Friday, May 29, 2009

“No Green Shoots Here”...A Message from Warren Buffett’s (Likely) Successor.


We break from our ongoing assessment of the most interesting questions—and Warren Buffett's answers, or non-answers—from the Berkshire Hathaway shareholders meeting to bring you
an important message from Buffett’s likely successor….


About the most direct comment on the state of the economy Warren Buffett would make during the recent annual shareholder meeting (comments that are currently occupying the virtual pages of NotMakingThisUp) was that things were not good, and not likely to get much better any time soon…but that they would get better.

Asked how Buffett was feeling about things more than six months after his famous (or infamous, depending on your point of view) “Buy America, I Am” op-ed for the New York Times during the height of the melt-down, Buffett began by stating the obvious.

Thanks to the meltdown, the earnings power of Berkshire’s non-insurance businesses “was below normal last year, and will be below normal this year,” Buffett said. “People began acting differently. It was almost like a bell. It hurt our jewelry, NetJets, American Express…”

Happily, he noted, the sudden distress had an upside for Berkshire Hathaway and its shareholders:

“People changed their behavior. And all of a sudden the phones started ringing at GEICO,”
Berkshire’s low-cost auto insurance business. “All of a sudden saving $100 became more important,” he said.

Asked later about the real estate market—something Buffett is uniquely qualified to discuss, for many reasons, not the least of which is that Berkshire’s energy company, Mid-American Holdings, happens to own the nation’s second-largest real estate brokerage firm—he said:

“What I’m seeing, and I do see a lot of data…in the last few months you’ve seen a real pickup in activity, although at much lower prices, but I think you've seen something, you’ve seen a real pickup in activity…”

Calling up the numbers, as Buffett tends to do, he said, “We create about 1.3 million households a year” and noted “we’re building 500,000 units a year,” so “We’re gonna eat up the inventory…it will get done. You’ll have a stabilization in pricing…and then our insulation business and our brick business and our carpet business will get better.”

Finally, late in the day, when asked about his views on gold as an alternative to currencies in a crumbling world, Buffett said flatly,


“There are always a lot of things wrong with world, but it’s the only world we’ve got. The only thing I know is over time things will look better and better.”


If Buffett shaded his comments at the annual meeting towards the positive, his likely successor and CEO of MidAmerican Holdings Company, David Sokol, shaded things towards the negative in a presentation yesterday at the Ira W. Sohn Investment Research Conference in New York, as reported by Michael McKee via our trusty Bloomberg:

“We’re not seeing the green shoots,” said Sokol, head of MidAmerican Energy Holdings Co., which owns HomeServices of America Inc. “We don’t see improvement.”

Homes in the process of foreclosure are creating a “shadow backlog” of unsold properties that will continue to hang over the market….

While official statistics show a 10- to 12-month supply of unsold homes, “we believe the backlog of homes for sale is twice that.”

Many people who want or need to sell their homes haven’t put them on the market yet because the outlook for sales has been poor, he said. “It will be mid-2011 before we see the market in balance,” with no more than a six-month backlog, he said.

—Michael McKee, Bloomberg, May 28, 2009


Even more interesting than Sokol’s commentary on the specifics of a housing recovery timetable was his criticism of the Congress and the administration’s stimulus actions—a criticism his boss, who helped Obama get elected, no doubt shares:

Sokol suggested government efforts to ease the crisis are actually drawing out the recovery. “We really need to let the economics work through the system,” he said.

It is still difficult and costly for businesses to borrow, Sokol said, creating “headwinds” for recovery. He predicted the U.S. unemployment rate would rise above 10 percent from
April’s 8.9 percent.

—Michael McKee, Bloomberg, May 28, 2009


We’ll resume our series on the Berkshire “Woodstock for Capitalists” with more questions answered—and avoided—by Sokol’s boss, Monday 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.

