due to a difference in the mix of systems.

Basically, the company sold off four used systems in the same quarter of '05. The result: average revenue increased. Sounds like they made the right decision.

Sales and Sales-type lease systems recognized (first row is '06, second is '05; periods necessary to keep rows in order)
IMAX 2D GT..............0....1
IMAX 3D.................3....4
IMAX 3D SR..............3....1
IMAX MPX................5....3
Totals.................11....9

MPX (just introduced in 2003) shows the best growth in demand, 40% increase YOY. Next best, IMAX 3D SR shows a 66% increase in sales.

The Company believes that it is possible that its installation of theater systems in 2006 could be negatively impacted by (a) the difficulty it is experiencing in effecting "sign and install" transactions, which are agreements for theater systems that are installed in the same calendar year in which they are signed, which difficulty it believes is due in part to the disappointing performance of the films V for Vendetta: The IMAX Experience, Poseidon: The IMAX Experience and The Ant Bully: An IMAX 3D Experience and (b) the potential slipping of some installations scheduled for the fourth quarter of 2006 into 2007.

Anyone who has seen V, Poseidon or the Ant Bully doesn't really need IMAX to tell us they fell short of the mark. Notice that Superman Returns isn't in that list. Revenue from new instillations slipping in to 2007 is a short term shortfall.

Film distribution revenues
…increased to $5.0 million in the second quarter of 2006 from $2.7 million in the second quarter of 2005, an increase of 88.0%. The increase is primarily due to the production and release of Deep Sea 3D in March 2006 and the continued performance of Magnificent Desolation: Walking on the Moon 3D, released in September 2005.

On (primarily) these two movies alone, film revenue nearly doubled. Note as well….

Film post-production revenues increased to $3.0 million in the second quarter of 2006 from $1.1 million in the second quarter of 2005, mainly due to an increase in third party business relating to Superman Returns: An IMAX 3D Experience at the Company's post-production unit.

If I understand the earlier statement about “processing fees” verses “recoupments” this means that the $1.9 million increase came from fees (paid to IMAX) from WB for Superman Returns. Furthermore…

IMAX DMR revenues, which are revenues to the Company generated from the gross box office performance and conversion services performed on IMAX DMR films, increased to $4.1 million in the second quarter of 2006 from $1.4 million in the prior year quarter. The increase in DMR revenue is due primarily to the releases of Superman Returns: The IMAX 3D Experience in June 2006 and Poseidon: The IMAX Experience, in May 2006. Film production revenues remained consistent at $0.1 million in both the second quarters of 2006 and 2005.

…which means that—despite an increase of nearly 300% YOY—we have yet to see all the income from Superman Returns or Poseidon (especially if we note that IMAX is still realizing revenue from Walking on the Moon released nearly a year ago.

I'm watching to see what the SEC investigation concludes. On the other hand, the lawsuits are typically the frivolous suits being filed against any stock that sheds significant value (aka. Netflix a year ago).

With new openings and a backlog of theaters, along with the majority of ticket sales for WB through Superman Returns, I'm planning on holding this one for some time. Management's unwillingness to sell the company for less than they think it's worth says that they are committed to riding out the storm for growth.

CNET: CUNow or CUNever

2006-09-06T14:55:00.000-07:00

The Nitty Gritty:I'll save you the hassle and give the punch-line first (only so long as responders to this post respectfully read the details as to the conclusions drawn). In short, CNET is losing money on a decrease of new accounts and stock options, while remaining unhealthily tied to Google. Living off the scraps thrown by the internet giant isn't good; I call it a diet of “Google-droppings.” Diversification is another issues at CNET. Granted, it has some “great” site names, but then the greatest names haven't been household words like TV.com or Kids.com. Really: think Google, eBay, Yahoo, and AOL. Before the internet, we all yelled at the Kids to get off the TV, but how many of us Yahooed at a dog named Google for going AOL (All Over the Living room). Great names don't make a great company, especially on the internet.

I believe the diversification hurt its ability to focus on Computer Shopper magazine as a steady stream of non-internet revenue. Now, all of CNET's eggs really are in one basket, and that basket is being held by Google. Some will see the sale of CS magazine as specialization (how so—with at least 12 front-page sites?). Not me.

Ad revenue isn't a moat and any “ad-revenue driven company”—read, CNET—that values it's domains and trademarks anywhere near $38 million is bloating it's numbers. With administrative expenses growing 13%, I'm asking, “How come it keeps taking more people and more money to recruit advertisers?” CNET seems more focused on it's ability to draw ad revenue than create a unique product that will ultimately keep people coming and coming and coming. Add in one final thought: the exercising of options and their immediate sell-off aren't the actions of insiders expecting their company to double in the next two-to-five years.

Sorry, but adding that all up and I have to say, “CNET, CUNever”

The Details
Options
In the last 6 months, 750 thousand shares were sold by insiders (through direct sales or exercise of stock options); $4.9 million worth in the past three alone, and some 8.5 million remain “in the money” to exercise. Also from the last 10-K, “As of March 31, 2006, there was $45.8 million of total unrecognized compensation cost related to nonvested share-based awards granted under the option plans. That cost is expected to be recognized over a weighted-average period of 2.8 years. So, of all the money in hand, I can expect at least another $4.5 million to go the way of the dying wind.

One may point to change in accounting of options rules (FAS) for the chunk of money that CNET gave out in options. I rather look at such visible accounting as indication of past options and grants pointing to the direction in liquidation of the company.

Note this line on the options: stock options are granted with an exercise price equal to the fair market value at the date of grant. All stock options have terms of 10 years, except for options issued to employees in Switzerland which have a term of 12 years, and generally vest and become fully exercisable four years from the date of grant. And yet, looking at the numbers, all options exercised in the past 6 months have been cashed in. Those aren't the actions of insiders who expect the value of their company to double in the next year, or even the next two years.

Income and Revenue Net income YOY (T2Y) increased 325% and 236% respectively. On the Cash Flow side, 2nd Quarter 06 showed “First time Accounts Receivables” has being positive though (on the negative side) Capital expenditures is still up. Investments are down.
Backing out the doubling of goodwill over the past three years, and total assets have remained flat. Long-term debt mostly flat.

Gross Profit has increased 77% over the past three fiscal years. Gross Profit has been flat over the last four quarters, except for the typical Christmas time bump in ad revenue.

Selling and administrative expenses grew by 13% in the last quarter, driving operating income into negative territory. Revenue for last quarter (YoY) is up 17%. Cost of revenue was up 14%.
General and Administrative (glut of employees) was up 32%. So despite the 17% increase in revenue, overall income went from $233,000 to a loss of over 3 million.

Comparing the last two quarters, Cash increased 32% though accounts receivable declined 24%.

Net income was hugely negative. Gains on sale of marketable securities was a negative. I assume this means that money invested took a loss in sale, indicating the need for liquidation. Meanwhile, accrued liabilities were up slightly.

CNET sold it's share of ownership in Computer Shopper magazine. Okay, I can see the benefits of that, with increasing print and paper costs (totaling about 5% a year from my experience in PR) and declining readership. However, is that how we understand a 66% decline in revenue YoY from the magazine: declining readership? Maybe it wasn't the focus it should have been? Maybe too many internet pots got the old magazine burned? I think there were bundling capabilities for advertising between print and web that could have helped CNET unfetter it's revenue from Google-droppings.

Ad Revenue Specifics Revenue from Google approximated 10% of total revenues, and 5% of CNET's accounts receivables was from Google. Wow! Remember when ad revenue was cut just after the tech bubble burst (Web 1.0)? In short, CNET is largely benefiting from the droppings from Google's table. In short, until CNET gets more independent, as goes Google so goes CNET…and the millions of bloggers benefiting from web searching. Keep in mind, 85% of revenue is ad driven (i.e. $70,932 of $83,368), and most of that is click-through revenue. That means, CNET doesn't get a penny until someone clicks through.

MarketWatch.com reported that in the first half of 06, ad spending was not as lofty as expected, slowing to around 2.9% and falling well short the expected 4.5%. Although, the article notes, internet display advertising rose 18% (an increase of 49%).

Goodwill or Bad? A trademark is only as valuable as the company behind it. How about “Ben Franklin Stores” (not the kite guy, but the store)? Don't see many of them around do you? What's that trademark worth? At one time, it was worth a lot. Now, not so much. CNET, I find your self-valuation of trademarks to the tune of $38 million a bit of a stretch. I'll give you half, and back out the rest.

When the Good News is Worse than the Bad

2006-08-27T15:00:00.000-07:00

The date was August 13, 2002 and it had not been a good two years.

Background – I inherited my broker through marriage and—in three years—he had done absolutely nothing to manage our account since I began paying attention to the $10,000 we had invested with Schwab. Why? Because he mostly dealt with $10,000,000 accounts. Our gnat didn't have a chance in a million of showing up on his radar.

Three Strikes – I called the guy, and in a ten minute conversation, he had three strikes…and took them all. First, why was half our account in an under performing mutual fund? His response: yea, I think you probably should get out of that one. (Now he tells me). Second, why weren't any of our dividends set to automatically reinvest? His response: that makes taxes harder for some people when it comes time to sell. (But of course, he reinvests his dividends). Third, what recommendations did he have to improve our returns? His response: the stock market goes up and down and it just isn't predictable. (Gee, that's original).

Flying Solo – I pulled all our money out of all the funds and rolled the cash into our money market. I began doing research on the internet on stocks, funds, etc. and I came across this site called “The Motley Fool.” I'd never heard of it before, but I began reading articles about various stocks and—as an intuitive person—much of it made sense. I'm Austrian in my economic thinking much more than I am Keynesian. Believing that I'd rather see dividends that come to me for reinvestment than pray for stock appreciation, I bought in to half-a-dozen dividend paying stocks…and one non-dividend paying stock.

