Saturday, February 28, 2009

This Just In: Berkshire Equity Portfolio Back to its Cost Basis


The 2008 Chairman’s Letter from Warren Buffett is in, and while it contains much of what you’d expect—a self-confession or two, that old Mae West “Snow White” joke, one humorous new aphorism (“beware of geeks bearing formulas”) and a metaphor that associates derivatives with social diseases, not to mention a sober assessment of the world economy, one no-punches-pulled prediction on inflation, as well as plenty of cheerleading for Berkshire’s managers and businesses—the biggest shocker in the letter is not actually highlighted, or even mentioned, by Buffett.

The shocker is this: Berkshire Hathaway’s portfolio of equities—the stocks such as Coke and P&G and Washington Post that Warren Buffett himself, the “Oracle of Omaha,” famously purchased over the years at bargain prices—appears, as of yesterday’s market close, to be worth not much more than Buffett's cost.

That’s right.

Based on the year-end portfolio presented in the letter (and it has changed only modestly over time, but now excludes two stocks, Burlington Northern and Moody’s, in which Berkshire owns 20% and must report its holdings under the equity method,) Berkshire’s entire equity portfolio, which had a $37 billion cost basis and a $49 billion market value at year-end 2008, was, as of yesterday’s market close, worth only about $37 billion.

Now, we know what you’re thinking: you’re thinking, “Warren doesn’t mind, so why should we?”

Indeed, Buffett doesn’t mind—he says so in this year’s letter, on page 5:

Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me.

Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

Yet Buffett also disclosed what might go down as the second most surprising disclosure in today’s letter: he had to sell some of Berkshire's stocks to make those headline-grabbing investments in GE, Goldman Sachs and Wrigley:

To fund these large purchases [GE, Goldman and Wrigley], I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips).

No, to answer the obvious question, we’re not suggesting Buffett’s portfolio is any worse off than anybody else’s.


Yet the fact is, the value of Berkshire’s equity portfolio is not only of enormous economic importance to Berkshire Hathaway and its shareholders, but to investors around the world who watch what Warren does and frequently imitate his moves.

And the fact that it appears to be right back to its cost basis—after decades of not—is startling.

Now, the calculation itself is fairly straightforward. Since year-end Berkshire’s equity portfolio has suffered losses of close to $1 billion or more in American Express, Conoco-Phillips, P&G, and USB, if the computers here at NotMakingThisUp are correct.


And while some of those losses are certainly temporary, the hits to his financial holdings look more permanent—as does the whopping $5 billion decline in Berkshire's 7% stake in Wells Fargo thus far in 2009.

Virtually every other named holding in Berkshire’s portfolio—including Coke, Tesco, Swiss Re, and even poor old Washington Post—is also down year-to-date.

Consequently, if our math is correct, Berkshire’s equity portfolio stands at roughly $37 billion as of yesterday's market close, dead even with its $37.1 billion reported cost basis at year-end 2008.

(For comparison’s sake, at the end of 2007, Berkshire’s equity portfolio had a $35 billion unrealized gain.)

As a modest shareholder in Berkshire Hathaway, we’re rooting for the current, jaw-dropping state of affairs in Berkshire’s equity portfolio to revert to the mean—i.e. back to fat profits.

Nevertheless, if anyone had doubts how bad it is out there (Buffett himself writes in today’s letter, “We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond”) look no further than the Berkshire portfolio.


As for what may be the least surprising aspect of Warren Buffett’s letter to shareholders—we think it is that Buffett himself acknowledged what we wrote in “Pilgrimage to Warren Buffett’s Omaha,” page 208, in a chapter called “What Would Warren Do?”

Far from being a “forum for business discussion,” as Buffett wrote [when describing the virtue of attending Berkshire’s shareholder meetings], not a single shareholder has even asked about the business.

So Buffett, according to the final page in this year's letter, is changing the rules on asking questions at the upcoming meeting.

More on those changes Monday, when we introduce the Pilgrimage to Omaha Top Ten List of Questions We’d Like to Hear Somebody Ask “The Oracle of Omaha.”


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC
Pilgrimage to Omaha™

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.

Read All About It: Berkshire Hathaway Net Worth Down 9.6% in 2008


Warren Buffett's letter to shareholders is out, and it’s official: Berkshire Hathaway’s net worth declined nearly 10% last year.