Tuesday, May 26, 2009

The Best of “Woodstock for Capitalists,” Part 4: Best Questions Not on Our List—Avoided


An Only-in-LA Question about Buffett’s “Partner”; A “Damn Miracle”; Oddball Things That Happen Once every 50 Years; A Sales Pitch for Wells Fargo and a Brief Sermon on Leverage.


As reported previously in these virtual pages, of the “Top Ten Questions for Warren Buffett” selected by readers of NotMakingThisUp prior to this year’s “Woodstock for Capitalists”—the Berkshire Hathaway annual shareholders meeting—fully eight were asked, in one form or another, of Buffett and his long-time business partner, Charlie Munger.

(Note that we refer here to Munger as Buffett’s business partner. A few weeks ago we were in Los Angeles speaking to a somewhat under-informed business school group. After we had referred several times to Munger as “Buffett’s partner,” a hand went up. “This Mr. Munger,” the student asked earnestly, “Is he Mr. Buffett's life partner?”
Only in L.A.)

Now, since a total of 51 questions were asked during the five-plus hours of questions-and-answers, there were plenty of topics not considered “Top Ten” material by our readers that shareholder did think worth hearing Buffett and Munger ruminate on.

And ruminate the two men did.

Topics ranged from BYD, the upstart Chinese car manufacturer championed by Munger (“A damn miracle,” the notoriously skeptical Munger called the company, prompting laughter), to the impact of a hypothetical nationalized healthcare plan on Berkshire’s portfolio (“We’ll see what the national sentiment is as expressed in Congress,” Buffett said, “and act accordingly.”)

Of those questions that did not make our Top Ten list, several were quite good, and deserve to be highlighted here. Of them, Buffett answered one and generally avoided the other two.

The first question avoided was asked by Fortune Editor and long-time Buffett friend and confidant (not to mention early Berkshire investor) Carol Loomis.


It hinged on Buffett’s standard measure of value-creation by company managers: that a public company should create a dollar of market value for each dollar retained in the business, or else give the money to shareholders.

Buffett wrote about it in his now-famous 1983 “Owner’s Manual,” in which he presented 13 astoundingly clear “owner-related business principles”:

We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.

Ten years ago Buffett updated and commented on this (as well as the other 12 principles) for the benefit of thousands of Berkshire shareholders added through the 1998 stock-for-stock purchase of General Re, as follows:

We continue to pass the test, but the challenges of doing so have grown more difficult. If we reach the point that we can't create extra value by retaining earnings, we will pay them out and let our shareholders deploy the funds.

The question posed by Loomis, on behalf of a shareholder from Yardley Pennsylvania—and it’s a great one—was that since Berkshire’s market value had not so increased over the last five years, “Will Berkshire pay a dividend or not?”

Buffett readily admitted that Berkshire has not done this in recent years. “I would say he is right that we have not increased market value for each dollar of retained earnings…”.


Indeed, Berkshire’s large investment portfolio—comprising the Cokes, Wells Fargos and Washington Posts of the world, which was valued at $75 billion at the end of 2007, including net unrealized gains of just over $30 billion—had shrunk to an estimated $65 billion at the end of 2008 (the precise number is unavailable because of a change in accounting for certain equity investments).

Still, Buffett by no means was willing to concede that he and his business partner no longer “pass the test” and it was time to “let our shareholders deploy the funds,” as he wrote back then.

I would also say that we measure our business performance against the S&P,” Buffett added, and by that measure, Berkshire has done “better” than the alternative.

And certainly Berkshire has done better: a 20% compound growth over 44 years compared to slightly over 9% for the S&P 500 in the same time frame, and only a 9.6% decline in 2008 versus a negative 37%, including reinvested dividends, for the broader market.

Still, the percentage loss in Berkshire's equity portfolio last year was closer to the S&P’s negative 37% than to Berkshire’s modest 9.6% drop in book value. In fact, by year-end 2008, Berkshire’s portfolio’s total net unrealized gains were down almost two-thirds, to something north of $10 billion.