The Good News – I can't find the original Motley Fool article but it recommended ValueClick Inc. (Nasdaq: VCLK) as a great example of an under-appreciated (non-dividend paying) growth stock. I knew little about it, but decided to drop $105.00 (less than 1% of my portfolio value) for 39.9225 shares. For those of us slow on math, that comes to $2.63 per share. Read carefully, because the key line above is that “I knew little about it.” I bought, but didn't know why.

The Problem – When you buy a stock, you need to know why. We've all heard that before, but the fact is we don't always practice what we…preach? In this day and age, we play at marriage, and we play at jobs, and we play at religion, and we play at the stock market, saying, “Let's give it…a try, and see what happens.” Folks: that's little-f foolish. But I was new to the game, and I played it like a teenage boy plays with love. I thought, “It's only $100 bucks. What's the risk?” But there's ignorance and then there's…ignorance. You could call me ignorant.

The Bad News – ValueClick Inc. sits at $14.13 today, with a 52-week high of $20.98. Quick math: 39.9225 times $20.98 is $837.57, or 800% increase in my original investment. But let's say I didn't time the market right and held out till today: 39.9225 times $14.13 is $564 and change, or a five-bagger if you will. Not bad right? Right? Can I get an Amen or something? I only wish it were true, for you see I sold out my 39.9225 shares at $2.35 a share on April 2, 2003 (about 8 months after buying) and at a loss of about 2% my original investment.

The Answer – When you don't know why you buy a stock, you certainly don't know why to keep holding it when it's doing nothing or, worse…when it is going down. Ignorance robbed me of a 5-8 bagger, and I've never forgotten it. In fact, in my “Current holdings” portfolio at Yahoo! I keep VCLK listed, despite the fact I haven't owned it in years. It sits there as a reminder that it's easy to be foolish, impetuous, and ignorant, especially when the market is down or flat-lined; while it's hard to be wise, patient, and informed. Friends, learn from my mistakes: know why you buy and then don't sell until that fact changes.

The date is July 27, 2006 and it hasn't been a good year. Most of my stocks are down for the trailing 12 months…but I haven't sold. In fact, quite the opposite: I've added to many of those holdings with increased share purchases. Imbalance in my portfolio forced a sale of some Netflix holdings nearly six months ago. The continual decline of the stock has allowed me to buy back in a reasonable shares.

My most dumbest investment by far was one of my best. The stupidity was in me and not the stock. Sure, I'm in the negative on a lot of stocks, but I know why I bought them and until that changes, I'll know not to sell. Thanks VCLK for the lessons you taught me. Thanks Fool for letting me journey along in your stock evaluations.

Dreaming Outside the Box: Netflix

2006-08-26T14:57:00.000-07:00

Everybody and their mother is pitching some kind of VOD: Apple, MSFT (coming soon), AMZN, YADA, YADA, YADA (note: if you don't know that YADA is not a true company, you might decide to stop reading now). Homogenization seems to be the going thing—with everybody looking to join up with somebody for content control and unique offerings. IMAX—which isn't in to VOD (yet?) is partial owner of several production companies. Marvel (MVL) is focusing on content ownership and will prove a future partner for some VOD company. Even Netflix purchased some movies awhile back as a means of content ownership.

So how does Netflix prove itself unique over the competition—which, as stockholders, is what we really want? Well, obviously, a growing core network of repeat customers to existing services is Element #1 (E1). E2 would be (full or part) ownership in unique content producing companies. E3 would be strategic partnerships with content owners (e.g. DIS and AAPL). Yes, yes, but everybody is thinking in those terms. So, for our friend and champion, Reed Hastings, can we dream outside the box?

1. Unique hardware – I don't mean a phone that lets you watch part of a movie on a screen smaller than the bottom of a water bottle; but rather, hardware that takes in to consideration the limitations on bandwidth and adjusts for that to improve speed and accuracy of data package reception. DSL uses ATM technology. What if hardware networks were established that ran on existing parallel bandwidth? It would work like this: instead of data packages being sent sequentially along one cable, packages would be broken down and distributed simultaneously along multiple cables. Some packages would be broadcast wirelessly. Others along fiber-optics, and still others along copper wiring. Packages would be marked so whether package #200 arrives before package #5 is irrelevant because the hardware receiver reorders the packages and “binds” them in proper order. Download of a HD film could be cut in half in areas where you have overlapping network facilities. One such partnership might be with Radyne Corp (RADN), a stock of interest to the Rule Breakers news letter. With their Troposcatter Modems, Radyne was able to transmit 40 Mbps over the horizon. Just how many of these modems would you need to transmit VOD packages from LA to St. Louis?

2. Unique Software – while the unique hardware option would require software supporting it, I'm now thinking of different software: new compression software. As more and more movies are filmed and produced digitally, it seems that someone would find a way to further layer the digital elements so that repeat data can be broadcast only once. Similar in nature to the compression of a JPEG, over say a TIFF, similar scenes would see the borders, edges or some other film elements reduced to something akin to (the old computer language of): “GoTo #5.” Using a different analogy, it would be akin to breaking a human being down to one gene sequence instead of having to recreate him by appearance (e.g. brown hair and eyes, 6.2, 190, etc.). Software—either on the production side, or even in the post-production phase—that could code films in this way would be highly profitable. VOD companies with unique compression software in turn become highly profitable by further increase download speeds.

3. Unique Company Management – In my neighborhood alone, I can pick up 20 DSL wireless signals from similar modeled modems (indicating to me that they are, for the most part, all with SBC…our local provider). Though many of these folks may be on the same branch as I am, others would be on parallel branches of service (separate grids). Similar in result of #1 above, this option would allow SBC to “license out” bandwidth from lower usage individuals to higher usage individuals. This too would allow for increased download speed along parallel entryways. Furthermore, providers may eventually set up “neighborhood networks” that function as storage bases for highly accessed information. Say we're all SBC/Yahoo! customers. We all have to “view” the login screen when logging in. My computer captures and saves many of those images in my Temp Folder, unless I have that emptied each time I shut down (an option). However, if SBC had a “hard drive” of sorts that prioritized and kept copy of regularly accessed content, it could reduce the amount of bandwidth necessary for repeat actions to take place. Hard drive space supplements limited network capabilities during down periods, taking repeated “snapshots” of repeat access information and data freeing up more capabilities for package prioritization in busier times. In this scenario, “neighborhood networks” function like a DVR for certain data. Obviously, one would have to overcome copyright concerns, but with Cable companies offering DVR network services, the obstacles are not impossible. More bandwidth is freed up for VOD.

4. Unique Partnerships –There will always be opportunity for further partnership between distribution companies and production (content ownership) companies. But I'm thinking of such things as Value Added Content (VAC) through partnerships between Netflix and, say, TiVo. Netflix could, using its “queue management” and rental history—combined with TiVo's tracking data—tag customers for specific interests and preferences. For example, Netflix would know that I've rented X-Men, Fantastic Four, and Spiderman 2. In my queue are V for Vendetta and X-Men III. TiVo could cross compare to my viewing habits to see that record similar television series. During low-demand network periods (say 12 AM to 6 AM in a given area), TiVo could download some percentage of the film to the hard drive and store it. In the morning, you would be asked if you want to preview the first 10 minutes and then decide whether you want to download (rent) the rest. If not, the content is erased from your TiVo. But if you accept, your account is billed and the download continues, but the download time is greatly diminished because 6 hours of data has already been downloaded. Pack-reordering software would easily reassemble the rest of the film seamlessly.

An interim version of the above partnership would combine mail with download capabilities. Rented films would be mailed, while unique content relevant to the movie would be downloadable to a TiVo simultaneously. The disk arrives in two days, by which time the data is also ready and available for your viewing. The downloaded content might be special features available only through Netflix and TiVo.

Or what if Netflix offer queue suggestions like this: “Joel, if you put Romancing the Stone and Raiders of the Lost Ark in your queue back to back we will mail them immediately. For doing so, you can immediately begin to download Indiana Jones and the Temple of Doom to your TiVo.” Raiders is in my queue and so obviously I would be interested in Temple of Doom. Maybe not Romancing the Stone, but then again I wouldn't mind watching it if I knew I got a free download in the process. This allows Netflix to get more of their low-demand movies out into homes, reducing demand on new-release films, while giving me the chance to see a movie I might not otherwise have considered. Someone on the 3 out plan can't have 3 new release films out if he has one from his queue partnered with a low-demand title and a free download.

4.5. Seamless Hardware / Software Connection – remember, lots of folks were offering music downloads before Apple, but—as is often noted—it is the seamlessness between iTunes and iPod that has made Apple the leader of music downloads and master of the MP3. Transition: VOD. Lots of companies are going to try it, but the eventual winner will be someone who finds a way to link special (i.e. unique) hardware with VOD in a seamless manner. On this front there are lots of players: cell phone makers (Motorola), network owners (SBC/ATT), content providers (NFLX) and content owners (SONY, TWX). I don't know what it means, only that the leader in this market is going to find a unique way of linking hardware and software in a way that proves superior to others—offering seamless downloads and viewing.

5. Centralized Distribution Station - Netflix already has distribution centers at key parts of the nation. When VOD does explode, other date centers could be added to existing centers or at other places to reduce download time. Instead of pulling a movie across four networks and 6 states, a new release title could be available at every download station, reducing network exchanges, distance to travel, and the potential of receiving lower package priority. If I “rent” my VOD from Kansas City and I live in St. Louis, data relay is greatly diminished than if I have to get my data packages from, say, New York or Los Angeles. Really, this is what Redbox is talking about doing in their kiosks. DVD burn on demand would mean that at no time would someone get the “not available” message at a Redbox.

