Month: October 2009

Learning to Love Insider Trading
Here’s a hot tip: Want to keep companies honest, make the markets work more efficiently and encourage investors to diversify? Let insiders buy and sell, argues Donald J. Boudreaux.

So reads the deliberately eye-catching headline on the front page of the “Life & Style” section in this weekend’s Wall Street Journal.

And while we’re as contrarian as the next stock market follower, and weren’t much surprised that the government finally cracked down on the practice of gaming quarterly earnings through relentless pursuit of “The Call”—complete with the early-morning arrest of a well-fed hedge fund manager—we can’t help but admit that our immediate thought before we even got to the body of the article was this:Donald J. Boudreaux must be a professor…And a tenured one, at that.

Not that there’s anything wrong with being a tenured college professor, to be sure.It’s just that, of all the constituencies in the financial markets who might have a strong opinion on the merits or demerits of insider trading—small investors, day-traders, mutual fund analysts, hedge fund managers, CEOs and even professional arbitrageurs—who but someone completely outside the day-to-day function of the equity markets would offer advice that is so theoretically sound, and yet so useless in practice?

Here’s how Mr. Boudreaux sums it up right at the top:

The reassuring truth: Insider trading is impossible to police and helpful to markets and investors. Parsing the difference between legal and illegal insider trading is futile—and a disservice to all investors. Far from being so injurious to the economy that its practice must be criminalized, insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest—in keeping prices from lying to the public about corporate realities.

According to Mr. Boudreaux, allowing insiders to trade on what is happening within their companies—without restriction—would allow all the news that’s not currently in print to be reflected in the markets immediately, so that instead of “lying to the public,” asset prices would be kept “honest.”

Like Communism when it is being taught in the sunless confines of a lecture hall, this sounds pleasing to the ear. However, also like Communism—as anybody who actually lived in East Germany or Poland or Russia (and still, today, Cuba) knows—it’s lousy in practice, and for the very same reason: human beings don’t act according to nice theories.

But before we look at what’s wrong with Mr. Boudreaux’s nice theory, let’s look at the specifics of his case.

First, he postulates a company, “Acme Inc.” that is run by an “unscrupulous management” team that misleads investors as to the true state of affairs inside Acme Inc. Not only do the investors lose a bundle when things hit the fan, but, as Boudreaux correctly notes, the economy as a whole suffers because capital which has been wasted on this company might otherwise have been employed in a productive business.

Boudreaux concludes the Acme case thusly:

It’s in the public interest, therefore, that prices adjust as quickly and as completely as possible to underlying economic realities—that prices adjust to convey to market participants as clearly as possible the true state of those realities.

“Well, yeah,” sharp-eyed readers would no doubt say to Mr. Boudreaux, “it is important that prices reflect reality…so why is it that every time professional short-sellers attempt to ‘convey to market participants as clearly as possible the true state of those realities,’ they get rewarded as follows:

1. Temporary bans on short-selling, and/or
2. Federal subpoenas into their short-selling activity, and/or
3. Congressional investigations into short-selling, and/or
4. Innumerable TV appearances by insufferable CEOs bashing short-sellers?”

In other words, where in the world did Mr. Boudreaux get the idea that “market participants” care about “the true state” of reality?

Perhaps from a book by some efficient-market theorist, but wherever he got it, he ignores that flaw in the logic and pushes ahead with his legalize-insider-trading reform proposal by quoting—pay attention, now—an attorney who authored a book 43 years ago:

“I don’t think the [Enron-era] scandals would ever have erupted if we had allowed insider trading [said the attorney] because there would be plenty of people in those companies who would know exactly what was going on, and who couldn’t resist the temptation to get rich by trading on the information, and the stock market would have reflected those problems months and months earlier than they did under this cockamamie regulatory system we have.”

This presumes, first, that the corrupt insiders would share their misdeeds with “plenty of people” in the company, which is the second of many howlers on which Mr. Boudreaux hangs his unfortunate thesis.

It also presumes that lower-level employees, upon sniffing out the fraud, would sell stock in order to make money on the impending collapse.

Having shorted many stocks—including some outright frauds—over the years, we could have assured Mr. Boudreaux, had he asked us, that most lower-level employees, even those working at what are proved to have been frauds, never ever believe they are working for a fraud.

What they believe is that they are working on the side of good and righteousness, and that it is the short-sellers who are working on the side of evil and badness, and merely promoting negative news to profit from the demise of their very fine company.And they fervently hope this is true because they want their stock options to make them rich.

