I always imagined that I’d be a subscriber to a print edition of my daily newspaper long after it passed from normal to weird to quaint. I don’t have milk or ice delivered, nor did I use cloth diapers, but the experience of retrieving the morning paper from my front steps and the feel of the paper in my hands as I read it always seemed far superior to the pale glow of my computer screen. I thought our love would last forever; I certainly didn’t stray.

My local paper, desperate to increase revenue, began to charge a premium for home delivery rather than, as had long been industry practice, offer a discount. I decided I could just as easily pick up the paper myself, but only on days I had time to read it, so I canceled. Periodically, I’d resubscribe when I received offers of 75% off cover price for 13 or 26 weeks, being careful to cancel when the special rate expired. Eventually, I found I was buying the paper less and less often and then, not at all.

Even after this, I continued to subscribe to Barron’s, excitedly bringing it in and reading it each weekend. I always turned first to Alan Abelson’s weekly column, and was never disappointed by his wit and insight. This love too began to fade. It began when I began to receive renewal notices offering me a “special” rate. Special apparently meant “twice as much as it would cost on our website and without online access.”

Last week, the Bancroft family made much noise opposing News Corp.’s(NWS) bid for Dow Jones(DJ), publisher of Barron’s and the Wall Street Journal. Despite the fact that the bid was 60% above the previous close,the deal appears dead on concerns that new ownership would threaten the paper’s integrity, independence and quality. Judging by an article appearing in this weekend’s Barron’s, a downward slide in quality has already begun.

I was quite dismayed when I began reading the article in this week’s Barron’s on Delta Airlines(DAL)’s prospects as it emerges from bankruptcy. I immediately noticed something amiss. Every ticker symbol in the article was wrong. As were multiple names. As were multiple words. PlaneBuzz has a copy of the article and a list of mistakes here. PlaneBuzz further reported Barron’s response to complaints:

“The use of an automated spellchecker resulted in a number of errors in last week’s feature story about Delta Airlines. The company’s chief executive is Gerald Grinstein, and an analyst cited was Ray Neidl of Calyon Securities. Delta’s ticker symbol is DAL, US Airways’ is LCC. American Airlines’ parent is AMR, with the ticker AMR. A variety of other words also were garbled. A fully corrected version of the story is available for free on Barron’s Online, at www.barrons.com .”

Old media claims an advantage over blogs in terms of quality, but apparently, no human looks at the final version of articles appearing in this paper. I’ll probably continue to read Barron’s for now, and may even subscribe to a daily newspaper again. But I now see a day in the future when I won’t. And if the newspaper has lost even me, its irrelevancy is not far off. Maybe they can cut a deal with the milkman.

In Warren Buffett’s 2006 annual letter to Berkshire Hathaway shareholders, released today, he comments on two different struggling industries. One, he believes, will once again see great days. The other, is doomed to growing irrelevance and shrinking profitability.

Though Buffett was rumored to be a buyer of newspapers, perhaps by desperate sellers who hoped he might be, he makes clear that he sees a grim future for the industry. Buffett writes:

Not all of our businesses are destined to increase profits. When an industry’s underlying
economics are crumbling, talented management may slow the rate of decline. Eventually, though,
eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago,
“If you want to get a reputation as a good businessman, be sure to get into a good business.”) And
fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits
of our Buffalo News to decline. The skid will almost certainly continue.

Buffett describes the factors that served to make newspapers huge cash cows for many years and describes the irreversible changes that are rocking the industry:

Now, however, almost all newspaper owners realize that they are constantly losing ground in the
battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had
come along first, newspapers as we know them probably would never have existed.

Finally, he suggests who the likely buyers for newspapers are:

For a local resident, ownership of a city’s paper, like ownership of a sports team, still produces
instant prominence. With it typically comes power and influence. These are ruboffs that appeal to
many people with money. Beyond that, civic-minded, wealthy individuals may feel that local
ownership will serve their community well. That’s why Peter Kiewit bought the Omaha paper
more than 40 years ago.
We are likely therefore to see non-economic individual buyers of newspapers emerge, just as we
have seen such buyers acquire major sports franchises. Aspiring press lords should be careful,
however: There’s no rule that says a newspaper’s revenues can’t fall below its expenses and that
losses can’t mushroom. Fixed costs are high in the newspaper business, and that’s bad news when
unit volume heads south. As the importance of newspapers diminishes, moreover, the “psychic”
value of possessing one will wane, whereas owning a sports franchise will likely retain its cachet.

