Friday, April 30, 2010

The NotMakingThisUp ‘Pilgrimage to Omaha’ Top Ten List


Well, the polls have closed, the questions are in, and we will be passing along the following Ten Questions We’d Like to Hear Warren Buffett Asked to ace New York Times reporter (and “Too Big to Fail,” a NMTU recommended read author) Andrew Ross Sorkin, who will be one of three reporters asking questions at the meeting.

Of course, there are no guarantees than Mr. Sorkin will get to any of them when the question-and-answer session begins tomorrow morning—last year the reporters had to weed through over 5,000 questions, and there will be more than that this year—but here goes.


If our readers are any indication, 40% of the questions tomorrow will have something to do with Goldman Sachs. Here are four excellent variations on that theme:

1. Goldman Sachs is a significant Berkshire investment that contradicts many of the philosophies that are the foundation of Berkshire company investments, including fair executive compensation and business integrity beyond reproach (and indictment). Short of Goldman Sachs & Company being found guilty of violating the law, when do you say you have had enough? Many Berkshire shareholders and the American people are already there.

2. Were you naive in basing your trust on people and an image of Goldman formed years ago when it was an investment bank, rather than what it has become: a proprietary trading organization that feels no obligation to look after the interests of its customers?

3. After spending your life preaching about the ills of the modern financial system and what it stands for - including advising new grads to go there only with 'noses closed' - why did you invest in the absolutely worst practitioner of that kind of finance…and then defend its 'legal but blatantly immoral and socially reckless' practices all this year?

4. You tell your managers not to do anything they wouldn’t want to read about on the front page of a national newspaper. Even if they are legally exonerated, Goldman Sachs & Company violated that fundamental principle. Berkshire owns preferred stock in Goldman. What are you doing about it?


Of course, there are other assets within Berkshire besides a preferred investment in a Wall Street bank. Indeed, thanks to the acquisition of Burlington Northern, the company now has 257,000 employees—almost as many as GE.

And based on our submissions, Buffett can expect that acquisition to account for the second-largest number out of the 60 or so questions he’ll be getting. Here’s one that sums up the gist of what’s on our readers’ minds:

5. Given the return prospects relative to the risks, pound for pound, was fully acquiring Burlington Northern the best available opportunity to allocate capital for Berkshire, given the many other attractive franchises available for partial or outright purchase during the crisis?

Goldman Sachs and railroads aside, Buffett will also be getting questions about derivatives, his late-found hunger for capital-intensive businesses, and much else that we couldn’t squeeze into a nice, round, “10.”

The following finish our list:

6. You’ve said, “In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow.” Now Berkshire has large investment in capital intensive businesses such as railroads and utilities. Have the business struggles of a thought to be sure-thing business like Coca-cola changed your thinking and increased you preference for sure-thing utilities and railroads?


7. Why haven’t you invested in real estate over the years? Assuming a good location, rents increase with inflation, cap-ex is minimal and the business is easily understandable.

8. As a 49 year-old who put the bulk of my equity investments in Berkshire Hathaway more than a decade ago, I’d like to thank you. Looking ahead, should an investor like me who will be dependent on these assets in my retirement feel comfortable with the risk of concentrating my investments in this one asset for the next 15 or 20 years?


9. Are you concerned with the number of countries - the United States included - that have "become dependent on the kindness of strangers" financially?


Before we get to Question # 10, let’s just say it sums up one thing we learned writing a book about Warren Buffett.

Underneath all the public adoration of the most successful investor who ever lived, there lies a subset of investors who think a) Buffett was lucky (a “black swan event,” as one serious, thoughtful guy told us), or b) a magnificent scam artist—and I am not making that up.

This later group views his foray into derivatives, and then lobbying against the derivatives proposal; his support for the inheritance tax, while avoiding it himself; not to mention his criticism of banks and mortgage brokers while maintaining a large position in Moody’s, a major contributor to the credit crisis, as well as many other apparent discrepancies in the House of Buffett, as all being signs of…well, let’s let Question #10 stand on its own.

