Tuesday, December 30, 2008

The Peerless Prognosticator of Palm Beach


We have been asked in recent days why we don't join the chorus of investment advisors, CNBC pundits and just plain wise guys offering stock market/investment predictions for the New Year.

Our standard response has been similar to what James Thurber wrote in his introduction to “My Life and Hard Times” (look it up, kids), to the effect that he always carried the uneasy feeling that whatever he was writing had already been done better and more quickly by Robert Benchley (look him up, too).

Robert Benchley was a famous humorist, sort of the Will Farrell of his day—only literate and actually funny. And, in our book, the Robert Benchley of stock market prognostications has to be my old pal, Doug Kass, the so-called “Bear of Boca.”

Doug, who runs money, writes on the stock market and somehow managed to find time to appear on CNBC in years past whenever the hosts needed to find a lonely bear on housing, also publishes a list of predictions every year.

So with Kass on the case, who needs another batch from us?

Sure enough, Sunday night it hit our email: Doug’s fearless predictions for 2009. So fearless, in fact, that the number of predictions runs to twenty in all.

And these are not your Bryon Wien-variety, “The dollar will strengthen and then weaken”-type stuff.


Wien, who pioneered the annual Wall Street prediction phenomenon, tends towards the kind of on-the-one-hand-on-the-other statements employed by Wall Street strategists such as he used to be. Doug, however, minces no words. Whereas last year, for example, Wien (who to his credit accurately predicted recession and credit tightening) foresaw consumer spending being “lackluster” in 2008, Doug predicted a “retailing depression,” quote/unquote.

And Doug’s predictions for 2009 are, as usual, a mix of straightforwardly logical calls quite at variance with the emotional consensus (on housing, for example), along with some out-of-left-field notions, including musings on Madoff that are of such specificity that you wonder what, exactly, Doug has been hearing at temple.


Now, we will not attempt to repeat, refine, or review any of the 2009 predictions. You should read them yourself, as Doug wrote them:

http://www.thestreet.com/story/10455209/1/kass-20-surprises-for-2009.html

But before you do, we want take issue with one aspect of Doug's new list.

Candor and lack of word-mincing aside, what also distinguishes Doug from other Wall Street “seers” is that Doug always prefaces his new predictions with a no-holds-barred look back at his prior lists.
Read carefully from this year's look-back:

Our surprise list for 2008 proved to be our most successful ever, with 60% of last year's "possible improbables" proving to be materially on target. Almost half of the prior year's predicted surprises actually came to pass, up from one-third in 2006 and from 20% in 2005. Nearly of one-half 2004's prognostications proved prescient and about one-third in the first year of our surprises for 2003.

What we want to take issue with is Doug’s note that 60% of the picks from his 2008 list were “materially on target.”

The fact is the 60% that Doug got right, in our view, were so out-there at the time he wrote about them, and turned out to be so dead-on-accurate in the way they unfolded—record market volatility, hedge fund outflow acceleration, job losses, “an unprecedented and abrupt drop in personal consumption expenditures,” not to mention Fed policy, Goldman Sachs miscues, private equity “at a standstill,” the value of the dollar falling and the price of oil breaking above $135—that to say Doug was “materially on target” is like saying Tiger Woods won a golf game last summer before his knee gave out.

If anybody came closer than Doug Kass to getting the guts of the 2008 financial crisis—and much of its ramifications—right, ahead of time, we’d like to know.

Indeed, so variant (to use one of his favorite terms), so out-there, so accurate and so timely were Doug’s 2008 predictions that we here at NotMakingThisUp herewith re-title the so-called “Bear of Boca” with something more appropriate than that one-dimensional sobriquet.

Since Doug’s Florida office is in Palm Beach these days, we’re going for the “Peerless Prognosticator of Palm Beach.”

And while we’re at it, we’ll mention something else. One other unfinished piece of business lurks here.

We think it only right that every guest on CNBC—the money managers and the so-called strategists who smirked, sneered, laughed, snorted, and talked over Doug during his Larry Kudlow appearances for the two or three years that the housing bubble was percolating into a worldwide economic crisis which not one of those prattering princes of positivism got right—ought to say on the air and into the camera, the next time Kudlow has them on, for whatever reason he might want them on, what Abraham Lincoln once wrote to General Ulysses S. Grant after that general's bloody march on Richmond:


“You were right and I was wrong.”

It won’t happen, of course. But that doesn’t mean it shouldn’t.

So, our hat is off to Doug Kass: The Peerless Prognosticator of Palm Beach.



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Wednesday, December 24, 2008

Shazam! From the Boss to the King to John & Paul (But Not George or Ringo), Not to Mention Jessica & Nick


Like everyone else out there, we’ve been hearing Christmas songs since the day our local radio station switched to holiday music sometime around, oh, July 4th, it feels like.

And while it may just be a symptom of our own aging, the 24/7 holiday music programming appears to have stretched the song quality pool from what once seemed Olympic pool-deep to, nowadays, more of the ankle-deep, wading pool variety.

What we recall in our youth to be a handful of mostly good, listenable songs—Nat King Cole’s incomparable cover of “The Christmas Song” (written by an insufferable bore: more on that later), Bing’s mellow, smoky, “White Christmas,” and even Brenda Lee’s country-ish “Rockin’ Around the Christmas Tree” (recorded when she was 13: try to get your mind around that)—played over and over a few days a year, has evolved into a thousand mediocre-at-best covers played non-stop for months on end.

Anybody else out there wonder why Elvis bothered mumbling his way through “Here Comes Santa Claus”? It actually sounds like Elvis doing a parody of Elvis—as if he can’t wait to get the thing over with.

And, fortunately, get it over with he does, in just 1 minute, 54 seconds.

Along with that and other mediocre-at-best covers, of course, there are the occasional odd original Christmas songs—the oddest of all surely being Dan Fogelburg’s “Same Old Lang Syne.” You’ve heard it: the singer meets his old lover in a grocery store, she drops her purse, they laugh, they cry, they get drunk and realize their lives have been a waste, and, oh, the snow turns to rain (we make none of that up).

So how, exactly, did that become a Christmas song?

Then there's ex-Beatle Paul McCartney’s “Happy Christmastime,” which combines an annoyingly catchy beat and dreadful lyrics, something McCartney often did when John Lennon wasn't around (Lennon, for example, replaced McCartney's original “I Saw Her Standing There” teeny-boppish opening line, “She was just seventeen/A real beauty queen,” with the more suggestive “She was just seventeen/You know what I mean”), to create a song you try to drive out of your mind by humming something more tolerable, like, oh, Jessica Simpson and Nick Lachey's duet, “Baby it’s Cold Outside” (more on this gem, later).

McCartney actually recorded his new Christmas standard nearly thirty years ago, and it rightfully lay dormant until the advent of All-Christmas-All-The-Time programming a couple of years ago.

Fortunately, by way of offset, Lennon’s own sour, downbeat, but catchy “Happy Xmas (War is Over)” is played about as much as “Happy Christmastime.” Who else would start a Christmas song: “And so this is Christmas/And what have you done...” but John Lennon?

(Of course, who but Paul McCartney would start his Christmas song, “The moon is right/The spirit's up?” If anything explains the Beatles’ breakup better than these two songs, we haven’t heard it.)

Now, we don’t normally pay much attention to Christmas songs. If it isn’t one of the aforementioned, or an old standard sung by Bing, Tony, Frank, Ella, Nat, Bruce and a few others, we’d be clueless.

But thanks to a remarkable new technology, we here at NotMakingThisUp suddenly found ourselves able to, for example, distinguish which blandly indistinguishable female voice sings which blandly indistinguishable version of “O Holy Night”—Kelly Clarkson, Celine Dion, or Mariah Carey—without any effort at all.

The technology is Shazam—an iPhone application that might possibly have received the greatest amount of buzz for the least amount of apparent usefulness since cameras on cell phones first came out.

