A Real Handicap?

When Mettill Lynch’s search committee interviews potential successors to ex-CEO Stan O'Neal, it probably should inquire about their golf games. Why? There's been a pretty good correlation between financial-industry CEOs' golf scores and stock-mkt performance over the past 3ys.

Co’s headed by good golfers frequently have trailed those led by duffers and non-golfers. O'Neal, for example, is a golf fanatic with a handicap of 9. He lost his job last week after presiding over Merrill’s disastrous foray into subprime mortgages and derivatives that led to an $8bn quarterly charge.

In contrast, Goldman Sachs, led by Lloyd Blankfein, a golfer with a handicap around 30, has become Wall Street's best-managed big firm. (A handicap denotes how many strokes above par a golfer usually shoots. On a typical 18-hole course, par is 72.)

It might cheer Merrill's board to know that Larry Fink, a prime candidate to succeed O'Neal, doesn't golf. Neither does Jamie Dimon, boss of JP Morgan, which weathered this year's financial messes relatively well. And Berkshire Hathaway, headed by a so-so golfer Warren Buffett, has a marvelous long-term record. Buffett's handicap is 20. He doesn't play much anymore and now would be thrilled to shoot his handicap.

Goldman, BlackRock and JPMorgan have done well in the stock market since 2005's end, while Merrill, Washington Mutual and Bear Sterns, all led by good golfers, have been laggards. "Golf takes an enormous amount of time," one CEO says. "If you're too good a golfer, you're spending too much time at it."

O'Neal spent a lot of time on the links from mid-Aug through the end of Sep, according to information posted on a US Golf Association Website that maintains handicaps for nearly 2m golfers across the country, based on information provided by the golfers. O'Neal, a member of four clubs, played 20 times from Aug. 12 through Sept. 30, most of it on weekends.

Bear Stearns CEO James Cayne, meanwhile, drew criticism for taking a helicopter for a round of golf at his New Jersey club during the summer when his co was reeling from the collapse of 2 of its hedge funds.
On the other hand, CEO Dick Fuld of Lehman Brothers and American Express boss Ken Chenault both know their way around fairways and bunkers. Lehman has been a stock-mkt laggard since '05, but it has an extraordinary long-term record. Fuld and Chenault are considered to be among their industry's top CEOs.

Still, the evidence suggests that CEO's who spend too much time on the greens might not produce enough green for their shareholders.

Shorting Cramer

THANKS TO HIS NIGHTLY CNBC SHOW Mad Money, Jim Cramer has become the chief cheerleader for the bull market, or what was the bull market until a few weeks ago. Last spring, he was giddily exhorting the Dow Jones Industrial Average toward 15,000, with no troubles in sight. Earlier this month, as the Dow tumbled in the direction of 13,000, he had an on-air meltdown, complete with screaming, sobs and predictions of financial doom. The clip quickly made the rounds on YouTube. Friday, after the Fed cut the discount rate, he said that the Dow's run to 14,500 had begun. With dramatic pronouncements like that, it's no wonder that more than 100,000 viewers tune in each weeknight for his antic mashup of sound effects, Streetwise advice and stock picks.

It's those stock picks that caught our attention. Cramer, by all accounts, had a stellar career as a hedge-fund manager. And he is held out by CNBC as the guy who can help viewers make big money. But a comprehensive and careful review of his stock picks by Barron's finds that his picks haven't beaten the market. Over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the S&P 500 16%, according to a record of 1,300 of the CNBC star's Buy recommendations compiled by YourMoneyWatch.com, a Website run by a retired stock analyst and loyal Cramer-watcher.

We also looked at a database of Cramer's Mad Money picks maintained by his Website, TheStreet.com. It covers only the past six months, but includes an astounding 3,458 stocks -- Buys mainly, punctuated by some Sells. These picks were flat to down in relation to the market. Count commissions and you would have been much better off in an index fund that simply tracks the market.

When we asked Cramer and CNBC for their own records of Mad Money's stock-picking performance, they had more excuses than a Tour de France cyclist dodging a blood test. They complained that the list from YourMoneyWatch.com contained some stocks from the program's "Lightning Round," in which Cramer gives a quick analysis and a buy or sell decision on stocks phoned in live by viewers. These, they argued, shouldn't count in our tally.

CNBC officials also said that viewers should buy Cramer's picks a week after they're aired. They said that the show is mainly educational, and not just about stock-picking. In the end, they said we should focus only on the tiny universe of stock selections -- about 12 a week -- that Cramer researches the most. And we should do it only for the issues picked this year. CNBC analyzed these stocks, and said that if held for one month, they beat the S&P by 0.8%, or 1.7% after two months. They offered no results for the year-to-date.

We analyzed those stocks ourselves, and, as in all our calculations for this story, relied on Patrick Burns, a statistical-computing expert in London who consults for hedge funds and major investment firms.