And keep in mind we include this one not to be a wise guy. It in fact sums up the gist of the largest single group of questions we received, behind only Goldman Sachs and the railroad acqusition:

10. How long will you continue to be one of the major hypocrites in America?


One other thing we learned writing a book about Warren Buffett, and it was unfortunately reinforced in this year's Top Ten contest: thanks to emails, instant messages, Twitter, Facebook and the rest, people have lost the ability to spell.

The number of emails we here at NotMakingThisUp had to clean up via capitalization—including, sadly, “America”—was astonishing.

Next year we’re going to publish a secondary Top Ten List: “The Top Ten Emails Your Mother Would Cringe Reading.”

On to Omaha!



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, April 26, 2010

Questions We’d Like to Hear: The NotMakingThisUp ‘Pilgrimage to Omaha’ Top Ten List


Well it’s that time of year again.

In a few days something like 35,000 people from literally all around the world will begin suffering United Airlines connections in Chicago, Minneapolis and elsewhere, for Omaha, where the only for-profit annual shareholder meeting among New York Stock Exchange-listed companies is about to take place: the Berkshire Hathaway meeting.

Or, as Warren Buffett likes to call it, “Woodstock for Capitalists.”

(Those Berkshire shareholders who do not suffer commercial airline connections to get to Omaha will either be driving or arriving in style courtesy of NetJets, which Berkshire naturally owns.)

As always, the heart of the three-day extravaganza will be the Saturday morning question-and-answer session held by Buffett and his acerbic Vice-Chairman, Charlie Munger (“The Abominable ‘No’-man,” as Buffett calls him).

When we attended the Berkshire meeting in 2008 while writing “Pilgrimage to Warren Buffett’s Omaha,” the question-and-answer session was dominated by non-financial, non-Berkshire questions, thanks to Buffett’s remarkably democratic question-selection technique (he simply called on anyone who got up early enough to grab a spot at one of the 12 or 13 microphones placed inside the Qwest Center arena).

That led to predominately “What Would Warren Do”-type of questions from adoring fans, as opposed to hard questions about Berkshire and its businesses.

Last year, Buffett refined the methodology, inserting three reporters into the mix to screen half the questions, and the result was a much sharper Q&A, without too much of the WWWD stuff. (Buffett, by the way, loves answering those “WWWD” questions—he’s a natural teacher; he likes the stage; and he’s smarter than anyone else in the room except Munger, so what the heck).

The only refinement at this year’s meeting will be that Buffett is adding 30 minutes to the 5-plus hour Q&A, so instead of handling the usual 50-55 questions, Buffett thinks he’ll be able to accommodate 60.

Which brings us to today’s topic: the Top Ten list of Questions We’d Like to Hear is back at these virtual pages.

Readers should submit their best question—the one they’d like to see Warren Buffett (or Charlie Munger) answer next Saturday in front of 35,000 people.

We’ll select the Top Ten, publish them here Friday and submit them to Andrew Ross Sorkin. (Let us know if you want your name used should Mr. Sorkin ask it.)

While there is no guarantee at all that any one of our Top Ten will make the cut, chances are most of them will be asked in one form or other. (Last year’s batting average was .800.)

Following the meeting we’ll publish how well our readers anticipated the reporters themselves.

Post 'em here, or send them to
pilgrimagetoomaha@gmail.com. And soon.

JM.




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, April 23, 2010

Letting Go of Goldman: Here Comes Inflation


You may never have heard of Leggett & Platt, but chances are good you’ve used their products—if, say, you ever slept on a bed, or sat in a chair or drove a car.

After all, it is precisely those basic but essential products that utilize pieces of metal, foam or plastic shaped at Leggett & Platt factories around the globe, whether they are springs for beds, rollers for office chairs, or lumbar controls for car seats.

Indeed, long-time readers may recall that we here at NotMakingThisUp check in with Leggett & Platt from time to time, for two reasons. The first is for its uniquely broad view into end-market demand among businesses ranging from bedding to automobiles. The second is because the company has virtual real-time insight into to the supply-and-demand characteristics of many industrial commodities.