That makes 2008 Warren Buffett’s second down year—and Berkshire’s worst—since he began investing other people’s money in 1956.

Our guesstimate, which we published in these virtual pages on January 22 (see “Warren’s Worst Year”) to some criticism for jumping the gun on the “Oracle of Omaha”, was down 8%.

More interesting than the precise number, of course, is Buffett’s own commentary on the year past, and what might happen in the year ahead.

We’ll have our own take on the letter in these virtual pages soon,
by way of introducing a competition of sorts which should interest our readers—whether you idolize Warren Buffett, or loathe him, or merely want to understand Berkshire Hathaway better.

Details, as they say, at eleven.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

Friday, February 27, 2009

Obama Begins to Nationalize Healthcare: Wall Street Shocked, Shocked!


Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down. That is what my economic agenda is designed to do, and that’s what I’d like to talk to you about tonight.


—President Barack Obama’s Address to a Joint Session of Congress, February 24, 2009


So began our President this past Tuesday night in a televised speech that apparently did not make it into the cable boxes of most healthcare investors, to judge by the reaction yesterday when details of that budget hit Wall Street.

Granted, it might have been that anybody who actually paid attention to what the President said were so stunned by the whopper near the top of the speech, when the President disclosed he would rely on Vice President Joe Biden to oversee the $787 billion stimulus plan, that they missed the healthcare discussion later on:

That is why I have asked Vice President Biden to lead a tough, unprecedented oversight effort – because nobody messes with Joe.

Now, Joe Biden has never been mistaken for Dick Cheney, or even Mickey Rourke, for that matter, as far as “messing with” goes.

Elected to the U.S. Senate four years out of law school, Biden hung his hat there for the next 35 years until, serendipitously, one of his various unsuccessful runs for President landed him on the Obama ticket, thanks to that distinguished Senator-like hair and those foreign relation credentials touted by Biden aids tired of hanging out in the Senate for three decades with nothing to show for it but big offices.

Contrary to the President’s remark, Biden has indeed been severely “messed with” during his career, most notably by Hillary Clinton and Obama himself during the recent Democratic primary campaign. Even after he made the ticket, Obama’s own staff” “messed with Joe,” keeping him and his weird, eliptical meanderings as far from television cameras and microphones as possible during the final days of the election.

Consequently, the President’s flight of fancy—that a 35-year Senate veteran and failed Presidential candidate with no actual working experience would effectively oversee a $787 billion spending package so that “not a dollar is wasted”—might have caused investors to miss an even bigger hint at what was coming down the pike, when the President discussed the bank bailout proposals:

I understand that on any given day, Wall Street may be more comforted by an approach that gives banks bailouts with no strings attached, and that holds nobody accountable for their reckless decisions.

This in-your-face throwing down of the gauntlet to Wall Street might have given investors a further clue that Obama was not necessarily aiming to be their best friend.

But if they did not pick up on it then, they certainly ought to have when the President pulled no punches discussing his healthcare plans:

For that same reason, we must also address the crushing cost of health care.

This is a cost that now causes a bankruptcy in America every thirty seconds. By the end of the year, it could cause 1.5 million Americans to lose their homes. In the last eight years, premiums have grown four times faster than wages. And in each of these years, one million more Americans have lost their health insurance. It is one of the major reasons why small businesses close their doors and corporations ship jobs overseas. And it’s one of the largest and fastest-growing parts of our budget.

Given these facts, we can no longer afford to put health care reform on hold.

Does this sound like a man on the side of fat-margined biotech companies and paper-shuffling HMOs?

Still, for some strange reason, Wall Street was shocked—shocked!—by the details in yesterday’s budget.

It seems that in order to provide more comprehensive coverage for Americans who can’t afford it, the budget looks to cut costs out of one of the most profitable industries on the planet.

Yesterday, investors read the fine print and reacted.

But they can’t say they weren’t warned.



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

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.


Wednesday, February 25, 2009

Zombies Must Die


The government taking over a bank presents plenty of problems. Among the challenges, Federal Reserve Chairman Ben Bernanke said this week, is “that you tend to lose the franchise value, that the counterparties and others don’t want to deal with you because they don’t know your future.”