Nonetheless, Charlie Munger (Buffett's business partner) was even more blasé than Buffett about what had happened in 2008:

“I don’t get too excited about these oddball things that happen once every 50 years. If you’re reasonably prepared for them other people are suffering a lot more, and other opportunities are coming to you. Take Wells Fargo, I think Wells Fargo is gonna come out of this best, way stronger…”

Buffett picked up on this, and turned his answer into a sales pitch of sorts for Wells Fargo:

“I had a class meeting that day—it’s the only time any of those guys have gotten me to name a stock…somebody with a Blackberry checked the price, it was below $9. I said I’d put all my net worth into it on that day. Wells Fargo is gonna be a lot better off—unless they have to issue a lot of shares, which they shouldn’t…”

And while Buffett was wrong on that—Wells Fargo issued 341 million shares less than a week later—he was right about buying the stock at $9 a share.

The stock sale was priced at $22 a share.

Buffett was also right when he summed up his response with a brief sermon on leverage:

“You can’t let somebody else get you in a position where you have to sell out your position. Leverage is what gets you in trouble in this business.”

Next up: another good question, avoided, by Buffett...and his business partner.


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, May 21, 2009

The Best of “Woodstock for Capitalists,” Part 3: The Most Logical Answer



The Midas Touch; Good Businesses and Bad Businesses; and Moats Filling Up with Sand.


“Years ago you warned against utilities,” began the second-to-last question of the day, from a Costa Mesa, California shareholder. (Shareholders picked by lottery alternated with questions submitted to, and read by, reporters.) In light of this, the investor asked, why was Buffett was pouring so much money into the things.

She was referring to Buffett’s long-held distain for capital-heavy and government-regulated businesses, which can be traced at least as far back as John Train’s 1987 Buffett book “The Midas Touch”—possibly the first and still one of the best of the dozens of “How Warren Buffett Does It”-style books out there.

The fact that Train’s book remains remarkably current 22 years after publication is no small a testament to how little Buffett’s investment criteria have changed over the decades. In fact, half the chapter titles would fit a brand-new “How Warren Buffett Does It” book published in the year 2009—including “GEICO,” “Good Businesses,” “Bad Businesses,” and “The Margin of Safety.”

One thing that has changed in the intervening years, however, is Buffett’s perception of the value of utilities, which offer “decent” and assured returns, at the risk of government interference.

The beauty of a franchise like See's Candies, of course, is that no government regulator determines the price of a box of See’s fudge (Buffett does that himself), or the return on capital of the business (since Berkshire spends very little on See's, the return on capital is stratospheric).

But as the availability of See’s-type franchises at reasonable prices has diminished, while Berkshire’s appetite for capital deployment has grown, Buffett has happily committed capital to utilities.

“I would say the capital intensive businesses that scare me more are outside the utility business, where you pump in capital without knowing if you’ll get a return,” Buffett told the woman from Costa Mesa and the other 17,000 people in the Qwest Center arena. “We’ll probably get those returns with or without inflation,” he added.

All this assumes Berkshire maintains good relations with government regulators. And Buffett is anxious to stay on good terms with those regulators. In this year's shareholder letter, he wrote:

Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned by families.…

In the regulated utility field there are no large family-owned businesses. Here, Berkshire hopes to be the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of purchasers when transactions are proposed.


Having stated the major risk in owning a regulated utility, Buffett then provided a remarkable advertisement for the virtues of Berkshire Hathaway stewardship of a public utility:

Our two pipelines, Kern River and Northern Natural, were both acquired in 2002. A firm called Mastio regularly ranks pipelines for customer satisfaction. Among the 44 rated, Kern River came in 9th…and Northern Natural ranked 39th. There was work to do.

In Masio’s 2009 report, Kern River ranked 1st and Northern Natural 3rd. Charlie and I couldn’t be more proud of this performance. It came about because hundreds of people at each operation committed themselves to a new culture…

This is remarkable because Buffett usually talks about how hands-off Berkshire is when it comes to its acquired businesses, as he did in the 1987 letter:

With managers like ours, my partner, Charlie Munger, and I have little to do with operations. In fact, it is probably fair to say that if we did more, less would be accomplished…. Our major contribution to the operations of our subsidiaries is applause.

