Moodys Corp: Warren Buffett Defends the Indefensible

I am a big fan of Warren Buffett and his investing prowess - I run a blog called Everything Warren Buffett - and long-term approach to the stockmarket that he has built up over generations but recent comments and actions from the man have left me wondering whether my admiration for him has been rather blinded by his image as a folksy, no nonsense kind of guy who wont put up with, and dispense, to put it bluntly, bullshit.

Much of that has changed for me over his comments on the Moody's ratings fiasco.

With that in mind I just have to join the chorus of commentators who have roundly criticized Warren Buffett over his recent testimony to the Financial Crisis Inquiry Commission (FCIC) over the defense of rating Agency Moodys Corp [MCO.NYSE], a company in which the once great man is the largest shareholder in.

While Moodys isn't completely to blame for the 2008 financial meltdown (the lenders, borrowers politicians - principally Bill Clinton's administration - mortgage back securities businesses and a whole host of other characters in this drama share the ignominy) and what has happened subsequently, it did rate subprime mortgages as good loans and a prize moron could figure out even before the September meltdown these loans were always in danger of defaulting, it was just a matter of when not if.

Warren Buffett's defense of Moody's part, is ,well, indefensible. Buffett, known for his principled stance on matters of business, investing and commentary on such things has ruined his reputation by not coming out and roundly criticizing Moodys, which he would have been expected to do given his past history on such matters of business ethics and the like. Moodys business practices have effectively endorsed short term risky derivatives and short term gain over a long-term outlook for business, something that Mr Buffett has been yelling from the rooftops for the last 60 years.

In Buffett's testimony to the FCIC he gave a lame excuse for Moody's part in the 2008 crash:

On Wednesday, though, Mr. Buffett testified that he did not know all that much about the credit rating market, even though the holding company he controls, Berkshire Hathaway, is the largest shareholder in Moody’s Investors Service, one of the three companies that dominate the business.
“I’ve never been to Moody’s,” he said at a hearing of the Financial Crisis Inquiry Commission, which is investigating the causes of the global crisis that led to the government bailout of big banks. “I don’t even know where they’re located. I just know that their business model is extraordinary.” New York Times
Feigning ignorance of a company that Buffett has such a large stake in just doesn't stack up. We know he doesn't have "intimate" knowledge of every minutia of the way businesses he has shareholdings in do business, he has a vast portfolio and little time to spread around, but he is however aware of the basic way all his businesses run. His solid reputation as an investor has been built on knowing the businesses he invests in. it is part of his investment mantra that comes out of his mouth to any investor or business interviewer who will listen or ask questions of him.
The past would have seen Buffett own up and take responsibility for mistakes that he has made and he has owned up to plenty. The inconsistency of his approach over the Moody's fiasco has dented a reputation that he has built up over a very long time .
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently". Warren Buffett
Personally, I will find it difficult now to take what Warren Buffet says seriously. He has time to redeem himself but he is 80 years old this year and probably doesn't have another 20 years.
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Watch Buffett's full testimony


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BP Disaster provides opportunity for investors

British Petroleum PLC [BP.LSE] is a company in a fair amount of trouble at the moment. Apart from the fact that its oil well in the Gulf of Mexico is leaking the black stuff into the ocean and causing an environmental disaster of monumental proportions and it could get alot worse, the financial implications for the business could be just as catastrophic for the company and shareholders.

There are billions to be spent on clean-ups and further billions on compensation and legal cases for years to come and markets just hate uncertainty.

So far almost 40% of capitalisation has been lost from the value of BP over the last 4 weeks.

All this bad news of course presents a great opportunity to buy this otherwise top asset for much less than it is worth.

As I pointed out it will cost the company (and insurers) many billions to put this right and so it should but it shouldn't be forgotten by prospective investors that this company made US$6 billion of profit on nearly $9 billion in revenue in the last quarter alone so it can afford to take quite a big hit without it affecting the company badly in the long-term.



The value in BP now lies for smaller investors in not only the cheaper shares but also the distinct possibility that the company is now under threat of a takeover offer because it will be seen by possible suitors as a relative bargain.

While many possible risks remain for investors in BP, the market reaction seems a little like overkill to me and its shares are cheap. The longer the disaster in the Gulf continues on for the further BP shares could fall and present an even bigger opportunity. Just how further the shares will fall is anyone's guess but it seems clear that they will.

Fortune favours the brave.

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Restaurant Brands: KFC Sales Figures Explained - Part 2

I am back to explaining the latest quarterly KFC sales regarding Restaurant Brands [RBD.NZ] to shareholders because the company and business media seem to keep ignoring the bogeyman of inflation.

It is something I have mentioned many times before but it must be stressed once again because Restaurant Brands shareholders and prospective investors in the company must be given the full picture when it comes to RBD managements disclosure over their KFC sales.

