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In the world of Shake-Shack, everything is about “The Shack.” Where most restaurants report “same-store sales” and “store-level operating margins” and “store economics,” SHAK reports “same-shack” sales and “shack-level operating margins” and “shack-onomics.” It’s a cute, quirky culture the company has built from modest roots—the now-famous hot-dog stand in Madison Square Park—into an international phenomenon, in 12 short years. Of course, 12 years in today’s world is actually a long time, but things didn’t get serious until 2004 when the first Shake Shack restaurant opened, starting the launching pad that would shoot the rocket ship into orbit following the wildly hyped IPO just 16 months ago to the point where, by the end of the first quarter, there would be 88 such “Shacks,” with an inordinately large number—36 to be exact—licensed to other operators outside the U.S., mainly in the Middle East. And it is towards that Middle East exposure we turn our attention here, since Wall Street’s Finest haven’t bothered—and anything Wall Street’s Finest don’t bother with is always interesting to this virtual column. Not so long ago—in the July 2015 S-1, for the record—SHAK described the Middle East as “our most prominent growth market.” And the Middle East clearly was the prominent growth market at that point, having seen 49.7% licensing revenue growth in the fourth quarter of 2014. But by the first quarter of 2016 that growth rate had throttled down to 14.3%. What happened to SHAK’s “most prominent growth market”? Here’s what management said on the recent earnings call: “Now, while the Middle East remains a very important market and part of our international footprint, we are experiencing softness in sales there this year, particularly in our mall locations throughout energy-dependent markets that are seeing a natural economic slowdown right now coupled with currency headwinds. So we expect sales in our Middle East Shacks to remain under pressure through this year given the macro environment in the region.” Not too long ago—i.e. last summer, around the same time as the aforementioned S-1—the company was describing the Middle East in far rosier terms: “When we had just opened the second Shake Shack on the Upper West Side of New York, Mohammed Alshaya, probably many of you know Alshaya, from the Middle East, came to us and said, I don’t normally do this. I normally go with much bigger brands here, and I know you only have two, but I think Shake Shack would do tremendous in the Middle East and I want to bring you over. And Danny and Randy kind of looked at each other and shook their heads, but out of pure curiosity got on a plane and went to Dubai, saw the way Alshaya operates, saw how they do things, saw how their culture connects with ours and said, you know what, let’s take a chance, let’s do it. So they opened a Shake Shack in the Mall of the Emirates in Dubai and it was one of the leading restaurants in the system and still is at this time.” Alshaya is, indeed, a legit operator, and they do indeed normally go with bigger brands. They’ve opened Cheesecake Factories and Pottery Barns, and they know how to do it. But Cheesecake Factory and Pottery Barn took their time on the whole opening-a-zillion-stores-overseas thing. Specifically, it took Cheesecake Factory 35 years before they opened their first restaurant overseas, in Dubai, with Alshaya in 2012—and the company spent a lot of time getting ready. After all, Cheesecakes in Dubai can’t serve alcohol or sell pork products, so the menu had to be adjusted and the company’s culture had to be transported all the way from Calabasas Hills to the United Arab Emirates. Today Alshaya operates just 9 Cheesecakes, compared to the couple-dozen-plus Shacks it opened with a bang not so long ago. And while Cheesecake has let it be known, most recently in March, that its international units continue to do well, SHAK said on its recent call the Middle East market is already “maturing…quite a bit” as it switched the focus to new licensees in Asia: “If you look at our guidance of seven Shacks all year here for that, the Middle East has got quite a few restaurants there. Our region is maturing for Shake Shack quite a bit. We have some great opportunity. We just opened in Riyadh and doing really well there. As I’ve said, in Bahrain and Oman. So we fully expected that region to mature a little bit.” From “our most prominent growth market” to a “maturing” region in less than 12 months might be a record. Not the record a growth company wants to hold, but a record nonetheless. Jeff Matthews I Am Not Making This Up © 2016 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

It’s bad enough when analysts thank CEOs for letting them ask a question on an company earnings call, at least when they do it in a way that goes beyond a simple act of politeness and more towards a cringe-making act of fawning, which too many analysts have a way of doing these days. This is, after all, a business: it’s an analyst’s job to ask questions; it’s a CEO’s job to answer them. Get on with it. What’s worse, however—much worse—is when an analyst who asks a good question gets schmoozed by the CEO, and instead of following up and getting an answer, surrenders. It happened tonight on the Apple call. After thanking the company for “fitting me in” (really?) the analyst asked Tim Cook—all quotes are from the indispensable Seeking Alpha—a very reasonable question about the “top two or three things” that had changed from the previous quarter, when Apple’s CEO was way more bullish about the demand environment for iPhones than it turned out to be. Cook’s response turned the question into a math equation: “…we did not contemplate or comprehend that we were going to make a $2 billion-plus reduction in channel inventory during this quarter. And so if you factor that in and look at true customer demand, which is the way that we look at it internally, I think you’ll find a much more reasonable comparison.” The analyst jumped on Cook for changing the subject—after all, he said, the fact that you decided to cut $2 billion out of channel inventory must mean you had $2 billion more product in the channel than you expected, which means “true customer demand,” as Cook called it, was $2 billion weaker than plan, right? Ha! We’re joking. The analyst did no such thing. He surrendered. “Okay, great. Thank you,” he said, and then asked a softball follow-up. Tim Cook took home $10.3 million last year. He can handle tough questions. Personally, I’d like to know why Cook—who gets on his high moral horse every time some politically correct brushfire starts up somewhere in America—gives up without a sound when the Chinese authorities demand the Apple Store stop carrying apps involving the Dalai Lama. We know the answer: money. Still, it would be fun to ask. But don’t hold your breath. Jeff Matthews I Am Not Making This Up © 2016 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Mr. McCleery: You aren’t one of those agitators, are you? Benjamin: What? Mr. McCleery: I hate ’em. I won’t stand for it. —The Graduate We here at NotMakingThisUp only write book reviews when we like the book. (If we don’t like it, we don’t write anything at all, because it’s hard—really hard—to write a book, so just the fact that someone has written a book ought to be respected, not criticized.) Journalist Dan Lyons has not only written a book, but it’s good—and not just “good,” but laugh-out-loud good. The subject matter, however, is not always laugh-out-loud funny. It’s about Lyons’ time at HubSpot, the “cloud-based marketing and sales software platform company” he worked for at roughly the peak of the Web 2.0 cycle (Lyons would probably describe it as a “spam-based marketing and sales software platform company,” but we’ll go with the official terminology), and while you may be more familiar with the frat-boy excerpts that have already made made plenty of headlines, they’re nothing anybody who was around during the last bubble hasn’t heard about before and don’t need repeating here. Way more interesting is Lyons’ take on what it’s like to be a 50+ year old Boomer working at a hotshot Millennial company—or “cult,” as he sees it. Lyons listens to conference calls with the company’s ‘social media scientist,’ “a competitive weightlifter who lives in Las Vegas and basically does nothing”; he spends too much time in meetings, which, “like most journalists—and, I would argue, most sane people” he detests; and he gets so fed up with the bubbly self-reinforcing “Happy!! Awesome!! Start-Up Cult” culture that he begins sending around emails like “Jan is the best!!! Her can-do attitude and big smile cheer me up every morning!!!!!!!” about the “grumpy woman who runs the blog,” until he is told to “cut that s— out.” It’s a riot, and it makes the book swing, but that’s not the important stuff. The important stuff includes the sheer whiteness of the workforce, which should be no surprise to him but is (did he really report on the technology world most of his career and not notice that before?); not to mention the youngness of the place, which should also be no surprise to him (does he not know how young Mark Zuckerberg still is?) But the spookiest bit has nothing to do with the age thing, or the “astonishing lack of diversity” (did he think poverty-trapped kids from Harlem are actively recruited by young affluent suburban white kids?), it’s the cultish behavior reinforced from the top, most notably in the way in which employees who’ve been fired are NOT said to have been “fired” or to have “resigned to pursue other interests.” They are said to have “graduated.” “Nobody ever talks about the people who graduate,” writes Lyons, “and nobody ever mentions how weird it is to call it ‘graduation.’” Yet “graduations” happen quite a lot, apparently: the best line in the book being “People just go up in smoke, like Spinal Tap drummers.” Of course, Lyons himself eventually “graduates” after the culture clash starts to get to him (which it actually did on his first day at HubSpot, but he persevered) and he begins to set himself up in ways that make you scratch your head and wonder if he ever actually worked in a corporate environment. Exhibit A in the did-he-really-not-see-this-coming-a-mile-away setup to his own graduation is when Lyons pitches a new online magazine—an idea his direct boss had already rejected—to his boss’s bosses without his boss knowing Lyons was going over his head. “They love the idea,” he says of the meeting with HubSpot’s co-founders. “That night I go home feeling like a conquering hero.” Poor bastard, you think, reading that line. Exhibit B in the did-he-really-not-see-this-coming-a-mile-away department is when Lyons is shocked—shocked!—that nothing subsequently happens, because he didn’t have anyone else at the meeting to verify that the two co-founders actually approved the idea. As one colleague far wiser than Lyons in the ways of corporate politics tells him, “You should have had a witness.” Exhibit C in the did-he-really-not-see-this-coming-a-mile-away department, naturally, is when Lyons’ boss-who-rejected-the-idea-before-Lyons-chose-to-go-over-his-head appropriates the idea as his own. By now, however, even Lyons has figured out what’s happening: “At this point the message could not be more clear,” he writes. His boss “is doing everything short of hiring a skywriter to scrawl GET OUT, DAN in the airspace above HubSpot headquarters.” Lyons at least has some fun as the clock winds down. At an anything-goes marketing idea meeting he proposes putting an “unbearably ambitious and energetic young woman who recently graduated from college, loves HubSpot more than life itself, and would do just about anything to get a promotion” in an orange (the Hubspot color) jumpsuit and helmet and firing her “right through an open window and into a cubicle. Bang! There she is! She doesn’t miss a beat. She just starts giving a lecture about marketing.” To a cynical career journalist, HubSpot was a gift that kept on giving. On the downside, however, Lyons stretches at times to make bigger points—something book editors tend to encourage authors to do in order to gin up the meaning of an otherwise highly enjoyable, and very telling fish-out-of-water memoir. For example, trying to turn his time at HubSpot into a lesson about the cheerful heartlessness of the Web 2.0 revolution, he actually quotes Carl Icahn—the slimeball takeover artist who bankrupted TWA while pocketing a sweet discount airline ticket deal for himself, among many other things that make Donald Trump look magnanimous and would normally set a cynical journalist’s hair on fire—about Marc Andreessen from back when they were fighting over eBay, which is stupid because Andreessen (think Netscape, Facebook, Twitter, among other life-changing companies he’s been involved in) has added more value to the current quality of life in America than even Carl Icahn has managed to extract for himself. Lyons also quotes, of all things, a snarky Robert Reich “Facebook post” about the sharing economy having become a “share the scraps” economy—tell that to the next Uber driver you get who’s paying his way through college or saving for a condo or running a non-profit and wouldn’t have the flexibility to earn extra income without Uber. Finally, Lyons surveys the money-losing business models of so many Web 2.0 start-ups and naively wonders “why there are so many companies that remain in business while losing money”—this after he has started the book with a chapter about getting fired from his prestigious and well-paying job at Newsweek Magazine, which, like most dead-tree publications “has been losing money for years.” Losing money, whether for a start-up with vast potential, like Amazon.com, or for a fading franchise like Newsweek, has never stopped anybody from trying. That is, after all, Capitalism. But the big-picture stuff feels like an editor made him do it, because the other 98% of the book moves fast, tells a great story, and actually will make you laugh. Out loud. —JM NB: Just for the record, prior to its publication, the author of Disrupted asked, and I answered, a couple of questions about my perspective on the SAAS business model of Salesforce.com.