—The Wall Street Journal, February 20, 2009 [emphasis added]


Those are the words of the current Fed Chairman, and we are not making them up.

According to Mr. Bernanke, Citigroup—CitiSmorgasbord, as we like to call it—has a “franchise value” that might be “lost” if the U.S. Government took over what Wall Street has marked down to a per-share price of less than the loose change in your pocket.

In fact, at yesterday’s close of slightly north of $2.50 a share, you could give up your morning Starbucks latte and instead buy a share of Citigroup stock, with enough change left over to buy a share of Fannie Mae, if you really wanted to speculate.

How’s that for “franchise value”?

Now, we here at NotMakingThisUp don’t take Citigroup, or its franchise, lightly. Our business happens have an account ensconced within the computerized bowels of that firm. So we’d like very much to see the place survive.


Still, we have our doubts.

Created Frankenstein-like by Former Master of the Universe Sandy Weill, who extracted about a billion dollars from the place before sailing off into the sunset just a few short years ago, CitiSmorgasbord is in its current form little more than a zombie bank—the kind of lifeless, destructive financial force U.S. wonks used to make fun of when they roamed Japan years ago.

(We don’t bring up Mr. Weill’s name lightly. Indeed, we find the furor kicked up over the $400 million “CitiField” fiasco supremely ironic, given that Weill himself has been slapping his name on buildings at places like Cornell University, thanks to the far-more-than $400 million dollars the same firm paid him during its heyday, before the era he helped perpetuate came to grief.)

While Citigroup indeed has a franchise, and maybe several, we have no confidence that the “franchise value” of Weill’s Balkanized Empire—net of all liabilities, seen and unseen—is much more than the current market price.

In fact, we worry it may be much less. A quick look at the months-old balance sheet tells us that at September 30, 2008, Citigroup had nearly a trillion in debt, with shareholder’s equity of $126 billion.

Berkshire Hathaway, meanwhile, had almost exactly the same shareholder’s equity, at $120 billion, but only a twentieth of the debt: $47 billion, to be exact.

Which financial services firm would you rather do business with?

Given that we cannot bank with Berkshire Hathaway, however, we here at NotMakingThisUp have in fact made sure our deposits at CitiSmorgasbord are below the FDIC-guaranteed threshold—just in case.

And that’s the guts of the problem, that “just in case.” Because everybody from bond traders to hedge funds to plain old checking account holders are wondering about “just in case,” and acting accordingly.


In light of that persistent drain of both goodwill and cash, will Citigroup’s so-called “franchise value” prove any more enduring than the “franchise value” of Washington Mutual, or Wachovia, or Lehman Brothers proved to be?

Beats us.

Still, while we have no rooting interest in the stock itself, nor in any other ailing institution whose main business was lending money with abandon, paying whopping bonuses to the men and women who lent the money, then writing off the loans, firing the men and women who lent the money, and asking the government for help, we do have an interest in seeing the American economy stop bleeding.


And it seems to us the best, simplest and most direct way to do this is to do exactly what the new Administration has said it does not want to do: nationalize the zombie banks.

The notion that Citigroup and any other zombie bank could be less badly run under a Government shareholder than they have been under ownership by the Fidelitys and Vanguards of the world, is hard to fathom. Bernanke’s concern that the “franchise value” of the Balkan Empire that is CitiSmorgasbord would somehow be lost seems to us the figment of a fevered imagination clouded by too many white papers.

So why not get it over with already? Wipe out the shareholders whose job it was to hire managers to run the business effectively, and preserve for the taxpayers whatever potential upside might come as owner, rather than merely absorbing all the downside as lender-of-last-resort.

Knowing the U.S. Government backing is not only implied but tangible, depositors would feel better about their deposits and creditors would feel better about their credits.

And Bernanke’s argument that “the counterparties and others don’t want to deal with you because they don’t know your future,” would evaporate, because right now those counterparties don’t have a clue what Citigroup’s future is.

Nationalized, they would know that the floor was in, and credit default swaps would drop from the 460 level to whatever the U.S. default swap is running these days. Markets could focus on rebuilding—not on speculating about what-more-bad-news-might-happen-tomorrow.