Netflix could further benefit from cross comparison of customers in a given area to videos of interest. If order Spiderman II by VOD, an email can be sent to other customers in the St. Louis area saying, “If you want Spiderman II today, just click here.” Spiderman II moves up on their queue as a currently checked out film, and the data is transmitted to STL from…wherever. However, Netflix has a duplication station in STL where the same package is sent down two different lines (basically cloned) to arrive at two homes at the same time. Transmission time from the point of origin to the city or neighborhood of commonality would be the same—but because the data is only transmitted once, it prevents duplication. As things stand, theoretically, I could order Spiderman II at the same time as my next door neighbor and have the entire movie sent in duplicate packages down the same channels of the network.

6. Good Old Fashioned Letter Writing and Pictures – Remember we're dreaming outside the box, so don't laugh. But if you think about services like Skype, it seems more and more people are using the Internet to communicate…in old-fashioned ways (like the telephone and mail). Take Amazing Mail for example: For little more than the cost of a postcard and postcard postage, I can get a postcard made from any picture I took and mailed to anybody I want. What if Netflix allowed for old-school communications to break in to current model distribution? Let's say my brother and I are both Netflix subscribers. I now can go to the Netflix site, upload a picture and a blurb about our recent trip to North Carolina, and know that it will be printed and shipped in his next DVD order. It could be printed at the same time as his envelope data and weighing in at a half-piece of paper wouldn't affect postage. Think about it: your mother is always saying, “Johnny, you never call and you never write.” Well give her a Skype modem and a Netflix subscription. Then you can call her on the internet and know that with ever DVD she gets, another letter and picture will go out with it.

7. Coinstar – Amazon is doing a no-service fee partnership with Coinstar. Why not Netflix? Deposit your 5000 pennies and get a certificate good towards the purchase of your first year as a subscriber with Netflix.

8. Free VCDs – With the cost of a CD being near pennies, what if Netflix made VCDs available for free (the way AOL does). These VCDs could be unique (owned) content. Or it could be 10 trailers that can be watched at home on a DVD or computer. How many times do people sit down in front of their computer to see trailer after trailer at Apple's Quicktime site? Now, through this interactive VCD, you can view 10-20 trailers of newly released films that can be added to a queue through a combination of internet access and CD-ROM interaction: “Like these films? Just click the box of those you like, click send, and these movies will be automatically added to your Netflix queue.”

Summary
I guess I could keep going, but you've probably checked out already. To summarize, while VOD may still be a little way off (or it might come en mass tomorrow! Just don't hold your breath), there is still a lot of opportunity for our dear Netflix to capitalize on the VOD trends, as well as profit from a wide range of currently (and widely) available forms of distribution.

Bank of Granite: 5 for 4 Split

2006-08-23T14:58:00.000-07:00

Bank of Granite – down 5% today. But not on the 5 for 4 stock split (yesterday's new) which I take as a good thing. Consider some of the competition:

GRAN – Market Cap of $297, a P/E of 16.8, and a dividend of 2.5%
BTFG – Market cap of $265Mil, a P/E of 17.1, and dividend of 2.1%
CAC – Market cap of $282Mil, a P/E of 14.8, and a dividend of 2%
HTBK – Market cap of $281Mil, a P/E of 16.8, and a dividend of .08%
LKFN – Market cap of $281Mil, a P/E of 15.2, and a dividend of 2.1%

Granite is in line with each of the following banks with regard to PE and Market Cap, but notice that the current price for CAC is a whopping $41.26. Half that to be in line with GRAN and you half the dividend as well.

Insider options that have been exercised have not quickly been relinquished, as opposed to those of eBay insiders—wherein every exercised option was immediately sold. Options exercised and held indicate a commitment to the value of the company at current prices, with expectation of growth (bullish). Insider ownership remains a strong 8%.

Float is only about 11.8 million. Ten day average volume is roughly .017 million (17,000), or .002%. Closely held stock? Yes, which is why a split may do well in freeing up some shares for broader ownership, greater flexibility in trades, and higher interest in the stock (which is basically the reason the board gave for approving the split). Meanwhile, stock splits have been about every two-to-four years, with the last one being in 2002.

ROE is at 12.72% with a profit margin of 18.8%. Debt to equity is .5 while EPS is $1.41, and a PEG of 1.9.

Looking at historical prices, the stock looks to be in the latter half of a 5 year cycle running from the high teens to the mid twenties. PE has been declining over the last 5 years while the dividend has been on an upward increase.

In the past 52 weeks, GRAN has danced around a slow upward climb on trajectory with the 50-day moving average.

GRAN has a lot going for it and, personally, I'm glad to see my original purchase of 68 shares grow into 71.5 through dividend reinvestment, and that to 89 after September 25th.

4 Miles & 12 Cans + a Penny = $2000

2006-08-22T14:59:00.000-07:00

During my 4 mile run, I stoop to pick up a penny. On the back-leg of the run, I'll palm a dozen flattened aluminum cans (@ .05 cents each). Am I cheap? You might think so. I call it shrewd synthesis: doing what I normally do, and finding ways to make money on it.

What does a penny and a dozen aluminum cans equal? Added with the other regular gimmicks available to tight-budgeted individuals (aka. Myself) the total was $2000 in each of the last two calendar years. Here's how I did it:

1. eRewards – an online points program that allows you to accumulate points for taking short surveys and reading emails. Points can be redeemed for airline miles, Hilton Honor points, free days of a car rental and, my favorite, Blockbuster rentals. For $25 in points (not redeemable for cash), you get 6 rentals (of any kind)—1 per month for 6 months. You can only redeem for this reward once per calendar year and usually I do it in January. Sign-up is free: www.erewards.com

2. Online Surveys – online surveys is a great way to make some extra cash. I like the Lightspeed Panel (http://us.lightspeedpanel.com/members/scripts/signup.phtml) because you can accumulate points fairly easily for short surveys. Longer surveys pay even more. Points can be redeemed for gift cards, Amazon gift certificates, and even cash (paid through PayPal). I usually take payment in the form of Amazon gift certificates because, in the fine print of the GC it says the cash value is 1/100 of a cent per dollar. I ran this by several tax accountants to make sure it was legal, and they all indicated that declaration of value for tax purposes could be based on that value (someone, please correct them if they are wrong!!!). Another site is Testspin (www.testspin.com). Again, signup is free and I receive about 10 emails a week asking me to take short to long surveys. Each pays between $1 and $10 in Amazon Credit (payable in $10 amounts; you have an account that they keep the money in till it reaches $10). Last year, I brought in $120 in Amazon GCs that way. Also see www.surveyspot.com or www.epoll.com. Another: Pinecone Research (just emailed me about the need for males 18-24: http://www.pineconeresearch.com/signup/ds469Referral1.asp

3. Mypoints – like many sites, this is a shop-through site. But in the past 8 years, I've earned well over 100,000 points (about .01 cent per point = $1000) in gift certificates, etc. by receiving their emails, clicking on each of them and earning .05 cents per time. I also do much of my shopping through the MyPoints website in order to earn points on my purchases. Signup is free: www.mypoints.com

4. Refund Cents – Michele Easter has made lots of money on coupons, test drives, FARs, and on and on. Several ways for you to benefit. Completely free is her weekly email that she sends out, usually including great items for sale at Amazon (which means I don't have to do that legwork) in addition to numerous online coupon codes and forms to print, even the occasional test drive link. If you want a little more access, you can pay for the online version for about $1 a month (last time I checked). This gives you more access to other forms, rebates, test drives, etc. If you are really in to it, you can also subscribe to the print version. www.refundcents.com

5. FAR – stands for “Free After Rebate.” Rebates accounted for nearly $500 in free items. Most of these I needed. Others went into the “donate to Charity box” which I empty out once every two years, or into the “Give away for Christmas box” which I draw on every December. Everything from hair gel to shampoo, soap, cereal, bread, canned fruit, car oil, batteries, jump drives, hardware tools, kitchen supplies, software, and so on. The Refund Cents email (mentioned above) is a great resource to find out about FARs. I also check the Walgreen's Monthly Saving's (available online as a PDF a http://www.walgreens.com/store/rebateclub.jsp). I love Walgreen's because they give you an incentive to take your refund as GC credit, by taking 10% onto the top of the value. One month, there were $50 in items that were FAR. I bought them all and was credited $55 in GC credit. Over the next year, I did the same thing again and again, until my GC credit grew to $100. In stock terms, that's a two bagger in a year. Other favorite FAR locations:
- Office Depot (see weekly flyer and website) www.officedepot.com
- Office Max (see weekly flyer) www.officemax.com
- Target (see website) www.target.com
- Almost any & every grocery store
- Amazon (see top sellers, clearance, “Today's Sales,” and “the Friday Sale.”) www.amazon.com
- Walgreen (check weekly flyer as well as Monthly Savings Catalog): http://www.walgreens.com/store/sundayad/default.jsp?adref=HomePage (NOTE: Walgreen sells Gift Cards to lots of places, even Shell Gas station. Get $50 in FAR in six months and you get to fill up your car for free…maybe twice)

5. Angel Food Ministries – Get $60-80 worth of dinners for $25. It isn't a pyramid scheme of anything like that. It's just a ministry where you can order food through a church at $25 per unit and save significant amounts of money each month. My wife and I recently found out about this and have begun using the service. Find locations in your area: www.angelfoodministries.org

6. Harris Poll Rewards – For taking surveys with Harris Interactive, you earn points that are good toward merchandise and GCs. I've made $40 on them in the past year. Sign-up is free and then you receive emails with links to the surveys. http://www.harrispollonline.com/

7. Hotel Points / Airline Miles– Maybe you don't fly that much so you think it isn't worth it. Or maybe you do but you never stay at a hotel, so why sign up with them? Because these points are often transferable between accounts at fairly small denominations. American Airlines, for example, will let you exchange points for subscriptions (e.g. the Wall Street Journal, 1800 miles). Another website out there will allow you exchange miles/points from Delta, American, and others for gift cards: www.points.com. Hilton Honors points can be traded for Delta Sky Miles, and you can double-dip. I have earned 1 free ticket, 4 free nights, a $50 gift card, and $75 in Amazon credit in 24 months through this program (and I only occasionally travel).