And judging by Leggett’s most recent earnings call—i.e. yesterday’s—it is clear that not only is the demand for what Leggett makes going up (no surprise: the stock market began signaling this last fall) but the price of those industrial commodities is going up.

Quickly and broadly.

Here’s how Karl Glassman, the company’s Chief Operating Officer put it, in response to one of Wall Street’s Finest, courtesy of the indispensible Street Events:

Joel Havard - Hilliard Lyons - Analyst
“Karl, you have made a few comments today about the inflation pressures coming your way, the price hikes are passing through.

“Is the environment changing, specifically with regard to the length of the timing curve that it takes to see these coming your way and your ability to pass them through?...”


Karl Glassman - Leggett & Platt, Incorporated - EVP, COO
“…If there is a difference today, it is the magnitude and the variety of inflation. From our finished bedding and furniture customers' standpoint not only are they getting it from steel but they are seeing it -- everything petrochemical-based.

“So they are getting foam increases, fiber increases. The leather guys are seeing huge inflation in hides. Cardboard. All the MDFs [medium-density fiberboards]. So it is a challenge.

“Historically the retailers have said to the manufacturing customers, we won't let you pass through. Our manufacturer customers are in a squeeze. They have to pass it through at retail. The magnitude and the velocity of this, retail has to move this time.”

Fun as it has been to weigh in on the Goldman situation—and unless the entire Goldman crew takes the fifth in front of Congress next week, a la Mark McGuire, we see nothing to change our dollars-to-donuts bet that the final score in that case reads “Goldman 1, SEC 0”—it seems time to get back to what makes markets move.

Like, say, “the magnitude and the variety of inflation.”




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, April 19, 2010

From BACCHUS to ABACUS: Exhibit A in Defense of Goldman Sachs


Let’s start by making one thing clear: we here at NotMakingThisUp harbor no particular good will towards Goldman Sachs.

In fact, not long ago we published in these virtual pages a column titled “Goldman 8, Public Zero…the Teachable Moment of Bare Escentuals (January 15).” It was a minor but explicit illumination of Goldman’s relationships with its clients—i.e. pretty much the same relationship a water moccasin has with a frog.

Loyal readers will recall that we described how Goldman Sachs first sold a total of 36 million shares of cosmetics maker Bare Escentuals (sic) to the public at prices ranging from $22.00 to $34.50. Then, after the wheels came off the proverbial track at Bare, Goldman’s crack research team slapped a “Sell” rating on the company’s stock…but not until after it had already collapsed to $13 a share.

Adding insult to injury, just a few weeks after that “Sell” rating—from Bare’s very own investment bank—sent the shares crashing, Bare Escentuals received a takeover bid for $18.20 a share.

But wait, as they say, there’s more!

Bare Escentuals then hired none other than Goldman Sachs to advise the cosmetics company on the $18.20 a share offer. Goldman, naturally, endorsed the price as fair—just weeks after its own research department had declared $13.00 as too rich a price for Goldman’s clients to pay—and received fees for doing so.

By our count, that amounted to eight ways Goldman Sachs made money on Bare Escentuals at the expense of anybody on the other side of the table.

And while we therefore do not have any particularly benign feelings towards Goldman Sachs, neither do we harbor ill-will towards the government institution which filed a complaint against that firm on Friday.

Indeed, the SEC Chairman who, in our view, pulled the teeth out of that animal under the previous administration and then flailed ineffectually while the world collapsed thanks in part to his blunders—i.e. Chris Cox—is gone, and good riddance to him. (For an entertaining and insightful look at that sordid story, read Andrew Ross Sorkin’s excellent account of the Lehman collapse, “Too Big to Fail.”)

Still, we’ve read the SEC’s complaint filed against Goldman Sachs Friday afternoon—headlines of which seemed so shocking they sent Goldman shares, and stock markets, crashing.

And while the complaint portrays yet another sordid story—the account of some really awful paper Goldman helped package and sell to a dumb German bank at the behest of a smart U.S. hedge fund manager—we think the government doesn’t have a leg to stand on.