Newspapers, Buffett believes, are to be reduced to mere trophies, symbols of the great wealth of their owners. But like the great works of Ozymandias, in time, nothing will be left but remnants of shattered printing presses.

Later in the letter, Buffett speaks about HomeServices of America, the second largest real estate broker in the U.S. With the weakening of the U.S. real estate market, HomeServices’ revenue and earnings dropped 9% and 50%, respectively, despite having made several acquisitions. Despite these negative trends, he remains optimistic:

Nevertheless, we will be seeking to purchase additional brokerage operations. A decade from now, HomeServices will almost certainly be much larger.

The difference between the newspaper industry and the real estate brokerage industry is a lesson at the core of value investing. Newspapers represent a dreaded value trap- cheap this year, cheaper next year, and still cheaper the year after. Buffett experienced value traps firsthand with Berkshire’s textile business. On the other hand, real estate brokers are cheap based on short term expectations, but will, he believes, recover and grow once again. It is often unclear which group cheap stocks fall into. The ability to properly discern is indeed the hallmark of successful investors.

Matrixx Initiatives(MTXX) believes that its Zicam line of homeopathic cold remedies will relieve your cold symptoms. Jove Partners believes that it knows how to solve Matrixx’s own ailments: a sale of the company to a strategic investor.

Jove filed a 13D today, disclosing a 5.1% ownership stake and declaring that

The Reporting Persons appreciate the job that management has done and is
doing to build the Zicam brand. However, they believe that the value created to
date has not been appropriately recognized by the market and will not be fully
realizable as long as Zicam remains a stand-alone brand. In particular, the
Reporting Persons believe that the Issuer’s profit margins have been depressed
and should normalize over the next several years. The Reporting Persons believe
that this normalization could be meaningfully enhanced if the Issuer were
acquired by a strategic investor.

Matrixx fell far short of estimates for 2006, blaming a late cold season. Jove’s thesis, that Zicam would be a more profitable product as part of a larger company rings true. The difficulty of competing for pharmacy shelf space with behemoths like Johnson & Johnson(JNJ), which recently expanded its girth with its purchase of Pfizer’s(PFE) consumer products division, is great. Improvements in distribution and manufacturing from being part of a larger company could be substantial as well.

One potential concern are claims that Zicam has caused users to lose their sense of smell. The company has already settled several lawsuits, but it is unclear what potential future exposure might be. This would clearly be a concern of a potential buyer.

I previously noted Jove when they filed a 13D on Lifetime Brands(LCUT) and some background information on them can be found in that post.

Jove’s filing led to a 12% jump in Matrixx’s shares today(2/22) as investors seem to believe that the company is now likely to be acquired above the current price. With no debt, and a market cap minus cash of less than two times sales, Matrixx may indeed be a good fit for buyer who can grow sales and margins.

Disclosure: I hold no postion in MTXX

Recently, Jove Partners disclosed a 5.2% stake in Lifetime Brands(LCUT). In its 13D filing, Jove reported that:

The Reporting Persons believe that the Issuer would benefit from additional marketing and industry expertise on its board of directors, and have suggested
individuals for consideration by the board.

Lifetime CEO Jeffrey Siegel was quoted as saying “Jove Partners is a [Lifetime Brands] shareholder who has been advising us at our request. They have tremendous expertise in e-commerce.”

Who is Jove Partners and what particular expertise might they bring to the table?

A search of SEC filings reveals no other filings by Jove Partners. However, reading the 13D reveals that Joel Tomas Citron is the managing member of Jove Partners. Mr. Citron is the Chairman of Oxigene(OXGN). More relevant, he was Chairman of Provide Commerce, parent company of ProFlowers, before its sale to Liberty Media. The similarly named Jovian Holdings was a major holder of Provide Commerce, with a 29% stake at the time of the acquisition. Citron was a director of Jovian Holdings as were Jared Polis, who was a principal of Blue Mountain Arts, guiding it to a $900 million buyout by Excite, and Arthur Laffer, famous for the Laffer Curve.