For readers who haven’t seen the ads or heard about Shazam's wonders from a breathless sub-25 year old, Shazam software that lets you hold your iPhone towards any source of recorded music, like a car radio, the speaker in a Starbucks, or even the jukebox in a bar, and figure out what song is playing.

Shazam does this by recording a selection of the music, analyzing what it receives, and displaying the name of the song, the artist, the album, as well as lyrics, a band biography and other doodads.

What possible good could there be for identifying a song playing in a bar?

Unless you’re a music critic or a song-obsessed sub-25 year old, we’re still not sure. But we can say that Shazam is pretty cool.

In the course of testing it on a batch of Christmas songs—playing on a standard, nothing-special, low-fi kitchen radio—heard from across the room, without making the least effort to point the iPhone at the source of the music, Shazam figured out all but one (a nondescript version of a nondescript song that it never could get) without a hitch.

And, as a result, we can now report the following: 1) it is astounding how many Christmas songs are out there nowadays, most of them not worth identifying, Shazam or no Shazam; 2) all Christmas covers recorded in the last 10 years sound pretty much alike, as if they all use the same backing track, and thus require something like Shazam to distinguish one from the other; 3) nobody has yet done a cover version of Dan Fogelburg's “Same Old Lang Syne,” fortunately; 4) none of this matters because Mariah Carey screwed up the entire holiday song thing, anyway.

Now, why pick on Mariah Carey in these virtual pages, as opposed to, say, someone who can't actually sing?

Well, her “O Holy Night” happened to be the first song in our mini-marathon, and it really does seem to have turned Christmas song interpretation into a kind of vocal competitive gymnastics by demonstrating as much of her five-octave vocal range as possible not merely within this one particular song, but within each measure of the song.

Her voice jumps around so much it sounds like somebody's trying to tickle her while she’s singing.

More sedate than Mariah, and possibly less harmful to the general category, The Carpenters' version of “(There’s No Place Like) Home for the Holidays” comes on next, and it makes you think you’re listening to an Amtrak commercial or something (“From Atlantic to Pacific/Gee, the traffic is terrific!”), so innocuous and manufactured it sounds.

Johnny Mathis is similarly harmless, although his oddly eunuch-like voice can give you the creeps, if you really think about it. Mercifully, his version of “It’s Beginning to Look a Lot Like Christmas” is short enough (2:16) that you don’t think about it for long.

Now, without Shazam we never would have known the precise time duration of that song. On the flip side, we would we never have been able to identify the perpetrators of what may be the single greatest travesty of the holiday season—Jessica Simpson and Nick Lachey, singing “Baby it’s Cold Outside.”

“Singing” is actually too strong a phrase here. Simpson’s voice barely rises above a whisper, and you cringe when she reaches for a note, although she does manage to hit the last, sustained “outside,” no doubt thanks to the magic of electronics. Lachey’s vocals are like what people do in the shower—they think they’re singing, but they’re not, really.

Thus the major downside of Shazam might be this: having correctly identified who was responsible for this blight on holiday radio music, if we ever ran across the two in our car, we wouldn’t stop to identify the bodies.

Fortunately, the bad taste left by their so-called duet is erased when Nat King Cole’s “The Christmas Song” comes on next.

Thanks to Shazam, we learn that this is actually the fourth version Nat recorded. The man worked at his craft, and it shows here. Unfortunately, the song’s actual writer, Mel Tormé, had the personality of a man perpetually seething for not getting proper recognition for having written one of the most popular Christmas songs of all time. (We did not learn this from Shazam: we once saw Tormé perform at a small lounge, where he chewed out a less-than-attentive audience member during the middle of a song, completely destroying the mood for the rest of the set.)

The pleasant sensation left behind by Cole’s “Christmas Song” is quickly erased by a male singer performing “Let it Snow, Let it Snow, Let it Snow.” He sounds somewhat like Harry Connick, Jr. doing a second-rate version of Sinatra.

Who is this guy, we wonder?

Shazam tells us it’s Michael Bublé. We are pondering how such a vocal lightweight became such a sensation in recent years when John Lennon’s “Happy Xmas” comes on. The only downer, of course, is when Yoko comes in on the chorus, like a banshee.

The other songs in our Shazam song-identification session are too many to relate. Sinatra, of course; Kelly Clarkson, an American Idol winner who essentially does a pale Mariah Carey impersonation; Andy What’s-His-Name, with the bland stuff—Williams; and Tony Bennett, one of the best.

Then there’s Willie Nelson, who has a terrific, understated way of doing any song he wants—but sounds completely out of place singing about Frosty the Snowman. One wonders exactly what kind of white powder Willie was thinking about while he sang this, if you get our drift.

Oh, and there’s Coldplay’s “Have Yourself a Merry Little Christmas,” which pairs the sweetest piano with the worst voice in any single Christmas song we heard; Amy Grant, a kind of female Andy Williams; the Ronettes, who are genuinely terrific—a great beat, no nonsense, and Ronnie singing her heart out with that New York accent; and Mariah doing “Silent Night” with the same roller-coaster vocal gargling.

Gene Autry’s classic “Here Comes Santa Claus” would be bearable except that he pronounces it “Santee Closs,” and this is unfortunate in a song in which that word appears like 274 times. 'N Sync is likewise unbearable doing an a cappella “O Holy Night,” with incessantly cute harmonies and Mariah-type warbling to boot. Hall & Oates’s “Jingle Bell Rock” has absolutely nothing to distinguish it from any other “Jingle Bell Rock,” while Martina McBride manages to sound eerily like Barbra Streisand immitating Linda Ronstadt singing “Have Yourself a Merry Little Christmas.”

Almost winding things up is Dan Fogelburg’s aforementioned “Same Old Lang Syne.” Something about the way he sings “liquor store”—he pronounces it “leeker store”—never fails to provoke powerful radio-smashing adrenalin surges that need to be suppressed.

Fortunately, we suppress those urges, because the Shazam experiment winds up with one of the best Christmas songs ever recorded. Better than Bing, maybe even better than Nat, depending on your mood.

It’s Bruce Springsteen, The Boss, doing “Santa Claus is Comin’ to Town,” and even though it was recorded live more than 25 years ago, it still jumps out of the radio and grabs you.

Now, as Shazam informs us, this recording was actually the B-side of a single release called “My Hometown.” [Back in the day, kids, “singles” came with two songs, one on each side of a record: the “A” side was intended to be the hit song; the “B” side was, until the Beatles came along, for throwaway stuff.]

Fortunately nobody threw this one away.

The Boss begins the familiar song with some audience patter and actual jingle bells, then he starts to sing as the band comes to life. Things move along smoothly through the verse and chorus...until ace drummer Max Weinberg kicks it into high gear and the band roars into a fast shuffle-beat that takes the thing into a different realm altogether.

Feeding off the audience, Bruce sings so hard his voice slightly breaks at times. Then he quiets down before roaring back again into a tear-the-roof-off chorus, sometimes dropping words and laughing as he goes.

This is real music—recorded live (in 1975 at the C.W. Post College)—with no retakes, no producer, and no electronic vocal repairs, either.

Try doing that some time, Jessica and Nick.

Actually, come to think of it, please don’t.



Merry Christmas, Happy Hanukkah and a Good New Year to all.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.



Monday, December 22, 2008

The Most Important Article You Maybe Didn’t Read this Weekend


Being wrapped up in year-end matters, not to mention a review of holiday songs that will appear in these virtual pages whenever we get around to it, we here at NotMakingThisUp can do no better than point potential readers to what may well be the most important article you might not have read this weekend.

The article is by ace NY Times columnist Joe Nocera, and the headline explains it all:


How India Avoided a Crisis.

