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Since “Hellhound on His Trail” came out in the spring of 2010, I’ve had occasion to think anew about the many conspiracy theories that swirl around the story of the King assassination…a lot of perfectly sane people believe that Martin Luther King was killed as a result of a vast, shadowy conspiracy. —Hampton Sides, author, “Hellhound on His Trail.” This being the weekend America honored MLK, we’re recalling that lament of the above-quoted author Hampton Sides—whose excellent, compelling account of the largest manhunt in FBI history is worth buying, right now, on your Kindle or iPad—about the persistence of weird conspiracy theories surrounding what was, in fact, the well-documented assassination of one civil rights leader by one sorry but clever-enough jailbird, as we consider the persistence of a weird conspiracy theory about a once-proud retailer brought low by one genius of a hedge-fund manager. We speak, of course, about Sears. The conspiracy theory, lately making the rounds on Wall Street, stems from the fact that the hedge-fund genius, Eddie Lampert, who also happens to be Sears’ board chairman, recently purchased nearly 5 million shares of Sears, mostly from his own hedge fund, at a price of close to $30 per share. The conspiracy theory hinges on three verifiable facts: 1) Eddie Lampert is an extremely smart guy with a terrific track record; 2) Sears under Lampert has become even more of a basket case than it was before he took control; and 3) despite the obvious collapse in Sears’ business model, Lampert had been using Sears’ own coffers to buy up stock in the open market at absurd prices that were far higher than what he just paid for the stock, rather than invest in the business itself. And on all three facts, the conspiracy theorists are correct. Lampert is smart—witness his success with AutoZone. And he has been using Sears’ own cash to buy stock in the open market at absurd prices, in hindsight: Fiscal Year $MM Bt # MM Shares Bt Average Px 2010 $394 5.5 $72 2009 $424 7.1 $60 2008 $678 10.3 $66 2007 $2,900 21.7 $135 2006 $816 6 $136 2005 $590 5 $125 Total $5.8 Billion 55.6 million shares Average price: $104/share. Last trade: $33.56 per share. Value destroyed: $3.9 billion. As for the notion that Sears has become a retail basket-case, look no further than the credit default swap market in Sears Acceptance Corp—the Sears financing arm—and you’ll see they have blown out to levels that even the calculator-impaired credit monitors at S&P would recognize as, er, stressed. “Why then,” the conspiracy theorists ask rhetorically, “would Eddie have bought back all that stock for the company at stupid prices before buying stock for himself cheap?” Their answer—and while we’re paraphrasing what we’ve heard, we’re not making up the gist of it—is this: “Eddie wants Sears to go bankrupt so he can take control of the real estate and make a ton of money.” And while the conspiracy theory seems to wrap up a lot of loose ends, it does not take into account the most obvious notion, which is that Eddie got Sears wrong. By way of demonstrating just how wrong he may have gotten it, we herewith present a sample of howlers from various Sears filings over the years: [Sears] completed development of new Internet technologies and migrated our selling websites to an improved e-commerce platform. This new platform positions us to attract and retain customers using a multichannel service approach to create a consistent experience across the channels and enhance the offerings and the shopping experience where channels intersect. Examples include store-to-Web, Web-to-store, special order catalogs and the sales hotline. Multichannel represents the potential for a sustainable growth vehicle for our company and represents an opportunity for us to unify and integrate the customer’s experience. …in August 2007 we introduced the Ultimate Appliance Promise campaign. The purpose of this campaign is to show our customers that we are uniquely positioned to meet their appliance needs by offering the largest selection of appliances, a price guarantee, one year of free service and support, and next day delivery and installation in many markets across the U.S. [Sears] remodeled approximately 30 Kmart stores to include Sears-brand products. We intend to continue our rollout of home appliances, including Sears Kenmore-brand products, into Kmart locations over the next several years as a means of expanding our points of distribution in response to competitor store growth. As of February 2, 2008, approximately 280 Kmart stores, including certain of the remodeled locations, offered broad assortments of home appliances. MyGofer expanded its fulfillment options in a variety of ways, as well as serving as the engine behind additional integrated retail efforts. MyGofer.com provides features and benefits designed to create a one-stop shopping experience, offering a range of quality products including groceries, prescriptions, health and beauty products, and electronics. MyGofer was created to provide our customers with speed and convenience – the same day a customer places an order, it is ready within hours, with pickup now available in over 600 stores. And, our favorite: With regards to social media, we deployed a variety of campaigns and applications to make our experiences more engaging and “sticky,” both on sites like Facebook and Twitter, as well as on sears.com. Maybe—just maybe—like when a loser from a broken home of whom nobody had ever heard managed to kill the leading civil rights leader of his times and almost get away with it, the facts are just the facts. To support this perspective, we now harken back to an early report on Sears that spookily heralded everything that came afterwards: a 2006 Fortune Magazine piece in which Lampert is called “The Steve Jobs of the investing world,” yet contains enough evidence of the penny-pinching narrow-mindedness that destroyed Sears to be almost prescient: The mood was tense at the Bel Age Hotel in West Hollywood, Calif., early last year. The top two dozen executives of Sears Roebuck & Co. were gathering for a strategy session with Eddie Lampert, then 42, the billionaire hedge fund manager who had just engineered an unlikely takeover of their venerable but struggling company. The fact that the vehicle of his acquisition was discounter Kmart–which Lampert had come out of nowhere to snatch control of during bankruptcy–was only one source of unease. Once their presentations started, Lampert also began poking holes in virtually every idea. “What’s the benefit of that?” he asked again and again. “What’s the value?” He shot down a modest $2 million proposal to improve lighting in the stores. “Why invest in that?” He skewered a plan to sell DVDs at a discounted price to better compete with Target and Wal-Mart. “It doesn’t matter what Target and Wal-Mart do,” he declared. Eyes began rolling… —Patricia Sellers, Fortune Magazine, February 8, 2006 And the eyes should have rolled. Because, as it turns out, it does matter what Target and Wal-Mart do, just as improved lighting does matter in stores where women bring children to shop for clothes. How much such things matter is evident in the numbers ever since Eddie began second-guessing the expenditure of cash on anything, it would seem, excepting high-priced stock. From 2006 to 2010, Target and Wal-Mart together spent $16 billion and $33 billion, respectively, on capital upgrades to their businesses (we’ve arbitrarily cut Wal-Mart’s actual capital expenditures of $67 billion in half, to account for the company’s international spending). Sears, meantime, spent a miniscule $1.4 billion, or about 3% of Target and Wal-Mart combined—and less than a quarter of the share repurchase cost—on silly things like “improved lighting.” The result? While Target’s annual cash flow from operations grew from $4.9 billion to $5.3 billion in that time, and Wal-Mart’s grew from $10 billion to $12 billion (again dividing that company’s total figure in half), Sears was watching cash flow from operations drop 90%, from $1.4 billion—almost 10% of Target’s and Wal-Mart’s combined cash flow—to a nail-biting $130 million…which is less than 1% of its rivals. And Sears has done that while generating over $40 billion in annual sales—not easy to manage, negatively-speaking-wise. None of this, of course, is new-news. The 2011 numbers, previewed last month, were even bleaker for Sears. But beyond the obvious value destruction and the conspiracy theorist-like attempt to reconcile conflicting facts, the company’s recent performance and its chairman’s ensuing share purchase in January raise a rather obvious question that doesn’t appear to have crossed any minds in the press corps: why is it that Eddie Lampert, who directed Sears Holdings’ share repurchases of 55.6 million shares at an average of $104 over the 2006-2010 period, bought for himself rather than for Sears Holdings those 4.8 million shares at around $30 a share (technically the ‘purchase’ was likely an allocation of his annual performance fee in stock, but still…)? After all, a company that had spent nearly $6 billion on its stock at an average price of $104 would presumably have found the shares even more attractive at $30. Wouldn’t Sears Holdings have liked to average down? To the conspiracy theorists, the answer is self-evident: it clinches their view that Eddie has purposely been buying back stock at silly prices in order to shrink the share base and drive up his personal percentage of the remainder, while simultaneously disinvesting in the stores so aggressively that the Sears parking lot is the only place to find a space at the mall during the holidays, making it worth more to Eddie dead than alive. But we don’t buy it. We think Eddie’s mother, quoted in the above Fortune article, had it right: “I never thought he would go into retail,” Dolores Lampert says. “It’s a very hard business. But it’s a challenge, and Eddie likes a challenge.” Still, if Warren Buffett is looking for scapegoats on Wall Street, he might want to direct some attention to Sears. Unlike Staples, for example, which private equity nurtured and grew into an industry-creating powerhouse, here’s a business that was an industry-creating powerhouse that has, pretty systematically, been destroyed by private equity. Retail is indeed a very hard business. Jeff Matthews Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2011) 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. The content herein is intended solely for the entertainment of the reader, and the author. NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.” So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff. And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management