Well it’s earnings season again. That means it’s time for IBM to puke another quarter and hold an incomprehensible—literally, incomprehensible—earnings call during which it spins every data point in such a positive light that you’d think they held the winning Powerball ticket, while strictly limiting analysts to one question—no follow-ups, please—and abruptly cutting things off when the hour is up. For those of us accustomed to the full disclosure practiced by the terrible, horrible, no-good banks, this practice of IBM’s management team not belaboring bad news is something out of Fawlty Towers (“Don’t mention The War. I mentioned it once but I think I got away with it.”) By way of comparison, Wells Fargo and Citi’s back-to-back earnings calls last Friday started at 10 a.m. E.S.T. and ended at 1:15 p.m., give or take. Analysts on both calls were free to “get back in the queue,” as they say, and they did, until every question was exhausted. But that practice is not the IBM Way. No sir. Windy analysts are quickly cut off and the opportunity to follow-up an obfuscatory answer (the IBM norm) is not given—bringing to mind yet another Basil Fawlty line: “Trespassers will be tied up with piano wire.” So if you didn’t get a chance to listen to IBM’s earnings call—and we’ve poked fun at them for years, most recently here—you really ought to read the transcript courtesy of the indispensible Seeking Alpha, here. If you didn’t know any better, you’d think that IBM is swimming in gold, that its cloud offerings are taking the world by storm (“We’re the largest,” they declare, without mentioning that their internal measure includes low-margin IBM hardware), and that Watson, which as they always remind us won Jeopardy in 2011 (or was it 2010? Or was it actually Wheel of Fortune during Kardashian Week?) is the next Amazon Web Services, which it is not. In reality, IBM’s revenues are down—even in the not-falling-apart Americas—its cash flows are down, its share repurchases are down (even though the stock is down, and presumably more attractive than the last time they spent billions propping it up), and the only reason it “beat the number” was, naturally, the tax rate, which IBM plays like Duane Allman played “Whipping Post.” (See “Bring Out the Belgian Waffle!” here.) Oh, and never forget that IBM always makes sure to exclude the negative impact of currency and divestitures on these calls and in their press releases, but does not exclude the positive impact of acquisitions. And IBM made seven cloud acquisitions alone in 2015. Altogether, it is, as we started at the top, literally incomprehensible. And if you don’t believe us, try this answer from the CFO on for size, about the miss in IBM’s super-high-margin software business: Sure thank you, thanks Toni. A few comments on software, so as we said in our prepared remarks, the deceleration third to fourth really was driven by this – by the mix shift and the continuation of the transaction closing rates that we saw in September. So we talked about – coming out of September we talked about a slower rate of closing in some of our larger deals and that’s what we experienced as well in the fourth quarter. And as I mentioned in my prepared remarks, because of the mix shift alone we see an improvement and as you point out the weather company another acquisitions by the way to the extent that they are – have software in them they will obviously bolster that growth rate. A few things, I think are important to note within software. First, as we said in our prepared remarks and the phenomena is really no different in the fourth and what we’ve seen all year, our annuity business within the software business. So that’s about 70% of our overall software stream. Our annuity business continues to grow. So that has a service in it, it has our subscription and support business in it as well, so that continues to grow. And then outside of our largest clients and this is a phenomena that we’ve been talking about, outside of our largest clients where they don’t have as broad access to our software portfolio, we continue to see growth as well, both transactionally and they’re obviously part of the asset service stream. Within the large clients as I mentioned earlier and as we talked about in our prepared remarks, we provide flexibility, it gives them – it gives our clients an ability now to manage their projects and they deploy maybe differently than they anticipated at the beginning of the year. From my discussions with our clients, a lot of that depends on the visibility they have both of their demand patterns and the visibility they have to sort of the – kinds of projects they might have to implement in the near-term. So I don’t think that’s any different than what we’ve experienced in the past… If you can make anything of that—and we’re pretty sure even Warren Buffett, the largest IBM shareholder, couldn’t make anything of that—let us know. Meantime, don’t mention the revenue drop, the earnings decline or the cash flow shortfall. I mentioned them once but I think I got away with it… Jeff Matthews Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2015) Available now at Amazon.com © 2016 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews.
 Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

2015 Editor’s Note: We have not heard much new in the way of holiday music, so let’s turn straight to the rock and roll biography scene—specifically Chrissie Hyndes’ autobiography, “Reckless: My Life as a Pretender,” which is like witnessing a car wreck in book form. While there’s plenty here that’s harmless and bland (early days in Ohio, e.g.), there’s plenty that makes you want to put the book away in a very dark place, and all you can think is, How was she not part of “that stupid club,” as Kurt Cobain’s mother called it? (Look it up, kids.) Similarly depressing are some rock movies we’ve been watching on Netflix—starting with the Levon Helms biography, “Ain’t In It for My Health,” which minces no words when it comes to his former bandmate and nemesis, the Canadian songwriter Robbie Robertson, who squeezed out of Levon (the only American in The Band) vibrant scenes of Americana (“The Weight,” and especially, “The Night They Drove Old Dixie Down”) without sharing the royalties. Even more depressing than the Hynes book and the Helms movie combined, however, is the Glenn Campbell-gets-diagnosed-with-Alzheimers-while-you-watch film, “I’ll Be Me.” Your editor saw Campbell perform at a Wall Street birthday bash circa 1997, and he was clearly miserable throughout: flushed faced and word-slurring, Campbell and his band blew through his greatest hits like Bob Dylan on a bad day, and, embarrassingly to everybody in the room, kept calling the host—whose name was Paul and who, when introducing the singer, nearly broke down while talking about how much it meant having him perform—“Pete.” But “I’ll Be Me” does a great job explaining Campbell’s life now and back when…and if you’re interested in knowing more about that back when, you ought to watch “The Wrecking Crew,” our last movie shout-out. “The Wrecking Crew” was the name of the L.A. session players behind The Byrds, The Beach Boys and classics like “I Got You, Babe”—just listen to Hal Blaine’s slamming drums on the outro—and the movie is a joyous look at the faces behind the instruments behind the songs. Glen Campbell was a supremely talented guitarist for the Wrecking Crew before he decided—to the initial amusement and later jealousy of some of the Crew—go for the gold himself. Suggestions on other movies (and books) are encouraged in the comments below…after all, your editor hasn’t finished compiling his Christmas list, if you get our drift… Merry Christmas, Happy Hanukkah and a Good New Year to All! —JM, December 3, 2015 2014 Editor’s Note: Well, Michael Bublé’s computer is still releasing holiday songs, which is the worst we can say about this year’s holiday music survey. The best we can say—and it is truly good news—is that The Boss’s hard-driving, live version of “Santa Claus is Comin’ to Town,” done entirely without computer-aided Bublé-style vocals, seems to be gaining much deserved traction. Meanwhile, one of our previous also-ran mentions in the What-Did-We-Do-To-Deserve-This? category, one Taylor Swift, deserves a big boo-yah for telling the Spotify algorithms to stuff it, pulling her entire catalogue from the automated listening service—including, by definition, the song mentioned here last year, which should be no tragedy to Spotify customers anyhow. As for our usual review of the latest rock memoirs, which tend to flood the bookshelves right about now—only to turn up in the mark-down bins come spring, which is when your editor actually buys them—the best read during brief trips to our local, increasingly down-on-its-heals Barnes & Noble, has to be Mick Fleetwood’s “Play On.” Fleetwood is one of the most underrated drummers in rock music, being the kind who drives the beat without histrionics and stays well behind the kit while the front-people do their thing (it was Fleetwood and fellow Mac bassist John McVie who rescued “Werewolves of London” for Warren Zevon and producer Jackson Browne, after the house band could not make the song work) so his remembrances of the formation of Fleetwood Mac are insightful and compelling even for those—including your editor—who were never big Fleetwood Mac fans. Currently priced at $30.79 at Barnes & Noble for the hard copy version, or $21.00 on Amazon, I’ll wait until spring and pick it up for $5.99—sorry Mick, but that’s the business we’re in. Merry Christmas, Happy Hanukkah and a Good New Year to all! —JM, December 19, 2014 2013 Editor’s Note: The most unnerving aspect to this year’s holiday music survey is the unavoidable, near-totalitarian presence of an insipid cover version of George Michael’s already-plenty-insipid-for-our-taste-thank-you-very-much “Last Christmas,” which, as we point out below has one of the most inane choruses ever written (no mean feat there), which wouldn’t be so bad except it is repeated over and over and over until you want to hand yourself over to Vladimir Putin’s security forces and let them do their worst. The perpetrator of this latest holiday music outrage is, it turns out, Taylor Swift, about whom your editor knows nothing except she adds exceedingly little to a song that needed plenty of help to begin with. But, as always with these annual surveys, your editor digresses. On the happier side of the music world, this last year has seen a number of excellent new rock memoirs, of which Kinks front-man and songwriting genius Ray Davies’ is the most interesting. The centerpiece of the story line in Ray’s “Americana” is his getting shot by a mugger in New Orleans some years back, but interspersing that tale he manages to tell much of the story of his career. If you want to read how Ray came up with classics like “Better Things” (why couldn’t that be a Christmas song? It’s as much about the holidays as “Same Old Lang Syne,” about which your editor has plenty to say later on), this is your book. Neil Young’s “Waging Heavy Peace,” which came out last year, is even better than “Americana,” however, and more fun to keep picking up when the mood strikes: Neil’s recollections are loopy, digressive, and admittedly unsure in some cases (at one point he compares his memory of a drug bust with Stephen Stills’ recollection of the same drug bust—and given that Neil only stopped “smoking weed” the year before writing the book, as he admits, it’s no wonder their recollections are very different), but like all things Neil Young, he says what he means and means what he says. And if you’re wondering where songs come from—great songs, eternal songs—Neil’s book is the place to begin. Would that a holiday song may one day spring from the fecund mind of Neil Young himself, for while he professes more of a Native American religious spirit than a Judeo-Christian one, either way, it would be so long Taylor Swift. Merry Christmas, Happy Hanukkah and a Good New Year to all! —JM, December 7, 2013 2012 Editor’s Note: We interrupt this holiday music review to bring you a potential stocking-stuffer that ought to bring tidings of good cheer… Amazon.com: Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett (eBooks on Investing Series Book 1) eBook: Jeff Matthews: Kindle Store 2011 Editor’s Note: Back by popular demand, we’ll again try to keep this year’s update brief…but past performance would tell you not to hold your breath. Here goes. Our annual holiday music survey—highly biased, rankly unscientific and in no way comprehensive—covers new ground this year, to wit: the SiriusXM all-holiday-music channel. Actually, there are two such channels courtesy of the satellite radio monopolists at SiriusXM. There’s one for “traditional” music of the Bing Crosby kind, in which human beings sing traditional Christmas songs while other human beings play musical instruments to accompany those songs; and there’s another channel for everything else, including the Auto-Tune-dependent sensation Michael Bublé, who has only gotten more popular—unfortunately—this year, along with a new presence not entirely unexpected but nonetheless frightening in its implications: Justin Bieber. Enough said about that, for our main beef with SiriusXM is not the presence of yet another teen idol on the holiday music scene. Our beef lies with the soul-less quality of the entire SiriusXM gestalt, which requires its three