The URL is as follows:

http://www.nytimes.com/2008/12/20/business/20nocera.html?_r=1&scp=4&sq=Nocera&st=cse

Here’s how Nocera frames the central question of his piece:

… two years ago, the Indian real estate market — commercial and residential alike — was every bit as frothy as the American market. High-rises were being slapped up on spec. Housing developments were sprouting up everywhere. And there was plenty of money flowing into India, mainly from private equity and hedge funds, to fuel the commercial real estate bubble in particular. Goldman Sachs, Carlyle, Blackstone, Citibank — they were all here, throwing money at developers.


So why did the Indian banks stay on the sidelines and avoid most of the pain that has been suffered by the big American banks?

For the answer, read the column.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Thursday, December 18, 2008

Steve Jobs: 42% vs. 4%



The oddest news of the week—Bernie Madoff-related news aside—has to be Apple’s explanation of Steve Jobs’ absence from the upcoming MacWorld, in today’s Wall Street Journal:

The company said it was scaling back on trade shows because they have become a “very minor part of how Apple reaches its customers.”

MacWorld is not just a “trade show.” It is a seriously big deal. It’s like Woodstock for Apple users. Just two short years ago Jobs announced the iPhone at MacWorld, setting off a 50-point run in Apple’s stock before the thing even hit the market.

So Jobs not going is no mere casual one-off: it’s like Obama suddenly announcing he has no plans to attend the upcoming inauguration, because, after all, what does it have to do with running the country?

Wall Street, of course, turns to worst-case explanations, including the never-ending speculation over Jobs’ health.

This is no small issue: big as Apple is, it is one of only two companies we can think of that appears to rely on the unique talents of one human being to do what they do especially well. (Berkshire Hathaway is the other.)

Jobs, as everyone knows, had pancreatic cancer. Pancreatic cancer, as everyone knows, is about the worst cancer going. Five year survival rates of the most common (involving so-called exocrine pancreas cases) are 4 in 100.

Fortunately, Jobs had a rare, relatively good form of pancreatic cancer, an islet cell neuroendocrine tumor, for which he was treated with—according to Fortune Magazine—“a variation on the Whipple procedure,”

a complex, Rube Goldberg-type operation in which surgeons remove the right-most section, or “head,” of the pancreas - as well as the gallbladder, part of the stomach, the lower half of the bile duct, and part of the small intestine - and then reassemble the whole thing in a new configuration. The severed surfaces of the stomach, bile duct, and remaining pancreas are stitched to the small intestine so that what’s left of the pancreas can continue to supply insulin and digestive enzymes.

Jobs has reportedly told associates he is cancer-free, and for all the constant speculation about whether or not this is really true, it shouldn’t be any wonder that he looks thinner than before, nor should it be a shock that maybe he’s not up to another MacWorld.

A doctor we consulted described what Jobs had as a seriously difficult surgery, with all sorts of post-surgery issues related to bodily functions nobody likes to think about, even though those issues are well worth the price of surviving pancreatic cancer.

As to those survival rates, according to the National Cancer Institute, “Cancers arising from endocrine elements of the pancreas [as opposed to the exocrine] were much less common and the 5-year survival rate was 42% [as opposed to 4% for the exocrine type].”

It’s been five years since Jobs was diagnosed, and 42% is, of course, much better than 4%.

And that is fortunate not merely for Jobs himself.

While Warren Buffett has added enormous value for thousands of shareholders of Berkshire Hathaway, Steve Jobs has done that and more: he's added enormous value for millions of people's lives.



Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Monday, December 15, 2008

Bernie Madoff and Hamlet’s Ghost


“Madoff Securities is the world's largest Ponzi Scheme.”
—Wall Street Journal, quoting Harry Markopolos letter to the U.S. Securities and Exchange Commission, 1999.



Like most people in this business, we here at NotMakingThisUp knew next to nothing about Bernie Madoff or the Madoff Family of So-Called Funds, until, oh, Thursday morning.

That’s when news hit the tape that a guy had been arrested at his home after telling associates that his $50 billion Family of So-Called Funds had been “just one big lie” and “a giant Ponzi scheme.”

Now, you would think that a guy who ran $50 billion would be pretty well known among hedge fund types and other money managers.

You’d think that the head of a firm claiming to handle more money than Mario Gabelli—one of the most relentless stock hounds we’ve ever known (we last saw Mario presenting at a Merrill Lynch conference; before that, he was grilling the locals at the Berkshire Hathaway annual meeting)— would cut a regular figure on the investment circuit.

You’d expect, over the course of a decade or two in the business, to run into somebody from the joint—a marketing guy, an analyst, a portfolio manager—somewhere.

But we never did. Not at a conference, not at the Berkshire Hathaway annual meeting, not even listening in on an earnings call or two.

Of course, Madoff’s methodology was, supposedly, of the “black box” kind—buying stocks and selling options using top secret algorithms—so there was no need to be on an earnings call, let alone schlepping out to Omaha to listen to Warren Buffett.

Still, you might think the general lack of something visible going on behind the curtain at Madoff would have raised some red flags among regulators—i.e. the people who are supposed to protect investors from scams.

You might think a supposed $50 billion fund with audited statements from an unknown accounting firm with no web site might, oh, raise some eyebrows.

And it did.

As the Wall Street Journal has reported, one individual more or less laid out the issue for the regulators in language that does not get much clearer, nor much further from the actual truth:

Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff's stock-options strategy and was convinced the results likely weren't real.

"Madoff Securities is the world's largest Ponzi Scheme," Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.

Harry Markopolos may be today’s version of Hamlet’s Ghost.

Recall that as that play, “Hamlet,” opens, Hamlet’s dead father appears as a Ghost, telling Hamlet how his own brother (Hamlet’s uncle) killed him in the garden, took his crown and married his wife (Hamlet’s mother).

Hamlet intuits the Ghost is telling the truth—but then spends then next two hours trying to make up his mind whether the Ghost is the real deal, or just telling Hamlet what he wants to believe.

Like Hamlet's Ghost, Harry Markopolos tried to tell the right people what happened, as the Journal reports:

Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the SEC, according to documents he sent to the SEC reviewed by The Wall Street Journal.

And Markopolos wasn’t the only one to have doubts.

At least one hedge fund advisor, Aksia’s Jim Vos, saw Madoff for the scam it appears to have been by—sacre bleu!—investigating Madoff’s accounting firm and discovering that is was housed in a strip mall…and had just one accountant.

But it was not merely sharp-eyed investigative types who saw what was happening well before the Feds.

A friend and fellow money-manager called us Friday, to gloat. “You see this guy Madoff?” our friend asked, his voice a mixture of outrage and I-told-you-so. “I had a guy who used to beat me up all the time,” our friend said, his voice steadily rising as he recalled the injustice of the thing. [NB: we are leaving out the more colorful nouns and adjectives that punctuated his language; we suggest using your imagination—all of it—to capture the essence]. “He’d say, ‘why can’t you do that? Why can’t you make 8% guaranteed?’”

We turned the volume on our phone down while he went on. “I used to take [insert bad noun here] from this guy all the time. All the time! I told this [extremely bad double-noun] it was too good to be true.”

And of course it was.

Now, we are not writing to dwell on the regulatory bumbling that led to our friend’s client losing whatever he invested in Madoff. Nor do we celebrate the loss of billions by rich numbskulls who got swindled here, for it is not merely rich numbskulls that will lose fortunes on this catastrophe.

We know of a nearby town that is losing $42 million of its police, fire and town employees’ pension money—14% of total assets—to Madoff’s apparent scam.

Instead, we seek to answer the question that has been asked of us over and over again: how did this happen? How is it possible for people to have believed this guy?

The answer is as old as Hamlet. Recall that play’s tortured hero could not believe what his uncle had done, despite the appearance of his dead father’s ghost to tell him so, until Hamlet himself had conducted his own version of our modern due diligence: he forced the new King to watch a play reenacting his own father's murder (“The play’s the thing/wherein I’ll catch the conscience of the King.”)

