JP MORGAN - IT MAY NOT BE THEIR FAULT...THAT'S HOW DESPERATE THE FIRMS ARE TO ACHIEVE RETURN.

What happened at JP Morgan is not even the tip of the iceberg.  Capital markets cannot be traded successfully using huge leverage without catastrophic breakdowns.

The Background:
1. Wall Street firms were allowed to go public.  Allegiance was no longer to clients and partners but to public shareholders.
2. The fixed commission structure of the industry was gotten rid of and in its place was put a negotiated commission structure.
3. The money management industry, aside from the brokerage industry, developed control of commission generating assets.
4. As the profitability of the historic Wall Street model deteriorated, greater risks had to be taken in order to achieve increasing shareholder profits and for brokerage executives to earn high compensation (financial dangers were somebody else's problem).
5. It didn't matter how much risk the firms, took the money no longer belonged to them.
6. Shareholder profits overrode fiduciary responsibility.
7. Most Wall Street fortunes have been made on fees from other people money.  Very few Wall Street employees have made their fortunes investing in the markets they recommend to their own clients.
8. Large financial  organizations all hire public relations firms.  Its hard to separate fact from fiction or where the PR takes over from the reality of the controlling people in management.
9. Jimmy Dimon should have to produce his investment portfolio to see if the methods the bank was using with other people's money was being used in the same manner in his own portfolio.
10. We already know that Warren Buffett only wants to buy back Berkshire shares near book value, but he buys publicly traded companies that trade many times above book value which makes no sense whatsoever.
11. The very survival of our Capitalist structure depends on a slow unwinding of the gambling in trillions within our savings institutions.
12. Even if a half dozen people at JP Morgan can understand what was going on, what would happen if God forbid,  these half dozen people had an accident in a plane or car...no one could ever pick up the pieces.
13. Lastly, Congress is elected for only two years and 98% of the Congressman know absolutely nothing about the banking system.

We should stop worrying about the sexuality of people and begin the arduous task that lies ahead. If we try to escape from this we will fail.

ROOSEVELT DID IT...I GUESS OBAMA DOES TOO...

The Obama Presidential campaign continues to disrespect the intelligence of the average American.

An Obama advertisement currently running states that women are discriminated against in the workplace. According to Obama's political ad, women receive 70% of the pay that men do for the same job. Clearly if that was true, it would be wrong.

These ads are information that is out of context and not true.

1. How long has the woman been doing the job compared the man?

2. How well does the woman do the job and on what criteria compared to the man?

3. What is the average age of the woman compared to the man?

4. What is the level of education of the woman compared to the man?

5. How effective is the woman doing her job compared to the man?

It is highly misleading to just state on public TV that women are discriminated against.

Did this misleading President mean to say that the government pays women less money than men for the same job with the same experience? Did he mean to say that the people that flip hamburgers in a food chain are paid differently based on gender?

I don't think so. If we can run ads based on gender we can run ads based on religion, color and everything else.

What companies is he talking about, etc? By the way, President Roosevelt's secretary, Missy, was paid $5,000 dollars per year in the 1940s, while men with the same job were paid twice as much. If it's true Mr. President, is it still true in your administration? Is that what you are really talking about?

We need a more educated nation so politicians like yourself can't run these kinds of distorted advertisements.

If this was really true Mr. President what have you done in the last four years to correct this so-called injustice?

BLOG OF THE DAY

Unfortunately Obama is such a leftist, probably a socialist deep in his mind, that he wants to raise taxes as the economy weakens.

What a sad story...

YOU CAN'T UNDERSTAND WHAT YOU DON'T READ...

I was responsible for handing out a pool of money to several money managers. They all seemed to have pretty consistent performance records (a couple of points plus or minus the yearly averages) and they averaged among them about sixty companies in their portfolios.

Other things being equal, I decided the money would be placed with those money managers who knew, at the least, the basic financial information of the companies they owned.

I want to put this in perspective. Each portfolio manager owned approximately 60 different companies. Each one of these companies issued an annual report and a SEC form called the 10K. In addition, each of these companies issue quarterly reports called the 10Q. Each of the companies issued at least another 15 financial releases of one sort or another throughout the year.

Since the average 10K is over 100 pages and the average 10Q is about 50 pages this means that for each company a portfolio manager, wanting to know about their investments, would read over 400 pages per company per year. Multiply this times 60 times for each company in their portfolio and you would be reading 24,000 pages. On each of these pages there are hundreds of numbers, thousands of words, hundreds of footnotes and confusing accounting explanations.