8. Points programs – I don't care how often you shop there, if there is a point's program that's free, sign up. Being part of a points program usually means you also get special invitations and coupons. My top three favorites are: Ace Hardware, AMC Theaters (most theaters for that matter), and Office Depot. I also love Borders Rewards. I have a tab on my keys for almost every free points program I can find. Often, these points are redeemable toward items that we use every day, or are transferable for other items. Get good to mix and match, like buying Office Depot stuff through MyPoints to get points from both, with free shipping over $50. Places you can sign up for points:
- Office Depot: www.odadvantage.com
- Borders: www.bordersstores.com (must sign up in the store; but you get immediate coupon)
- Ace Hardware: www.acehardware.com (see the Helpful Hardware Club)
- AMC Theaters: www.amctheaters.com
- Qdoba (restaurant): www.iloveqdoba.com
- CVS Pharmacy: www.cvs.com (regularly sends $4 off coupons by email)
- Regal Cinemas: www.REGmovies.com
- Build-a-Bear: http://mystuff.buildabear.com
- Wehrenberg Theaters: www.wehrenberg.com

9. Upromise – You probably know about this, and there are lots of ways of making money through it. Upromise links to many of the major 529 accounts now, so your savings are rolled into a college savings fund, tax free. You don't even have to buy anything through their site, since there are options of getting points for your utility and phone bills, etc. If you haven't already, now's a good time to visit: www.upromise.com

10. Checking accounts – I love it when banks offer free checking and a $50 bonus for signing up. In the heyday of the internet, I did that weekly. Now, I do it about once a year. I keep the account open for a year, legitimately use it as my auction (online sales) account, and then close it when another offer from another bank comes up. Recently www.ingdirect.com offered a $25 bonus for opening an orange savings account (code came in Amazon purchase box), and National City is currently offering the $50 opening bonus in my area (the Midwest). Bank accounts don't usually affect credit rating, but do your DD. I never have more than two open at any time.

11. eBay – It started with what I had: childhood toys, but it grew to more. While selling on eBay one day, I came across some items for auction that I had seen for sale at Wal-Mart on the clearance aisle. I went back the next day and picked up 4 Transformer toys for $5 each and immediately sold them for $11 each. If something doesn't sell, you might be able to return the item (if it isn't opened and you have your receipt, etc.). Listings have grown and competition is sometimes steep. You have to do more research now than in the early days, but you can still make it profitable with a little time.

Also, you can normally get Amazon gift certificates at eBay at a 10-20% discount. Check there for other merchant certificates and save money on money through eBay: www.ebay.com

12. Coupons – yes, of course there is the Sunday paper, but I'm talking about email coupons. What do you eat, drink, wear? Where do you shop, take vacations, visit? Just about every product and company has a website that also has email updates and many of them (a large majority in my experience) have coupons and incentives in the email. For example, by signing up for the Blockbuster email (free), I regularly get coupons for .99 cent rentals or rent two for $2. Borders has an email that is weekly and has 20-30% discounts on single item purchases. What else: Cheerios, Valvoline, Shell, BP, McDonald's, your local Mall? Yep! And if you don't want them filling up your personal account, just set up a Yahoo! or Gmail account for this not-junk but not-personal mail.

13. Cash Back Credit Cards – Credit Cards aren't for everybody. If you have a spending problem, don't do it. My wife and I only use credit cards so long as we can pay them off. I use the Sharebuilder card which pays 1% back on all purchases. Some other Credit Cards pay more, but I'm happy getting $25 into my ROTH IRA every two months (to the tune of $125 a year).

Add in the redemption of aluminum cans…and a jar full of occasional pennies and it all adds up to saving money.

If Context Is King…

2006-08-22T14:55:00.000-07:00

During the recent translation of an historic document on religious polity (from English into old-Lithuanian) my friend remarked, “It just doesn't make sense for my people. We have not raised most of the questions that this document means to address, and it only makes confusion when I think about it.” In short, like they say, Context is King!

It stands to reason that if a Protestant document from the 17th century written in English doesn't apply or translate (easily) into 21st century Lithuanian in any way that is helpful—socially as well as linguistically—perhaps 21st century US democracy doesn't easily “replicate” to 21st century Iraq. I'm not suggesting that the people of Iraq don't deserve to be free from the rule of a dictator whose regime massacred hundreds of thousands (maybe millions). But does that mean that the best, the “rightest” and most appropriate government must naturally be the US form of democracy?

The problems with this thinking is that our democracy grew out of a republic of states, has grown hand in hand with a capitalistic economy, is notably a two-party system, and mirrors in practice and structure that system popularized by Rome. Iraq has had none of these. The closest Iraq came to Roman influence was only under Trajan in 116, and that influence (control) of Rome lasted for only a couple of years. Today, signs of that control are literally non-existent.

National political structure, as one part of the health and stability of a national entity, must interlock easily with the other structures of society: religious, familial, economic, cultural, and geographic, to name a few. In the Philippines, the matriarch is the most powerful and respected figure in the family. Not so Iraq. Until recently (and still in some areas) of the former Soviet Union, the prevailing mentality of commerce was that “greater benefit is derived by not having to re-stock an in-demand item, than the benefit of increasing supply to meet demand." We scoff as such silliness, and yet both these situations illustrate how national government is not the end all of national stability (regardless of the fact that we view it as such in this country, as noted by the furry of contempt or praise launched or lauded respectively at our own federal government).

Many people want to debate the rightness and wrongness of the war in Iraq. I am of the mind we should be debating the greater issue: what form of government would best suit a middle-eastern country of Islamic views, Arab, Muslim, patriarchal, multi-partied, agrarian based (for the majority) but with large natural reserves in fossil fuels, and used to a dictatorship? We cry, “Democracy!” Maybe a better option would be a village-elected Oligarchy. How about a King and (his wife) a Queen? What about a patriarchal-Republic? How about a Social-Empire?

When a people have no conceptualization of money, you can't just come in and offer them capitalism and believe that will solve their problems. Likewise, when a society knows little or nothing of personal freedoms—either because of totalitarianism, or due to an emphasis on familial structure—one simply can't grant total personal freedom and believe that those who would be free will be free—free as we define it.

So, if Context is King! then we can safely assume that Familial Structure, Historic Precedence, Cultural and Societal Expectation, Religion, and Economy are Queen, or better yet, Mamma. And like they say: if Mamma ain't happy, ain't nobody happy.

Taking the eBay-T

2006-07-25T15:01:00.000-07:00

Someone wrote in response to my recent criticisms of ebay, “Next. simply insane logic” supposing that response somehow deals with the underlying issues that ebay is facing. But let it never be said that I'm unwilling to eat my words…given that I'm wrong. Let's run back over the basics:

1. One Fat Sale After Another – and I'm not talking about some online auction that's about to end. I'm talking about the 1.6 million shares that insiders have sold on ebay in the last six months. What about the buys? Well, there is Mr. Richard T Schlosberg III (a director), who added a whopping 1000 shares (read with intense sarcasm). This brings his grand total to 6000 over the past three years. Then there was the purchase by Edward W. Barnholt (another Director) who picked up 4500 shares, bringing his total share holdings to…4500 shares.

On the other hand, lots of options being exercised. Hum…..

2. Come On In - just don't expect much In-come! Net Income for ebay has dropped consistently over the last four quarters (taking the typical Christmas pop out of the equation). Net income in March 2006 was 15% less than this time last year. Over the past four quarters, Cash and Equivalents has increased 1%. Short term investments have flat lined. Net receivables (now what does ebay receive? Advertising money, auction fees, and fees from paypal), has grown 15%, and yet total current assets are valued at only 5% more than they were last year. Long term investments has decreased 26% comparing March 06 and March 05. Goodwill has skyrocketed (which means very little at the end of the day). Back out the doubling of Goodwill and quarter-to-quarter comparisons for March reveal a meager 5% increase in assets. And to boot, total revenue is up 28% which has translated to a decrease of 15% in income applicable to common shares!

On the debt side, there is none to speak of, though accounts payable is up from this time last year. Capital surplus is up well over 40%, and yet the Net Tangible Assets is down 11%. Ebay has a TTM P/E of 34 (and a FTM P/M of 24) which is hardly cheap. It has a PEG of 1.4, though it does has a higher ROE than the industry average (but then “what” is the industry in this case? Yahoo? Google? Verisign? I guess that depends on what part of ebay you're looking at). And, it has a Beta of 1.7. Humm…

3. Don't Just Scream It Man - but someone please call and remind me that I'm forgetting the great and powerful Skype. No, I haven't forgotten Skype. But I'm still trying to figure out how it fits into the core business. This month ebay launched the Skype cell phone, where you can now make calls from a hand-held unit rather than to be tethered to your computer. First, I'm still not sure how this equates to future cash for ebay--unless ebay means to take on Nokia now. Second, even if it does, I'm still not convinced that Skype is primarily a core-business accessory so much as a diversification. But pro-ebay people can yell all they want about Skype. Until it changes the bottom line numbers of income and revenue, it isn't much more than an “investment.” Hummm…

4. Share buy Backs – Of course there is the planned $2 billion share buy back, which should retire about 5% of the current float. That's something, right? Sure, so long as you remember that that options exercised in the past 6 months is equal to 20% of the proposed buyback. Hummmm….

5. IT is Only Advertising – which ITself raises questions. Why the huge push into a variety of advertising fronts (namely, the What is IT campaign?). Maybe the low hanging fruit is gone? Maybe that's why I occasionally get the four-color ebay magazine with the $5 off coupon inviting me to spend more. Maybe that's why ebay invited people to find the cash hidden on its site (this time last year). Maybe that's why ebay is joining up with Hershey's WrapperCash, and the "Shop Smarter, Shop Safer" sweepstakes and the $1000 daily PayPal give away and on and on and…when does it stop? I mean, are these cross-promotionals really promoting the core business? Hummmmm….