thousand channels to carry songs strictly on the basis of whether they share either a common date of issue (as on the “40’s at 4,” “50’s at 5,” “60’s at 6” et al channels), or a common target audience demographic. Among the later, for example is the “Classic Vinyl” channel, which is essentially a “Classic Rock” channel (“Classic Rock” being a Baby Boomer euphemism for what our parents knew as “Oldies” radio) that plays the WNEW-FM playlist from around 1968 to 1978. And nothing else. And there is the “Classic Rewind” channel, which is another Oldies channel that plays the WPLR-FM playlist from about 1979 to the late 1980s. And nothing else. Then there’s “The Bridge,” a Baby Boomer euphemism for “Easy Listening.” It plays Oldies of the James Taylor/Carole King/Jackson Browne vein. And nothing else. Certainly there are one or two such channels that manage to jump around between genres (The Spectrum is worthwhile on that score). But, in the main, each SiriusXM channel is tightly focused on a specific, narrowly defined demographic…sometimes scarily so. Here we’re thinking of the “Metal” channel, which plays loosely defined “songs” that consist of young men screaming their apocalyptic guts out above what appears to be a single, head-banging, machine-gun-style guitar-and-drumming musical track that never, ever changes. You marvel at where these guys came from, what portion of the domestic methamphetamine supply they consume, and how many serial killers might be listening to “Metal” channel at the very same moment as you. If Beavis and Butt-Head could afford a car, this would be their channel. Unfortunately, no matter which channel you pick and who the purported “DJ” may be (there are a lot of old-time, smokey-voiced, recognizable DJs on the various Sirius Oldies channels) you’ll hear a sequence of songs that all sound like a computerized random-number-generator picked ‘em. Listening to the “60’s at 6” channel, for example, you may hear a great Beatles single like “Hello, Goodbye” from 1967, followed by the wretchedly excessive “MacAurther Park” from 1968, followed by an unrecognizable chart-topper from 1962 that nobody plays anymore because it wasn’t any good even in 1962. The listener ends up flipping around from channel to channel and wondering why the bandwidth-happy SiriusXM monopolists don’t just give each artist its own channel, as they in fact do for Springsteen, Elvis and Sinatra. Those are channels you might expect to find, but there is, oddly enough, no Bob Marley or Rolling Stones channel—and, head-scratcher of all head-scratchers, no Beatles channel. In fact, the absence of The Beatles from the SiriusXM digital bandwidth relative to, say, the Eagles and Fleetwood Mac, is one the great mysteries of our age. After all, the Beatles individually and collectively contributed 27of the Rolling Stone Top 500 Songs of All-Time or 5.4% of those songs, yet they get nowhere near 5.4% of the SiriusXM airplay, whether on “Classic Vinyl,” “Classic Rewind,” “The Bridge,” “60’s on 6, ” “70’s on 7,” “The Spectrum” or any of the other three thousand channels here. You quite literally have as much chance of hearing “Snoopy and the Red Barron” on SiriusXM as “Revolution.” So why then is there a Jimmy Buffett channel (called “Margaritaville,” of course)? Having gotten all that off our chest, we can move on, since SiriusXM’s holiday channels add no new material to our annual survey because most of the songs are widely played everywhere else. Furthermore, we’ve been asked to assemble a “Top Ten Worst” list of holiday songs for this review. The problem is there are just so many, as we’ll be getting to shortly. Rod Stewart’s somnambulant “My Favorite Things,” which sounds like he’s reading the lyrics from a child’s book of verses, is right up there, while Dan Fogelberg’s “Same Old Lang Syne” stands out in any crowd of non-favorites. Easier, then, to simply identify the All-Time, Number One, No-Question-About-It NotMakingThisUp Worst Holiday Song of All Time, and let everyone else argue about the remaining 9. It is “The 12 Pains of Christmas.” This so-called comedy song takeoff on “The 12 Days of Christmas,” a pleasant English Christmas carol discovered by a U.S. schoolteacher from Milwaukee and used by her in a Christmas pageant in 1910, is an easily forgettable humorous novelty song that is neither novel or humorous, in any way. It isn’t even fun writing about, so we won’t bother: we’ll simply move on to something pleasant, which happens to be an entirely different sort of humorous novelty song that is both novel and humorous, and, therefore, well worth a mention here. We’re talking about the wonderfully bizarre, catchy, Klezmer-style cover of “Must Be Santa,” from Bob Dylan’s 2009 Christmas album, “Christmas in the Heart.” (Yes, Bob Dylan made a Christmas album.) The music is fast and cheerful, and Dylan’s low, growly voice is almost indistinguishable from Tom Waits. (The truly bizarre music video is not to be missed, watch it here.) After you get over the initial shock of hearing Bob Dylan singing what most Baby Boomer parents will recall being a Raffi song, it becomes impossible to not enjoy. Another glaring absence from our previous years’ commentary is neither novel or humorous, and inconceivably does not appear to qualify for the SiriusXM random-song-generator holiday song playlist despite being many-times more worthwhile than most of the SiriusXM catalogue, whether holiday-themed or not. The song is “2000 Miles” by the Pretenders, and it belongs on anybody’s Holiday Top Ten. If hearing Chrissie Hynde on that original song (she’s also recorded some good Christmas covers, including one with the Blind Boys of Alabama) doesn’t get you in a mellow holiday mood, nothing will. Merry Christmas, Happy Hanukkah and Good New Year to all. —JM, December 4, 2011 2010 Editor’s Note: Back for the third consecutive year by popular demand, we’ll try to keep this year’s update brief—but don’t count on it. For starters, we’re going to plug a book: Keith Richards’ autobiography, “Life,” which happens to be one of the best books ever written—and we don’t just mean “Best in the Category of ‘Memoirs by Nearly-Dead Rock Stars’.” It is a great book, period. The story of how ‘Keef’ (as he signs sweet letters to his Mum while rampaging across America), Brian and Mick developed the Rolling Stones’ sound, for example, is worth the price alone (in short, they worked really hard; but the full story is much better than that). Yet there’s more—much more. Guitarists can soak up how Keith created his own guitar sound; drummers will learn—if they didn’t already know—Charlie Watts’ high-hat trick (and from whom he stole it); while songwriters had better prepare themselves to be depressed at how Mick wrote songs (‘As fast as his hand could write the words, he wrote the lyrics,’ according to one session man who watched him write “Brown Sugar”). And that’s just the rock-and-roll stuff. The sex-and-drugs stuff is also there, and the author lays it all out in his unfettered, matter-of-fact, straightforward style, often with the first-person help of friends and others-who-where-there (and presumably of sounder mind and body than you-know-who: the drug and alcohol intake is truly staggering) who write of their own experiences with the band. Okay, you may say, but how exactly is Keith Richards’ autobiography relevant to our annual review of holiday songs? Well, while furtively reading snatches of ‘Life’ during a stop at the local Borders (we expect to see the book under the Christmas tree sometime around the 25th of this month, hint-hint), we happened to hear another musical legend perform one of our favorite offbeat Christmas songs in the background, and it occurred to your Editor that of all the bands out there that could have done that same kind of interesting, worthwhile Christmas song, The Rolling Stones probably top the list. What with Keef’s bluesy undertones and Mick’s commercial-but-sinister instincts on top, it would have certainly made this review, for better or worse. (Along these lines, The Kinks’ cynical, working-class “Father Christmas” is one of the all-time greats, and doesn’t get nearly enough air-time these days.) Now, for the record, the offbeat Christmas song that triggered this excursion was “’Zat You Santa Claus?”—the Louis Armstrong and The Commanders version from the 1950’s. (The song was later covered, like everything else but the Raffi catalogue, by Harry Connick, Jr.) Starting out with jingle bells, blowing winds and a slide-whistle, you might initially dismiss “’Zat You?” as a sadly commercial attempt by Armstrong to get in on the Christmas song thing, except that his familiar, Mack-the-Knife-style vocal comes over a terrific backbeat that turns it into what we’d nominate for Funkiest Christmas Song Ever Recorded. It is a delight to hear, and the fact that it is suddenly getting more air-time this season is a step-up in quality for the entire category—or would be, if not for the apparent installation of Wham!’s “Last Christmas” in the pantheon of Christmas Classics. A 1980’s electro-synth Brit-Pop timepiece, “Last Christmas” combines a somewhat catchy tune with lyrics that make a trapped listener attempt to open the car door even at high speeds to get away: Last Christmas, I gave you my heart But the very next day you gave it away This year To save me from tears, I gave it to someone special Considering the fact that the songwriter (Wham!’s gay front-man, George Michael) decided to repeat that chorus six times, the full banality of the lyric eventually gives way to incredulity: “Let me get this straight,” you begin to ask yourself. “This year he’s giving his heart to ‘someone special’… so who’d he give it to last year? The mailman?” “Last Christmas” does have the distinction of being the biggest selling single in UK history that never made it to Number 1. Furthermore, all royalties from the single were donated to Ethiopian famine relief, the same cause which led to creation of what turned out to be the actual Number 1 UK single that year, “Do They Know It’s Christmas?” “Do They Know…” is a song that has received some push from readers to receive an honorable mention in these pages, and while it is certainly an interesting timepiece, with much earnest participation from the likes of Sting, Bono and even Sir Paul, it is not nearly as worthwhile as an album that seems just as prevalent these days: A Charlie Brown Christmas by jazz pianist Vince Guaraldi. How a jazz pianist was hired to create the music for a TV special with cartoon characters is this: the producer heard Guaraldi’s classic instrumental “Cast Your Fate to the Wind” on the radio while taking a cab across the Golden Gate Bridge. One thing led to another, and thanks to that odd bit of chance, future generations will have the immense pleasure of hearing a timeless, unique work of art every year around this time. (A second odd tidbit for our West Coast readers: Guaraldi died while staying at the Red Cottage Inn, in Menlo Park—of a heart attack, however, and not the usual, more gruesome fate of musicians who die in hotels.) One second-to-last note before we move on: we have been heavily lobbied by certain, er, close relations to include Mariah Carey’s “All I Want For Christmas is You” as a worthwhile holiday song—despite our previously expressed misgivings about her contribution to the genre (see below). And we have to admit, her “All I Want…” leaves behind the incessant vocal pyrotechnics that made some of her other Christmas covers (“Oh Holy Night,” for example) unbearable, at least to our ears. In this case she seems to trust the song to take care of itself, which it does in fine, driving, upbeat style. Now, as Your Editor previously hinted, all he wants for Christmas is Keef’s book. And it had better be there, if, as previously noted, you get our drift. Finally, and speaking of autobiographies, we happened to read Andy Williams’ own book this past year and must report that our reference to Williams below was overly harsh. For one thing, his book is as honest as Keef’s; for another, as a singer not necessarily born with the vocal equipment of, say, Mariah Carey, the man worked at his craft and succeeded mightily where many others failed. Which, we might add, is, after all, the hope of this season. And so, we wish for a Merry Christmas, Happy Hanukkah and Good New Year to all. —JM, December 13, 2010 2009 Editor’s Note: 
Back by popular demand, what follows is our year-end sampling of the Christmas songs playing incessantly on a radio station near you, and it demands from your editor only a few updates this holiday season. For starters, we have not heard the dreaded duet of Jessica Simpson and Nick Lachey singing “Baby, It’s Cold Outside” thus far in 2009, and for this we are most grateful. Indeed, if it turns out that their recording has been confiscated by Government Authorities for use as an alternative to lethal injections, we’ll consider ourselves a positive force for society. On the other hand, we are sorry to report an offset to that cheery development, in the form of a surge in playing time for Barry Manilow’s chirpy imitation of the classic Bing Crosby/Andrew Sisters version of “Jingle Bells.” For the record, “Jingle Bells” was written in 1857…for Thanksgiving, not for Christmas. And it’s hard to imagine making a better version than that recorded by Bing and the three Andrew Sisters 86 years later. But Manilow, it seems, didn’t bother to try.