Does anybody out there besides us recall how the Enron trading room broke into cheers when Jeff Skilling called a pesky, skeptical short-seller a very bad word on a conference call?The fact is, despite repeated warnings from such short-sellers—Jim Chanos called it “a hedge fund in drag”—nobody wanted to hear about the financial rot within Enron until after the stock had collapsed, taking many innocents, both inside the company and outside the company, with it.

In the words of Paul Simon, “a man hears what he wants to hear and disregards the rest.”

Moving on, we come to the third howler within Boudreaux’s case: that the side-effect of unrestricted insider trading would be to eliminate the individual investor from direct investment in the equity markets, and that this would be “a good thing”:

Another potential benefit [he writes] of lifting the ban on insider trading is explained by Harvard University economist Jeffrey Miron: “In a world with no ban, small investors might fear to trade individual stocks and would face a greater incentive to diversify; that is also a good thing.”

In other words, we should disenfranchise those very investors who seek financial security through prudent investment in common equities by allowing insiders to control the stock market to their own, insider-information-advantaged benefit.

Mr. Boudreaux has clearly never read “Reminiscences of a Stock Operator,” in which the very “world with no ban” posited by his Harvard economist is described in colorful detail. Had he read this classic, Boudreaux would have known that such a “world with no ban” once existed, and that the result was such abuse and dysfunction to the central fact of capital markets—raising capital for profitable enterprises—that the Securities and Exchange Commission was created to end the abuse and dysfunction.

But that ignorance doesn’t stop him.

No, he sets up his forth howler, declaring—in the manner of the High School Senior who hasn’t made his case but nevertheless declares it made—that insider trading prohibitions are biased anyway:

Not only do insider-trading prohibitions slow economic growth, promote corporate mismanagement and discourage investment diversification, their application also is unavoidably biased.

The bias, he claims, exists because law enforcement officials only go after insiders who act on information, which he says ignores those insiders who benefit by not acting because of inside information—the example being an insider who chooses not to sell shares in a drug company after learning of an impending FDA drug approval.

This he construes as bias, and he then makes up—out of whole cloth—a fact to support this assertion of bias:

And because opportunities to profit through insider ‘non-trading’ might well occur with the same frequency as opportunities to profit through insider trading, as many as half of those investment decisions influenced by inside information might be undetectable.

By now, we have concluded that our initial instinct about Mr. Boudreaux is correct: who else but a Tenured College Professor would argue that “undetectable” investment decisions occur with the same frequency as detectable ones?

Unfettered by logic or facts, Our Tenured College Professor plows ahead—hey, if you can make up stuff in the Wall Street Journal, the world is your oyster!—and lays out what surely must be the most convoluted paragraph ever conceived and executed in that paper:

This bias is not only a source of prosecutorial unfairness; its existence casts doubt on the assumption that insider trading is so harmful that it must be treated as a criminal offense. After all, if capital markets continue to function as well as they do given that many investment decisions potentially influenced by inside information are unstoppable because they are undetectable, why believe that the detectable portion of investment decisions influenced by inside information would be harmful if they were legal?

The mind reels with this logical back-flip—he has invented a fact (“many investment decisions are potentially influenced by inside information”) and proposed decriminalizing insider trading as a result of that made-up fact.

But he doesn’t stop there.

Instead, OTCP proceeds to contradict his message entirely and say that harmful “inside information” does, in fact, exist.

He now postulates a big software company that wants to take over a small software company—which takeover would be “undermined” if the news leaked:

The big company, therefore, has a legitimate interest in preventing insiders from trading on the knowledge that it plans to acquire the smaller firm. And the general public has an interest in permitting the company (and other firms in similar circumstances) to prevent trading on such inside information.

Zounds! We now have “bad” inside information, whereas just a few paragraphs before we only had “good” inside information!

So how does OTCP reconcile the notion that managers at lousy, fraud-infested companies like Enron should be allowed to trade their own stock with abandon and yet acquisition-hungry software companies ought not to have to suffer day-trading by their own lawyers, auditors and acquisition staff?

He’d leave it to the companies themselves:

Each corporation should be free to specify in its by-laws the types of information that insiders may not trade on. Any insiders who trade on such information would violate that firm’s by-laws and, hence, subject themselves to suit by that firm. Corporations whose by-laws prohibit all or some insider trading will have standing to sue anyone who violates their by-laws. People who trade on inside information not protected by corporate by-laws would be acting perfectly legally.