People simply want to believe good stuff, not bad stuff. It's human nature.

Investors wanted to believe Enron’s numbers were legit. They wanted to believe AIG’s earnings were real. They wanted to believe Fannie Mae and Freddie Mac could grow earnings 15% forever. And we don’t mean your average day-trader.

We mean professional investors.


Big names with the resources to conduct their own due diligence into Enron and AIG and Fannie Mae, but did not. Famous investors who should have known that a natural gas trader couldn’t deliver consistent earnings without resorting to fraud, as Enron did; or that the U.S. housing market could not compound at 15% a year forever, period, as Fannie Mae's books seemed to suggest.

So how did Madoff happen? Simple: enough people wanted to believe it that it happened.

And not even Hamlet’s Ghost—or Harry Markopolos, for that matter—could have stopped those people from believing it.



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Friday, December 12, 2008

The Consumer Trade Down, Costco-Style


Costco, being one of the best run retailers on the planet, ranks at the top of our list for earnings conference calls, when it comes to getting a handle on what is happening out in the real world.

And yesterday’s call did not disappoint, at least as far as getting a handle goes. As to what is happening out there…well, it’s a downer.

Here’s CFO Richard Galanti, courtesy of the indispensible StreetEvents, highlighting one of the most disturbing developments during the quarter:

…one of the other things that jumped out at us was health care costs. Particularly during the month of October and into early November, and in talking to our third party administrators of the plan, they said they have seen this a lot of places around the country and putting two and two together myself, it's almost in sync with the stock market decline that we saw health care costs go up dramatically above and beyond what you see at the end of the calendar year anyway when people have just -- they have already hit their deductibles and they want to make sure they get their free eye exam in or their teeth cleaning.


As far as trends during the last three months (ending November), Galanti had this to say:

…the trend during the quarter of weaker comps are mostly on the non-food side of our business. Needless to say, that hit earnings as well as the trend line from September to October to November was slightly down each quarter, the underlying comps. And with those weaker sales results, I might add those were despite more aggressive pricing, conscious effort on our part, to drive sales during the quarter.

How much “more aggressive” was pricing? Here’s a mind-blowing observation about television sales during the quarter:

…our television sales have been way up in November. [W]e had unit sales up over 50% in the four weeks, but that translated into a dollar sales increase of only 3%.

Yes, he did say that: television unit sales were up 50% in November—but dollar sales were up only 3%.
Here’s why:

If you go onto Costco.com, you can see that we're selling two packs of flat screen televisions for less than $1500 for the both of them.
And so…notwithstanding what's going on in the economy and with big ticket items, we have taken advantage and been opportunistic and going to vendors that have been stuck with inventory when other cancellations have occurred elsewhere and taking advantage of that.

That’s what good companies can do: take advantage of bad companies when things get rough.

And they are rough.

The few bright spots in Costco’s sales came not in the fun stuff you look for at the wholesale clubs while you’re loading up on oversized detergent and giant boxes of raspberries and bags of frozen shrimp—not iPods or digital cameras, say.

No, it is in the basics where Costco’s business is booming:

In terms of merchandise categories for the quarter, within food and sundries, which is about half our business…virtually all sub categories were up year-over-year with groceries, canned goods and what have you being the strongest comp in the mid teens.

Canned goods and half-priced television sets—the new economy, available at Costco.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Tuesday, December 09, 2008

Deep Capture? Deep Shmapture


When an email appears with the subject line, “American Soldiers punished by naked shorting,” our eyes, so to speak, perk up.

Turns out, this email is not merely some clever bit of spam, intended to get the receiver to send off their social security number or AMEX card information to some Russian hacker, but is actually sent out under the auspices of a public company CEO.

For that reason alone, the average reader might think it contains a grain or two of truth, and be inclined to take a look.

Unfortunately, while the email does indeed contain a few grains of truth—as we shall see—the email’s headline is essentially what Hitler called the “Big Lie,” a lie so “colossal” that nobody could imagine it would have been made up.

Well, this one is made up.

The email connects to a web site called Deep Capture, with a lead story that reads, and we are not making this up:

Hedge Funds to US Soldier: “I need a Maybach, so…You can die too.”

Take a Mercedes, stir in a couple hundred thousand dollars, and you get a car called a Maybach. Hedge fund guys in New York and Connecticut buy them.


What follows purports to tell the tale of a company called Force Protection, a real company that makes vehicles that protect soldiers from hidden explosive devices. Force does this by fitting the base of the vehicle with a heavy, V-shaped shield that deflects the blast outward, away from the soldiers inside the vehicle.

The tale told by this particular idiot, to paraphrase Shakespeare, is that Force Protection was driven out of business by “some people” that “began naked short selling them into oblivion” so that hedge fund managers could buy Maybachs.

According to this web site, the company was unable to issue stock following the purported naked shortselling attack, and consequently, “throttled back their expected output” of life-saving MRAPs.

The web site finishes with this whopper:

“Thus, more of these will be created in Iraq this month…” [above a photograph of soldiers saluting flag-draped coffins] “…so that soft hedge fund guys can have more of these:”—followed by a photo of a sleek new Maybach.

Having once owned shares in Force Protection—albeit briefly, owing to the management’s tendency, in our view, towards hyperbole, as well as the presence of many looming competitors in the business of protected vehicles—we can say we know of no such “naked shorting” conspiracy against Force Protection, although the shares did appear on the Reg SHO list, which is one of the grains of truth provided by this web site. (Another being that Force Protection makes MRAPs.)

Nor, would it appear, has Force Protection experienced a problem manufacturing more MRAPs this year than last, as the web site implies. The company itself, in fact, touted higher deliveries of the Cougar brand of MRAP in last month’s earnings press release:

The Company noted that the third quarter represented strong levels of MRAP production. Force Protection and its subcontractor, General Dynamics Land Systems (GDLS), delivered 422 Cougar vehicles during the third quarter….This compares with 353 Cougar vehicles delivered in the third quarter of the prior year, which generated $176.9 million.

Indeed, the company does not appear to have suffered from its inability to issue stock. Again, from Force Protection’s own press release:

The Company noted that at September 30, 2008, it continued to maintain a strong capital position, with no long-term debt and $79.4 million of cash. Additionally, the Company noted that, in order to create additional financial flexibility, in October 2008 it modified its credit agreement with Wachovia Bank to increase the principal amount to a maximum of $40 million and to extend the maturity date to April 30, 2010.


Mr. Moody concluded, "We are very pleased to continue to make progress in our operational and financial results. Our results in the third quarter reinforce our belief that we are a fundamentally strong company with an important, ongoing role to play in the survivability solutions market. We believe that there is an excellent opportunity to further develop our business, to continue to provide new technology and products to our customer and the war-fighter and, importantly, to create significant value for our shareholders."
—November 10, 2008

Hardly a company driven to the wall by naked short-selling.

Now, Force Protection has had its ups and downs, not the least of which is that there are three other manufacturers with government contracts to build MRAPs. Furthermore, there are plenty of MRAPS in Iraq already:

Although some current and former marines are critical of relying too much on the vehicles, fearing that they might change the fast-moving nature of the force, by mid-January about 2,500 MRAPs were in Iraq, up from about 100 in June. By this June, the military expected it would have more than 6,000, the bulk in Iraq.

Cheryl Irwin, a Defense Department spokeswoman, said nine manufacturers originally competed for contracts to build the vehicles and four were chosen: the Navistar International Corporation, manufacturer of International Harvester trucks; a partnership between Force Protection and General Dynamics; and BAE Systems of Rockville, Md.

—New York Times, February 24, 2008

Competition aside, Force Protection has had a few issues particular to itself.

Not being in compliance with Nasdaq Marketplace Rule 4310 (c)(14) for a period of time, as a result of not filing its June quarter 10Q, for one.

