On Twitter

Sooner or later, I feel I needed to share my thoughts about Twitter; since I have added some 1,000 or so followers in the past few days, this seems like a good time as any to speak up.

I have probably been using Twitter on and off for close to two years. From the start, I have had a love-hate relationship with the platform, for a variety of reasons. Initially it was largely a case of poor stability and reliability, then as Twitter made it into the mainstream, it seemed as if it was one too many communications channels – both inbound and outbound. As a result, I have a history of using Twitter in periodic bursts of activity, becoming disillusioned, swearing it off for awhile, then eventually poking my head back in to see if I should give it another test drive. If it sounds like a crazy process, I tried the same approach with classical music for several years and one day suddenly discovered I was in love. (Fortunately, I never took this approach to dating…)

In the last two months I have finally made my peace with Twitter. There is no longer any love or hate, but I think I have finally come to terms with how I would like to use this communications channel. The easy part is outbound communications, where I have decided to differentiate my Twitter posts from the blog by focusing on three areas, in descending order of importance (at least as I see it):

  1. ‘Retweeting’ commentary and analysis (largely but not entirely investment-related) that I believe deserves a wider audience
  2. Notifying readers of a new post up on VIX and More
  3. Offering impromptu comments about intraday market activity

For those who are interested in following me on Twitter, you can find me at Twitter.com/VIXandMore

From my perspective, the more difficult side of Twitter has always been inbound communications, where I prefer not to drink for the proverbial fire hose in real time. I have found that I can keep up with only 2-3 dozen of my favorite Twitter sources – and only for those who tweet no more than a few times per day. So while I get only a small slice of the Twitter community, I get quality input in real time. For the other 300 or so of my regular sources of information, I can always grab their RSS feeds via Google Reader or Bloglines and read the material at my leisure.

I have tried a variety of applications which I thought might significantly improve my Twitter experience, including TweetDeck and others, but none of these has revolutionized my Twitter experience. For my purposes, the best Twitter application I have used so far is Twitterfall, which I first heard about in Traders Atwitter Over New Apps from Theresa Carey’s excellent Investor Brain blog. Part of the reason I have become a Twitterfall fan is that I can use it to set up filters for keywords such as VIX and VXX – so I can scan the entire Twitterverse in real time to see what is being said about these subjects.

Going forward, I hope to continue to use Twitter as an extension of the blog, to highlight some interesting links as I happen upon them and to offer some intraday market commentary that is probably more appropriate for a microblogging platform than for posting in this space.

Ask Mr. Dealmaker

EDITOR'S NOTE: In our neverending quest to inform, entertain, and titillate our Devoted Readership, the editors of this publication have decided to inaugurate an exciting new series on this site, entitled "Ask Mr. Dealmaker." Designed to encompass the educational brilliance of Ask Mr. Wizard, the career savvy of Lucy Kellaway, and the psychological sensitivity of Dear Abby, this new feature will appear at irregular intervals according to the unpredictable whims of our senior writer and the volume of interesting mail in our mailbag.

Should you have a question about the nature of today's global capital markets, the real, unvarnished life of a practicing investment banker, or just exactly how tall Steve Schwarzman really is, please send a stamped, self-addressed e-mail to epicureandealmaker [at] hushmail [dot] com. Should our columnist detect any redeeming value whatsoever in your query, he will respond to it in these pages as soon as he wipes the tears of laughter off his face. Unless you have a burning wish to see your identity splashed all over the worldwide interweb, the Editors strongly recommend that you use an alias in your correspondence.1

* * *

Well, I can't believe those bastards in the Editorial Office have pushed yet another harebrained scheme onto Your Hardworking and Underappreciated Correspondent. I guess the publisher is getting a little freaked out by the relentless approach of The Permanent and Irrevocable Death of Journalism As We Know It.

He's such a pussy.

Anyway, we found one dusty letter at the bottom of the mailbag, so let's go.


Dear Mr. Dealmaker —

I am an MBA student who is graduating from [redacted] Business School this year.

I am concerned that the recent financial crisis and turmoil in the global economy has tarnished the perception of an MBA degree in the eyes of the public. I have worked hard to complete my degree, and I want to make sure that people view my accomplishment in the proper light.

As you may know, some of my colleagues here at [redacted] have published a code of business ethics for managers under the title "The MBA Oath." Several commentators I respect have written favorably about it.

Do you think it would be a good idea for me to sign the Oath to show my allegiance to proper business conduct principles?


Confused on the Charles
Cambridge, MA

* *

Dear Confused on the Charles

Don't bullshit me, son. You're not worried about your reputation; you're worried about getting a job.

And given that MBAs are about as welcome in corporate America as an international tax audit, you should be. You and your MBA peers are struggling desperately to come up with some gimmick that will make the thirteen firms across the country who are still hiring trust you enough to offer a second round interview. So some cleverboots at HBS came up with the MBA Oath and stole somebody else's lunch money to print up a bunch of laminated cards for your wallets. Good luck, I say.

Here's the deal: as a marketing gimmick, the Oath is pretty slick, but as a way to generate trust among others, it sucks. For one thing, it is voluntary and self-selected. Attila the Hun, Joseph Goebbels, and Caligula could all have signed the Oath, and for all anyone knows their modern-day MBA equivalents did, too. In fact, bad guys with zero ethics have the greatest incentive to sign up to such schemes, because they hope whatever good juju accrues to the thing will rub off on them and blind victims to their misdeeds until it is too late. Everyone pays lip service to good ethics, you know, especially the bad guys. Just wait until a signatory blows up the next Enron or Madoff Securities, and then see what your precious honor code is worth.

