Albert Meyer

Cisco: Compelling at These Levels

Thanks PrudentInvestor for some common sanity in this debate.

You'll notice I asked Asif to tell us how much Cisco has accumulated in profit the past 15 years (still waiting)... in $ billions... no such luck. The company spends all the profit it books to repurchase the stock it dishes out to employees.

Asif should not to talk about dividends and buybacks in the conventional sense. After buying stock to fight the dilution coming from option exercise, there is no cash left for dividends. Sorry, Cisco shareholders, you will never see a dividend.

There is no benefit to shareholders when you inflate the share count with stock issued to employees and then you buyback that stock. FASB hasn't figured it out but for dummies like us, when you buy back the stock you've issued to employees you are paying compensation through the back door - forget about Black-Scholes... as Holmann Jenkins of the Wall Street writes... FASB 123R produces "junk numbers." Just folow the cash, you can't go wrong. Stay away from Cisco, unless you in it for a trade... more than one billion options coming down the pike... 20%+ dilution. You are not investing, you are bailing out excutives and monetizing their options.

If your mother-in-law's owns Cisco, tell her to sell the fund. The manager has no clue. That goes for all these stock option laden companies.

Asif, are you still bullish on Cisco?

On Apr 09 08:11 AM prudentinvestor wrote:

> Asif,
>
> Like many companies nowadays, they are managed for the benefit of
> executives and employees, not shareholders.
>
> They buy back stock to give their employees and to boost the price
> for the benefit of their executives' options. If the shareholders'
> money wasted on overpriced buybacks does not suffice to boost their
> options, they re-price underwater options, like Google just had the
> gall to do!
>
> Meanwhile, shareholders get diluted and receive no dividends, just
> wait for the "greater fool" to pay them a higher price.
>
> Boards are mostly stuffed with "good-ol-guys-and-gals", all they
> want is to stay on the board for the pay and perks, without regard
> to shareholders' interests. Most real shareholders do not vote or
> even know which companies they "own" because their mutual fund managers
> do it for them.
>
> If the administration wants to reinstate a healthy stock market,
> they need to place restrictions on the governance of publicly traded
> companies to prevent management's abuse of their shareholders. The
> SEC, or perhaps the retirement oversight agencies, have this duty
> because much of the public have no option but to put their retirement
> savings in publicly traded stocks via their 401K's, and most don't
> even know what stocks they indirectly own, so they are being unwittingly
> fleeced. Companies that don't like such restrictions should either
> go private, or, at least, should be banned from ownership by "Joe
> the plumber's" 401K, and only be traded by individual investors who
> actually get to vote on corporate governance.

Cisco: Compelling at These Levels

Have you looked at Cisco's balance sheet? Before you do, take a guess at how much the company has accumulated in profits over the past 15 years - in $ billions.

Mark-to-Market Accounting: FASB Responsive, But Not Independent

Brilliant... as is dixie 69's comment "FASB 157 does not insure transparency... see above.

FASB is clueless, but talking about M-T-M, why not mark stock options to market? Why use a flawed model to estimate the cost and then not true up the numbers once an employee exercises the option? Because FASB dances to the piper's tune. Stock options allow insiders to steal from shareholders and FASB won't stand up to its financial backers on this one. Besides, for 15 years FASB held firm that stock option compensation was not an expense. You can't make it up. When companies use operating cash flow to repurchase stock issued to employees it incontrovertibly becomes an operating expense, not a financing activity. FASB can't even figure something as basic as this.

The people at FASB had no clue what damage M-T-M would cause, because they never understood the financial machinations of Wall Street. Bring back cash accounting and accrue only for operating revenues and expenses. Disclose and discuss any significant differences between cash flow and earnings in plain English. Countrywide would not have survived one year on this basis. Instead, it lasted long enough for insiders to extract $500 million in stock option gains. GAAP is flawed, only the Conceptual Framework (CP) has validity, but CP is not part of GAAP - go figure. The accounting profession has failed in its mission.