Yet Goldman walked away with several victories that raise questions about the strength of the SEC’s case. The company wasn’t forced to sacrifice any top executives, including Chief Executive Lloyd C. Blankfein, as some executives had feared. The changes it agreed to won’t weaken its profits or standing as Wall Street’s mightiest firm. The record-setting penalty is equivalent to just 14 days of profits at Goldman in the first quarter… Analysts had expected Goldman to pay at least $1 billion as part of the deal. —The Wall Street Journal We were right. Barry was wrong. Barry, of course, is Barry Ritholtz, a friend of these pages whose fiery mix of intelligent economic commentary and populist outrage at chicanery both on Wall Street and Washington is chronicled in The Big Picture. And Barry was convinced the SEC’s case against Goldman was so air-tight the firm would have to “settle or lose in court.” As detailed in “From BACCUS to ABACUS: Exhibit A in Defense of Goldman Sachs” (April 19, 2010), we here at NotMakingThisUp weren’t convinced Goldman would lose anything but a few bucks. Settle Goldman did: lose in court they did not. And what Goldman settled for, as the Wall Street Journal notes, was a mere 14 days’ worth of profits. What Goldman admitted to was nothing—not a thing except ‘incomplete information.’ Now, Barry, in taking a victory lap on The Big Picture this morning, maintains that “GS conceded misleading disclosures,” but in fact Goldman conceded no such thing.Here’s how it’s worded in the actual consent filed by Goldman Sachs: Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was “selected by” ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure. And that’s it. Goldman admitted to a ‘mistake,’ not a crime. Now, Barry calls this “misleading,” and that’s his prerogative.But the proof of the strength or weakness in the SEC’s case lies, we think, in what Goldman gave up to settle. And, money aside, Goldman didn’t give up much at all. Here’s an incomplete list of the non-monetary terms Goldman agreed to in the consent: Goldman agrees it will not seek reimbursement for the fine from insurance policies; Goldman agrees to “expand the role of its Firmwide Capital Committee”; Goldman will have its legal department review “all marketing materials…used in connection with mortgage securities offerings”; Goldman will have mortgage employees “participate in a training program” covering “among other matters, disclosure requirements”; Goldman will “provide for appropriate record keeping to track compliance with these requirements”; Goldman will wave “any claim of Double Jeopardy based upon the settlement of this proceeding”… And other such stuff which, all in all, doesn’t do much to the financial machine known as Goldman Sachs. So for all the arm-waving, at a price of 14 days’ worth of profits and some extra admin costs, Goldman Sachs, we think, once again, comes out on top. 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.

Gawker, which is just one of the many excellent reasons the New York Times keeps cutting staff (I have yet to see an article “tweeted” or “liked” by anyone under the age of 30 from the Times) carried the following inflammatory story yesterday which zipped around the blogosphere faster than a Joe Biden expletive moment: Harvard Cancer Expert: Steve Jobs Probably Doomed Himself With Alternative Medicine Having established a provocative statement of purported fact in the title, Gawker’s unfortunate story led off with a howler of first sentence: Steve Jobs had a mild form of cancer that is not usually fatal… That statement is wrong. How wrong, we wrote about in 2008, here. In fact, the five-year survival rate on the kind of “mild” islet cell tumor Steve Jobs had been diagnosed with in October 2003 is 42%. Mathematically, of course, that means the cancer is indeed usually fatal. And Steve Jobs survived seven years. Now, a big part of the problem is that Apple as a company did the medical world—and the blogosphere—no favors by downplaying Jobs’ condition over the years. (And we wrote about that here.) For example, when Jobs appeared at a conference in 2006 looking like, well, like a cancer patient, Apple actually said, “Steve’s health is robust and we have no idea where these rumors are coming from.” Two years later the company claimed Jobs had “a common bug.” With all the disinformation spread about Jobs over the years, it is no wonder Gawker got it so wrong; but, having gotten it so wrong, they ought to get it right. 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. NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.” So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff. And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management

Editor’s Note: We had the opportunity to interview author Alice Schroeder as the paperbook version of her best-selling, and eye-opening, “The Snowball: Warren Buffett and the Business of Life” was hitting stores. We emailed more than a dozen questions to Alice, including a few that might have been uncomfortable, but, we thought, worthwhile. Alice answered them all. Our questions are in plain typeface; Ms. Schroeder’s responses are italicized in bold. For her thoughts on brilliant people, costly aspirations and codependency, as well as working against actuarial tables, sources fearing retaliation and when “he stopped speaking to me,” not to mention the next CEO’s biggest challenge, Charlie’s dictionary entry, “a major case of monkey mind” and other unique insights into Warren Buffett and the future of Berkshire Hathaway, read on! JM: First of all, Alice, congratulations on having written a book—that isn’t easy. Second, congratulations on the book being successful enough to warrant a paperback—that isn’t as common as it used to be. AS: Thank you very much. And congratulations on your very successful book. JM: Thanks. What was the worst part—not the hardest, but the worst—about writing the book in the first place? AS: Wow, we are really launching right in here. Okay, the worst part was living with fear. Nearly all writers live with a fear of being judged that increases as the book draws closer to its publication date. I did live with that fear, yet it was far outweighed by my fear of the consequences of publishing this book. I wrestled with that daily for years. Eventually, I could judge the truth of my writing by my feelings. If it made me feel weak, even nauseous to write something, that was good. It meant that I’d succeeded in subduing the fear monster with my blow dart just long enough to pen it on the page. I never reread The Snowball if I can help it. The fear monster glares at me from its captivity inside the book. Better to just shut the covers and leave it there. JM: Understood. What was the best part of writing “The Snowball”? AS: There’s no one best part. You can’t imagine how grateful I feel to have had this opportunity. I have never learned so much about so many topics so fast. Warren is a great teacher. Simply by observing him and his world you absorb a whole new culture, as an anthropologist would. I got to spend time with a whole cast of other interesting, brilliant people. Imagine being able to talk to Bill Gates for hours. He’s a great teacher, too. I researched all sorts of unusual topics that would never have crossed my desk otherwise. The history of desegregation in Washington, D.C. How a slaughterhouse was organized in 1940s Omaha. The history of Las Vegas. I learned to write narrative nonfiction. Some days the words well up inside you and you know they are coming from somewhere outside yourself. To experience that sense of grace is why writers write. This experience changed my life in so many ways that I can’t recount them in a paragraph. JM: So what, if anything, did you regret about the book once it was published? AS: According to both my agent and editor, every writer sees the flaws in their book, real and imagined, as soon as they open the covers. And it’s true. JM: You bet. Now, the new, paperback version of “Snowball” is shorter, but I honestly couldn’t identify major chunks that you removed—and that is no easy feat. What did you remove and who decided what to take out? AS: I did the cutting myself, which was essential, and removed words, phrases, and sentences to condense stories when possible rather than wholesale cutting. I had to make some tough decisions. One story that was hard to cut, for example, was the story of Warren’s silver investment in the chapter “Semicolon.” He had bought almost a third of the world’s silver supply. He wanted to go to London to visit the silver, and pictured himself in the vault, enjoying the feeling of being surrounded by all those silver bars. What an image. JM: Yes it is. Now, a question about the title. Not about “The Snowball” part, which some Buffettologists thought was odd given that the snowball metaphor is one of his least well known—but about the “Warren Buffett and the Business of Life” part. As your book points out, his wife left him—physically, at least—after 25 years, and his children, in their formative years, appear to have occupied his mind less than 10-Ks and 10-Qs. Indeed, subheadings in your book’s index under “Warren Buffett” include, and I am not making this up, ‘attention-seeking,’ ‘emotional frugality,’ and ‘focus, total absorption and obsession.’ Isn’t one subtext of your book that WB failed where it really matters in the “business of life?” AS: We read biographies of eminent subjects to learn from their lives, for better or worse. These are people who have succeeded and failed on a grand scale, and the lessons they impart are magnified accordingly. Warren’s life is so instructive – the Inner Scorecard, his way of dealing with people, how he taught himself to think about risk, about time, about responsibility. When I started working on the book it felt like getting a post-graduate degree in life. I wanted to give those lessons to the reader. As for the business of life in the title, the point is that business is inseparable from life. Most of the investing books focus on financial success as an isolated goal. Yet his business life can’t be understood outside the context of his personal life. Warren’s story is a living illustration that aspirations to be as successful as him have a cost. Until I got to observe him closely I didn’t realize how single-minded he is. People who want to invest like Warren Buffett ought to understand what this would mean to their lives. Lastly, readers might be interested to know that a professional indexer creates the index. This is a real job – indexer — I am not making this up. Other terms she chose: complex personality, honesty, sense of rectitude, sentimentality, showmanship, personal growth after Susie’s death. JM: You interviewed a lot of people for your book. First, what was your relationship with Susan T. Buffett, and how comfortable were you interviewing her? AS: I met Susie the day I first interviewed Warren as an analyst. The first five years we barely knew each other. It wasn’t until the book got going that we started getting acquainted. Susie’s very comfortable to be around. One time she took me down to Glide Memorial Church to see the gospel choir rehearse, and we had dinner with the Reverend Cecil Williams and his wife, Janice Mirikitani. I’ve had a couple of meals with Susie, and her eating habits were nearly as appalling as Warren’s, incidentally. As you would expect from reading The Snowball, when I was interviewing Susie, she didn’t want to talk about herself, but was forthcoming about Warren. She was diagnosed with cancer six months after I started working on the project, which limited the interviews we were able to do. That was too bad. She was a wise woman. JM: Who was most fun to interview? AS: Warren, of course. He’s nonstop funny as well as always teaching you things. Among the rest, my favorites, hands down, were the older people. The actuarial tables were not working in my favor, with so many people of Warren’s generation and older to interview, so I started with the oldest first – those over age ninety – and worked my way down. We so rarely spend generous amounts of time with our elders. I was able to do it often and at length. It was a privilege to spend so many hours among people who had accumulated such a great store of wisdom. JM: Who gave you the most insightful view of Buffett? AS: Warren, by letting me spend so much time observing him and talking to him. My observations of him became the litmus test against which I measured everyone else’s statements. Beyond that, his sisters, Doris and Bertie, who have known him longer than anyone. Charlie Munger. His kids. Sharon Osberg. Don Graham. A few others that I’d prefer not to name. JM: Speaking of those last, in your acknowledgements you cite “those who asked not to be named”: what, in general, did those who didn’t want to be named have in common? AS: They wanted the truth to be told, and were afraid of retaliation if they were named. JM: Wow. Okay. One final question along this line: there’s a quote late in the book (Page 694 in the paperback), about how Buffett held off on endorsing Obama “until it became irrelevant.” You write: As one observer put it, “Warren only ever wants to back winners. Your real friends are the people who are there for you even though it might cost them something.” That sounds remarkably catty for a true friend of Buffett to say. Buffett is a guy who won’t sell the Buffalo News even knowing its value is going to zero and who almost never fires a CEO, even if the business is underperforming. I suspect it was said by a political acquaintance. Am I wrong about that, and do you agree “he only ever wants to back winners”? AS: To help and endorse and support your friends when they are in need is different than making business decisions about underperforming assets and people. The quote you refer to came from a close friend of his who has no involvement in politics, and is simply one of the people who have been hurt. I would describe it as a wounded, not catty statement. Remember, we’re speaking of the man who wouldn’t help his sister when she nearly went bankrupt, who wouldn’t help his daughter when she was pregnant (and they are not the sources of this quote). By the way, as you can tell from The Snowball, people who’ve been hurt by Warren almost always rise above it, and still love him in the end. JM: You became the first major sell-side analyst (we call them “Wall Street’s Finest” here—no offense, I hope) to cover Berkshire Hathaway after Buffett merged with Gen Re. You gained enough of Buffett’s respect that he regularly appeared at your famous (among Buffettologists) Friday night dinner in Omaha during the annual meetings, and ultimately gave you his blessing to write what was perceived to be his one and only authorized biography. How did your own personal view of Buffett change from the first time you ever met him to the day “Snowball” was published—and how about as of today? AS: If I could make one small adjustment to your introduction, Warren cooperated with me for The Snowball, but it was not an authorized biography. The latter means the subject has editorial control over the book. When I knew Warren as an analyst he was an awe-inspiring, almost infallible-seeming figure. Fortunately he didn’t care about the stock’s rating, and I believe he might even have been perversely pleased had I put a sell rating on it, so that he could show off how little he cared and make a point about Wall Street. (I didn’t, and it would have been a mistake to do that during the time I followed BRK). Once I got to know him better he became real, fallible, even fragile. His achievements actually seem more impressive to me with hindsight. To start out in life with a family like his and accomplish what he has done is, in my opinion, a greater feat than the public generally gives him credit for. Whereas the hero-worship of Warren Buffett has been overdone, his real accomplishments are underappreciated. Today, he seems the same person as when I finished the book. The test of whether you’ve done good research is how well you can predict and, more important, explain your subject’s behavior. Warren rarely surprises me, and I nearly always understand his motives. JM: You wrote extensively—I’d guess too extensively for most Buffettologists, not to mention for Buffett himself, if the rumors are true—of his personal life. In fact, you named his first wife’s lover. Having been a Wall Street analyst and having written a book about Warren Buffett, I know it is not easy to write something unflattering about a person you both like and admire. How hard was it to physically put those words down in a book that would be read by WB, not to mention his best friends and family? Also, where did the worst reaction come from, and do you think you could have or should have done anything differently? AS: It’s strange that this is a controversy. A biography includes the details of the personal relationships that influenced the breakdown of the subject’s marriage. That goes without saying. You can’t really understand Warren Buffett without this information. And of course I didn’t want to hurt Warren. I care about him as a human being. It was hard to know that he was going to be hurt and that I would be the instrument of his pain. But let us turn this around a bit. Warren knew my work as an analyst. He knew that I was dogged about research and that I had a history of writing things that were true even if they upset people. He chose me for this project anyway. He may have thought, who knows what. That in exchange for such complete cooperation, I would owe him the loyalty of writing the version he wanted. As many people would. Nonetheless, he knew what he was getting when he chose me. That was not an accident. He immediately began shoveling biographical material of an intensely personal nature at me. Until that point I had no idea of the situation I was walking into. Once I started to understand, it became my responsibility to do corroborative research. The choice was to tell the truth, which would hurt