 Instead, Barry and his back-up group, called Expos, simply copied Bing’s recording, right down to that stutter in the Andrews Sisters’ unique, roller-coaster vocals on the choruses, as well as Bing’s breezy, improvised, “oh we’re gonna have a lotta fun” throwaway line on the last chorus. Sharp-eared readers might say, “Well, so what else would you expect from a guy who sang ‘I Write the Songs’…which was in fact written by somebody else?” We can’t argue with that, but we will point out another annoyance this year: the enlarged presence of Rod Stewart in the Christmas play-lists. Don’t get us wrong: we like Rod Stewart—at least, the Rod Stewart who gave the world what Your Editor still considers the best coming-of-age song ever written and recorded: “Every Picture Tells a Story.” It’s the Rod Stewart who gave us “Do Ya Think I’m Sexy?” we’re less crazy about. So too the Rod who chose to cover “My Favorite Things” (for the definitive version of that classic, see: ‘Bennett, Tony’) and “Baby It’s Cold Outside” with Dolly Parton (for an only slightly more offensive version of this one, see: ‘Simpson, Jessica’ and ‘Lachey, Nick’). As an antidote to Rod, we suggest several doses of Jack Johnson’s sly, understated “Rudolph the Red-Nosed Reindeer,” which seems to be gaining recognition, and anything by James Taylor—especially his darkly melancholic “Have Yourself a Merry Little Christmas.” Of all the singers who recorded versions of this last—and Sinatra’s might be the best—it is Taylor, a former junkie, who probably expresses more of the intended spirit of this disarmingly titled song. After all, the original lyric ended not with the upbeat “Have yourself a merry little Christmas, let your heart be light/Next year all our troubles will be out of sight,” but with this: “Have yourself a merry little Christmas, it may be your last/Next year we may all be living in the past.” No, we are not making that up. The good news is it should keep Barry Manilow from be covering it any time soon. JM—December 19, 2009 Wednesday, December 24, 2008 Shazam! From the Boss to the King to John & Paul (But Not George or Ringo), Not to Mention Jessica & Nick Like everyone else out there, we’ve been hearing Christmas songs since the day our local radio station switched to holiday music sometime around, oh, July 4th, it feels like. And while it may just be a symptom of our own aging, the 24/7 holiday music programming appears to have stretched the song quality pool from what once seemed Olympic-deep to, nowadays, more of a wading pool-depth. What we recall in our youth to be a handful of mostly good, listenable songs—Nat King Cole’s incomparable cover of “The Christmas Song” (written by an insufferable bore: more on that later); Bing’s mellow, smoky, “White Christmas”; and even Brenda Lee’s country-tinged “Rockin’ Around the Christmas Tree” (recorded when she was 13: try to get your mind around that)—played over and over a few days a year…has evolved into a thousand mediocre-at-best covers played non-stop for months on end. Does anybody else out there wonder why Elvis bothered mumbling his way through “Here Comes Santa Claus”? 

It actually sounds like Elvis doing a parody of Elvis—as if he can’t wait to get the thing over with. Fortunately The King does get it over with, in just 1 minute, 54 seconds. Along with that and all the other covers, there are, occasionally, the odd original Christmas songs—the oddest of all surely being Dan Fogelburg’s “Same Old Lang Syne.” You’ve heard it: the singer meets his old lover in a grocery store, she drops her purse, they laugh, they cry, they get drunk and realize their lives have been a waste…and, oh, the snow turns to rain. So how, exactly, did that become a Christmas song? Then there’s ex-Beatle Paul McCartney’s “Wonderful Christmastime,” which combines an annoyingly catchy beat with dreadful lyrics, something McCartney often did when John Lennon wasn’t around.

 (After all, it was Lennon who replaced McCartney’s banal, teeny-boppish opening line for “I Saw Her Standing There”—“She was just seventeen/Never been a beauty queen” is what McCartney originally wrote—with the more suggestive “She was just seventeen/You know what I mean,” thereby turning a mediocre time-piece into a classic.) But Lennon was not around to save “Wonderful Christmastime” even though McCartney actually recorded this relatively new Christmas standard nearly thirty years ago, before Lennon was shot. It rightfully lay dormant until the advent of All-Christmas-All-The-Time programming a couple of years ago. Fortunately, by way of offset, Lennon’s own downbeat but enormously catchy “Happy Xmas (War is Over)” is played about as frequently as “Wonderful Christmastime.” Who but John Lennon would start a Christmas song: “And so this is Christmas/And what have you done…”? Of course, who but Paul McCartney would start a Christmas song, “The moon is right/The spirit’s up?” If anything explains the Beatles’ breakup better than these two songs, we haven’t heard it. Now, we don’t normally pay much attention to Christmas songs. If it isn’t one of the aforementioned, or an old standard sung by Nat, Bing, Frank, Tony, Ella and a few others, we’d be clueless. But thanks to a remarkable new technology, we here at NotMakingThisUp suddenly found ourselves able to distinguish, for example, which blandly indistinguishable female voice sings which blandly indistinguishable version of “O Holy Night”—Kelly Clarkson, Celine Dion, or Mariah Carey—without any effort at all. The technology is Shazam—an iPhone application that might possibly have received the greatest amount of buzz for the least amount of apparent usefulness since cameras on cell phones first came out. For readers who haven’t seen the ads or heard about Shazam’s wonders from a breathless sub-25 year old, Shazam software lets you point your iPhone towards any source of recorded music, like a car radio, the speaker in a Starbucks, or even the jukebox in a bar—and learn what song is playing. Shazam does this by recording a selection of the music and analyzing the data. It then displays the name of the song, the artist, the album, as well as lyrics, a band biography and other doodads right there on the iPhone. Now, you may well ask, what possible use could there be for identifying a song playing in a bar? And unless you’re a music critic or a song-obsessed sub-25 year old, we’re still not sure. But we can say that Shazam is pretty cool. In the course of testing it on a batch of Christmas songs—playing on a standard, nothing-special, low-fi kitchen radio—heard from across the room, without making the least effort to get the iPhone close to the source of the music, Shazam figured out every song but one (a nondescript version of a nondescript song that it never could get) without a hitch. And, as a result, we can now report the following: 1) It is astounding how many Christmas songs are out there nowadays, most of them not worth identifying, Shazam or no Shazam; 2) All Christmas covers recorded in the last 10 years sound pretty much alike, as if they all use the same backing track, and thus require something like Shazam to distinguish one from the other; 3) Nobody has yet done a cover version of Dan Fogelburg’s “Same Old Lang Syne,” which may be the truest sign of Hope in the holiday season; 4) None of this matters because Mariah Carey screwed up the entire holiday song thing, anyway. Now, why, you may ask, would we pick on Mariah Carey, as opposed to, say, someone who can’t actually sing? Well, her “O Holy Night” happened to be the first song in our mini-marathon, and it really does seem to have turned Christmas song interpretation into a kind of vocal competitive gymnastics aimed strictly at showing off how much of the singer’s five-octave vocal range can be used, not merely within this one particular song, but within each measure of the song. In fact Mariah’s voice jumps around so much it sounds like somebody in the studio is tickling her while she’s singing. More sedate than Mariah, and possibly less harmful to the general category, The Carpenters’ version of “(There’s No Place Like) Home for the Holidays” comes on next, and it makes you think you’re listening to an Amtrak commercial rather than a Christmas song (“From Atlantic to Pacific/Gee, the traffic is terrific!”), so innocuous and manufactured it sounds. Johnny Mathis is similarly harmless, although his oddly eunuch-like voice can give you the creeps, if you really think about it. Mercifully, his version of “It’s Beginning to Look a Lot Like Christmas” is short enough (2:16) that you don’t think about it for long. Now, without Shazam we never would have known the precise time duration of that song. On the other hand, we would we never have been able to identify the perpetrators of what may be the single greatest travesty of the holiday season—Jessica Simpson and Nick Lachey, singing “Baby it’s Cold Outside.” “Singing” is actually too strong a word for what they do. Simpson’s voice barely rises above a whisper, and you cringe when she reaches for a note, although she does manage to hit the last, sustained “outside,” no doubt thanks to the magic of electronics. Thus the major downside of Shazam might be that it can promote distinctly anti-social behavior: having correctly identified who was responsible for this blight on holiday radio music, the listener might decide that if they ever ran across the pair in his or her car while singing along with the radio too loudly to notice, they wouldn’t stop to identify the bodies. Fortunately, the bad taste left by that so-called duet is washed away when Nat King Cole’s “The Christmas Song” comes on next. Thanks to Shazam, we learn that this is actually the fourth version Nat recorded. The man worked at his craft, and it shows. This is the best version of the song on record, by anyone, and probably one of the two or three best Christmas songs out there, period. The second those strings sweetly announce the tune, you relax, and by the time Cole’s smoky, gorgeous voice begins to sing, you’re in a distinctly Christmas mood like no other recording ever creates. (Unfortunately, the song’s actual writer, Mel Tormé, had the personality of a man perpetually seething for not getting proper recognition for having written one of the most popular Christmas songs of all time. We did not learn this from Shazam: we once saw Tormé perform at a small lounge, during which he managed to mention that he, not Nat King Cole, wrote “The Christmas Song”—as if this common misperception was still on everybody’s mind 35 years later. When that news flash did not seem to make the appropriate impression on the audience, he later broke off singing to chew out a less-than-attentive audience member, completely destroying the mood for the rest of the set.) Like that long-ago performance by the “Velvet Fog,” the pleasant sensation left behind by Cole’s “Christmas Song” is quickly soured, this time by a male singer performing “Let it Snow, Let it Snow, Let it Snow” in the manner of Harry Connick, Jr. doing a second-rate version of Sinatra. Who is this guy, we wonder? Shazam tells us it’s Michael Bublé. We are pondering how such a vocal lightweight became such a sensation in recent years—the answer must surely be electronics, because his voice, very distinctly at times, sounds like it has been synthesized—when John Lennon’s “Happy Xmas” comes on. It’s a great song, demonstrating as it does Lennon’s advice to David Bowie on how to write a song: “Say what you mean, make it rhyme and give it a backbeat.” The fact that Lennon had the best voice in rock and roll also helps. Unfortunately, his wife had the worst voice in rock and roll, and a brief downer it is when Yoko comes in on the chorus like a banshee. (Fortunately she is quickly drowned out by the children’s chorus from the Harlem Community Choir.) The other songs in our Shazam song-identification session are, we fear, too many to relate. Sinatra, of course; Kelly Clarkson, an American Idol winner who essentially does a pale Mariah Carey impersonation; Blandy—er, Andy Williams; and one of the best: Tony Bennett. Then there’s Willie Nelson, who has a terrific, understated way of doing any song he wants—but sounds completely out of place singing “Frosty the Snowman.” One wonders exactly what kind of white powder Willie was thinking about while he was recording this, if you get our drift. Oh, and there’s Coldplay’s “Have Yourself a Merry Little Christmas,” which pairs the sweetest piano with the worst voice in any single Christmas song we heard; Amy Grant, a kind of female Andy Williams; the Ronettes, who are genuinely terrific—a great beat, no nonsense, and Ronnie singing her heart out with that New York accent; and then Mariah again, this time doing “Silent Night” with that same roller-coaster vocal gargling. Gene Autry’s all-too-popular version of “Here Comes Santa Claus” would be bearable except that he pronounces it “Santee Closs,” which is unfortunate in a song in which that word appears like 274 times. ‘N Sync is likewise unbearable doing “O Holy Night” a cappella, with harmonies the Brits would call cringe-making, and Mariah-type warbling to boot. Hall & Oates’s “Jingle Bell Rock” is too easy to confuse with the other versions of “Jingle Bell Rock”—thank you, Shazam, for clearing that up—while Martina McBride manages to sound eerily like Barbra Streisand imitating Linda Ronstadt singing “Have Yourself a Merry Little Christmas.” Winding things down is Dan Fogelburg’s aforementioned “Same Old Lang Syne,” and here we need to vent a little: something about the way he sings “liquor store”—he pronounces it “leeker store”—never fails to provoke powerful radio-smashing adrenalin surges. Fortunately, we suppress those urges today, because the Shazam experiment concludes with one of the best Christmas songs ever recorded. Better than Bing, and maybe even better than Nat, depending on your mood. It’s Bruce Springsteen. The Boss. Doing “Santa Claus is Comin’ to Town”…
