Thursday, April 30, 2009

Breaking a Rule for Peter Buffett, and We Hope Neil Young Doesn't Mind


We have a few rules here at NMTU.

One is "No Yahoo Message-Board Language."

By that we mean that the commentaries offered by readers should have no "LOL"-type nonsense and no all-lower-case run-on sentences, no cursing and no mindless personal retribution.

Some readers don't get it--a lot, actually--and their comments are left in our inbox, never to see the light of day. 383 of them, at last count, over our 4 year history.

A second is "No Advertising."

Since Day One we have not used Google Adwords or any other form of advertising on this site, nor do we intend to. We'd like to think it's an ethical stance, the way Neil Young refused to let corporate sponsors run his tours. But mainly we're just control freaks who worry about the dilutive effect of other people's messages interfering with our own.

Hey, maybe Neil's a control freak, too. In any case, there'd be worse examples to follow.

A third rule is we don't shill for anybody.

The average blog-reader might not realize it, but most bloggers receive emails from PR people on a daily basis. Dozens each week.

The PR flaks are looking to promote a website or a book, or frequently an author who knows all about some topical subject...and if you want to talk to the author, call this number.

(Overstock.com CEO Patrick Byrne's flak did this during the financial crisis last fall, as if a CEO of a public company had nothing better to do than yap about his conspiracy theories regarding the economy. As we recall, Byrne was taking credit for predicting the financial crisis, even though his company, which should have benefitted mightily from the trade-down effect as did Wal-Mart, Family Dollar and a host of others, wasn't exactly knocking the cover off the ball like those well-managed retailers.)

All this is by way of saying we're going to post something here for somebody else, for the first time ever.

And we're doing it just because this individual's PR person asked nicely, several times.

Also, in doing our research for "Pilgrimage to Warren Buffett's Omaha," we liked what we learned about the individual this PR person represents.

Finally, the event being promoted might just be the only not-for-profit gathering during the Berkshire annual shareholders meeting.

So here goes: our first, and probably last, act of publicizing something entirely for the sake of publicizing something.


Warren Buffett’s son, Peter, will be returning to his hometown for an evening of ‘Concert and Conversation’ at The Rose theater. All proceeds from ticket sales are going toward the Omaha-based foundation, Kent Bellows Studio and Center for the Visual Arts.

Peter’s ‘Concert and Conversation’ serves as an entertaining and informative look into the life of a man with a truly unique upbringing. His open discussion about the lessons he's learned as the son of one of the most noteworthy investors of our time and its effect on creating the man he's become, acts as a true testament that life is never a straight road.

The evening will include live performances of selections from Peter’s album releases including his latest, Imaginary Kingdom, punctuated with videos from his film/television work and philanthropic activities.

EVENT DETAILS:An Evening of Concert and Conversation with Peter Buffett
WHEN: Saturday, May 2nd at 7:30 pm
WHERE: The Rose, 2001 Farnam Street, Omaha, NE
TICKETS: $42, with $25 of the cost being tax deductible

http://rosetheater.org/season-events.asp


I hope Neil Young understands...


Jeff Matthews
I Am Not Making This Up

NotMakingThisUp LLC
Copyright 2009

The Least Helpful Calls Today


The least helpful call you will get today—well, there are so many, and all of them in one stock, that we have a hard time winnowing it down to a single unhelpful call.

The stock, for the record, is Sequenom, a genetic testing company with a much-ballyhooed, non-invasive Down syndrome test that yielded what appeared to be highly accurate test results in recent months, and was expected to be launched this summer.


The results looked so good the company was able to sell 5.5 million shares last summer, with barely a blip in a rising stock chart, to help fund the test.

Then last night the company announced a delay in the test launch, caused by “employee mishandling of R&D test data and results.”

A stormy conference call a half hour after the press release did nothing to appease the barking seals that had been recommending the stock on dreams of billion-dollar type sales potential: “The clinical performance that was portrayed for these tests appears to be questionable,” is how the CEO put it, after much browbeating.

So, this morning, Leerink Swann, Rodman & Renshaw, JMP Securities and Oppenheimer, among others, have all removed various labels on the shares of Sequenom ranging from “Buy” to “Market Outperform” to “Perform” (yes, there are brokers who call stocks “Perform,” whatever that means) and replaced them with labels ranging from “Market Perform” to “Underperform,” with a couple of brave firms daring to use the less ambiguous “Sell.”


Now, these moves don’t particularly help anyone looking to follow the advice of their brokers, which is why they are Least Helpful Calls.

After all, last night’s close in the shares of Sequenom was $14.91. This morning, pre-market, the price is somewhere in the $3 area.

Certainly the champ of today's Least Helpful Calls has to be a firm named Auriga U.S.A. which initiated the stock with a Buy and a target price of $20 a share just yesterday, and this morning is downgrading it to a Sell.

New target price, $1.

Still, we nominate all the brokers who are downgrading Sequenom this morning for the Least Helpful Call You Will Get Today.