On Mar 28 04:32 PM partnerj wrote:

> It appears that most MTM supporters are looking back at the assets... etc.... see above

Southern Copper Corp: An Interesting Way to Play the Commodity Rebound

Great company. Second largest copper reserves in the world, behind Chile's Codelco. Pays all compensation in cash only - no stock options, no dilution, no games. CEO comp in 2007, $1.4 million. Distributes profits liberally. Power plants are being built in China and India at a healthy rate; more than 1MW per week being added (fact check this). China added 80GW in 2008, 1.5 MW per week. Creates demand for copper. Cash cost of production, net of by-product revenue, $0.50 per pound, but in some quarters in 2007 and 2008, by-product revenues exceeded cost of production. Net margin in excess of 20%, ROE 35%+. Totally transparent and shareholder-friendly company, strong balance sheet, great margins, etc.

Copper and Resources Lead to Portfolio Outperformance

Hi Bill,

Great reply. Yes, Tenke is a risky proposition, but manageable. Both companies earn enough revenue from by-products to cut net copper production cost to the $0.60 to $1.00 per pound price range. PCU doesn't have stock options. CEO basic salary $600K per annum. PCU distributes most of its profits. FCX has super-sized compensation packages. FCX's gold and molybdenum reserves are attractive. I'd own both companies. PCU has better margins. PCU did not cancel its dividend. FCX used the fourth quarter of 2008 to write down its assets purchased from PD - ridiculous big-bath charge to boost future earnings. I frown on that, but the market punished the stock and it will be a good investment going forward.



On Mar 24 11:20 AM Bill Herbert wrote:

> Hi Albert,
>
> PCU is a stock that has been good to me in the past – but I haven’t
> followed it closely over the last year. I bought some in the teens
> and sold in the high thirties a couple of years ago, but held onto
> FCX and some others at that time. PCU has actually been less volatile
> than FCX, for whatever good that is in terms of portfolio stability.
>
>
> The risky things about PCU are its ownership/control by Grupo Mexico,
> and the geographic risk. All the mines are in Mexico and Peru – both
> mining-friendly, for sure. But Mexico has been melting down economically
> for some time, and I believe there is a lot of political/confiscation
> risk there. I know that Cantarell, the huge oil field in the southern
> Gulf that has bankrolled the Mexican economy for over twenty years
> is in serious decline, and lower oil prices are a big hit to their
> revenues. I believe that Mexico may have to impose new taxes or royalties
> on mining properties – which are numerous - and since a lot of the
> PCU stock is American-owned, they can say it’s for the good of Mexico
> and who really cares about the Americanos, anyway?
>
> Also, I don’t want to be at the whim of a large conglomerate (Grupo
> Mex) that may capriciously sell assets, do an unfavorable capital
> raise, or declare a large dividend to itself, as many have done in
> the past. I don’t have the time to monitor their honesty or capability,
> so I will pass even though they may generate great returns for investors.
> Note that in 2005, PCU did a $900 MM secondary, in which both the
> Pritzker family and Phelps Dodge (run by Adkerson) sold shares. Maybe
> that doesn’t mean anything, but they opted out of the PCU play, only
> to expand and develop other copper resources.
>
> There are safer ways to play the copper upside – and FCX also has
> a huge gold resource, which I like. On the negative, they may have
> an expensive boondoggle in Tenke, so they are by no means perfect.
> In general though, FCX has very solid management, and it took a ridiculous
> plunge to under $17 from its (overvalued) peak of $120. So it had
> fallen farther, and had more upside, IMO. Also, it has better access
> to capital, one would think, if it decides to get acquisitive. There
> are numerous properties out there just begging to be picked off by
> the majors – and some of them are in FCX’s back yard in AZ so they
> get economies of scale with existing infrastructure. I know they
> have mothballed some development lately, but longer term, it may
> be in their interest to lock up valuable resources at fire sale prices.
>
>
> Having said all that, I think that perhaps the best resource-based
> investments right now are selections from the MLP space in U.S. energy
> infrastructure. I hope to find the time to cover some of those names
> in a future update.
>

Copper and Resources Lead to Portfolio Outperformance

Great article. What's your take on Southern Copper?