The SEC, in its great wisdom, along with other regulatory agencies has provided such extensive historical data on companies that practically no one is capable of effectively reading and analyzing the tons of data.

So the question we were going to put to the managers, most of whom ran billions of dollars, ran along the following lines, what are the sales of company, what are their gross margins, how many shares were outstanding along with similar other questions. Over 80% percent of the questions could not be answered by these very skilled money managers.

So what good does all the disclosure do the average investor if most skilled money managers aren't using it? We all know that over time professional money managers don't tend to outperform the major market averages and the value added is more towards portfolio structure and asset allocation. The average and sophisticated investor is not capable of getting any value from the pages of risk disclosure in financial reports.

Money managers cannot effectively use 24,000 pages of annual data. Their brains won't be able to parse the information effectively.

So what's to do. That's for another blog.

THE OBAMA SONG..."COMING TO AMERICA"

Tom Friedman is a writer. He is also a part of the so called one percenters. I wonder how many occupy wall street people or left wing democratic liberals think of him in those terms.

He has written a lot of excellent books, he is one of the great journalists, extremely hard working etc. etc. etc.

In his June 13th editorial on page A23 of a New York newspaper, he made what I consider to be a major and serious almost critical misanalysis of the European and Middle Eastern political situation. He wrote about how the unification of Europe is not working and how in the Arab world they are falling back into "sects, tribes, regions and clans". At the end of the editorial he wrote the following astonishing analysis of chaos.

"When countries with such different cultures become this interconnected and interdependent, when they share the same currency but not the same work ethics, retirement ages and budget discipline-you end up with German savers seething at Greek workers and vica versa".

Now I am going to rewrite this sentence to try to bring his analysis into the context of our own country. The words that I'm changing are highlighted.

When people or states with such different cultures become this interconnected and interdependent, when they share the same currency but not the same work ethics, retirement ages or budget discipline you end up with anyone who is not in the one percent club seething at the well to do.

If Tom Friedman's editorial about the collapsing European and Middle Eastern communities is even close to correct, we should expect as a responsible writer that he point out that we are on the same path.

President Obama is using the "bully pulpit" to fan the flames of jealousy and class warfare.

As long as the public school building I went to which is now 100 years old and the black and Hispanic children attending are failing at standardized tests and a man of "change" changes nothing of importance, there goes our chance for excellence. Jealousy and class warfare will only make matters much worse.

Is what's happening in Europe and the Middle East the canary in the coal mine?

BLOG OF THE DAY

The left-wing democrats are claiming the Romney does not support teachers, police officers or firefighters.

There are several things these three groups have in common among others.

One - They are all government jobs.
Two - They are all Union jobs.
Three - They are all groups that have attempted to use fear as a basis for taxpayer's support.
Four - They are all paid for with tax dollars.
Five - We pay for these services whether we want them or not.

If you don't support the teachers, you wont get education for your kids. If you don't support the firefighters, your house will burn down and if your don't support the police officers you will be attacked by the "hoards".

These jobs are called "essential" services.

Now think about it this way. If food isn't delivered to the super market, is that an essential service? If medicine isn't delivered to the drug store, is that an essential service? If the pharmacies and doctors don't do their jobs, is that essential services? If your dog is sick, is your veterinarian an essential service. How about a gas station - I guess that's an essential service too.

The left-wing unionized workers unions have found ways to differentiate themselves from the rest of us so that what they do is an "essential" service. Essential is defined as union.

Obviously Candidate Romney salutes the work done by ALL essential services as does President Obama.

The difference is Romney is looking for ways to increase the size of the economic pie whereas Obama just counts votes.

YOU WANT TO GET A GOOD LAUGH...

New York City's Mayor Bloomberg wants to tax soda because some people think its a significant contributor to obesity and bad health. Okay, so we pay a tax on soda, you can drink soda if you want to or not.

But here is the kicker...Mayor Bloomberg owns a TV station that espouses financial advice day after day after day. People lose money on much of what is said on these kinds of financial news channels.

So if soda is bad, so is inaccurate, incomplete or misleading, second to second financial commentary.

Obviously we should tax the people who watch financial TV channels because they may be harming their financial well being, just the same as soda.

No wonder we can't grow the economy.