It turns out that CNBC did its analysis incorrectly, and that the stocks beat the S&P by 0.4% in one month and 1.2% over two months. CNBC measured the stocks' performance against the average performance of the S&P year-to-date, instead of against the performance of the S&P from the date of each stock pick. Also, it included more than 100 recently recommended stocks that weren't held for the full one- or two-month holding period that CNBC claimed.

More important, the stocks fell short of the S&P by a statistically significant 2.2% through last week.

Our question is: How are viewers supposed to know that they should pay attention only to this subset of stock picks each week and ignore the thousands of others that Cramer makes on his show?

Then there's the day-after-pop phenomenon. Our analysis of Cramer's picks over the past two years, from YourMoneyWatch.com, showed that, on average, the stocks jumped 2% the day after he mentioned them. From there, they usually moved sideways or down for the following 30 trading days (see chart). This offered an opportunity to make money -- 5% to 30% a year -- by selling Cramer's selections short.

Cramer agrees that there is a shorting opportunity in the temporary effect he has on stocks -- a trade that he'd jump on if he still were at a hedge fund. "If you short the bump, you will do well," he said last week. "I've said it on the show many times."

There's no doubt that Cramer is trying diligently to make you money. His advice is generally smart, his knowledge of individual stocks amazingly detailed. But the credible evidence suggests that the telestockmeister's picks aren't beating the market. Did you really expect more from a call-in host who makes 7,000 stock picks a year?

THE 52-YEAR-OLD CRAMER HAS PROVEN HIMSELF a Renaissance man, if you don't mind applying that term to someone who goes on TV donning everything from Rasta wigs to football helmets, and, on a bad day, decapitates bobble-head dolls made in his own likeness. He struck it rich in the heyday of hedge funds, started a successful online media company and put up some of the best financial journalism in print and broadcast. Simultaneously.

He's written several books, including Confessions of a Street Addict, a wonderful memoir of his highs and lows as a trader and entrepreneur. It's peopled with the amazing Old Boy network that Cramer started building during his days as a student at Harvard: New York Gov. Eliot Spitzer, New Republic editor-in-chief Martin Peretz, Microsoft CEO Steve Ballmer. And, it turns out, the screaming, chair-throwing character that Cramer plays on TV is based on the real-life person he was, as he pursued success through any obstacle, including those of his own making. In the memoir, Cramer freely confesses to his screw-ups, as he continues to do on Mad Money. That self-flagellation makes him a lovable protagonist in a modern American success story.

After entering Wall Street as a Goldman Sachs broker, Cramer started his hedge fund in 1987. The market crashed, but he was in cash. His firm, Cramer Berkowitz, went on to rack up 24% annualized returns over the next decade or so, a performance for which Cramer generously shares credit with his former colleague, Jeff Berkowitz, and one of the firm's traders: his then-wife, Karen.

If Mad Money offers unconvincing proof of Cramer's long-term stock-picking prowess, so does his account of his hedge-fund activities. His memoir suggests that some of Cramer Berkowitz's profit came from clever trading. The $300 million fund might execute hundreds of trades a day, some of them a bit gimmicky. Cramer describes how they'd find a stock in which selling had petered out, then build a position. Next, they'd hunt up some bullish news on the company and feed it to sellside analysts and reporters. On the subsequent rise, Cramer could profit by selling out his position. "Buzz merchandising," his book calls it. Smart and effective, but definitely not in the fuddy-duddy style of Graham & Dodd.

In December, Cramer made a video for TheStreet.com describing the ways his hedge fund had used tricky trading techniques. He said hedge funds could pass negative rumors to "bozo" reporters. When the video circulated through Wall Street and caused an uproar. Cramer said that he'd only been talking hypothetically, to blow the whistle on the hedge-fund industry's bad actors.

OF COURSE, CRAMER DIDN'T NEED REPORTERS to get out the story on his stocks. Early on in his hedge-fund career, he pioneered a new kind of participant journalism through his frequent magazine columns and television appearances. Cramer talked to his audience from the playing field, instead of from the distant press box where other financial journalists sat.

In outlets like SmartMoney, he often discussed stocks that his fund owned. That was a good thing, if Cramer imparted valuable information and didn't secretly trade against his recommendations. Over the years, regulators have frisked Cramer's trading records for duplicity. They've always found him clean.

In 1996, Cramer launched TheStreet.com, his own financial-media vehicle. Three years later, the mania for dot-com stocks was epidemic. At their initial offering, shares of TheStreet.com's (TSCM) were priced at $19, but opened at $60. For a short while, Cramer's stake was worth upward of $250 million. Then the dot-com bubble burst, driving the stock below a dollar by 2001.

But the Website survived the shakeout, and the stock now is around $10. TheStreet.com has become a feisty competitor to other online financial news sites -- including those of Dow Jones (DJ), which publishes this magazine and is half-owner of Smart Money. Cramer has always been the site's main draw, but TheStreet.com has employed many other talented editors and reporters.

