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Nasdaq CEO Goes AWOP (Absent Without Phone)…Has He Never Heard of Radio Shack?

Post author By jeff matthews
Post date June 12, 2012
2 Comments on Nasdaq CEO Goes AWOP (Absent Without Phone)…Has He Never Heard of Radio Shack?

Mr. Greifeld couldn’t talk. Having monitored the rocky process from Silicon Valley, where he had gone to join Facebook executives in remotely ringing the market’s opening bell, he concluded the worst problems were fixed and caught a noon flight back to the East Coast.

So, marooned for almost five hours in business class with a phone he says didn’t work, he didn’t realize that continuing breakdowns at his exchange had left countless investors not knowing how many Facebook shares they had bought or sold and at what price, nor did he know the SEC chief wanted to reach him.

—“Nasdaq CEO Loses Touch Amid Facebook Chaos,” Wall Street Journal, June 11, 2012

Yesterday’s Wall Street Journal piece on the CEO at the center of the Facebook debacle—Robert Greifeld, of Nasdaq—which you can read with a subscription here or find elsewhere floating around the Internet, is remarkable in at least three ways.

The first is the image of Greifeld, who had flown out to Silicon Valley for the opening hoopla, “listening on his private company line” for crucial updates to the faltering IPO while “hoping his cellphone battery would hold.”

Did he never hear of Radio Shack?

The second head-scratcher, which surely jumped off the screen for anybody under the age of 30, or 40, or even 50, is Greifeld’s excuse that, after he “decided to make a run for the airport to get back to the East Coast by late afternoon,” he found he couldn’t monitor the unfolding disaster or speak with the SEC Chairman who was trying to find him because the “armrest phone” in his United Airlines business class seat on the flight back to JFK didn’t work.

Did he never hear of Virgin America? You can put in a full day’s work flying across the country on Virgin—and you don’t need a business class ticket to do it—thanks to their ubiquitous, and excellent, WiFi network.

And what CEO of any company—let alone a company that depends on computers, networks and all manner of high technology to earn a living—would get on a plane equipped with nothing better than decades-old, germ-festering armrest phones to stay in contact on the biggest day in his company’s history?

The third, most egregious, and least defensible howler was Greifeld’s twice-used college sophomore-level excuse to explain unexplainable behavior: he passed the buck to NASDAQ’s techies.

“When they say yes, we say go,” he tells the Journal, which also wrote:

During the IPO, he says he went with the best information he had from technology officials in Nasdaq’s headquarters…they expected to fix remaining problems promptly.

If Jamie Dimon had used that excuse to explain his London Whale problem, he’d have been out the door at JP Morgan so fast it would make your head spin.

Unlike the CEO of JP Morgan—who admitted to a problem, took the blame, and is prepared to go to Congress to take the heat from the uninformed weasels of Capital Hill—the CEO of Nasdaq seems to be doing his best to explain his Absent-Without-Phone behavior by blaming everybody but himself.

Let’s see how long that lasts. And how long he lasts, come to think of it…

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2012) Available now at Amazon.com

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. And if you think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the entertainment of the reader, and the author.

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Mangled Spoons to Grill Jamie Dimon: Lights! Cameras! Gotcha!

Post author By jeff matthews
Post date June 5, 2012
4 Comments on Mangled Spoons to Grill Jamie Dimon: Lights! Cameras! Gotcha!

Jamie Dimon’s trip to Capitol Hill next week to explain his bank’s multibillion-dollar trading debacle could quickly devolve into Washington Gotcha Theater.

But it shouldn’t. It should be used to draw out some real answers that will help inform the public and lawmakers about the risks of our banking system…

So begins Andrew Ross Sorkin’s quite reasonable, and well-written, DealBook Column, “Some Questions to Ask Mr. Dimon,” which you can read here.

The questions Sorkin fantasizes Congresspersons asking are all good, and it would be great fun and most interesting to hear them asked as written, without histrionics, so that Jamie can answer them, without histrionics.

But they won’t be asked—at least the way they’re written.

That’s because the Congresspersons asking the questions generally have the intelligence of spoons—and not just your basic cereal spoon, but spoons that have gotten caught in the garbage disposal and are mangled beyond recognition.

Of course, mangled-spoon-intelligent though they might be, Congresspersons have one instinct that preserves their electability and drives their behavior: to get on TV.

I know, because I testified before Barney Frank’s finance committee just prior to the 2008-9 financial meltdown. The hearing was about whether hedge funds could cause a market collapse. They didn’t ask about Lehman Brothers.

In fact, they didn’t ask much that they didn’t want to hear.

They came in (they never stayed for anything but their own turn in the spotlight); they made a statement; then asked something rhetorical; then made a pretense of listening to the answer; then left.

It was all about theater, and not a bit about substance—except one guy, who I’ll get to.

The most intellectually dishonest as I remember it was a New York rep, Caroline Maloney, but they were all pretty bad, Republicans playing Republicans and Democrats playing Democrats.