And now we head to Omaha, for a meeting that should be far more helpful than what we're hearing on Sequenom this morning.


Jeff Matthews
I Am Not Making This Up


© 2009 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, April 23, 2009

What They Want to Know: Our Top Ten List for Warren Buffett


Well, the questions are in, and we have winners.

74 questions were submitted to our “Top Ten Questions We’d Like to See Warren Buffet Asked” contest, and more than 300 readers voted for their favorite.

Now, we’re unfortunately a little primitive technologically-speaking here at NMTU, and readers could select only one question—not ten, as we originally envisioned—for the list.

As it turned out, however, this had a distinct benefit: it reduced ballot-stuffing, and the leaders really stood out from the rest.


For example, almost half the questions received one or no votes. Three-quarters of the questions got five votes or less. And 85% received fewer votes than any of the Top Ten questions.

So our Top Ten results were unambiguous, and by and large they fulfill Buffett’s own goal of getting questions about the business, not the kind of “What Would Warren Do” stuff that dominated last year’s meeting. (When the high school senior from Germany asked Buffett “what I should do for the rest of my life” it got a little frightening—at that age I wasn’t thinking much beyond what I was going to do the rest of the afternoon.)

Let's consider them one by one.


Question 1, the top vote-getter—whether Buffett has a back-up in mind for Berkshire’s insurance ace Ajit Jain, who operates out of a small office in Stamford, Connecticut yet is responsible for more of Berkshire profits than any individual besides Buffett himself—might seem obscure to those who don’t know much about Berkshire beyond Warren Buffett and Charlie Munger, but it’s a great question, and has never been asked, as far as I know.

While everyone wants to know what Berkshire will do to replace Buffett if he gets ‘hit by a truck,’ nobody seems to wonder what Buffett would do to replace Jain if the truck should appear in Stamford, Connecticut, rather than Omaha, Nebraska.


And it’s a material issue for Berkshire shareholders.

Questions 2 and 9 are Moody’s-related, but each takes a different angle on the subject. The first asks why Buffett doesn’t buy Moody’s and restore the franchise; the second asks why Buffett didn’t use his considerable prestige and clout to rein in Moody’s during the subprime ratings mania.

I like ‘em both.

Question 3—how Buffett justifies holding stocks “forever” when the fundamentals have permanently changed—was asked a couple different ways, and this is the version that won the most votes.

It’s a great question, particularly following a year in which many individual investors, lulled to sleep by the Great Bull Market, saw their pensions vanish thanks to the collapse of former “hold forever” investments such as Fannie Mae, Freddie Mac, AIG and Citibank.

While Buffett had the wisdom to unload his Fannie Mae years ago (he correctly saw the earnings manipulation for what it was: earnings manipulation with potentially catastrophic consequences), many others weren’t so fortunate.


Even The-Prince-Who-Rescued-Citibank in 1990, poor old Al-Waleed bin Talal bin Abdul Aziz Al Saud, “The Arabian Warren Buffett,” got hosed on his “forever” investment when Citibank did what it does best: overleverage its balance sheet and underprice its risks.

I’d bet the Prince—and the Berkshire shareholders heading to Omaha—would appreciate hearing what, exactly, Buffett would say about this topic.

Question 4 is only one of a handful of questions we received that related to Buffett’s high public profile, and it’s a good one. The other questions on this general topic were, however, more pointed, less objective, and seemed eager to take Buffett to task both for his support for Obama (he is a lifelong Democrat: people who are surprised by this haven’t read “Pilgrimage to Warren Buffett’s Omaha”!) and his “Buy American, I Am” op-ed in the New York Times early in the financial collapse.

But our readers are a discerning bunch and showed no inclination to get into the political side of things in these questions. I’m grateful but not surprised that they picked the best question of the bunch.

Question 5 is also one of which we received several on the same topic—the topic being Buffett’s large derivatives bet. Essentially, he wrote insurance against the stock market going down in a big way, not long before the stock market went down in a very big way.

Now, Berkshire has written catastrophic insurance against earthquakes, hurricanes and billion-dollar consumer contests for decades, and has made money doing so. And it is likely Berkshire will make money on the index puts in the long run.

Buffett himself wrote about the derivatives at length in the current shareholder letter, framing them as a low-cost source of capital, which they very likely will have proved to be when they mature decades hence.

Nevertheless, there is a larger issue at play here. It is whether Buffett handcuffed himself by doubling-up on the market near its peak, forcing him to sell stocks into the market decline in order to make investments in GE, Goldman Sachs and Wrigley—and this question frames the issue in a way worth a response.

Question 6 is just plain terrific, and anybody who has followed Buffett's investment career would be interested in hearing his response, for Buffett has, in recent years, invested heavily in regulated energy businesses requiring what for Buffett is anathema: heavy capital expenditures.

Indeed, for the first time in three decades of writing shareholder letters, Buffett boasted about spending more money in these businesses than they earn where he used to brag about how much money Berkshire took out of its businesses.

It would not be an exaggeratation to call that a jaw-dropping moment in the annals of Berkshiredom.