The reeling mind now staggers at the embedded cost of this notion.As if Sarbanes-Oxley wasn’t enough of a burden, now every small public company must police the various types of stock trading by its own lawyers and scientists and truck drivers, parsing whether or not their trades were based on a certain type of information contained in the corporate by-laws or not?

Unfortunately, OTCP doesn’t stop there.

He proceeds to describe how different companies would have different insider-trading prohibitions. (Non-tenured readers who actually change jobs once in a while can imagine the nightmare involved in getting up to speed on the nuances of insider-trading restrictions at each new job.)

There’s more, but let’s end it by simply noting that, as Marx and Engels in The Communist Manifesto constructed a seductive theoretical framework for the political organization of human beings on the basis of a faulty reading of human nature, OTCP has constructed a seductive theoretical framework for the regulation of “insider information” based on the same faulty reading of human nature as Marx and Engels.They mistakenly assumed that human beings are not willing to do whatever they must for their own survival, even if it hurts somebody else.

Yet as anybody who knows anything about Wall Street (and Main Street, by the way—witness the recent Jersey City corruption crackdown) knows, when there is money to be made by exploiting a system, it will be exploited.
So how to deal with insider trading?It’s certainly not remotely “impossible to police,” as OTCP declared right at the start.We’ll explain ourselves via an example from the real world, not a theoretical world lovingly constructed in the pages of the Wall Street Journal.

Here goes.

Last year—July 28th, 2008 to be precise—shares in a company called Virtual Radiologic (ticker VRAD), which does off-site reading of radiology images for hospitals, suddenly nose-dived in the last hour or two of trading, closing down 15%, or $2.54 per share on a whopping 200,000 shares.

That was four-times the average daily trading volume of the three previous, uneventful days.

As an investor who follows a variety of companies, including VRAD—although we did not have a position in VRAD shares at the time—we noticed the end-of-day collapse and immediately wondered who knew something, and what that something might be.

Nine minutes after the market closed that day, we found out: the company reported lousy earnings.Here’s how the news appeared on the tape:

Virtual Radiologic reports Q2 EPS of $0.13 vs $0.16 two ests; revs increased 22% YoY to $25.9 mln vs $27.03 mln two ests…Co sees FY08 $0.70-0.74 vs $0.84 two analyst ests; sees revs $108-111 mln vs $116.30 mln two analyst ests.

So, even as the press release was being readied for zipping to the PR Newswire, somebody was selling Virtual Radiologic stock.

In size.

And when trading resumed the following morning—after a grumpy conference call with Wall Street’s Finest—VRAD shares opened down at $9.83 and kept going down until the close, stopping at $9.24 on total volume of 1.387 million shares.

That’s what we’d call a likely case of insider trading.

Now, we don’t know anything else about the matter outside of these facts:

1. A stock got hit hard into the close, on unusually high volume;
2. Immediately after the close, bad news was released;
3. The stock opened down the next morning on enormous volume.

We know nothing about who was trading the stock, or what they knew, or how they knew it.

We had no position in the shares and didn’t bother to follow up on the situation, because, frankly, it seemed so obvious an insider had acted on material non-public information that we expected to see some kind of insider-trading charges hit the tape shortly.

One year later, we’re still waiting, and still we know nothing more than what we observed that day.

The point of the story is this: the answer to the question of dealing with insider information is not to promote a system that already didn’t work back before the SEC was created to deal with a system that didn’t work. It is to deal with obvious stuff, like what we believe must have occurred with VRAD on a fine July day in 2008, swiftly.

Communism didn’t work for the simple reason that those who were first in line stole the means of production from the poor shlubs with whom they were supposed to share those means of production.

And unfettered insider information won’t work, for precisely the same reason.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

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

The least helpful call you will see today—and there are a number of contestants for that honor, not the least being Leerink Swann’s reduction in price target for fallen angel Boston Scientific from $15 a share to $12 a share now that the stock has already collapsed (last trade, $8.57)—must be the following bit of Analyst-Speak from the research team at Deutsche Bank.



It concerns Yahoo!, about whose business prospects we here at NotMakingThisUp express no opinion at all—although we will point out that CEO Carol Bartz may be to technology management what Warren Buffett is to investing.

That is, she’s very, very good.

And the stock market appears to have already recognized this, for it has rewarded Yahoo! shareholders with a 45% gain year-to-date. Whatever Bartz is doing at Yahoo!, its shareholders clearly want her to keep doing it.