The only exception was a guy from Mississippi who sat there the entire session—he was the only one who stayed from start to finish—and asked very straight, non-TV-camera-oriented questions about what would happen, for example, to the retiree from “the pipefitters union” if a hedge fund they’d invested in went down. He didn’t know much but, unlike Maloney and the rest, he didn’t pretend to know. And he listened to your answers and then asked another question.

I wasn’t completely surprised at the mangled-spoon quality of the I.Q. quotient in the room—I once got a call from a Congressperson-friend on a financial sub-committee before the crisis when they were debating something to do with Wall Street. The conversation literally—literally—went like this:

“I’m going into a session…now, remind me, ‘fixed income’ is what?” “Debt.” “Okay. And equity is…” “Stocks.” “Right, okay, thanks.” I am not making that up.

If the guy from Mississippi is still there, Jamie Dimon will get some good questions. Otherwise, the Maloney types will do their best to bring out the worst.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2012) Available now at Amazon.com

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“HP Beats The Number!” Only In America…and North Korea, Come to Think of It.

Post author By jeff matthews
Post date May 24, 2012
8 Comments on “HP Beats The Number!” Only In America…and North Korea, Come to Think of It.

“HPQ prints a fairly strong quarter (PC driven, partially offset by declines in printing/Autonomy) on an improvement in margins across PC’s, printing and services. More importantly, management announced a $1.7B restructuring that’s expected to result in $3.0B – $3.5B in cost savings by FY’14 (which will be reinvested into new channels/R&D), and as a result, they raised the outlook on the fiscal year, as they’re now looking for $4.05 – $4.10 in earnings power (vs. $4.00 prior)…”

That’s the summary of Wall Street’s “thinking,” such as it is, about last night’s Hewlett-Packard layoffs call—er, earnings call—and it contains so many remarkable statements you don’t know where to begin.

The “declines in…Autonomy” comment, for example, refers to the first revenue drop at Autonomy in at least 32 quarters—which, considering HP bought Autonomy for $10 billion a mere 6 months ago (telling us, at the time, Autonomy would “accelerate” its “software business momentum”) is no easy feat.

Then there’s the $1.7 billion restructuring “that’s expected to result in $3 – $3.5 billion in cost savings…which will be reinvested in new channels/R&D.” Here’s what HP said about it last night:

“As a result of productivity gains from automation, in addition to streamlining the organization, HP expects to eliminate roughly 9,000 positions over a multi-year period. The combination of these activities will allow HP to reinvest for further growth. Investment areas will include private cloud infrastructures, application services and desktop as a service. You’ll also see other new offerings…”

Oh, wait, that’s what HP’s Ann Livermore said in June 2010 about another restructuring that was going to boost margins and business reinvestment…

Here’s what HP actually said about it last night:

“What we announced was that on a long-term basis, we see the savings opportunity to be roughly $1.8 billion on an annual run-rate basis. And this is after we reinvest some of the head count savingings…”

Oh, wait, that’s what HP’s CFO said in September 2008…

You get our drift. It’s like when one “Dear Leader” in North Korea gets replaced with another “Dear Leader” and nobody in North Korea remembers that the old “Dear Leader” promised everything the new “Dear Leader” is promising, mainly because they’re too busy digging for worms for their breakfast to care.

The biggest howler in the HP layoff report, of course, is the new, “higher” earnings power as a result of this latest batch of layoffs.

HP has trained the barking seals on Wall Street to focus strictly on non-GAAP earnings, which, as we have pointed out here before, means—literally—earnings not prepared in accordance with generally accepted accounting principles.

Specifically, by leading off with non-GAAP earnings, HP shows the good stuff—revenue and gross profit, for example—from its many terrible acquisitions (Compaq and EDS, to name two) and excludes the bad stuff, such as amortization and restructuring costs associated with those businesses.

Of course, without the bad stuff—the turnaround costs and the amortization from those acquisitions—HP wouldn’t have the good stuff (revenues and gross profits).
Don’t ask us how it gets to report numbers this way, but it does.

In any event, last we checked, the actual GAAP number HP buried in last night’s release was cruising in at a cool $2.25 to $2.30 per share, or almost half the non-GAAP number…and down by one-third from the previous GAAP guidance of $3.20.
And in case you are wondering about cash flow, from which all good things business-wise come, HP’s second quarter cash flow from operations, according to our Bloomberg, declined almost 40%, from $3.9 billion to $2.5 billion, marking the lowest second fiscal quarter cash from operations since 2005, when revenues were one-third lower.

Only in America! And North Korea, come to think of it…

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2012) Available now at Amazon.com

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The Facebook Face-Plant: “Nobody Put a Gun to Their Heads”

Post author By jeff matthews
Post date May 23, 2012
13 Comments on The Facebook Face-Plant: “Nobody Put a Gun to Their Heads”

A friend called up today about the Facebook “Face-plant” hysteria: he wanted to know why everybody was looking for somebody to blame.