Buffett did something else quite unusual in this year’s letter: he bragged about putting more money into a business than that business made for Berkshire:

In 2008 alone, [Berkshire’s] MidAmerican spent $1.8 billion on wind generation.... By the way, compare that $1.8 billion to the $1.1 billion of pre-tax earnings of PacifiCorp….

In our utility business, we spend all we earn, and then some, in order to fulfill the needs of our service areas. Indeed, MidAmerican has not paid a dividend since Berkshire bought into the company in early 2000. In exchange, we have been allowed to earn a fair return on the huge sums we have invested. It’s a great partnership for all concerned.

It was the first time in 30 years worth of Buffett's annual letters Buffett boasted about spending, not saving, money...and it was, of course, quite deliberate: regulators are now reading the letter along with Berkshire shareholders.

Now, none of this means Buffett has abandoned his notions of what makes for a truly great business, and towards the end of his response at the meeting, he reverted to character:

“On balance…the best businesses are the ones that don’t require much capital and yet make good money. They’ve got some moat around them.”

To this, Charlie Munger added the coda that may explain a good deal of the recent acquisition activity at Berkshire Hathaway:

“Unfortunately a lot of moats have been filling up with sand lately—newspapers and television stations.”

Hence, Buffett’s response on the question of investing in utilities got our vote for Most Logical.

We will continue our exploration of the Best of Woodstock, with the Best Question Not on Our List, Answered

…and Best Question Not on Our List, Avoided.


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, May 18, 2009

The Best of “Woodstock for Capitalists” Part 2: Least Logical Answer


In Part 1 of this two-part series we promised the following key disclosures from the Berkshire Hathaway annual shareholders meeting:

· Best Question Not on Our List, Answered
· Best Question Not on Our List, Avoided
· Sharpest Implied Put-Down
· Mystery Revealed!
· Least Logical Answer
· Most Logical Answer
· One Industry Not to Expect Buffett to Buy Into


And

· The Most Philosophical Start to Any Answer at Any Annual Meeting in History, Since the Beginning of Recorded Time


So without further ado, here goes: The Least Logical Answer

The question, by one Aaron Goldzimer, was straightforward and helpfully reprinted by New York Times ace Andrew Ross Sorkin—one of three reporters asking the questions—in his DealBook blog:

“Warren, in your General Electric and Goldman Sachs investments, do you think you’ve picked attractive businesses or simply attractive securities? Ben Graham’s Security Analysis suggest that the most frightening things management can do is manage earnings, which it could be argued both of these firms do. What’s your reaction to that?”

—Andrew Ross Sorkin, DealBook, May 4, 2009

In assessing Buffett’s “reaction to that,” let’s be clear of one thing: nobody is going to make light of Warren Buffett’s capacity for logical thought.

It is, after all, the rational appraisal of investment ideas that accounts for Buffett’s quite literally unparalleled investment success—not to mention the fact that the man processes more financial information than probably any other human being on earth.

And that last clause was not a throw-away line.


We didn’t stick it in there to merely conclude the primary thought, nor was it added merely to lend weight to the statement about Buffett’s rational thought process. Buffett has very likely read and absorbed more financial information in the last 78 years than any other human being on earth.

So when Buffett kicked off his response to the question of “managed earnings” at Goldman Sachs and GE with the whopper that “A large percentage of American businesses have managed earnings,” and “I wouldn’t know anything about that” at Goldman or GE—our reaction was, well, it’s a whopper.

GE, by any standard—and Wall Street has very low standards, we know—has to be one of the most earnings-conscious companies on earth.

This doesn’t mean GE is a bad company, or that it practices accounting gimmickry outside the bounds of Generally Accepted Accounting Principles. It's just that GE plays up to Wall Street analysts the way World Cup soccer players play up to the refs—throwing themselves on the ground, grabbing a leg, writhing in pain, and then, once the yellow flag comes out, jumping up and running back to their position, smiling.

