My Fellow Americans: February 2014

Did You Get Your 2013 Pay Raise?

If Not, Maybe You Should Learn to Read Between the Lines . . .

Didn't you receive your 2013 pay raise? You know, like the 74% increase to $20 million that Jamie Dimon, king of JP Morgan Chase just received?

Sure it was a tough year, with the U.S. government demanding a record $20 billion in sanctions against J.P. Morgan Chase for their role in the 2008/2009 financial crisis and London Whale debacle, but they’re lucky to have Jamie Dimon, right?

And, even with that awesome pay raise, Jamie’s still trailing the only other financial-titan-still-left-standing from the financial crisis years—Lloyd Blankfein.

Yep, Mr. Blankfein, longtime CEO of Goldman Sachs Group Inc., earned $23 million in salary for 2013, which was only a 9.5% raise over 2012. Still, nothing to sneeze at!

So if these guys are doing so well, after causing a global financial crisis less than five years ago, where are the pay raises for the rest of us? After all, we’re the ones (U.S. and global taxpayers) that bailed out these kingpins and their crippled financial institutions after they caused a mess that was way over their collective royal heads.

If you didn’t receive a sizable 2013 pay raise, you’re probably not using the same strategies as Jamie Dimon and Lloyd Blankfein. Here’s a few things you may consider doing differently in 2014.

Pay Raise Strategy #1 – Sell a Piece of Your Hide to Warren Buffett

That’s right, probably the surest way to guarantee yourself a mega pay raise in 2014 is to sell a piece of yourself to Warren Buffett.

Following the lead of Dimon and Blankfein, you can commit some pretty heinous financial sins – if you have Mr. Buffett as your buddy. The problem is this; Warren doesn’t just buddy up to anybody, he’s usually only interested in you if he owns a piece of your hide.

The Oracle of Omaha, through his Berkshire Hathaway empire, has long been a major financier of Goldman Sachs and lent them billions in the financial crisis. There’s no way Mr. Blankfein would be making $23 million if Buffett didn’t back it—especially in a year when Goldman had flat revenue and a decline in overall compensation for all the rest of the staffers at the firm.

And, the billionaire investor went so far as to call his buddy, Jaime Dimon, “a bargain.” Because Warren holds his shares in JP Morgan Chase personally, instead of through his Berkshire portfolio, no one’s sure how much of Jamie’s hide he owns. But, he sure did go to bat for his buddy Jamie’s, raise, according to the January 24, 2014 Wall Street Journal article. “If I owned J.P. Morgan Chase,” Buffett declared, “he (Jamie Dimon) would be running it, and he would be making more money than the directors are paying him. . . .If Jamie decides he wants to make more money, all he has to do is call me and I’d hire him at Berkshire.”

However, if you don’t think Warren Buffett’s going to be making an offer to buy a chunk of your hide anytime soon, I suggest learning to read between the lines to secure a pay increase for 2014.

Pay Raise Strategy #2 – Learn To Read Between The Lines

One of the reasons investment bankers make tons more money than average folk is that they have entire departments of people devoted to reading between the lines on their behalf.

So, given it’s the time of the season for annual earnings releases, I’m going to share with you a few tricks of the accounting trade to help you “read between the lines” as the major corporations make their 2013 earnings announcements. Hopefully these “Tricks of the Trade” tips will help you give yourself a pay raise without anyone but the IRS having to know about it.

Read Between the Lines – Trick #1: Paper Losses, Now, Ensure Future Profits

If you want to see a healthy return in your investment portfolio in the near-term (1 – 3 years), buy stocks of companies increasing their loss/future cost reserves. For the most part, reserve increases are paper losses generated by recording more expense in the current period, which makes it easier to show big profit gains in future, usually near-term periods. Or conversely, sell stocks of companies where reserve reductions account for a substantial portion of their current reported earnings.

The best run companies, financially, use every opportunity to increase reserves – economic downturns, acquisitions, global warming, you name it. Another opportune time to reserve-build to ensure future profits, is when a new CEO or CFO takes the helm of a major public company. Not only is it a once-in-a-lifetime opportunity to blame everything on the prior regime, but recording a large loss, or substantially less-than-Wall Street analyst-expected profit, drives the value of the new CEO/CFO’s stock options way down, virtually ensuring the options will increase in value rapidly over the course of the new executive’s reign. A great example of this is Royal Dutch Shell PLC (Shell Oil).