The only “franchise value” worth protecting here is not that of CitiSmorgasbord or any of the other zombie banks roaming Wall Street: it is the franchise value of the United States of America. And the best way to stabilize the patient is to stop the hemorrhaging, and get the blood flowing to the rest of the body. And to do that, the zombies must die.



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

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.

Sunday, February 22, 2009

The Most Irresponsible Thing You’ll Read This Weekend


GM Seeks $16.6 Billion More in U.S. Aid

GM said it might need as much as $100 billion in financing from the government if it were to go through the traditional bankruptcy process. Rick Wagoner, GM's chairman and chief executive, said the bankruptcy scenarios are "risky" and "costly," and would only be pursued as a last resort.

—WSJ February 18, 2009


The most irresponsible thing you’ll read this weekend is—well, you’ve already read it, we think.

That would be General Motor’s Chairman and CEO, Rick Wagoner’s threat that a GM bankruptcy would be “risky” and “costly.”

Why irresponsible? Well, think about those words for a minute.

Think about the fact that GM stock was above $60 a share when Wagoner was made CEO in June of 2000—last trade $1.95.

Think about the fact that GM has reported losses of close to $70 billion in the last three-and-three quarters years under Mr. Wagoner’s leadership.

Think about the fact that GM is a 101 year-old company which under Mr. Wagoner has accumulated negative retained earnings of $60 billion-and-climbing—meaning that in more than 100 years of operation, the company has not managed to keep a dime’s worth of retained earnings for its shareholders.

And ask yourself if letting GM continue as it is could be any riskier, and any more costly, than it’s been as a public company under Mr. Wagoner.

Now, we have no doubt the political money-launderers in Washington—of both parties—will agree with Mr. Wagoner, and will continue to fund GM in what essentially amounts to nothing more complicated than a continued effort to secure Michigan Electoral College votes for each party’s future Presidential bids.

But that wouldn’t make the statement that a bankrupt GM would somehow be riskier, and more costly, than GM as an independent public company has been, any less irresponsible.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

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.

Friday, February 20, 2009

Stimulus Part II: Fiscal Katrina on Its Way…Warren Buffett for Spending Czar?


Today, I signed the American Recovery and Reinvestment Act into law.

So begins an email we recently received from our new, internet-savvy President.


Now, what exactly is going to “Recover” thanks to the $787 billion combination of Fed spending and tax cuts, which our previous posting on this topic details, remains to be seen.

And as for the “Reinvestment” part, we likewise note that the money is going not so much for the kind of “bold” programs the President has been talking up. Rather, a good $300 billion is earmarked to be bulldozed into existing, failing, government money pits.

Quibbles with the Act's title aside, the money has been approved, and therefore it will be spent. And the email message from the President tries to be reassuring on this point:

It's a bold plan to address a huge problem, and it will require my vigilance and yours to make sure it's done right.

I've assigned a team of managers to oversee the implementation of the recovery act. We are committed to making sure no dollar is wasted.


Forgive our cynicism if we happen to think most of the dollars will in fact be wasted. After all, that’s what government does. Still, the “No Dollar Wasted” promise can be dismissed as a rhetorical flourish along the lines of the previous White House occupant’s “Mission Accomplished.”

More intriguing is the concrete promise that some sort of committee—“a team of managers”—will oversee the Fiscal Katrina about to hit our government institutions.

Unless, however, that “team of managers” consists of two people, Berkshire Hathaway Chairman Warren Buffett and his equally penurious Vice Chairman, Charlie Munger, well, good luck with that, as they say.

For all his two years in the U.S. Senate, Mr. Obama never apparently learned how this stuff actually works. Here’s how it works: the money gets appropriated by the appropriations committee, and the agency that receives the money spends it.

Period, end of story.

In fact we recently had dinner in Washington with a friend who works for a consulting firm that has been hired by just such a cash-flooded agency.

This agency had received a mandate to conduct certain things that will probably never see the light of day—not because those things are top secret, but because the goals were established under the previous administration.

No matter: the money was approved and allocated, and the cash is flooding in so fast the agency doesn’t know how to spend it.

So the agency did what many agencies do in the same circumstance: they hired a consulting firm to help spend the money. Several hundred million dollars' worth.


[Note to jobless MBA students: go to Washington; interview with consulting firms; get job].

The good news about the so-called "Recovery and Reinvestment Act," economy-wise, is that a half-trillion of our money and our children’s money is going to be spent in the next couple of years.