Warren, anger other people, and expose me to vindictiveness, or to lie, which would violate the reader’s trust and my integrity. I had to work myself up over and over to find the courage to tell the truth. From time to time, I talked to Warren, and my agent talked to Warren, to let him know that he wasn’t going to like, or even necessarily agree with, some aspects of the book. He continued to cooperate with me throughout. Warren read the book in July 2008, right before it went to the printer. Afterwards, we continued to have a perfectly friendly relationship, right up until the week The Snowball was published. It was only then that he stopped speaking to me. Under the circumstances, someone might deduce that other people’s reactions influenced him, although there’s no way to know for sure. I wouldn’t do anything differently with hindsight. This was an important book that needed to be written. I made a considered judgment based on the readers’ needs, and have tried to set my own feelings aside. JM: The results speak for themselves, I’d say. Now, moving beyond the personal, while researching “Pilgrimage to Warren Buffett’s Omaha,” my thought process on Berkshire changed: I went in thinking Buffett the Investor could be replaced by an equally rational investor, while Buffett the Manager could be replaced by anyone who merely left the Berkshire companies alone. However, I came out thinking Buffett the Investor may not need to be replaced—because the investment portfolio is so minor relative to the businesses Berkshire now owns—while Buffett the Manager can’t be replaced for the simple reason that nearly all those Berkshire companies are run by individuals who sold to Warren Buffett, not to Howard Buffett and the Board of Directors. Furthermore, it seems unlikely that families who might want to sell to Warren Buffett would feel comfortable selling to a David Sokol on anything like the terms Buffett would get. What’s your take? . AS: Allocating Berkshire’s capital (as opposed to investing in stocks) is going to be the CEO’s biggest challenge. The Berkshire companies throw off a lot of cash. Even after the company declares a dividend, as it almost certainly will, there is still the capital management question. Warren has a term, the Institutional Imperative, to describe the empire-building and other foolishness that leads to overpriced acquisitions, underutilized capital, stock repurchased above its intrinsic value, stock issued below its intrinsic value, and all the other failures of capital management that companies are so prone to commit. CEOs are rewarded in all sorts of ways for creating bigger companies, not more profitable companies. That’s putting aside all the risk that goes with running a big insurance business and the other financial exposures that Berkshire’s balance sheet includes. Then there is the Buffett charm you describe, which has brought the company such good acquisition opportunities. How do you replace that? Capital management is the biggest risk shareholders face. Warren’s not replaceable as a manager, in my opinion, because he’s created a company that’s an expression of his personality. Even so, Berkshire can evolve to become a more conventional yet still successful company without losing its essence if Warren’s successor does a good job. I am not in the camp that believes it must be broken up. That’s conceivable, but not necessary. The most critical issue is choosing good operating managers. Undoubtedly many of those who are running the businesses now will retire when Warren leaves. They have hand-picked their successors without much, if any, oversight from Warren. The next CEO will need to approach the turnover as an opportunity, not a problem, if he wants to succeed. It is, for example, an opportunity to improve diversity in Berkshire’s leadership. JM: Good points, all. Now, you are not a Berkshire shareholder: why? AS: I thought it would be a conflict of interest to own BRK while writing the book, and didn’t want to have to deal with that. Plenty of people who write about him do own the stock, which I’m not criticizing. Whether someone can manage a conflict of interest is purely a personal thing. But you can also see, collectively, how it influences the gestalt. The tone of writing on Buffett as a whole is largely set by the way so many authors are financially invested in him. If all these people have gotten rich or are getting rich or hope to get rich because of Warren Buffett, how objective can they be? Journalists and analysts disclose whether they own a stock, but interestingly, they aren’t ever asked to disclose whether the investment is material to their net worth. After the book was published and I’d said my piece, I did buy some BRK. It’s not significant to my net worth. JM: I meet an inordinate number of people who have personally met Buffett and/or Munger in one way or another—finance (Buffett), real estate (Munger), charity (Munger), and education (Munger also)—and I’ve heard some great stories. You must hear things all the time: what’s a favorite story, or a favorite interaction of your own with them, that you didn’t include in the book? AS: Warren is not so good with anything visual. Once we were talking on the phone after I had known him for years and he had seen me on many occasions. As a sort of joke, I asked him what color my hair was. He paused for quite a long time, and then said, “Not black.” JM: Perfect. Of course, Charlie Munger is as important to the Berkshire model as Buffett himself. My own feeling is that Munger has had a better rounded life than Buffett—and yet he comes across to strangers as impossibly arrogant. What’s your take on Charlie? AS: It’s hard to sum up Charlie in a couple of sentences or a paragraph. He’s quite humble in his genuine respect for the achievements of others, as long as they equal or exceed his own intelligence, in his opinion. He is so ungodly judgmental that some people find him insufferable, yet his fundamental kindness shines through. Politically … if you look up “politically incorrect” in the dictionary you’ll find a picture of Charlie there instead of a definition. That’s part of why Charlie is refreshing to be around, though. He’s always himself. There is not a phony cell in his body. Your time will not be wasted talking to Charlie. Usually he’s got something very interesting and insightful to say. It’s better to listen when you’re around Charlie than to try to talk. The phenomenon I wrote about in the book, about him turning his head off when other people are talking, is very much in evidence at times. He’s really a treasure. I enjoyed interviewing Charlie immensely. JM: I bet. Now, back to Warren. There’s a single sentence in your book (page 650) that blew my mind. It puts Buffett in focus like nothing else I’ve read, but I’m not sure if you meant it the way it’s written. The setting is this: Susan T. Buffett, his first wife, has had a brain hemorrhage in Sun Valley; Buffett is distraught and at her side in the hospital; their two younger children have traveled a long distance to get there; and when they arrive at the hospital, you quote Buffett telling them nothing about their mother, her condition, or what exactly happened. You have him saying, “I’ve been here 5 hours.” Is it really all about him? AS: Well, I guess the best way to answer that is to say that a trained psychologist or psychotherapist would have a field day reading The Snowball. I’m not qualified to diagnose psychological conditions. But my observation was that Warren knows himself pretty well. He’s intentionally arranged his life so that things center around him. He’s got his own means of reciprocating and being loyal to people, yet at the same time is not the least ashamed to say that he feels needier than others. He’s so open about his self-orientation that it’s quite disarming, even part of his charm. He seeks out people who are comfortable with one-sided relationships, and once said that he felt he served Susie and Astrid by being a “taker,” because they loved to “give.” I thought that was pretty astute of him. He’s got a knack of making codependency work for the people involved, which is why people love him even after they get hurt. JM: Buffett is known as a guy who “tap-dances to work,” and is so comfortable in his rational approach to the market that he could turn things off and nap whenever he needed to. When did he start taking sleeping pills? AS: Warren is not a big self-medicator, unless you count work, sugar and caffeine. He loves going to work. It really is the highlight of his day. Work is his stress-reliever. He told me he’s never been a great sleeper, and I’m sure that’s true. He goes through withdrawal from work, and he can’t play bridge in his sleep. He’s got a major case of monkey mind, as the Buddhists would say. My recollection is that he first started using Ambien for jet lag. If he uses it for insomnia, who cares? He’s certainly no Michael Jackson. Probably at least half the people reading this take Ambien or something similar from time to time. JM: True. Of course, Buffett is, we know, astonishingly intelligent—and not just about investments. For example, he saved Salomon from extinction; turned around the Buffalo News during a very difficult time; and gave excellent advice to Kay Graham—as you write in your book—that helped her save the Washington Post during a crisis early in her tenure running that company. So how does he sit on the board of Coke while its CEO starts promising growth targets—which Buffett hates—that leads to channel-stuffing and an SEC investigation? Does he really hate confrontation that much? Or