After retiring from his hedge fund in 2000, Cramer became a full-time journalist, writing for TheStreet.com and New York magazine. But he had the most fun on TV. For years, he'd pitched broadcasters, trying to get his own show. He finally succeeded with CNBC, the financial channel owned by the NBC Universal unit of General Electric (GE); first, with Kudlow & Cramer, and then, in March 2005, with Mad Money. (Dow Jones currently has an agreement to supply content to CNBC).

CNBC's evening schedule had been Desolation Row for years. Mad Money changed that, grabbing viewers with a combination of unequivocal stock picks and slapstick -- a concept that Cramer developed with the help of his nephew and co-writer Cliff Mason, as well as some talented CNBC producers. By cable-television standards, the show has been a hit, with its Nielsen ratings rising every year to a 2007 level of 134,000 homes -- many of them fairly affluent.

In the first part of the show, Cramer typically gives prepared recommendations on one or more stocks. Sometimes, he'll interview the CEO of a company whose stock he then endorses. All the while, he's donning sombreros, shoving toy bears in a meat grinder and sneaking in slyly erudite quips.

Then comes the show's truly distinctive feature: the Lightning Round. With no advance notice, Cramer takes calls from viewers who -- after shouting the obligatory "Booyah!" -- ask him about a stock. Within seconds, Cramer gives a curt Buy or Sell rationale. Then on to the next caller. It's dazzling -- a display of Cramer's freakish ability to remember something about thousands of stocks.

The show's popularity hasn't hurt TheStreet.com. Site traffic, ad sales and the share price have risen. Cramer, meanwhile, has been selling. Since 2005, he's sold $4.6 million worth of TheStreet.com shares through an automatic selling program.

Cramer is unapologetic about his self-promotion, but he acknowledges his bad calls, too. What he hasn't done is tell his viewers the overall score for his two-plus years of Mad Money picks. When he hits his "Buy Buy Buy" sound-effect button, can viewers expect market-walloping results?

In trying to figure that out, we came across YourMoneyWatch.com, a Website started by Michael McGown, a retired securities analyst who worked for several major brokerage firms. McGown started the site not long after the show started, and says Cramer sent a complimentary e-mail after noticing it. McGown counts only Cramer's clear and unconditional Buy recommendations, following a sensible set of rules. McGown tracks the stock until Cramer says sell. "As a person watching the show," says McGown, "I think it's a fair way to rate him."

Over two years, YourMoneyWatch has tracked 1,300 Mad Money picks. It's this tally that shows Cramer's stocks lagging behind the Dow and the S&P 500. This year, Cramer's done better. McGown's data show his picks up 3.2%, while the S&P is up 2%; the Dow, 4.9%; and the Nasdaq, 3.7%. CNBC says the YourMoneyWatch data, as well that of Cramer's Mad Money Website, are "not authoritative."

Hoping to get Cramer's advice on how to measure his Mad Money picks, I called him a few weeks ago. He tore into me. "I've never read a single article that I thought wasn't a massive distortion of what the show's all about," he said. When I said I just wanted to see Mad Money's record, he replied: "I've never seen an analysis that I've regarded as honest, and I doubt yours is any different."

WHERE DID THOSE ANALYSES GO WRONG? They counted buys and sells from the Lightning Round segment, said Cramer, and they ignored his caveat against purchasing on the day after a broadcast -- a 24-hour rule he decreed in his Mad Money book. "I say buy it on Day Two," he explained. "I can show exact data, which says my picks are much better than the S&P."

Hearing that, I asked if I could see it. Cramer spelled out the e-mail address of someone at TheStreet.com. I spent the following days -- and weeks -- trying to get a response from that person, from Cramer, from CNBC. Meanwhile, I pored over his Mad Money book, including the two chapters that detail the importance of his Lightning Round advice. He writes that, by definition, Lightning Round recommendations are based on his previous knowledge of the stocks, not on fresh research. Yet he doesn't tell his viewers to ignore the call-in segment's Buys and Sells, concluding: "I still think you should listen to what I'm saying."

While waiting for a response from Cramer, I made a happy find: http://madmoney.thestreet.com/. It called itself an exact record of every recommendation in the show since January of this year. A personal note from Cramer likened the site to an audited record of his performance, outside of his control. "I am doing this because my personal reputation is at stake," said the words by Cramer's picture.

There were more than 3,400 recommendations in the database. Better still, it distinguished between stock picks made in the Lightning Round and those from other portions of the show. Our analysis of these stocks found no difference between the performance of the Lightning Round picks and the rest of the Mad Money recommendations.

Jim Cramer has defined himself as a financial journalist who gives you clear Buy and Sell recommendations to make you money. If he's serious about that mission, he or CNBC should publish a database that tracks all his picks from the show's launch date. Even cheerleaders need to be accountable.

