Sunday, July 19, 2015

Fact-Checking William D. Cohan; Or, Paul Is Not Dead

 TV personality, author and commentator William D. Cohan is grumpy about a lot of things.
 There’s the Duke lacrosse scandal, for one, about which he’s just publish a “shocking, thought-provoking new book”—according to the description on his own web page.
 And for another there’s Wall Street, from whence he came, and about which he’s written plenty of grumpy, conspiracy-minded books.
 Hence it’s no surprise to find Cohan invited to speak at the Sun Valley Writer’s Conference, whose attendees tend to be wealthy, Wall Street-leery arts supporters from L.A.
 It’s even less surprising that one of the talks he gave to those same attendees was entitled “Who Has the Real Power Now on Wall Street?”—actually, less of a talk and more of a very grumpy, very conspiratorial dish about what he perceives to be the current state of Wall Street—and that the audience was with him from the get-go.
 Kicking off with the quite legitimate observation that the Dodd-Frank law was not understood by either man whose name is on it, Cohan explained that Dodd-Frank did nothing but give more power to the six major banks at the heart of the 2008-9 financial crisis (now five, since Bank of America rescued Merrill Lynch), although he failed to explain why (it’s the fact that big banks can spend the big regulatory bucks while smaller banks have a harder time doing so: hence, regulation favors the large and hurts the small, yielding consolidation).  
 No matter the reason Dodd-Frank failed its mission, the crowd nodded approval at Cohan’s dark conclusion and murmured its disapproval of the Big Bad Banks.
 Bolstered by this friendly reception, Cohan then proclaimed that government regulators don’t help address the weaknesses in the Dodd-Frank regulations because “the SEC is a tool of Wall Street.”  After all, he pointed out, U.S. Presidents appoint Wall Street people to the job of overseeing Wall Street.   Since they will eventually go back to Wall Street, they aren’t going to do anything to kill the golden goose.  
 Thus, he noted, Mary Shapiro left FINRA to run the SEC with a $9 million bonus from her work at FINRA, at which the crowd gasped and murmured its disapproval of money-grubbing Mary Shapiro.
 At this point, Cohan could have said anything he wanted—he could have said Paul McCartney really was dead; John Lennon really had mumbled “I buried Paul” at the end of Strawberry Fields Forever; and the Abbey Road cover photograph was, in fact, an allegory of a burial ceremony because Paul was barefoot—and the crowd would have gasped and nodded and murmured their approval.
 Instead what he said was something far sillier than “Paul is Dead.”   He said that thanks to their status as bank holding companies regulated by the Federal Reserve, “the investment banks are now a cartel.”    
 In fact he said they are even more of a cartel than OPEC, because they split up turf, noting darkly that “Goldman Sachs and Morgan Stanley don’t compete all that much,” which might be news to some of the traders and bankers we know at those firms.  No matter, the Bank Cartel is alive and well, according to Cohan, because he’s “been assured by bankers on Wall Street” that they are going to “raise prices on their clients.”
 The crowd tisked and shook their heads and nodded knowingly: I knew it!
 Now, Mr. Cohan is not just a TV Personality.   He is an author, and he has written books about Wall Street, where he did, after all, once work.  
 And being an author, it apparently occurred to him that he ought to offer some proof for his “cartel” theory besides unsubstantiated hearsay.
 So he did:  “Wall Street is booming in every way,” he said, declaring, as if stating an indisputable fact, Profits have never been higher. 
 Quote, as they say, unquote.
 Now, having just listened to supposed-cartel-co-conspirator BankAmerica CEO Brian Moynihan point out that his company has just completed its 15th consecutive quarter of reducing employment by 3,000 human beings or more, the phrase “booming in every way” wouldn’t necessarily spring to the mind of anyone remotely paying attention to the current environment on Wall Street.
 However it’s the “profits have never been higher” that seemed flat-out wrong.  Since this was a speech, and there were no fact-checkers around as would be the case if this had been a manuscript for publication, we here at NotMakingThisUp decided to check the facts ourselves to see if Mr. Cohan was, in fact, not Making That Up.  
 The results, from our trusty Bloomberg, are in the table below, which shows the most recent earnings data from the five money-centers that remain intact from the crisis days compared to their peak quarterly numbers, almost entirely from the 2006-2007 fat years (Wells Fargo is not included because it is a substantially different entity thanks to the Wachovia acquisition):   