How the U.S. Banking System Was Madoffed by the FASB

7) Change the tax code code to get rid of stock-based compensation as a tax deduction for corporations. No such deduction in Canada and other countries

8) In financial statements, expense the intrinsic value of stock options (as it is currently done for tax purposes), i.e., trash Black-Scholes for option accounting

9) Lower corporate tax rate to 25%. China's corporate tax rate is 25% - a communist country; oh, the irony...



On Mar 13 09:32 AM petyaczar wrote:

> Sarbanes Oaxley begat Mark to Market in response to Enron.
> The U.S. Congress begat Enron when they deregulated essential gas
> and electricity and opened it up to speculators.
> The politicians are the handmaidens of FASB 157
> The Politicians are the root cause of this accounting crisis (FASB
> 157) that created a financial panic and the subsequent credit squeeze.
>
>
> At its core, Mark to Market requires someone who has no interest
> in selling a performing asset (A willing owner and jence an unwilling
> seller) to discount said asset to the point at which an unwilling
> disinterested party (buyer) MIGHT become interested.
>
> THIS IS BEYOND STUPID.
>
> Kill Mark to Market and FASB 157, drive a stake thru its heart, cut
> off its head,burn the corpus delecti.
> The politicians have used Mark to Market to pull off a Coup de Tat
> and destroy the capitalist free market system.
>
> The politicians are using this "crisis" to expand government power
> as they bring America into a socialist state.
>
> Never allow politicians to mess with the accounting system, else
> before you know it 2+2 is redefined as equaling 1.3 - or some such.
>
>
> Never confuse accounting with reality.
>
> Solve the root cause of this problem and the economy will be restored
> as the financial system is restored and markets will soar as credit
> begins to flow when confidence in balance sheets is restored
>
> 1)Get rid of Sarbanes Oaxley = Mark to Market
> 2)Get rid of FASB 157
> 3)Reinstate Glass Steagall Act
> 4)Reinstate the uptick rule on short sales
> 5)Increase margin on commodity futures trading to 50%
> 6)Make it illegsal for politicians to mess with the accounting system.
>
>
> IMO

Mark-to-Market Triggered This Recession; It Will Also Trigger the Recovery

If mark-to-market is such a great thing, why doesn't FASB mandate that stock options (warrants actually) be marked to their intrinsic values every quarter instead of using models that are utterly flawed? Because that way, shareholders would learn on a timely basis how much money executives are stealing from shareholders.

At least, on exercise of options (warrants), the intrinsic values should be compared to the values that were accrued at grant date and the numbers should be trued-up to correct the accruals. That's what we do with valuation allowances and other such estimates. But ah, stock options (warrants) are the executives’ pet scam and we are not going to bite the hand that feeds us. FASB is in cahoots with the “scamsters.” The "F" is FASB stands for "fraud." OK, a bit harsh, but I hope you get the point.

FASB is inconsistent and politically compromised, hence these glaring contradictions. You can't mark assets to market when no market exists. (A market for employee options exists. Telefonica buys call options to cover the option grants they make to employees. Consequently, they accurately account for the cost of options and also avoid shareholder dilution. The best of both worlds with the compliments of the Spaniards – shame on us.) I think FASB misjudged the doomsday devise they concocted and then their pride would not allow them to back down.

How the U.S. Banking System Was Madoffed by the FASB

If mark-to-market is such a great thing, why doesn't FASB mandate that stock options (warrants actually) be marked to their intrinsic values every quarter instead of using models that are utterly flawed? Because that way, shareholders would learn on a timely basis how much money executives are stealing from shareholders.