10 Biggest Pops

Cramer's picks often jump during the trading day before they're mentioned on his 6 p.m. Mad Money show. Of the 1,300 picks tracked by YourMoneyWatch.com, these 10 spurted the most. CNBC offered a variety of reasons why stocks might run up so much before the show, including news events affecting the companies involved and Cramer mentioning the stocks on his radio show, which was cancelled in December. CNBC has added disclaimers to warn viewers that Cramer may mention his picks elsewhere before the show, but we found very few pre-broadcast mentions in his Action Alert newsletters. For his part, Cramer told us he didn't do any stock trading on his own account and held only cash, a beach house, his charitable trust and some mutual funds. One possible explanation for the run-ups: He often jumps on stocks that are in the news and moving up sharply. Not always a smart move for long-term investors.

Dear Investors, We're...

Running a hedge fund means never having to say you're sorry, at least not in so many words.

That isn't to say some hedge-fund managers don't have a lot to feel bad about. In the past few weeks, some of the biggest names in hedge-fund land -- Goldman Sachs Group, Highbridge Capital Management, AQR Capital Management, Renaissance Technologies -- have certain funds that lost as much as a third of investors' money as stock and credit markets seized up, and stocks moved in unexpected ways, in reaction to the spreading subprime-mortgage debacle.

None of these highly paid managers are prostrating themselves before their clients, begging forgiveness, however. Instead, in letters to clients, they point fingers at other hedge funds, once-in-a-lifetime events and their own computer programs.

Black Mesa Capital, a Santa Fe, N.M., hedge fund captured the "don't blame us" spirit with its letter last week, blaming "unprecedented market events," including "a very large or several very large trading entities, possibly very large hedge funds...liquidating massive" portfolios. The managers, Dave DeMers and Jonathan Spring, said they are taking "unprecedented actions" to fix its problems, a response to the "unprecedented market events." The fund lost about 10% in the first eight days of August. Black Mesa didn't respond to a request for comment.

Highbridge, which saw its $1.7 billion statistical-arbitrage fund lose 18% in just the first eight days of the month, sent out a letter pointing to other hedge funds, who the firm said were making similar trades, rather than explaining Highbridge's own mistakes. "As you may be aware, many hedge funds and asset management firms utilizing similar strategies are experiencing unprecedented volatility," said the firm, which has $37 billion in total assets.

Goldman's letter portrayed the firm's money-losing hedge funds as innocent bystanders, caught up in a violent market.

"The quantitative funds run by Goldman Sachs Asset Management have not been spared in this difficult environment," said the Goldman letter, sent Aug. 13, explaining why its hedge funds lost between 17% and 34% in the first 10 days of the month. "Our response has been comprehensive and immediate." Goldman didn't respond to a request for comment.

A simple mea culpa would be more satisfying for many investors. "I would like to hear an 'I'm sorry,'" says Jane Buchan of Pacific Asset Management Co., an Irvine, Calif., firm that invests in hedge funds.

The recent pain has largely centered on quantitative hedge funds, which rely on computer models of the sort more often developed by math whizzes than English majors. So, some of the explanations are heavy on the jargon. "The culprit is not the Basic System but our predictive overlay," said Jim Simons, who runs Renaissance Technologies, one of the largest hedge funds, in an Aug. 9 letter telling investors that one of his funds had lost almost 9% in the first eight days of August. He's gained back a chunk of that in the past few days.

"When you've done your best, there isn't a great deal to apologize for, the event was a whirlwind that caught everyone by surprise. It certainly caught us by surprise," Mr. Simons said in an interview. "But not having anything to apologize for and not feeling bad are two different things -- certainly, I feel bad for anyone losing money."

Lawyers say they advise hedge managers to detail losses quickly, but restrict their explanations to the facts. Owning up to mistakes or apologies could give an opening to investors to level lawsuits, they say.

"It's sort of like how doctors never say they're sorry," says David Moody, a partner at law firm Purrington Moody Weil. "It's an invitation for a lawsuit."

One major hedge-fund manager admits to using the word "sorry" in his letter to investors, but striking it at the last moment, arguing that he had nothing to apologize for. Another executive argued that funds sending out letters were treating their investors better than other big losers who have left their investors in the dark.
"Don't sugarcoat it," says Jacqueline Whitmore, a Palm Beach, Fla., author who gives speeches about business etiquette. "There's a hesitation to want to say that you were wrong, but it can be worded in a way where you can tell the truth, but it doesn't sound like this is the end of the world."

Clifford Asness, a founding principal of AQR, a Greenwich, Conn., firm, was blunt about his failure. But he blamed others, too. "Our stock-selection investment process, a long-term winning strategy, has very recently been shockingly bad for us and for all of those pursuing similar strategies," wrote Mr. Asness, whose largest fund is now flat on the year. "The very success of the strategy over time has drawn too many investors. Now, we are witnessing some of them exit, and...it's painful."

But there are times when the losses are so bad that hedge-fund honchos feel the need to give a full mea culpa. When Sowood Capital, a Boston hedge fund, was losing big money in July, few of its investors realized how bad things were getting. Then they received a letter, on July 27, and another on July 30, describing how Sowood's two key funds had lost more than 50% in just a few weeks and were winding down.