can he simply rationalize his way out of anything? AS: Warren is pretty good at rationalizing what he needs to if there is money to be made, and he really does hate confrontation. This is mostly about something else, though. You will notice a seeming passivity when he sits on a board that is similar to his reluctance to direct his own managers. (This trait is almost always taken at face value as being one of his strengths, by the way, rather than being studied for the lessons it yields as both a strength and a weakness. But I digress.) Warren divides the world into matters for which he has assumed personal responsibility and everything else that is not about him. Where he’s taken responsibility and will be judged for it, he’s uncompromising with himself, and even a micromanager. Otherwise, he “abdicates,” to use Tom Murphy’s term. With both the operating managers and the CEOs of the companies who’s boards he’s sat on, the point at which he takes action is when the damage done by others could reflect on his reputation. The best example is Coca-Cola. He was passive until the crisis, then took on a role so active it shocked people. JM: Understood. In the paperback “Snowball,” which is updated to cover the financial crisis, you make the excellent point that Buffett’s derivatives position handcuffed him during the market collapse last year. But instead of taking sides on whether Buffett should or shouldn’t have sold puts with $37 billion in notional value on the market near the peak, let’s invert the question in a manner of speaking, as Charlie Munger likes to do, and look at the sale of puts this way: What does it mean that he did it? Does it mean that he had become as complacent as everyone else, despite years of warning about “ticking time bombs” and “financial weapons of mass destruction”? AS: I don’t think he was complacent. Warren views derivatives as being fraught with credit risk. He structured these, and other deals, to protect the company from the capital calls that such risk entails. The decisions he made were excellent in that sense. They are the reason why Berkshire is still standing, financially healthy and why it did not require a bailout. It’s dicey to second-guess an investor as successful as Warren Buffett. Chances are he will be proved right on those puts and they’ll be profitable. I do think Warren, in his focus on the long-term, missed how much the short-term volatility of the market would affect others’ perceptions of Berkshire’s day-to-day financial strength. Berkshire had an awful lot of market exposure going into the crisis, and unfortunately, during the bloodbath, it didn’t look like the Ft. Knox of capital to the rating agencies. JM: Okay. And last but not least—you. You describe yourself as “a full-time writer.” What’s next? AS: I’m working on another book, subject undisclosed except that it’s not a biography. I have been approached to write a biography by several other well-known people, but said no. Right now my interests lie elsewhere. I’m also writing a column on general topics for Bloomberg, roughly once a month, which has been incredibly enjoyable. Occasionally I’m also writing other short pieces, for example, like this, or for The Motley Fool or Huffington Post. You can find these at my website, www.aliceschroeder.com. JM: Excellent, Alice. On behalf of our loyal and thoughtful readers, I thank you very much and wish you good luck. . Jeff Matthews I Am Not Making This Up © 2009 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.

Jeff, With all due respect, I think you are a bit off the mark with your comments about ACCO’s management. So begins a well written, thoughtfully considered response to a NotMakingThisUp column by a reader identified as “Cadamyale.” “Cadamyale” was responding to “An Inflationary Spiral Out of China,” in which we offered a back-handed slap at the management and business model of ACCO Brands—actually two such slaps—in the course of making a more pointed commentary about the inflation wave eminating from China. China’s influence on the domestic inflationary scene, as readers will recall, was once downplayed by the current Fed Chairman, who, all evidence to the contrary, cast a skeptical eye on the importance of China’s role in keeping American consumer prices under control via the massive labor arbitrage of the 1990s and early 2000s—by which manufacturers such as ACCO substituted low-cost Chinese labor for high-cost US labor and regulatory constraints—as follows: “There seems to be little basis for concluding that globalization overall has significantly reduced inflation in the U.S. in recent years; indeed, the opposite may be true,” he [Bernanke] said. —The Wall Street Journal. Now, in our opinion, Bernanke’s comment was as astonishing as it was plainly wrong, and we said so (in Fed Big Flunks Eco 101, March 7, 2007): If you quoted those words to my friend who runs a supplier of office products to Wal-Mart and other Big Box retailers, he’d probably spit out his coffee all over his Wal-Mart invoices. Those invoices, at least on a per-unit basis, did done nothing but go down for the last decade, after Wal-Mart abandoned its “Made in America” campaign and began to enforce a constant price squeeze on its vendors, aided and abetted by the opening up of dirt-cheap manufacturing capacity in China —JeffMatthewsIsNotMakingThisUp. I not only stand by those remarks, but I make the following offer: I will provide Mr. Bernanke the telephone number of the office supplier in question, in case he ever wants to test his China Thesis. I believe it would do our Fed Chairman good to brush up on his practical economics, for while he might know everything there is to know about “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression” (a 1983 Bernanke thesis available on Google Scholar), I think he is a bit out of touch when it comes to “The Mother of all Bubbles: How Communist China’s Deflationary Policy of Ravaging its Natural Resources, Enslaving its Farmers and Underpricing its Currency Allowed Alan Greenspan to Inflate the Heck Out of American Housing Prices” (a thesis I believe somebody, some day, will write). Now, the office products supplier I am offering to hook up with Mr. Bernanke is not ACCO Brands. . It is, in fact, a small competitor that has been at the forefront of the production shift to China and, unlike ACCO, has seen its profitability rise while it has reduced costs to its customers, which include many of the same customers to which ACCO has been charging more and selling less. The fact that it has been possible for at least one office products manufacturer to successfully transition its business model while ACCO has struggled to do the same tells me that the difference is not in the business itself, but in the management at the top, which is why I came down rather harshly on the ACCO folks in “An Inflationary Spiral Out of China.” Nevertheless, we here at NotMakingThisUp encourage and admire informed opinion, and appreciate the fact that at least one reader—the aforementioned “Cadamyale”—was moved to offer not merely a negative reaction to our commentary, but an informed observation that adds some value to the issue at hand. I quote from “Cadamyale” who clearly is not some inflamed Yahoo-message-board-stalking shareholder of ACCO Brands, but somebody with more than a rooting seat in the corporate stadium: Without passing judgement on the merits of acquiring GBC (I think it is a bit early to determine whether or not this was a success), ACCO’s management rightly chose to shed some unprofitable business and raise prices on some GBC products. Prior to acquisition, and on the front end of the current inflation cycle, GBC guaranteed its customers’ pricing for two years. ACCO raised prices this year. The resulting sales attrition has been more than expected, but buyers will come to see that ACCO offers a better product and value-added service than private label whiteboard suppliers and competing “laminating solutions” The new product development cycle is coming. It includes a document finishing system that will allow the hapless assemblers of pitchbooks to change out pages without disassembling the entire book. It ain’t sexy, but it is a better product. GBC is a major restructuring and integration project that management has always targeted for completion in 2009. It took the same tack in assembling the legacy portfolio, which, while not the sharpest knife in the drawer, does generate 20%+ returns on tangible assets. In my opinion, this is more a case of lack of investor/WSF patience than incompetent management. While I appreciate these observations, I respectfully stand by our previous statements on ACCO. The company’s sub-1% return on assets—whether those assets are tangible or not—tells the story well enough, as does the following quote from the latest 10-Q, which makes it clear the company’s problems are not merely restricted to the woeful General Binding acquisition: “The [sales] decrease was driven by the previously-planned divesture of non-strategic business…and volume decreases in all but the Commercial Laminating Solutions segment…partially offset by the positive impact of $16.3 million in currency translation as well as price increases implemented in North America and Europe in early 2007.” Nevertheless, if the denizens of Yahoo message boards engaged in the kind of thoughtful and reasonable commentary as that of “Cadamyale,” we wouldn’t have readers like that to thank. Informed opinion is always welcome. Jeff Matthews I Am Not Making This Up © 2007 NotMakingThisUp, LLC The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.