For another thing, it suffers from the drawback that it was written by MBA students. These, as everyone knows, are formerly intelligent individuals who have been exhaustively retrained to generate clotted, jargon-ridden bureaucratese in place of straightforward, honest prose whenever possible. The thing sounds like a Fortune 100 company mission statement. (That, if you need to ask, is very low praise indeed.)

I am not opposed to public codes of behavior for functional elites. I think they can be useful reminders to their members of shared principles and values that should be cultivated. But the shorter and more general they are, the more powerful they become. Semper Fidelis, Ars Gratia Artis, and "Eat at Joe's" are good examples of this. Reconstituted along these lines, the MBA Oath would probably sound a lot like "Don't do bad things," or "Be good."

Put this way, you can see just how empty and/or disingenuous such pablum really is. Be good to whom? When? How? Under what circumstances? To whose detriment? Unlike loyalty to your comrades, artistic integrity, or even devotion to your neighborhood beanery, ethical behavior in a business context is never straightforward or simple. A businessman constantly makes decisions which harm some real or potential stakeholders, because business is composed of and affects a staggering number of people who have different and often competing interests. Business ethics are situational, which is merely to say that they depend most heavily on the particular set of circumstances and decisions at hand, rather than on some inflexible itemization of principles printed on a playing card. Often, a business decision which triggers ethical thinking is a choice among lesser evils, or one which minimizes harm, rather than maximizing good. And you have to pick and choose which oxen are going to get gored—shareholders, employees, taxpayers, etc.—because somebody has to take it in the neck.

There are no cookbook approaches to this kind of stuff. You either have ethical principles and try to apply them to the best of your ability, or you don't. If you do, the most important resources you will need are integrity and courage. If you don't, then, well, we'll probably see you on the cover of Fortune magazine one of these years.2

Sadly, for your purposes, integrity and courage are not attributes that translate well to a resumé or a job interview. But realizing that they are what matter, and saying so honestly to whomever asks, will generate a hell of a lot more credibility than reciting a laundry list of politically correct business ethics bromides. It will be up to you to prove you have the stuff—both to yourself and others—when circumstances dictate.

In the meantime, if you want my advice, here it is: Leave the Oath, take the cannoli.

Ta for now,


1 Incoming letters will be edited for length, content, style, and in any other way TED feels would contribute most to general hilarity and malicious ridicule. You have been warned.
2 Whether as a hero or a goat (or both), I will leave as an exercise for my readers.

© 2009 The Epicurean Dealmaker. All rights reserved.

The Spectre of Default

Governments the world over are hoping to publicly borrow their way out of the stupendous mess created by the private financial sector. They are thus engaging in a monetary and fiscal experiment of Titanic proportions, steering a patchwork ship of State constructed from traditional Keynesianism and radical free-market ideology. Unfortunately, they are either blind to, or are nervously whistling past, the largest iceberg field in the history of economic navigation.

We are not going to escape unscathed.

Let's quickly set out what went wrong: oceans of debt blew asset bubbles for everything from clapboard houses and dinky mortgages to smelly shares, hedge funds, LBOs and 2/20 private equity funds. If an "asset" as much as fogged the mirror it was sliced, diced, indexed and leveraged to the hilt, transformed into a creative financial "product". A private banker friend told me two years ago that his nouveau riches customers from as far afield as Bangalore, Dubai, Sao Paolo and Moscow cared about one thing and one thing only: how many times can I leverage this baby up? At the top, if the answer was less than 40-fold they just sniffled and turned their noses away. (That's 97.5% margin, in case you were wondering..).

What happened next, predictably enough, was a debt crisis of historic proportions - and it's still going on. Amazing isn't it, how the newest generation of suckers always jump with glee into the oldest trap in the world* ?

Debt In The Yihaa !! Era

Governments, particularly in the U.S., are now desperately trying to avoid their biggest bugaboo: persistent asset deflation through debt destruction. Why? Because most assets are held by that tiny minority of the population for whom the golden rule applies (he who who owns the "gold" makes the rules). The vast majority of the rest have debts. To get a sense of the vast divide, in 2007 half of all American families had a net worth of $58,000 or less. By contrast, the top 10% had a net worth of $4,000,000 on average.

Chart: Federal Reserve

For a pluralistic republic like the U.S., does it make any sense to salvage the top 5-10% of the population's assets by placing more debt on the shoulders of everyone else - who already own next to nothing? Would it not be better to work out a debt default and reduction plan, instead of pumping the debt bubble even bigger?

But, mention debt default by (intelligent) design during a polite conversation and watch it grow hot and indignant - that's the moralistic Protestant Ethic weaving through most of us, I guess. Putting it another way, the Spectre of Default haunts, increasingly with as much fear as the other one did, back in 1848.

I am starting to believe that what America ultimately needs is a modern-day Solon and a healthy dose of seisachtheia.


* A short aside about the benefits of a comprehensive education in financial history: an acquaintance just told me he is convinced the economy is on a solid rebound track. When asked how he came to this conclusion, he proudly assured me had taken one (1) year of economics at college, some 20 years ago. Yes, indeed, there's one born every minute... So, at least, read a bunch of books before sententious certainty sets in, eh?

It’s about Chime

In practice:

One that almost got away

CHW Could Chime Communications (CHW) be one of many companies that traded at incredibly cheap prices in February and March, but have since rebounded so strongly the value has all gone?

The share price fell below 40p, briefly, and it’s now well over a pound, partly because doomsday was cancelled, or postponed, sometime in April, and partly because Chime did so well in 2008.

Its ten-year price earnings ratio is less than six, much higher than it was, but still well inside bargain territory. Chime’s results to 31 December 2008 reveal an increasingly profitable, less indebted company which combined with the low share price is enticing, especially considering its bullish update in May.