 If that is a cartel, it is not doing a very good job of jacking up prices for its clients.
 Return on equity for the “booming-in-every-way cartel is down 50% from peak levels; return on assets is down 40% from peak, and earnings (in billions of net after-tax dollars, adjusted for non-recurring items), are nearly 30% below peak.
 Not even close to Never been higher.
 And while we are at it, we should probably also point out that John Lennon actually said “cranberry sauce,” not  “I buried Paul,” at the end of “Strawberry Fields Forever;” that Paul went barefoot during the Abbey Road cover shoot because it was a warm day outside the EMI studio at St. John’s Wood, not because the cover photograph was an allegory of a burial ceremony; and that Paul is actually still alive and well, and recently turned 73.
 Just in case Mr. Cohan tells you otherwise.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2015)    Available now at Amazon.com

© 2015 NotMakingThisUp, LLC




Saturday, May 02, 2015

Sgt. Pepper! Joe Cocker! Jimmy Page! Oh, and Warren and Charlie...

                  The best part of this year’s Berkshire meeting—except seeing Charlie Munger in good form, which we’ll get to in a bit—was the movie.
            Not the movie itself, but the end of the movie, when the sing-along tribute to Berkshire’s managers, which always used to be set to the tune of “My Favorite Things,” turned out to use “Sgt. Pepper” instead.
            That’s some good taste there.
    But, actually, the best part of the Beatles-themed piece of the movie came as it died out and, miraculously, the “Sgt. Pepper Reprise”—the best two minutes of The Beatles ever recorded, in your editor’s opinion—began to play during the credits.  
   (Yes, we know—Dear Prudence…Across the Universe…Revolution…Oh! Darling…Something…Everybody’s Got Something To Hide…The End—are up there, but it all depends on what mood you’re in, right?   And the mood we were in was, “Hey, this is seriously good taste.”)
            But that was before the absolute best part of the entire meeting actually occurred, which was when the Sgt. Pepper Reprise died out and the house lights stayed dim and suddenly that willowy organ introduction—Can they really be playing this?—to Joe Cocker’s full-throated ¾-time version of  “With a Little Help From My Friends” began to coil above the sound of 20,000 or so Berkshire shareholders shifting in their seats waiting for Warren and Charlie to hit the stage, which they did as The Grease Band came in over the organ with a bang, young Jimmy Page leading the charge on electric guitar…
            It doesn’t get any better than that.
            And it didn’t.

            Not that it wasn’t a good meeting.   It was a very good meeting.  It just was kind of all downhill from there—at least when it comes to the energy of the thing. 
            Substance-wise, Warren and Charlie sat for the usual five-plus hours of thoughtful questions (for the most part) and thoughtful answers (with a bit of deft tap-dancing on Warren’s part, particularly when the enormously touchy subject of 3G—the Brazilian takeover artists whose Berkshire-financed slashing-and-burning at Heinz has turned a sleepy-but-modestly-profitable ketchup company with declining sales into a hugely profitable ketchup-and-potentially-mustard company with declining sales—came up).
            Naturally, Carol Loomis did the bringing up, because a) Carol is a terrific journalist, and b) Carol has no fear, while she also knows that Buffett can rationalize anything.
            And rationalize 3G he did, saying “I don’t think you can ever find a statement that Charlie and I have made…where we’ve said more people than are needed should be working at our companies.”
            That’s not the point, of course: the point is that if 3G ran Berkshire it would very likely have substantially fewer than 300,000+ employees in short order, no matter how often Buffett points to the 25 FTEs at corporate headquarters as proof that Berkshire doesn’t have any fat.
            (Buffett later, and ludicrously, claimed that if Berkshire operated as a normal bloated American company it would have a huge corporate headquarters staff which 3G would be entitled to slash if it ran Berkshire—thus ignoring the corporate headquarters functions scattered throughout all the various Berkshire companies, which naturally have their own CFOs and Treasurers and controllers and legal et al.)