Based on Siegel’s quote and the experience of the three, I think it is likely that the board candidate(s) proposed include some combination of Citron, Polis and Laffer. Lifetime has significantly stepped up their online presence, adding products from their other brands to pfaltzgraff.com, and the background that Jove Partners has in ecommerce could be helpful in growing direct sales to be a significant part of Lifetime’s business.

Back in September, I wrote about Lifetime Brands. At the time, the stock was trading at $20.10 and the company had projected 2006 EPS of $1.50-$1.70. The company lowered that to $1.45-$1.55 with the release of 3rd quarter earnings, and on December 21, lowered it further to $1.10-$1.15, below 2005 earnings of $1.23. Though the company has not yet released 2006 numbers, on January 25, it stated that it expected 2007 EPS of $1.40-$1.70. The end result of all of this is that on February 15, the stock closed at 19.54, not far from where it was in September.

The particular problems that Lifetime has faced have been largely related to its direct to consumer business. The experience and expertise that Jove brings could indeed be helpful in helping the company resolve these problems and get back on the path to consistent, strong growth. In the meantime, I believe the shares remain a good value.

Disclosure: I hold a position in LCUT

You may recall my December post regarding Nuvelo(NUVO). The company reported that a pivotal trial for its lead compound, alfimeprase, had failed to meet its endpoints. On the release of this news, the stock fell 80%, and has continued to float downwards since.

Nuvelo began 2006 trading at $8.11 and quickly jumped above $17 when the company partnered with Bayer on alfimeprase. After December’s failed trial results, the stock closed the year at $4 and by February 7, has dropped to $3.33. For shareholders and the company, not a particularly good year.

The Board Of Directors, or at least the Compensation Committee appears to disagree. In an 8-K filed last week, the company reports:

On January 29, 2007, the Compensation Committee (the “Committee”) of the Board of Directors of Nuvelo, Inc. approved the bonuses for Nuvelo’s named executive officers (as defined in Item 402(a)(3) of Regulation S-K) for fiscal year 2006. The bonuses awarded are weighted and based upon internal targets as determined by the Committee. For the 2006 fiscal year, the target bonus for Nuvelo’s Chief Executive Officer was 40% of his base salary, and for officers at the senior vice president level the target bonus was 35% of their base. The Committee is vested with the authority and discretion to increase or decrease the size of the bonus pool and actual bonus amounts based on its review of each individual’s performance and achievement of corporate goals. The Committee determined that for the 2006 fiscal year the bonus pool would be funded at 92% of its target level and the named executive officers would be awarded bonuses at between 100% and 140% of their target levels, after taking into account the 92% funding of the bonus pool.

The 2006 bonuses to Nuvelo’s named executive officers are as follows:

Ted W. Love, M.D., Chairman and Chief Executive Officer: $289,248
Michael D. Levy, M.D., Senior Vice President, Research and Development: $184,828
H. Ward Wolff, Senior Vice President, Finance, and Chief Financial Officer: $50,313
Lee Bendekgey, Senior Vice President and General Counsel: $126,449

Now, I understand that the company’s management and employees worked hard, and that sometimes the science just doesn’t work. But it seems rather unseemly for the compensation committee to conduct its review regarding the “achievement of corporate goals” in a year which saw the stock drop 50% and in which the value of the company’s pipeline evaporated and determine that top executives are entitled to bonuses of 100%-140% of their target levels.

One can only imagine what the bonuses would have been had the trial been successful.

Disclosure: I hold a position in NUVO

Charlie Munger, vice-chairman of Berkshire Hathaway and CEO of Wesco Financial recently spoke with the Los Angeles Times on the issue of executive compensation. As always, the 83 year old Munger provided colorful commentary.

Munger derided compensation consultants, declaring that “I have always said that prostitution would be a step up for these people.” Munger pointed out that the problem was not that CEOs were evil, but that “… envy-driven compensation mania … brings out the abosulte worst in good people.”