Rubbing the noses of its bigger competitors, chairman Lord Bell announced double digit rises in sales, profits and margins over the first quarter in 2008.

You’d expect a PR and marketing agency to come up with good reasons to be cheerful, and here they are, straight from the annual report:

  • PR. The results confirm that public relations is weathering recession better than advertising and market research. Chime’s Bell Pottinger division brings in 55% of operating income, which offset weakening performance in other divisions in 2008.
  • Fear. Chime says never have corporate reputations been more important than now, when so many lie in tatters. The answer, apparently is corporate responsibility, communicated by Chime 24/7.
  • Government spending. Chime trumpets a number of Government contracts including Hepatitis C awareness and saturated fat campaigns.
  • Foreign revenue. Chime also represented Zambia’s new president Rupiah Banda in the election he recently won, a demonstration of the international sales that account for 60% of revenues.

There’s no shortage of colourful clients for the company that once promoted democracy in Iraq and defended Greg Rusedski against doping charges, but, set against these stories, and the equally impressive numbers, is the possibility, some would say probability, of a ‘double-dip’ recession. We’ve already seen what can happen to a company like Chime’s share price when investors fear economic meltdown.

Most media companies suffer in recessions, yet Chime has done worse in stockmarket terms than the media sector in general, despite other constituents, like TV companies and newspaper publishers, facing unprecedented competition from the Internet.


The conventional wisdom, never to be trusted, but borne out by Chime’s results, is that ‘reputation management’, as the PR industry is rebranding itself, is a growth business in the Internet age.

Admittedly Chime’s grown by acquisition – a common way to blow shareholder’s money - taking over at least 19 companies since 2000, four as recently as 2007, and it was rebuffed in May by Next Fifteen, another group of PR agencies and related marketing companies.

Chime made three more very small acquisitions in 2008, and it probably owes about £15m over the next five years for past acquisitions. If they perform well enough, it could owe more than double that in cash and shares.

During the dot.com crash, it almost paid the ultimate price for its expansiveness when profits collapsed and high levels of debt forced it to renegotiate its banking covenants and sell-off one of its companies.

Perhaps memories of its flirtation with insolvency still linger with investors. But Chime had no bank debt at its financial year end and its financial director says it’s keeping cash and its £32m debt facility as a bulwark against more economic distress.

It may have learned, and since Next Fifteen’s price had collapsed from almost a pound to less than 30p earlier this year, Chime’s approach seems opportunistic. If so, we can hardly blame it for chasing value, when that’s exactly what a value investor would do.

Considering shares in a company that has recently trebled in price, as Chime’s have (almost) is a sterner test because we know much of the potential in its low-price has evaporated.

Remarkably, though, the value doesn’t seem to have boiled away completely.

Next Fifteen (NFC), and larger rival, Huntsworth (HNT), also look worthy of inspection.


Surprise! Former Share Sleuth pick (PDF), Games Workshop (GAW) says that its profits are likely to be ahead of expectations, while Yell, not a favourite, could breach its banking covenants.

In theory:

Terrific telly

Watch the demise of Merrill Lynch and Bank of America on PBS, through the eyes of the bankers, John Thain and Ken Lewis. It’s terrific telly.

The Economist leads where blogging will follow, incredibly.

Jeff Matthewslast word on this year’s Pilgrimage to Omaha reveals Charlie Munger, not Buffett, as the true star of the Berkshire-Hathaway festival. Here’s some of his worldly wisdom.

June 22, 2009 Stock Market Recap

Well so much for my guess about the bears disappearing ahead of the Fed meeting. Today's selloff did a lot of technical damage to the charts, especially with respect to moving average breaks. Probably the most-watched breaks were the S&P 500 breaking both its 50 and 200-day averages. But I also saw tons of individual stocks slicing below one or both of those averages. T2108 (% of NYSE stocks above their 40 DMAs) gives us a good idea of how stocks are breaking down with its 42% drop today.

Back in April I linked to Dr. Duru's post about the rare technical sighting of T2108 above 90. I pointed out then (as I always do) that I don't like to use T2108 for tops. In the past I've found it to work much better at bottoms than tops (it worked well at the January top though). I guess it takes longer for people to snap out of a greed phase and to allow a top to form. The S&P 500 rose another 10% since it first cracked 90 and even now is still up about 4%. So I'm not sure what's the best use of T2108 at tops. Perhaps it could be implemented as some kind of early warning of froth.

What's of interest to me now is how close T2108 is getting to 20, which has been an important bottom signal. That signal worked like a charm for years but fell apart, like so many other indicators did, in last years market massacre. I'll be keeping a close eye on it over the next week or so.

Here are the index charts.

Trend Table

Some downgrades today.

TrendNasdaqS&P 500Russell 2000

(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
Lat Indicates a Lateral trend