So too GE plays the Wall Street game, and anybody who’s ever listened to a GE earnings call knows it.

And surely Warren Buffett knows it.

He's certainly read the GE proxy statement, which describes how the compensation committee arrives at the GE CEO’s compensation each year—compensation that is heavily dependent on not merely return on capital and cash flow from operations, but “earnings from continuing operations” and “earnings per share from continuing operations.”

He certainly knows that GE’s 2008 earnings would have been significantly lower than reported if not for a substantial reduction in GE’s income tax rate, from 15.6% in 2007 to all of 5.5% in 2008.

He also knows that GE’s tax rate is not even remotely comparable to other well-run conglomerates such as Honeywell, at 27%, and 3M Company, at 31%.

Consequently, we rate Buffett’s answer—that he “wouldn’t know anything about” earnings management, particularly at GE—as the “Least Logical Answer” we heard all day.

Interestingly, the balance of his response—as to whether GE and Goldman were “attractive investments” or “attractive securities”—was weighed towards the latter: “We were the low bid,” Buffett said. “The terms of the deals were overwhelming.”

Indeed they were.

Up next: Most Logical Answer


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, May 12, 2009

The Best of “Woodstock for Capitalists”…Highlights from the 2009 Berkshire Hathaway Annual Meeting


Part 1: The Power of Free Chicken Wings; Snidely Whiplash’s Mustache; Munger’s John Lennon to Buffett’s Paul McCartney; a Bit of New-News; and We Get a Question Asked!


To the Berkshire shareholder making the annual trek to Omaha this May, not much changed from years past.

Hotel rooms were hard to come by, airplanes were full, and local restaurants booked, months before the shareholder meeting even began. And on the eve of the meeting itself, there were the usual long, polite lines of Berkshire shareholders waiting for free chicken wings under the Borsheim’s tent Friday night.
(Never underestimate the willingness of Berkshire shareholders to wait in line for free food.)

Also, come Saturday morning, well before the sun was fully up over Council Bluffs and the Missouri River, the familiar pair of lines had sprouted from the main doors of the Qwest Center, snaking several hundred yards in opposite directions before curling back part way around the Qwest Center itself.

(From the Hilton across the street, the two long, curling lines looked like nothing so much as a human representation of Snidely Whiplash’s mustache—something for the Guinness folks to think about.)

Once inside the arena—itself the size of Madison Square Garden—the seats filled up quickly, as usual, and yet there remained a few empty spots in the vertigo-inducing seats up near the rafters, as usual.

And shortly before 8:30 a.m. a familiar excitement began sweeping through the crowd down on the floor of the arena—near the stage where Warren Buffett and his long-time business partner, Charlie Munger would later take questions from the assembled multitudes for more than five hours—when the Oracle himself made his way to center court, to take a seat to watch the movie that kicks off the proceedings.

But, at the same time, much else was indeed changed.

Despite the pronouncement by Becky Quick of CNBC (who along with Fortune Magazine Editor Carol Loomis and the New York Times' Andrew Ross Sorkin was one of the three reporters selected to read questions submitted by email—the biggest change this time around) that 35,000 were in attendance, the crowds were noticeably thinner than last year, when 31,000 descended on Omaha for “Woodstock for Capitalists.”

And the mood of those who made the pilgrimage this year was notably subdued: the Not-Since-1937 Bear Market of 2008 had made itself felt even in Berkshire Hathaway’s comfortable epicenter. The crowd seemed older and quieter, with fewer groups of the giddy, high-fiving young men that had been making the trek in recent years.

Another notable difference—once the question-and-answer session started—was a greater participation by Berkshire’s Vice Chairman than in years past.

Now, Munger’s clipped, dry, trademark method of declining to answer when called on after many minutes of energetic, gesture-filled commentary by Buffett (“Nothing to add,” he says flatly; “Nothing on that one, either”) can bring down the house.