Announcing in August, 2008 that its 2007 financial statements “should no longer be relied upon,” for another.

Announcing it had identifyied “material weakness in its internal control over financial reporting,” in November 2007, for a third.



Deep Capture? Deep Shmapture, more like.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Thursday, December 04, 2008

Will They Drive to Sea Island Next Year?


Well the big news out of Detroit—and we are Not Making This Up—is that Ford Motor is going to start building “small fuel-efficient cars.”

That’s right.

Four years after crude oil prices broke the $50 a barrel ceiling on their way to nearly $150 a barrel—and then round-tripped all the way back to $45—Ford Motor is going fuel-efficient.

Here’s how the Wall Street Journal broke the story via email:

NEWS ALERT from the Wall Street Journal

Ford Motor plans to tell Congress it is retooling itself to build small fuel-efficient cars and break from the past strategy of focusing mainly on large pick-up trucks and sport-utility vehicles, a person familiar with the matter said.

—Dec. 1, 2008

It wasn’t all that long ago that Ford management was complaining about the impact of rising gasoline prices on sales of its bread-and-butter truck business instead of doing something about it, like, say, making smaller, fuel-efficient cars.

In fact, it was just two years ago that CEO William Ford, Jr. described the situation in an email to Ford employees:

“An unprecedented spike in gasoline prices during the second quarter impacted our product lineup more than that of our competitors because of the longstanding success of our trucks and S.U.V.’s…”

That was in August 2006, which was six years after the Toyota Prius first hit the U.S.

Today, the same William Ford, Jr. is telling the Wall Street Journal:

“We want to come blasting out as a global, green, high-tech company that's exactly where the country and the Obama administration want us to head.”

The time to “come blasting out” green was back in, say, 1993—when Eiji Toyoda, the William Ford, Jr. of Toyota, decided to develop a car that could get 47.5 miles per gallon, 50% better than Toyota’s best small car at the time. After $1 billion and a lot of hard work, that car became the Prius.

Water under the bridge, you may say.


And, politically speaking, you are correct. The Not So Big Three will get a bailout, because it’s hard to explain to a powerful union that Wall Street bankers and bond dealers ought to be bailed out but not Flint line workers.

And they will get their bailout despite the public outrage at the fact that the men who helped oversee the industry’s decline flew private jets to Washington to ask for the money.

Some, of course, rose to the defense of the Not So Big Three. Former baseball commissioner Fay Vincent was moved to write a Wall Street Journal op-ed piece with the following howler, “Do you think any member of Congress or the Senate has been to Iraq on a commercial jet? Of course not. Never.”

Mr. Vincent seems not to understand that commercial jet service between Dulles and Baghdad is rather spotty these days, while that between Detroit and D.C. is quite robust.

But the public was not fooled. The public intuited that the guts of the problem stemmed from the way the companies have been managed—witness Toyota’s 15 year head-start on Ford when it comes to getting with the green thing—and there was no better demonstration of that fact than the way it apparently never crossed the minds of these men that it might appear outrageous to be gassing up a fleet of G-IVs to travel to Washington to ask for money to bail out their truck-and-SUV-dependent businesses.

So we here at NotMakingThisUp wonder what that same public might say if it came to light that early this year, the already-ailing General Motors took over an entire resort—Sea Island, Georgia—for its executives.

For a full week.

And we wonder what that public might say if it furthermore came to light that GM, according to the astonished source who told us this story not long after it occurred, required that those same executives be ferried around the resort only in their own brand of cars?

Let’s hope they don’t take the private jets to Sea Island next year.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Monday, December 01, 2008

Black, and Blue, Friday: Landfill Scavangers at Saks


Much will be written about “Black Friday”—the busiest shopping day of the year, when most retailers start to coin money—and in fact much already has been written.

So we’re not going to blather about the numbers here, which look “better than feared,” to quote the most over-used phrase we’ve seen in the press all weekend.

But having watched the retail business for more than a couple of business cycles, we’ll offer what we saw happening. And what we saw was a continuation of the Great Leverage Unwind.

Now, for starters, it is extremely dangerous, investment research-wise, to walk into a store and ask the nearest clerk “How’s business?”

Most likely you’re talking to an hourly employee who's been working at the place less than a year. As such, they don’t think in terms of “year over year same-store sales.” They think in terms of “today” versus “yesterday.” Or even “now” versus “this morning.”

So chances are they’ll tell you things are really busy if they happen to be really busy at the moment; and really slow if they happen to be really slow.

Also, a store can be packed or not based on the time of day, or the day of the week, not to mention its proximity to the holidays, as well as whatever the regional economy is doing.

But by visiting the same stores at the same time of day at the same time of year, you can take the pulse of what’s happening to a reasonable degree.

And the pulse we took over the weekend was like nothing in years.

Saks—the Fifth Avenue Saks—looked like Filene’s Basement the day before Thanksgiving, with 30-40-50% off signs everywhere, and women rifling through stacks of relatively inexpensive scarves and other accessories with the hunted look of landfill scavengers.

Indeed, all New York City seemed to be on sale—and full of shoppers looking for a sale. Our old pal Mustafa—we used to have breakfast at his place every morning—said the restaurant business has been horrible. He motioned out the window at the crowds standing by the Rockefeller Center skating rink: “Look, nobody there!”


And indeed the crowds did look thin.

This is no doubt due to the rising dollar—and falling world stock markets. Unlike years past, we heard fewer accents on the streets of New York City, particularly Eastern European voices. And this is killing high-end retail.


One extremely upscale store that’s been packing ‘em in the last few Bubble years was so empty on Saturday afternoon you could have shot the proverbial cannon through it and not hit a customer, although you would have taken out plenty of “For Sale” signs.

The place felt like a Tuesday morning in June, not the day after Black Friday.

Moving to another side of the country, we found that the airports, too, were dead. And not just on the inside, but on the outside, too: we had a hard time driving out of the Hertz rental lot in San Francisco owing to an unusually high number of cars parked everywhere.

Where’d the customers all go? Simple, they traded down. So it was Black Friday for some retailers, but quite Blue for others.

The Great Unwind continues.



Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Wednesday, November 26, 2008

How Borders Group Returned Value to Nobody


The poster child of poor capital management might just be Borders Group.

Borders, which runs one of our favorite book stores in the country (Union Square in San Francisco) and goes by the ticker BGP, is the now-beleaguered bookseller spun out of K-mart long ago in happier times.

Borders is also one of those companies that so desperately wanted to make Wall Street’s Finest happy—not to mention its own shareholders—that it spent all its cash, and more, to buy back stock.

“Returning value to shareholders,” it was called back in February 2005, when Borders management proudly announced a $250 million share repurchase plan, and the stock price was $25.

Wall Street’s Finest were, of course, delighted, and the company received the kind of “attaboys” that caused a long list of management teams to pursue the greatest value-destroying fad in American business history. In this case, it crippled a once wonderful chain of bookstores:

“The stock’s cheap, in our opinion, and the company seems to agree,” [hedge fund manager Bill] Ackman said last week at the Value Investing Congress in New York. Borders…has “one of the most aggressive share-repurchase programs I’ve ever seen.”

—Bloomberg LP, November 2006

In the end, of course, that repurchase program was far too aggressive.

Five years ago Borders had a $1.9 billion market value and more cash than debt on its books. Today, Borders has a $50 million market value (yes, that’s right, $50 million) and more debt than cash. Like, $525 million in debt against $38 million in cash.

Oh, and the stock’s current price? $1.00 a share.

“Returning value to shareholders?” No. “Mortgaging the future,” at best. “Destroying the company,” at worst.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Monday, November 24, 2008

Letter from Las Vegas


Clever advertising notwithstanding, it turns out that what happened in Vegas not only didn’t stay there, but the consequences have taken down nearly every investment bank in America, caused bank runs in England, wiped out Iceland’s entire banking system, and helped set back the market value of the S&P 500 by a decade .