The "record" $54 million of sales reported in today's result for KFC is only a record in terms of 2010 dollars. KFC are actually serving up less chicken to fewer customers.

Their best listed year was in 1997 where they did $172.3 million in KFC sales. That is because of accumulated inflation at a very conservative 3% annually over the last 13 years amounts to 39%.

Now lets assume conservatively that RBD sell $220 million of KFC for the full year 2010 and compare that figure to the 1997 record year.

39% inflation means in 2010 dollars RBD would have to sell $67.2 million more chicken just to match the record made in 1997.

$220 million is a fair way from the figure they need to make, of $239.5 million, just to match the 1997 record.

I am not an accountant and nor do I think I need to be but if such emphasis of "record sales" is placed on a figure by RBD management to gain market approval that the expenditure of 10s of millions of shareholder funds on KFC refurbishment in order to attain those sales then that figure should be clearly accurate and take inflation into account. That is simply not the case here.

Granted one can do the math oneself to come up with relative figures and compare year by year sales but having said that, to use current sales figures as a tool to push further shareholder expenditure must be justified to the nearest decimal point.

RBD's figures therefore do not pass this test and furthermore for analysts and business reporters to accept this without question is surely remiss to some extent.

Still my record with this company probably goes back longer than many on the RBD board or those professional stock analysts in their professional capacity.

To say KFC are improving sales is true but to say the KFC product is selling in record numbers is highly misleading, to the market and to its shareholders. In order to show a decent "recovery" of the brands sales that justify the hoopla from RBD management and brain dead business writers KFC sales would at have to get nearer to $300 million per annum, than the $220 million it is now achieving.

Once again, I am not an accountant but I would like to see inflation taken into account when businesses do their books, at lease an annotation in the audited reports of what the inflation rate was in the last year so a stockholder or a prospective stockholder can make a fully accurate comparison before they decide to buy, or not as the case may be.

I am a big fan of the KFC product.


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c Share Investor 2010

Allied Farmers: Prosecutions should be on the cards

I do not understand why the Securities Commission is not pursuing directors of Allied Farmers Ltd [ALF.NZ] for fraudulent behavior over failure to disclose the true value of assets bought off Hanover Finance in its prospectus issued in November 2009 before the restructuring of Allied and the assuming of new shareholders owned money by Hanover into the Allied group.

Assets assumed by Allied from Hanover are now worth 30% of what they were valued at in the November 2009 prospectus and ALF shares are trading below 6c.

Rob Alloway from Allied is now assessing assets on its books acquired from Hanover:

Yesterday Allied Farmers managing director Rob Alloway said it had completed assessment on a further $69.1 million of loans or around 65 per cent of the loans book acquired from Hanover and would be writing them down by $33.6 million. A further $37.5 million in loans had yet to be assessed.

Excuse me for my ignorance but didn't he and his mates do due diligence on Hanover assets before issuing their prospectus or did Rob merely take Mark Hotchin and Eric Watson's word that there was close to half a billion of assets to be realized for new investors in Allied Finance and existing Allied shareholders.

Of course given the smoke and mirrors nature of Hanover's business their loan book was likely to be one filled with inconsistencies, overvaluations, inter-party loans and poor record keeping but it was up to Rob and Allied and their mates to do sufficient homework so as to give Hanover investors an accurate picture of what they could get out of a sale of Hanover assets to Allied and therefore give them a real choice as to whether they should have agreed to the deal or vote to wind up Hanover.

Grant Samuels wrote an "independent" report into the deal late last year and said:

The Allied Farmers proposal is superior to the status quo and a high risk of receivership for Hanover Finance investors, according to Grant Samuel. NZ Herald

Rubbing salt into the wound the Samuel's report indicates:

Samuel said an alternative cash offer for Hanover was a remote possibility, and if it were to eventuate from another party it would be at a substantial discount to the current book value.
NZ Herald

Samuel's report then was clearly wrong on all counts and the money paid to them for the report came from Allied Farmers pockets.

I criticized their report last year but there seems to be few in the mainstream business media willing to lam-bast these bastards - the big boys protecting themselves again?

I would be loathed to say that the Allied deal done last year was a purposeful conspiracy to get Watson and Hotchin off the hook, but it has (so far?), and those involved in helping; Allied, Samuels, Hanover investors and Allied Farmers shareholders, et al should all feel some shame.

Where the hell are the real independent appraisers willing to call a spade a spade instead of fraudulent reports agreeing with the participants in the deal. Who the hell is protecting the investor, besides their own savvy and financial education?

I just wonder where The Securities Commission and the NZX are on the blatant failure to disclose the true value of Hanover assets in the November 2009 prospectus.

It is their duty to at least make a public statement but what SEC really need to do is break down the door of the Allied Farmers head office, grab the books and do a forensic accounting analysis on the Hanover/Allied deal.

Perhaps then we will find out where the bodies lie.




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c Share Investor 2010