“They wanna blame the underwriters, they wanna blame the analysts, they wanna blame NASDAQ, they wanna blame the insiders. But how about they look in the mirror?” he said. “Nobody put a gun to their heads and told ‘em they had to buy it.”

And he’s right.

In fact, there was plenty about Facebook to make a sober investor take pause even before it became a badge of honor to tell the Wall Street Journal you were going to load up on the stock, as so many investors did.

Check out, for example, the following sequence of quarterly revenue growth starting in March 2011 and ending in March 2012:

111.88%, 107.18%, 104.28%, 54.72%, 44.73%.

Now ask yourself, “Is this a company I want to buy at any price?

Well, that’s the annual growth rate in Facebook’s quarterly revenues, straight off our Bloomberg. Not exactly “up and to the right” as they say on Wall Street.

Here’s another set of numbers—also publicly available—that might have flashed an even bigger yellow warning sign for a prospective Facebook IPO flipper:

140.66%, 114.56%, 79.77%, 58.99%, 32.15%.

That’s the growth in quarterly revenues from last March to this March, also straight off our Bloomberg, for Zynga.

Zynga, as most Facebook fans know, is the equivalent of a hotdog vendor in Yankee Stadium: the only place it sells its stuff is on Facebook. If you follow how the hot-dog vendor is doing on any given day, you have a pretty good idea how full Yankee Stadium is.

So you would think anybody buying Facebook would have looked at not only Facebook’s revenue progression, but Zynga’s as well.

And given those trends, you’d think anybody buying Facebook would have paid attention to the other warning signs, like GM pulling its ads off Facebook the week before the IPO; like the underwriters ramping up not only the deal price but the deal size; like CNBC devoting the entire day of the IPO to Facebook—that sort of thing.

And of course you’d be wrong.

People wanted to buy Facebook, no matter what.

And those people can blame the underwriters or the analysts or NASDAQ or the insiders all they want.

But as my friend said, “Nobody put a gun to their heads.”

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2012) Available now at Amazon.com

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So Inflating Your C.V. Is Worse Than Inflating Your Earnings…

Post author By jeff matthews
Post date May 14, 2012
No Comments on So Inflating Your C.V. Is Worse Than Inflating Your Earnings…

Poor Scott Thompson. The world’s (currently) most famous accused-resume-inflator is gone from the C-Suite at Yahoo.

Oh, and he has thyroid cancer to boot.

Meanwhile, Wall Street’s Finest are gearing up for next week’s earnings from Hewlett-Packard, and based on our perusals of various so-called research reports—not to mention a puff-piece on the company in this week’s Barron’s—all signs point to an “in-line” quarter from HP, although one analyst is suggesting “yet another restructuring plan/charge of about $1billion.”

[Editor’s Note: Tuesday morning, another of Wall Street’s Finest came forth with an expected non-recurring-recurring-like-clockwork restructuring charge as high as $2 billion for HP. Let the Palo Alto “non-GAAP” earnings games begin!]

[This just in on Thursday afternoon: news is breaking that HP will lay off as many as 25,000 workers. In the perverse logic of one Wall Streeter, this “would enable investments in strategic, higher growth areas,” as if HP has not been able to make those investments with its $3 billion R&D budget (perhaps the $10 billion share buy-back authorization has something to do with it). Faulty logic aside, expect earnings estimates to start being ratcheted upwards… ]

Now, we have, more than once, commented on the low quality of HP’s reported earnings. You can read about it here and here, if you like.

Suffice it to say, HP does what portfolio managers can only dream of getting away with: it reports “non-GAAP” earnings that include the good stuff from acquired companies (revenue and gross profit, for example) and excludes the bad stuff from those same companies (amortization and restructuring charges, for example), which serves to a) point out what silly prices HP pays for acquisitions in the first place and b) explain how such a theoretically profitable enterprise as HP came to possess a tangible book value of minus $7.84 per share, according to my Bloomberg. (Yes, that’s negative, not positive, $7.84.)

Nevertheless, Wall Street’s Finest dutifully record those “non-GAAP” earnings from HP and set their clocks by them.

Imagine if portfolio managers tried to report “non-GAAP” investment returns, booking only their winners.
Or if baseball players tried to report “non-GAAP” batting averages.
Or, most relevant of all, if Jamie Dimon had tried to call that $2 billion trading loss from his London Whale a “non-recurring” loss…
Hey, HP does that stuff every year, and for some reason, Wall Street’s Finest buy HP’s “non-GAAP” earnings presentation lock, stock and barrel.

We’re not sure why they buy it—after all, GAAP earnings surely exist for a pretty good reason, as investors discovered a decade ago when the tech bubble collapsed—but they do.