*** I'm simply using the indices' relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.

Surprises of The Amazon Kindle

On mother's day we got a Kindle for my wife and she hasn't been able to live without it since.  Thank you Amazon.  In many more ways than one, it is a wonderful device, so good that it makes me debate whether every family member should have one.  But for now we are sharing it.  I am reading the kids "The Treasure Island" every night, and for myself, I am reading the Russian Classic "The Brothers Karamazov" by Dostoyevsky.  I chose that book because, it was well recommended by a few friends, and one in particular who called it the best book he's ever read. So much for that. Here is how this story about new technologies for old habits gets funny. Unlike a book, The Kindle is a tablet so you don't really know how far you are into a book, unless it tells you.  With a physical book, you can, with one look kinda know where you are.  The Kindle solves that problem by putting a progress bar in the bottom that tells you what percentage you are into the book. So when I started "The Brothers Karamazov", it started by showing me that I was 1% into the book.  But after 3 weeks of reading, I noticed that I was still at 1%.  I slowly got nervous.  I was hoping that every time I pressed "next page" I'd finally get to 2%, but no, I seemed to be stuck at 1%. Then I started thinking: "How long is this book for God's sake?".  At this rate, it will take me 3 years to finish it.  I knew these Russian's wrote long books, but holy cow. Then finally I asked my wife, about this bizarre phenomenon, and she took one quick glance at the Kinde and threw it back at me saying something like: "look at the title of the book you ordered, you..." I did and there was the answer. I had not downloaded The Brothers Karamazov, but instead: "The Complete Works Of Fyodor Dostoyevsky" D'oh!  No wonder I'll be stuck at 1% for a lot longer. So here is the lesson for Kindle and new technologies for old habits.  With an Electronic tablet, you may not know exactly what book you are reading!!  On a physical book, you get that confirmed every second you look at the book.  With a download, mistakes can happen.  Something as basic as knowing what you are reading is a potential failure point with a digital tablet.  Who would have thunk it?


The Capital Spectator will be taking a few days off, returning to what passes as normal around here on Friday, June 26.


Another former Fed club member weighs in today on how/when/if the Fed unwinds the massive monetary stimulus it's created over the past year. Frederic Mishkin, a former FOMC member, summarizes the problem and the potential in today's Wall Street Journal, observing that there's good news and bad news embedded in the recent rise in long-term interest rates:

"One cause of the rise in long-term rates is the more positive economic news of the past couple of months, particularly in financial markets. The bad news is that long-term interest rates are higher because of concerns about the deteriorating fiscal situation, with massive budget deficits expected for the indefinite future. To fund these budget deficits, the Treasury has to sell large quantities of bonds both now and in the future, causing bond prices to fall and interest rates to rise."

Speaking of expectations, what's the market thinking? Based on the previous close of Fed funds futures on CBOT, traders think the central bank will begin tightening the screws ever so slightly in the second half of the year, as per the chart below. To be sure, there's still no inflation on the radar screen and it's not yet clear the economy has stopped contracting. But markets have a tendency to look forward. That doesn't make them right, but it doesn't stop them from considering the full range of possibilities and placing odds on what appears to be the most likely outcome.

The geeks shall not inherit the earth

“I am indeed rich, since my income is superior to my expense, and my expense is equal to my wishes.”


-       Edward Gibbon.


The brief of Eric Beinhocker’s outstanding ‘The Origin of Wealth’ (Random House, 2007) is to address the questions: what is wealth ? How is it created ? And how can we create more of it ? But it also, almost incidentally, explains how the current banking crisis happened.

To read more,

Download The geeks shall not inherit the earth

Creation Science, oil drilling, naked shorts and constitutionally protected stock fraud

I once – unfairly perhaps – questioned what passes as mainstream conservative thinking as anti-scientific. The real target was greenhouse gas denial where the debate has gone (a) the greenhouse effect is not real to (b) yes – it is but it not caused by humans and then it will go to (c) but we can’t do anything about it anyway. I figured (fairly) that if you deny the science you wind up getting counted out of the debate. The “conservative” line was a fast-track to irrelevancy.

The reason why my criticism was unfair was that I used “creation science”, a realm of pure science denial, as a club to beat conservatives with. And I was rightly pulled up.

However I had what was – in my view – a market test of whether creation science was garbage. And that was that there were plenty of oil companies spending cumulatively billions of dollars on oil exploration using methods of finding oil (eg fossils of seeds and weeds) that were consistent with evolution and inconsistent with creation science. However I could find nobody who spent even a few million drilling for oil based on creation science.

This blog however corrects its mistakes. There is a serious oil company that does drill based on biblical texts and creation science. I was plain wrong.

So I give you one of the promotional websites of an oil company (Zion Oil and Gas) with a market cap of about $100 million.


And – just because these things should not go to waste – I give you one of their many YouTube promotional videos. In that video they got to ring a stock exchange opening bell. Creation Science is – it seems – at the heart of American Capitalism.

This ungodly liberal with his own creation myth (evolution) stands corrected.


PS. Don’t bother looking – you can’t short the stock. There are no securities available to borrow – and naked short selling – that just isn’t allowed.

If you need to know who is behind this then Mother Jones started the work, and Richard Bartholomew nailed it. It turns out that it is promoted in religious publications by the well known preacher and Christian Zionist Hal Lindsey who does not dislcose his family's substantial holdings.

I will refrain from again making a case for naked shorting because I can't see any real social benefit in aggressive hedge fund managers sharing when Hal Lindsey fleeces his flock. We can keep the losses in the fundamentalist family without any major social detriment.

And on this - I pity the SEC. If the promoters hold the belief in oil in Israel as true religious belief it will be very hard for the SEC to go after them. Even if this is as transparent a scam as Mother Jones thinks it will be hard to prove. Did the Founding Fathers mean to constitutionally protect stock fraud?

‘Woodstock for Capitalists’ Concluded: “The Edge of Death” and Other Matters

Lost Bragging Rights; Credit Default Squeeze Explained; Student Loan Business Unexplained; A Nephew Married and a Suspicion Confirmed; Charlie Munger, Rational to the Last; a Final Breakthrough Foretold

Lost Bragging Rights and a Mystery Explained

Warren Buffett loved his Triple-A credit rating.

He mentioned it frequently, and spoke of its importance as far back as his 2003 shareholder letter:

Among the giants, General Re, rated AAA across-the-board, is now in a class by itself in respect to its financial strength.