And that’s also the bad news, for it will be wasted in ways that make TARP, and TALF, and anything else we've seen since the housing boom burst, look positively rational.



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

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.

Tuesday, February 17, 2009

Stimulus Plan Part I: What Would Sears Do?


“We have a once in a generation chance to act boldly, turn adversity into opportunity, and use this crisis as a chance to transform our economy for the 21st century”
—Barack Obama


We have written on these virtual pages, and in a chapter titled “What Would Warren Do?” in “Pilgrimage to Warren Buffett’s Omaha,” about the fact that most of the questions asked by shareholders at Berkshire Hathaway’s famous shareholder meeting—the “Woodstock for Capitalists” of which Buffett himself is exceedingly proud—have nothing to do with Berkshire itself, or any of its “76 or so wonderful darn businesses,” as Buffett likes to describe them.

Instead, shareholders ask questions about Buffett himself: how he invests, what books he reads, even—we are not making this up—what he eats.

“What should I do with the rest of my life?” a young student from Germany earnestly asked at the May 2008 meeting, to the considerable discomfiture of those of us in attendance who, at that same age, weren’t thinking much beyond breakfast.

Consequently, individuals expecting to come away from the Berkshire meeting with a full understanding of what the future holds for that company (both in the short run and in the longer run, after Buffett himself is no longer on the scene) might be sorely disappointed if not for the fact that listening to Buffett discuss how he invests, what books he reads, and, yes, what he eats—not to mention hearing Berkshire Vice-Chairman Charlie Munger offer pithy and, for the most part, politically incorrect commentary on the world at large—is well worth the trip to Omaha.

Now, Buffett’s profile has been elevated far beyond that small stage in the Omaha Qwest Center to a world political stage in recent years. He has been advising both Hillary Clinton and President Obama on economic matters for some time, and was part of the economic advisory team trotted out for the cameras shortly after the election.

One might have hoped, therefore, that a kind of “What Would Warren Do?” sense of long-term thinking and sound fiscal management would have informed the stimulus package now on its way through Congress—particularly given President Obama’s above-quoted determination to “act boldly” in the face of the current economic crisis.

It did not.

So mediocre, so full of more-of-the-same is the $787 billion package passed by the House that it appears Congress has attacked the economic crisis by asking itself not “What Would Warren Do?” but, more like, “What Would Sears Do?”

Just take a gander at the three largest components of the $787 billion spending bill from two points of view: “boldness” and stimulus.

First, about $300 billion goes for existing programs and existing infrastructure: $87 billion for state Medicaid programs; $54 billion to subsidize state budget deficits; $40 billion to extend unemployment benefits; $27 billion for highways and bridges; $26 billion to schools for special education; $20 billion to increase food-stamp benefits; $21 billion for laid-off workers’ health insurance; and a $17 billion increase in Pell Grants.


There is also—our personal favorite—$5 billion in aid to states to do whatever they want with.

Worthy as that $300 billion may be, and we express no opinion on the merits of any of these particular programs, not one dollar of this $300 billion is even remotely transformational, nor is it “acting boldly.” Nor does it stimulate much.

It is more like $300 billion worth of running-in-place.

A second $200 billion of the $787 billion House bill is comprised of various tax cuts: $115 billion in $400-per-worker tax credits; $70 billion to taxpayers hurt by the alternative minimum tax; $14 billion in one-time payments to the elderly and poor.

Transformational? Hardly. Stimulative? Well, without, again, reflecting on their merits, we point out that Congress granted tax rebates last year in excess of the $115 billion in this bill, and consumer spending stabilized for a month or two, but that’s about all it was good for.


Now, given that these first two slugs of the $787 billion—which add up to $500 billion—do little more than keep things where they are, the third slug is, therefore, where you might expect to see some “bold” thinking.

You’d be wrong.

A measly $8 billion for mass transit, but $10 billion to construct NIH buildings.


A rounding error's worth of $1.3 billion for Amtrak, which needs more like $130 billion and some real management if America is ever to move off highways.

Then there's $7 billion for broadband Internet to rural areas, which Google could probably figure out how to do for $70 million.