"We are very sorry this has happened," Jeffrey Larson, Sowood's founder, wrote to his investors. "A loss of this magnitude in such a short period is as devastating to us as it is to you."

Nice haircut

In January 2005, someone using the name "Rahodeb" went online to a Yahoo stock-market forum and posted this opinion: No company would want to buy Wild Oats Markets Inc., a natural-foods grocer, at its price then of about $8 a share.

"Would Whole Foods buy OATS?" Rahodeb asked, using Wild Oats' stock symbol. "Almost surely not at current prices. What would they gain? OATS locations are too small." Rahodeb speculated that Wild Oats eventually would be sold after sliding into bankruptcy or when its stock fell below $5. A month later, Rahodeb wrote that Wild Oats management "clearly doesn't know what it is doing .... OATS has no value and no future."

The comments were typical of banter on Internet message boards for stocks, but the writer's identity was anything but. Rahodeb was an online pseudonym of John Mackey, co-founder and chief executive of Whole Foods Market Inc. Earlier this year, his company agreed to buy Wild Oats for $565 million, or $18.50 a share.

For about eight years until last August, the company confirms, Mr. Mackey posted numerous messages on Yahoo Finance stock forums as Rahodeb. It's an anagram of Deborah, Mr. Mackey's wife's name. Rahodeb cheered Whole Foods' financial results, trumpeted his gains on the stock and bashed Wild Oats. Rahodeb even defended Mr. Mackey's haircut when another user poked fun at a photo in the annual report. "I like Mackey's haircut," Rahodeb said. "I think he looks cute!"

Mr. Mackey's online alter ego came to light in a document made public late Tuesday by the Federal Trade Commission in its lawsuit seeking to block the Wild Oats takeover on antitrust grounds. Submitted under seal when the suit was filed in June, the filing included a quotation from the Yahoo site. An FTC footnote said, "As here, Mr. Mackey often posted to Internet sites pseudonymously, often using the name Rahodeb."

After The Wall Street Journal contacted Whole Foods yesterday, the company said in a statement that among millions of documents it gave the FTC were postings its CEO made from 1999 to 2006 "under an alias to avoid having his comments associated with the Company and to avoid others placing too much emphasis on his remarks." The statement said, "Many of the opinions expressed in these postings now have far less relevance than when they were written." Whole Foods didn't confirm every Rahodeb posting as being from Mr. Mackey.

Bulletin Boards

Mr. Mackey declined to be interviewed. But he soon posted on the company Web site, saying that the FTC was quoting Rahodeb "to embarrass both me and Whole Foods." He also said: "I posted on Yahoo! under a pseudonym because I had fun doing it. Many people post on bulletin boards using pseudonyms." He said that "I never intended any of those postings to be identified with me."

Mr. Mackey's post continued: "The views articulated by rahodeb sometimes represent what I actually believed and sometimes they didn't. Sometimes I simply played 'devil's advocate' for the sheer fun of arguing. Anyone who knows me realizes that I frequently do this in person, too."

Like Whole Foods itself, Mr. Mackey, a 53-year-old vegan, is somewhat unconventional. He dropped out of college and worked at a natural-foods store before co-founding Whole Foods in Austin, Texas, in 1980. He and his wife practice yoga and meditation and own a 720-acre ranch west of Austin. He once took a sabbatical to hike the Appalachian Trail.

He built Whole Foods in part by acquiring many smaller chains. In January, he slashed his salary to $1, saying, "this is what my heart is telling me is the appropriate thing to do right now."

Whole Foods agreed this February to acquire Wild Oats, of Boulder, Colo. The FTC sued in federal court in Washington to block the deal, saying it would reduce competition. The agency is trying to use Mr. Mackey's own words against him. Its suit quotes the CEO as telling other board members the takeover would enable Whole Foods "to avoid nasty price wars" and reduce the risk that a big conventional grocer would create a competitor to Whole Foods.

When that part of the suit became public, Mr. Mackey fired back with a 14,000-word treatise on his blog on the Whole Foods Web site. He accused the government of "bullying tactics," failing to do its homework and taking out of context "macho posturing" by executives that's common.

Rahodeb had begun posting on Yahoo Finance in the late 1990s, and quickly became known as a cheerleader for Whole Foods stock. "I admit to my bias," he wrote in 2000. "I love the company and I'm in for the long haul. I shop at Whole Foods. I own a great deal of its stock. I'm aligned with the mission and values of the company ... Is there something wrong with this?"

Rahodeb expressed pride in the CEO's work. "While I'm not a 'Mackey groupie,'" he wrote in 2000, "I do admire what the man has accomplished."