Thus we have the strange contrast of Mr. Thompson being ridiculed and then run out of town for a modest (and still unexplained) bit of resume inflation, while just down 101 from Yahoo the folks at HP prepare to report yet another quarter of “non-GAAP” earnings, even though HP’s non-GAAP earnings appear to have less relationship to their GAAP earnings than Mr. Thompson’s “non-GAAP” resume had with the “GAAP” version that Dan Loeb’s detectives uncovered.

The HP folks ought to hope Dan doesn’t get his detectives to start asking questions about that…

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2012) Available now at Amazon.com

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Berkshire 2012: The Times They Are A-Changing and Other Observations

Post author By jeff matthews
Post date May 10, 2012
2 Comments on Berkshire 2012: The Times They Are A-Changing and Other Observations

Editor’s Note—

This year we’re utilizing a shorter, snappier way to summarize the Berkshire Hathaway annual meeting as a way to spare readers the redundancies in Buffett and Munger’s question-and-answer session.

After all, the commentary overlap with past meetings is probably 75% nowadays—we’ve even developed a sort of Berkshire shorthand for our note-taking, writing simply “Graham story” when Buffett launches into his dissertation on the importance of certain chapters in Ben Graham’s “The Intelligent Investor,” for example; “MBA joke” whenever Buffett or Munger make fun of the meaningless (and dangerous) risk-evaluating models of the academic world; and “IBK joke” when they go after investment bankers, another favorite target.

Nevertheless, the meeting was, as always, interesting.

For one thing, attendance was down, noticeably, even if Buffett wouldn’t say so—probably a side-effect of his high, and highly controversial, political profile these days. Also, there was the added (and, we thought, welcome) presence of insurance analysts asking questions for the first time since the very old days when a few professionals would show up at the Berkshire cafeteria and fire away.

Overall, there was a detectable “thrill is gone” sense hanging over the weekend. Buffett himself did not show up at some of the side-parties that many of his most loyal shareholders routinely schedule, as he did in the past, and even the press complained about the tight restrictions on their cameras.

But Charlie Munger, pushing 90, was in great form, and Bono was spotted in the crowd, a step up from last year when George Lucas made it.

So there.

—JM, May 2012

Berkshire Hathaway 2012

Biggest Change: Tighter security and more of Buffett The Analyst than Buffett The New-Age Spiritual Guru.
Gone, unfortunately, was Buffett’s pre-meeting stroll to a seat in the middle of the floor of the arena to watch the kick-off movie (instead he was kept inside the Board of Director’s gated pen, up front near the stage, where beefy guards with earpieces and zero smiles stood watch).

Gone, fortunately, were questions like “What should I do with my life?” and “Do you believe in Jesus Christ and do you have a personal relationship with God?” (That was actually asked—and answered by Buffett—a few years ago: you can read the answer in our book.)

Best Change: Three insurance analysts asking geeky business questions about Berkshire’s operations—the first time in years Buffett has been questioned in depth about the guts of Berkshire Hathaway.

And while there was grumbling from the sightseeing-types in the crowd about the technical discussion (as well as from ace financial analyst/money manager John Hempton, who thought it was not technical enough and wrote about it here, although I knew what John thought before he wrote that because I sat with him), the fact is Buffett has gotten away with very few hard questions about Berkshire’s operations in the years since he became a CNBC staple.

Expect fewer attendees next year, and the year after, and the year after…but better questions.

Most Fun: Getting to see and hear Warren Buffett discuss the insurance businesses in detail thanks to those geeky questions. He didn’t create the track record of a lifetime by luck.

Least Fun: Two rants, both by people from Boston (where else?)—one about the Liberty Mutual scandal and the other about Fannie Mae/Freddie Mac, both of which Buffett and Munger handled far more patiently than the crowd.

Also, way too many questions about Berkshire’s lagging stock price (it’s a conglomerate with a bunch of low P/E business for gosh sakes, not a closet mutual fund run by Warren Buffett any more.) Speaking of which…

Most Delicious Moment: Charlie Munger blowing off a well-known hedge fund manager who used the microphone to talk up Berkshire’s stock before lobbing a softball, “what-am-I-missing” type of question about the lagging stock price.

Rather than respond in Typical Public Company CEO Fashion about how Berkshire was “executing its strategic objectives” or complaining the stock was “not reflecting the underlying values of the business” or reassuring us that management would “pursue all means to enhance shareholder value,” as most CEOs would do, Munger simply said: “I wouldn’t worry too much. I think you aren’t really welcome in this room if that sort of short-term orientation turns you on.”

And that ended the discussion about Berkshire’s stock price.

Least Appreciated Line: “If you make your buy and sell decisions based on what a business is worth, you’ll make money.”—Warren Buffett.

Most Appreciated Line: (In response to a question about succession at Berkshire after Buffett’s death.) “The good fortune is not going to go away just because Warren happens to die. It won’t help him, but…”—Charlie Munger.