THE ONLY WAY OUT (ORIGINALLY PUBLISHED 8/8/11)

Time magazine, in its recent edition, shared a superb article on the complexity of the American Civil War. Its really a must read for those of us trying to maintain a historical grasp of this time in our history.

Among what may or may not be one of the more minor points of the article by Mr. Drehle, was the statement "One of the blessings of being able to set up shop on a new continent was that Americans never had to be defined by clan or tribe or region."

Unfortunately, as we grasp to believe this statement has credibility, the fact is it's untrue and as we will see in a moment, contributes significantly to the dimension of our economic problems.

We no longer argue over the wrongness of slavery of any sort, or about the right to equal education between men and woman, but we do argue incessantly, in subtle and direct ways, about inequality of economic wealth.

Walk down Fifth Avenue in New York, among many other places, and what you find is doorman or two, possibly a security person in the lobby, and maybe even an elevator man. Go down to Florida, and behold the many gated communities which are ostensibly for the wealthy but are significantly upper middle class, and look for the myriads of security men driving around in each community.

We may not be being defined by clan, but we are being defined by other things like wealth, education and expanding rights.

It can be said that if you can afford to live in a better neighborhood or have a bigger boat or whatever, you're barely a welcomed part of society in many places. Very few of the people on Fifth Avenue or in our many gated communities would give up these security amenities. These types of social segregation by, "class", are known to not work in the long term interest of democracy. Let us ask why not...

Jealousy among tribes, clans or economic classes is part of the mosaic of mankind. Unfortunately the jealousy as it exists, requires so much security that it's bad for everyone and does not get to the root cause of why.

Awhile back in one of my blogs, I wrote that no one can argue about everyone having available the so called amenities of living in our type of society. I stated that this could only come about if the thrust of the nations policy was to create wealth and wealth and wealth. I stated that wealth should not be gotten illegally or immorally, but it would be good for everyone if we figured out how to increase it. I've been met with some hostility on my emphasis on wealth. Simply put, the size of the pie has to grow so the slices can be bigger and someday of equal size.

The wealth of this country basically flows through the system. Therefore, other things being equal, the more flow the more volume. It is well known in economic circles that tax policy has been used to incentivize those areas of the economy that the prevailing government deems in the nation's interest. Depletion deductions for resource companies are meant as an incentive to seek more resources. Mortgage interest deductions are meant as incentives for people to buy homes, apartments, create jobs and demand for building products. Charitable deductions increase donations for organizations in need. Taxes on cigarettes are meant to reduce consumption of a very harmful product, and on and on it goes. If these so called loop hole deductions are taken away or reduced, I think it would indicate that the whole concept of targeted tax incentives was counterproductive. Without going into this too deeply, taxes are just another expense, no more and no less, to individuals and corporations. As a general rule, any expense including taxes, can reduce consumption or in a corporate sphere, contribute to higher prices.

The idea is to incentivize wealth creation and then decide the best we can whether the free flow of the market forces or more centralized controls, will push wealth retention in more economically productive directions. It can be argued that allocation of cash flow by corporations to buy back their own shares at inflated prices is a misallocation of free cash flow. For managements to tell their shareholders that they are returning wealth to them from share repurchases, can in many cases be shown to border on the absurd. We all know that the government also makes mistakes. It's real simple because people make mistakes. If we decide the government can increase wealth more effectively than wealth creators, so be it. This is pretty unlikely to occur.

We should always clamp down on the schemers. We have to let it be known that America is a land of equality before the law, a land where prejudices are unacceptable; but not a guarantor of equality of results. In summary, we are on a journey that can only be properly served when the doorman and the gates come down, and the poor and the rich can walk among each other with a feeling of dignity and safety.

BLOG OF THE DAY

Obama is so bad I can't even figure out what to say about him.

CONTROVERSIAL BUT TELL ME WHERE I'M WRONG..

I lived in a unionized family for alot of years.

There is so many words written in so many media that to believe that my words have any impact on others would be folly. So you could say that I write my blogs as a record of my thinking to myself. Very few people care what I say nor should they. I'm just one person that does some good stuff but slides along in the vast cauldron of life along with all my readers.

A newspaper in New York runs so many articles that are replete with misleading information. A particular article I am referring to is "The College Gap Leaves Some Cities Behind".

If you dig a little deeper you would see that the largest number of union workers live in California and just over half live in just six states.