But many Berkshire shareholders immensely enjoy hearing Munger’s dour, morality-infused codas after one of Buffett’s snappy, upbeat, riffs—Munger’s John Lennon to Buffett’s Paul McCartney.

And this year Munger declined to comment only a handful of times (last year, by contrast, he passed on close to twenty questions) and his remarks added immeasurably to the proceedings.

They also slowed things down a bit: only 51 questions were asked, and answered, this year, compared to 63 last year.

Munger’s greater participation surely had something to do with the fact that the questions were almost entirely focused on Berkshire Hathaway’s investments and insurance businesses.

Thanks to the new Q&A format, in which three reporters alternated with shareholders picked by lottery, there were few of the “What Would Warren Do?” style questions that had clogged up the proceedings in recent years.

Indeed, NotMakingThisUp readers who participated in our “Top Ten Questions for Warren Buffett” competition should feel a measure of satisfaction for having been very much on target in anticipating the topics selected for discussion by the three reporters.

Of our “Top Ten Questions,” eight were asked in roughly the form voted for by our readers. These covered Ajit Jain, Moody’s, derivatives, the economy, capital-heavy businesses, and Buffett’s “hold forever” time horizon.

Only two of our “Top Ten Questions” did not make it: Buffett’s purchase of Conoco-Phillips at the peak of the oil mania, and a “What did you know and when did you know it?” question regarding the General Re transaction with AIG.

Not a bad hit ratio.

Furthermore, one of our “Top Ten Questions” was asked straight from the blog by Aznaur Midov, a student at San Francisco State University’s Financial Analysis & Management Education group.

“How do you justify holding a stock ‘forever’ when the fundamentals have changed?” Aznaur asked.

Buffett’s answer was instructive: “We make only two exceptions—if they promise to start losing money permanently and if they have labor problems.”

A few minutes later, Buffett was asked the corollary to this question: whether hanging onto the Washington Post was a good use of shareholder capital; and if there was a price at which any newspaper investment might be “compelling.”

Buffett responded with a bit of new-news: a decade ago he’d been urged to sell the Buffalo News—Berkshire’s wholly owned and once mightily-profitable newspaper—by the Publisher of the Buffalo News himself, Stan Lipsey.

“I said I agreed 100%,” Buffett noted, saying Berkshire could have sold it “for hundreds of millions.” Nevertheless, he said, repeating his earlier response to Aznaur, “As long as we don’t face unending losses or union problems,” Buffett wouldn’t sell the paper.

We’ll be back with other key highlights of the Berkshire meeting, including:

· Best Question Not on Our List, Answered
· Best Question Not on Our List, Avoided
· Sharpest Implied Put-Down
· Mystery Revealed!
· Least Logical Answer
· Most Logical Answer
· One Industry Not to Expect Buffett to Buy Into

And

· The Most Philosophical Start to Any Answer at Any Annual Meeting in History, Since the Beginning of Recorded Time


Stay tuned.



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, May 08, 2009

Stress Test Done, Crisis Over; Buffett Wrong, Kass Right.


Fed Sees Up to $599 Billion in Bank Losses
Worst-Case Capital Shortfall of $75 Billion at 10 Banks Is Less Than Many Feared;
Some Shares Rise on Hopes Crisis is Easing


—The Wall Street Journal, May 8, 2009



Three weeks ago, in “Stress Test On, Crisis Over,” we here at NotMakingThisUp argued that the fact the government was finally getting around to “stress-testing” the health of the nation’s largest banks, at a time when banking fundamentals were starting to improve, meant that the crisis itself was over.

We summed up our admittedly cynical, but grounded-in-30-years-of-watching-The-Market view this way:

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.

—NotMakingThisUp, April 17, 2009



Today, with the results of the Federal stress test in, and many financial stocks using the occasion to continue their recent rally, we think a greater and far more important voice than our tiny virtual speaker-phone could ever be—The Market itself—has made itself heard.