The day after Steve Jobs gave his near-messianic iPhone demo in early January, I ran into a hedge fund friend. His reaction to the “revolutionary and magical” (Jobs’ words) iPhone? He’d sold his entire position in Research In Motion. Now, my friend was clearly not alone: shares of RIMM had closed down eleven bucks the day Jobs Googled ‘Starbucks’ from his demo unit and ordered “4,000 lattes to go,” and it would drop another ten before bottoming a week later, on the theory that the iPhone was some kind of Blackberry-killer. But my hedge fund friend’s reasoning was not so much that the iPhone would kill the Blackberry—he understood the products address entirely different end users. It was this: “RIMM’s not going to beat numbers any more.” In other words, overnight, Apple’s iPhone had rendered RIMM’s move into the consumer-friendly market with its Pearl something of a non-event. It wasn’t that RIMM was going to be threatened by the iPhone—it just took away the upside of RIMM’s move into the consumer side of the smartphone market. Of course, RIMM’s stock has since recovered to pre-“4,000 lattes to go” levels, and analysts are universally convinced the company’s earnings report tonight will surprise on the upside, thanks largely to the Pearl. While we offer no short-term opinions on earnings or stock prices, we have collected the reasoned, thoughtful views of nearly fifty of Not Making This Up’s sterling readers regarding the iPhone and its place in the wired world. And the outlook for RIMM may not be quite so tarnished as the market, and my friend, first thought. (For Palm, on the other hand, the news is less perky.) We also discovered that what statisticians might call a statistically significant portion of our readers have issues with their wives. I am not making that up. Let’s start with the obvious: our data sample is ridiculously small. Furthermore, it is skewed towards an older demographic than the iPhone will target. Nevertheless, if Apple wants to get somebody to shell out five hundred bucks for this thing, our readers are probably as good a sample of those somebodies as any other. What kind of readers do we have? Their cell phone carrier is apt to be Verizon, Cingular, or—surprisingly—T-Mobile. Sprint is a distant fourth, just ahead of Alltel. For mobile email, they use Blackberrys or Treos, in that order. Fully one third of our responders do not use any mobile email at all—they use their laptops when they need to get connected. Here’s how they responded. 1. Do you plan to buy an iPhone for $499 plus calling plan with Cingular the minute it is available, or soon thereafter? 85% have no plans to buy an iPhone, either on Day One of the New Era, or soon thereafter. Now, that number means absolutely nothing, of course; but the reasons tend to gravitate towards several distinct issues. 2. Why or why not? The biggest single deterrent is that this will be the first generation of a product. Price is another issue—as Christian Warden points out, “I got my Blackberry for $50 after rebate.” Cingular does not get high marks, either: to paraphrase the great Jack Nicholson line, a lot of potential iPhone users would rather stick needles in their eyes than use Cingular. 3. Which iPhone feature do you like the best? Which feature bothers you most? Of our prospective iPhone buyers, it’s the all-in-one nature of the phone’s capabilities—phone, email, music, web browser—that has them ready and willing to pay the $500-plus-service-contract. The touch-screen is a highly polarizing issue. People either love the idea or hate it—but mostly they hate it. As CSS wrote: “Try dialing a phone number on a touch screen while driving and you’ll see what I mean.” One feature, however, seems to be one of those “why hasn’t anybody done this before?” Apple specialties that will in fact change the way people use their phone: the select-which-voicemail-you-want-to-hear-first voicemail feature. As “Johnny” wrote: “I Like the interface of answering select voicemails first, rather than first come first listen, clearly the wife can wait.” Clearly, Johnny has some issues at home that the iPhone may not resolve. 4. If price is the issue, would you pay, say, $299 for the iPhone, plus calling plan? The answer to this question is probably the best news of all for Apple: the pool of our potential iPhone buyers doubled from 15% to 30%. 5. What kind of cell phone do you use every day, and who is your current carrier? Would switch your current cell phone number to Cingular and use it on the iPhone? Cingular is a problem. Only one fifth of our respondents were willing to switch their phone to Cingular. Apple needs Verizon, eventually. 6. What kind of email device do you use every day, and who is your carrier? Would you switch your email to the iPhone and get rid of your current device? There is good news for RIMM and bad news for Palm here: while Blackberry users are equally inclined to use an iPhone for their email, it appears that the iPhone would be for their personal email—leaving the Blackberry as their work email. Treo users, on the other hand, appear willing to switch their email entirely to an iPhone. As Mark said, “Apple has a reputation for making things that actually work-unlike the Treo that has more bugs than a swamp. Treo and Microsoft both like to force you to do shut down/restarts.” 7. Did you buy an iPod when it first came out? Do you have one now? This was a control question, to weed out the Mac-fanatic/Mac-hater contingent from regular folk, and also to get a sense of what might happen down the road if the iPhone price comes down and other carriers get their hands on it—and it shows more good news for Apple: while about a third of our respondents claimed to have been first-generation iPod buyers, more than two-thirds now own at least one. Some, however, like Andrew, remain conflicted about their iPods: “Bought one for my wife. She rarely uses it. Waste of money for us.” As I said, wives seem to be an issue for some of our readers. 8. Do you need a new iPod? Would you replace it with an iPhone? This, in my view, provided the most interesting response of all. Roughly half of our eventually-will-probably-get-an-iPhone respondents would not replace their iPod with an iPhone. For starters, the storage on an iPhone is incomprehensibly small to most heavy iPod users. As Neal put it: “The only issue with replacing the iPod entirely is storage. I currently have about 35 gig of music on my iPod. 8 gig on the iPhone is not going to be enough — I will have to be making hard choices about what music travels with me.” And there are other, more personal reasons. This is from Yanor: I wouldn’t replace my ipod with an iPhone because the iPod Mini I use is all I need when I use it, usually around the house late at night when I’m working and my wife is sleeping. Like now. As I said, wives are an issue. No word on the husbands, however. Perhaps we’ll need another survey… Jeff Matthews I Am Not Making This Up © 2007 Jeff Matthews The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

• HILLARY CLINTON SAID she was forming an exploratory committee for the 2008 presidential race, embarking on a widely anticipated campaign for the White House. (Clinton’s statement) 9:49 a.m. • New Mexico Gov. Richardson Sets Committee • Sen. Brownback Declares Presidential Bid • Road to 2008: See Who’s in the Race — Wall Street Journal, online edition I appear before you today to announce that yet another newcomer has formed an exploratory committee to investigate a potential candidacy for the 2008 presidential race. The candidate is my dog, Lucy, and the committee consists of her sibling, Rosie, and three cats: Marvin, Ralph and Kitty. I admit to being somewhat surprised by this development: Lucy is a mutt whose major concern in life has been, until today, primarily limited to the Universal and Unrestricted Availability of Affordable Dog Treats to all canines regardless of age, creed or mixed heritage, not to mention getting scratched on the rump once in a while. Nevertheless, Lucy wants me to tell the world, to paraphrase the memorable words of Senator Dole when he quit his Senate seat to prepare for his doomed Presidential bid, “I sit here, more or less still except when one of the cats walks by and swats my nose, just a dog.” Lucy apparently reached her courageous decision after hearing about the inordinate number of politicians who have likewise announced their plans for the World’s Most Powerful Office without having the faintest chance of making it to the first meaningful party caucus—Iowa—yet for some reason feel compelled to call the press together and make an announcement such as this: “Search the record of history. To walk away from the Almighty is to embrace decline for a nation… To embrace Him leads to renewal, for individuals and for nations.” That comes from Senator Brownback, a Kansas Republican who may in fact be the best candidate of any candidate who ever threw his or her metaphorical hat into the ring for any political office ever created…but if it’s any indication of how he plans to run for President, I can’t see how the good Senator from Kansas has any better shot at reaching the White House than my dog Lucy from the Humane Society. Certainly, not being electable to an office doesn’t mean a person shouldn’t try for it. This is, after all, America: Abe Lincoln famously tried and failed many times before his moment came, and he is now widely acknowledged as the greatest President we’ve ever had. Still, one would think a savvy pol such as Bill Richardson, the politically ambitious Governor of New Mexico whose