live. Yes, this song was recorded live, and despite its age (more than 25 years old), the thing still jumps out of the radio and grabs you. Now, as Shazam informs us, this particular recording was actually the B-side of a single release called “My Hometown.” (Back in the day, kids, “singles” came with two songs, one on each side of a record: the “A” side was intended to be the hit song; the “B” side was, until the Beatles came along, for throwaway stuff.) Fortunately nobody threw this one away. Springsteen begins the familiar song with some audience patter and actual jingle bells; then he starts to sing and the band comes to life. Things move along smoothly through the verse and chorus…until ace drummer Max Weinberg kicks it into high gear and the band roars into a fast shuffle that takes the thing into a different realm altogether. Feeding off the audience, The Boss sings so hard his voice slightly breaks at times. Then he quiets down before roaring back into a tear-the-roof-off chorus, sometimes dropping words and laughing as he goes. This is real music—recorded in 1975 during a concert at the C.W. Post College—with no retakes, no production effects, and no electronic vocal repairs, either. Try doing that some time, Jessica and Nick. Actually, come to think of it, please don’t. Merry Christmas, Happy Hanukkah and a Good New Year to all. Jeff Matthews Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2014) Available now at Amazon.com © 2015 NotMakingThisUp, LLC

In case you thought Berkshire Hathaway was involved in only one bad deal—the $36 billion all-cash takeover of cyclical, airline-supplying Precision Castparts for 20-times what may (or may not) turn out to be peak-cycle earnings—well, there’s another deal Berkshire is involved in, indirectly, that is not looking great for the acquiring company and its shareholders: M&T Bank’s $5.4 billion all-stock acquisition of Hudson City Bancorp. Berkshire Hathaway has owned shares of M&T for years, maybe decades, and for good reason: run by down-to-earth Bob Wilmers, whose annual shareholder letter is required reading for anyone in this business, M&T is one of the few banks with $50 billion or more in assets that made it through the financial crisis without losing a dime, or needing a bailout, or both, thanks entirely due to the sober culture of the place. And while your editor owns M&T shares for exactly the same reason as Berkshire Hathaway, the acquisition of Hudson City is looking more like a pig in a poke than the tarnished gem it appeared to be the day the deal was announced way back in August 2012. The Feds, you see, have yet to approve the deal, for reasons supposedly relating to concerns about M&T’s anti-money-laundering capabilities. And while M&T has been spending heaps of money to fix whatever accounted for the Fed’s concerns, the deal approval kept getting deferred. Meantime, M&T’s stock—and the value of the shares it agreed to pay for Hudson—kept climbing and now stands 30% above the initial $7.56 value per Hudson share to $10.20 today. With 530 million Hudson shares outstanding, that means the initial $4 billion price tag has jumped to over $5.3 billion. Worse, given the long-deferred approval, Hudson has been shrinking. Who, after all, wants to work with a bank that may or may not be around—depending on the Feds—in a year or two or three? And who wants to work for that bank? No surprise, then, that employment at Hudson has shrunk from over 1,600 to 1,466 at last count, while the loan book has likewise been shrinking—from $27 billion or so around the time of the announcement to around $20 billion today. Deposits have also skedaddled: there were $18 billion at last count, down from $23 billion back when. And despite the 30% jump in the value of the transaction, shareholder equity has barely budged: $4.8 billion, up from $4.7 billion. So what M&T was once paying below book value for it is now paying a pretty fancy multiple of book, in bank terms. Nevertheless, Wall Street’s Finest continue to cheerlead the transaction. When Hudson yesterday announced a $30 million settlement with the Feds (a different branch of the Feds from the ones who will decide on the deal’s fate shortly) over allegations of “redlining,” you would have thought Hudson had instead announced that it had discovered that the company’s Paramus headquarters was sitting on a giant shale gas field with a pipeline already connected to Con Edison ready to supply New York City’s energy needs for the next millennium: M&T’s stock popped and research reports declared that this was just the sign we needed that the deal would shortly be approved. And maybe it will be. But as an M&T shareholder, I’d just as soon not be paying 30% more for so much less. Jeff Matthews Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2015) Available now at Amazon.com © 2015 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews.
 Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

TV personality, author and commentator William D. Cohan is grumpy about a lot of things. There’s the Duke lacrosse scandal, for one, about which he’s just publish a “shocking, thought-provoking new book”—according to the description on his own web page. And for another there’s Wall Street, from whence he came, and about which he’s written plenty of grumpy, conspiracy-minded books. Hence it’s no surprise to find Cohan invited to speak at the Sun Valley Writer’s Conference, whose attendees tend to be wealthy, Wall Street-leery arts supporters from L.A. It’s even less surprising that one of the talks he gave to those same attendees was entitled “Who Has the Real Power Now on Wall Street?”—actually, less of a talk and more of a very grumpy, very conspiratorial dish about what he perceives to be the current state of Wall Street—and that said Wall Street-leery audience was with him from the get-go. Kicking off with the quite legitimate observation that the Dodd-Frank law was not understood by Mr. Dodd or Mr. Frank, Cohan explained that Dodd-Frank did nothing but give more power to the six major banks at the heart of the 2008-9 financial crisis (now five, since Bank of America rescued Merrill Lynch), although he failed to explain why (it’s the fact that big banks can spend the big regulatory bucks while smaller banks have a harder time doing so: hence, regulation favors the large and hurts the small, yielding consolidation). No matter the reason Dodd-Frank failed its mission, the crowd nodded approval at Cohan’s dark conclusion and murmured its disapproval of the Big Bad Banks. Bolstered by this friendly reception, Cohan then proclaimed that government regulators don’t help address the weaknesses in the Dodd-Frank regulations because “the SEC is a tool of Wall Street.” After all, he pointed out, U.S. Presidents appoint Wall Street people to the job of overseeing Wall Street. Since they will eventually go back to Wall Street, they aren’t going to do anything to kill the golden goose. Thus, he noted, Mary Shapiro left FINRA to run the SEC with a $9 million bonus from her work at FINRA, at which the crowd gasped and murmured its disapproval of money-grubbing Mary Shapiro. At this point, Cohan could have said anything he wanted—he could have said Paul McCartney really was dead; John Lennon really had mumbled “I buried Paul” at the end of Strawberry Fields Forever; and the Abbey Road cover photograph was, in fact, an allegory of a burial ceremony because Paul was barefoot—and the crowd would have gasped and nodded and murmured their approval. Instead what he said was something far sillier than “Paul is Dead.” He said that thanks to their status as bank holding companies regulated by the Federal Reserve, “the investment banks are now a cartel.” In fact he said they are even more of a cartel than OPEC, because they split up turf, noting darkly that “Goldman Sachs and Morgan Stanley don’t compete all that much,” which might be news to some of the traders and bankers we know at those firms. No matter, the Bank Cartel is alive and well, according to Cohan, because he’s “been assured by bankers on Wall Street” that they are going to “raise prices on their clients.” The crowd tisked and shook their heads and nodded knowingly: I knew it! Now, Mr. Cohan is not just a TV Personality. He is an author, and he has written books about Wall Street, where he did, after all, once work. And being an author, it apparently occurred to him that he ought to offer some proof for his “cartel” theory besides unsubstantiated hearsay. So he did: “Wall Street is booming in every way,” he said, declaring, as if stating an indisputable fact, “Profits have never been higher. ” Quote, as they say, unquote. Now, having just listened to supposed-cartel-co-conspirator BankAmerica CEO Brian Moynihan point out that his company has just completed its 15th consecutive quarter of reducing employment by 3,000 human beings or more, the phrase “booming in every way” wouldn’t necessarily spring to the mind of anyone remotely paying attention to the current environment on Wall Street. However it’s the “profits have never been higher” that seemed flat-out wrong. Since this was a speech, and there were no fact-checkers around as would be the case if this had been a manuscript for publication, we here at NotMakingThisUp decided to check the facts ourselves to see if Mr. Cohan was, in fact, not Making That Up. The results, from our trusty Bloomberg, are in the table below, which shows the most recent earnings data from the five money-centers that remain intact from the crisis days compared to their peak quarterly numbers, almost entirely from the 2006-2007 fat years (Wells Fargo is not included because it is a substantially different entity thanks to the Wachovia acquisition): If that is a cartel, it is not doing a very good job of jacking up prices for its clients. Return on equity for the “booming-in-every-way” cartel is down 50% from peak levels; return on assets is down 40% from peak, and earnings (in billions of net after-tax dollars, adjusted for non-recurring items), are nearly 30% below peak. Not even close to “Never been higher.” And while we are at it, we should probably also point out that John Lennon actually said “cranberry sauce,” not “I buried Paul,” at the end of “Strawberry Fields Forever;” that Paul went barefoot during the Abbey Road cover shoot because it was a warm day outside the EMI studio at St. John’s Wood, not because the cover photograph was an allegory of a burial ceremony; and that Paul is actually still alive and well, and recently turned 73. Just in case Mr. Cohan tells you otherwise. Jeff Matthews Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2015) Available now at Amazon.com © 2015 NotMakingThisUp, LLC