Question 7 echoes Question 3, with a more academic and forward-looking flavor.

Question 8, regarding Buffett's thought process in ramping up his Conoco-Phillips investment at the peak of the oil mania, is one of my favorites, and I hope it gets asked—not because it rehashes what Buffett has already admitted in his letter was a horrible investment (a “sin of commission”), but because it gets at the most uncharacteristic aspect of the investment, which is an apparent lapse in the key ingredient in Buffett’s success: his rationality.


Now, as Buffett himself wrote in his latest letter to shareholders, he wants more questions about the business than he's been getting in recent years, and I think we’ll be giving Mr. Sorkin at the New York Times plenty of good ones, all worthy of the Oracle’s time.


These are 9 rational and dispassionate questions, and aside from #4 they bear entirely on either the Berkshire businesses or Buffett’s investment methodology.

Question 10, however, is different. It’s about the AIG affair—something shareholders have been too timid to bring up in the past.


And who could blame them: would you want to stand up in an arena teeming with 17,000 Warren Buffett fans (and another 10,000 watching from satellite locations), and ask a hostile “What-did-you-know-and-when-did-you-know-it?” question about the biggest black eye in Berkshire’s 44-year history under Buffett?

While the AIG affair is, nevertheless, a business issue, and worth asking about, Question 10 is phrased in a personal, accusatory fashion that I didn’t endorse. When the sender refused to restate it in a manner more likely to generate a response, it stayed as it was.

And since no other questions about AIG were submitted, and since our readers want to know what Buffett would say about the matter, well, the question is as it was submitted.


I apologize for the tone and the implication, but not for having an AIG question on our list. After all, a CEO who didn't blink an eye when he was asked in front of 30,000 people last year if he “believed in God and had a personal relationship with Jesus Christ” could handle this one, too. (If you want to know how Buffett responded to that one, you'll have to read “Pilgrimage to Warren Buffett's Omaha”!)

All in all, I think the contest did what it was intended to do: provide excellent questions worth asking at the upcoming Berkshire Hathaway shareholder meeting. I thank the readers of NMTU for their interest, their thoughtful responses and their votes.

Those of you who see your question below, please confirm your mailing address and whether you would like to be identified should the question be asked at the meeting at
pilgrimagetoomaha@gmail.com.

All Top Ten winners will receive a copy of “Pilgrimage to Warren Buffett’s Omaha,” signed by the author.

We’ll be sending these pronto to Andrew Ross Sorkin at the New York Times. Should Mr. Sorkin decide that one or more fits the bill, I look forward to being in the Qwest Center two Saturdays from now and hearing the questions asked...

...and answered!

JM


The Top Ten Questions We’d Like to Hear at the Berkshire Annual Meeting

#1 To what extent does Berkshire's reinsurance business rely on Ajit Jain and is there currently another individual in the division capable of replacing Mr. Jain?

#2 Why not either sell the Moody’s position entirely since the franchise value and moat are severely and possibly permanently impaired (redeploying capital into more attractive investments that no doubt exist); or buy Moody’s entirely and use the Buffett/Berkshire reputation to entirely revamp Moody’s into a highly valuable business again? Berkshire may be one of the only franchises that could install the integrity needed to turn around the ratings agencies.

#3 Washington Post went from being a local paper to a national paper to a learning company. Wells Fargo went from being a conservative bank to a highly leveraged mortgage lender. Moody's went from being a boring ratings agency to a co-conspirator in the mortgage bubble. How do you justify holding stocks “forever” when the original investment eventually becomes unrecognizable in most cases?

#4 You said in your letter the United States' best days lie ahead of it. Upon what do you base that statement: economic data, natural optimism, political pressure, or wishful thinking?

#5 Isn't there significantly more risk than what you are suggesting in your sale of long-dated index puts? If one had sold puts on the Dow from 1927 to 1929 (during the run up, a period similar to when Berkshire sold their options), 15 years later, the market was down from an average of say 300 on the DJIA to approximately 140 a loss of a little over 50%. And if one had reinvested the premium in the market, one would have lost 50% of that. So the cheap financing ( less than 1%) does not end up being cheap. Finally, isn't there a risk of doubling down on the stock market as most of Berkshire's business returns are tied to returns in the stock market?


#6 You’ve written See’s Candies’ beauty rests in the minimal incremental tangible capital required to grow profits. Recently, you’ve expressed excitement for Berkshire’s investments in utilities, insurance and railroads – capital intensive industries potentially facing massive inflation. Can you reconcile these contrasting viewpoints?

#7 What factors, if any, would cause you to change your favorite holding period from “forever” to “sometime in the future” when thinking about the challenges your businesses face?

#8 On Conoco, it seems Berkshire made the uncharacteristic move of buying an asset with a price chart that went straight up, rather straight down. Please explain the decision making process on Conoco and what you learned from this admitted mistake.

#9 Being a major shareholder in Moody's, why didn't Mr. Buffett play a more active role in urging Moody's to change its rating process and save it from disrepute?