6. If you can't play with Google…join up with Yahoo – which is just about the best option left open for ebay. Yahoo has tried just about everything that ebay does well (auctions, online money sending system, online phone calls, etc.) while ebay has just about nowhere else to go currently except on to playing fields that Google currently dominates. Could this benefit ebay? Yes…maybe. Could this benefit Yahoo? Yes…maybe. And in the words of James Stewart, writing for SmartMoney.com, these are the “internet big three.”

But this does not change the fact that such a merger would result in a diversification of the core ebay business. Hummmmmm…

Conclusion: I don't think ebay has a moat in its current form. I know it doesn't have a salvage value if worst comes to worst. Maybe I'll eat my words…but then maybe others who do take the ebayt are likely to find a not-so-pleasant hook lying somewhere just below the surface.

eBay: An American Idol

2006-07-19T15:03:00.000-07:00

A network of individuals hoping to turn a buck on the sale and resale of items. Small businesses that find the auction platform useful. An internet face for the faceless masses who can't afford a website (or are smart enough to know that www.come.to.us probably won't get a lot of hits). And a $4.2 billion dollar free phone service. In short, nothing that can't get duplicated.

The problem with pure internet businesses is that one is ultimately buying into an idea. It's quite Austrian: one supposes that the patters of human behavior are at least somewhat predictable, and that people have found www.ebay.com to be a place for buying and selling, which in turn increases the market community, which in turn drives up the potential for advertising revenue. And yet, if advertising revenue dries up, and people really start seeing Amazon as a better community—humans are fickle that way—one asks, “What do I really own?” A brand name? Yes, there is that, but Coke which is at the top of the brand value list, only clocks in at $70 billion—which is only 1/5th ebay's current market value.

In short, Yahoo!, Google, and ebay for the most part, are really just American Idols. Think about it. We log on, we type in the name of our Idol and bada-bing, bada-bang, we have our results. But next week—whether due to higher barometric pressure, or stomach acid, or just cramps—we type a different Idol's name. Oh, that felt good and you know the American motto is that “if it feels good, do it!” (I'm not endorsing this philosophy.)

GM is in trouble but at least the holders of GM have some qualitative equity, regardless of the fact that it doesn't come close to offsetting the debt the company has. Owners of Intel have something. Owners of Bank of Granite have a lot. Even owners of Amazon have inventory and stuff.

Yahoo, ebay, Google? They have popularity. Now I'm not against popularity. I like being popular. Problem is, while it only take innovation and a little luck to become popular, it takes a lot more to remain popular. And when popularity is all you have, and you lose that, then all you have is a brand name that isn't worth a third of Coke's.

Quickly: who was the first American Idol? Who was the first winner of the Amazing Race? Who was the first millionaire in America? Who was the 33rd President? See. Popularity is a fading reality, and I have trouble banking on a company that has a name, a free phone service, and a really big load of popularity.

It's a great idea, I admit. I use it, along with millions of other users. But the same can be said about VHS machines, IBM machines, typewriters, 8 track players, record players, hula-hoops, mood rings, wooden shoes, slide-rules, and the abacus?

Okay, so IBM still has a market cap of $119 billion. One in ten! Better than gambling, but are you willing to bank your retirement on that? I can almost hear it now: “And the winner of the 2010 Largest Internet Community Site award goes to...drum roll, please….”

How Hot is the Amazon?

2006-07-17T15:04:00.000-07:00

History:
I'll not bore you with what you may (or may not) know about the history of Amazon (read it here: http://www.islandconnections.com/edit/bezos.htm); however, I will remind us of Amazon's six core values: customer obsession, ownership, bias for action, frugality, high hiring bar and innovation.

Customer Obsession
From the lowly beginnings of an online bookstore, Amazon has become much, much, more, driven by this first value: obsession. In the same way that people are compulsively driven to buy items from the Home Shopping Network (HSN), and the like, Amazon has created a site of compulsion. No, I don't mean buying items that you don't need. Rather, through its history, Amazon has found ways to build upon Customer Obsession. For me, it was the Gold Box which offered specials every day. I never bought from that list, but I always liked perusing what was being pitched my way. Then came the invitation to sell what I'd bought. That's natural enough, especially for a bookstore, right? What are my other options? Give it to a library. Buy another bookshelf. Get another cardboard box. All vain attempts when the alternative is to recoup some of my money on that book which—quite honestly—just didn't do it for me. But so also for electronics, software, clothing, and…toys!

Ah yes, toys. My introduction to the internet came through Yahoo! Auctions where I sold item after item from my childhood collection. That was in September 1998. By 2000, I was actually in the market of selling, buying, and reselling. Some days, I would turn a vintage Star Wars figure around for a 40% profit. And when I needed money for seminary, I dipped into the most beloved of my collection, like the Blue Snaggletooth. I went ebay when Yahoo began charging fees. After that, traffic pretty much died out on my items.

On weekends, when buying those essentials (aka, milk and bread), I would peruse the clearance isle at Wal-Mart. Most weeks, I'd find 2-3 items that I could resell at a 40%+ profit. But again, Amazon—in its partnership with Toys R Us—won me out. The “Friday Sale” came about, and regularly I'd check the site to see which toys were on clearance. Yada yada yada… You can see the obsession.

What I do with toys, software, and some vintage books, other people do with clothes, jewelry, shoes, furniture, baby items, kitchen items, etc. In comes Amazon playing home to hundreds of thousands of items—new and used—in just about any category you are looking for.

Ownership
I think Bezos meant “company ownership” which is what made Wal-Mart what it was in the final days of Sam Walton—and consider, that 105.65 million shares are held by insiders, equating to 25% inside ownership—but I can't help but read a double entendre into the word: ownership. Isn't it what people are looking for at Amazon: ownership. I use a Canon XT Rebel and people ask, “Where did you get that?”. In my office, I have a Senseo coffee brewing system and, again, people ask, “Where did you get that?” Often, behind that question is, “Where can I get one?” Ownership. In response to both questions, “Amazon.” The site is built on the concept of ownership: if you bough that, then you'll probably also want X, Y, and Z that other people bought along with it. Ownership, compounded.

And of course there is the inside ownership of the company. I doubt Chick-Fil-A would be half the company it was today if insider ownership had diminished. Diminishing ownership results in diminishing influence and, ultimately, diminishing control. Bezos, by keeping insider ownership high, has prevented such erosion. And if you're interested, try searching for “Ownership” at Amazon (in books). The first hit you'll get is a book called “Ownership and Control” outlining models for corporate governance. :

Bias for Action
Being unfamiliar with this term, as I was, I did a search at Amazon books and what I got was, “A Bias for Action: How Effective Managers Harness Their Willpower, Achieve Results, and Stop Wasting Time (Hardcover).” This little book is an engaging dialogue on freeing corporate managers to be…creative, pro-active, problem solvers, and even intuitive. Sounds like Amazon to me. What about searching and downloading books? What about making our own short films? What about partnering with Toys R Us, Office Depot, Target, Weight Watchers, Borders, and a dozen other retailers? What about creating space for programmers to save unfinished work (for transportability purposes), eventually leading in to a Blog meets unique-software-patch/program-writing community? What if musicians can upload one track to Amazon for free distribution, and those tracks with enough hits get a full album deal? What if…? Sounds creative, imaginative, and intuitive, harnessing the power of the manager.

Frugality
Okay, so you can sell your own books, or you can sell your books and your neighbor's books. Only you don't have to store your neighbor's books, or pay to have them shipped, and yet you get a commission off every sale. We can understand frugality as being the opposite of excess. No, Microsoft Word won't give that as the antinomy, but excess is what sites like EToys and Overstock are about: excess inventory, excess anticipation of sought-after items, excess over- and excess under-anticipation for changes in trends. Overstock gets a box load of stuff it can't sell and that's money lost. Amazon gets a box load of stuff it can't sell, and it (often) ships it back to the supplier for a credit. So much of what goes through Amazon isn't Amazon's which accounts to sales without the overhead. It's like Dell. Oh, and did I just see Dell listing new desktops and laptops at Amazon's site? In a word, wise. In a word, frugality.

High Hiring Bar
The saying goes that people who work for institutions are either brilliant or else utterly unable to do anything else. As someone who works for an institution, I am not brilliant, but I also fight the downward pull of mediocrity to perform at the most basic of levels. High Hiring Barmeans measures to ensure the right mix of personality, performance, and potential in an intuitive yet productive, creative and progressive, functional, structured, yet fluid environment. In short, if there were a “Amazon Hiring for Dummies!” it would have one page, and one line: “Freeloading dummies need not apply.”

Take Amazon Prime for example. It's really better than the Free Shipping on $25 orders in this way: someone (me for example) signs up for Amazon Prime at $80 a year. No matter how much I order, I can get it in 2 days for free. Then again, no matter how little I order, I've still paid my $80 fee. Eighty dollars in Amazon's bank is better than nothing and the removal of shipping costs makes accessibility all the more…accessible. The tendency will be to buy more, and more often. In one week, while sampling Amazon Prime, I placed four separate orders, orders that I would not have placed had I been required to spend $25 for free shipping and still not have it arrive during my desire for ownership, during my peak period of obsession. Ah yes, gratified in two days, easier and cheaper than had I gone to Borders or Barnes and Noble! Smart? Oh yes: recurringly so.

Innovation
For those still with me, innovation—in a word—means trying, failing, and trying again because there is a better way to do things and, with persistence, you mean to find it, be it partnerships, independence, free shipping, instant shipping, free downloads, sample downloads, buyer tracking habits, product promotion, and so on.