Royal Dutch Shell PLC – Hides It Well:
According to 1/18/14 The Wall Street Journal, Royal Dutch Shell PLC’s shares fell .9% following their announcement of a profit warning for 2013 earnings. The profit warning was so rare for Shell, the announcement made the front page of the Business & Finance section, with the title, “Shell Bruised by Big Bets- Oil Giant Warns of Rare Profit Miss; New CEO Must Find Ways to Lift Output.”

Hello! With key phrases like “rare profit miss” and “new CEO,” in the same sentence, it’s a major signal that some accounting tricks of the trade may’ve been deployed.

Reading further in the WSJ article, here are the Read-Between-The-Lines “buy” signs I spotted in Shell Oil’s “profit-warning” disclosure.

The new CEO, Ben van Beurden, took over the helm of the company three weeks before the rare “profit warning” was issued. Yet, he’s no newcomer to the business, as he’s been climbing the ranks at Shell for years.
Shell hadn’t issued a profit-warning in ten years. It is a “no surprises,” tightly managed, steady financial performer, in an industry where price volatility, natural disasters and other major production interruptions are a constant. They obviously mastered the reserve game in both their oil and financial operations a long time ago.
- It’s important to point out also that the “profit warning” and “profit miss” don’t mean that Shell’s losing money—they’re still reporting billions of dollars in profits. Those terms mean that Shell is “warning” Wall Street’s financial analysts that their profit will “miss” the analysts’ expectations of what Shell’s profit should be.
The Largest Losses are Paper Ones—Being Driven By Accounting Entries That Increase 2013 Expenses by Decreasing the Book Value of Assets or Increasing the Book Value of Reserves:
- Included in the $5 billion shortfall from 2012 Q4 earnings, are significant Q4, 2013, asset write-down charges, including a $2 billion write-down of North American shale assets. They’re not writing these assets down because they’re not producing, they’re just saying “we paid too much” which in accounting lingo translates to substantially lower amortization charges in future years, resulting in higher profits from the exact same assets.
  
  Shell also disclosed its profit warning was based upon “a cost of supplies basis that factors out the impact of inventories.” In accounting lingo, this means that they’ve given zero value to their own refining processes or gasoline sitting in their own gas pumps. So regardless of the stage of refining their oil is at, they’re valuing it in their 2013 financial statements as if it was only in the raw material state. This way, later on when they recognize the sales of the 2013 end-of-year inventory, they’ll be able to reflect higher margins, because the inventory (asset) is being carried at a lower-than-market value on their financial statements.
  
  And, Shell's been outspending its competitors for the past decade on large capital projects, as they lead the industry in investment in the perpetual search to find new sources of oil to replenish those currently being depleted. And in 2013, they’re recording net capital spending costs of $44.3 billion, up nearly 50% over 2012.
  
  While Mr. van Beurden is publicly decrying his predecessor’s strategy of funding “elephant projects,” it’s his term at the helm that’ll reap the benefits of these massive exploration projects—with as much of the costs of development shouldered by the prior regime as possible.

Yep, my bet is Mr. van Beurden’s built enough financial reserves at the end of 2013 to buy himself a nice honeymoon performance for at least the couple of years. All things being relatively equal, Royal Dutch Shell’s 2014 profits have got to be much higher than 2013’s. Might as well buy some shares and take a profitable ride on van Beurden’s back!

Read Between the Lines – Trick #2 – Short Sell the Stock, When They’re Laying on the Hype

When large corporations use statistical maneuvers and publicity to divert attention from less than expected performance, and the stock market seems to believe the hype, even if the company is still recording billions of dollars in profit, it’s time to “short,” the stock. The stumble, or even bigger tumble, is definitely forthcoming—it’s just a matter of when. Senior corporate executives resort to these measures to secure current year stock option prices and bonuses based on stock prices, trying to maximize their own paychecks, before the public finds out about whatever they’re trying to hide.

The way you get your pay raise for reading between the lines on this one, is to lock in your “short” price before the financial institutions initiate their own sell-off. Don’t be greedy or you may not receive your pay day. Just short the stock at 10% to 20% less than its current price and then tread water until it’s time to collect your paycheck.

Guess what—the billionaire investor, buddy of the financial titans, Warren Buffett and his Fortune 100 conglomerate, Berkshire Hathaway, are providing a perfect example of where the positive hype doesn’t align with the less than expected financial results. And, given his backing of the financial titans’ pay raises, Mr. Buffett’s hype-bubble isn’t about to be burst open by JP Morgan Chase’s or Goldman Sachs’ analysts in the short-term, so you still have time to secure your position.

Berkshire Hathaway – Beware When Warren Buffett Passes the Blame or Tries to Hide the Shame:

The pre-earnings release hype emanating from Berkshire Hathaway, Inc., is that Todd Combs and Ted Weschler are tea-leaf readers extraordinaire—“Better than Buffet”!

