Monday, March 29, 2010

A Sign of the Times…and of the Future

So it is that a bank office in what was close by (but not in) Ground Zero of the Housing Bubble no longer advertises itself as the place to go for Alt-A, No-Doc, Liar-Loan mortgages.

Instead, as the photographic evidence (courtesy of sharp-eyed reader Chris Wagner)demonstrates, the Novato, California bank branch has been turned into a “Home Preservation Center.”

Novato happens to be on the Redwood Highway where it leaves behind San Pablo Bay and heads north to Petaluma and beyond, past the horse farms and rich fields of Cotati and other farming communities.

And this photograph, we think, is worth paying attention to, because, like all Bubbles and their aftermath, what happens on Main Street ultimately gets reflected on Wall Street.

Indeed, just a few years ago it seemed that every other building on our own Main Street was being turned into a bank.

In the space of the few short years that encompassed the peaking of the Housing Bubble, HSBC, Washington Mutual, Wachovia and others all opened spanking new branches in our small New England town. And we already had plenty of bank branches here.

No matter: where once a small food market, a deli and a local store had sold basic necessities to people who could afford them, the new bank branches—along with the old—peddled mortgages to people who could only afford them if they a) lied about their financial position on their application, b) were charged a below-reality interest rate, and c) the Housing Bubble did not pop.

In hindsight, of course, our glut of bank branches turned out to be not only a sign of the times—but a sign of the future.

And by a curious stroke of coincidence, today’s Wall Street Journal tells us what the photograph from Novato says: the damage those bank branches did to the American home buyer might be mainly behind us.

Mortgage Increases Blunted

The struggling housing market appears as if it will sustain less damage than expected this year from a spike in the monthly payments on hundreds of thousands of exotic adjustable-rate mortgages.

The number of such loans scheduled to adjust to higher payments this year has shrunk. Lower-than-expected interest rates, coupled with efforts to aggressively modify loans, are likely to mute payment shocks for some borrowers. Many others already have defaulted on their loans even before their payments adjusted upward.

“The peaks of the reset wave are melting very quickly because the delinquency and foreclosure rates on these are loans are already very high,” says Sam Khater, senior economist at First American CoreLogic….

—Nick Timiarao, the Wall Street Journal, March 29, 2010.


What will become of all the new “Home Preservation Centers” if this happy “melting away” continues?

We’re not forecasting a housing boom, but it does seem like a good time to buy: interest rates are low and so are prices. Those Home Preservation Centers could, perhaps, become “Banks” once more.

Perhaps, too, small town stores will make a comeback after years of being snuffed out by new bank branches. For this Novato location, may we suggest an organic food store offering great produce from local farmers?

Alder Lane Farm of Cotati comes to mind. We hear they have the best eggs in California.



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, March 25, 2010

The Most Dangerous Call You Will Hear Today


Today we here at NotMakingThisUp break with a longstanding tradition of identifying “The Least Helpful Call You Will Hear Today” in order to identify a new category of Wall Street research.

We call it “The Most Dangerous Call You Will Hear Today,” and until today it has not existed for the simple reason that before the financial crisis came along and caused all manner of failing CEOs—from the lowest, least-material money-losing internet company to the whitest white-shoe Wall Street firm—to blame their own material failures on unnamed, unknown, and never-identified “short-sellers,” it seemed impossible to fathom that any thoughtful research opinion could be construed as dangerous.

Indeed, 30 years ago, when we started on Wall Street as a very junior number-cruncher in the equity research department of a large and proud Wall Street firm, our boss—a forceful, smart, hard-driving Greek—published whatever he wanted to publish, whenever he wanted to publish it.

Investment bankers and CEOs be damned.

Your editor can still picture the man waving his cigarette in the air—smoking was allowed in office buildings back then—when somebody from above tried to interfere with us, and using to remarkable effect the kind of language Lehman CEO Dick used when his firm was collapsing under the pile of bad real estate loans and bad LBO loans Fuld’s team had assembled, as depicted by Andrew Ross Sorkin in his excellent book, “Too Big to Fail.

But those days are long gone.

As commercial banks bought up investment banks, old-style research became a tool for the bankers to win new clients and pacify existing ones. Worse, even Moody’s and S&P—so-called independent ratings agencies—saw the writing on the wall, and wrote pretty much whatever their clients asked them to write.