The best part of this year’s Berkshire meeting—except seeing Charlie Munger in good form, which we’ll get to in a bit—was the movie. Not the movie itself, but the end of the movie, when the sing-along tribute to Berkshire’s managers, which always used to be set to the tune of “My Favorite Things,” turned out to use “Sgt. Pepper” instead. That’s some good taste there. But, actually, the best part of the Beatles-themed piece of the movie came as it died out and, miraculously, the “Sgt. Pepper Reprise”—the best two minutes of The Beatles ever recorded, in your editor’s opinion—began to play during the credits. (Yes, we know—Dear Prudence…Across the Universe…Revolution…Oh! Darling…Something…Everybody’s Got Something To Hide…The End—are up there, but it all depends on what mood you’re in, right? And the mood we were in was, “Hey, this is seriously good taste.”) But that was before the absolute best part of the entire meeting actually occurred, which was when the Sgt. Pepper Reprise died out and the house lights stayed dim and suddenly that willowy organ introduction—Can they really be playing this?—to Joe Cocker’s full-throated ¾-time version of “With a Little Help From My Friends” began to coil above the sound of 20,000 or so Berkshire shareholders shifting in their seats waiting for Warren and Charlie to hit the stage, which they did as The Grease Band came in over the organ with a bang, young Jimmy Page leading the charge on electric guitar… It doesn’t get any better than that. And it didn’t. Not that it wasn’t a good meeting. It was a very good meeting. It just was kind of all downhill from there—at least when it comes to the energy of the thing. Substance-wise, Warren and Charlie sat for the usual five-plus hours of thoughtful questions (for the most part) and thoughtful answers (with a bit of deft tap-dancing on Warren’s part, particularly when the enormously touchy subject of 3G—the Brazilian takeover artists whose Berkshire-financed slashing-and-burning at Heinz has turned a sleepy-but-modestly-profitable ketchup company with declining sales into a hugely profitable ketchup-and-potentially-mustard company with declining sales—came up). Naturally, Carol Loomis did the bringing up, because a) Carol is a terrific journalist, and b) Carol has no fear, while she also knows that Buffett can rationalize anything. And rationalize 3G he did, saying “I don’t think you can ever find a statement that Charlie and I have made…where we’ve said more people than are needed should be working at our companies.” That’s not the point, of course: the point is that if 3G ran Berkshire it would very likely have substantially fewer than 300,000+ employees in short order, no matter how often Buffett points to the 25 FTEs at corporate headquarters as proof that Berkshire doesn’t have any fat. (Buffett later, and ludicrously, claimed that if Berkshire operated as a normal bloated American company it would have a huge corporate headquarters staff which 3G would be entitled to slash if it ran Berkshire—thus ignoring the corporate headquarters functions scattered throughout all the various Berkshire companies, which naturally have their own CFOs and Treasurers and controllers and legal et al.) But we came to praise Buffett and Munger, not to criticize them, particularly Charlie, who got in his usual wonderfully concise, pointed observations after Buffett had frequently wandered around the metaphorical map on various topics ( and Charlie participated in literally every question asked during the first half of the session). For example: On why Clayton Homes (criticized in a recent Seattle Times “expose”) has some customers who default: “If we made the default rate zero we wouldn’t be lending to people who need it.” On what investment formula Buffett and Munger could provide to evaluate companies: “We don’t have a one-size-fits-all system.” On his and Buffett’s less-than-healthy diets: “The way I look at it, if I die earlier I’ll just avoid a few months of drooling in the nursing home.” On why Van Tuyl has been wildly successful in the notoriously nepotistic car business: “Van Tuyl has a system of meritocracy where the right people get the power and the ownership.” On why Berkshire changed over time as it did: “We were always dissatisfied with what we knew…we wanted to learn more.” On how to succeed without a business degree: “Play the hand you’ve got.” And on what he and Buffett look for in business partners: “The trustworthiness is more important than the brains.” And that’s just the first half of the meeting, because we left at the lunch break, never to go back. Readers who wish can call up Charlie’s bon mots on Twitter and on the “live-blogs” of any of half a dozen financial news outlets that covered the event, but we’re not going to pretend to have been when and where we weren’t. Why now? Maybe it was seeing the NetJets pilots and attendants, dressed to the nines in their uniforms and walking quietly and respectfully in a very long oval outside the CenturyLink Center the entire meeting, so different in seriousness and demeanor from past “Hey look at us!”-type protests at the Berkshire meeting; maybe it was Buffett’s inability to admit publicly, “Well, yes, it’s true, the 3G guys are more Mr. Potter than my George Bailey, but so what?”; maybe it’s the fact that Business Insider—Henry Blodgett’s quite wonderful online vision of what would happen if People Magazine covered the business world (with occasional great scoops thrown in the mix)—published a reporter’s visit to Warren Buffett’s Favorite Steakhouse (here), complete with photos of the actual type of steak Warren likes to order… We don’t know, but after hearing Joe Cocker (1944-2014, sadly) singing his guts out on the heels of Ringo and The Boys slamming it, the whole thing just seemed like enough. And so, enough. Jeff Matthews Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2015) Available now at Amazon.com © 2015 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews.
 Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Jamie Dimon’s trip to Capitol Hill next week to explain his bank’s multibillion-dollar trading debacle could quickly devolve into Washington Gotcha Theater. But it shouldn’t. It should be used to draw out some real answers that will help inform the public and lawmakers about the risks of our banking system… So begins Andrew Ross Sorkin’s quite reasonable, and well-written, DealBook Column, “Some Questions to Ask Mr. Dimon,” which you can read here. The questions Sorkin fantasizes Congresspersons asking are all good, and it would be great fun and most interesting to hear them asked as written, without histrionics, so that Jamie can answer them, without histrionics. But they won’t be asked—at least the way they’re written. That’s because the Congresspersons asking the questions generally have the intelligence of spoons—and not just your basic cereal spoon, but spoons that have gotten caught in the garbage disposal and are mangled beyond recognition. Of course, mangled-spoon-intelligent though they might be, Congresspersons have one instinct that preserves their electability and drives their behavior: to get on TV. I know, because I testified before Barney Frank’s finance committee just prior to the 2008-9 financial meltdown. The hearing was about whether hedge funds could cause a market collapse. They didn’t ask about Lehman Brothers. In fact, they didn’t ask much that they didn’t want to hear. They came in (they never stayed for anything but their own turn in the spotlight); they made a statement; then asked something rhetorical; then made a pretense of listening to the answer; then left. It was all about theater, and not a bit about substance—except one guy, who I’ll get to. The most intellectually dishonest as I remember it was a New York rep, Caroline Maloney, but they were all pretty bad, Republicans playing Republicans and Democrats playing Democrats. The only exception was a guy from Mississippi who sat there the entire session—he was the only one who stayed from start to finish—and asked very straight, non-TV-camera-oriented questions about what would happen, for example, to the retiree from “the pipefitters union” if a hedge fund they’d invested in went down. He didn’t know much but, unlike Maloney and the rest, he didn’t pretend to know. And he listened to your answers and then asked another question. I wasn’t completely surprised at the mangled-spoon quality of the I.Q. quotient in the room—I once got a call from a Congressperson-friend on a financial sub-committee before the crisis when they were debating something to do with Wall Street. The conversation literally—literally—went like this: “I’m going into a session…now, remind me, ‘fixed income’ is what?” “Debt.” “Okay. And equity is…” “Stocks.” “Right, okay, thanks.” I am not making that up. If the guy from Mississippi is still there, Jamie Dimon will get some good questions. Otherwise, the Maloney types will do their best to bring out the worst. Jeff Matthews Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2012) Available now at Amazon.com © 2012 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. And if you think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the entertainment of the reader, and the author.

Another day, another “Is Warren Buffett is Irreplaceable?” article. Today’s version, however, carries the imprimatur of the New York Times’ “DealBook” column, and it’s written by a professor to boot. The gist of the professor’s case appears right in the first two paragraphs, as follows: Acquisitions usually come with a nice premium for the seller. But when Warren E. Buffett is the buyer, there is typically something of a discount. The ability to make acquisitions on favorable terms is a testament to Mr. Buffett’s personality and skills as a deal maker. It also highlights an almost unsolvable problem for his company, Berkshire Hathaway, and its shareholders. When its 82-year-old chief executive is gone, who will negotiate such sweet deals? Exhibit A in the ensuing story is the recent Heinz deal, terms of which the professor parses in order to make the point that Buffett got a “really tasty” deal when considering the expense of the 9% preferred stock issued to Berkshire relative to the 4.25% yield on debt issued to help fund the balance of the acquisition: Mr. Buffett is getting 55 percent of Heinz plus an interest payment of $700 million a year. This is an extraordinarily good deal. Furthermore, the professor points out, the fact that “The Heinz board decided to deal only with Berkshire” fits the pattern established during the Burlington Northern and Lubrizol deals, where “neither board appeared to negotiate particularly hard.” Thus, he concludes, “When it comes to Mr. Buffett, boards roll over.” The analysis, however, leaves aside a few important facts. Fact one is that Berkshire (and its partner in the Heinz deal, 3G) is paying an all-time high price for Heinz stock since it was founded in 1869. Fact two is that no strategic buyer expressed any interest at all in outbidding Berkshire and 3G for Heinz. And the reason nobody else stepped in is that Berkshire and 3G are paying an extremely high multiple for Heinz—14.3-times EBITDA (a metric Buffett distrusts) and 17.4X pre-tax, pre-interest income, his preferred valuation measure. In fact, Buffett said at the recent shareholder meeting, “Charlie and I paid probably a little more than we would have if we’d bought it ourselves,” without 3G, who will run it. So the Heinz deal is hardly a steal—and if it were, surely any number of strategic buyers or Carl Icahn-types would have jumped into the fray to push up the price. (Witness the current bidding war for Sprint, which has an enterprise value of $39 billion, compared to Heinz at $27 billion.) As for the Burlington and Lubrizol boards “rolling over” for Buffett during their negotiations, well, again, the facts disagree with the superficial observation: Berkshire paid a record all-time high price for Lubrizol (specifically, $135 a share for a stock that had traded at $23.75 less than 24 months prior to the deal announcement). And in the case of Burlington Northern Santa Fe, a Class 1 railroad with almost no alternative bidder who could even theoretically buy the company, Buffett paid $100 a share for a stock that had traded above $100 a share for less than five months out of its 160 year history (during the housing bubble, just prior to the financial crisis). Just seven months before Berkshire’s bid the stock had touched $50.73 a share, and the day prior to the announcement it was $75.87 Oh, and Berkshire offered either cash or stock for Burlington’s shares, so whatever the Burlington board was theoretically leaving on the table by not soliciting somebody else—and who else could have topped Berkshire’s $35 billion bid in those dark days is a topic the professor does not address—will accrue to those Burlington shareholders who took Berkshire stock instead of cold, hard cash. There is one other major factor outside price and availability of other suitors that explains the ability of Buffett to court companies, and it is a big one not discussed in the DealBook article: Berkshire does not mess with the companies it buys. Unlike most acquirers, who promise their Wall Street investors zillions of dollars in synergies (i.e. layoffs and plant closures) resulting in all manner of earnings accretion, Buffett leaves his companies alone, and that is a tangible benefit which any board of directors ought to consider when deciding what should happen to the assets for which they are a fiduciary. In the case of Burlington Northern, for example, the ability to invest for growth, without the need to meet Wall Street forecasts, as part of Berkshire Hathaway has allowed the railroad to take advantage of a shale oil boom that has helped boost revenues by 40% and pre-tax earnings by 50% since the day the deal closed. And that is good for not just the Burlington Northern railroad, and for Berkshire Hathaway, and for Warren Buffett…it is good for the Burlington Northern shareholders who chose to take Berkshire stock, a key point missing from the DealBook analysis. As for the question asked by DealBook, “When its 82-year-old chief executive is gone, who will negotiate such sweet deals?” the answer is: a) there’s a guy; b) he’s already getting the same kinds of deals Warren Buffett is getting, and; c) his name is in this book: “Warren Buffett’s Successor: Who It Is and Why It Matters” (eBooks on Investing, 2013). Jeff Matthews Author “Warren Buffett’s Successor: Who It Is and Why It Matters” (eBooks on Investing, 2013) Available now at Amazon.com © 2013 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. And if you think Mr. Matthews is kidding about that, he is not. The content herein is intended solely for the entertainment of the reader, and the author.