No attribute is more important…. When an insurer lays out money today in exchange for a reinsurer’s promise to pay a decade or two later, it’s dangerous – and possibly life-threatening – for the insurer to deal with any but the strongest reinsurer around.

In 2004 he crowed even louder about it:

Gen Re’s financial strength, unmatched among reinsurers even as we started 2003, further improved during the year. Many of the company’s competitors suffered credit downgrades last year, leaving Gen Re, and its sister operation at National Indemnity, as the only AAA-rated companies among the world’s major reinsurers.

So it is no big surprise when a shareholder at the Berkshire Hathaway 2009 shareholders meeting asks about the recent Moody’s downgrade of the Berkshire companies’ debt two levels, from AAA to Aa2, on “the severe decline in equity markets over the past year as well as the protracted economic recession.”

And it is no surprise at all when Buffett promptly admits that losing the Triple-A rating bugged him:

“I very much liked having a triple A. I was disappointed when Moody’s downgraded—we didn’t think that was gonna happen, but it did. It does cause us to lose some bragging rights.”

What is a surprise comes when, in the course of discussing the downgrade, Buffett reveals the answer to a mystery which prevailed for months prior to the meeting: what
caused credit default swaps on Berkshire Hathaway—certainly nobody’s idea of a teetering financial institution on the brink of collapse—to soar to levels associated with companies more like Sears?

Turns out that, as we here at NMTU had ventured to guess (see “Is Buffett Worried? No, but Somebody Is,” from November 20, 2008), the spike had been caused by counterparties to the index put options Buffett had sold—prior to the market collapse—buying protection on Berkshire, driving the price of that protection up to absurd levels.

Here’s how Buffett explained it:

“When we write an equity put option—a billion dollar put—and somebody pays us $150 million, we get the cash and set up a liability. The other guy takes $150 million out of cash and sets up a $150 million receivable.

“Now, as the world has developed, the value of that asset has increased and he reports that through earnings, and we report that as a loss. BUT, we’ve got the cash, and he’s got an asset that’s due in 15 years or something.

“Now, his auditors say, you have to go buy a credit default swap [on Berkshire] to protect yourself against that receivable going bad…”

Hence the spike in credit default swaps on Berkshire Hathaway, which for a period of time made the Oracle of Omaha's 44-year-long accumulation of cash-generating businesses and insurance “float” appear to have no more going for it than Sears Holdings Corp.

Buffett concludes the discussion—by way of making his shareholders feel better about contracts that were, at that point, billions in the hole—with the observation that as the price of the credit default swaps increased, the cost to the counterparty of maintaining that put option soared.

“It explains why people may want to modify their contracts with us,” he adds, smugly.

One Industry Not to Expect Warren Buffett to Buy Into

“The only thing out of bounds,” Buffett likes to say before the questions begin, “is what we’re doing now.” But that doesn’t stop shareholders and money managers from fishing.

And, sometimes, they catch something—but not necessarily what they’re looking for.

Asked by a Montclair New Jersey shareholder to talk about the student loan industry—currently under a cloud given the recent near-death experience of Sallie Mae—Buffett lets Munger handle the question.

It turns out to be the briefest answer the entire day, and no doubt a disappointing one to the shareholder from Montclair:

“We don’t know a lot about it,” Munger says. Period.

For Buffett and Munger not to know a lot about a business…well, that’s one business not to expect Buffett and Munger to buy into any time soon.

Suspicion Confirmed

The clocks in the Qwest Center arena are approaching 3 p.m.

The crowd has thinned out, and the question and answer session is almost over.

The 51st and last question of the day now comes—oddly enough—from a young man with a microphone, standing in the audience near the front of the stage.

I say “oddly enough” because up until now, the meeting has been run entirely differently from years past.

Instead of shareholders asking questions unfettered from one of a dozen microphones placed around the Madison Square Garden-sized Qwest Center arena, Buffett chose three reporters—Carol Loomis of Fortune, Becky Quick of CNBC and Andrew Ross Sorkin of the New York Times—to ask questions submitted via email. In between each reporter’s turn, a shareholder chosen by lottery asked a question.

This new format distinctly limited the kind of “What Would Warren Do?” questions that had come to dominate the proceedings, and made for a much more relevant set of questions.

It also, however, slowed things down.

After all, when a person stands at a microphone to ask a question of the world’s most successful investor and his equally intelligent (and highly acerbic) business partner, that person doesn’t want to look like an idiot in front of 30,000 people and a worldwide press corps.

Thus, in years past, the questions—though generally off-topic, and sometimes way off-topic—tended to be asked quickly, and to the point.

That same person, however, when emailing a question to one of the three reporters, may write to his or her heart’s content.

And that's why the questions from the reporters today—even the really good questions—have tended to be verbose and sometimes convoluted, none more so than the one about Berkshire’s derivatives exposure, which conjured up “Slim Pickens in 'Dr. Strangelove' riding a nuclear bomb” and much other flowery imagery to make a simple point—i.e. that Berkshire’s derivatives positions had cost a bunch of money, and what did Buffett think of that?

Furthermore, although Buffett himself started the meeting by highlighting the new format—“They’re all Berkshire Hathaway-related questions…. We had a problem where they drifted off the last couple of years: what we should do in school, that sort of thing”—he hasn’t exactly been forthcoming in responding to those Berkshire-related questions.

Buffett has refused to do a post-mortem on the General Re acquisition; failed to address a great question on the difference between the money-center banks that collapsed and one (Wells Fargo) that didn’t; professed ignorance of earnings management at one of the most earnings-managed companies in the world (GE); and dismissed the Index Fund-style 2008 performance of the four money-managers in the running to succeed him at Berkshire with a figurative wave of the hand (“They did not cover themselves in glory, but I did not cover myself in glory so I’m more tolerant,” he said blandly).