Worse still, independent research firms started getting sued merely for publishing negative research.

(Next thing you know, short-sellers will be sued simply for being short-sell—oh, wait, that’s already happened….)

In light of this perverse turn of events, today’s research call from something called “WBB Securities” looks even more remarkable than it might otherwise appear.

For WBB Securities has, we are informed, slapped not merely a “Sell” rating on a stock—shocking as that would be—but a “Sell Short” rating, at least according to the indispensible Briefing.com:

Electro Optical Sciences downgraded to Sell Short at WBB Securities; tgt lowered to $5 (9.16)

WBB Securities downgrades MELA to Sell Short from Sell and lowers their tgt to $5 from $7.25 saying while they find MELA's candid assessment of the difficulties assailing the FDA and companies before the agency refreshing, they also find it cause for concern in assessing the chances and delays in approval of a PMA product when, according to management, this is "not what's supposed to happen" in the approval process. Firm says as a result of this FDA response and a re-assessment of their modeling of MELA, they are lowering their rating.


Now, Electro Optical is not your garden-variety money-losing investment bank or internet retailer. Electro Optical has developed a gizmo that illuminates potential melanomas on the skin: hence the company’s stock ticker is “MELA.”

And melanoma is bad—very bad. Most people have no idea how bad a malignant melanoma can be. (How otherwise to explain the current younger generation’s infatuation with a new brand of cigarette known as The Tanning Salon?)

Electro Optical’s gizmo is a bit like an ultra-sound device that uses light waves to detect “suspicious pigmented skin lesions” for possible biopsy. It’s a great idea, replacing as it would the inefficient method by which a harried, time-short doctor merely looks over the skin.

The market potential for such a product could be enormous, but for reasons we here at NotMakingThisUp don’t grasp—and to be clear, we have absolutely no interest in the stock as a long or a short—the company has encountered a bumpy road to FDA approval, as yesterday’s news demonstrates.

Whatever the problem with the gizmo itself, the company, according to our Bloomberg, has a debt-free balance sheet and close to $30 million in cash. Unfortunately it’s lost roughly $18 million in each of the last two years while pursuing regulatory approval.

That's what an analyst-friend of ours used to call “a spicy meatball.”

And while slapping a “Sell” rating on any stock is difficult enough these days—courting as it does the wrath of investment bankers and CEOs—putting a “Short-Sell” rating on anything short of an already-bankrupt company in a world in which short-sellers have been blamed for the failings of the men who ran Lehman, Bear Stearns, Fannie Mae, Freddie Mac, Countrywide Credit, AIG, GE, Merrill Lynch and Wachovia, not to mention the entire country of Greece, is almost inconceivable.

Which is why we nominate the WBB rating on MELA The Most Dangerous Call You Will Hear Today.



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Sunday, March 21, 2010

Book Review: The Trouble with Harry


Harry Markopolos has an important story to tell in No One Would Listen: A True Financial Thriller (John Wiley & Sons, Inc.)

Markopolos, if you don’t recall the name or where you’ve heard it already, happens to be the guy who figured out—early enough in the process to mean something—that Bernard Madoff was conducting a classic Ponzi scheme, an in-one-door-out-the-other redistribution of his investors’ cash, under the guise of operating a sophisticated stock trading operation.

Now, Harry was not actually the only guy to figure it out—as it turns out, a lot of investment professionals knew, or presumed, that what Madoff was doing was not what he said he was doing and what his deluded investors assumed he was doing.

Also, Harry had several other professionals working with him, formally and informally, as part of a loosely unified “team” to decode what Madoff was really doing with the cash.

Still, Harry seems to be the one guy who actually felt strongly enough about the whole charade to try to stop it. He alone contacted the SEC and described in some detail what was probably going on behind the scenes on the 17th floor of the famous “Lipstick Building” in New York City where Madoff carried out his remarkably simple, but convincing, fraud.

And he did so not once, but five times.

So what did the SEC do?

Well, knowing the high stakes involved and the fact that billions of innocent investment dollars were at risk, the SEC immediately moved to investigate Madoff and swiftly shut down the fraud before many billions of dollars could be lost.