            But we came to praise Buffett and Munger, not to criticize them, particularly Charlie, who got in his usual wonderfully concise, pointed observations after Buffett had frequently wandered around the metaphorical map on various topics ( and Charlie participated in literally every question asked during the first half of the session).
For example:
            On why Clayton Homes (criticized in a recent Seattle Times “expose”) has some customers who default: “If we made the default rate zero we wouldn’t be lending to people who need it.”
            On what investment formula Buffett and Munger could provide to evaluate companies: “We don’t have a one-size-fits-all system.”
            On his and Buffett’s less-than-healthy diets: “The way I look at it, if I die earlier I’ll just avoid a few months of drooling in the nursing home.”
            On why Van Tuyl has been wildly successful in the notoriously nepotistic car business: “Van Tuyl has a system of meritocracy where the right people get the power and the ownership.”
            On why Berkshire changed over time as it did: “We were always dissatisfied with what we knew…we wanted to learn more.”
            On how to succeed without a business degree: “Play the hand you’ve got.”
            And on what he and Buffett look for in business partners: “The trustworthiness is more important than the brains.”

            And that’s just the first half of the meeting, because we left at the lunch break, never to go back.  Readers who wish can call up Charlie’s bon mots on Twitter and on the “live-blogs” of any of half a dozen financial news outlets that covered the event, but we’re not going to pretend to have been when and where we weren’t.
            Why now?
            Maybe it was seeing the NetJets pilots and attendants, dressed to the nines in their uniforms and walking quietly and respectfully in a very long oval outside the CenturyLink Center the entire meeting, so different in seriousness and demeanor from past “Hey look at us!”-type protests at the Berkshire meeting; maybe it was Buffett’s inability to admit publicly, “Well, yes, it’s true, the 3G guys are more Mr. Potter than my George Bailey, but so what?”; maybe it’s the fact that Business Insider—Henry Blodgett’s quite wonderful online vision of what would happen if People Magazine covered the business world (with occasional great scoops thrown in the mix)—published a reporter’s visit to Warren Buffett’s Favorite Steakhouse (here), complete with photos of the actual type of steak Warren likes to order…
            We don’t know, but after hearing Joe Cocker (1944-2014, sadly) singing his guts out on the heels of Ringo and The Boys slamming it, the whole thing just seemed like enough.
            And so, enough.



Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2015)    Available now at Amazon.com

© 2015 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.