Not so the analyst at Deutsche Bank, who continues to bravely fight the rising tide.

And if any readers can figure out precisely what the analyst is trying to say in today’s commentary—aside from the fairly obvious fact that his “Hold” rating has been too timid (“Hold” being the Wall Street equivalent of “We Don’t Like This Stock”), but, in the proud tradition of Wall Street’s Finest, at least since we were part of that club nearly 30 years ago, he can’t bear to throw in the towel just yet—please let us know.

We re-print the note as it appeared in our inbox this morning:

Yahoo! (YHOO.OQ),USD17.17 Hold Price Target USD16.00 – Jeetil Patel. Tgt $15 to $16. We maintain our HOLD investment rating on shares of Yahoo!, as we believe the co’s. removal of lower-quality ads and re-investment back into engineering and products is the right long-term approach to growth. However, these changes have been slow in implementation (evidenced by 3Q EBITDA upside on lower opex), thereby placing Yahoo! in a longer transition (into 1H 2010) than expected while the online ad market is growing.



Hold – As expected, Yahoo! beat 3Q EBITDA due to lower R&D, ad spending while revs almost hit the mark on affiliate revs, forex gains (Q/Q) and fewer cutbacks in low quality ads. While there are signs of ad stabilization at Yahoo!, any improvement was difficult to detect after adjusting for these helpful items. More importantly, this is a business that clearly needs fixing, but our sense is that management is not moving as aggressively as hoped to overall [sic; suggest ‘overhaul’ was meant] the business when there are revs and profits at risk. Investors may be getting excited about playing the online ad recovery, but a stalled fix/re-investment may push Yahoo!’s recovery out until 2Q 2010 at the earliest (even though online ad growth may be turning shortly).



For the record, we count seven qualifiers in just two paragraphs: one “however,” one “while,” one “more importantly,” two “buts,” one “even though” and a “may be.”

(It reminds us of the old Woody Allen line: “I’d like to leave you on a positive note, but I can’t. Would you take two negatives?”)

Furthermore, we can’t fathom how Yahoo! could “beat” the 3Q EBITDA number “as expected.”

Thus, for having elevated double-speak into triple-speak and possibly quadruple-speak, we nominate today’s Yahoo! comment from Deutsche Bank as the Least Helpful Call You Will See Today.

Jeff Matthews

I Am Not Making This Up



© 2009 NotMakingThisUp, LLC

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

It is not Google’s upbeat economic comments on last night’s earnings call we will be, for lack of a better term, extolling here today—although Google’s CEO, Eric Schmidt, stated in no uncertain terms that business is coming back.

Here’s how he began the call, courtesy of the indispensible Seeking Alpha:

You know, while there is obviously a lot of uncertainty about the pace of economic recovery, we believe the worst of the recession is behind us and we’re seeing lots of signs of that in all of the industries that we pay attention to. So we’re very optimistic now about the future. We now have the business confidence to invest heavily in the next phase of innovation, hoping to invent the future as we see it.

So Schmidt began the call, and in case you didn’t hear him correctly, he closed his bullish introductory comments with an exclamation point:

The worst of the recession clearly [is] behind us and because of what we have seen we now have the confidence to be optimistic about our future and we’re going to invest as a result, and that I think is ultimately good for the long term of Google.

This is important stuff.

While everyone has been searching for “green shoots” and other signs of “stabilization,” much of the news we have been hearing from real companies has been of the “less-bad” variety, as opposed to the “outright good” type.

Google has given us the outright good, including one particular piece of news that nobody much expects to hear about ever again in our lifetimes: new hiring.

Again, from Schmidt:

So how are we investing? Well, we’re going to invest in people. We’re already stepping up our hiring…

This is good news coming from one of the world’s leading growth companies, which had actually been reducing headcount during the crisis.

Still, we come to praise not so much what Google said last night, as how Google said it.In what promises to revolutionize the public company conference call business, Google adopted a new method of taking questions from Wall Street’s Finest…and in typically Googlian fashion, the company used its own product to do so.

The product is Google Moderator (“Helping the world find the best input from an audience of any size”). Already used by the White House for a Town Meeting with the President, Moderator is a slick way to allow participants to vote on the questions they deem most relevant.