One of those six states is Ohio. Ohio is the state in which the city being referred to in the article is located. National statistics show that black people have the highest union membership rate in the country and they also have a lower college graduation rate than other races.

When we fix the reasons behind the unionization and lower education levels we will go a long way from not having to write distorted articles in national newspapers.

For those of you that may think this sounds like a biased article I remind you that I was not only brought up in a unionized family but I also spent 10 years in the Fifth Avenue Armory in the midst of Harlem. There were three white guys in my unit. I can say that I was never better treated, accepted and had tons of friends.

If we don't look at the real causes of headline articles we will never fix the real problems that show up on the surface but are not even close to the cause.

BLOG OF THE DAY

A PARENT'S NOTE TO A CHILD...
Some people are always perpetual victims. It's my teacher's fault, it's my father's fault, it's my mother's fault, it's everybody's and everything's fault but my own. If you stay up late, if you don't concentrate, if you don't set reasonable goals, if you make wrong decisions and you know that they are wrong, you are responsible and even more as you grow older.

Set three good goals such doing well in school, jumping an extra foot and improving your social behavior.

Love ,
DAD

EVEN THE BEST STRUGGLE...

From time to time we like to keep track of the investment performance of our old associate, Lew Sanders.  This has academic interest to me since he truly is a real smart guy,.  If man with his brains can't outperform the S & P 500, it speaks volumes as to the difficulty of the "Average Joe" trying to outperform the market.

The only real access we have to his portfolio performance is a website called Tickerspy which aggregates the portfolio holdings of investment firms based upon SEC filings. Sanders Capital, his recently formed investment firm, seems to have been under performing the market averages in most time frames that I can find reported on the Tickerspy website.

For example, figures on Tickerspy show that the S & P 500 return is approximately down 3% for the last three months, while the Sanders portfolio seems to be reported down 8%.

For the latest 6 month period the S & P 500 shows a return of about 12 1/2 %, while the Sanders portfolio shows a return of about 3 to 4 %.

If these figures are close to  correct, they don't say much during this short time frame for the value added by the Sanders Capital group.

In my opinion, there is no such thing as value investing and since Lew is as good as it gets, in terms of academic knowledge, indexing is still alive and kicking.  

PRESIDENT OBAMA IS A BIGOT?

This blog may be highly controversial.  I will keep it short. For whatever my blogs may have been worth, I consider this to be by far the most significant.

For whatever reasons, justified or not, antisemitism towards Jewish people has been a long term historical reality.  In the mid 1800's after a relatively long period of Jewish attempts to integrate into European society, it became apparent that no matter what methods of assimilation the Jews tried, antisemitism remained.

Out of this period grew a series of Jewish responses; Jewish enlightenment, Socialism, Immigration, Zionism and Westward migration.

I have had a difficult time trying to really put my finger on why I didn't like President Obama.  He is educated, young, a family man, hardworking, likes dogs and kids, etc. and certainly not stupid.  A politician par excellence.

And now for the kicker.

Unfortunately a very significant number of the Jews became socialists, communists and today would be called left-wing liberals.  There was a strong feeling that if all people became very similar, the universal man if you will, then the Jews would be able to blend in and antisemitism would disappear. We all know that this assimilation attempt failed.

Today we know that the antisemitism against Jews was a prejudice and generally not predicated on Jewish failings, any more or less than any other group.  If you go and watch the TV today you will see our President calling for "prejudice" against people he believes to be rich, rather than explaining to the masses how our system works and how we tend to benefit immensely from creation, entrepreneurship, investment of wealth, etc.

Just as the Jews tried to leave their areas of settlement and find new homes to not be attacked, you will find more and more builders of this nation looking for ways to separate.  The Facebook founder who gave up his US citizenship to move to Singapore is the very beginning, no wheres close to the end.

So in summary, I hate to say it but our President looks to me like a bigot who instead of attacking the Jews, has chosen a campaign strategy of attacking the successful, both were small minority groups.

Let's hope that this bigotry will be just as unsuccessful as antisemitism.

ATALANTA SOSNOFF INTRODUCTION...

My original blogs were meant for young people starting their careers. Negotiation among people is a complex matter.  Most of us, when we are young, know next to nothing about the strategic and emotional concepts of negotiating contracts.

This little vignette is dedicated to protect you from predators (including yourself), in the give and take of contract signing.

The original contracts at the founding of Sanford Bernstein and Company were endlessly thorough. I was able to have included many protections against partners who could turn out to be devious.  At that age, I did not grasp the full extent of the causes of human aggression and deception.