Well, Tiger Woods Syndrome is breaking out all over, even in Omaha, Nebraska. By “Tiger Woods Syndrome” we refer to what happens when the Mainstream Media has been sitting on a story it has long known of but couldn’t go with because the subject was too powerful: when the story suddenly, irrevocably blows wide open (like, oh, the guy’s wife tries to bash his head in with a golf club), well, suddenly everyone has a story to tell, and the press is happy to tell it. And while the David Sokol Affair didn’t involve sex or golf, it did involve enough bad judgment to blow the cover off the notion that Warren Buffett’s perceived successor had everything a Berkshire shareholder could ask for, which is precisely when the knives came out here in Omaha at the Berkshire Hathaway shareholder meeting. Friends and financial reporters who’d been told things over the years would say quietly to us, “Don’t quote me, but…” and then tell a Sokol story (more about judgment and personality than about anything you could put down as being wrong) that had either been dismissed as just sour grapes from a Sokol competitor or had been suppressed for the same reason nobody in the Mainstream Media ever bothered to investigate Tiger Woods’ extracurricular activities: the guy was too rich and too powerful. And, hey, David Sokol had Warren Buffett’s blessing. But with Sokol gone, so is the glow—and a lot of shareholders would like to know exactly how close did Berkshire Hathaway come to putting Warren Buffett’s life’s work in the hands of a guy willing to pick off a few points in a stock ahead of his employer’s acquisition of that company? Unfortunately, the real answer to that question—probably a lot closer than Warren Buffett would like to admit—was never actually addressed at the Berkshire meeting, either by Buffett or Charlie Munger. Indeed, because of the Sokol Affair, Buffett seemed on his guard and more defensive than usual. In contrast to last year’s defense of Berkshire’s relationship with Goldman Sachs, when Buffett came out swinging, this year he was more reflective and less direct in getting to the heart of the Sokol-related questions. He seemed still stunned at the whole turn of events. Charlie Munger, by contrast, was sharp, hard-nosed and positively voluble throughout. Munger also got the funniest line of the day in the video within the movie that kicked things off. (The video—the best in years—was a laugh-out-loud takeoff on the TV show “The Office,” called “Michael’s Replacement,” in which Buffett and Munger take over at Dunder Mifflin from the clueless Michael Scott and his conspiratorial number two, Dwight Schrute. When a jealous Dwight sizes up Munger, his replacement as Number Two, sneering, “You don’t look so tough,” Munger adjusts Dwight’s tie, leans in and says menacingly, “There are eighteen ways I could kill you.”) But it was in the six-hour Q&A following the movie that Munger demonstrated what has made him so valuable to Warren Buffett and to Berkshire Hathaway all these years, participating in an unprecedented number of questions, and with more substance and fewer jokes than usual. In fact, at one point Munger abruptly took over one of the Sokol questions from Buffett, saying sharply, “I’ll handle this,” when a shareholder suggested Lubrizol’s board of directors had violated its fiduciary duty by negotiating only with Berkshire Hathaway, and not auctioning the company. And whereas Buffett mainly played defense, with long-winded explanations of Sokol-related issues, Munger played offense, summing up matters crisply and, as usual, with no holds barred. Sisters Under the Skin For example, after Buffett explains in long and meandering detail how he came to believe Lubrizol belonged in the Berkshire family, despite its tainted upbringing, Munger simply says, “You know ISCAR and Lubrizol are to some extent sisters under the skin…very small markets…fanaticism in service. If you have any more like that, give Warren a call.” We Own So Many Wonderful Businesses When Buffett wrestles with an explanation for the current valuation of Berkshire’s stock ($125,000 a share at the time of the meeting) compared to one observer’s estimated intrinsic value of $185,000 (based on the faulty premise that Berkshire’s $95,000 per share worth of investments are somehow unrelated to the insurance businesses and therefore a cash-equivalent that should be added to $90,000 per share for the businesses themselves) Munger dismisses the premise that Berkshire’s share price is tied to any break-up calculation, and instead focuses the crowd on the long-term value of Berkshire: “It’s terrible trouble you people have…we own so many wonderful businesses we hate to part with them.” Europe Survived the Black Death… As usual, while Buffett takes the bright side of most issues in keeping with his inherent optimism in the future, Munger offers a dour, cynical view based on his broad knowledge of history and human behavior—but usually arrives in the same spot. Asked “How can a lousy long-term U.S. economy make you happy?” Buffett gives a long, enthusiastic, cheerleader’s answer, winding up with, “All I can tell you is…the power of capitalism is incredible.” Munger, on the other hand, dryly notes: “Europe survived the Black Death when a third of the people died, but we’re gonna move on.” Still, Buffett is crisper and forceful when it comes to his comfort zone: Berkshire and its legacy. He minces no words when asked about whether, and when, Berkshire will pay a dividend. “There will come a time, and who knows how soon because the numbers are getting big…when a dollar only buying 90c of value…but I predict the day Berkshire declares a dividend the stock will go down because that will mean it is no longer a compounding machine…” It Had Its Head Up Its— And Munger does hold back at least once in the six hours of Q&A, when they are asked about Berkshire’s position in Wells Fargo, one of the banking giants whose inherent profitability has been impaired by the Dodd-Frank legislation and the housing implosion. Buffett defends the investment without much input from Munger: “US banking profitability will be considerably less than early part of this century; one reason is the leverage will be reduced… If you keep out of trouble on the asset side, it’s a good business because credit is very cheap. I like our positions there.” Yet, months later, speaking to investors in Los Angeles, Munger will say that what he admired about Wells Fargo is its management didn’t hesitate to admit “it had its head up its ass” when it came to mortgage lending. But Munger bit his tongue here in Omaha. Not a Terribly Rational Thing Still, when he does speak here, it is just as straightforward as that observation in defense of Wells Fargo management. When asked about gold as an investment, for example, Buffett launches into almost a professorial discussion of investing. “There are three categories of investment,” Buffett begins, describing currency, which depends on the behavior of monetary authorities to maintain its value; gold and other commodities that “don’t produce anything and you hope somebody will pay you more for later one,” and then assets “that make things, like a business, a farm”—which is the category Buffett and Munger have generally stuck to, with a few bets on currencies and commodities along the way. Munger simply says: “Buying something that only goes up if the world goes to hell is not a terribly rational thing.” This Attitude of Trust When Buffett is prodded by a shareholder about Berkshire’s lack of formal compliance procedures “like most firms,” he gets defensive, first saying “I don’t think most companies have them” (which is absolutely not true when it comes to financial giants like Berkshire), then dismisses the idea altogether: “But we could have all the records in the world…they could be trading in their cousin’s name.” Munger, on the other hand, defends Berkshire’s culture entirely: “If you look at the greatest institutions in the world, they trust their people…it’s so liberating…I think your best compliance cultures are the ones that have this attitude of trust.” Glitches That “attitude of trust” may be Munger’s Achilles heel when it comes to BYD, the Chinese car company of which Munger was a shareholder and fan for their efforts in battery technology well before Berkshire invested in the company. BYD’s initials stand for “Build Your Dreams,” but the company has been accused of copying other carmaker’s designs in diplomatic cables uncovered by WikiLeaks, one of which read: “BYD seeks to ‘Build Your Dreams’—based on Someone Else’s Designs.” Asked by a shareholder about the company, whose earnings and share price have been under pressure, Buffett demurs, saying, “Charlie’s the BYD expert.” Munger begins his answer with the worst line of defense, BYD’s stock price, and then dismisses any issues with bland assurances as uncharacteristic as they are unenlightening: “Of course the price is still way higher than the price BRK paid… Any company that tries to move as fast…is going to have its glitches…I’m quite encouraged…” “Glitches” is the same term Munger employed to describe the Sokol stock trading affair in the immediate aftermath of that black eye, and it may be as understated an adjective when applied to BYD as it was to Sokol’s $10 million investment in Lubrizol in the weeks preceding Berkshire’s bid for the company. BYD thus far has failed to produce anything like its past promises, as contained in this 2009 Reuters article: BYD says that its new E6 electric car due out before the end of the year will do 250 miles (400km) on a single charge. This is a very big number. The Tesla electric sports car does almost as much, but has little room for anything else in the car but the battery. The E6 is roomy with space for five passengers and a good-sized boot. The battery tucks under the back seat. —Roger Harrabin, Reuters The E6 was not out “before the end of the year” 2009, nor was it out before the end of the year 2010. And when the Wall Street Journal inquired about the delay late last year, BYD gave the paper a howler of an excuse: Stella Li, BYD’s senior vice president and head of its U.S. operations, said the holdup was caused by BYD’s efforts to make the car roomier, especially its rear-seat area that was cramped thanks to a beefy battery pack that needs to be stored under the seat. Ms. Li told the Journal the E6 would be ready for sale in 2012. (We here at NotMakingThisUp would call that bluff.) A Star Rises in the East But, BYD aside, Munger has few blind spots, and enough blunt assessments about the ways of the world to keep Berkshire shareholders happy… On why Berkshire does not trade commodities like oil: “Oil trading worked best of all for the people who bribed Nigeria.” On what caused the financial collapse: “My answer is that past panics and depressions tended to involve great waves of speculation…. I think you can confidently expect a new mess before your career is over… Part of this mess is due to our academic institutions… Finance really attracts people who should be in snake charming.” On the political environment in Washington: “I remember an era when we had a bipartisan foreign policy, the Marshall plan. Now it seems we have two parties competing to be more stupid.” On CEO compensation: “I think somebody has to be an exemplar for not grabbing all you can…” On which asset class he would add to his ‘circle of competence’ if he were going to live another 50 years: “It would either be tech or energy.” But the best line of the day—one not picked up on by everyone in the arena, so fast and subtle it was—came towards the end, on a question asked by a very sincere investor. “If you were to have a baby in the next 5 years,” the shareholder begins, drawing titters from the crowd, “how would you incentivize them to compete against hungrier kids from other parts of the world…” Munger, whose age (six years older than Buffett and now approaching 90) has always been the subject of jokes between the two men, sits up in his chair and a huge smile crosses his face at the idea of becoming a father as an octogenarian: “A star rises