So…how hot is the Amazon? I'd be interested in hearing what you think.

A Stroll Through the Annual Report

2006-07-06T15:05:00.000-07:00

Fiscal Year End 2006
Net Sales were down about $500,000
Net income fell $7,000,000
Cash (used in) provided by operations fell a full $28,000,000 (for a loss of $2,707,000)
Net Income is a whopping 2/3rds less YOY
Dividend remains unchanged

Results from Operations
Went from $12,681,000 to -$2,312,000 YOY!

Key Notes of Interest
Page 10-11: “During fiscal 2006, the Company's net decrease in cash and cash equivalents was $8.3 million verses a decrease of $20.5 million in 2005. The net decrease in cash and cash equivalents and short-term investments combined was $25,0 million in fiscal 2006, verses an increase of $12.6 million in fiscal year 2006. Net cash used by operating activies in 2006 was $6.5 million verses cash generated by operating activies of $22.9 million in 2005. The fiscal 2006 cash use was primarily a function of the low level of net earnings…” You can say that again!.

Page 24: “On September 14, 2005, the company entered into a new credit agreement with JPMorgan Chase Bank…(which) provides for a $30.0 million unsecured facility to cover revolver and letter of credit needs and expires on September 13, 2007…

Page 22: Concerning Litigation, “The Company demanded damaged in excess of $250 million” from Stani for use of “proprietary and specialized knowledge and experience, and it's (TOPPs) trade secrets, regarding the production of gum… If the company ultimately prevails in this litrigation, it could have a material impact on the Company's consolidated financial statements.”

Page 25: Acquisition of WizKids for $28.4 million

Consolidated Balance Sheets
Total Shareholder Equity declined $15,000,000 YOY

Earnings Per Share Information
Dilutive Stock Options declined 2%
Diluted Stock (outstanding and options) dropped .4%

Inventory
Increase of $900,000 due largely to “work in process.”

My Random Thoughts
Positive-
Long history and strong brand recognition
- Seasonal market for cards, timed and tied with release of top selling (licensed) movies (non-sports) or seasons (sports).
- 77% price of 52 week high; 121% price of 52 week low, representing a 48% market price of 52 week movement
- 79% rise in 1st Quarter (2007) profit, on higher-than-expected sports card sales;
Reuters rates TOPP a Buy
- Two Analyst upgrades since Nov 2005.

Negative
- Competitive market (WSJ reported today that Nestles too hit on British sales due to 18% decline in Kit Kat)
- Unexplainable pay scale for management; “Topps Chairman and Chief Executive Officer, Mr. Arthur T. Shorin, has received an average salary of approximately $980,000 over the last three years. Mr. Shorin's salary is in line with the salary received by the chief executive officers of multi-billion dollar companies such as Kraft Foods, Hershey and Wrigley's.”

An Austrian (Economist's) look at TiVo

2006-05-15T15:06:00.000-07:00

Q: Is TiVo a no-show or a grow-grow company?
A1: We are Americans and we don't wait for anything.
An editorial column in the weekend paper declared, “High prices of Gas not having impact on usage.” In short, the writer expressed his surprise that people weren't driving less. To quote an American icon, “Duh!” Why is it? Because the people who can afford to drive…well, they can afford to drive: big houses, big SUVs, and big paychecks. And the people who can't afford to drive…well, they can't afford not to drive. Those who ride the bus, don't have jobs that consume their time; e.g. you never see them using a PDA. Those who have the time, don't have the patience; they live by the PDA. So…why would I wait for my show to continue when I can just zip right through the commercials?

A2: DVRs are Ubiquitous
Well, not really, but it seems that way. Seems everyone has one, or one coming out. But, in reality, TiVo's DVRs are getting top reviews. For example, CNET rated TiVo's HD DVR as the best on the market (read CNET's review of the DirecTV HD DVR: http://reviews.cnet.com/DirecTV_HD_DVR_HD_TiVo/4505-6474_7-30842839-2.html?tag=nav. Notice: this machine can only be used with DirecTV. And how is this bad for TiVo? TiVo isn't in the business of “making” content or even “making it HD” but in capturing it in whatever way it's transmitted. Then again, TiVo isn't really a hardware company any more, is it. It's intellectual property alone is changing the way advertisers are getting product to consumers; but then that's not really news, is it! But remember a year ago, TiVo purchased six patents from IBM that “have to do with audience research and measurement, integration of television signals with internet access, automatic rescheduling of recordings, content screening, enhanced program information search and electronic program guide interface enhancements.” Bad move for a hardware company. Good move, for the content control King.

A3: The E*mperor's New Suit…is just the beginning!
The hype surrounding the EchoStar (E*) suit has faded like the explosion from the second Death Star (see Return of the Jedi: http://www.amazon.com/exec/obidos/ASIN/B00003CXCT/hobbithole/102-2618853-3117726?%5Fencoding=UTF8&camp=1789&link%5Fcode=xm2). But all is not at peace in the Republic. The Dark Sith Lord is still wreaking havoc over on the Overstock Board(http://boards.fool.com/Messages.asp?mid=24089273&bid=116190). Meanwhile, the E*mperor is trying to figure out how to get out of the deep hole that TiVo put it into. (Sorry. Got carried away.) Don't forget, “TiVo intends to seek a permanent injunction against EchoStar's DVR products”(http://www.tivo.com/cms_static/press_87.html). The suit against E* is going to net TiVo at least $74 million (up to $87 million). An injunction is going to bring in buckets more. Pause; replay; slow-motion: B.U.C.K.E.T.S. M.O.R.E.! This is only the first royalty payment we can expect to see from rip-off versions of the real thing. And like TMF Mile High pointed out last week(http://www.fool.com/News/mft/2006/mft06051222.htm?ref=btp), “DVR-industry researcher The Carmel Group says that roughly half of those homes will have a DVR of some sort by 2010, up from 15.6 million today. That leaves an available royalty stream from 34.4 million DVR sales. Multiply that by $18.50, and you've got $636 million—and that may be lowballing it. After all, TiVo isn't about to stop selling boxes.” Ah…! I can still hear the screams of the E*mperor as he falls from his tower of infringement into the hands of TiVo.

A4: You Don't Have to Wait…to Watch this Commercial!
So we're Americans. And boy do we hate waiting. And the only thing worse than waiting for a commercial to get over is waiting for a product that we really, really, really want. Need? Not a chance. Most of us has no idea what “need” is. But to want something so bad, you'll even mortgage the future to get it today, paying 15% on a charged-up Big Mac and whatever else TiVo is now targeting our viewing habits toward. That's right, with Advertising falling from regular television, that money has to go somewhere. How about into TiVo's coffers? TiVo announced today (http://www.tivo.com/cms_static/press_92.html) its first “upfront, multi-million dollar advertising agreement” with none other than “Interpublic Media, which oversees the media services operations of the Interpublic Group of Companies (NYSE: IPG), including Initiative, MAGNA Global, Universal McCann and a number of leading specialist media agencies.” Note the key phrase: "upfront." This isn't conditional pay: if they bite, we will pay. This is a guaranteed: whether they bite or not, the money is yours! Well, this makes sense, because after all TiVo does hold patents on audience research and measurement and as someone who has worked in the PR field, I'd rather pay $1 per customer and know I'm hitting 80% on relevancy than $.30 cents per customer and be taking pot-shots in the dark, averaging 60% relevancy.

A4: Who Wants to Buy a Sinking Ship?
Despite TMF Breaker Rick's comments last month, TiVo isn't a sinking ship…and yes, folks, believe it or not, it would make more sense for someone to buy it now being $3 higher than last fall. It's the classic Disney/Pixar issue: Disney passed on a buyout when Pixar cost a third what it finally paid for it. Then again, it was paying on potential not proven profitability. Ditto Google, Cisco, or just about anybody else seeking to bag TiVo. Last fall, TiVo was nothing but potential. Now, it's proven profitability. It's IP is valuable. It makes the best boxes, despite the dime-store knockoffs. Heck, it's just plain lovable! Not only is it not sinking, but TiVo is on the rise in all the above.

So...Advertising dollars: Got that. Best hardware: Got that. Intellectual Property: Got that! A culture that hates to wait for anything: Got that! Contracts with phone companies: Got that too! Throw in a backrub and there's just about nothing TiVo can't do…

The only question then is: Got Tivo?

A Stock-Watchers Evaluation of OSTK

2006-04-19T15:07:00.000-07:00

I've visited the Overstock board for several months now, and I remain continually amazed at the persistent level of misinformation that is posted herein. Still, I remain interested in the stock and finally hunkered down for my own dose of DD.

From the 2005 Annual Report
I read through just about every word of the 2005 Annual report, filed on March 16 of this year. What concerns me is the nature of Overstock's growth. Take for example their expansion into book, music, and video (BMV) products. According to the report, Overstock offers “approximately 62,000 non-BMV and 725,000 BMV products.” Good news right? Maybe, because the report goes on to say that “we [OSTK] currently have fulfillment partner relationships with approximately 460 third partiers, which post on our Websites approximately 48,000 non-BMV products as well as most of the BMV products and a portion of our current travel offerings.”

In short, most of the growth that Overstock is seeing currently is through second-party sales, or what they call “fulfillment partner relationships.” I am not exactly sure how this corresponds to direct sales, but it seems to indicate that OSTK doesn't own these BMV items. If not, then they only take percentage cuts on the sales. Not so Amazon, by comparison. They own the majority of BMV products they sell, which increases the percentage earnings on each BMV product sold.

By nature, these relationships are tenuous. As the report indicates, “Our use of the term 'partner' or 'fulfillment partner' does not mean that we have formed any legal partnerships with any of our fulfillment partners.'” Consider: no company wants to sell overage below market-value, and certainly not below cost. The report indicates that “during 2005, approximately 62% of our orders were for inventory owned and shipped by third-party fulfillment partners.” Refinement in responsiveness to market trends by any one of Overstocks “partners” could result in a radical reduction of liquidated goods. While this would be good for the company (e.g. Bissel), it would be bad for Overstock.