Weirdest Moment in the Opening Movie: The cartoon, in which the University of Nebraska football team (Buffett’s favorite) plays a University of Washington team made up of robots coached by failed/disgraced presidential candidate Herman Cain. (I am not making this up.)

Worse, during his half-time pep-talk, Coach Cain made a bunch of 9-9-9 jokes and then urged his men to hit hard, yelling “Take that, sucka!” like a, well, like a stereotypical African-American.

Who thought that would be funny?

Best Comment on the Opening Movie: “Are they that corny every year?”—John Hempton.

Oh Puh-leeze Moment: When Warren Buffett defended “the Buffett Rule” with talk of “shared sacrifice” and the curious claim that his rule applied only to “a very few” people, meaning those with “the 400 largest incomes in the U.S.” which of course is no longer the case, as everyone in the place knew.

You-Could-Hear-A-Pin-Drop Moment: When Buffett casually said Todd Combs and Ted Weschler, the recently hired money managers at Berkshire, are being paid “one million dollars a year,” plus incentive fees. Buffet’s no fan of “shared sacrifice” when it comes to incentivizing his own moneymakers…

A Lesson For Every Money Manager Department: Buffett’s revelation that in all of his and Munger’s years of managing Berkshire together (47 and counting), “We’ve never talked about macro stuff.”

Most Surprising Applause Line: Becky Quick’s question on behalf of a man who first noted that his 84 year old father wouldn’t buy Berkshire stock because of Buffett’s constant yapping about a Buffett tax, and then asked what impact Buffett’s high profile might be having on the stock price. (This got spontaneous, fairly loud applause despite the Buffett-friendly crowd.)

Least Surprising Applause Line: Buffett’s response to the young man, which was “I don’t think anyone should have their citizenship restricted” simply because they run a public company, plus this zinger about the young man’s 84 year old father: “Maybe he oughta own Fox.” (This got louder applause than the question, naturally.)

Feel-Good Question, Literally and Figuratively: From Andrew Ross Sorkin, on behalf of “many” in the crowd who had urged him via email to ask, “Warren, how’re you feeling?”

Feel-Good Answer, Literally and Figuratively: Buffett’s response to Sorkin, “I feel great.”

Best Munger Retort: (To Sorkin after Buffett said “I feel great.”) “I’m jealous. I probably have more prostate cancer than he does.”

Least Interesting Question: About gold. ‘Nuf said.

Most Interesting Question: “How do the large sovereign debts get balanced, and do they concern you?”
Buffett’s answer was, “I don’t know how it plays out in Europe…I would totally avoid buying medium or long term government bonds.” Munger added, “He’s asking the really intelligent question of the day and we’re having a hard time answering it.”

For the record, this “really intelligent question” actually drew applause from the crowd when it was asked, which tells you what’s on people’s minds regardless of which party they’re voting for in November.

Also, for the record, the fellow who asked it was from Boston, which just goes to show not everyone in that Commonwealth is certifiable.

Least Convincing Answer: Buffett, asked by the fearless (and good friend of Buffett) Carol Loomis whether buying the Omaha World-Herald newspaper was “some self-indulgence?”

The Oracle spent a good five minutes explaining how the paper “still tells me some things I can’t find out about elsewhere,” such as—and I am not making this up—the obituaries and the wedding notices. Nobody was buying it.

Most Convincing Answer: Buffett and Munger, when asked by one of those geeky insurance analysts whether Berkshire would ever be subject to the Investment Company Act of 1940.

Buffett said he’s read the Act “20 times” (and when Buffett says he’s read something 20 times, he’s not kidding), and “I see no way Berkshire comes close to that.” Munger said flatly, “We are NOT just an investment company.”

Something Every Investor Should Always Keep in Mind: Asked about why Berkshire keeps such a large cash reserve, Buffett said, “We don’t ever want to go back to ‘Go.’”

Worst Answer: Buffett, when asked how Amazon.com will affect Berkshire’s various businesses, said, among other things, “It won’t affect Nebraska Furniture Mart.”

Best Answer: Munger, to the same question, “I think it’s terrible for most retailers—not slightly terrible, really terrible.”

Most Concise Answer: Munger, when asked how a business can “build barriers” around itself: “It’s tough. We sort of buy barriers, we don’t build them.”

The Single Most Revealing Comment About What Made Berkshire A Growth Stock And Why It Is No Longer One: “There were times when Ajit [the genius who runs Berkshire’s reinsurance business] would generate billions of float and Warren would generate 20% returns on that float, and that would happen over and over and over…and that was fun.” —Charlie Munger

One More Mungerism Before We Go: “I rejoiced the day I got rid of a stock quoting machine. I like this idea of owning businesses forever.”