in the east,” he says in an awe-struck voice, drawing broad laughter as Buffett begins his answer. A Fortune Fairly Won and Wisely Used Still, it is not wisecracking that makes Charlie Munger so important to Berkshire Hathaway. It is the genius of his recognition—forged as an attorney working with struggling companies in Los Angeles before hooking up with his fellow Omaha native in the 1960s—that buying good businesses at reasonable prices was better in the long run than buying bad businesses however cheap they appeared to be, which was how Warren Buffett came to take control of Berkshire Hathaway before Munger came along. It was Munger’s crucial notion about the long-term value of good businesses versus bad business (“Bad businesses throw tough decision after tough decision at you; good businesses throw cash,” was how he once put it) that led the two men to make their first acquisition together in 1972—See’s Candies, for $25 million. And See’s was a very good business. For one thing, it almost immediately began generating excess cash (well over a billion dollars so far) for Buffett to reinvest elsewhere. For another, it created the template by which Berkshire would amass a collection of good companies, bought at reasonable prices, that today employee over a quarter-million people and churn out a billion dollars a month in cash. Asked about their legacies at the Berkshire meeting, Buffett initially wisecracks that he would like it to be “Old age,” then says he’d like to be known as a teacher. Munger, who has always seemed more well-rounded, if less wealthy, than his partner, sums up his answer as succinctly, and appropriately, as you’d expect: “I have an uncle with a saying: ‘A fortune fairly won and wisely used.’” Indeed. The End. Jeff Matthews Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2011) Available now at Amazon.com © 2011 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Let’s start by making one thing clear: we here at NotMakingThisUp harbor no particular good will towards Goldman Sachs. In fact, not long ago we published in these virtual pages a column titled “Goldman 8, Public Zero…the Teachable Moment of Bare Escentuals (January 15).” It was a minor but explicit illumination of Goldman’s relationships with its clients—i.e. pretty much the same relationship a water moccasin has with a frog. Loyal readers will recall that we described how Goldman Sachs first sold a total of 36 million shares of cosmetics maker Bare Escentuals (sic) to the public at prices ranging from $22.00 to $34.50. Then, after the wheels came off the proverbial track at Bare, Goldman’s crack research team slapped a “Sell” rating on the company’s stock…but not until after it had already collapsed to $13 a share. Adding insult to injury, just a few weeks after that “Sell” rating—from Bare’s very own investment bank—sent the shares crashing, Bare Escentuals received a takeover bid for $18.20 a share. But wait, as they say, there’s more! Bare Escentuals then hired none other than Goldman Sachs to advise the cosmetics company on the $18.20 a share offer. Goldman, naturally, endorsed the price as fair—just weeks after its own research department had declared $13.00 as too rich a price for Goldman’s clients to pay—and received fees for doing so. By our count, that amounted to eight ways Goldman Sachs made money on Bare Escentuals at the expense of anybody on the other side of the table.And while we therefore do not have any particularly benign feelings towards Goldman Sachs, neither do we harbor ill-will towards the government institution which filed a complaint against that firm on Friday. Indeed, the SEC Chairman who, in our view, pulled the teeth out of that animal under the previous administration and then flailed ineffectually while the world collapsed thanks in part to his blunders—i.e. Chris Cox—is gone, and good riddance to him. (For an entertaining and insightful look at that sordid story, read Andrew Ross Sorkin’s excellent account of the Lehman collapse, “Too Big to Fail.”) Still, we’ve read the SEC’s complaint filed against Goldman Sachs Friday afternoon—headlines of which seemed so shocking they sent Goldman shares, and stock markets, crashing. And while the complaint portrays yet another sordid story—the account of some really awful paper Goldman helped package and sell to a dumb German bank at the behest of a smart U.S. hedge fund manager—we think the government doesn’t have a leg to stand on. The gist of the SEC’s complaint—and while we are not attorneys, we have been in this business a few decades and seen more than a few frauds in that time—appears to be, in part, that Goldman and an employee mislead IKB, the German bank in question, by not disclosing that John Paulson’s hedge fund had helped select the garbage Goldman was selling to IKB: In sum, GS&Co arranged a transaction at Paulson’s request in which Paulson heavily influenced the selections of the portfolio to suit its economic interest, but failed to disclose to investors…Paulson’s role in the portfolio selection process or its adverse economic interests. —Paragraph 3, SEC v. GOLDMAN SACHS & Co. and FABRICCE TOURRE. Let’s leave aside the obvious howler here—since when did it become a broker’s responsibility to violate the confidentiality of its clients by disclosing the seller’s identify to the buyer?—and focus on the specifics of the SEC charge, particularly the notion that IKB would not have proceeded with the transaction had Goldman not omitted Paulson’s name from the discussion, as spelled out here: IKB would not have invested in the transaction had it known that Paulson played a significant role in the collateral selection process while intending to take a short position in ABACUS 2007-AC1. —Paragraph 59, SEC v. GOLDMAN SACHS & Co. and FABRICCE TOURRE. Who, exactly, is this IKB that, if we are to believe the complaint, had been led like a lamb to slaughter by Goldman Sachs at the behest of John Paulson?Well, IKB is short for IKB Deutsche Industriebank, and it was once a sleepy German industrial lender that, during the 2000s, made the plunge into sub-prime CDOs for the same reason so many of its peers did: it seemed like a good idea at the time. Indeed, so good an idea did it seem, that IKB boasted of its prowess in evaluating exactly the kind of garbage the SEC is now trying to claim Goldman Sachs misled it into buying. Far from being an unwilling pawn on the financial chess-board, IKB issued press releases about its move into the exotic world of toxic mortgage structures even as John Paulson, the genius who sold the garbage to IKB, was deciding it was time to sell the same toxic mortgage structures short. Indeed, as far back as March, 2006—a year before the tainted transaction with Goldman Sachs—IKB issued a press release announcing the closing of a deal, chest-thumpingly-named “BACCHUS” (we are not making that up) which seems to make it very clear that IKB was not only a willing buyer, but a willing distributor of the same kind of garbage as the boys in lower Manhattan. Here begins that press release: IKB closes first “Bacchus” deal, strengthening its position as an asset manager for corporate loan portfolios. [Düsseldorf, Germany, 16 March 2006] IKB Deutsche Industriebank AG has successfully concluded “Bacchus 2006-1″, a funded securitisation of acquisition financings. With this deal, IKB further strengthened its position as a leading asset manager for corporate loan portfolios. The € 400 million Collateralised Loan Obligation was arranged and placed by JP Morgan… Bacchus, of course, was the Roman god who inspired the term “Bacchanalia.” Call us old-fashioned, but for our part, if we had been a stodgy old-line German bank packaging securities for resale, we would have selected a more sober god to name our deals after—“Apollo,” perhaps (god of music and healing; ‘associated with light, truth and the sun’), or “Artemis” (goddess of the hunt). Not the god of drunken orgies. Having discovered that IKB appears to have been no babe in the CDO woods, we now submit the following document that we suggest may well suffice as “Exhibit A” in Goldman’s defense. It is a presentation by Dr. Jörg Chittka, head of IKB investor relations, prepared for a Dresdner Kleinwort Day for Investor Relations on December 12, 2006—just a few months before the transaction in question—and it can be downloaded from the IKB web site. Let’s flip quickly through Dr. Chittka’s “slide deck”: “Slide 3: Highlights—Market Leader/Strong performance/Solid ratings…” —IKB Dresdner Kleinwort IR Day 12.12.2006 Hmm, IKB would seem to be no country bumpkin. This slide informs us that, among other things, IKB is a “Specialist in long-term corporate finance” and a “Market leader in long-term corporate lending in Germany” with a market share of 13%. “Slide 5: Focused market strategy—Specialisation(sic)/Lean sales system/Selective new business…” —IKB Dresdner Kleinwort IR Day 12.12.2006 Sounds good! Dr. Chittka informs us that IKB has a “Rating-oriented product and price strategy,” and that “New business” is “strictly oriented to rating and margin spread.” So how on earth did IKB end up owning a bunch of Goldman-packaged, Paulson-shorted garbage? The next slide holds a clue, in the form of a timeline showing IKB’s history: “Slide 6: Lines of Development · 1924: Foundation · 1930s: Pioneered long-term lending at fixed interest rates… · Entering 2000s: CLO-transactions and investments in international loan portfolios” —IKB Dresdner Kleinwort IR Day 12.12.2006 Ah, there we have it. IKB is getting into the CLO business, especially in international loan portfolios! But what does this little German bank know from CLOs? Well, it turns out this little German bank claims to possess an advantage: “Slide 9: Competitive edge · High expertise in all fields of corporate finance, incl. -rating advisory and -industry research” —IKB Dresdner Kleinwort IR Day 12.12.2006 There you have it: IKB claims to have “high expertise in all fields of corporate finance,” and that includes both “rating advisory and industry research.” Indeed, the IKB slide deck goes on, bragging in the kind of detail you can bet Goldman Sachs’ attorneys will be happy to share about the “excellent rating IKB enjoys” thanks to its “outstanding funding base”; the “Strong and stable customer relations based on relationship banking over decades”; the “High diversity of IKB loan book”; the “High granularity” of the IKB loan portfolio; the “Improving quality of the loan book” and the bank’s “Solid capital base for business growth.” So confident was IKB’s management of all these things that Slide 35 boasts that “IKB is going to meet the operating profit target for the financial year 2006/2007 as a whole.” How, exactly, would IKB perform this feat? Slide 36 informs us that one of the ways is by the “additional investments in international loan portfolios.” International loan portfolios such as ABACUS 2007-AC1, perhaps? There is more—60 pages in all—but from our brief review it would appear that this particular German bank took the other side of the Paulson trade not because it didn’t know Paulson was selling. After all, at the time the deal was structured in early 2007, John Paulson was just “John Paulson, merger arbitrage hedge fund guy,” not “John Paulson, billionaire hedge fund manager who bet against the housing bubble and won.” No, it would appear that IKB—creator of BACCHUS, self-proclaimed possessor of “high expertise in all fields of corporate finance,” and seeker of “additional investments in international loan portfolios”—simply wanted the other side of ABACUS, period. From BACCHUS to ABACUS really wasn’t too long a journey for IKB, but it was deadly.And while Goldman & Company may have showed IKB the way, they did not, it would seem, drag them kicking and screaming.More like skipping and singing.Jaded we may be, but we here at NotMakingThisUp will bet, as the saying goes, dollars to donuts that at the end of the day, the score in this case looks like this: Goldman 1, SEC 0. Jeff Matthews I Am Not Making This Up © 2010 NotMakingThisUp, LLC The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.