By 2005, Whole Foods' $4 billion in annual sales made it the leading player in natural and organic foods. In January of that year, with the stock at a split-adjusted price of about $47, Rahodeb predicted great things: "13 years from now Whole Foods will be a $800+ stock before splits." The stock closed yesterday at $39.50.
For an executive to use a pseudonym to praise his company and stock "isn't per se unlawful, but it's dicey," said Harvey Pitt, a former Securities and Exchange Commission chairman. Told of the Mackey posts, Mr. Pitt said, "It's clear that he is trying to influence people's views and the stock price, and if anything is inaccurate or selectively disclosed he would indeed be violating the law." He added that "at a minimum, it's bizarre and ill-advised, even if it isn't illegal."

A spokeswoman for Whole Foods said Mr. Mackey only revealed information about Whole Foods that already was public knowledge. His comments "weren't illegal" and weren't "against company policy," she said.
Rahodeb sometimes sparred with other users. "Your quarterly cash flow variance isn't statistically meaningful because the time period is too short," he told a user who criticized Whole Foods in March 2006. Rahodeb then pasted a summary of the previous six years of the company's operating cash flow, saying that over five years it "has increased 330%."

When it came to rival Wild Oats, Rahodeb didn't pull punches. He often criticized Perry Odak, who resigned as Wild Oats CEO last year. "While Odak was trying to figure out the business and conducting expensive 'research studies,' to help him figure things out, Whole Foods was signing and opening large stores in OATS territories," Rahodeb wrote in 2005. "Odak drove off most of the long-term OATS natural foods managers." Reached yesterday, Mr. Odak said he had no idea Mr. Mackey was behind the postings, but "it doesn't surprise me."

Keeping Abreast

Sometimes when Rahodeb went without posting for several weeks, other users expressed concern. Once, Rahodeb reassured them he was keeping abreast of the chat.

Last August, Rahodeb filed his last post on the Yahoo message board. He said he had lost a bet with "hubris12000" about Whole Foods' stock performance, and the bet's terms required that he quit posting. He blamed the whims of the stock market for a 40% decline in the company's shares.

"Whole Foods itself has a very bright future, and I will continue to hold my stock for a very long time," he wrote. "I've enjoyed my eight years on this Board, but all things must come to an end. I wish everyone the very best. Hog152 -- keep the faith. Liberfar -- good luck with your market-timing game. Hubris12000 -- take your profits while you can."

Giving New Meaning to Green Revolution

By BILL ALPERT

The full page ad in Wednesday's New York Times suggested to me that my industry's ad sales must be really struggling. It promised riches to anyone who bought Nano Chemical Systems Holdings, a penny stock with two very important nanotech patent applications for biofuel production: "NCSH is the right company at the right time for savvy investors looking for big gains."

Nano Chemical (NCSH) actually makes spray wax sold in discount stores. The shares (ticker: NCSH) ended Wednesday at 72 cents. It takes heroism to sell print ads these days, but the Nano Chemical copy read like a spammer's e-mail. To this worshipful New York Times reader, it was as if the book of Leviticus carried a massage parlor ad -- and that was before I discovered the Environmental Protection Agency's hazardous waste proceeding against this "Green" company's factory; the Securities and Exchange Commission's open investigation; the chief executive's undisclosed fraud settlement with the SEC; and its investment banker's conviction for cocaine trafficking.

Calling the ad's phone number for more information, I reached Redwood Consultants in Novato, Calif. While I waited for a reply, I found that Redwood is run by Jens Dalsgaard, who used to be a broker with A.G. Edwards before the Big Board's regulators fined him $15,000 in 1999 for secretly trying to arrange a short squeeze in the shares of Diana Corp., a meat distributor that went bankrupt after trying to become an Internet company. Dalsgaard didn't return my call.

So I called Nano Chemical directly in Seaford, Del. When I asked for Chief Executive Alexander H. Edwards III, they referred me to the Tampa, Fla. offices of John Stanton, an accountant who's controlled several of Edwards' previous employers. Edwards became CEO this month, after the company borrowed $300,000 from a Stanton business. The company bio on Edwards details his 1987 graduation from the U.S. Naval Academy and his stint as president of a publicly-held surgical supply company. While I waited for Edwards' return call, I found that his bio left out the part about his paying $50,000 in 2003 to settle (without admitting) the SEC's civil fraud charges that he faked the surgical company's sales.

I can't blame Nano Chem for turning to The New York Times. Little else seems to have worked. In 2005, it arranged to get $1.7 million from an Italian financier who had previously bankrolled a chain of topless nightclubs called Scores. That money never materialized. In the last year or so, it's sold stock to Tampa area investors like Robert M. Esposito and Raymond J. Carapella. Esposito's Barrington Financial is Nano's investment banker. Before that, he ran nightclubs and got busted for selling cocaine. Carapella's long criminal record includes convictions for armed robbery and a scam in which he sold fake diet pills with his older brother George, who consented last year to an SEC bar against his participating in penny stock dealings, because of his prior history of running pump-and-dump stock frauds. The SEC subpoenaed Nano Chem itself last year.

When CEO Edwards called me back Friday, he said he was very bullish about where the company was headed. Since its nano-enhanced Green cleaners and lubricants were as good as or better than non-environmentally friendly products, he said, why wouldn't consumers buy them? "Lord have mercy, I have four children," he said. "I would hope that everybody would buy it."