And Warren Buffett’s Successor as CEO of Berkshire Hathaway Is Who? The answer is clear. Read all about it in the forthcoming 99c mini-eBook on Amazon.com, “Buffett’s Successor: Who it Will Be, Why it Matters.” To be published by eBooks on Investing this summer.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2012) Available now at Amazon.com

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Doing the Right Thing: Upside? Zero. Downside? Financial Ruin…

Post author By jeff matthews
Post date April 16, 2012
11 Comments on Doing the Right Thing: Upside? Zero. Downside? Financial Ruin…

In a typically breezy, highly readable and highly informative blog post (Bronte Capital: Daddy you are more evil than I thought), hedge fund manager (and friend, for the record) John Hempton writes an at once amusing and illuminating description of what he does and why he does it, to the admiration/horror of his son.

(John leaves out the ‘how’ he does it, but I can tell you it is the ‘how’ that makes John so good).

However, by summing up his work in the manner he does such that it generates his son’s amusingly alarmed reaction (quoted in the title of the piece), John, I think, diverts attention away from the real underlying issue that anybody who plays on both sides of the investing fence faces when considering going to the press or to the authorities with negative information about a public company.

The real underlying issue is this: the downside of going public with damaging information on a public company, even if that information could bring down a bad guy and stop the bad guy from doing damage to other innocent investors down the road (e.g. Robert Maxwell, whose favored broker was Goldman Sachs, as described here), is so much greater than the upside that it makes no sense (in America, at least) to bother.
So you just keep your mouth shut.

What is the downside to going public? There are many facets, but the two main ones are these:

1) Getting sued by the offending scammer, who, being CEO of a public company, can spend unlimited company money (not his own), on the effort to shut your mouth, run you out of business and keep the scam going;

2) Getting ignored (or worse–see David Einhorn’s grim experience with the unintended cost of being right in “Fooling Some of the People All of the Time“) by the Feds.

Now, what is the upside of going public?

Well, the upside is you may ultimately be proven right, and the bad guy may go to jail, in which case the investors and shareholders and analysts and investment bankers who hated your guts during the process and wanted to see you die because it was you (not the bad CEO) who was destroying their company, will finally admit you were right and shower you with kisses—no, wait.

They won’t.

They will still hate your guts.

In fact, they’ll hate your guts even more, because they will perceive that it was you who brought their company down. After all, without your efforts the fraud they were profiting so handsomely from would not have collapsed.

They’ll think, in fact, that you’re evil, because, as you will learn the hard way, scammers never, ever admit culpability: they blame short-sellers on the way to jail, in jail and out on parole.

So, to summarize: Upside to doing the right thing by going public? Zero. Downside? Financial ruin.

Still, while the bad guys John has exposed (and there are more than a few) may agree with the title of his blog, his investors (I am not one) would probably say that John Hempton is way less evil than his son fears.

And simply based on what I know of the work he does in arriving at his unwanted, non-conscencous, frequently scam-busting conclusions, I would tell his son, “No, your old man’s alright.”

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

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.

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David Schwartz: One of The Good Guys

Post author By jeff matthews
Post date April 3, 2012
No Comments on David Schwartz: One of The Good Guys

David Schwartz, who passed away last weekend, was one of the good guys.

The company he and his wife, Alice, founded in their garage many years ago is a clinical diagnostics and life science products maker called Bio-Rad Labs, which readers may recall from a few years back when its “mad cow” disease test was suddenly in demand after a limited but frightening outbreak of that brain-wasting disease in North America.

Mad cow test aside, Bio-Rad happens to be one of those off-the-radar public companies that does nothing the way Wall Street’s Finest like to see things done when it comes to “increasing shareholder value.”

For one thing, it has a Class A/B stock structure that gives the family control in a way that most Wall Street analysts, who have never run anything in their lives more complicated than an espresso machine, find exasperating, since it has (presumably) prevented the company from being taken over for a short-term profit—long-term potential be damned.

For another, Bio-Rad doesn’t issue scads of stock options to senior executives, which means it doesn’t have to toss money down a rat-hole buying shares back at silly prices, which is what most companies do when they are “enhancing shareholder value” via share buybacks that should actually be labeled “enhancing our senior executives’ value.”

(In 10 years, Bio-Rad’s fully diluted share count has risen only 15.5%. At the other extreme, Life Technologies, which swims in the same pool as Bio-Rad but plays the Wall Street game like a shark, has seen its fully diluted share count rise 75% in the same time frame.)

A third thing Bio-Rad does that has never endeared it to Wall Street’s Finest is not managing its quarterly earnings to hit Wall Street forecasts. Its average “earnings surprise” over 5 years has been 21.3%, according to my Bloomberg, while the aforementioned Life Technologies’ “earnings surprise” is a P/E-enhancing 11.6%. (GE, the King of Managing to Quarterly Earnings, has a 4.4% average surprise.)

There are many more things Bio-Rad does that don’t march to the mantra of “enhancing shareholder value” sung by Wall Street’s Finest (and by way too many public company CEOs), like building a real business without worrying about what analysts worry about.