Here’s how Google’s IR person described it:Please submit your questions via the Moderator page that we have sent out and the audience will vote on the most relevant questions. We will only be taking questions that are relevant to today’s earnings results and Google’s long-term strategy.
And the result was—at least we here at NotMakingThisUp think so—a resounding success.

While Google’s previous earnings call allowed for only questions from 16 of Wall Street’s Finest—what with WSF’s habit of asking multi-part questions; obsessing with minor details like why this quarter’s tax rate was half a basis point different than last quarter’s tax rate; not to mention notoriously circuitous questions that frequently generate the response, “I don’t understand your question but I’ll try to help you…”—last night’s call allowed for 24 questions.

We weren’t math majors, but that looks like a 50% increase in productivity.

And that meant innocent bystanders like us didn’t have to listen to the phrase “How should we think about…” repeated 600 times, not to mention the absolute worst symptom of Sell-Side Analyst Syndrome, the dreaded “Great quarter, guys…”

All in all, we must say to the folks at Google: great conference call, guys—and we mean it. Here’s hoping America’s other public companies will swiftly adopt Google Moderator.

Of course, there is one company that will NEVER do so, and that company is based in Redmond, Washington.

Right now, in fact, we suspect Microsoft is working on its own version of Google Moderator, which will no doubt have 15 different versions, depending on the length of the conference call being moderated, the size of the audience, the CUSIP number of the company being discussed, not to mention the particular font size audience members prefer to type in…

Coming soon! Microsoft Audience Statistical Question Postulator, Version 1.0 (Model Train Enthusiast Edition)!™

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

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

“The only nonnegotiable principle here is success. Everything else is negotiable.”



—Rahm Emanuel, The New York Times, June 7, 2009





The CBO said Wednesday that the Senate Finance Committee’s health bill would cost $829 billion over a decade and reduce the federal budget deficit by $81 billion over that period. That helped dispel concerns among moderate Democrats, and committee leaders set a vote on the bill for Tuesday. “This resolves one of the big unknowns,” said Sen. Evan Bayh. “It does create momentum.”

–The Wall Street Journal, October 9, 2009

Well the impending train wreck that is national healthcare so-called-reform looks to be pulling out of the station shortly: it has, we are told, “momentum.”

Not “logic,” or “rationality,” or “elegance,” or “demonstrable worth.”

It has “momentum.”

Now, momentum is a fine and wonderful thing when it is applied to something good—like, say, an upturn in the business cycle.

Business cycles start, always, as a rally in credit markets—i.e. cheap money. The availability of such cheap money then spreads from Wall Street to Main Street, encouraging spending for goods and services, which, in turn encourages new production…which creates rising employment, higher demand, and even higher employment.

That’s good “momentum.”

Momentum is not so fine or wonderful, however, when it is applied to something bad, like a downturn in the business cycle.

Lower spending causes production cuts and layoffs, which leads to lower spending which results in further layoffs, etc.

That’s bad “momentum.”

Momentum, in and of itself, is therefore absolutely meaningless: what matters are the facts of the case to which the term is applied.

And in this case, the facts of the so-called healthcare reform plan recently drafted by the Senator Finance Committee are this: it is in no way, shape, or form, “reform.”

It is, rather, a crude political construct fostered by extortion, to the benefit of both the politicians who can claim victory while accomplishing nothing good for taxpayers, and the special interests who will never claim victory in public but will sleep easy at night knowing they have, in fact, accomplished a great deal of good for themselves.

Lest we be accused of pointing political fingers—our interests are strictly mercenary, what with running a hedge fund and all—let us look at what, exactly, constitute the facts of this $829 billion bill, recently blessed by the Congressional Budget Office as a reform vehicle and deficit reducer.





Big picture, the Senate bill will, we are told, insure an additional 29 million “nonelderly” Americans ten years from now, thus raising the percentage of insured Americans from 83% to 94% in 10 years. (For you home-gamers, that’s a cost of $28,586 a person over 10 years, or $2,859 a year.)

We are also told that the plan will still leave 25 million Americans without insurance in 2019.

That’s right: according to the Bill itself, there will be 29 million Americans newly insured, and 25 million Americans still using hospital emergency rooms as their primary form of healthcare, in 2019.

How it is that the insuring of 29 million individuals at a cost of $829 billion, while leaving 25 million out in the cold, amounts to “reform,” we here at NotMakingThisUp don’t have a clue.

But we’ll leave the labels for others to defend or decry while we look at how this Clearly Non-Universal Healthcare Plan gets paid for.