What about the company's EPA problems? He said those were the responsibility of prior owners. The SEC? The investigation is closed, said Edwards. After glowing testimonials about IR-man Dalsgaard and banker Esposito, he said he knew nothing about their histories. "They have no active management in the company," Edwards said about their records. "And I don't see that that's germane to what we're talking about."

Was his own fraud settlement with the SEC germane? Time had passed, he said, so that he wasn't required to make the disclosure. "You sound like my wife's divorce attorney," he told me. "But I hope you put a positive spin on what we're doing here."

Stanton, Esposito and the Carapellas didn't return calls. After my inquiries to the company and its promoters on Friday, the shares plunged 27% to close at 43.5 cents, on six times their average trading volume.

The Times ad was placed by a just-formed corporation paid $232,102.94 by a "third party." That corporation's phone number is Esposito's.

Moto, Eat Nokia's Dust

Ever since Motorola reported its shockingly horrible results for the fourth quarter about two weeks ago, my editors have been asking for a prognosis.

I kept telling them that we needed to wait until Nokia reported its numbers in order to assess the true magnitude of the damage in Schaumburg, Ill. Is the entire industry under siege, or did Motorola trip up?
The verdict is in: The industry is under pressure, but Motorola (ticker: MOT) is in a deep hole.

Last week, rival Nokia (NOK) surprised most everyone by reporting better-then-expected revenue and earnings, especially in the wake of Motorola's financial implosion. But the biggest takeaway from Nokia's call was that its cellphone margins actually rose, despite the lower asking prices for phones that were introduced because of intense competitive pressure. Nokia's handset operating margins were 17.8%, up more than two percentage points from the previous quarter's level, while gross margins in all segments were up. In comparison, Motorola's margins came in at 4.4%, about half as high as expected.

To be fair, other handset makers, such as LG and Samsung, have suffered from shrinking margins, while Sony-Ericsson is the only other major handset maker, with Nokia, to buck the trend. Sony-Ericsson can thank its concentration on high-end, music-enabled phones for that. Meanwhile, Motorola is racking up market-share gains and high-volume growth in emerging markets, at the expense of margins and profitability. That isn't a winning combination.

Don't look for Nokia to give Motorola a break soon. The operating gap between Nokia and Motorola could widen during this year's first half, as Nokia unleashes new handsets. Prices will likely come down, but margins could continue to expand as production costs slip faster than prices, predicts Charter Equity Research analyst Ed Snyder.

Motorola has been riding the super-successful RAZR for three years, while Nokia consolidated its model templates and developed new, lower-cost handsets that are rich in features and fashion. Motorola handsets such as the multimedia KRZR and the BlackBerry-like Q have failed to capture momentum, in part because Motorola slashed RAZR prices to irresistible levels in order to grab share.

"We see this as the end of Motorola's latest run in handsets," Snyder posits.

Nokia's scale and cost advantages, owing to decisions made at the height of RAZR-mania, could allow the Finnish company to thrive in a year when most everyone else, except Sony-Ericsson, struggles.

At the recent Consumer Electronics Show in Las Vegas, where Motorola CEO Ed Zander was a keynote speaker, the company had so few new products to unveil that seemingly a third of his speech was filled by a Yahoo! executive, who was touting that company's new mobile-search service. That wasn't one of Zander's better moments. Worse, the keynote speech came a day before Apple threw its hat in the ring as the latest entrant to an already cut-throat arena.

After two quarterly-earnings misses in a row and with no hot successor to the RAZR in sight, the prognosis for Motorola isn't healthy.

While enticing at 18-plus a share -- its price Friday afternoon -- and trading at only 15.2 times trailing earnings (versus Nokia's 17.2 times), Motorola stock appears to be no better than dead money for at least the first half of 2007.

Notablecalls: No trade.

The Inner Workings of InnerWorkings (Nasdaq:INWK)

The key figure in a software company selling stock has left a trail of unhappy investors.

In a road show continuing this week, Morgan Stanley hopes to persuade investors to part with $150 million for the follow-on stock offering of a company called InnerWorks. This Chicago-based company claims that its proprietary software is radically changing how American companies procure print jobs. In just the five months since their initial offering, InnerWorkings shares (ticker: INWK) have risen a radical 80%, with a recent print of 16.20.

But those reading the prospectus should also re-read the Dr. Seuss story about the Sneetches, who paid a huckster to change their plain bellies into star bellies, and vice versa. The chap ends up leaving town with all their money, while laughing: "They never will learn...You can't teach a Sneetch!"

You see, InnerWorkings goes to great lengths to obscure its ownership and control by a chap named Eric P. Lefkofsky who has a history of busting investors after promising to radically transform bricks-and-mortar industries. He seems to identify with Dr. Seuss's huckster: he called his last business Starbelly.com, a venture that rapidly went into bankruptcy and provoked fraud suits by investors alleging that Starbelly's software was never what Lefkofsky promised. The current InnerWorkings road show and stock-offering is, in part, aimed at cashing out much of Lefkofsky's stock while InnerWorkings shares teeter at stilted levels.