But what about Las Vegas itself?

What is happening in a city that once advertised itself, essentially, as a place to come and cheat on your wife?

We received the following report from a regular visitor to the various trade shows that make Las Vegas their home, and thought it worth passing on to our readers.


When I visit Las Vegas I make my way to the airport exit and enter a line to get a taxi to the hotel.

On every occasion prior to tonight I have encountered a line of people numbering in the hundreds (sometimes several hundred) who wind their way up and down four rows that stretch up and down a wide sidewalk outside the airport exit.

Not this time. There were perhaps three dozen people in line. No need for four rows. One was enough. Instead of the usual 5 to 10 minute wait (I was always amazed at how efficient they were hustling 100s of people into taxis and out to the casinos), I was in a taxi within a minute.

The taxi driver, a guy in his 30s from Brazil who had been in Vegas for 10 years, told me that the volume of people he sees is down 30% compared to last year. And the people who come don't leave their hotel. They aren't going out at night. So his business at the hotels is down.

How is the real estate market right now in Las Vegas? He said it’s great if you want to buy a house at a good price. He bought 8 years ago for $170,000, says his house is now worth $230,000, but three years ago it was worth $450,000. That's when his wife wanted to sell and move into an apartment, and buy a house back home in Brazil. But instead they refinanced, taking out $50,000 cash. Now, “It’s okay as long as I work and my wife works and we can pay our bills, and better if we can save a little.”

The hotel is another story.

Usually, when I book a room in Las Vegas it’s $79-99 a night at the Luxor through Orbitz. I can walk to the Venetian where the conferences are and where the rooms normally cost $300-400. This time I booked at the Venetian. Reason? It cost $120/night. But that's not the end of the story.

I get to the registration desk and the clerk asks if I want to be upgraded to a suite. I tell him no, I’ll just take the room I booked. He then registers me on the computer, hands me my key with a map of the hotel and tells me he gave me a suite anyway.


What happens in Vegas is happening everywhere!



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Saturday, November 22, 2008

Is Buffett Worried? Part II: “It’s Not Personal, Sonny.”


Finally, Berkshire Looks Undervalued
By ANDREW BARY

Ignore misplaced skepticism -- Buffet's baby is finally cheap again.

—Barron’s, November 24, 2008


Well, now we know.

The culprit in Berkshire Hathaway’s recent fall from grace—at least in the credit default swap market—may just be the very firm Warren Buffett himself invested in just two months ago.

That firm would be Goldman Sachs.

According to this week’s Barron’s:

The Street talk is that Berkshire's counterparties, believed to include Goldman, are worried about their Berkshire financial exposure and are trying to hedge that by buying protection in the credit-default swap market.

Barron’s goes on to point out what we alerted readers here on Thursday:

The cost of that protection last week hit five percentage points -- up from a half-point earlier this year, and seemingly absurd for a company that still deserves a triple-A credit rating. Similar protection for Chubb (CB), which has a lower credit rating, costs less than a percentage point.

What makes Barron’s speculation particularly juicy is the fact that Warren Buffett is an extremely loyal person.


Buffett almost never replaces the CEOs of the 76-plus Berkshire companies, short of government pressure in the case of General Re; never sells what he calls Berkshire’s “permanent” investments in the likes of Coke and Washington Post, no matter how high the price or how much their prospects have change; and even hangs on to once-great companies such as Fruit of the Loom despite the near-total evaporation of their competitive “moat” and the inevitable decay in their business.

One wonders, if the Barron’s speculation is true, how Buffett feels about Goldman Sachs’ own peculiar notion of “loyalty”…which is to say more of the Michael Corleone type—“It’s not personal, Sonny. It’s strictly business”—than of his own.



Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Thursday, November 20, 2008

Is Buffett Worried? No, but Somebody Is


Warren Buffett professes never to worry about a position, even if it’s down 50%.

Since he never strays outside his famous “circle of competence,” except maybe for that US Air investment a few years back, Buffett figures he knows more than the market thinks it does, manic-depressive as that market tends to be. “You use the market to serve you and not to instruct you,” he told one young investor from India at the Berkshire annual meeting this year.

So the odds are good that Buffett himself is not breaking a sweat over his own stock’s 40% decline since his late September cavalry-to-the-rescue investment in Goldman Sachs.

After all, who knows more about Berkshire than Warren Buffett?

Still, somebody out there is indeed breaking a sweat about Berkshire, and not just the company's stock. Credit default swaps in Berkshire—insurance against a default by Berkshire—have been climbing ever since the market began its September swoon, and suddenly spiked in the last few days.

Specifically, the Berkshire 5-year CDS began the month of September at about 100, climbed to just over 250 a week ago, and cruised to 481.7 yesterday, according to our Bloomberg. (This means somebody was paying $481,700 annually to insure against a default on $10 million of debt for five years.)


Why does this matter?

Well, credit defaults swaps have been an excellent early warning indicator of trouble at nearly every financial company that now no longer exists in their previous forms. And the reason is quite simple: companies doing business with highly leveraged financials can buy credit default swaps in those financials in order to hedge the risk of a collapse.

This is exactly what happened with AIG. According to the recent, excellent Wall Street Journal account of AIG’s final days, Goldman Sachs reportedly was buying credit default swaps in AIG to hedge their counterparty risk well before that firm hit the wall. So by keeping an eye on movements in credit default swaps, shareholders get a good look at where the bond market thinks the company is going.

And in the case of Berkshire, the bond market is worried.

Most strikingly, Triple A-rated Berkshire’s CDS are trading higher than several considerably lesser lights in the insurance realm, including Allstate (301.7), Progressive (252.3) and Odyssey Re (158.3).

Which begs the question, who is buying credit default swaps in Berkshire Hathaway, and why?

Taking the last question first, the most obvious reason is Berkshire’s heavy exposure to derivatives, particularly the $37 billion notional value stock market put options Buffett sold for nearly $5 billion when the world markets were substantially higher than today, and on which Berkshire has taken mark-to-market losses of nearly $2 billion already.

In addition to the market index puts, there is another $11 billion in notional value worth of credit default obligations on Berkshire's books.

All told, Berkshire entered the crisis with nearly $50 billion of theoretical derivative exposure. This may seem ironic, given Buffett’s early warnings against derivatives as an asset class (“ticking time-bombs,” he called them five years ago), but Buffett is no shrinking violet when it comes to making money off whatever comes his way that fits in that circle of competence of his. “We have at least 60 derivatives,” he told shareholders two years ago, “and believe me: we’ll make money on all of them.” And his shareholders believed him.

But somebody, now, does not.

Who might that somebody be? For starters, the firms (insurance companies, most likely) who purchased those index puts from Berkshire might be getting nervous that, since the crisis has not let up, they should hedge their exposure to Berkshire.

Or it might be insurance companies that have purchased reinsurance from Berkshire (Berkshire does a huge business in catastrophic reinsurance—hurricanes and such), hedging their exposure in case the “Oracle of Omaha” suddenly loses his touch.

Time will tell if Mr. Market is instructing us, or not.


Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Monday, November 17, 2008

The Sincerest Form of Flattery


“I think there is something happening in the American marketplace that has to be stopped,” Byrne said. “When it comes to light it’s going to make Enron look like a tea-party.” [Emphasis added.] —Overstock.com CEO Patrick Byrne in “Insights from an Outsider” by Chase Christiansen, from Weber State University address, Nov. 6, 2008.


Chapter 28: A Convulsion That Makes Enron Look like a Tea Party—From “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2011).


On the one hand, we’re delighted Byrne read the book. On the other hand, we’re disappointed he doesn’t seem to be giving given credit where it properly belongs. That is, to Berkshire Hathaway Vice Chairman Charlie Munger, who made the Enron comment at last May’s annual shareholder meeting.