The gist of the SEC’s complaint—and while we are not attorneys, we have been in this business a few decades and seen more than a few frauds in that time—appears to be, in part, that Goldman and an employee mislead IKB, the German bank in question, by not disclosing that John Paulson’s hedge fund had helped select the garbage Goldman was selling to IKB:

In sum, GS&Co arranged a transaction at Paulson’s request in which Paulson heavily influenced the selections of the portfolio to suit its economic interest, but failed to disclose to investors…Paulson’s role in the portfolio selection process or its adverse economic interests.

—Paragraph 3, SEC v. GOLDMAN SACHS & Co. and FABRICCE TOURRE.

Let’s leave aside the obvious howler here—since when did it become a broker’s responsibility to violate the confidentiality of its clients by disclosing the seller’s identify to the buyer?—and focus on the specifics of the SEC charge, particularly the notion that IKB would not have proceeded with the transaction had Goldman not omitted Paulson’s name from the discussion, as spelled out here:

IKB would not have invested in the transaction had it known that Paulson played a significant role in the collateral selection process while intending to take a short position in ABACUS 2007-AC1.

—Paragraph 59, SEC v. GOLDMAN SACHS & Co. and FABRICCE TOURRE.


Who, exactly, is this IKB that, if we are to believe the complaint, had been led like a lamb to slaughter by Goldman Sachs at the behest of John Paulson?

Well, IKB is short for IKB Deutsche Industriebank, and it was once a sleepy German industrial lender that, during the 2000s, made the plunge into sub-prime CDOs for the same reason so many of its peers did: it seemed like a good idea at the time.

Indeed, so good an idea did it seem, that IKB boasted of its prowess in evaluating exactly the kind of garbage the SEC is now trying to claim Goldman Sachs misled it into buying.

Far from being an unwilling pawn on the financial chess-board, IKB issued press releases about its move into the exotic world of toxic mortgage structures even as John Paulson, the genius who sold the garbage to IKB, was deciding it was time to sell the same toxic mortgage structures short.

Indeed, as far back as March, 2006—a year before the tainted transaction with Goldman Sachs—IKB issued a press release announcing the closing of a deal, chest-thumpingly-named “BACCHUS” (we are not making that up) which seems to make it very clear that IKB was not only a willing buyer, but a willing distributor of the same kind of garbage as the boys in lower Manhattan.

Here begins that press release:

IKB closes first “Bacchus” deal, strengthening its position as an asset manager for corporate loan portfolios.

[Düsseldorf, Germany, 16 March 2006] IKB Deutsche Industriebank AG has successfully concluded “Bacchus 2006-1", a funded securitisation of acquisition financings. With this deal, IKB further strengthened its position as a leading asset manager for corporate loan portfolios. The € 400 million Collateralised Loan Obligation was arranged and placed by JP Morgan…


Bacchus, of course, was the Roman god who inspired the term “Bacchanalia.”

Call us old-fashioned, but for our part, if we had been a stodgy old-line German bank packaging securities for resale, we would have selected a more sober god to name our deals after—“Apollo,” perhaps (god of music and healing; ‘associated with light, truth and the sun’), or “Artemis” (goddess of the hunt).

Not the god of drunken orgies.

Having discovered that IKB appears to have been no babe in the CDO woods, we now submit the following document that we suggest may well suffice as “Exhibit A” in Goldman’s defense.

It is a presentation by Dr. Jörg Chittka, head of IKB investor relations, prepared for a Dresdner Kleinwort Day for Investor Relations on December 12, 2006—just a few months before the transaction in question—and it can be downloaded from the IKB web site.

Let’s flip quickly through Dr. Chittka’s “slide deck”:

“Slide 3: Highlights—Market Leader/Strong performance/Solid ratings…”
—IKB Dresdner Kleinwort IR Day 12.12.2006


Hmm, IKB would seem to be no country bumpkin. This slide informs us that, among other things, IKB is a “Specialist in long-term corporate finance” and a “Market leader in long-term corporate lending in Germany” with a market share of 13%.