Indeed, one of Buffett’s favorite questions the entire day was entirely theoretical: What would Buffett have done had he been in the same position as Bank of America’s Ken Lewis, who felt pressured by Paulson and Bernanke to withhold making public the deterioration of Merrill Lynch during the financial crisis?

Boy that’s a great question,” Buffett says enthusiastically, then turns the question on its head. “If I’d been in Ben Bernanke’s or Paulson’s situation would I do differently? We were in a fragile situation in September, if B of A had rejected Merrill on a material adverse change clause…. I’m gonna ask Charlie what he would do.”

Munger stirs in his seat and says simply:

“You can criticize the original decision to buy Merrill and the contract they signed, and that would be legitimate, but once they signed that contract I believe the Treasury and B of A behaved honorably”

With Buffett wondering out loud what he would do if he’d been Ben Bernanke or Hank Paulson, a suspicion—that he actually prefers answering the “What Would Warren Do?”-style questions to the strictly-business questions in which he might embarrass a member of the extended Berkshire family in front of 30,000 people—takes root.

And it is confirmed when the young man with the microphone standing in the audience asks the 51st question of the day.

The young man’s name is Alex, and he wants to know “how we can improve the economy.”

“We can do what the government wants us to do and spend, and housing formations are important. I don’t know if that gives you any ideas or not.” Buffett says suggestively.

The young man then turns to a young woman beside him: “Mimi, you’re my best friend, would you be my wife?”

It’s a set-up. The couple embraces, the audience applauds, and Buffett concludes the day’s question-and-answer session on a decidedly non-business note:

“I have two comments to make. Alex is my sister Doris’s grandson, my grand-nephew; and Mimi is terrific.”

The meeting is over. The crowd disburses.

Charlie Munger, Rational to the Last

If, by concluding the session with a grand-nephew's marriage proposal in front of 30,000 people, Warren Buffett appears to affirm the transformation of the Berkshire annual meeting into something more pep rally than business meeting, Charlie Munger has changed his own contribution to the proceedings not one bit.

In fact, Munger has added more to the proceedings than in recent years, although always in the same rich, deeply skeptical, highly moral vein that made him sentimental favorite of a good portion of Berkshire’s “quality shareholders.”

Asked how to improve the “financial literacy” of Americans, Munger says dourly,

“I don’t think you can teach people high finance who can’t use a credit card.”

When Buffett is asked whether he uses “a normal free cash flow over the discount rate” calculation in making investments and responds with his standard line—“If you need to use a computer or calculator to make the calculation, you shouldn’t buy it”—Munger adds:

“Some of the WORST business decisions I’ve ever seen is when people do these complex calculations. The worst I’ve ever seen was when Shell did that with Belridge Oil.”

(I still have the Lucite paper-weight with the tombstone ad announcing that deal from almost exactly 30 years ago. Merrill Lynch, my alma mater, helped do some of those “complex calculations” for Shell.)

And when Buffett defends his ownership of Moody’s—the ratings firm that contributed mightily to the subprime crisis by slapping Triple-A ratings on junk assets—Munger says:

“I think the ratings agencies eagerly sought stupid assumptions…it’s an example of being too smart for your own good.”

But Charlie Munger is no grumpy old man. He is, above all things, rational.

A discussion of recent stability in lower-priced housing markets, improved home affordability and the current high rate of absorption—Berkshire owns the second-largest real estate broker in the country, and Buffett notes that household creation is running nearly three times the current construction pace—brings this matter-of-fact observation from Munger:

“If I wanted to buy a house in Omaha, I’d buy a house tomorrow.”

Defending last year’s no-better-than-S&P 500 performance of the four investment managers in the running to succeed Buffett, Munger says:

“I don’t think we would WANT a manger that could think he could just go to cash on a macroeconomic basis and then jump back in…we can’t do it ourselves.”

Dismissing a question about last year’s decline in Berkshire’s stock price, Munger focuses on the future:

“What matters is this, our casualty business is probably the best in the world; our utility business, if there is better utility I don’t know it…and I could go down that list. And if you think it’s easy to get into that position Berkshire occupies, you’re living in a different world than I inhabit.”

Charlie Munger is, as always, thinking big thoughts.

And some that are more philosophical than have ever been expressed at a public shareholder meeting.

A Final Breakthrough

Asked about the potential returns from Berkshire Hathaway by a shareholder who notes that Berkshire’s book value has grown 20% only once since 1995, Buffett focuses on the numbers:

“It’s absolutely impossible that we’ll come close to a figure like 20%...we hope that we achieve a few percentage points better than the S&P 500 a year. If we get a couple points better—I’ll feel better.”

Munger, on the other hand, focuses on the intangibles:

“I think this company will make a big and constructive contribution to its surrounding civilization in the years to come.”

Asked if Berkshire’s “sustainable advantage is largely you,” and what happens to this advantage when he is gone, Buffett first jokes that this focus on his eventual demise is “Defeatism,” then argues the sustainable advantage is the culture “embedded” in the Berkshire businesses—a culture reinforced by this very meeting:

“Our culture, our managers, our shareholders JOINED that culture, it gets reinforced all the time, they see that it works… it’s meaningful because there will be people that want to join up with us and they won’t have a good second choice.”

Munger goes a step further:

“A lot of corporations in America are run stupidly from headquarters as they try and force the divisions to come up with profits every quarter that are better than the last quarter…and a lot of problems creep into that business.”

He finishes that profoundly insightful knife at the heart of American capitalism with a hint of his own brand of fatalism:

“While Warren and I will soon be gone…the stupidity of management in the corporate world will likely remain to give Berkshire a competitive advantage in the future.”