Bernstein was smarter than I was and had included in the contract, a minimum ownership under all future possibilities.  I was naive enough to cave into pressure from two of my partners and accept a lesser form of ownership rights after 72 hours of intense negotiation.

In the end there was a loophole that enabled Bernstein, Hertog and Sanders to vote to diminish my responsibilities.  I should never have agreed to that loophole and it was a serious learning experience which I vowed to never do again.

Along the way while I was President at Bernstein, I was discussing with Martin Sosnoff his joining of the firm as Chief Investment Officer and significant shareholder.  He decided to stay with his own company where he was in partnership with someone else.

Finding my situation at Bernstein not to my liking I left the firm.  I had six other offers of significance to join new firms but decided because of close friendship with Martin (a brilliant and unique man) that I would help him build his company, Atalanta.   Several people would join me from Bernstein including their Chief Financial Officer Harvey Siegel, an extraordinarily bright operations executive.

Not wanting to repeat the same contractual errors I made in the Bernstein negotiation, I insisted on a much stronger contract with Atalanta and was given a substantial portion of the firm, for which to this day I am grateful.

Through the efforts of several people we were able to build Atalanta from about $150 million in assets to almost $6 Billion from 1980 to 1986.  The firm was extremely profitable and I estimate had the highest assets under management per major owner in the industry.  Along the way we went public.  That is really the episode that I suggest caused the firm to go from $6 billion in assets when I left to only $2 billion a few years after my departure.

The point is, although I had a much stronger contract in many respects than my preceding contract with the Bernstein organization (which in my opinion would not have existed had I not joined the firm), as it turns out the new contract with Atalanta was not strong enough.

Although Atalanta was one of the largest money managers for the Catholic Church, Mr. Sosnoff decided to become a major shareholder in Caesars World.  Most of his shares were held in margin accounts.  During the market decline of 1987, Caesars went from about $30 to $10 which caused huge margin liquidation, wiped out a fortune and resulted in a depletion of the Atalanta assets.  Unfortunately these assets didn't recover to the 1986 highs for many, many years later.  I don't believe the firm was ever as close to as profitable as it was when it was a private entity.  There are three major ways to become wealthy, build a profitable business, take the business public, and make concentrated investments using as much margin and leverage as you can.

But today's kind of long vignette is really about Green Mountain Coffee and how ego traps even brilliant people. Recent history is replete with the effect of leverage on the downside, the most recent of which is Green Mountain Coffee.  Caesars World recovered in price. Although I don't know the Green Mountain story, it may also recover. Even Chesapeake Energy, which is a similar leverage in reverse catastrophe, may live to see another day.

In my next blog about Atalanta I will tell you what happened.

BLOG OF THE DAY

Yesterday an analyst at a major brokerage firm forecasted that the price objective for Green Mountain Coffee was $51.  When the report was written the stock was trading in the high $40's.

Today Green Mountain is trading at $27 a share, down from the high $40's in one day.  This analyst is still predicting a price objective above $50.  If we want to clean up the research side of the investment business one way to do this is to tell this analyst to take his entire paycheck and buy Green Mountain stock in the $20's.

Who wouldn't  do that if you could double your money?  It's a strange world.

FEES BEFORE ALL ELSE...

It wasn't long ago that a company called OpenTable was a "hot stock" selling at over $100 a share.  It recently was trading at $36.  It wasn't long ago that American Airlines was considered the premier airline.   American recently filed for bankruptcy.  Research in Motion was the leader in cell phones and sold at $140 a share and now trades in the low teens.  General Motors had double its market share. Microsoft was being sued for antitrust right before competition for its operating system exploded. First Solar and the other solar companies were hot stocks selling for many times their current prices. Netflix was a $300 stock a year ago and is now $75.00.   Green Mountain Coffee was a $100 plus stock six months ago and is trading today for $28.   Don't let anybody fool you because when each of these things were occurring very few, if any, forecasters predicted negative change for these companies, only continuation of the existing circumstances.  I can make a list of the demise of hot companies that would run page after page. 

This is especially true in stock brokerage firms most of which have disappeared over the years.  There was EF Hutton, Dupont, Lehman, Bear Stearns, Kidder, Bache and Soloman. Even Merrill Lynch is no longer a stand alone.  Ask yourself the question if these brokerage firms knew anything much more that the rest of us about investing how could they have not had made their fortunes in purchasing what they had been recommending.
 