Eerily like Starbelly, there's less than meets the eye to the company's touted "PPM4" software, say some InnerWorkings ex-employees. In the weeks before Morgan Stanley's eagle-eyed due diligence team toured InnerWorkings for its August 2006 initial underwriting, workers stayed late padding the company's off-the-shelf FileMaker Pro database with an impressive-looking list of suppliers. Then they dummied up some screen-shots of the software for the inside cover of the prospectus. Citing the quiet period prior to its stock offering, the company declined to answer my questions.

Despite its Potemkin technology trappings, InnerWorkings is a glorified broker of print jobs. Like others of its ilk, it beats up on printers on behalf of corporate clients and splits any savings it extracts. Much of its sales growth has come through roll-up acquisitions of other print brokers. And a related-party transaction in the months before the IPO seems to have produced a big part of InnerWorkings' profits. Even so, the last-reported 12 months' profits amounted to a paltry $5.7 million. So the current stock market valuation of $700 million is 125-times those trailing profits.

That's a ridiculous valuation for a company in the mundane print brokerage business. And I suspect that fact isn't lost on the 37-year-old Lefkofsky who, with his wife and others, controls 35% of InnerWorkings shares via some holding companies. Unwilling to wait even until the Feb. 11 expiration of InnerWorkings's IPO lockup agreement, Lefkofsky and other insiders would unload 6.2 million shares in the follow-on offering that Morgan Stanley reportedly wants to price this week. That would net insiders $100 million.

InnerWorkings' prospectus makes only passing mention of Lefkofsky, with a sentence buried on page 54 describing him as someone "instrumental in the formation and development of our company" who served as a director until May 2006 and also as a consultant. When I asked InnerWorkings about him last week, a company spokesman said Lefkofsky's consulting had stopped back in June 2006.

So I thought it generous of Lefkofsky to be still laboring at InnerWorkings on Friday, while the firm's title-bearing leaders junketed on Morgan Stanley's road show. The InnerWorkings phone directory doesn't list Lefkofsky, but the company operator quickly put me through to his office, where a friendly-sounding lady told me he was running a meeting. He did not return repeated voice-mails and e-mails.

Ex-employees tell me that the company's disclosures hardly do justice to Lefkofsky's daily role at the company, where he has remained a foul-mouthed, coffee-chugging boss who micro-manages InnerWorkings by force of his strong personality and his group's 35% control position. On the other hand, it's easy to see why the company and its underwriters would want him to remain behind the curtain. He's left a trail of burned investors and fraud allegations. Just out of law school in 1994, Lefkofsky got the city of Columbus, Wisc., to back his takeover of a local clothing maker where he promised to create jobs making apparel branded by major-league sports teams. After laying off the workers, the firm sought bankruptcy protection, with its bankers alleging in a state suit that Lefkofsky applied the business's resources to starting his next venture, Starbelly.

Business-to-business procurement Websites were hot in 1999, and Starbelly.com held itself out as a marketplace where companies could arrange to put their logos on promotional items of clothing and hard goods like coffee mugs. Through some family connections, Lefkofsky and his partners attracted the eye of a Chicago-based promotional items vendor named Ha-Lo Industries. A due diligence investigation by Ernst & Young warned Ha-Lo that Starbelly's software was not as proprietary -- or even as functional -- as Starbelly claimed, according to Ha-Lo documents discovered in subsequent shareholder suits. The publicly-held Ha-Lo nevertheless bought Starbelly for $240 million in cash and stock in May 2000, saying that Starbelly's website would bring in $1 billion in revenues.

Lefkofsky and his Starbelly pals quickly assumed control of Ha-Lo, according to lawsuit records. But the software fizzled and the website was a flop. In scarcely a year, Ha-Lo wrote off Starbelly completely. It entered bankruptcy court in July 2001. Class action fraud suits against Lefkofsky and others were ultimately settled, but not before turning up vulgar, reckless Lefkofsky e-mails (one of which is reproduced verbatim below) that might bring shudders to any public investor entrusting her savings to his latest venture.

"Lets get funky. Lets announce everything. Lets be WILDLY positive in our forecasts," he told his Ha-Lo colleagues, even as that business was falling apart. "if we get wacked on the ride down -- who gives a sh*t. Is it going to worse than today? is our market cap going to fall to 200N, 100M who the f**k cares."
No wonder he's taken a low public profile since starting InnerWorkings with Richard A. Heise, Jr. -- another promoter hounded himself by the fraud suits of investors who said he never delivered his promised Internet software for managing executive benefit plans.

Numerous ex-employees of InnerWorkings told me that its vaunted software also doesn't work as claimed. A century ago, there was an investor named Mark Twain who lost a bundle investing in ersatz printing technologies. He said that history doesn't repeat itself, but sometimes it rhymes.