#10 How do you sleep at night knowing you sacrificed Ron Furgeson [sic; it is spelled Ferguson] to avoid your own responsibility with the General Re/AIG crime?





Jeff Matthews
I Am Not Making This Up

© 2009 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, April 21, 2009

Thank You Michael Milken, Two Years Too Late


Why Capital Structure Matters
Companies that repurchased stock two years ago are in a world of hurt.
—By Michael Milken, The Wall Street Journal


If you didn’t have enough reason to spit your coffee out over the newspaper this morning, what with the President of Iran calling Israel “a cruel and repressive racist regime,” there’s always the op-ed page of today’s Wall Street Journal.

That’s where Michael Milken writes the two-years-too-late observation that there are times when “even a dollar of debt may be too much for some companies.”

Milken, for those too young to remember, was the finance whiz whose grad-school observation—that a collection of junk-rated securities could actually be a safer investment than the individual ratings implied—led eventually to the last great credit crisis in America, when Drexel and the rest of Wall Street leveraged Corporate America just in time for the 1990 LBO-Bubble collapse.

And, ironic as it seems, Milken fingers much of today’s woes on the “return-value-to-shareholders” mania of yore:

Without stock buybacks, many such companies would have little debt and would have greater flexibility during this period of increased credit constraints. In other words, their current financial problems are self-imposed. Instead of entering the recession with adequate liquidity and less debt with long maturities, they had the wrong capital structure for the time.

Now, we here at NotMakingThisUp have no argument with Mr. Milken’s observation on the dangers of too much debt in a capital structure.

It’s just a little too late to matter.

By way of comparison, we’re reprinting here our take on the subject back when companies were still pedal-to-the-metal on the road to self-destruction.

Note that we spared nobody: not CEOs, not Boards of Directors, not Wall Street Investment Bankers, not Wall Street Analysts, and not even Hedge Funds, of which we are one.



Wednesday, August 08, 2007
The Shareholder Letter You Should, But Won’t, Be Reading Next Spring

Dear Shareholder:

Well, it seemed like a good idea at the time.

I am referring to your board’s decision to approve a massive share buyback and huge special dividend last summer, when the buzzwords going around Wall Street were “returning value to shareholders.”

Why we did it was this: a smart banker from Goldman Lehman Lynch & Sachs came in, all gussied up and looking sharp, and made a terrific PowerPoint presentation to the board with multi-colored slides that showed how paying a special $10 a share dividend, plus buying back a bunch of our stock at the 52-week high, would “return value to our shareholders.”

We should have thrown the fellow out the window, along with his PowerPoint slides, but what happened was, my fellow board members and I were so busy deleting emails from our Blackberries that we just didn’t notice the last slide showing (in very tiny numbers) the “Trump-style” debt we would be incurring to do so.

We also missed the footnote showing the fees that would go to Goldman Lehman Lynch & Sachs for the courtesy of their showing us how to wreck our balance sheet.

Those fees, I am embarrassed to say, amounted to more money than we made the quarter before we “returned value to shareholders.”

But the fact is, we’d been getting so much pressure over the last few years from the hedge fund fellows who own our stock for ten minutes tops, not to mention the so-called “analysts” on Wall Street (around here we call them "Barking Seals"), to do something with the cash...well, the truth is we just couldn’t stand answering our phones any more.

So, in order to finally start getting things done instead of spending all day explaining to these hedge fund fellows and the Barking Seals on Wall Street why we weren’t “returning value to shareholders,” we decided to do the big buyback and the big dividend.

And for a few weeks there, it was pretty nice.

The stock jumped, the phones stopped ringing, and the Barking Seals started congratulating us on the conference calls instead of asking us when we were going to get rid of our cash.

Unfortunately, not only did getting rid of our cash and taking on a huge debt load NOT “return value” to you, our shareholders, it actually crippled the company for years to come.

For starters, as you know, the aftermath of last summer’s sub-prime debt crisis is forcing perfectly fine companies to liquidate businesses at fire-sale prices…but we can’t take advantage of those prices, because we have no cash. And thanks to the debt we incurred “returning value to shareholders,” the banks won’t loan us another dime.

Secondly, as you also know, we’ve had to lay off hundreds of loyal, hard working employees to pay the interest expense and principal on all that debt, because unlike Donald Trump, we actually repay our debts.

Furthermore, as you probably don’t know, we’ve also scaled back some interesting research projects that had great long-term potential for the company, but were deemed too expensive to continue in light of the fact that we have no cash.

Now, I’d feel a heck of a lot worse about all this if we were the only company suckered into buying our stock at a record high price and paying a big fat dividend on top of it.

But I’m happy to report there were others who also did the same stupid thing.

For example, Cracker Barrel, the restaurant chain that depends on people having enough money for gas to get to its stores along Interstates across America, spent 46 bucks a share for 5.4 million shares of its stock early last year to “return value to shareholders.”Cracker Barrel’s stock now trades at $39.

And Scott’s Miracle-Gro, whose business is so seasonal it loses money two quarters out of four, put over a billion dollars of debt on its books with the kind of special dividend and share buyback we did.