The first way it gets paid for is this: Americans will be required to have health insurance, and if they don’t get it, they’ll pay a penalty of up to $750 a year. (It’s just like a tax, only it’s not called a tax, because the plan is not supposed to raise taxes. Go figure.)

So the government, as we pointed out above, will spend $2,859 a year per person for ten years to insure 29 million people, but will only fine/tax an uninsured person $750. Furthermore, there are exemptions to the fine/tax based on income levels and “hardship situations.”

The second major revenue source will be stiff new taxes on “Cadillac” insurance plans—so long as they aren’t in the name of a union member.

You can see the wheels coming off the track even before the train has left the station!

Now, how does the Senate bill make up the obvious funding gap?

Well, it assumes cost cuts. In particular, the bill postulates that Medicare will stiff doctors by slashing payments 25%…even though this will never happen.

Medicare cuts to docs get proposed every year, and every time they come up in Congress, they get blocked—as they will be blocked this year, too. Nevertheless, the Congressional Budget Office analysis which gave this Senate bill “momentum” assumes the Medicare cuts will happen.



All in all, the CBO report is about as meaningful as one of those 50 page company reports produced by Wall Street’s Finest, in which the target price of that company’s shares happens to amount to a few dollars above the current share price, as it always does.

Which is to say, the CBO report is not meaningful at all. Garbage in, garbage out, as we say on Wall Street.

Still, you may ask—as did Marlon Brando in “The Godfather”—how did things ever get this far?

How did an obvious farce of a bill, which doesn’t do the two things that it’s supposed to do—i.e. “reform” healthcare and provide “universal” coverage—get through the most influential Senate panel with what Washington calls “momentum”?

Simple: it was paid for by the very same special interests that all politicians promise to banish from the decision-making process when they arrive in Washington: Big Pharma, Big Hospitals, and Big Ambulance Chasers, to name just a few.

Let’s start with Big Pharma, which was the first special interest to buy off the White House, when it negotiated—directly inside that White House—an $80 billion maximum cut in drug prices over ten years.

$80 billion may sound like a lot of money, but it is not: $80 billion amounts to all of two years’ worth of Pfizer’s gross profits.

And that is a pittance when compared to the benefit Pfizer and the rest of Big Pharma will see under Healthcare So-Called Reform. After all, those extra 29 million newly insured American lives will mean more 29 million more mouths to swallow billions of extra pills every year.

Gosh, if each one of those 29 million newly insured mouths spends just $275.80 a year on pills from Big Pharma (less than the cost of a year’s worth of generic Lipitor), that’ll be $80 billion extra cash going to Big Pharma right there.

Not even George Bush would have tried to call this healthcare “reform” with a straight face.

How, you may ask, did such a thing happen under Barack Obama?

Not being politically inclined—we’re in business to make money, whoever happens to run the place—we think all signs point to Rahm Emanuel, the President’s Chief of Staff.

He is, after all, the same Rahm Emanuel who in June told the New York Times: “The only nonnegotiable principle here is success. Everything else is negotiable.”

Even, apparently, Obama’s populist principles.

Whatever the reason—and for the purpose of full disclosure—we have purchased shares of Big Pharma precisely because Obama’s “reform” should make that business better than anything George Bush could have envisioned in his wildest dreams.

Next up in the White House extortion caper was Big Hospital, which pledged $155 billion in cost savings in return for avoiding onerous cuts elsewhere.

Medical device makers, on the other hand, were apparently asleep at the switch during the negotiations. While Big Pharma and Big Hospital were promising a combined $235 billion to push the reform ax out of their way, the medical device companies were being targeted for $4 billion in cost cuts by the Senate Finance Committee.

(Don’t expect this cut to stand, however: it seems that the erstwhile populist Senators Al Franken and John Kerry—whose states are loaded with medical device makers and their employees—are now squawking at this particular aspect of healthcare “reform.”)

Big Labor, naturally, never needed to negotiate with the White House, thanks to its pre-election payoffs to the Obama campaign. Despite the Senate bill’s plan to impose stiff taxes on “Cadillac” healthcare plans, union jobs will be exempt, which is fortunate for Big Labor, since its members frequently get “Cadillac” healthcare coverage.

All in all, the so-called “healthcare reform” plan looks to have been put together by and for special interests, without a single actual “reform” in the bill—tort reform being the most obvious missing ingredient, for the obvious reason that Big Ambulance Chasers were on board Team Obama from Day One.