“Slide 5: Focused market strategy—Specialisation(sic)/Lean sales system/Selective new business…”
—IKB Dresdner Kleinwort IR Day 12.12.2006


Sounds good! Dr. Chittka informs us that IKB has a “Rating-oriented product and price strategy,” and that “New business” is “strictly oriented to rating and margin spread.”

So how on earth did IKB end up owning a bunch of Goldman-packaged, Paulson-shorted garbage?

The next slide holds a clue, in the form of a timeline showing IKB’s history:

“Slide 6: Lines of Development

· 1924: Foundation
· 1930s: Pioneered long-term lending at fixed interest rates…
· Entering 2000s: CLO-transactions and investments in international loan portfolios”


—IKB Dresdner Kleinwort IR Day 12.12.2006


Ah, there we have it. IKB is getting into the CLO business, especially in international loan portfolios!

But what does this little German bank know from CLOs? Well, it turns out this little German bank claims to possess an advantage:

“Slide 9: Competitive edge

· High expertise in all fields of corporate finance, incl.
-rating advisory and
-industry research”
—IKB Dresdner Kleinwort IR Day 12.12.2006


There you have it: IKB claims to have “high expertise in all fields of corporate finance,” and that includes both “rating advisory and industry research.”

Indeed, the IKB slide deck goes on, bragging in the kind of detail you can bet Goldman Sachs’ attorneys will be happy to share about the “excellent rating IKB enjoys” thanks to its “outstanding funding base”; the “Strong and stable customer relations based on relationship banking over decades”; the “High diversity of IKB loan book”; the “High granularity” of the IKB loan portfolio; the “Improving quality of the loan book” and the bank’s “Solid capital base for business growth.”

So confident was IKB’s management of all these things that Slide 35 boasts that “IKB is going to meet the operating profit target for the financial year 2006/2007 as a whole.”

How, exactly, would IKB perform this feat?

Slide 36 informs us that one of the ways is by the “additional investments in international loan portfolios.”

International loan portfolios such as ABACUS 2007-AC1, perhaps?

There is more—60 pages in all—but from our brief review it would appear that this particular German bank took the other side of the Paulson trade not because it didn’t know Paulson was selling.

After all, at the time the deal was structured in early 2007, John Paulson was just “John Paulson, merger arbitrage hedge fund guy,” not “John Paulson, billionaire hedge fund manager who bet against the housing bubble and won.”

No, it would appear that IKB—creator of BACCHUS, self-proclaimed possessor of “high expertise in all fields of corporate finance,” and seeker of “additional investments in international loan portfolios”—simply wanted the other side of ABACUS, period.

From BACCHUS to ABACUS really wasn’t too long a journey for IKB, but it was deadly.

And while Goldman & Company may have showed IKB the way, they did not, it would seem, drag them kicking and screaming.

More like skipping and singing.

Jaded we may be, but we here at NotMakingThisUp will bet, as the saying goes, dollars to donuts that at the end of the day, the score in this case looks like this:

Goldman 1, SEC 0.



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, April 15, 2010

Stotlar to Buffett: “Your Burlington Deal is Working Already: Stuff is Moving Again”


UPS upgraded to Overweight at Piper Jaffray; tgt $79
Piper Jaffray upgrades UPS to Overweight from Neutral and sets target price at $79 following UPS's strong upside 1Q10 pre-report. They believe the report, and operating leverage / margin implications, exhibits UPS has finally taken drastic enough past measures to improve its global network cost structure.—Briefing.com


The least helpful calls you will receive today—and there are more than the one from Piper summarized above—all pertain to a single news item: last night’s upside earnings announcement by UPS.

UPS, as long-time readers know, is one of a pair of what we here at NotMakingThisUp consider two of the most important canaries in the global economic coal mine, along with FedEx.

So what exactly did UPS say, aside from the fact that the just-finished quarter’s earnings came in 20% higher than previously expected, which has triggered so many unhelpful calls from Wall Street’s Finest this morning?

Well, for starters, UPS said international volumes “grew significantly” in the quarter (like 9% in the export side and 24% within international boundaries). And that the U.S. turned in its first year-to-year increase since 2007. Finally—and this should really be no surprise to anyone: when good things happen to a company that has been cutting costs like crazy, earnings go higher—UPS raised guidance for the year.