Health Management Associates—a healthcare chain that can’t collect money from about a quarter of the patients it handles—paid shareholders ten bucks a share in a special dividend to “return value to shareholders” and then missed its very next earnings report because of all those unpaid bills and all that new interest expense it was paying.

Oh, and Dean Foods, a commodity dairy processor with 2% profit margins, returned all sorts of value to shareholders early last year—almost $2 billion worth—just before its business went to hell in a hand basket when raw milk prices soared.

So, you see, everybody was doing it.

And boy, do I wish we hadn’t.

Jeff MatthewsI Am Not Making This Up
© 2007 NotMakingThisUp, LLC



Jeff Matthews
I Am Not Making This Up

© 2009 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, April 20, 2009

Top Ten List On Its Way...


Well, the Top Ten List of Things We'd Like to Hear Warren Buffett Asked at the upcoming annual meeting, which was promised for today, is not quite ready.

In the immortal words of that great philosopher, Robert Plant, it's nobody's fault but mine.

Please check back tomorrow morning.

JM

Friday, April 17, 2009

Stress Test On, Crisis Over


Anybody else out there remember what our government leaders were doing one year ago next month, when the financial system was heading into free-fall after a decade of profligate home-lending?

They were holding hearings about oil prices.

Specifically, they were investigating the role of hedge funds—who else?—in the price spike that was saw oil hit an unsustainable, demand-choking level of $150 a barrel (see “Congress Blames the Hedge Funds—Yeah, That’s It!” from May 23, 2008).

Of course, Congress never actually did anything about it, because oil prices almost immediately began collapsing, what with the financial crisis and all.


But they sure held hearings.

Now, if Congress had wanted to do something serious about reducing our dependence on oil, it might have thought about doing something before a crisis began: but that is not the way democracy works.

Democracy responds to the front page of the newspaper—or, the latest viral YouTube video—which is in itself a response to whatever is currently a problem, not what might be a problem years down the road.

So as we ponder the collective holding-of-breath over the impending results of the so-called “Stress Test,” by which our nation’s banks are being subjected to all manner of what-if scenarios by the same regulators who never bothered to do this stuff when times were good, it occurs to us that if the government has decided it is time to conduct a serious analysis of the ability of our nation’s banking system to withstand an economic tsunami, well, then, the tsunami must already be behind us.


Indeed, listening to Jamie Dimon and his team on the JP Morgan earnings call yesterday, the outlook sounds a whole lot better than it did last year around this time, back when Congress was too busy holding hearings on the price of oil, naked short-selling, atonal music and whatever else it could think to blame on hedge funds, to worry about the kind of financial crisis our regulators are just now getting around to stress-testing.

Putting it into a formula, we derive the following:

Improving Fundamental Outlook + Severe Government Reaction = Crisis Over.

And we think you can take that to the bank.


Meantime, the Top Ten Questions for Warren Buffett have been selected, and will be revealed here on Monday.




Jeff Matthews
I Am Not Making This Up

© 2009 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, April 15, 2009

The New McCarthyists, Part II: Where the Culprits Are


[Please note, polls close tonight in our Top Ten Questions for Warren Buffett competition; vote now at the top of these virtual pages!]


Everyone wants to blame somebody else for the financial crisis.

Rick Santelli wants to blame the homebuyers. Jon Stewart wants to blame Rick Santelli and Jim Cramer. Jim Cramer wants to blame short-sellers. Short-sellers want to point out that they never loaned a dime to anybody, subprime or not—and, besides, it was bulls like Jim Cramer encouraging innocent investors to stick with stocks like Bear Stearns, not short-sellers.

But nobody listens to short-sellers, because, as one letter-writer reflected the common wisdom in Barron’s this weekend,

“Shorting caused the demise of financial companies that were intentionally targeted by short players.”

That this statement is false doesn’t particularly matter to Jim Cramer—or even Barney Frank or Chris Dodd.

Nor does it matter to the New McCarthyists that thus far nobody has put forth any name of any financial company that was “intentionally targeted” by any short-seller.

Ironic it is, then, that the same weekend Barron’s was reprinting this most comforting New McCarthyism, its sister publication, the Wall Street Journal, was about to publish a detailed look at the where the real culprits behind the “demise of financial companies” are: the mortgage brokers.

In April 14th's “Older Borrowers, Out in the Cold,” reporter Ellen Schultz lays out in cold, hard facts—as opposed to the vague, nameless short-selling conspiracy theories—how mortgage brokers destroyed the banking system along with peoples’ lives:

YUBA CITY, Calif. -- In 2006, Carol Couts, a 66-year-old widow in Yuba City, Calif., was living in her home, payment-free, when a mortgage broker persuaded her to refinance her no-cost mortgage for one that exceeded her monthly income by more than $400.

She can't afford the payments, and unless her lender modifies the loan to make it affordable, she'll lose her home of 25 years. She's given away most of her furniture and her cat, and packed her belongings in cardboard boxes. "We've got nowhere to go," she says, referring to herself and her dachshund, Ollie….