Here’s how we wrote about it in “Secrets”:

The questions have been uniformly friendly…. But when Buffett calls on the twenty-fourth question of the day, the pleasant mood quickly changes.

“I’m Dr. Silber of the Infertility Center of St. Louis,” the man starts off, in a bright, friendly voice. The arena collectively freezes. Here we go: the abortion question….

But the doctor isn’t going there at all. “We have three candidates, all of whom seem to be pandering to voters,” Dr. Silber says, referring to the presidential election campaign now in full swing. “What would you do as president?”…

Munger speaks in his crisp, didactic fashion. “I’d like to address the recent turmoil and its relation to politics…. We have had a convulsion that makes Enron look like a tea party,” he says. “Human nature always has these incentives to rationalize and misbehave. We’re going to have turmoil as far ahead as you can see.”

—Berkshire Hathaway Vice-Chairman Charlie Munger, quoted by Jeff Matthews in “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”. Emphasis added.



It is, indeed, a great line.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Friday, November 14, 2008

Jamie Dimon for Treasury?


Well, what the heck.

Since we here at NotMakingThisUp already endorsed one candidate for an important financial post in the new administration (see “Jaimie Caruana for Fed Chairman!”), let’s do another: Jamie Dimon, CEO of JP Morgan, for Treasury Secretary.

Now, this idea actually has a shot—Dimon has been giving advice to Obama himself; consequently, Dimon's name has been tossed around as a candidate for Treasury, along with one even bigger name: Warren Buffett.

Buffett, I suspect, would rather stick needles in his eyes than take a political position reporting to the Senator Foreheads of the world. Can anybody seriously imagine Warren Buffett explaining financial markets to “Friend of Angelo” Chris Dodd?

(I recently bet a woman at a book signing that Buffett would never take the job. Actually, she bet me. She asked if I thought Buffett would be the next Treasury Secretary. I said something to the effect of “Not a chance,” and she immediately bet five bucks. I’ve already spent the money.)

But Jamie Dimon is something else. Speaking at a recent Merrill Lynch conference, Dimon gave perhaps the best explanation for the financial freeze-up I’ve ever seen, and it didn’t involve charts or graphs.

“Let’s do a little interactive questionnaire right here,” Dimon said, breaking off an attempt to answer a question about when lending will start to ease up. “How many of you have moved money from riskier assets to risk-free assets, to protect your investors’ capital?”About half the hands in the room went up.

“You’re the problem,” he said, smiling, but making the point. “You’ve made the right decision for your business, but until people start moving money the other way, we’re stuck.” [Those are not all exact quotes, but quite the gist of his comments.]

Even Chris Dodd could have understood him.

Dimon also gave a rousing windup to his talk, saying that anybody betting against the U.S. was making a huge mistake. He defended Bernanke and Paulson—“They’re making decisions on the fly,” he pointed out, adding that despite all the talk about how slowly the administration is moving, his counterparts in Asia are impressed with how swift the actions have been in comparison to past history.

Now, my dog Charles will be Treasury Secretary before Warren Buffett.


Not that Charles has anything on Buffett, brain-cell-wise, if you get the drift. It’s just that Buffett has a company with over a quarter-million employees, over $100 billion in sales, and nearly 80 companies—every one of which he purchased—not to mention some serious financial derivatives now on the books in the form of S&P Index puts and CDOs.

He’s not going to turn all that over to some blind trust and start schmoozing Congresspersons who wouldn’t know a CDO from a CD.

But Jamie Dimon? I wouldn’t bet against it.



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Wednesday, November 12, 2008

Hedgies in the Hot Seat


So the heaviest of Wall Street Heavies—George Soros, Philip Falcone, John Paulson, James Simons and Ken Griffin—are making their way to Capitol Hill even as we write this.


The five, supposedly chosen because they all made more than a billion last year, will testify before thoughtful and deliberative Congresspersons who really want to learn about this hedge fund business of ours, in order to make sure that Washington regulates the hedge fund industry as intelligently and rationally as possible.

We’re joking, of course.

What those Congresspersons want to do is say as many words as possible before their time limit expires and the Chairman gavels them to get to the point, before they run off to their next meeting.

We know: we’ve testified before one such committee.

On the one hand, it was kind of cool. They were as diverse a group of individuals as you’ll ever get under one roof; about as American as could be. On the other hand, they were, for the most part, blowhards. All it all, it was quite depressing.

The typical “question” went something like this:

Congressperson Sludge: “Thank you, Mr. Chairman, for this opportunity to get at the heart of the concerns of my constituents in the great state of [fill in your average state]. Now, Mr. Hedge Fund Manager, I want to ask about these hedge funds and why these hedge funds are hedging, and what they hedge. Is it not dangerous when so much money is in the hands of so few people with no accountability to the American people, this rabble you’re talking about, who do most of working and paying and living and dying in this town—”


Chairman Bile (banging gavel): Congressperson Sludge, you’re doing Jimmy Stewart from “It’s A Wonderful Life” again. Next time I hold you in contempt!"

Congressperson Sludge: “I apologize, Chairman Bile. What I want to ask the hedge fund persons is but before I get to that let me say that my state is the banjo capitol of the world, and banjos are the backbone of our society, and your corrupt influence on our financial structure should not be tolerated, except, of course, in the event of war—which I voted against, although it seems to me—”

Chairman Bile (banging gavel): Congressperson Sludge, your time is up. [Looking around.] Sludge? Where did he go?


Today’s hedge fund line-up is quite impressive, particularly because Congress finally picked one of the right guys to talk to: John Paulson, who got this whole subprime mess dead right.

Too bad nobody invited him to the table when his namesake, Henry Paulson, and the academic theorist Ben Bernanke, whose main qualification for the job of Fed Chairman seems to be that he studied the Great Depression and wrote a paper about it, were trying to figure out how to deal with the subprime crisis.

If they had, the Feds might not have gone off on tangents like the supposed “naked short-selling” crisis that some Congresspersons actually became convinced was what drove Fannie Mae to ruin.

Of course, just this week, Fannie Mae reported a $29 billion loss. And nowhere in the press release did we see a reference to the “naked shortsellers” who might have caused the loss.

Let’s hope Congressperson Sludge actually asks a real question—and waits around to hear the answer—today. He might learn something.

Nah.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Monday, November 10, 2008

Jaimie Caruana for Fed Chairman!


Inside the Fed, there were running debates resembling academic seminars, with Mr. Bernanke running discussions but often offering few opinions.
—The Wall Street Journal, November 10, 2008

Who is Jaimie Caruana, you ask?

As governor of Spain’s central bank, Mr. Caruana “helped implement dynamic provisioning,” according to the same Wall Street Journal—i.e. this morning’s edition—that also reported on the Bernanke Fed’s predilection for verbal noshing of the academic type.

What is “dynamic provisioning,” you ask?

It is, essentially, a spare fuel tank for banks that siphons off excess cash when an economy is running smoothly, for the day that same economy starts to sputter, as The Wall Street Journal explains:

In 2000, Spain’s central bank introduced a system of so-called dynamic provisioning that forced banks to build up reserves against future, hypothetical losses. At the time, Spanish banks stiffly resisted the regulation, fearing they would lose ground against competitors.

Now the rules are credited with giving Spanish financial institutions with big capital cushions that have helped them ride out the financial turmoil remarkably well, despite the collapse of the country’s housing bubble.

Take a gander at the chart on loan-loss provisions in the Journal story for a look at how Mr. Caruana’s efforts prepared Spain for the inevitable. (Sharp-eyed readers may note that Iceland appeared to be well-reserved at the time.)

Imagine, a political appointee who took the time to think ahead!

That’s why our vote is for Jaime Caruana, for Fed Chairman.