main claim to fame is that he could not get the streets plowed after a recent snow storm hit his state, would know that Hillary Clinton is going to be the Democratic Presidential candidate in 2008—period, end of story. Yet here he is, announcing the formation of yet another Committee to Yadda-Yadda-Yadda: “I am taking this step because we have to repair the damage that’s been done to our country over the last six years…. Our reputation in the world is diminished, our economy has languished, and civility and common decency in government has perished.” I will go on record here and say that as highly as they may think of themselves, there is not a declared or undeclared Democratic candidate, Mr. Richardson included, who has a chance of beating Hillary for the nomination. Not “Fighting Joe” Biden, nor our own “Senator Forehead”—Chris Dodd—or the earnest John Edwards, the curiously bloated Al Gore, the humorless John Kerry, the frighteningly incompetent Dennis Kucinich, or the I-don’t-know-enough-about-him-to-precede-his-name-with-a-remark Tom Vilsack. Not even—and I say this strictly as a matter of political reality—Barack Obama has a chance to win the nomination, although I would put money on Obama to be Hillary’s Vice Presidential candidate, which is, I imagine, what the current the posturing is about. As for the Republicans, I’d be likewise willing to bet Mitt Romney is the candidate in 2008. Not for nothing, but Bill Clinton and George Bush before him were each terrific fundraisers and former Governors. Plus I hear Mitt gets people excited…and this is from people who don’t usually get excited about politicians. Unfortunately, when it comes to the chances for my dog Lucy, I must tread lightly on these pages, for while I admire her stance on Mandatory Dog Treats for All, I must admit the rest of her platform is pretty thin. Still, Lucy has promised to flesh out her positions on Iraq, global warming, energy independence and tax-code reform…so long as I give her more treats, and keep scratching that itch. Jeff Matthews I Am Not Making This Up © 2007 Jeff Matthews The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

The partners began to sense that they might not make it. Their exquisitely wrought experiment in risk management, to say nothing of their fabulous profits, was in danger of unraveling. —When Genius Failed, by Roger Lowenstein According to natural-gas investors who traded alongside Amaranth, Mr. Hunter repeatedly used borrowed money to double-down on his bets —Wall Street Journal. 9/20/06 The most memorable part of Roger Lowenstein’s excellent book on the Long Term Capital Management debacle (quoted above) was when LTCC’s founder, John Meriwether, called a retired, street-wise, market-savvy ex-Bear Stearns confidant for advice. When he heard LTCC was down 50%, the old-timer didn’t mince words. He told Meriwether: “You’re finished.” What the old pro was telling the computer-driven “Genius” of the book title was that when the market smells blood in the water, it goes after whatever is bleeding and doesn’t let go. Now, this week’s blow-up of Amaranth, a Greenwich Connecticut-based hedge fund which appears to have fallen victim to some wild and crazy natural gas trading, does not, as far as anybody knows, rival LTCC’s when it comes to potentially bringing down the system. After all, LTCC had margined their positions into a nominal exposure close to a trillion dollars, compared to the multiple billions involved at Amaranth. Nevertheless, the two situations are not entirely unrelated. As happened with LTCC, when word of a problem at a hedge fund hit the natural gas markets last week, those markets appear to have started going precisely the wrong way for the fund most exposed to those moves—Amaranth. I have no idea how the situation will unwind, and I certainly hope there isn’t the kind of second and third-derivative damage in other markets of the type that caused LTCC’s demise to force an emergency session of the Federal Reserve. Those were very dark days. But the lesson is obvious: for all the confidant talk about how derivatives off-load risk and therefore create a safer financial world, there is something to the notion that what we are building up here is the potential for a liquidity crisis that brings the system down. Before you scoff at this, try to guess who told the Wall Street Journal the following less than three weeks ago: “Spreads and options are of their very nature instruments for positions which are designed to allow the user to capture upside with a much clearer understanding with respect to downside exposure.” Give up? It was the CEO of Amaranth. Three weeks after that statement, reports the Journal, institutional investors in Amaranth are now trying to sell their interests in that hedge fund to a firm that provides secondary markets in such things. Says the market-maker: “Sellers want 30 to 40 cents on the dollar, but buyers are only willing to pay 10 cents to 20 cents on the dollar.” When sharks smell blood… Jeff Matthews I Am Not Making This Up © 2006 Jeff Matthews The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

When I’m stuck in traffic anywhere in the vicinity of New York, I call Mike. Mike is the busiest real estate lawyer I’ve ever known. He handles five to six closings a day in the New York Metropolitan area—and he basically spends 250 days a year in his car, driving from Queens to Staten Island to Rye to Brooklyn and back to Queens, handling deals. After doing this for twenty years, Mike—to put it mildly—knows his way around The City. So, when I was stuck in traffic on the way to Yankee Stadium last night, I called Mike. And in the course of getting from Mike the best way to get to the House That Ruth Built before the first pitch was thrown (“Where are you? Okay, listen, here’s what you do…”), I also got the low-down on Mike’s real estate business—which mainly involves multi-family, middle-to-low income homes: “It’s the pits,” he said cheerfully. “Thank God I socked it away the last couple years.” He asked, “You remember 5, 6 years ago? Before 9/11?” I said I did. “It’s like that. I’m down to one or two closings a day.” It seemed like only yesterday—but it was actually just last summer—that the home-builders and the real estate-happy day-traders-turned-condo-flippers had decided rising interest rates wouldn’t stop the housing boom, thanks to all the factors that people point to when they’re buying into a bubble, but which can be summed up in one sentence: “It’s different this time.” But it isn’t. “It’s the pits.” Jeff Matthews I Am Not Making This Up © 2006 Jeff Matthews The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

“During the Christmas season, certain online search engine costs increased significantly over the prior year, and as such we made the decision not to pursue the resulting high cost order volume.” That comment was contained in the long first paragraph of a press release from FTD Group, the flower delivery people, that was issued at 5:54 E.S.T. last Thursday night, when almost nobody was around to care. Now, I don’t follow FTD closely, but its business model depends more than you might guess on internet searches—after all, somebody searching for “flowers” on Google is probably not doing deep scientific research into botany. They are very likely a guy, running late, kicking himself for putting it off until the last minute. Indeed, Google the word “flowers” and you will find an FTD ad, third from the top: Get it There Today. Fresh Flowers Satisfaction Guaranteed-Order Now! What is also interesting about the FTD release is that the company states that despite a pull-back in online ad spend and the resulting revenue shortfall, the company will still hit its EBITDA and earnings targets: “As a result, despite this slight decline in order volume for the Christmas season, we are reiterating our EBITDA and EPS targets for the year.” This suggests that at least in the floral delivery category of online search, and assuming FTD is not just blaming an innocent bystander like some companies we could imagine, the marginal cost of a new customer has reached parity with the marginal profit from that customer. Which is not something anybody expected happening any time soon. So what is FTD doing about this turn of events? “…we have begun making additional investments in our marketing staff to help build a more diversified marketing portfolio. We believe these initiatives will enable us to regain our competitive position in the marketplace and continue to deliver long term bottom line results for our shareholders.” I’m not sure what it means to build “a more diversified marketing portfolio.” 