In 2007, she received numerous phone calls from a mortgage broker named Daniel Lewis. According to Mrs. Couts, he told her he was contacting seniors to warn them that banks were canceling reverse mortgages because they were unprofitable. She would have to refinance her home, he told her, or lose it. (This wasn't true; reverse mortgages generally aren't repayable until death.)

Mrs. Couts's first statement showed she had an adjustable-rate mortgage with an initial interest-only monthly payment of $1,333. She soon defaulted, and Wachovia Corp. -- which had acquired World Savings & Loan, the firm Mr. Lewis worked with -- started foreclosure proceedings….

Mr. Lewis couldn't be reached for comment.

—The Wall Street Journal, April 14, 2009


Mrs. Couts, unfortunately, is not the only victim whose loss at the hands of unscrupulous mortgage brokers the article details.


But her experience—and you should read the entire article, from start to finish—is, in microcosm, the true story of where the blame for the financial crisis lies.

Looking for culprits?


Go where the mortgage brokers are.



Jeff Matthews
I Am Not Making This Up


© 2009 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, April 13, 2009

The New McCarthyists


“I have here in my hand a list…”
Senator Joseph McCarthy, Wheeling, West Virginia, February 9, 1950.



If Joe McCarthy was now alive and representing the great state of Wisconsin, we have no doubt what class of Americans he would be angrily denouncing.

Hint: it would not be Communists.

“I have here in my hand a list of short-sellers,” McCarthy would probably be saying in speeches around the country, waving an imaginary list of imaginary miscreants for the cameras; “Names that were made known to the SEC as being behind the demise of the financial industry and who nevertheless are still working…”

For those readers too young to recall Joe McCarthy and his particular legacy—McCarthyism—the Senator from Wisconsin was a hard drinker and friend of the Kennedys (he was godfather to Robert F. Kennedy’s firstborn; try to get your mind around that the next time you get all weepy about “Bobby”) who surged to prominence during the paranoid post-World War II years when Communism, not climate change, was the threat.


McCarthy made his name largely on the basis of flimsy speeches accusing the State Department of harboring Communists without ever making an accusation that stuck.

And the notion that Joe McCarthy would be leading the anti-short-selling campaign came to us while reading just such a flimsy accusation in Barron’s, of all places.


In the current issue, a Barron’s reader and letter-writer repeats the oft-stated and never-substantiated claim that “shorting caused the demise of financial companies that were intentionally targeted by short players.”

I was hoping the letter-writer was going to name one—just one—financial company that was so targeted, as well as the short-sellers who did the alleged targeting, so that we could rid the face of the earth of this supposed evil.

But he did not.

The fact is nobody has.

And the reason nobody has, and I suspect nobody ever will, is that no such names exist. They are as imaginary as the State Department Communists of Joe McCarthy’s alcoholic dreams.

Investment banks and financial giants failed for a simple reason, and it had nothing to do with short-selling.

They failed because their CEOs responded to Wall Street’s demand for smooth, mindless 15% annual earnings growth by jumping on the subprime bandwagon and stuffing their balance sheets with toxic levels of those poisoned assets.

It happened at Wachovia, it happened at AIG, it happened at Freddie Mac, it happened at Lehman, it happened at Fannie Mae.

Warren Buffett—no slouch when it comes to reading balance sheets—was so distrustful of Fannie and Freddie management’s artificially targeting 15% earnings growth to satisfy Wall Street that he sold all his stock in those two companies in 2000.

Thus at least one investor manager was able to avoid most of the carnage for which the New McCarthyists now demand retribution.

If the pitchfork-carriers running through Capitol Hill truly want a villain, they ought to simply look in the mirror.
After all, the CEOs of companies like Fannie Mae and Freddie Mac weren’t doing stupid stuff to please short-sellers.

They were doing stupid stuff to please money managers on Wall Street and politicians like Chris Dodd, “The Senator from AIG,” on Capitol Hill.

Human nature being what it is, however, the New McCarthyists aren’t letting mere facts stop them from demanding retribution from the only people on Wall Street who tried to warn them not to believe the numbers: short-sellers.

“Dumb lending and dumb borrowing,” is how Warren Buffett described the cause of the housing bubble and the financial collapse.

To that, we would add, “dumb investing.”


Jeff Matthews
I Am Not Making This Up

© 2009 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, April 08, 2009

Kremlinology, the Berkshire Way…and Some Good Questions for the Oracle


Here’s something you don’t see every day—and by “every day” we mean, “almost never”:

Marvin Beasley, Chairman and Chief Executive Officer of Helzberg Diamond Shops, Inc., an indirect wholly owned subsidiary of Berkshire Hathaway Inc. has advised Berkshire Hathaway Inc. that he has decided to resign effective today.
—Berkshire Hathaway, April 6, 2009


The last time the CEO of one of Berkshire Hathaway’s dozens of stand-alone subsidiaries resigned was twelve months ago, almost to the day.