Yet it is when Buffett and Munger are asked about the potential for economic upheaval in these uncertain times that Munger comes through with the most remarkably philosophical answer to a question at any annual meeting:

“Well now that I’m so close to the edge of death,” he says matter-of-factly, “I find myself getting more cheery about the economic future. We are going to harness the direct energy of the sun...

“What I see as a final breakthrough—you can see it coming over the horizon. I think it’s usually a mistake to think only about your probable misfortunes, it’s good to think about what’s good about our situation.”

Charlie Munger, rational to the last.

Good to think about, indeed.

Jeff Matthews
I Am Not Making This Up

© 2009 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.

June 18, 2009 Stock Market Recap

Strictly based on technicals I'd say that we're set up for a bounce. My short-term stochastic readings show the indices the most oversold they've been in about five weeks. They're also just starting to lift off of support levels. However, tomorrow is a quadruple witching expiration day so there's no telling how that will impact the action. Looking out to next week I don't expect to see much activity ahead of Wednesday's Fed decision -- not that I think they will actually do anything. My guess is that, absent any major news, the bears will go into a mini hibernation and the market could just float higher early next week ahead of the Fed. Hopefully we'll get some volume back into the market after the meeting and get some clarity on short-term direction other than sideways.

Research In Motion Limited (RIMM) is all over the news tonight after reporting earnings. It traded down near its 50-day moving average immediately after the report buy bounced back during the conference call. Technically, I like the bear case on it since it broke that April trendline. But I wouldn't want to initiate a short position with it being so short-term oversold. A weak bounce back near that broken trendline could be a gift for the bears.

Trend Table

No changes.

TrendNasdaqS&P 500Russell 2000

(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
Lat Indicates a Lateral trend

*** I'm simply using the indices' relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.

A Mighty Wind

I wash my hands of this shit.

I have stated my case about the prospects and proper outlines for reform of financial regulation in this country before. Apparently, no-one with any scratch or power to do anything either a) read those pieces, b) agreed with me, or c) gave a rat's ass what I think. Fine, have it your way.

As you already know, Obama, Geithner, Summers, and crew have released their 85-page white paper outlining the Administration's proposed reforms. The most I can say about it on a family website is that it appears to have been composed with the objective of winning an obscure federal competition for the white paper which uses the largest number of capitalized initials and incomprehensible acronyms in a single document. There certainly seems to be little actual policy content of interest discernible in the mess. (Although I have sent a copy to NSA cryptographers to see whether it is really a cleverly disguised instruction manual for the conversion of sugar beets into synthetic diesel oil. It does sort of look like organic chemistry.)

Of course, everybody else in the commentariat and his hamster has already weighed in on the plan. Feel free to expose yourself to this spectrum of opinion, if you will. For those of you with limited time or tolerance for having your face sanded with a cheese grater, however, let me offer up my comprehensive, unbiased summary instead: [ white noise ].

It just doesn't fucking matter.

* * *

Many members of the punditocracy, including your Frustrated and Increasingly Irritable Correspondent, have commented at length on what is charmingly known as "regulatory capture." This is the phenomenon—most aptly demonstrated by the historical relationship in this country between the financial sector and its regulators over the last several decades—whereby the regulatee worms its way into the mind, practices, and governing philosophy of the regulator to such an extent that it effects something like a reverse Stockholm syndrome. The regulator adopts the objectives, goals, and mindset of its supposed charges, and becomes hostage to the institutions it is supposed to regulate.

Let me suggest here that this conception, while empirically valid, is at once both too narrow and incapable of explaining why the current Administration, with the mighty wind of a once-in-a-generation financial system collapse and the massed voices of millions of pitchfork-toting Americans at its back, has been unable to deliver a policy document which is worthy for use as anything other than toilet paper in the visitors' restrooms on Capitol Hill. Rather, in order to understand this epic regulatory fail, we need to broaden our concept to encompass the idea of complete inside-the-Beltway capture.

Forget the no doubt significant fact that substantial portions of the Administration's regulatory proposals were authored by products of a government-to-industry-to-government merry go round like Hank Paulson, Larry Summers, and Tim Geithner. Forget the fact that the Administration is said to have consulted heavily with industry participants and lobbyists for input on proposed regulations. No, what really matters at the end of the day is that the Commodity Futures Trading Commission is overseen by the House and Senate Agriculture Committees.

"Agriculture committees?," you say, "You're shitting me, right?"

Sadly, no, I am not shitting you.

* * *

You see, the story goes that the West Wing politicos read the tea leaves and figured out that the most important and effective thing they could do to reform financial regulation in this country—consolidate the current alphabet soup of ineffectual, overlapping, squabbling bureaucracies into a coherent, unified agency that would be able to regulate entities across markets and industry subsectors according to what they do, as opposed to what they are—was politically impossible to get through Congress. Too many Congressmen and Senators have made a lifetime meal ticket out of the industry lobbying and political contributions that come from the financial sector, and too many have accumulated meaningful institutional leverage within their legislative bodies by virtue of membership on powerful regulatory oversight committees. Through various historical accidents and parliamentary shenanigans over the years, oversight of the grab bag of financial regulators has gravitated toward a host of separate and often competing Congressional committees. There is no way on God's green earth that any Congressman in his or her right mind (or the rest of them, for that matter) would give up that kind of political power voluntarily.

And, notwithstanding concerted efforts by certain elements of the conservative press to the contrary, Congress has largely escaped blame for the situation we find ourselves in. Sure, there are good arguments that political and legislative agendas over the past decades helped contribute to the financial sector pile-up we have just lived through. But let's face it: no-one in this country honestly believes their Congressman or Senator knows anything about finance, derivatives, or the capital markets. Based on recent evidence, it would take a heroic effort to convince them otherwise (and you would still have to explain Maxine Waters). No knowledge, no culpability. Congress has gotten off largely scott-free.