Todd Combs Hard at Work

The January 18 - 19, 2014 Wall Street Journal ran an article entitled, “Buffett Managers Outpace the Boss.” The caption above the photos of Todd and Ted declared “New Oracles: Berkshire Stock Pickers Shine.” And, in case readers are dumber than a box of rocks and may’ve still missed the intended message, below the photos of the two new gurus was the statement, “Two Berkshire Hathaway managers seen as potential successors to Warren Buffett have netted better returns than the noted investor.”

It isn’t until the fifth paragraph of the Wall Street’s article that it’s disclosed, “Mr. Buffett fell short of his own performance target for the conglomerate for the first time since the Omaha, Neb., native took control of Berkshire in 1965.”

Even oracles can't be right all of the time!

The next two paragraphs blame Mr. Buffett’s shortfall performance on the strong stock market, stating, “Thanks to the index’s robust gains in 2013, Mr. Buffett will fall short of that (his) goal,” and predict Berkshire’s shareholders aren’t likely to hold the less than expected performance against Mr. Buffett.


Ted Weschler's Working Hard Too

Four more paragraphs about how wonderful the newly anointed ones, messers Combs and Weschler, are performing, including this quote from the Oracle of Omaha, himself, “They’ll both be huge assets for decades to come.” (Read between the lines – “See, I’ve hired awesome successors, so even though I’m 83, fear not and buy my stock.”)

Finally in paragraphs twelve and fourteen, there’s a taste of the pre-Rupert-Murdoch-owned Wall Street Journal journalistic skepticism that’s been slowly disappearing from our profit-hungry media these days. It’s disclosed that each of the oracles-in-training managed $3 billion in assets, while Warren managed over $100 billion. In fact, in the final paragraph of the article, paragraph twenty-two, it’s finally disclosed that the portion of Berkshire's investment portfolio managed by Mr. Buffett has performed about 38% worse than the S&P 500 over the past five years.

So far, there’s been no noticeable hit to the stock price, as most people are following instructions and “aren’t likely to hold the less than expected performance against Mr. Buffett.” And, the mega financial institutions, headed by the likes of Jamie Dimon and Lloyd Blankfein, wouldn’t dare anger their buddy Buffet by publishing a “Sell” recommendation for Berkshire’s stock just yet. This means there’s time for you to lock in your “short sell” position.

The tone of the recent Wall Street Journal article certainly implied a “buy” or “hold” recommendation, pointing out that Berkshire’s shares are up 30% over the prior year. However, the article fails to mention that the S&P 500 was also up 30% over 2012. In comparison, over at Dimonland, J.P. Morgan Chase’s shares were up 33%, beating Buffett’s Berkshire and the S&P 500’s performance, despite the record $20 billion in federal sanctions levied against their firm.

Reading between the lines, my tea leaves indicate a “short” recommendation.

Mr. Buffet and his minions are trying way too hard to make us believe his heir-apparents outperforming him statistically is the same as them outperforming him, or the S&P 500, in real dollars.

I don’t know what Mr. Buffett does or does not know about Berkshire’s performance outlook, but it’s not like the Oracle of Omaha to deflect the attention away from his own investment portfolio performance or to blame the S&P 500 for his shortfalls. But, I do know this, real dollars are required to pay stockholders’ dividends, and over the past five years, Berkshire’s stockholders would’ve been nearly 40% better off with their real dollars invested in an S&P 500 index fund.

With that kind of abysmal performance, even Jamie Dimon and Lloyd Blankfein won’t be able to keep the pension funds and other major institutional investors drinking Berkshire’s Koolaid forever.

Take my advice, short Berkshire’s stock. Maybe it’ll go viral. Perhaps the market-trading computer programs will catch on and cause a massive sell-off in Buffett’s flagship that catches Jamie Dimon, Lloyd Blankfein and the analysts at J.P. Morgan Chase and Goldman Sachs by surprise and they all lose money.

Wouldn’t that be great fun, garnering our own 2014 pay raises at the expense of the very guys who caused our property values to tank, our 401K plans to plummet, and our jobs to pay less or be cut completely?

In closing, compliments of YouTube, here’s a live performance off Bonobo’s Days to Come album—the song “Between the Lines.” As the lyrics so rightly state,

“Things aren't always how they seem
We've got to make the best of it
Eye for an eye
Tooth for a tooth
Sometimes we're blind
We can still see the truth”

Ciao for Now,

Sera Macintosh

My Fellow Americans

Monday, February 3, 2014

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Sunday, February 2, 2014

Don't We Get A Pay Raise, Too?

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