Because of the tenuous nature of these “fulfillment partner relations” I began looking at trailing revenue and cost of goods sold from direct revenue, to see how OSTK came out. Over the trailing 8 quarters, this is how it looks:

Balance from Direct Revenue (DR minus cost of goods sold)*: $3721, $4468, $5437, $14656, $9624, $8502, $8279, $15093
*(in thousands)

This shows that the most recent quarter ranked as the top direct revenue-producing quarter in the last two years. One point for Overstock.

Digging deeper, I looked at the last four quarters with regard to inventory. Inventory at Overstock has been on a constant rise. That also sounds good for a company that depends upon sales of liquidated assets. However, a rise in inventory might also be a sign that Overstock has products that can't be moved. Which is it? Well, over the last four quarters, total assets have decreased by 44%, but if one backs out inventory, total assets have decreased 65% over the last four quarters. By comparison, Amazons total assets have increased 63% over the last four quarters, increasing 59% when backing out inventory. WOW! Amazon has got something right that Overstock is missing. One point against Overstock!

Accounts receivable (defined as “unpaid customer invoices, and any other money owed to you by your customers”) at Overstock has skyrocketed 551% in the past four quarters. I'm not sure how this is a good thing when working with companies that are anxious to liquidate assets. Why are there so many unpaid customer invoices, and what is that relationship to growing inventory? Uh…is that one point against or minus one point against (and minus a minus is a positive, right?)

Looking at the Balance Sheet for the trailing four quarters, short-term investments has been on a stead decline, to the tune of 16.5%. By comparison, Amazon has increased its short-term investments by 59% during the same time frame. Net receivables for Overstock saw quite a jump in the third quarter of '05, but then leveled off again last quarter. By comparison, Amazon is seeing consistent growth in its net receivables. That is a point against Overstock!

Looking more closely at the core nature of Overstocks business, I can see how getting better margins in closeout products can be an excellent revenue stream. Simply because a certain product is closeout (e.g. can't be sold for one reason or another) in one location doesn't necessitate that the product is out of favor in other areas; however, this is always the possibility. As the goes on to read, “Style, color, or model changes quickly turn inventory into closeout merchandise.” What happens if Overstock gets overstocked with products it can't turnaround? Well, the first thing we'd see is a growing amount of inventory…and the second thing we might see is a growing number of unpaid accounts. Humm…..

Another concern is the changing nature of the “fulfillment partner relations.” Starting this past year, Overstock became “primary obligor for the majority of [fulfillment partner] transactions, and we assume the risk of loss on the returned items.” What this means is that any item returned, goes directly to Overstock, regardless of who shipped it, and Overstock assumes that liability. While this might remain a minor expense, the very fact that returns often are due to defect or damage leaves Overstock holding the bag on all potential losses in this area.

First Quarter 2006
So here's what I'm looking for in the coming first quarter report. First, I want to see less inventory or, at least, a leveling off of the inventory on hand. Secondly, I want to see a reduction in accounts receivables. Third, I want to see increase of profit from direct revenue streams.

What I don't really give a rip about is how many naked shorts there are out there, and how much Overstock float is never fulfilled. I want to know that this is a business that is going to continue growing at its core…and right now I'm pretty skeptical. So Overstock, if you are reading, please don't disappoint. Show me that the fast times at Overstock High aren't a fading memory of 2004, or else I'm booting you from my watch list to make room for someone else….

…like Amazon!

Netflix Needs…Blockbuster?

2005-10-27T14:55:00.000-07:00

Competition proves competency. In college, I was running the track one day when the football team was out practicing. After about 3 miles, the coach yelled over, “Do you play football?” He was trying to recruit me, but I knew something he didn't: I wasn't fast, and distance doesn't mean much in a sport that usually runs on a 10 sec / 25 sec cycle. Certainly he would have found that out if he had given me the 100 meter pitted against his average-speed players. In short, competition proves competency.

So Mr. Market is down on Netflix again (“Overvalued Again,” scream some!). Why? Well, because it's kind of out there running alone. And when that happens, things start to look easy. And when things look easy, they are easy to take away and therefore, these screamers rationalize, we should be down on Netflix.

So, I say again, Netflix needs Blockbuster, or Amazon, or some other DVD-by-mail option to give Mr. Market a view of the art and skill of Netflix's business model. We need these second-rate runners to try the 1500 meter against Netflix. We need them to try…and fail, and try again, only to fail again because just as over competition can ruin the prospects of an emerging company (impacting its intrinsic value) so under competition can ruin its prospects for gain (impacting its potential for gain).

At least, it can ruin its prospects for gain...in the short term. That's where long term Buy-and-Hold comes in. Folks, this isn't the 100 meter; this is the Boston Marathon in which the blazing tight-end first out of the blocks isn't likely going to be the even-stride runner who finishes the marathon in the best time.

But, one has to ask: Is it possible for there to be so much threat for prospective competition (in the on-again times; aka Blockbuster) and so much lack of comparison (in the off-again times; aka Nobody!) that the market stays down on Netflix just long and hard enough for some new, Rule Breaking, emerging model to impact delivery of entertainment to consumers at a rate comparable to the DVD-by-mail model such that Netflix never sees full valuation?

I'm not counting on it, but I believe that Mr. Market is so fickle that anything possible. So, I'm watching carefully, Netflix. I love you a lot but we aren't married. Remember, it isn't just how well you perform, or just how well you perform against others, but also how well you show that performance off to the skeptical shorts and analytical screamers looking to make it big on your eventual drop.

Still, I remain more optimistic than worried that the eventual market growth that Netflix demonstrates will create further “on-again” competition which will in turn simply show the underlying, stellar performance of Netflix, resulting in another nice run (up in value).

I only hope it doesn't happen before I'm able to pick up more shares.

Cumulative I’s result in Corporate Ayes

2005-09-26T14:52:00.000-07:00

Natural disasters. Terrorists activity. Wars and international turmoil aboard. Poverty and the growing gap between right and poor. Environmental neglect amidst decreasing natural resources. Population increases. Health care concerns. Cost of living increases. Bioengineering. Pay decreases. Bankruptcy. Government subsidies . Increasing national debt and an ever widening trade deficit. Corporate scandal. Liberal banking policies. Progressive welfare. Housing bubbles. Gasoline shortages. Monetary regulations. These are just a few of the factors that impact the condition of our economy, society, and culture through constantly changing realities.

The list could go on and would, beyond comprehension, were we to attempt to list all the uncertain factors in an uncertain future. We attempt to read the signs, determine which stock(s) or markets will benefit or be least hurt by changes in one or more of these factors. Will the next Hurricane drive up prices further, while hurting overall Gross Domestic Product? What about inflation or rising interest rates? If we are lucky, we guess right. If not….

But we fail to take into consideration one major influence in this process: YOU (as the epitome of the individual-I. We are rational, cognitive beings endowed—either by the grace of God or the luck of evolution—with the power of secondary causation. There is never a case in which our appropriation of information has not effect. Stated positively: you respond and become a factor in the determination of outcome. At the end of the trade day, for example, whether 100 shares traded or 1,000,000, if you bought or sold that you, you influenced that trading environment.

We love to tell the stories of two workers who built Home Depot, or Little Sam (Walton) building the Wal-Mart empire. We talk about them become the cumulative results of every small, individual action of their life demonstrate that there is power in the individual-I. But at the same time, we are less mindful of how our small actions (or inactions) equally affect tomorrow.

We are never merely respondents, like some RNA sequence. Rather, we have been dignified with purpose, significance and power. WE can be part of the herd or chose not to be, but either way we impact the outcome. Even within the herd, it’s the individual that turns and directs it.

A raindrop seems insignificant in a flood; so does one dollar in the bank. But aren’t we those who believe in the power of multiplication, whether of dividends or moral action?
Let us remember: proper analysis will still result in negative consequences so long as we fail to consider that what we do matters. Yes, you: Little you and little me.

A physics teacher once had 50 students stand around a pool of water. At the center of the pool was a boat. The goal was to get the boat to the edge of the pool; each student could only use one finger to splash the water up and down. It was a study in sine waves and how noise travels in waves and can cancel out other noise. It is also a study in the cumulative effects of a thousand tiny actions.

I watched Lone Star drop from $33 to $24 over the past few months. It hit $24.04 on Thursday. I thought about buying but didn’t3. Yester it rose to nearly $27.50. Who made that happen? Who decided that it was time to go back up? Every single buyer who jumped in and bought even one share helped push that boat to a different spot through the tiny actions of his one finger in the economic pool.

So, will the housing bubble burst and if so, how much? Will inflation grow or remain the same? Will undervalued stocks soar or keep dropping? Will the US automobile companies turn around? Will Wal-Mart show 8% growth this year? Will Netflix drop to $9 again? Or ask any other question that’s been bugging you and I assure you that the answer is not simply found in a 10Q or news release, but is found in the orchestration of events that results when thousands of individuals appropriate the consequences of what is read, and reacts to it determining the future.

In short, the Corporate “Ayes” are nothing more than the accumulation of individual-I’s. I don’t know what will happen. I can read the reports as well as you can. I do know this: the future isn’t simply made by me reading the reports and reacting, but also by whether you and I read the reports and how you react and how I react and how a thousand other I’s react, creating the corporate ayes through the individual I’s. I guess then the one predictable reality is that either way you look at it, the Ayes/I’s have it.

Once Upon an Ebay…

2005-09-16T14:50:00.000-07:00

Once upon a time…my next door neighbor spent all Friday afternoon setting up tables and labeling items at 25 cents each in hopes that the old axiom, “One man’s trash is another man’s treasure” would compute into a gain of some $25. At six hours time (2 to set up, 3 to sell, and 1 to clean up), that amounts to about $4.16 per hour. But for a Garage Sale in the heat of summer, 1985, that’s not too bad.