This last is a lesson much of corporate America has been trying to teach Wall Street’s Finest since the economic recovery began.

From a small restaurant chain serving the supposedly dead-and-buried American consumer to a giant integrated circuit company serving the supposedly dead-and-buried American businessperson, companies that cut costs as if the world was coming to an end in 2008 and 2009 are now reaping the benefits of an economic recovery.

And that recovery appears to be quickly gathering steam before the bemused and sardonic eyes of millions of scarred and scared investors, both professional and not, who got off the stock market train when it came off the tracks in 2008 and refused to get back on before it left the station in 2009.

Of course, there is one investor who not only got back on the train before it left the station: he literally bought the train.

We speak of Warren Buffett, of course, who announced his purchase of Burlington Northern last November as an “all-in wager” on the U.S. economy.

Shortly after Buffett made his move—the near-final piece of the Berkshire jigsaw puzzle, we think—your editor wrote about it in these virtual pages.

In “
Why Buffett Finished Off Burlington: It’s the Inventories, Stupid” from November 19, 2009, we described some of the dramatic cost-cutting and inventory-draining then rampant in Corporate America, then offered the conclusion that Buffett was going to be proved right fairly quickly.

And if the recent news from UPS, and CSK, and Intel, and California Pizza Kitchen, and Con-way are any indication, Buffett’s already right.

What exactly is the recent news from Con-way?” sharp-eyed readers may be asking themselves, since that company doesn’t report earnings for another two weeks.

Well, Douglas Stotlar, the CEO of the giant trucker, told Bloomberg news yesterday his company “is turning down as many as 145 load orders because of capacity constraints.”

“A year ago, we were looking at downsizing the workforce and cost control,” Stotlar said in an interview. “Now the issues are how do you take advantage of an economy that appears to be rebounding, how do you take advantage of the surge in demand.”

Con-Way’s truckload volumes were up 30 percent in January and February from the same months in 2009, Stotlar said. The company is also seeing growth in its partial truckload business, where shipments from more than one customer are moved in one truck.

“It appears to be across both retail” and manufacturing, Stotlar said. “We are seeing multiple touch points that are verifying to us that the economy is definitely recovering."
—Bloomberg News, April 14, 2010

No, Douglas Stotlar didn’t actually tell Warren Buffett “Your Burlington deal is working already: stuff is moving again,” as we titled this piece.

But he doesn’t have to: Buffett already knows it.


After all, he owns a railroad.



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, April 09, 2010

Meet the “New-Normal,” Same as the “Old-Normal”


It wasn’t merely yesterday’s headlines by which a cross-section of America’s retailers announced the return to vibrancy of the not-long-ago-dead-and-buried consumer that we here at NotMakingThisUp found so striking.

Oh, sure, Kohl’s, Gap, Ross Stores, Aeropostale, Limited, Cato, Bon-Ton, TJX, Stage and Dillard’s each reported comp sales gains anywhere from double to quadruple the expectations of Wall Street’s Finest—a rather mind-boggling set of headlines even for the most jaded Wall Street observer.

More than that, we thought, was the surprise in the voices of the retailers themselves at the sudden return-to-normalcy.

Our favorite such example occurred yesterday during the Pier 1 Imports call.

While we here at NotMakingThisUp make no recommendations on individual stocks, the comments from a company once left for dead—or, more specifically, 11 cents a share just about one year ago—which just reported rip-snorting sales growth like its better-thought-of brethren, are worth calling out.

In particular, it was the CEO’s exuberant response to a run-of-the-mill question from one of Wall Street’s Finest late in the call that caught our ears:

Brad Thomas, KeyBanc Capital:

And then just lastly, anything geographically that seems different…?

Alex Smith, Pier 1 Imports CEO:

YES! Some parts of the country have come back from the dead, which is TERRIFIC. [Exuberant management vocal inflexions recorded by NMTU] We’ve seen an uptick in business in Florida, which we’re pleased with. We’ve seen an uptick in business in California and the West Coast generally, which we’re very pleased with….