No—sorry! We’re making that up.

The SEC did nothing—almost literally nothing, it appears, if Markopolos’ account is to be believed.

And therein resides the problem—the only problem—with this book: it is so full of Harry writing about himself that the reader gets a little jaded. The trouble with Harry is he really seems to need the attention.

Now, if you’d been working on unmasking a financial fraud for ten years—going so far as to contact the SEC yourself, on your own time and your own dime, to walk them through chapter and verse of what would turn out to be the biggest financial fraud in history—you’d want some attention too.

But it would have been far better, I think, for someone else to have told this story.

(Of course, I could be wrong, but having written a book of which at least one published book review was written by a reviewer who never actually read the book, I think all book reviewers should a) have written and published a book themselves, and b) actually read the entire book he or she is reviewing, and c) say something constructive along with any critique.)

Structured as it must be in a first-person narrative, this book finds Harry awkwardly quoting himself in highly self-conscious fashion, as when he proudly recounts telling Congress, “The SEC roars like a mouse and bites like a flea.”

Muhammad Ali he is not.

But he is the guy who tried to tell the SEC that Madoff was very probably a scam. And a great—heartbreaking, but great—story it makes.

So pertinent and astonishing a story it is, in fact, that we here at NotMakingThisUp think this book should be read by every employee at the SEC; by anybody taking a course in securities analysis; and by anybody who puts their money in the stock market.

The history of the SEC’s failure with Madoff (SEC: total budget for Fiscal Year 2009, $913 million; or just about one billion with a “B”) needs to be told and retold.

While Markopolos is, unfortunately for the flow of the narrative, not above retelling things every chance he gets, it is highly fortunate that his entire story has seen the light of day.

Even the most jaded market observor with decades of experience will feel something like nausea while reading how the SEC’s Boston office was handed Madoff’s head on a metaphorical platter, and merely glanced briefly at it before sliding it into a deep freezer.

For Markopolos did not merely email somebody a brief complaint about Madoff’s suspicious-looking “45-degree” investment returns (so-called because that’s how his steady monthly increases appeared in chart form). Rather, Harry put together a serious analysis and, thanks to a contact within the Boston office, walked through the analysis with a regional director of enforcement he describes as “coldly polite.”

That was in May, 2000. Madoff wouldn’t give himself up for another eight years.

Still, Markopolos and his pals kept at it—the “it” being trying to figure out exactly how Madoff reported such steady, consistent gains.

The fact that Madoff couldn’t be doing what he claimed to be doing (using options to protect his downside while capturing modest upside in the underlying stocks) was easy enough for most professionals to grasp.

After all, anybody who knew anything about the options markets knew there simply weren’t enough options trading in Madoff’s stocks to accommodate his stated goal of providing constistent monthly gains on multiple billions of dollars under management.

But Markopolos & Company dug deeper: they proved, by a lot of hard work, that the so-called hedges wouldn’t work as advertised even if Madoff could do them in size.


So how is it, you may wonder, that so many professionals—even those who knew Madoff’s numbers didn’t make sense—never suspected the Ponzi scheme nature of Madoff’s operation?

As it turns out, Madoff had a built-in “cover” in the structure of his business: he operated a legitimate market-making firm in the two floors above his money management scheme.

Thus, the professionals who snorted that Madoff’s better-than-Buffett returns were impossible to be accomplished by a legitimate investing method simply assumed he was doing it illegitimately. They guessed he was front-running the clients of his market-making operatings.

And that was the beauty of Madoff’s scam: there was an explanation that made sense even to the most cynical professionals.

Except Harry Markopolos and his pals. They persisted, and this book tells the worthwhile story of that persistence.

Yet it is not always flattering to the author. He describes in gory detail his own motives (more on that later), which were not, in the beginning, as high-minded as you might think. Worse, he takes readers on strange side-trips, such as the nearly fatal but completely unrelated sailboat expedition of one of his compatriots, as well as the creepy negotiation he held with his wife-to-be (in a humorous vein, I think) about buying her an engagement ring: he offered to spend the money on breast implants instead, saying, “That way it’s something we both can enjoy.”

Yes, he quotes himself saying that to his wife.

Harry also becomes paranoid—almost comically so.