Notwithstanding the Class A/B structure, the lack of share buybacks, the non-smooth earnings stream, and big piles of cash that build up on the balance sheet and then leave when an attractive acquisition comes along (an acquisition which may or may not be “immediately accretive”—another slogan in the “enhancing shareholder value” toolkit of trite sayings), Alice and David built, from a standing start, a diagnostics and life science company with 7,000 employees generating $2 billion of revenue, carrying an enterprise value of $3 billion, without ever having to cater to the whims of Wall Street’s Finest.

How, exactly, did they accomplish this? One of many examples comes in the following story.

After the North American “mad cow” outbreak occurred, Bio-Rad was suddenly facing a windfall from its test, so I visited the company to get an update on its long-term plans from the CEO (David and Alice’s son, Norm Schwartz), and the CFO (Christine Tsingos). David sat in with us, wearing his usual bolo tie and occasionally interjecting in his affable way.

When the mad cow issue came up, however, David took over the conversation.

Now, he could have hyped his stock using the mad cow disease as a launching pad. He could have, like many other CEOs in his shoes might have, pretended it was the beginning of up-and-to-the-right growth for Bio-Rad that would get me and other investors excited. He could have easily pumped his stock and made himself a lot richer in the short-run.

But he didn’t.

Instead, he took a piece of paper and drew a line that looked like the normal distribution of a standard deviation. “The mad cow revenue will climb like this,” he told me, tracing the upward curve of the line. “Then it’ll peak and then fall off, like this. Meantime, we’ll use the money to invest in other things for the long term.”

And that’s exactly what happened.

And it’s exactly what they did.

And it worked for everyone involved.

David Schwartz was one of the very, very good guys.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

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.

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Augusta National Golf Club: What Would Warren Do?

Post author By jeff matthews
Post date April 2, 2012
5 Comments on Augusta National Golf Club: What Would Warren Do?

Golf’s Masters Facing Male-Only Dilemma With IBM CEO Rometty

By Beth Jinks and Michael Buteau
March 28 (Bloomberg) — Will International Business Machines Corp.’s Ginni Rometty be able to wear a green jacket at the Masters Tournament?
As Augusta National Golf Club prepares to host the competition next week, it faces a quandary: The club hasn’t admitted a woman as a member since its founding eight decades ago, yet it has historically invited the chief executive officer of IBM, one of three Masters sponsors. Since the company named Rometty to the post this year, Augusta will have to break tradition either way.
IBM holds a rarefied position at the Augusta, Georgia, course. The company has a hospitality cabin near the 10th hole, beside co-sponsors Exxon Mobil Corp. and AT&T Inc. The companies’ male CEOs have been able to don the club’s signature green member blazers while hosting clients. Non-members, who don’t wear the jackets, must be accompanied by a member to visit the course or play a round….

—Bloomberg, March 28, 2012

That’s the story, at least according to Bloomberg…but it’s not the whole story—or at least, the most interesting part of the story.

The most interesting part of the story is that Warren E. Buffett, CEO of Berkshire Hathaway and currently the highest profile liberal Democrat in the American business world—being a friend and advisor to the President of the United States while also allowing his name to be attached to a contentious tax hike proposal—also happens to be a member of all-male Augusta National Golf Club.

Indeed, one of the non-monetary perks of selling your company to Berkshire Hathaway is a round of golf with the Oracle of Omaha himself at men-only Augusta.

(You can read about that and more in the just-issued 2012 edition of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett,” available on Amazon.com’s “Hot New Releases in Investing” list.)

Further complicating the situation, and making it stickier than in years past for Warren Buffett, is that Berkshire Hathaway is now the largest shareholder of IBM, thanks to Buffett’s buying spree early last year.

So, we wonder, What Would Warren Do to unravel this Gordian Knot, wherein the CEO of one of his largest investments is banned from membership at the highest profile golf club in the world, of which he is one of its highest profile investors, at the very time his own very high public profile is part of the current tax policy debate?

We’ll bet Augusta decides to admit Ms. Rometty without a fuss or even a press release; Buffett is spared questions about the issue at next month’s Berkshire Hathaway shareholder meeting; and the President gets the credit.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

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.

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From the Files: “Round Up The Usual Suspects”

Post author By jeff matthews
Post date March 30, 2012
2 Comments on From the Files: “Round Up The Usual Suspects”

Editor’s Note: We’ve been asked to re-post the following column, published during the dark days of 2008 when the financial world as we knew it was coming to an end and then-Treasury Secretary Hank Paulson was pushing a bailout for his former friends and colleagues on Wall Street. The reader making the request erroneously states that this post had been taken down, which it had not; and why he/she wanted to read it again, we can’t say, but it’s always worth looking back at a crisis, so here goes…

Sunday, September 21, 2008

“Bail Out the Drunks, O’Malley, and Round Up the Usual Suspects”

A party begins in somebody’s back yard. It is quiet at first, nothing out of the ordinary.