Oh, and Congress wants $1 billion for airport screening equipment: apparently we need more of those GE “puffers” that sit unused at West Palm Beach airport because, as one screener told us, the only time these explosive-dust-sensing devices actually sound an alarm is when they malfunction.

Then there's $3 billion to defray new car taxes, and $5 billion in accelerated depreciation for business. And a whole lot of pork.

Indeed, anybody looking for “boldness” in a stimulus plan ought to look not at our Congress, but at China’s, whose $587 billion stimulus plan allocates a full 15% of its funds, or $88 billion, to adding 5,150 kilometers of new track and five high-speed passenger lines, in one year.

China can do this because, among other things, that country implemented a long-term rail plan four years ago, when our Republicans and Democrats were too busy conjuring up tax breaks to encourage ethanol production—as a sop to the farm lobby, the oil lobby, the highway lobby, and every other lobby that helped write this $787 billion “stimulus” bill—to bother with long-term thinking about anything so mundane as breaking America's addiction to fossil fuels.

Nancy Pelosi, as much a part of the problem as any of ‘em, had perhaps the most archetypically banal comment on the whole thing:

“By investing in new jobs, in science and innovation, in energy, in education ... we are investing in the American people, which is the best guarantee of the success of our nation.”

By our calculations, less than one-twentieth of the $787 billion House “stimulus” package relates to anything like science and innovation and energy and education outside the public-school-monopoly this bill enforces.


Mainly it goes to existing institutions, doing their mediocre, Sears-like thing.

Almost nothing goes for truly “bold” initiatives of the type China is pursuing, and our President insisted needed to be done:

“We have a once in a generation chance to act boldly, turn adversity into opportunity, and use this crisis as a chance to transform our economy for the 21st century”
—Barack Obama


We agree with that sentiment. But Congress didn’t do anything even close.


Worse, it looks like the former Senator from Illinois is going along with his erstwhile colleagues for the ride.


In Part II, we will look at how the so-called stimulus money will actually get spent. (Hint: badly.)


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

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.




Tuesday, February 10, 2009

How to Lose 60% in Less Than a Year, Without Bernie Madoff


Cablevision Taps Debt Market Again

In another bid to bolster its balance sheet, Cablevision Systems Corp. returned to the junk-bond market Monday to raise an additional $500 million in debt….

Cablevision also said it expects to take an impairment charge of between $350 million and $450 million for its newspaper group. The group includes newspaper Newsday, which Cablevision acquired for $650 million last year…
—The Wall Street Journal


Who in their right mind thought spending $650 million for Newsday—a marginal newspaper in a media-saturated market, being peddled by a desperate seller into a fatal newspaper down-cycle—was a good idea?

Nobody outside Cablevision that we know of—not even one of Wall Street’s Finest—thought for one minute Cablevision had a shot at even getting its money back, let alone making a reasonable rate of return.

But Cablevision does what the Dolans want to do, and so the poor non-Dolan Cablevision shareholders must now watch as their company absorbs a $350-to-$450 million write-off on last summer’s Newsday purchase, before the next year’s baseball season has even begun.

We here at NotMakingThisUp have some familiarity with Cablevision, aside from writing a here-we-go-again piece on the Newsday purchase last May (see “Hold the Presses: Rupert Outbid!” from May 11, 2008).

First, we’re a captive customer of Cablevision thanks to the non-efforts of our state’s wildly popular and entirely incompetent attorney general, who seems more comfortable going after brutally competitive but politically unpopular businesses like gasoline retailers—while leaving consumer-mauling monopolies like Cablevision to take care of themselves, at the expense of those who can least afford it.

Second, we’ve studied the economics of the business, as well as rapidly emerging—and free—alternatives, enough to believe that the cable monopolies have left themselves as vulnerable to the internet as the music companies were when Napster came along. Lest you think we’re making this up, ask the nearest teenager if they’ve ever heard of, and used, Hulu.com. You’ll be astonished what they’re watching.

For free.

So perhaps the Dolans really do now have shareholders’ interests at heart—at least that’s the refrain we hear every time “Jimmy” buys something stupid, or write down the value of something stupid he bought, or meets with Wall Street’s Finest, or fires another Knicks GM.

But even if the Dolans really do “get it”, they might have gotten “it” far too late to matter.


Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

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.