(I say ‘almost comically,’ for having shorted stocks professionally as part of my own investment methodology for decades, I know it is not easy going up against a sociopath with the resources of a large company behind him—and most effective scam-artists fit the classic profile of a sociopath.)

For example, in the most inadvertently amusing passage, Harry has decided that if the SEC will do nothing (two years have elapsed since his first attempt), then by gosh he’ll present his case to a Wall Street scourge, then-Governor Eliot Spitzer (still in his prime, before his highly public involvement on the consumer end of the flesh trade brought him down).

Spitzer was coming to Boston for a speech at the J.F.K. Library.

Harry writes:

The safest thing to do, I decided, was to get this information to him anonymously. I had identical twin sons due to be born…and those boys were going to need a father….

I started by printing out my entire submission on clean sheets of paper, taking out my name or any information that could identify me. I made certain I didn’t leave any fingerprints on the pages. I put on a pair of gloves and slipped the submission into a 9 x 12 manila envelope…

Markopolos then describes a scene out of a Ron Howard comedy:

It was cold that December night. I put on extra-heavy clothing and the biggest coat I owned. I was careful to dress down; I didn’t want anyone to notice me. I sat quietly for Spitzer’s speech. When he was done…I put on my coat and my gloves as if I was ready to go out into the cold, then walked to the front of the room. A library staff member was standing a few feet away from Spitzer. I took the 9 x 12 envelope…and handed it to her. “Would you do me a favor, please?” I asked. “Could you please make sure Mr. Spitzer gets this?”

“Of course,” she said.

“It’s important,” I added. Then I turned around and walked out into the blackness of a cold wintry night.

There is no evidence that Eliot Spitzer ever read my submission…

No kidding! Envelopes handed to politicians by strange men in heavy overcoats whispering “It’s important” do not generally go to the top of the inbox.

But Markopolos kept going, despite the inability of the regulators whose job it was (and is) to protect investors to grasp what his beef was.

His second attempt to convince the SEC that something was wrong took place in 2005, and it was much less subtle than the first—the report was titled: “The World’s Largest Hedge Fund Is a Fraud.”

This time, the SEC snapped into action: it raided Madoff’s offices—no, sorry, kidding again!

Inter-office politics caused the ball to be dropped, once more. Nonetheless, Harry persisted again, and again and again, until Madoff himself spared the SEC further aggravation at the hands of this crazy obsessive from Boston, and turned himself in.

Now, a reader might be wondering, “What was in it for Harry?” And it is a good question.

After all, Harry was not a short-seller looking to make money betting against Madoff: Madoff’s firm wasn’t publicly traded.

But he was a competitor.

A Wall Street “quant” by training, Harry was being pressured by his bosses to come up with a computerized trading program that could mimic Madoff’s steady, risk-free returns. They wanted the same dumb Europeans who were pouring money into Madoff’s black hole to leak some cash into Markopolos’s firm. And Harry wanted to get his bosses off his back.

He also—to his credit, and this is a trait shared by every short-seller I know—truly wanted to expose a fraud, to get the bad guy.

And get him he, eventually, indirectly, did.

For the full story, and all the details, read this book. It is an important book because the trouble with Harry—mostly a vainglorious paranoia that informs much of the phraseology in “No One Would Listen”—is not nearly as consequential as the trouble this book reveals among the regulators who should have, and very easily could have, shut down a run-of-the-mill scam before it became an off-the-charts human tragedy.

They only had to listen to Harry, and do something about it.



Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, March 19, 2010

What Hamlet Could Have Taught Day-Traders About FedEx


“There is nothing either good or bad, but thinking makes it so.”
—Hamlet, by William Shakespeare



Breathless headlines hit the tape yesterday morning before the market open: FedEx was reporting a better-than-expected quarter, but what looked like disappointing guidance.

According to our Briefing.com, in fact, FedEx shares were “gapping down” more than $3 a share in pre-market trading on the news.

Now, if you’re thinking the reason for the so-called “disappointing” guidance from that Memphis-based economic bellwether was something like a sudden collapse in demand for FedEx’s bread-and-butter package delivery, you would be wrong.

In fact, if you’re thinking the reason was in any way a bad reason, you’d be wrong. The reason was actually quite good.

The reason was higher bonus accruals.