Munger points out that legislation is unlikely to fix the problem, citing a 1993 law that aimed to curb compensation above $1 million. He concedes that some CEOs are worth huge packages, but that companies with less talented CEOs are forced to match high pay packages or admit “that the company down the street has a remarkable CEO, but we have a mediocre klutz.”

What should be done to solve this problem? Munger is not afraid to conclude that it my be unsolvable:

Just because something is a serious problem doesn’t mean that you can fix it. There’s an element of tragedy in this because some very good people are acting in some very bad ways. But things are seldom so bad that you couldn’t make them worse by a dumb intervention.

Munger goes on to say that the events of the last several years have gone some way in eliminating “the garden variety of corporate fraud,” but concludes “In my opinion, not enough executives have gone to jail.”

On November 22, after BJ’s(BJ) CEO Mike Wedge abruptly resigned and the stock jumped, I wrote expressing my concerns:

Mr. Wedge’s departure raises troubling questions about the company’s performance. Same store sales have been lackluster of late, but last week’s earnings announcement was ahead of expectations and management expressed optimism regarding Q4. I have a sinking feeling that another shoe may drop before a buyer comes along. Given the 25% runup in the past 2 months, now looks like a good time to follow Mr. Wedge out the door and say goodbye to BJ’s

Today, BJ’s dramatically lowered its guidance for the fourth quarter:

Based on management’s current forecast for fourth quarter sales and margin results and the establishment of the various reserves referred to above, the Company has lowered its earnings guidance for the fourth quarter of 2006 to a range of $.17 to $.25 per diluted share. The Company’s previous guidance for the fourth quarter, issued on November 14, 2006, was for diluted earnings per share of $.83 to $.87.

Eight days after the company provided guidance on November 14, the CEO resigned. Though we can only speculate, it seems reasonable to believe that it was already clear at that point that guidance would not be met. So we now have a pretty good idea of why Mr. Wedge left. The only question is, how many other shoes are in BJ’s closet?

Though the stock closed down 4% today(1/4/06) to $30.55, it still trades above where it was when Wedge resigned. BJ’s continued profitability, valuable real estate and strong balance sheet will continue to place a floor on share prices, but I believe it is below current levels. I sold my BJ’s shares on 11/22 and will continue to stay on the sidelines.
Disclosure: I have no position in BJ

The company with the world’s most expensive stock announced Friday that it was purchasing a company that sells nothing for more than 4 cents. While the price per item may be low, they make it up in volume, hitting $990 million in sales in 2005 and projecting $1.2 billion in 2006. Profit numbers were not available nor was the purchase price.

The story of Berkshire’s(BRKA,BRKB) purchase of TTI reads like many of the company’s recent acquistions. Paul Andrews, who founded the company in 1971 after being laid off by General Dynamics, decided to sell this summer and his instant first choice was Berkshire Hathaway. Though he viewed it as a long shot, he sent word and information to Buffett through John Roach who had previously sold Justin Industries to Berkshire Hathaway.

According to Dallas-Fort Worth Star Telegram

Buffett said it took him about an hour to read through the materials before he decided he wanted to buy the company. But first he wanted to meet Andrews.

Buffett and Andrews later met for 5 hours and cemented a deal.

Though Buffett himself has conceded that the huge amount of money chasing deals has made them hard to find, this deal illustrates some of the competitive advantages Berkshire continues to enjoy.

First, Berkshire offers the promise that the business will continue and that they will continue to have a role. In fact, Buffett expects it. For owners who have built their businesses up from nothing and don’t want to see them absorbed into a division of a faceless corporation or worse, leveraged up and sold to the public, this can be very attractive. As Buffett puts it:

We don’t marry people to change them. It doesn’t work very well in business, and it doesn’t work very well in life.

Second, Buffett uses no investment bankers. He quickly runs his numbers, makes a decision and makes an offer. There is no army of analysts descending, no months of paralysis as decisions are made.

Third, the aura around Berkshire and Buffett is a draw. The idea of being associated with them forms part of the attraction for potential sellers.