30 second spots on Howard Stern? Sandwich boards in Times Square? Whatever it means, the fact that FTD says the cost of using “certain online search engine(s)” has increased so significantly that the company cut back its online marketing is worth investigating. Therefore, the question before the house is this: is there any indication from anybody else who uses online search that online search is no longer economic in any field outside the flower delivery business at FTD? Informed responses are welcome. Jeff Matthews I Am Not Making This Up © 2005 Jeff Matthews The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Long-time readers may have gathered that I’m a bird-watcher, a serious one. But I’ve only half-followed a controversy between our local utility, United Illuminating, which wants to get rid of stray monk parakeets and their large nests for the sake of maintaining the power lines, and the so-called “Friends of Animals,” a Darien, Connecticut-based group trying to protect the squawking, bright green birds, for the sake of the birds. Then last week Friends of Animals announced a lawsuit against UI in a press release containing the following language, which I am not making up: The suit claims that numerous other birds, including song sparrows, house finches and great horned owls, also use the parrot nests for shelter. “The presence of the Monk Parakeet, a strict herbivore, is a benign effect on other local species and may actually increase numbers and variety of wildlife in an otherwise ecologically barren urban environment,” the suit says. Now, I live in this “otherwise ecologically barren urban environment” described in the press release. And in the past year I have witnessed—in the midst of this burned out holocaust of a region—the following wildlife in my yard: sparrows, finches, Goldfinches (both summer coats and winter coats), a Rose-breasted Grosbeak, Carolina Wrens, Winter Wrens, a Black-throated Blue Warbler, Black and White Warblers, Yellow Warblers, Yellowthroats, Northern Flickers, Hairy Woodpeckers, Downy Woodpeckers, Cedar Waxwings, doves, chickadees, and—just last week—a Red-Tailed Hawk perched eight feet away from me. Quite a “barren urban environment”! But that’s not the only bit of disinformation contained in the “Friends of Animals” press release. Let’s examine the nests themselves—described as “shelter” for native bird species—since the nests started the whole conflict with United Illuminating, which wants to kill the birds and eliminate the nests. Monk parakeets build their nests on utility poles or high up in oak trees. The nests look like giant mutant squirrel condominiums. The parakeets build them stick-by-stick with small branches they find on the ground and carry to the nest in their large beaks. Being made of sticks and being very big, a monk parakeet nest can weigh more than 400 pounds. I am not making that up. Since native New England oak trees were not designed to carry 400 pound monk-parakeet nests on the ends of their branches, the nests routinely break off the oak trees and fall in a huge clump to the sidewalk or the road. (The birds favor utility poles as well as trees along roads, rather than deep in woods, for reasons that likely relate to their eating habits.) I have hauled more than one broken nest off the road beneath a parakeet-inhabited tree a few blocks from our house during early-morning walks, and they are an engineering marvel: more than a yard wide and two or three feet high, they look like an ant-hill made of sticks. Tunnels run deep inside them, protecting the birds from harsh New England winters—which is why there is such a thing as a monk parakeet population 5,000 miles from their native sub-tropical habitat in South America. As for the “Friends of Animals” claim that the nests are used by other birds, such as “song sparrows, house finches and great horned owls,” I’m guessing that “Friends of Animals” just made that up. Anybody who knows anything about birds knows that no two types of birds build the same type of nests. The really obsessive birder can identify not just birds, but bird nests. I know about this unfortunate obsession, because I own a book about bird nests. The finches and sparrows identified as users of parakeet nests do not shelter in giant stick tunnels. They build loose, spherical nests from grass and twigs, with a soft inner lining. They reuse the nests, rebuild them, and refit them season after season—like an old New England couple in a salt box colonial. And old New England couples don’t up and move into a McMansion just because one happens to become available. Now, it is true that some birds occupy other bird nests. European Starlings, for example, (an aggressive, intrusive and destructive species brought here by a “Friends of Animals” type group dedicated to—and I am not making this up—introducing to America all the birds mentioned in the works of Shakespeare) evict native woodpeckers from their nests. Great Horned Owls—mentioned in the press release as possible parakeet nest-renters—sometimes occupy nests of herons and other birds. Therefore it would be possible that a Great Horned Owl might be interested in a monk parakeet nest, except for the fact that horned owls do not climb through tunnels. Owls perch on branches because they eat living things: they do not sleep in caves and emerge to feast on seeds, like parakeets. Besides, the notion that other birds might make use of a parakeet nest ignores the central fact of the issue: monk parakeets are highly aggressive and they flock together, like crows and starlings. Anybody who has watched the parakeets drive away flickers, sparrows, chickadees, goldfinches and cardinals from a bird feeder knows that monk parakeets—colorful though they may be—are not “benign” as the press release claims. They are, in fact, destructive—potentially with catastrophic effect. How, you might wonder, can a bunch of cute green parakeets be so destructive? As the members of “Friends of Animals” appear not to realize, we have a beautiful native North American bird species that nests every summer in the very same type of oak trees the monk parakeets now monopolize. These birds arrive from their winter feeding grounds in mid-April, roost high up in oak trees and build beautiful, simple nests out of the same sized oak-branches used by the monk parakeets. These birds are the size of hawks, only with elongated bodies and stick-legs. They nest so high, and keep so to themselves, that most people fail to notice them. These birds mate, lay eggs and raise hatchlings which they feed regurgitated crabs picked out of Long Island Sound and the marshes nearby. The hatchlings grow over the summer into large, beautiful, birds. Late in the summer they all fly south, leaving behind a bowl-shaped nest of sticks high on an oak branch. They are Yellow-crowned Night Herons. And Yellow-crowned Night Herons are infinitely more “colorful” and more “benign” and more integral to the Southern New England ecosystem than a bunch of squawking, intrusive parrots. But because the monk parakeets favor the same oak trees used by the herons year after year, these herons may well, over time, be crowded out by a bunch of South American parrots released from home bird cages. Back in the 1890’s, a bunch of well-meaning but badly informed Shakespeare admirers set loose 100 European Starlings in Central Park. There are now over 200 million starlings in North America—displacing hundreds of millions Blue Birds, Flickers and other native birds over the last century. As a Friend of Birds, I’ll side with United Illuminating over “Friends of Animals” on this one. Get rid of the monk parakeets now, while we still can. Jeff Matthews I Am Not Making This Up © 2005 Jeff Matthews The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Companies love to talk about “enhancing shareholder value.” They usually do so when announcing share buybacks that frequently have very little to do with “enhancing shareholder value” and more to do with preventing earnings dilution caused by the generous option grants which the insiders who control the corporate money spigot give themselves, in the interests of “aligning management with shareholders.” For all the self-congratulatory claptrap, when companies buy back stock it offsets the added shares from all those options grants and helps inflate the “Earnings per Share” calculation so as not to rouse the shareholders’ ire. According to DuPont’s management, which announced a large share repurchase yesterday morning, the difference between their repurchase and others is that only about half of all announced share repurchases actually get done. (DuPont did not wait around to buy back stock in the open market: instead, the company bought $3 billion worth of stock from a Wall Street firm, which presumably shorted the stock to DuPont.) One company that probably wishes it had not followed through on its buyback announcements must be Lexmark, the beleaguered printer company which earlier this month announced the biggest earnings miss I can remember at a mainstream technology-related company. A 50% miss. Management blamed all sorts of things—but it mainly came down to business falling off a cliff. I don’t know about you, but in the old days—five to ten years ago—printers were an important part of my computer purchases. They churned out envelopes, labels, letters, and stacks of faxes that came in every morning filled with the research musings of Wall Street’s Finest, all the while consuming gallons of the expensive ink that made Lexmark’s razor/razor blade model so profitable. But then all that information began to move around in digital form, and the printers piled up around my office like Tequila bottles in the parking lot after a Dave Matthews Band concert. And HP got its act together. And finally came the mind-boggling earnings miss from shareholder-friendly Lexmark. On yesterday’s conference call discussing the actual earnings report, the Lexmark folks discussed their active share repurchase program: year-to-date the company has bought back 12.6 million shares at a total cost of $870 million—average price, $68.83. Yesterday’s close: $39.69. Negative “enhancement” to the value of Lexmark shareholders: $367 million. In the case of Lexmark and its share repurchases, less would have been more. DuPont shareholders should hope its management has greater insight into its business than the folks at Lexmark. Jeff Matthews I Am Not Making This Up © 2005 Jeff Matthews The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.