And we think The Market is saying, “Crisis over.”

Now, by what perverse logic has this come to pass, you may wonder? How, as Don Corleone would have asked, did things get so far—that bank stocks would actually rally on headlines that Federal authorities fear up to $599 billion in bank losses and a capital shortfall of $75 billion at the top 19 banks?

Simple.

The Feds gave it their worst—for the moment, anyway—and that worst-case scenario proved to be not, as most investors had previously feared, widespread bank nationalization and more bank failures, but merely a new round of capital-raising that most of the banks in question appear capable of persuading The Market to handle.


In brief, the government has shown The Market its very worst case, and with that in mind, investors can now evaluate financial stocks they might want to own, without the sort of dreadful gnawing that some kind of unquantifiable black hole still lurks in the wings.

Which brings us to the headline of today’s piece.

What, exactly, did Warren Buffett get wrong, and Doug Kass get right?

Well, Buffett himself spoke out on the stress-test just last weekend at the Berkshire Hathaway annual meeting—Buffett’s “Woodstock for Capitalists,” which we attended with more than a rooting interest in the questions being asked of the “Oracle of Omaha.”


(See “What They Want to Know: Our Top Ten List for Warren Buffett ” from April 23, 2009 for details on those questions, and stay tuned here: we’ll have a follow-up on the meeting, and the questions that were asked, next week. But by way of a preview, Buffett was asked one of our Top Ten questions, and by Aznaur Midov, a student from San Francisco State University's Financial Analysis & Management Education group no less. Aznaur made the pilgrimage to Omaha with his fine classmates barely a month after we all met on their home turf for an intense, intelligent, and fun discussion of Buffett, Berkshire, and hedge funds.)

And what Buffett said, when discussing Wells Fargo—one of Berkshire’s largest stock holdings—was this:

“Wells Fargo is gonna be a lot better off—unless they have to issue a lot of shares, which they shouldn’t…”

Yet just this morning Wells Fargo issued 341 million shares, which is “a lot” in anyone’s book. In fact, it’s more than the 290 million shares that Berkshire Hathaway currently owns.

Buffettologists will, I know, complain that Wells Fargo really shouldn’t have been required to issue those shares, so Buffett wasn't really “wrong.”


They'll say today's 341 million share offering was done only in response to the Fed’s stress test, and besides don’t you know Buffett has compounded Berkshire at 20% a year for 44 years and who are you to point out something the Oracle got wrong, and when did you become the expert and yadda yadda yadda…

But the fact is, Wells was required to issue “a lot” of shares less than a week after those words were spoken.

Besides, there’s no criticism implied in making the point that Buffett got it wrong. For one thing, we've never been on the short side of Wells Fargo, for the simple reason that we remember too well that the same arguments now being made against Wells Fargo were being made back in 1990, when smart people told us how stupid Buffett was about Wells Fargo, and that Wells was up to its eyeballs in bad loans, and how could Buffett not realize Wells Fargo was going tapioca, and yadda yadda yadda…


...not long before the U.S. housing market, and Wells Fargo stock, began a very long rise up and to the right, to the benefit of Buffett and Berkshire shareholders.

Furthermore, the reason Buffett made the comment in the first place was that he'd been telling the story of how he told a business class from the University of Chicago, on the day Wells Fargo hit $9 a share, that, if he could, he would have put his “entire net worth” in the stock at that price.


Not a bad call at all. In fact, a great one.

(Having spoken to the very same University of Chicago Booth School of Business group just prior to their visit to Omaha, we give a shout-out to Chris Knapp, Jennifer Yang and the rest of that fine crew: they asked some of the best questions we’ve gotten about Buffett and Berkshire Hathaway, and it doesn’t surprise us a bit the Oracle mentioned their visit.)

Finally, the Wells offering makes our “Crisis Over” point better than anything we could write: the deal was priced at $22 and the stock is currently north of $25. A market that doesn’t blink while swallowing $7.5 billion of stock is a market that’s hungry for more.