But garage (and garbage) sales changed with the birth of Ebay, and that’s the story I want to discuss. Used to be, you might have a glass bell you knew to be worth at least $50, but that didn’t amount to much if the nearest bell buyer was 800 miles away in Omaha, NE. So the stuff we sold in garage sales was the junk: the stuff we just couldn’t justify putting in the trash, the stuff that someone must want. But then Ebay became the world “garage sale” linking buyers and sellers. Suddenly, I could get $10 for the comic book that I knew was worth $12 but only paid $1 for ten years earlier. In stock terms, that’s a 10 Bagger.

I started internet auctioning in 1997 through Yahoo! Auctions and cleared some 250 auctions before migrating over to ebay.com in 2000. Since that time, I’ve bought and sold (mostly sold) nearly 500 items, netting about $1400 in 2003 alone (of which every bit went to food and diapers). My first 100 auctions were childhood toys and comics. But soon, I began to get the feel for newer items that were marked on sale at Wal-Mart but weren’t available nationwide. So the next 500 auctions were a mixed bag of childhood belongings, garage-sale treasures, and new items.

But Ebay has been too successful. Here’s what I mean: in the old days, my neighbor guessed her old Charlie Brown lunchbox was worth $1.50 and asked $2 in hopes of getting $1. Then Ebay came and she now learns that her Charlie Brown lunchbox is worth $5 and gladly accepts $4 for it. But Ebay brings up as many buyers as it does sellers. Suddenly, two hundred 25-year old lunchboxes are available at Ebay, all in better condition than my neighbor’s, and they are all selling for $3. Now, my neighbor can’t get $4 for hers on Ebay, but neither can she ask $2 in a garage-sale when most her garage-sale shoppers also know that they can get a nicer copy at Ebay for half-again as much (plus shipping). Prior to Ebay, there was no way of gauging the supply or demand of the Charlie Brown lunchbox. Now, it is often all to well known.

Like any good novelty, Ebay created a frenzy. Dozens of people who never wanted a Charlie Brown lunchbox suddenly realized they could get one for $4. And the price went up, and up, and up, and….you get the picture. But the frenzy is over. Most Ebayers know that if they wait just long enough, they are likely to get the item they want at a discount-to-value ratio. Sure, there are little bursts of excitement, like what surrounded the newest Star Wars figures when they were first released. Now, just about all of them can be gotten at discounts to what you’ll find at Wal-Mart. In short, sellers can’t ask as much; and margins decrease.

Isn’t Ebay positioned for success? If you mean by that the hundreds of “small time” Mom and Pop shops…NO, it isn’t. Why? The internet does nationally what Wal-Mart does locally: equal prices. Ben Franklin had to stop selling microwaves at $500 when Wal-Mart came to town. How much more now that Ebay has come to town? The local antique map store in Atlanta closed down when the internet hit; on his margins, he couldn’t compete with the prices that the guy in New York was asking. So while more people are starting small businesses, and are making some fair money off them, in the end Ebay will become an expense that is cutting too much out of already fine margins of family businesses.

My predictions: volume of sales and listings will continue to decrease for Ebay over the next few years. Competition from the online marketplace offered through Yahoo! or Buy.com, or Amazon, or just about anybody, together with the decreasing margin between wholesale and retail (during the same time frame)—resulting in a decrease in listings—will continue to chip away at Ebay’s profits. The only way I can see Ebay getting a princess out of this frog is by increasing international posts and sales.

Ebay will either shrink or become something it isn’t, which is anything other than an online business house. Am I bearish on Ebay? Yep, but then don’t most fairy tales have a monster in them somewhere. The only question is, Who is the real monster: Ebay or me?

Is this stock a Marvel?

2005-09-13T14:49:00.000-07:00

As a past owner of Marvel Enterprises (MVL) stock and a current owner of some 100 Marvel classic comics—down from about 1500 (issues) at my high—I am still very interested in seeing what will happen to this multi-bagger turned south. Marvel has announced that it is entering the movie making business. How should I (as a stock watcher) and you (as either a stock watcher or holder) respond? My advice: wait.

Marvel is, in terms of college football, about to enter the third quarter. First Quarter: they’ve been around a long time and (in the past few years) have gotten some recognition out of all the pennies and quarters that kids like me dropped on current and past issues of X-Men, Daredevil, and G.I. Joe. They moved into the second quarter with the release of some hit movies like Spiderman and X-Men. But now, it’s talking about making movies themselves, and that has me concerned. That’s like apples and oranges: Marvel can write a good story and get it out on paper with some fairly good art (John Byrne was one of my favorites, and Todd McFarlane); but to date, it has been hit-and-miss with the movies. Is that because they aren’t controlling the storyline well enough? Is it because the characters might “ker-pow” great on the page but “ker-plunk” on the screen? I’m thinking that it’s just too early to tell.

Here’s what I’m looking for: If the first slew of Marvel-title, self-releases are caught up in snags, delays, and shrouds of mystery—much as we saw with Terminator III several years ago—or “rights” issues as we’ve seen with Sony and Stan Lee (and there are always some kind of rights issues when there’s money to be made), then there’s a good chance that I won’t be clicking the buy button. I also won’t be buying if the “blockbuster” releases include Howard the Duck, Elf Quest, Groo the Wanderer, or Alpha Flight (though a Canadian super hero team has a lot going for it against an misguided elf, a whacked out duck, and a traveling swordsman).

On the contrary, if we being to see the likes of the Avengers, Captain America, and maybe solo films with Wolverine that seem to carry the same punch as the comics, then I might be willing to check back in to Marvel. It isn’t about intrinsic value: it’s about what Marvel can do with the players currently on their team. So, Marvel Enterprises, if you are reading, show me you have the creative power, the marketing prowess, and a finger on the ever changing pulse of American entertainment and I’ll buy. Until then, I’m going to sit back, re-read my classic comics, and enjoy the half-game movie from the sidelines.

Why Coinstar will Shine for Years to Come?

2005-09-07T14:49:00.000-07:00

To mark the release of the Sacagawea Dollar a few years back, dueling newspaper writers offered their two-cents worth on the issue of coin monies. The pro-coin writer insisted that the masses love coin currency; after all, look at how Americans are spending more coins than ever. The con-coin writer argued a different angle: people are spending coins because they hate them and want to get rid of them; hence, the US Government should stop throwing away money as coins.

A penny for my thoughts: it doesn’t really matter which argument is better because either way the Federal Government makes billions in the sale of coins: over $1 billion in 1999, and $2.3 billion in 2000, and that is just on the sale of numismatic products alone. But even $2.3 billion is a coin in the bucket compared to the hundreds of billions in US coin currency outstanding, either because it is lost, swallowed by children, stashed away in socks, or just collecting dust in mason jars around the nation.

For example, how many of the Sacagawea Dollars will ever see circulation again. People have boxed these up by the hundreds in hope they will someday be worth something (and they will be worth something: $1 a year and declining annual with inflation). These interest free loans from you and me to Uncle Sam are the reason why coin money, while it has outlived its general usefulness, will be around for some time.

This means that coins aren’t going anywhere, except maybe back into our pockets, our washing machines, our sofa cracks, and occasionally our children! Oh, and into Coinstar’s (NASDAQ: CSTR) machines. Do people love coins? Sure, just enough to get rid of them (at a 8% fee) at the local Coinstar machine. Do I own Coinstar? No. Would I buy Coinstar? Maybe, if I had some lose change, but whether I buy it or not, I’m impressed by the way this company turns the common clink-clink-clink of pocket change into a resounding CHA-CHING, CHA-CHING, CHA-CHING on the bottom line. But then again, that’s just my two-cent’s worth.

Singing An Off-Key Song

2005-01-28T14:45:00.000-08:00

My brother and I used to play a game: if I could hum, whistle, or sing a song and get him to start humming, whistling, or singing too, he owed me a nickel; and vice versa. Well, it seems that Delta knows how to play that game as well.

How’s that tune go? You know the one where a struggling company somehow comes up with a money-making venture based off existing ventures. Think, Delta Song. Here is an “airline within an airline” that offers low-cost flights into “leisure markets through a combination of larger aircraft, high frequency flights, advanced in-flight entertainment technology and innovative product offerings.” How’s that? If Delta is bleeding money—in excess of $24 a share for the first 9 months of 2004—how can it actually turn a profit from Song while adding such perks as in-flight entertainment and innovative product offerings?

Well, we can rule out the cost of the planes, including their maintenance and upkeep; many of the Song planes are directly from the existing Delta fleet. We can rule out fuel as well, since a plane burns the same amount regardless of the name it flies under. So where do all the savings come in? Some will say frequency and efficiency of flights. If that’s all it takes, then Delta should be in humming happily along any day now.

Sadly, there are other notes out of key. Think unions. Throughout Delta’s last 10Q, the signs are everywhere. At one point the report outright states, “Our pilot cost structure is significantly higher than that of our competitors and must be reduced in order for us to compete effectively.” That tune should sound familiar. Think United Airlines and the incredible costs of their unionized labor force that helped drive UAL into bankruptcy, and may serve to keep them there, according to recent reports.

There may be a number of reasons why Song is making money, but then why isn’t Delta implementing these changes company wide? Because it’s a tune that won’t be sung by the 18% unionized workers within the mother company (comprised mostly if not completely of pilots). Even the 32.5% reduction to base pay rates for pilots (as of December1, 2004) may not offer enough relief, as the report goes on to say, hinting at possible Chapter 11.

So what do you do? Well, if you want to sing an air-transportation tune, consider JetBlue. Whatever you do, just don’t get let Delta catch you singing their Song. It’s way off key, and it guaranteed to cost you more than a nickel.