That’s when Joe Brandon, CEO of General Reinsurance, Berkshire’s large and sometimes-troubled reinsurance unit, stepped aside for Tad Montross.


And before the Brandon resignation, you have to go all the way back to September 2001, when Gen Re’s previous CEO, Ron Ferguson, “retired”—around the time, coincidentally or not—investigators had begun looking into an earnings-manipulation insurance deal with AIG that subsequently sent Ferguson to prison.

The Helzberg press release is even more out-of-character for Berkshire, because Buffett is bringing in an outsider to run Helzberg—from J.C. Penney, no less:

Beryl Raff will replace Mr. Beasley as Chairman and Chief Executive Officer of Helzberg Diamond Shops, Inc. Ms. Raff has spent over 25 years in the retail jewelry industry. Most recently, Ms. Raff was Executive Vice President and General Merchandise Manager of fine jewelry for J. C. Penney Company, Inc.

We can’t recall Buffett ever bringing in an outsider to run a stand-alone company, at least since Buffett himself took over at Salomon Brothers in 1991.

And the third intriguing thing about Monday night’s press release is the absence of any mention of Mr. Beasley by Buffett, only the new CEO of Helzberg:

Warren E. Buffett, Berkshire’s Chairman and CEO said of Ms. Raff: “Beryl is widely recognized throughout the retail industry as an outstanding merchant and strong multi-store retail executive. She will bring a finely balanced blend of merchandising instinct and analytical sharpness to her new position.”

If there’s one thing you learn on a visit to Omaha—and the next annual meeting is coming up in a few short weeks—it’s that Buffett likes a happy family. That means everyone, from Berkshire shareholders to Berkshire managers.

So when Joe Brandon resigned from Gen Re last year, Buffett praised him effusively, saying “the luster” of Gen Re had been “restored.” And when Ron Ferguson resigned as CEO of Gen Re in 2001, Buffett did likewise for Ferguson, saying he possessed the “the very same qualities that I would want to see in a man who was going to marry my daughter.”

All of which causes us to wonder why Buffett said nothing in Monday night’s press release regarding Beasley, who seemed a decent enough replacement for a very tough act to follow—Jeffrey Comment, the well-liked former CEO of Helzberg who died suddenly in 2004.

Now, this bit of Kremlinology doesn’t mean much in the grand scheme of things. Helzberg is a relatively small piece of the Berkshire retail empire, with 270 stores and an estimated annual sales of a mere half billion dollars.


That's chump change in the Berkshire cash register.

Far more important will be the upcoming annual meeting, particularly the question-and-answer session which should, finally, offer some good, tough questions about the Berkshire businesses—something Buffett hasn’t had in years, since he was elevated by the public to the status of a sort of Zen Master/life teacher.

And we’re looking forward to hearing not just the questions, but Buffett’s responses.

After all, Buffett just had his worst year in 2008—and only his second down year since he started managing other people’s money in 1956 (try getting your mind around that: two down years in 53).
And based on the questions we’ve received for our Top Ten List of Questions we’re going to submit to the New York Times’ Andrew Ross Sorkin, there could be some good ones.

By “good” we don’t mean irrelevant, obnoxious or disrespectful (save one, and it's a doozy, but it's neither irrelevant nor obnoxious). We mean good.

So be sure to cast your votes for the Top Ten—and remember to vote up to ten times, but no ballot-stuffing for a single question.


Thus far we have several very clear winners, but the virtual ballot box is open until tax day, April 15.

Our bet is Buffett himself is going to enjoy the opportunity to answer them, instead of, say, the one he got last year about whether he believes in God and has “a personal relationship with Jesus Christ.” If you want to read how he answered that one last year, it’s in “Pilgrimage to Warren Buffett’s Omaha.”

And if you want to read how he answers this years’ batch, stay tuned to these virtual pages…and the sequel to “Pilgrimage.”

It is coming soon, courtesy of McGraw-Hill. We are not making that up.


Jeff Matthews
I Am Not Making This Up


© 2009 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, April 03, 2009

The Boo-Yah! is Still Intact


Well that didn’t take long.

Was it really just three weeks ago that Mad Money host and former-hedge-fund-manager Jim Cramer promised Jon Stewart he would become the kind of financial commentator that would help protect small investors from the kind of stock manipulation that guys like, uh, Jim Cramer, bragged about doing on a tape that Stewart played for, um, Jim Cramer?

Indeed, it was (see “Boo-Yah! Will Never Be The Same”).

After being hoist with his own petard—thanks to Stewart’s relentless use of video clips featuring Cramer himself lecturing on how to manipulate the market—Cramer gave up and promised to be a force for good, rather than for the kind of manic-depressive, boo-yah trading techniques that made “Mad Money” one of CNBC’s most popular shows.

“I’ll try it. I’ll try it,” Cramer finally blurted out, his head nodding vigorously, like a teenager promising to ease up on the beer-and-shots stuff that you know—and that he knows you know—he’s going to do anyway, as soon as you give him the keys to the car.