That’s right. FedEx is starting to share the wealth with its employees. Here’s how the CFO put it on yesterday’s conference call with Wall Street’s Finest after the press release came out:

Our results also include the impact for accruals for our variable incentive compensation programs…which we did not have in the prior year. The impact of restarting these programs will dampen our earnings growth both in the fourth quarter and into fiscal 2011, although we do expect our earnings growth to be substantial.

And for that, the stock was down $3 before the market even opened.


Eventually, cooler heads prevailed. Rational shareholders who took Hamlet’s advice and actually thought about it came to realize what FedEx said was good news, not bad.


FedEx shares actually closed the day up nearly $3.

Now, to be clear, we offer no opinion on FedEx as a stock. We could not care less whether it goes up, down or sideways.

What we do care about is what FedEx says about the state of its business.


Indeed, long-term readers know that we here at NotMakingThisUp view FedEx and its near-twin UPS as the two most important canaries in the economic coal mine.

And by all measures, the air is clear.

If not, FedEx would certainly not be reinstating merit salary increases, incentive bonuses, and half the 401-K match, all of which went away during the crisis.

Better still, FedEx isn’t the only company that has been loosening up on the purse strings and sharing the wealth with somebody else besides the shareholders who have benefited massively from the unprecedented cost-cutting of the last two years.


Recent earnings calls with companies as diverse as Hibbett Sports (“a big bump in the bonus accrual”), Cheesecake Factory (“higher performance bonus accruals”), and Nordstrom Inc. (“higher performance-related expenses”) have all carried the exact same message as FedEx.

And that is why the news from FedEx, as anyone who studied their Shakespeare would know, was actually quite good if you thought about it longer than the one or two seconds it took to see the headline about “disappointing guidance” cross the tape.

So, to the tape-reading day-trader who blew out of his or her FedEx position early yesterday morning after seeing “the print” cross the tape…keep in mind that what is going on here is much larger than the penny or two distortion those higher employee compensation expenses are causing in quarterly earnings reports from public companies across America.

What’s going on is this: companies are starting to share the wealth, and that is good, not bad.

Read your Shakespeare.



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Monday, March 15, 2010

How Not to Manage Microsoft…Like a Car Company


As far back as April, 2006 we here at NotMakingThisUp reported on Microsoft CEO Steve Ballmer’s refusal to spring for iPods for his children, and his insistence that they not use Google.

In “Over-Share from Dr. Evil’s Hideaway,” we quoted Ballmer from a Fortune Magazine story thusly, when asked if he had an iPod:

“No, I do not. Nor do my children…. I’ve got my kids brainwashed: You don’t use Google, and you don’t use an iPod.”

The danger of this line of thinking, we noted, was that a heretofore successful company thus cuts itself off from knowing what its customers want.

One year later, in “Random People Creating Value,” we reported further on the dangers inherent in Ballmer’s insular, hard-headed management style, after he dismissed the Google management style as “a random collection of people” attempting to
“create value.”

We likened Ballmer’s approach to that of the old car companies, thusly:

Such a blinders-on, head-in-the-sand, not-invented-here mindset has heretofore been more closely associated with Detroit, where auto executives drive only their own company’s best cars. Small wonder the bigs at GM, Ford and Chrysler failed to grasp, before it was too late, the quality and innovation that allowed Toyota and other imports to eat their collective lunch.


—NotMakingThisUp, March, 2007

Little did we know that Steve Ballmer’s father once worked for Ford.

That’s right. In “Forbidden Fruit: Microsoft Workers Hide Their iPhones” the weekend Wall Street Journal describes—and we are not making this up—“the perils of being an iPhone user at Microsoft”:

Kevin Turner, chief operating officer…said he discouraged Microsoft's sales force from using the iPhone... "What's good for the field is good for Redmond," Mr. Turner said, recalls one of the people who heard his comments.

Mr. Ballmer took a similar stance at the meeting.

He told executives that he grew up in Detroit, where his father worked for Ford Motor Co., and that his family always drove Fords, according to several people at the meeting.

—The Wall Street Journal, March 12, 2010

Ballmer’s father, of course, was not alone. All the car companies used to feed spanking-new, smokin’-hot, top-of-the-line models to ‘the suits.’ That’s why the suits never saw the Japanese coming.