Now what, you might be wondering, did Doug Kass get “right”?

For starters, in Doug's “20 Surprises for 2009,” which we highlighted late last December on these virtual pages, Surprise #2 was this:

Housing stabilizes sooner than expected.

That nugget—widely derided at the time—looks like it is coming to pass, with tremendous implications for all kinds of businesses.

But second, and more importantly, we recall seeing Doug on “The Kudlow Report” during the dark days of late February/early March, when the S&P 500 was on its way to a negative 25% start to the New Year, on top of last year’s performance-killing negative 37%, and not many people wanted to hear from optimists.

But Douggie was optimistic. And he said so.

His exact words, as we recall them, were an echo of Buffett’s most famous comment on The Market—indeed, the best and most unequivocal market call ever printed—“Now is the time to invest and get rich,” which Forbes published at the market lows in the dark days of late 1974.


Just as ridiculous as those words might have seemed when Buffett spoke them in 1974, they seemed ridiculous the night Doug Kass spoke them, before he went on to elucidate why he believed them true.

And in light of all that has happened since those dark days of early March, 2009, our virtual hat goes off to Doug Kass, for getting a big thing very very right.

For what it's worth, that same hat goes off to Warren Buffett and Charlie Munger, too, for taking the time to talk to shareholders for five hours last weekend. It's something no company Chairman or Vice-Chairman has ever made a regular part of his or her annual meeting, and likely ever will.


And it's something we think not only every investor, but every CEO, CFO and board director should experience at least once in their careers.

We’ll have more on our first impressions from Omaha come 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.

Tuesday, May 05, 2009

Hasn’t Drive a Ford Lately; Not Likely to Any Time Soon


We here at Not Making This Up are big fans of Alan Mulally.

Mulally is the ex-Boeing genius hired to turn around Ford Motor Company three short years ago, and he is the individual responsible for the fact that Ford has not filed Chapter 11, has not taken government funds, and has not and likely will not require a rescue at the hands of American taxpayers.

Mulally is responsible for Ford’s rescue because he’s the guy who decided Ford would borrow every dollar it could get its hands on while credit was easy and nobody else in Detroit could see the same writing on the wall.

But if Mulally is going to turn Ford into a good business, rather than just a survivor, he’s going to have to sell cars. And if my mother’s experience is anything to judge by, Mulally has his hands full.

My mother has been a Lexus driver ever since American car quality started going into slogans instead of the cars themselves. But she recently decided—like many Americans, I’d bet—that since Ford seemed to be doing a good job against all the odds, she’d help the team and buy a Ford.

Now, you would think the local Ford dealer would be thrilled. After all, most businesses in Florida haven’t exactly been shooting the lights out lately, let alone car dealers.

Let alone American car dealers.

But this particular Ford dealer could not be bothered—or at least this particular salesman couldn’t.

Instead of asking a thing about her driving habits, what she planned to do with the car, how she planned to used it, he launched straight into the Guy Question, “What are you looking for?”


As if a grandmother is going to say “Well I want a turbo-charged six-cylinder twenty-five-hundred-CC engine with a Grampton Cycle Frapper and eight-way, hand-tied seats.”

Then, without so much as getting her name and address as she backed slowly away from him, the salesman at the Ford dealership let her go…on down the road back to the Lexus guy.



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, May 04, 2009

Pilgrimage Over, Stay Tuned


Well, it's over, more or less.

I say "more or less" because, given the fact that I am not flying NetJets this year, we need to wait for certain missing airline attendants to make their way to Eppley Field so that United Airlines can begin boarding First Class, Business Class, Premier Executive, Star Gold (not Gold Star), Star Silver (not Silver Star), Civil War Buff Class, Model Train Enthusiast Class, Crosby Stills Nash & Young Class, New Riders of the Purple Sage Class, and the rest of us lowly travelers, before starting for home and writing up what happened.

Please stay tuned.


Jeff Matthews
I Am Not Making Most of 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.