Well that was then, and this is now.

We caught a glimpse of “Cramerica” last night, just long enough to watch the host officially declare the end of the Bear Market, and the running of a new bull. What a thousand points on the Dow will do to a reformed stock junky!

Far from offering sober tips on how to invest for the long haul, Cramer was promising to find for his viewers a stock that hadn’t yet participated in the New Bull Market. He was, he said, looking for a “piece of merchandise” that had not yet been snapped up in the recent rally.

Now, that phrase—“piece of merchandise”—pops up frequently in “Confessions of a Street Addict,” Cramer’s excellent book on what it’s like to work at a hedge fund that nearly goes under…and comes back to fight another day.

To traders, stocks are “pieces of merchandise,” the same as anything else you can find at a store. In fact, Cramer said exactly that last night.

He even held up various pieces of damaged clothing to make his point that when shopping for discounted “merchandise,” an investor must distinguish between the cheap-but-worth-buying stuff and the truly damaged goods.

And that’s the problem.

To traders like Cramer—and he is a trader, not an investor—stocks are “pieces of merchandise,” just like shirts, shoes, refrigerators and cars.

But shirts, shoes, refrigerators and cars don’t have the potential to grow in value over months, years and decades, let alone to pay dividends. They don’t have the ability to create wealth, fund college educations or even make somebody a bit of mad money to blow on a new shirt, new shoes, a new refrigerator or a new car.

Pieces of merchandise depreciate the minute you buy them.

Traders don’t get that. Nor do they care. They’re traders. That’s their job. And that’s how they make money: by being dispassionate about whatever it is they’re buying and selling, whether it's a stock or a car or a pair of shoes.

There’s nothing wrong with trading: just don’t confuse it with investing.

When Cramer screams at somebody on a “Lightning Round” to “Sell-Sell-Sell” a “piece of merchandise” that “acts bad,” you’d better understand that he’s thinking like a trader, not an investor. And chances are he’ll be screaming “Buy-Buy-Buy” once that same “piece of merchandise” starts to “acts good.”

So that’s why it is that 20 days and 1,000 Dow points since his whipped-puppy-dog appearance on Jon Stewart, Cramer is back screaming “Buy-Buy-Buy” on whatever piece of merchandise looks good to him at that moment.

Now, what piece of merchandise did Cramer pitch last night? What did he find in the bargain bin that constitutes an overlooked, ready-to-rally idea? Was it a cheap consumer stock that will benefit from a recovering housing sector? A low-priced transportation stock that should do well once businesses start restocking their inventories?

No. It was Celgene.

Celgene happens to be a well-run biotech company that recently guided earnings a bit lower, causing the stock to fall out of bed. It also sells at 30-times trailing EBITDA, in a market in which hundreds of stocks sell for 3-and-4-and-5-times trailing EBITDA.

Bargain bin? Hardly.


So why did Cramer recommend it?

Because, he said, the Celgene story is, quote-unquote, “Still intact.”

And “Still intact” is, for those who never worked on Wall Street, the oldest, lamest, saw in the stock salesman’s book.


Go ahead, try it out on any trader, any money manager, any analyst you can find. They’ll tell you that phrase, “Still intact,” causes the radar of every professional investor to start emitting violent waves of radiation intended to destroy the offending speaker.

They’ll tell you “Still intact” is the last defense of the worst ideas, and that what it really means is this: whoever had the idea in the first place has run out of facts to support the story.

Indeed, they’ll probably tell you that when you get a call from the broker who sold you a stock that has fallen out of bed like Celgene did, and the broker tells you "Our thesis is still intact,” you run—don’t walk—to your computer and “Sell-Sell-Sell.”

It is the death-knell of all stock ideas, a defense reserved for names like Lucent and Nortel and Citigroup and Fannie Mae that will, as FDR said, go down in infamy. For every stock that is off 90% from its high and headed to Chapter 11, somebody, somewhere, is saying “our thesis is still intact.”

Indeed, if you read your history books, we think you’ll find that while Hitler was driving down the Champs Élysées getting the Heil Hitler from his goose-stepping troops, disgraced former Prime Minister Neville Chamberlain, who had thought Hitler a decent, misunderstood chap and thus gave up Czechoslovakia at Munich, was at home telling his cats
“Our thesis is still intact.”

In fact, we’d bet that the Cramer who ran the hedge fund would have thrown whatever salesman came into his office insisting that an idea was “Still intact” out the plate-glass window of his offices—or at least would have slammed his phone into the guy’s head like Joe Pesche does to that cowboy in “Casino.”

Yet the Cramer who three weeks ago promised to protect all those investors Jon Stewart suddenly cares about is now pushing a “piece of merchandise” whose main business—biotechnology—is anything but “intact,” what with Congress and the new administration aiming to make healthcare as unprofitable as possible for the companies that make the stuff.

Somebody, somewhere, did a great job pushing a “piece of merchandise” on Cramer.

Looks like the Boo-Yah! is still intact.





Jeff Matthews
I Am Not Making This Up


© 2009 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.