And Ballmer—like father, like son, it would seem—is doing the same for Microsoft.

It’s been four years since we here at NotMakingThisUp flagged that intransigence as a potentially fatal flaw—and that was back when the iPod was the hot new product.

Of course, the iPod long ago made Microsoft’s “Zune” music player as extinct as monks transcribing bibles. More recently, it is the iPhone that has been pushing Microsoft’s own smart-phone software off the shelves and into computer museums, where it belongs.

Now, just this weekend, we ordered an iPad, and it’s only a matter of time before the Dell notebook on which we write these virtual columns will go wherever dead Zunes are buried.

Seems to us that if Bill Gates is as smart as Warren Buffett thinks, and if Bill Gates really wants to see his legacy survive, he should buy Steve Ballmer an iPad and an iPhone and an iPod.

And Steve Ballmer should use them all, to understand—really understand—what Microsoft is up against.

Otherwise, Microsoft just might need to call Alan Mulally in a few years, to clean up the mess in Redmond.

Mulally, for readers not familiar with the name, is the genius behind the recent Ford renaisscance.

Mulally’s very first act upon being named CEO by the Ford family? He drove every Ford in the lineup.

Not just the good ones.



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, March 12, 2010

Lehman Brothers: “Another Drug We R On”


Editor’s Note: We will, as promised, soon conclude “What We Learned Writing A Book About Warren Buffett” in these virtual pages. This morning’s headline in our online Wall Street Journal, however, is too timely and important to go without a comment right here, right now.


This just in: short-sellers had nothing to do with the collapse of Lehman Brothers.

You’re reading that correctly. Summarizing the 2,200 page report of the bankruptcy-court examiner who investigated Lehman Brothers, the Journal’s headline says, “Lehman Torpedoed Lehman.”

Not—despite the misinformed yammering of hysterical Congresspersons driven near-mad during the financial crisis by the thought that, lacking any other employable skills as they do, their fat government pensions and healthcare benefits would be at risk if their country collapsed; and fueled by the highly misleading commentary of at least one self-appointed crusading CEO whose chief aim seemed to be to shift the spotlight away from his own shortcomings—short-sellers.

In fact, short-selling is not mentioned in today’s Wall Street Journal—just a lot of really bad management by people desperate to keep a sinking ship afloat any way they could, including “accounting maneuvers,” one of which was referred to by an insider in an email as “another drug we r on.”

But don’t listen to us—after all, in addition to investing in many fine American companies for the long run, we also sell certain not-so-fine companies short.

Listen to the Wall Street Journal:

A scathing report by a U.S. bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. blames senior executives and auditor Ernst & Young for serious lapses that led to the largest bankruptcy in U.S. history and the worst financial crisis since the Great Depression.

In the works for more than a year, and costing more than $30 million, the report by court-appointed examiner Anton Valukas paints the most complete picture yet of the free-wheeling culture inside the 158 year-old firm, whose chief executive Richard S. Fuld Jr. prided himself on his ability to manage market risk.

The document runs thousands of pages and contains fresh allegations. In particular, it alleges that Lehman executives manipulated its balance sheet, withheld information from the board, and inflated the value of toxic real estate assets.

Lehman chose to "disregard or overrule the firm's risk controls on a regular basis,'' even as the credit and real-estate markets were showing signs of strain, the report said.

In one instance from May 2008, a Lehman senior vice president alerted management to potential accounting irregularities, a warning the report says was ignored by Lehman auditors Ernst & Young and never raised with the firm's board….

—The Wall Street Journal

There is more—much more.


2,200 pages more, in fact, with 300 pages alone devoted to “balance-sheet manipulation” according to the Journal.

Read it yourself:

http://online.wsj.com/article/SB10001424052748703625304575115963009594440.html?mod=WSJ_hps_LEFTWhatsNews


And say goodbye to the made-up, non-existent, never-happened, figment of their imagination “naked short-selling scandal” that brought down America.



Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, March 11, 2010

Coming Soon...

We here at NotMakingThisUp will soon conclude our latest journey to Omaha (i.e. the no-longer-quite-so-recent Berkshire special stock-split meeting).