But as the night wears on, the music gets louder, the voices get more boisterous, and things begin to get a little out of hand. The neighbors can’t sleep, and one calls the police, but nobody comes.

The party gets louder, more out-of-control. A second neighbor calls the police. Again, nothing happens.

The party kicks into high gear. Drunks wander into backyards and urinate on the neighbors’ houses. A window is smashed. A fence is torn down. Neighbors call the police with lists of specific offenses, but are told the party-goers are all consenting adults, and the police have no reason to believe illegal drugs are being consumed.

In short, the policeman says, the partyers can handle themselves.

Suddenly, above the music and drunken singing comes a hysterical scream. A neighbor investigates and finds a fight has broken out, and somebody has been killed. The party-goers are in a stupor. They can’t agree on what to do.

911 is called and police cars come screeching to the scene of the crime. They discharge dozens of serious-looking cops who surround the premises, shine their flashlights in the faces of drunk and retching party-goers, count the empty liquor bottles strewn across the yard and throw towels over dazed, naked couples.

After carefully sizing up the situation, the officers make their move: they tell the drunks, “We’ll pay for the damages.”

And they arrest the neighbors.

So it is, we think, that the U.S. Government—which certainly shares responsibility with Wall Street for bringing the subprime mortgage mess down on the heads of the American people—acted on Friday when after years and months of ignoring the subprime mortgage crisis, or at least hoping it would go away, eagerly embraced a quarter-trillion dollar bailout fund for the very Wall Street firms that had promoted, securitized and distributed those subprime mortgages that brought the world to the brink of a financial precipice nobody could fathom…and banned short selling, to boot.

“Bail out the drunks, O’Malley, and round up the usual suspects” seems to be the word from Washington.

How else to describe it?

How else to describe a government whose Treasurer proposes a quarter-trillion dollar bailout for his friends and former competitors on Wall Street, and whose securities arm bans short sales in 799 stocks—many of which lie at the heart of the drunken orgy otherwise known as the subprime party—instead of taking action against the Wall Street firms that caused the mess in the first place?

One commentator this weekend, we think, got it right, when he wrote, in part:

Then again, maybe the S.E.C. is trying to cover up its own culpability in this crisis. Four years ago, the agency pushed through a rule that allowed the big investment banks to take on a great deal more debt. As a result, debt ratios rose from about 12 to 1 to more like 30 to 1. Guess what Lehman’s debt ratio was when it went bust? Yep: 30 to 1.

Joe Nocera, “Hoping a Hail Mary Pass Connects”New York Times, September 20, 2008

Joe Nocera was not, as we say here, making that up.

On August 20, 2004, the SEC enacted a rule called “Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities.”

The effect of this rule, as Nocera pointed out, was that it allowed five firms to increase their use of leverage dramatically.

Those five firms were Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley.

If the Federal Reserve is supposed to “take away the punch bowl” when the economic party is getting out of hand, with this rule change the SEC brought in a distillery and said “Here, boys, have fun.”

And did they ever have fun!

Lehman Brothers ramped up its debt-to-equity ratio from 21.4 in 2003 to 30.5 in 2007. Merrill Lynch jacked up its debt-to-equity from 16 to 31 in the same period; Morgan Stanley from 21 to 32.

Now, you can read the actual rule change here:http://www.sec.gov/rules/final/34-49830.htm.

But we’ll save you some time.

After declaring that “The principal purposes of Exchange Act Rule 15c3-1 (the “net capital rule”) are to protect customers and other market participants from broker-dealer failures [emphasis added]” the SEC states:

“We are amending the definition of tentative net capital to include securities for which there is no ready market [emphasis added]…”

What goes around, as they say, comes around, for as we write this, the U.S. Treasury is proposing a near-trillion dollar fund to buy securities for which there is no ready market.

You would think somebody at the table of Government bureaucrats and sober Congressional “leaders” trying to cobble together a rescue package might think to invite in the short-sellers who tried to warn Wall Street that these companies were headed for trouble.

But no.

Instead, short sellers—many of whom got the subprime collapse absolutely right, without ever resorting to the kind of abusive tactics short sellers as a class are now being accused of wielding in this fear-crazed environment—are being banished not merely from the discussion of what to do now, but from their profession by government directive.

Oddly enough, nobody seems to have considered using a simpler and far less costly way to fight the negative forces that began to feed upon themselves in recent weeks: simply reinstate the uptick rule.

That rule, which very effectively limited so-called bear raids in stocks by requiring that stocks be sold short only on an uptick, was removed by the SEC in 2007…after lobbying by Lehman Brothers and some of the same Wall Street firms now seeking shelter from the storm.

All in all Friday was, we think, a black day for free markets: those who got it right are being punished; those who got it wrong are being rescued.

And the homeowners enticed to buy at the top of the market using financial instruments they understood even less than the Wall Street firms that pushed those instruments, are not being helped at all.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.