Monday, February 09, 2009

First Came TARP, Then TALF…Introducing RALPH



Iceland told its people to, literally, go fish. Italy is bailing out cheese makers. And the United States is bailing out, well, nearly everybody.

There’s TARP (“Troubled Asset Relief Program”), and TALF (“Term Asset-Backed Securities Loan Facility”), and any day now our new, tax-forgetful Treasury Secretary—how’s that for change we can believe?—will be announcing still more programs to cure what ails the world.

But we here at NotMakingThisUp suggest a far simpler program than TARP and TALF. We call it RALPH (“If Reed And Lots of his Pals want to pay Higher taxes, let ‘em”).

The genesis of our proposal is a recent New York Times Op-Ed piece by Netflix CEO Reed Hastings, in which the purveyor of DVDs by mail pleaded with the Feds to raise his income taxes:

Please Raise My Taxes
I’m the chief executive of a publicly traded company and, like my peers, I’m very highly paid. The difference between salaries like mine and those of average Americans creates a lot of tension, and I’d like to offer a suggestion. President Obama should celebrate our success, rather than trying to shame us or cap our pay. But he should also take half of our huge earnings in taxes, instead of the current one-third….
—Netflix CEO Reed Hastings, The New York Times, February 5, 2009



Now, we here at NotMakingThisUp admire the job Mr. Hastings has done building an unlikely business model (DVDs by U.S. Mail) into a thriving public company.

And we are all for tax fairness.

Indeed, the current gap between the capital gains tax rate of 15% and the top earned income rate of 35% has created what Warren Buffett likes to point out is the unsavory spectacle of well-paid hedge fund managers and private equity mavens paying 15% tax on income, while the cleaning lady toiling in those same offices is paying as much as 35% on her meager salary.

Of course, Buffett does not mention that he himself ran a hedge fund before devoting himself to Berkshire Hathaway in 1969. Back then, the top income tax rate was 90%, and Buffett the hedge fund manager received the same favorable capital gains tax treatment that he now criticizes.

Furthermore, when Buffett was asked via email by “Douglas from Alexandria, Virginia” on CNBC last year why he doesn’t just pony up the extra cash and send it to the Feds, Buffett fumbled:

“Well, I don't—I don't say generally people. I think the lower class, the middle class, even the upper middle class are paying more than they should be paying. I think that the super rich, like myself, you know, my tax rate was 17 and a fraction percent in 2006, and everybody else in the office was paying way more. I'm not advocating tax increases across the board at all. I'm advocating a redistribution to the super rich….”

Still, we think Douglas was onto something.

So we propose RALPH.

After all, if Reed Hastings and Warren Buffett really want to pay higher taxes, why not let them?

Last we checked, the IRS Form 1040 allowed taxpayers to check a box sending $3 to fund the Presidential Election Campaign. And there are lines allowing adjustments for foreign tax credits and child care credits, self-employment taxes and AEIC payments.

Why not a line called “The Reed Hastings 50% Tax,” in which any taxpayer may voluntarily authorize a 50% tax rate on Mr. Hastings’ “huge” earnings, Warren Buffett's billions, and anyone else who wants to pay more?

Mr. Hastings would be happy, Warren Buffett would be thrilled, and the U.S. Treasury might get fatter.

And “Douglas from Alexandria,” and the rest of us, would find out exactly who shares the desire for a higher tax rate on their declining income.



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

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.

Friday, February 06, 2009

The Box Pandora


The cab driver pulled onto 101 South and accelerated into the first curve of the empty highway a little too fast for my taste, but I didn’t say anything just yet.

Then he really floored it, and I started getting nervous.

It was still dark, only 5:30 a.m., and I had plenty of time before the flight, but the guy kept accelerating, and moved into the far left lane even though all four lanes were empty.

The suspension was a little shaky and the cab seemed to float across the lanes without actually gripping anything, and my mind started racing with the various ways the vehicle could kill me before we reached what most people actually worry about—the 3,000 mile cross-country flight.

I didn’t especially want to die in a mundane, unremarkable accident at the hands of an anonymous cabbie whose face I couldn’t make out in the pre-dawn light and whose only hint of a psychological profile was the electro-pop synthetic musak he’d been blasting when I got in—the kind I associate with amyl-nitrate users—so I wasn’t exactly thrilled to be floating across lanes on bald tires in a car driven by a complete stranger whose only claim to expertise in his chosen field was the fact that he had a license to drive a cab, and happened to be parked out in front of my hotel at 5:15 a.m.