With the forthcoming and concluding chapter we will also initiate the shift of our Buffett and Berkshire-watching to a new blog, "Pilgrimage to Omaha," at http://pilgrimagetoomaha.blogspot.com/.

Longstanding readers who prefer less Buffett and more of Wall Street's Finest should prefer the change, while Buffettologists should find the "Pilgrimage to Omaha" content more to their interests.

In the meantime, your editor is looking forward to resuming commentary in these virtual pages on Wall Street's Finest and anything else that strikes our fancy, for there is much striking our fancy these days.

Like, for example, United Technologies and other American companies announcing share repurchase programs with their stocks back up to almost-all-time record highs.

Did we learn exactly nothing in 2008?

JM




Monday, March 01, 2010

What I Learned, Part VI: No Brilliant Ideas, but a Dig at Kraft










The second-to-last question of the day is asked, and it’s about Burlington Northern.

“Are you also purchasing rights of ways and do they have other purposes?” a shareholder wants to know.

He is, no doubt, wondering whether the “Oracle” has divined an additional use for the rights-of-way on which the Burlington Northern track sits—one that takes such clever advantage of those long, uninterrupted stretches of railway beds that, years from now, other railroad operators will smack their foreheads and mutter “How did we miss that!”

Buffett knows
exactly
where the question is going, for there has been speculation that he has his eye on using those rights-of-way to expand his electrical distribution operations in some sort of grand scheme to both help fortify the tired, aging national grid while likewise making buckets of money for Berkshire.

So he gets right to the heart of the matter:

“ I think Phil Anschutz found a way to do this in the case of his railroad, but no, Burlington Northern does not have a lot of excess land, and I don’t have any brilliant ideas to use the right of way, the rolling stock, the tonnage, the bridges…”


Buffett knows his history: Phillip Anschutz was the genius, Kansas-born, land/farming/oil magnate who began installing digital fiber-optic cable along the tracks of the Southern Pacific Railroad in the 1990s, creating Qwest Communications out of thin air—or, rather, thick dirt.

Anschutz was copying the model created by Williams Companies, a pipeline operator that had been stringing decommissioned oil pipelines with fiber-optic cable since 1985.

Buffett, however, will not be copying Williams or Anschutz: he merely wants the railroad.

Having made this clear, he winds up the subject with a dig at Kraft—the food company whose shares Berkshire owns, which is buying Cadbury for what is, in Buffett’s mind, an offensively high price using offensively low priced stock:

“Unlike Kraft, we do NOT expect dramatic synergies.”

This gets a laugh from the sympathetic crowd, and Buffett continues by accentuating the positives, and also displaying more of his command of financial history—the kind of command he will put to greater effect at the annual shareholder meeting when he and Charlie Munger will answer these types of questions for more than five hours:

“Matt Rose does a wonderful job running it [Burlington Northern]... I do not see its utility elsewhere. The Burlington had lots of oil, real estate [years ago], and they spun those things off. The railroads have nothing like the surplus of assets they had 20-30 years ago. I looked at a map of the Union Pacific the other day, when they were chartered in the ‘60s I think they had 10% of the land in Nebraska.”

By “’60s” Buffett is, of course, referring to the 1860’s, but I wonder if the youthful side of today’s crowd makes that connection.

The final question of the day—at least the last question Buffett will answer—is about his partner, represented today by a color cut-out of a youthful Charlie Munger...“What is Charlie’s view on the split?"

Buffett says,

“We consult on anything important—like this. We’re paying a full price, and paying part of the price in stock is unpleasant.”


When a shareholder from La Jolla tries to sneak in a question on Buffett’s view on the price of oil, the Oracle seizes the chance to cut things off:

“We should really limit this,” he says, concluding the question-and-answer session. “Charlie, any last words?” he asks his cardboard partner.



Instead of Munger’s voice, we hear him snoring.



This draws laughter and makes for the sort of humorous coda with which Buffett likes to end his public appearances. He stands and shareholders start moving to the front of the concert hall, their cameras ready.

As the cameras start flashing, Buffett obliges. He stands next to the image of Charlie and makes a “V” with his fingers behind Munger’s head.

The flashes go off.

Then Buffett waves and walks quickly offstage.

To be concluded…



Jeff Matthews
I Am Not Making This Up


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The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.