But this is the problem. If the voting public truly believed Congress had been an integral part of the problem, the Administration would have a legitimate political rallying point and enough momentum to push through a regulatory plan that entails a parallel shake-up in the committee oversight apparatus in Congress. We might have ended up with a plan that combined the regulation of securities with the regulation of their siamese twins, derivatives, in the form of a merged SEC and CFTC. Instead, the only existing regulator to get the axe is the pathetically underpatronized and unprotected Office of Thrift Supervision. Good riddance, I say, but it's sad that it has to take the pipe alone.

So here we are, with a proposed Administration reform which leaves the regulation of derivatives—the most complicated, sophisticated, and dangerous financial instruments we have, and ones which have enjoyed the least supervision and created the most havoc of any such instruments out there—firmly under the purview of an agency which is overseen by a bunch of tobacco-chewing, cowboy-hat-wearing hayseeds. Hayseeds, by the way, whose brilliance and incorruptible devotion to economic welfare and the public good has been demonstrated by their support of corn ethanol and agricultural subsidies. Fucking socioeconomic geniuses, these guys.

* * *

I have said it before: if you want to regulate financial geniuses, you had better employ some of your own. It'll cost you, but it will work. Otherwise, you are stuck with trying to control international drug dealers with helicopters, numbered Swiss bank accounts, and high-powered machine guns by using broken-down beat cops with bad knees and rusty six shooters. Law enforcement and the military have figured it out: you need elite units with state-of-the-art training, weapons, and esprit de corps to tackle the nastiest, smartest villains. When will it occur to the dim bulbs charged with supervising our financial system that they need the same set-up?

Apparently that is a bridge too far for these times. From all indications, whatever political momentum the Administration anticipated for financial reform has already begun to dissipate, even for the pathetically watered down trash they offered up yesterday. Barring some additional financial catastrophe, it appears that we will be stuck with even more ineffective bullshit regulation in the future.

Which, frankly, is just fine by me. As I said, I would have much preferred a more streamlined, effective, and efficient financial regulatory regime. Better regulations and rules not only would have helped create a healthier financial system for all of us, but also would have made the regulatory burden for the majority of us in the industry who try to make an honest living less stupid, inefficient, and nettlesome. Smarter and more effective regulators would be quicker and easier to deal with, and could actually speed and guide industry innovation for everybody's benefit. Enlightened and knowledgeable Congressional oversight could help regulators adapt and respond to inevitable changes in industry structure and environment. And actually appearing like we know what the fuck we are doing for a change might inspire other countries around the world to cooperate more closely with us in developing coherent international regulatory regimes.

But investment bankers adapt. Change is the water we swim in, the air we breathe. We will adapt to whatever stupid new regulations and incompetent, undertrained, overmatched new regulators you throw at us. And we will come out on top, as always.

It's just too bad we're gonna have to charge you extra for the added headache.

© 2009 The Epicurean Dealmaker. All rights reserved.

Partners vs non-partners – clarifying their role and importance

I was at a Dealmaker Media event the other week and was asked a question about the role of entrepreneurs dealing with partners vs non-partners at venture capital firms. Its a very interesting and relevant question for many entrepreneurs starting out who are unfamiliar with the fund raising process. Since I’ve been in both roles, I think I have a pretty good perspective on this dynamic. To differentiate the roles, I’ll actually split them into two groups, not based on title, but on their “authority”. From my experience, it really comes down to check-writers and non-check-writers, Hopefully this distinction is fairly self explanatory but really comes down to  do they have the authority to decide (obviously with the general agreement of the other partners in the fund) on whether they will fund a startup or not and serve on the board. Rarely do even check-writers decide completely on their own – that’s why they call it a partnership since there is a level of trust, influence, and sharing of responsibility. Titles, just like in companies, often mean very different things in venture capital firms. With titles ranging from Analyst, Associate, Senior Associate, Vice-President, Principal, Senior Principal, Operating Partner, Associate Partner, Venture Partner, Principal Partner, Partner, General Partner, Managing Partner, Managing Director, etc – it can get confusing very very quickly. Basically, its really hard to tell who is a check-writer vs not. VERY GENERALLY, if forced to bucket them, the breakdown is (not 100% across firms but maybe 90% accurate)
  • Check-writers – Managing Director, Managing Partner, General Partner, Partner
  • Non-check-writers – Analyst, Associate, Senior Associate,  Operating Partner, Associate Partner
  • Can go either way – Vice-President, Principal, Venture Partner, Principal Partner
The unfortunate thing (or fortunate depending on your perspective), even VCs (not just entrepreneurs) themselves often can’t tell the different when it comes to another firm unless they are very familiar with that particular firms structure and the individual’s involved. It gets even more complicated because many non-check-writers at firms want to project to the outside world that they can write-checks (trying to boost their credibility and influence in a firm to the entrepreneur) even though they can’t. Essentially, if you want funding, you need to get to a check-writer (pretty obvious at this point). They will be the one who champion’s your deal in their partnership and can push to get it funded – putting their own reputation on the line with their decision. The area that is less clear is the role of the non-check-writer. Simple advice – they are valuable and can be your greatest ally or your worst barrier to getting funding, but they are often a necessary and intermediate step to get to the check-writer. To get into more detail, the non-check-writer (typically an associate) is often the “first line of defense” for a VC firm. They are responsible for screening deals so they at least pass the initial sniff test. Unless you get a trusted referral directly to a partner in a firm, the
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