Meet the “New Normal,” same as the Old Normal...


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, April 05, 2010

The End of Wall Street, Sort Of


“The End of Wall Street,” Roger Lowenstein’s grandly titled account of the collapse of Merrill Lynch, Lehman Brothers and pretty much everything else in the fall of 2008, is instructive in more ways than merely reminding us of just how close to the edge we came in those few dark months.

Written in the classic Roger Lowenstein style—careful, precise, flowing—the book also re-informs us how we got there, which had nothing to do with the short-sellers on whom the whole mess was later blamed. It was subprime mortgages, and everybody wanted in.

But before taking us on that journey, Lowenstein starts the book with a dream—literally.

It is 2006 and ace investment veteran Bob Rodriguez dreams he is on trial, defending his firm’s holdings in Fannie and Freddie paper, which, in his dream, have gone bankrupt.

Rodriguez wakes up and recognizes the dream for the early-warning sign that it is. Having already lost faith in U.S. monetary policy during the reign of Alan Greenspan; and having sold all holdings of “Alt-A” paper in 2005, Rodriguez decides to review the firm’s holdings in Fannie and Freddie paper.

And he begins to sell them. All of them.

And this takes place fully two years before Fannie and Freddie will actually go into bankruptcy—or, at least, the moral equivalent of it: government seizure via “conservatorship.”
Lowenstein then moves the narrative to the subprime story itself: how everybody from Barney Frank to Angelo Mozilo helped subprime launch the first great bubble of the 21st Century; how smart guys like Pete Kelly at Merrill Lynch saw the writing on the wall and were overruled by the dumb guys in control; how brainiac regulators like Ben Bernanke didn’t expect it to come to grief; and how it did, anyway, come to its inevitable grief.

Along the way, Lowenstein brings Rodriguez back into the story as a sort of measuring stick by which the level of reaction to the excesses can be measured. As the book ends, Rodriguez is taking a sabbatical, having guided his FPA Capital Fund to the best 25 year track record of any diversified mutual fund.

Rodriguez’s part in this story is instructive, and it is no stretch to presume that Lowenstein, an early Warren Buffett biographer, includes him in the story to demonstrate that the dangers of subprime were not as opaque as a lot of people—even Wall Street veterans—wanted to pretend they were.

(Bill Miller of Legg Mason, for example, griped at the time that the government’s seizure of Fannie and Freddie was a “monumental policy error” and that the two did not “need capital and [yet] could not get it.” He was flat out wrong: they needed capital in size, and they could not get a new dime of it.)

But instead of focusing on the losers of the crisis—and there were many former investment stars in that category—what Lowenstein does is far more instructive: he puts the reader in the mind of a guy who actually did the careful, detailed work and who figured out, in real time, the dangers of what was transpiring.

There is more to the story, of course. How men like Stan O’Neal of Merrill and Chuck Prince of Citi were paid monumental sums, essentially, for failure ($161 million for O’Neal, $80 million for Prince), for one thing.

For another, how the AIG mastermind behind the biggest black hole in the entire crisis—Joe Cassano—“flew into a rage” when an AIG auditor “found errors in the way AIG had accounted for hedging transactions.” Unfortunately, the rage was directed at the poor auditor for pointing out errors, not at the errors themselves.

And how AIG CEO Martin Sullivan—another guy who would later get paid for failure, $47 million worth—and Cassano hid the company’s problems during a presentation to Wall Street’s Finest.

Oh, yes: and how some of the key players who brought this all on themselves tried to blame short-sellers as their handiwork unraveled.

If there is one aspect to Roger’s splendid re-telling of the whole, sordid story that we’d argue with, it’s the title (although authors do not necessarily choose their own titles). “The End of Wall Street” seems a bit over-dramatic. After all, Wall Street controls money. And when you control money, you control the show.

And, last we checked, the show goes on.

But for a reminder of what to look for the next time a bubble pops up yet nobody seems too worried about it, read Roger’s book.

And if you should have a bad dream about that bubble, pay attention to it. Bob Rodriguez did, and his investors are grateful.


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.