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Friday, November 07, 2008

Dubious about Dubai


OCTOBER 7, 2008
In Dubai, Show Goes On for Property

DUBAI -- Housing crisis? Mortgage meltdown? Credit crunch?

After spending a few hours at Cityscape, this Mideast boom-town's annual real-estate trade show, you just might forget about the financial crisis gripping much of the rest of the world.

—The Wall Street Journal


It seems like only a month ago that real estate speculators in Dubai were patiently explaining why their Real Estate Bubble was different from our Real Estate Bubble.

In fact, it was just a month ago!

On Sunday evening before the show, Nakheel, a Dubai-government-backed property developer, invited guests including the acting couple Catherine Zeta-Jones and Michael Douglas to the pink Atlantis hotel at the tip of its man-made, palm-shaped archipelago.

The occasion was the launch of Nakheel's latest project: a kilometer-tall skyscraper. The $38 billion project is supposed to someday tower above the world's current tallest building, Burj Dubai, itself nearing completion here.

Hey, with a government-backed developer and Catherine Zeta-Jones on board, what could go wrong with a kilometer-tall skyscraper?

"I'm sure most of you are asking why we're launching this, and you'd be mad not to question it," Nakheel's chief executive Chris O'Donnell said. He added, "The project will be built over 10 years, and we'll have many more [economic] cycles before then...the world will be a different place by the time it's built."

"Mad" is, we think, the exact word for
O’Donnell's assurances, as reported by the Wall Street Journal, that the speculation in Dubai will survive whatever cycles the world will throw at it.

In fact, O'Donnell's words bring back memories of summer, 2007, when an investment banker stood at a podium in New York City and confidently explained to a group of investors why Bubble-era multiples on peak-cycle EBITDA numbers for deep-cycle, capital intensive businesses like Freescale Semiconductor made sense.

The key, he said with a straight face, was the lack of restrictive covenants on the leveraged loans, which would help Freescale and others survive whatever economic cycles might be thrown their way.

Still, now that the leveraged loans of Freescale and others are going begging, we find that Perini Corp, a builder of mega-casinos among other things, wants to go to Dubai and get in on the game, as management explained on yesterday’s earnings call:

“The current economic climate involving the credit markets has caused some customers delay in certain new project starts, primarily in the hospitality and gaming markets. Some customers have decided to postpone preconstruction activity until financial markets regain their footing and open up credit capacity….

“Overall, we continue to see many opportunities to secure new business in each of our business segments, both domestic and international. Bob will share more details of our prospects in a few minutes, including our strategy to become a significant contractor in both Dubai and Abu Dhabi in the Middle East.

“In Dubai, we have agreements in principle with substantial local and international partners to participate in construction joint ventures which may be awarded within 90 days. These are for large hospitality and mixed-use projects for which we have participated in several design workshops to date….”

Call us cynics, but if we were building “large hospitality and mixed-use projects” in an overbuilt, Bubble-ridden market like Dubai, we’d want the cash up front, in the bank.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Wednesday, November 05, 2008

How Dave and I Learned about Efficient Markets



Markets, especially political markets, really are efficient.


I happened to be in downtown Chicago yesterday, Ground Zero of what was shaping up to be—hours before the polls had even closed—an Obama victory celebration unlike anything American politics has ever seen.

And the most striking thing about it was you could feel what was coming in the air.


A sort of magnetic pull seemed to be carrying people towards Grant Park from every neighborhood in the city. People wearing Obama buttons and Obama hats and Obama shirts with “I Voted” stickers on them walked in pairs, in groups and in long lines. And they were lining up at barriers in the park, to wait in the unusually warm afternoon sunlight for whatever it was they seemed to know was coming.

I’d seen this before—this anticipation of something coming, something already in the air before anything was officially declared settled. Only it was on the losing side of a political campaign.

The politician was Massachusetts Senator Edward Brooke, the first African-American Senator elected since Reconstruction. Immensely popular until a bitter divorce, Brooke had been struggling to hang on for a third term in the Senate.

His challenger was a bright, attractive Congressman named Paul Tsongas, who would later run unsuccessfully for President and die an untimely death from cancer. For reasons not entirely clear even thirty years later, Brooke’s campaign was largely entrusted to a bunch of recent college graduates—including a guy named Dave, and yours truly—whose main talents tended towards pretty much anything except what a well-run campaign needed.

And so, Brooke lost.


In truth, he’d lost weeks before the campaign ended, but not one of us had figured that out. So come election night, Dave and I stood around the badly-named Victory Party watching returns coming in on a TV monitor, wondering where everybody else was.

‘Everybody else’ was at the Tsongas party.

And that’s when Dave and I learned how efficient markets—and politics—can be. The crowd knew it before we knew it, before the networks knew it, before Brooke himself conceded.

[Minor historical footnote: thanks to Barbara Walters' shameless book-plugging, we now know that she was having an affair with Brooke during his campaign, so perhaps the blame for his defeat does not accrue entirely to David and me alone. Perhaps.]

Walking towards Grant Park yesterday took me back thirty years, almost to the day of that realization. Markets—especially political markets—are extremely efficient.

Whichever way you voted, it was kind of cool.


Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Monday, November 03, 2008

Companies Bought High, But Won’t Buy Low


Regarding our uses of cash in the quarter, capital expenditures were $49 million. We paid out dividends of slightly over $21 million and we repurchased 475,000 common shares for $25 million….

While we believe we have access to ample liquidity, we think it is prudent to so suspend our share repurchase program for the time being.

—Charlie Cooley, Treasurer, Lubrizol, October 30, 2008


Sharp-eyed readers who do the math implied in the quote above ($25 million spent buying back 475,000 Lubrizol shares = $52.63 per share) and then check the Lubrizol share price on their Google Finance ($37.58 last trade), will no doubt scratch their heads at the bizarre logic contained in the above commentary from Lubrizol’s treasurer.

Lubrizol happens to be a sleepy specialty chemical maker with a decent franchise in fuel additives. As the price of crude oil tripled in the last couple of years, so Lubrizol’s cost of goods soared, crimping margins as well as the recent stock price.

Yet now that Lubrizol's share price has declined along with everything else in this fear-crazed environment, the company is saying “We bought our stock at $52.63 a share, but we will not buy stock at $37.58 a share.” (For the record, Lubrizol shares traded as low as $34.25 and as high as $38.39 on Friday, when the statement was made.)

Fortunately, after several years of being asleep at the proverbial switch, Wall Street’s Finest are spotting the fallacy contained in the inherently illogical notion that companies who bought their shares near their all-time highs a few short months ago—under the “returning value to shareholders” mantra—are too scared to buy the very same stock at far lower prices today.

In fact, one of those Finest asked exactly the question of Lubrizol management that all such former members of the Returning-Value-To-Shareholders Club should be asked.

We reprint the dialogue courtesy of the indispensible StreetEvents:


Jeff Zekauskas - JPMorgan - Analyst

And lastly, you said that you bought 475,000 shares…and you spent $25 million, so you bought them at $52 a share. Your outlook is I guess the same as you thought it was, but you are suspending your share repurchase now that the stock is at $34. Do you think that that is -- do you think that that is a prudent thing to do?

Charlie Cooley - Lubrizol - SVP, Treasurer & CFO

Fair question. And as you know, Jeff, we have been asked this question during the course of the year, asking why our share repurchase program has been as kind of methodical and systematic as it has been. We have never viewed the share repurchase program as primarily being a tool of making a call on our share price. Rather we see it as a way of balancing our use of cash and adjusting [our] capital structure….


This is all about maintaining the strong financial help that we have enjoyed for years. So it is suspended temporarily and we will look for an opportunity to get back into a share repurchase mode.


We’re not sure exactly what Mr. Cooley meant by “balancing our use of cash and adjusting [our] capital structure.”

We think it means, “We bought high, and now we’re too scared to buy low, but we don’t want to say so on a conference call.”

Other interpretations are welcome.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.