So I did what I usually do to get the driver to slow down: I asked him a question.

“The hotel seemed pretty empty,” I said, over the music. He took his foot off the accelerator and turned down the radio. “Is business down or is it just the time of year?”

“Is both,” he said, with an extremely thick accent that suddenly made him more real and less threatening. He explained that there aren’t any conferences in town this week, and it’s usually slow this time of year.

But also, he said, business is down. “Hotels—not full.”

We were now doing a good ten miles an hour less than before, and had drifted back into one of the middle lanes.

I asked him where he was from.

“Ukraine,” he said. Turns out he’s lived in San Francisco for 16 years, following his sister, who had settled there. But he had some relatives in New York. “Brighton Beach,” he said. “You know it? Little Russia.” He pronounced it “'leet-el.'”

I asked what he thought of Putin, and he immediately brought up the Russian invasion of Georgia, which seemed like five years ago but in his mind happened yesterday. He became loud and animated.

“Bad, very bad.” Words flew out of him and tripped him up. “Big mistake for Russia,” he said. He spoke like an actor imitating a Russian immigrant speaking English, and motioned outside at the highway ahead of us. “Ossetians shoot into Georgia each night,” he said, pointing at imaginary rockets flying from one side of the highway to the other. “Every night they shoot rockets, guns. So Georgia fight back.”

“It was bad mistake for Russians. Bad mistake. Now oil go down—it was hundred fifty dollar a barrel, now fifty.” (Pronounced feeef-tee.) “So not rich now, nobody have money. Some have money, many have no money. So maybe now they invade for territory, but what happens instead...” he stumbled over a long word I couldn’t make out.


He looked at me in the mirror and fumbled for the phrase. “They open the Box Pandora?” he said, asking if I understood.

Mangled and thick as those words wore, it struck me as one of the most beautiful phrases I’d ever heard anyone say, in any language. “Ah, right. Pandora’s Box.”

“Yes, the Box Pandora. Is bad now for Russia,” he said, satisfied. “Very bad.”

Yes, the Box Pandora is very bad now for Russia indeed.



Jeff Matthews

I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

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.

Monday, February 02, 2009

Congress’ New Motto: 220 Years and Still Not Listening!


Legislators Seek Hedge-Fund Disclosure
—by Jenny Strasburg, the Wall Street Journal

Sen. Grassley in a statement last week called for "some sunlight" to be shed on hedge funds and their investors, adding that both groups have fought hard to retain secrecy. The bill he and Sen. Levin introduced also seeks stricter controls to prevent money-laundering through hedge funds.



The first United States Congress opened for business almost 220 years ago—on March 4, 1789, in fact.

218 years later, we were invited to testify before Barney Frank’s House Financial Services Committee, along with several, more distinguished representatives of the hedge fund business.

The subject was, in effect, what should be done about this hedge fund thing.

The Congresspeople asking the questions ranged from the earnestly inquisitive (North Carolina’s Mel Watt) to the fatuously brainless (New York’s Almost-Senator Carolyn Maloney).

Are hedge funds too big?, they asked. What if a big hedge fund failed?, they wanted to know.

Nobody asked about Lehman Brothers, or Fannie Mae, or AIG.

The collective answer from our side of the table was, generally speaking, that while hedge funds were indeed big, it didn’t seem much would happen if a big one failed.


After all, since Long Term Capital nearly brought down the system a decade ago, the hedge fund business had grown so broad and deep that a $10 billion hedge fund (Amaranth) had recently gone down without so much as a ripple—thanks to hedge fund counterparties with the capital and the desire to take Amaranth’s positions, at discounted prices.

The various Congresspeople might have listened to what we said, and could have maybe learned something, except that most were in the room for the time it took to make their statement, look serious for the cameras, and then run out to another meeting.

Which may be why, two years later—after the world financial system has been brought to its knees not by hedge funds but by the investment banks and mortgage providers whose donations helped all these Congresspeople get elected, and re-elected—we find that Congress is thinking maybe it should regulate those darn hedge funds more closely.

So we suggest a new motto for Congress: 220 Years and Still Not Listening!



Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC


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.