Say what you like about healthcare reform—say that it is necessary, or it is unnecessary; say that it is just another government program bound to fail, or that it is an important government duty to pick up where the private sector has failed; say that it is a manufactured crisis or that it is the most serious political issue of our time—but you can’t say this bill is rational, well-considered, and logical.

It is political, it is pay-for-play, and it is not reform. Indeed, it is Chicago politics at the National level.

How did our most populist modern President since Jimmy Carter come to allow such a state of affairs?

Well, apparently, everything—even principle—is negotiable.

Still, we leave the political name-calling for others who care about such stuff. Our business is to make money.

And unless something goes terribly wrong in subsequent legislative maneuvering, we think so-called “healthcare reform” provides the best opportunity for profitable investment in Big Pharma in decades.

The “Audacity of Hope”? Not that we can see.

More like, the Audacity of Extortion.

Jeff Matthews

I Am Not Making This Up



© 2009 NotMakingThisUp, LLC



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

One of the things they do better in Europe than we do in the United States is the way they drink coffee: in mugs.

In Italy, of course, most coffee gets consumed at espresso bars entirely unlike the typical Starbucks, which drew its inspiration from Italy but has, in one of the great ironies of our, no stores in Italy.But even in Swinging London, where you can find an entirely American-looking Starbucks on what seems like every streetcorner, unless you ask for one to “take away” you’ll get your coffee, or latte, or triple-yadda-yadda, in a ceramic mug—not a throwaway cup with a plastic lid, a recycled-paper sleeve and one of those thin plastic swizzle-stick-thingies to plug the hole in the lid and bottle up the heat.

Only in America do we provide what amounts to a portable, throwaway thermos every time somebody picks up a cup of coffee.

So ingrained is the “do what I say, not what I do” environmental culture in these United States that right here in La Jolla, California the local Starbucks can’t even provide one large coffee mug for use in its store.

“We’re out,” the manager behind the counter says. “I have to order more.”

So the Starbucks customer must take the portable throwaway thermos bottle, even to just sit in the store and drink a cup of coffee.

We’ll have more observations in these pages on what they do better in Europe, but for now, the way they serve their coffee is one of them.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

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

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

—The Securities and Exchange Commission

That’s not just us here at NotMakingThisUp talking, that’s what the SEC itself says right on its very own website.

And as part of that mission, the agency just wrapped up a two-day forum on “short-selling and securities lending.”

Never mind that short-sellers had nothing to do with—absolutely nothing—the sub-prime lending crisis or the Bernie Madoff fraud.

And forget entirely that it was a short-seller—not a public bureaucrat or a college professor—who first warned, well ahead of its collapse, of the dangers lurking in the Lehman Brothers balance sheet.

Public respect-wise, short-selling simply seems to be a no-win business model.

In bull markets, naturally, nobody wants to hear the bad news that is the short-sellers’ stock in trade. After all, what parent wants to be told they have an ugly baby…and what investor, or CEO, or working stiff, wants to be told they own, or run, or work for an over-rated company?

In bear markets, on the other hand, investors, CEOs and working stiffs alike look for scapegoats on which to blame their problems…and who better to blame than the short-sellers who profit from such calamity?

Indeed, having practiced short-selling as a hedging tool over nearly 30 years of investing, we were not a bit surprised by the efforts of some politicians and at least a few corporate CEOs to blame the entire financial crisis on the short-sellers who actually saw the thing coming, warned about what could happen, and made money as a result.

In those 30 years, every corporate big-wig we’ve ever observed who sat at the helm of a controversial, and sometimes fraudulent, business—convicted felons Jeff Skilling, Richard Scrushy and Dennis Kozlowsky among them—have at one time or another fingered “the shorts” for their problems. They do it the way bloated, fading home-run hitters blame positive steroid tests on errant trainers and bad doctors…anything but their own malfeasance.

Now, one method for more effectively regulating markets was proferred in a recent New York Times piece by the formidable Gretchen Morgenson, “But Who Is Watching Regulators?”

Instead of creating more regulations to try to prevent this kind of mess from recurring, why not figure out how to hold regulators accountable when they perform as poorly as they did in recent years?

Edward J. Kane, a professor of finance at Boston College and an authority on the ethical and operational aspects of regulatory failure, has some ideas about how to do this and right our damaged system in the process. He outlined them in a recent paper titled “Unmet Duties in Managing Financial Safety Nets.”…





Now, we here at NotMakingThisUp have enormous respect for Morgenson: she’s a tough, no-holds-barred financial reporter who takes nothing at face value.