We recently wrote a blog about the perils of machines trading of hundreds of millions of shares of stock daily.  This blog didn't get much attention. Machines that have no intention of investing in companies, waiting for dividend growth or probably in most algorithms not knowing anything about each of the companies their trading in.  These machines make it even more difficult. 

There was a recent event that might seem quite unimportant in the scheme of things and wasn't even in this country.  If you are familiar with the canary and the mine story it should not be overlooked.  I will just quote the headline for you and I suggest you keep it in mind because it's another example of what's going to happen. 

The headline was "MEXICO'S BENCHMARK IPC INDEX PLUNGES AFTER WRONG ORDER".  Within minutes the index dropped 2%. 

But now the real story.  With all the mistaken research opinions (it just happens to be part of the business) the SEC, in it's political wisdom, led by a Chairman with substantial ties to Bernie Madoff, has chosen to allow an inquiry into a firm called Egan Jones.  This is a recently started firm in the bond rating business.  It also happens to be the firm that was the first to lower the United States' bond rating.  In this mornings press, Bill Gross of Pimco, confirmed his views that the US bond rating would come down again.  But the SEC has chosen to go after this Egan Jones firm on the basis of what seems to be some minor misinformation in a 2008 regulatory application with administrative charges.  The three major bond rating firms, one of which we wrote about at length and will repeat the blog shortly, are not even mentioned.  There are serious issues in our Securities businesses as there are serious issues in the political business. 

How in the world did Obama appoint as the head of the SEC a person with such close ties to Bernie Madoff, who is now beginning to prosecute a case against a small bond research firm before it even concludes whats going on at the three large firms responsible for American Bond ratings.  All of which  I believe have high personnel turnover so that many of their ratings, at the very least, are done by a changing group of people which  tends to make them close to worthless.  Very few of them had the courage to call what occurred in the housing market just like very research analysts have the courage to call radically priced investment concepts unworthy of investors money..  The same concept applies to municipal bond debt which if they were being issued by companies would  be considered junk. 

The bond raters are no different than the stock recommenders.  The public should understand that Wall Street ratings and recommendations are a product being sold for profit not a guarantee or anywhere close to that of investment success. 

WARREN BUFFET - A MARKETING GENIUS...

Overlay a chart of the S & P 500 and Berkshire Hathaway since May of 2002.  It looks to me as if they both follow a very similar path throughout that entire period.  Why in the world Berkshire gets so much publicity seems to be a delusion of the press.

I knew a man who was once called a  Wall Street "Investing Legend" by the media and a major university.  Each time I examine his public investing record all I seem to find is under performance to the major averages.

Many of Berkshire's major division heads seem to be being paid millions of dollars a year to run Berkshire's various parts while Buffet publicizes that he doesn't hardly take a salary.  He doesn't take a salary so I guess he doesn't pay much taxes.  He doesn't pay a dividend on his shares and generally he doesn't buy back shares of his own company.  Since as you've seen the performance of Berkshire mirrors the S & P, shareholders seem to get a very mediocre return.  The emphasis seems to be on the maintenance of an illusion as to how rich Mr. Buffet is and how little taxes everybody else pays.

From what I can tell in the press when he dies his shares will go to a Foundation, hence there will be little taxes on his estate.  From what I can tell the Foundation receiving the shares of his estate spend a substantial amount of its money on projects outside the United States.

In summary, his stock doesn't perform relatively and there seems to be lots of missing important information in the company's annual report.  Additionally, Mr Buffet has figured out a method for avoiding substantial tax payments for himself while his poor little secretary goes to Congress and complains about other people's taxes.

Remember Berkshire Hathaway hasn't diverged much from the S & P performance for over a decade. Warren Buffet is a marketing genius.  

THE GADGET THAT BROUGHT DOWN AN INDUSTRY (FIRST PUBLISHED 4/14/11)

Many months ago when I bought my first IPAD I said to my business partner, "Holy Moly-this product is going to have some huge impact on PC sales". Months have passed and I have begun to think of how many people are employed in making PCS and their ancillary equipment.

The gadget that brought down an industry and we didn't see it coming. Holy Moly???

P.S. I must be crazy. "Laugh of the Day"

BLOG OF THE DAY...