At least, on exercise of options (warrants), the intrinsic values should be compared to the values that were accrued at grant date and the numbers should be trued-up to correct the accruals. That's what we do with valuation allowances and other such estimates. But ah, stock options (warrants) are the executives’ pet scam and we are not going to bite the hand that feeds us. FASB is in cahoots with the “scamsters.” The "F" is FASB stands for "fraud." OK, a bit harsh, but I hope you get the point.

FASB is inconsistent and politically compromised, hence these glaring contradictions. You can't mark assets to market when no market exists. (A market for employee options exists. Telefonica buys call options to cover the option grants they make to employees. Consequently, they accurately account for the cost of options and also avoid shareholder dilution. The best of both worlds with the compliments of the Spaniards – shame on us.) I think FASB misjudged the doomsday devise they concocted and then their pride would not allow them to back down.

Caterpillar's Troubling Bond Issue

Old Limey, you're not missing anything. Pretty good summary. old chap.

Caterpillar's Troubling Bond Issue

I like Gramps' spunk. Accountants have written the rules in such a way that they can make the numbers tell you anything they want. Grumps, take cash from operations, deduct capital expenditures and then deduct actual credit losses recognized in the bad debt allowance account (in substance a loss of cash/capital). That will give you CAT's true free cash flow. Compare that to net income. I haven't done the calc for CAT, but it's a pretty useful tool to demystify the accountants' smoke-and-mirror show. Vendor financing was a game Lucent played... and see what happened to Lucent. Lucent's former CEO, McGinn sits on the board of American Express, but his bio in the proxy statement makes no reference to his tenure at Lucent - go figure. Off the topic, but I just thought I'd throw it in the mix.

Leucadia's Key to Success

Some of the arguments made by others in favor of LUK are:

(i) "Earnings sheltered by NOLS are more valuable than earnings that are taxed!" Do you have a history of earnings generated by the company's operating businesses that you could share with us?


(ii) "Book value compounding at a 21% annual rate and the stock at 26% per year." How much of the compounding came from stock issues (acquisitions funded by stock) and the reversal of deferred tax valuation allowances? If you take out the stock issues and the deferred tax assets, what does the compounding look like then?

How long will it take the company to realize the NOLs. How long has it been on their books and how much of that have they realized to date?

Just asking. Thanks for the article. I know managment has been very good at timing acquisitions and subsequent disposals of businesses, but does this churn activity not make LUK more of a closed-end fund? Should it not sell closer to book value and how do you value the intangibles and deferred tax assets (NOLs)? That said, it has been a phenomenal stock.

Valuation multiples (TTM): ~P/E 27, ~P/S 8, ~P/B 1.8 (book value includes NOLs) EV/EBITDA ~150. Do you have an idea of what forward multiples might look like?

Bank Insiders Made Out Like Bandits

On the contrary, this article is extremely worthwhile. It highlights the dangers of investing in companies that make use of stock options to compensate executives. Far from aligning the interests of insiders and shareholders, employee stock options place insiders at a huge advantage over shareholders.

Stock option plans are front-running, stock-watering and insider trading all wrapped-up in one and legitimized by the guardians of our capital markets.

Millions of Americans are foolishly placing their retirement funds in index funds, ETFs and the like. Managers of these funds are "forced" to invest in these stock option disasters. Hundreds of millions of dollars of hard-earned wages are deftly transferred from the middle-class to a handful of executives.

This inequitable wealth-distribution (legitimized theft) is bad for the social fabric. It’s a stain on our capital markets. Articles like this educate the public. Hopefully one day, legislators and regulators with a conscience will step in and remedy the situation.

Bank Insiders Made Out Like Bandits

This insider trading, mainly at the expense of people who blissfully place their retirement hopes in index funds, is fully sanctioned by the SEC, the so-called guardians of capital markets. The SEC's defense would be that all the facts are disclosed. It's like saying that robbing a bank is no longer a crime because we have installed closed-circuit TV to record the action.

Bank Insiders Made Out Like Bandits

Great analysis. Much appreciated. How about a similar analysis for companies like Cisco and Broadcom?