Friday, March 27, 2015

Messi Announces Retirement, Reporter Asks About Half-Time Score

 Tom Prescott announced his retirement last night.   You may not have heard of him, but as CEO of Align Technologies (the inventors of Invisalign “invisible braces”) Prescott helped turn a $70 million revenue company with 35% gross margins, negative operating margins and a $127 million market value into a near-$800 million revenue company with near-80% gross margins and 25% operating margins.
 Oh, yeah, and a $4.5 billion market value, last we checked.
 More than that, Tom Prescott helped Invisalign develop from a niche product not much liked by the orthodontists who were supposed to use it (it’s far more expensive to them than the old-fashioned wires and brackets, plus, in the early days, before Prescott, the Invisalign treatment was far more limited in what it could do, teeth-moving-around-wise) into a near-standard of care in orthodontics around the world.
 And he did it the old-fashioned way: by spending on R&D to improve the product (a quarter billion in the last six years alone), marketing like crazy, and proselytizing every chance he had.
 Along the way, Prescott had to contend with a near-fatal copycat product (fought and won in courts of law), short-selling attacks (fought and won the best way possible: just running the business well) and big-company patent suits (smartly settled).
 If there ever exists a CEO Hall of Fame, Tom Prescott should get in on the first ballot.
 Thus it was quite a surprise to see the headline come across the tape after last night’s close that he would retire in June, with an outside-the-company successor to take his place.  No mention of such plans had ever passed his lips to anyone outside Align, and being the ripe young age of 59, nobody had ever bothered to ask him.
 Nevertheless, as the ensuing conference call made clear, the decision was voluntary, had been in the works for a year and a half, and had produced a successor who looks eminently worthy of filling some big shoes.
 Now you would think the first question on the call would be about the decision itself, with perhaps a follow-up on the successor and whatever plans he might have for the company.   
 But you would be wrong.  
 The first question was about what it’s always about for some of Wall Street’s Finest...near-term earnings:
 “Thanks.   Good afternoon.  Tom or David [White, the CFO], could you just elaborate on sort of the preliminary 1Q outlook in terms of revenues and EPS…?”
 It was as if Leo Messi suddenly announced his retirement from Barcelona during half-time, and the first question out of the reporters’ mouths was about who’s going to win the match.
 You could almost hear Prescott and his team restraining their incredulity, but, class acts that they are, restrain they did.
 Still, if there ever exists a Hall of Fame of Silly Analyst Questions, that one will get in on the first ballot.



Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2015)    Available now at Amazon.com

© 2015 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.

Saturday, February 28, 2015

Charlie Named Name


Ned Isakoff: “You got me blacklisted from Hop Sing’s?”
Delivery Man:  “She named name!”
—Seinfeld, “The Race” 
 Like Elaine Benes in that Seinfeld episode, Charlie Munger named name.
 Two names, in fact: Greg Abel and Ajit Jain.
 Unlike Elaine Benes’s name-naming, however, the two named by Munger have nothing to do with Communist agitation and the destruction of capitalism as we know it—far from it.  
 Rather, they have everything to do with Capitalist orthodoxy in its purest, most meritocratic form: who might succeed Warren Buffett as CEO of Berkshire Hathaway under the scenario, as Munger puts it, “Buffett left tomorrow.”
 Here’s the direct quote from Munger’s comments written for the 2014 Chairman’s Letter that hit Berkshire Hathaway’s web site this morning (2015 being the 50th anniversary of Buffett’s takeover of the company, both men wrote individual retrospectives on the last 50 years and what the next 50 years might bring):
 But, under this Buffett-soon-leaves assumption, his successors would not be “of only moderate ability.”  For instance, Ajit Jain and Greg Abel are proven performers who would probably be under-described as “world-class.”   “World-leading” would be the description I would choose.  In some important ways, each is a better business executive than Buffett…
 While Munger’s naming of names does not carry the same penalty as in the Seinfeld episode—neither man will be banned from ordering takeout at Hop Sing’s—it does carry far greater ramifications, because the moment Munger’s comments appeared on Berkshire Hathaway’s web site this morning, both men’s lives changed forever, for obvious reasons that we won’t enumerate, since everybody else will be doing that starting, oh, now.
 Instead, we encourage a careful reading of the full Berkshire letter—including both Buffett and Munger’s insightful commentary on what made Berkshire what it has become and where it might go—here.
 Fortunately, our book on the topic of Munger’s name-naming—“Warren Buffett’s Successor: Who it Is and Why it Matters,” (eBookson Investing, 2013)—was published well before Munger actually chose to name names, but we don’t have to change a word of it.


Jeff Matthews

Author “Warren Buffett’s Successor: Who it Is and Why it Matters””
(eBooks on Investing, 2014)    Available now at Amazon.com

© 2015 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.