Without numbers, it’s hard to determine what impact the deal might have on Berkshire. No matter how profitable the company is, $1 billion worth of sales isn’t going to have a material effect. But if the rate of return can exceed that on the company’s huge cash balance and the company can continue to deals like this, well then as Senator Dirksen was alleged to have said, “A billion here, a billion there, and pretty soon you’re talking real money.”

Disclosure: I own shares of Berkshire Hathaway

Maybe I was too harsh on Brian Hunter last week. This morning, I was greeted with a jolt of my own. One of my positions was down 80% in a single day. Fortunately for me, this isn’t the prelude to a death spiral. There’s no margin call to be answered. Such is the power of diversifying risk, especially when the underlying investments are as risky as development stage biotech.

Nuvelo(NUVO) is down over 80% today to around $3.90, after it announced that two separate trials involving its lead compound, alfimeprase failed to meet their primary endpoints. Nuvelo and its partner Bayer also suspended enrollment in two additional ongoing trials while they “examine the data.” While the company has not yet fully conceded that this product is dead, investors are treating it as such, and past experience shows they are probably right.

After today’s move, the company is valued at not much more than cash on hand. With a market cap of $200 million and $150 million in cash, the market has taken a rather dim view of the company’s prospects. The company has two other drugs in the clinic and at least one other candidate poised to progress to the clinic.

All indications are that management did all the right things. Earlier clinical results were sufficient to land a large partnership with Bayer. Trial design seemed to be meticulous. Though results in one of the 2 trials rose to the level of statistical significance they were not good enough to meet FDA standards for approval. The company has hypothesized that catheter placement has a greater effect on blood flow than was anticipated and resulted in the drug being flushed away from the clot relatively quickly.

Whatever the problem, the events highlight the risks of investing in these stocks. There is no such thing as a “slam dunk” in developing drugs. I was fortunate enoguh to buy NUVO at $1.95 and sell some above $16, but it’s still painful to watch anything go down 80% in one day. At this point, much of the event risk has been eliminated, and I’ll continue to hold NUVO. In fact, if it drifts down further towards its cash level, I’ll add it to my basket of biotech(which reminds me, I really need to write up the rest of the basket). Most importantly, it’s a sobering reminder: as these stocks shoot upward, sell some. Monrings like this underscore that point all too clearly.

Disclosure: I hold a position in NUVO

Bloomberg has posted a piece which explains in wonderful detail the events leading up to the spectacular implosion of Amaranth several months ago. In many ways, it reads like a shorter version of When Genius Failed, Roger Lowenstein’s excellent account of the collapse of Long Term Capital Management.
I wrote earlier about my belief that the stellar performance of many hedge fund managers was the product of luck, which was bound to run out, and not skill which could be expected to persist:

There are 9000 hedge funds out there, and most of them are run by people who have had good track records- but how many of these track records reflect skill(and are reproducible), and how many reflect luck(which will run out)? Hedge fund managers are self-selected from those who have had success, but I suspect that many of them aren’t any more prescient than our scammer. They’re the coin flippers who’ve gotten 10 heads in a row, and given the huge amounts of leverage in use, I think we will continue to see additional falls from grace.

Much of this is a direct result of compensation policies which incentivize traders to take huge risks. Huge bonuses are to be had for big returns which don’t need to be returned upon future bad performance, but traders don’t share in losses. Which brings me to the most incredible part of the Bloomberg piece.

Brian Hunter, the trader responsible for the positions that brought Amaranth down made 15% of the profits from his trades. In 2005, he took home $75 million. What’s he doing now? Bloomberg reports:

In Calgary, Hunter is still building a new home for his family, and people familiar with his plans say he’s talking about getting back to trading. “He will find a way to get involved again,” says former Deutsche Bank colleague Stanziale. “Otherwise, it would be too much intellectual capital wasted to have him on the sidelines.”

Hunter, despite the billions of dollars of losses he caused, still has his $75 million and is building a new house. Worse, the lesson hasn’t been learned. He’s still thought to be so brilliant that if he weren’t trading other people’s money again, at least one person laments the terrible waste of intellectual capital. Might he find future success? Yes, but you’re just as likely to find it betting it all on black at your local roulette table.
P. T. Barnum famously noted that there’s a sucker born every minute. If so, Brian Hunter will have a fertile market from which to draw new investors.