But Kane’s ideas seem to have a little less oomph than what the financial markets need. First among these ideas, for example, is an “oath of office”:

Mr. Kane suggests that financial supervisors take an oath of office in which they agree to perform four duties. First is the duty of vision, under which they would promise to adapt their surveillance practices to respond to the creative ways financial institutions hide their dubious practices.

Regulators must also promise to take prompt corrective action, and to perform their work efficiently. Finally, there is what Mr. Kane calls the duty of “conscientious representation,” whereby regulators swear to put the interests of the community ahead of their own.



—But Who Is Watching Regulators? by Gretchen Morgenson, The New York Times, September 12, 2009

All of which seems, to real-world practitioners in this business, crushingly naïve.

After all, every elected representative in Congress swears an oath of office to defend the Constitution of the United States—yet the head of the House Ways and Means tax-writing committee of this country is, by public accounts, a tax cheat. And the current Treasury Secretary of the United States—likewise an oath-taker upon assuming office—was, until nominated for the post and forced to pay up, likewise not exactly obeying the letter of the laws he was swearing to defend.

Now, this isn’t about Republicans versus Democrats—Republicans have plenty of their own on the honor role of oath-taking scoundrels. It’s simply about how to regulate markets in order to “protect investors.”

And it seems to us that the best way to protect investors is not to require particularly severe oath-taking on the part of regulators: instead, it is to appoint to the head of the SEC somebody who knows where to look to find the problems before they can hurt the investors the SEC is charged to protect.

Thus it is that—no offense to Mary Schapiro, who has provided an admirable spark of life into what had been rendered comatose by the previous regime—we here at NotMakingThisUp nominate Jim Chanos as next head of the SEC.

A professional short-seller, Chanos first made his bones nearly 30 years ago sniffing out fraud at Baldwin-United when that highflyer was beloved by Wall Street’s Finest. Jim did this by doing what Wall Street’s Finest did not: digging through mundane state insurance filings and piecing together a far less pretty picture of the business than Baldwin’s charismatic CEO was painting to Wall Street’s Finest and the investors who ultimately lost their shirts on the stock.

More recently, Chanos was the first to publically call out the accounting scam underlying Enron’s so-called “earnings” (“a hedge fund in drag,” I believe he called it), and he performed the same service in the case of Tyco, for which he received nothing but grief from Wall Street’s Finest—until that story likewise fell apart.

So, who better than Jim Chanos to spot—early, when it matters—the next Madoff, or Scrushy, or Skilling, or Kozlowsky?

It certainly isn’t going to be a finance professor from BC, or even a securities lawyer from GW, no matter how many oaths they take.

Of course, our proposal is, in itself, as crushingly naïve as that of Mr. Kane’s.

The very fact that the SEC just devoted a day and a half to the issue of short-sellers—the one investor class that publicly warned against the lending practices that nearly brought down the entire financial system—tells you everything you need to know about where short-sellers stand in the eyes of regulators.

And Jim Chanos himself will probably choke on his coffee, if and when he reads this. (Full disclosure: Jim is a professional acquaintance, and our paths cross once a year or so—usually in the breakout session of some extremely controversial company, where his presence tends to cause the CEO’s eyes to twitch.)

Still, in our opinion, competence—not oaths—is what makes a great anything, whether it’s a member of Congress or a general or a CEO or a school teacher.

And in the world of “protecting investors,” we can’t think of anyone more competent to spot a problem than one of the best short-sellers who ever practiced the craft.

Now, for the record, we here at NotMakingThisUp have no problem with ideas on the table for tightening up the stock-lending process that has resulted in near hysteria about “naked shorting” among Congresspeople who wouldn’t know a short sale from a tomato.

And we lived with the “up-tick” rule for 25 years or so before the wizards of the Bush Administration decided to revoke that rule at the absolute top of the market—so restoring the up-tick rule would seem to us to be no skin off anybody’s nose.

But the way you “protect investors” is not to shackle short-sellers. These are, after all, professionals who’ve made it part of their business model to sniff out the kind of fraud the SEC wishes to abolish from the system.

It’s hard to imagine that if Bernie Madoff had been running a public company, his scam would have gone on for two and a half years—let alone 25 years—with shorts on the prowl.

Or a Jim Chanos at the helm of the SEC.

Jeff Matthews

I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

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