This morning I looked at a stock market screen with almost 300 symbols on it. They were all red.  You mean to tell me everybody decided to sell all of these 300 stocks and all of the buyers decided to go away.  I don't think so.  I think massive computer programs kicked in for whatever reason.  Today, computer trading accounts for most of the transactions on the stock exchange.  The self centered argument for maintaining this gambling casino environment is as wrong as the housing market speculation was. We all have access to company information and the economy.  Only a limited few have access to huge computers where a push of a button executes the buying and selling of millions of shares.   This has to end before a machine controlling a machine controlling a machine pushes the wrong button.

WARREN BUFFET IS RICH..BUT IS HE THE ULTIMATE "SNAKE OIL" SALESMAN?

1. Warren Buffett tries to convince investors that his shares should be priced on book value.  On page two of his annual report he actually compares the change of the S&P to the change in the book value of his stock.  Why doesn't he compare book value to book value at the very least. Usually in modern times if it's real book value it's either based upon liquidation value or earnings power.

2. I have never seen a more complicated annual report. For example, you have to go all the way to page 59 to find that Berkshire owns a company called McLane that accounts for almost 25% of Berkshire's total revenues but contributes 2% to total earnings.

3. Consequently its fair to say that instead of $144 billion dollars of reported revenues Berkshire's real important base is closer to $111 billion dollars.

4. Nearly 15% of total Berkshire revenues are generated by the Burlington Railroad which Warren Buffett had absolutely nothing to do with building or creating.

5. By the time you take off $33 billion dollars of revenues from McLane and $20 billion dollars from Burlington you are left with about $90 billion dollars of revenue that one can impute to Berkshire management.

6. Of that $90 billion dollars of revenue, $32 billion dollars are in something called "other" businesses that seems to consist of about 100 little businesses and are nothing more than a huge conglomerate, usually not rewarded a high price earnings ratio by investors.

7, By the time you subtract the low profit margin of McLane and a huge conglomerate of dozens and dozens of companies, you are left with a $59 billion dollar business.

8. Another subsidiary called Marmon does another $7 billion dollars of business, requires $10 billion dollars of identifiable assets and probably earns about $600 million for a 6% return on investable assets.

9. You go to Berkshire's consolidated statement of earnings and you cant even find a mention of McLane, the food wholesaler that earns next to nothing.  It seems to be included in insurance and other.  That seems awfully  misleading to me.

10. I'm not even sure if the annual report, on page 27, is clear enough on the average number of shares outstanding. Value Line and Morningstar seem to show close to 2.4 billion shares outstanding, average or not.

11. On page 101, there is a list of non-insurance businesses and their number of employees, a total of 270,000.  There is about 60 non-insurance businesses, 40,000 people work for the railroad which has next to nothing to do with Buffet.  Marmon and McLane employ another 30,000 people, you can go figure out for yourself what the future profitability of these businesses is worth.  About 40,000 people work for fruit of the Loom and from what I can tell that company that doesn't seem to be doing well.

12. Where can you find the record of these individual companies?  I certainly couldn't.

13. You have to go all the way to the 60's though the early 80's to find when Berkshire's performance through book value significantly exceeded the performance of the S&P.   Recent years show an entirely different picture.

14. As regards to his large common stock positions on page 16 of the annual report he shows a $19 billion dollar profit of which $12 billion is in Coca Cola which he has probably held for 40 years. It shows another $4 billion dollars profit in Procter & Gamble which leaves very little profit on the rest of the portfolio. Has Buffet's performance on his stock portfolio been even close to the S & P?

15. Mr. Buffet talks about buying back his own stock up for up to no more than 10% of book value.  Well, if that is true why would he pay substantially more than book value for other stocks and not his own?

16. The company shows  a shareholder equity of $169 billion dollars.  There is $50 billion dollars of goodwill a non-asset asset and $76 billion dollars in equity securities most of which are probably float from the insurance companies and are not really Berkshire assets in my opinion.

17. I guess as Berkshire Hathaway common stock weakened into the high $60's Mr. Buffet was forced to buy back his own shares.  This may have been done to take attention away from the fact that Berkshire's share price had not changed since 2006 and was reaching the point where investors would begin to look for the real story.  Do your own analysis.

Seems to me that the cult of Warren Buffett, upon closer examination, is way out of proportion to reality.

Why in the world Buffets opinion on gold has any bearing on Berkshire Hathaway is beyond me except that he may have wanted to point out that in recent years you would have made a heck of alot more money on gold than on Berkshire's common shares.