MichaelZZ

Overall, Fundamentals Are Still Deteriorating

TO: hwood007: Obviously, you would never have thought about buying Bershire BRK.A) aka Warren Buffett (LOL).
Whereas the stock is selling around $110,000 per share, it has NEVER paid a dividend. The market is composed of all information and all types of buyers and sellers. Under what rational theory would you suggest that it is not rational to defer dividends?

Michael Z.

Overall, Fundamentals Are Still Deteriorating

Paraphrasing Isaac: Objects in motion tend to remain in motion, objects at rest tend to remain at rest, and to change either condition, requires energy.
In this case the energy factor should be effected by Congress by legislating the appropriate fiscal adjustments, i.e., immediately (do not wait until 2010) repeal those portions of the Bush tax legislations for those with taxable incomes in excess of $200,000 (arbitrary, i.e., could be $225M, $230M) and legislate permanent tax reductions for those with taxable incomes under $80,000.
This will be the energy factor, which will prime the engine of our economy. The longer it takes to do this, the more problematic will be the results.
A one-shot stimulus package will not work, as the recipients will pay down debt or add to savings due to insecurities, whereas a permanent tax reduction will mean that they will see their net paychecks increase and will have greater confidence. Unless consumers increase their collective confidence and spend, the situation will become much graver.
The parameters of the first traunch of $125 billion should be changed:
1) Only those institutions who want the funds should receive, i.e., none should be coerced into taking
2) The dividend rate should be changed to, at least 11%, for the purpose to stimulate the institutions to attempt to raise capital from private sources. They would know that they have the backstop of the 11% preferreds.
3) The conversion factor should be significant
4) As in the case of the Buffett purchase of GS preferreds, there should be substantial long-term warrants
5) The "fund" should be given seats on the Boards.
6) All dividends, other than any preferred stock dividends should be deferred for one year and will be re-assessed at the end of the year
7) There should be a moratorium for any bonuses and this will be reevaluated at the end of the first year
8) Those institutions which do not accept the "fund's" requirements and eventually fail, and which have exacted bonuses will place in civil and criminal jeopardy those recipients of the bonuses. The punishments will include imprisonments and the return of the bonuses plus substantial monetary penalties.
The common shareholders will be adversely affected (much of which has already been reflected), but that is appropriate.
Capitalism will be alive and well.


Michael Z.
Sherman Oaks
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Anyone Want a Cheap Coca-Cola?

In June 1998, a CPA friend asked me to look at the securities within his company's retirement program.
KO was a substantial portion of the portfolio.
Although my analysis was somewhat cursory, I, strongly, recommended that he sell his entire position in KO.
Co-incidentally, KO was at it apogee (88+).
He laughed, explaining that many millionaires had been made due to KO.
I reflected that I didn’t care.
The discussion went back and forth, but I failed to convince him.

Circa early 2000, he called me to tell me, that a few days prior, he had bought more KO @ $58, and now the price was $62.

Beginning in 1999, I was posting on Yahoo’s KO message board. As far as I know, the messages are still available for review, as I had began digging into the history of Coca-Cola and KO
I, almost, pleaded with readers to sell their respective positions.
My comments were greeted with severe animosity, which was to be expected, considering the venue.
I offered my rationale with facts, figures, and calculations.
I suggested that KO was, perhaps, reasonably valued in the mid-40’s.

Due to senility, I can’t recall if it were 2000 or 2001, but I saw a recommendation from Merrill Lynch, early in the year, that they were placing KO on its Focus listing.
I called Merrill Lynch (NY) and attempted to reach Douglas Lane, the Merrill KO guru.
Instead, I spoke with a female VP. We had a very cordial conversation, during which she explained the logistics of what happened.
KO was recommended to the Focus one committee, although, she said, the technicians HATE the stock.
I posted this information on the KO board.
Interestingly, it seems like a few months later, Eliot Spitzer began to investigate firms that recommended securities to the public while, internally, they were negative on the recommendations.
Interesting.

Coca-Cola was perhaps the Granddaddy of SPE’s, possibly courtesy of Douglas Ivester.
It’s SPE was Coca-Cola Enterprises, Inc. (CCE).
It appeared to me that Coca-Cola (CC) was buying small to medium size bottlers and reselling them to CCE at substantially higher prices.
The bulk of this activity appeared to occur between 1995 and 1997, which co-incidentally saw 17-18 earnings growth in Coca-Cola’s earnings, and a PE for KO to run up to the 50’s.
It seems like a scenario for a film, but that is when I began looking at this company, i.e., the end of this 3-year period.

I invite readers to review the balance sheet of CCE of 1998 and 1999.
Almost all mature companies have goodwill (costs of underlying assets purchased in excess of tangible value) on their books, as did CCE.
It was the remarkable amount of “goodwill” on the books of CCE that should startle any reader. Yes…, I was startled.
Whereas the stockholders’ equity was around $3 billion, the goodwill was sitting at a lofty and unbelievable $14 billion! I think the long-term debt was around $8 billion.
My perception was that the purchases from Coca-Cola created most of the enormous goodwill.

The foregoing has not yet been addressed. I am quite confident that the SEC is fully aware……….

The most recent “creativity” began 1998/1999.

Coca-Cola asked CCE to place stand-alone point-of-purchase displays in supermarkets, sporting goods stores, service stations, in fact, anywhere it could do so.
Coca-Cola would pay for the costs of these displays.

These are not exact numbers, but this will offer the concept used. Coca-Cola would pay CCE $300 million.

Here’s where the concept stretches credibility far beyond limitations.

Coca-Cola used a 12-year amortization for the funds, i.e., would capitalized the funds and amortize $25 million per year.
CCE, when the funds were received, characterized the monies as income in the year received.
Thus, this transaction, which was, in total, a wash when considering the two entities, together, created $275 million in income ($300 MM income for CCE less the $25 MM amortization expense at Coca-Cola).
Neat trick?

In 2001, I contacted and had discussions with a very senior official at the SEC. Although I offered all the information I had, he would respond that the SEC could not expose any information, which concept should be changed, but that is for another day.
Apparently, during our series of conversations, he made contact with Coca-Cola’s controller, Connie M. I discovered this through a FOIA request.
In a letter to Connie, he had asked why she felt it was justified for CCE to record the $300 MM as income. She said it was because they had to put the funds out before receiving from Coca-Cola, which is, obviously, laughable. It was a timing-difference.
And this answer was from Coca-Cola’s controller who was a CPA.

Due to the above, CCE took a $301 million charge in the Q4 of 2001 and described the charge as “a change from one acceptable accounting principle to another acceptable accounting principle”, thus it was recorded as a one-time extraordinary charge.
The charge was do to an accounting error, not a change from one acceptable method to another and as such, the financials, for the periods affected, should have been restated.

That treatment was to prevent restatements of prior periods, which would have exposed the fact that CCE’s earnings did not justify the carrying value of the $14 billion of goodwill. A write-down beyond $3 billion would have reflected the insolvency of CCE and would have necessitated a “going-concern” comment by E&Y on the published financials.

According to my notes, on January 24, 2002, at 07:30am, I called for Chuck Carver (E&Y partner in charge of CCE audit) @ 404-817-5214,
Janice Hamilton, his assistant, said that he was out. I gave her the “question” for Mr. Carver: Why, regarding the $301 MM charge, a restatement of prior years’ earnings were not made.
At 06:30pm, that same day, I received a cal from John Parker, who said that the SEC had approved the previous accounting treatment.
At 09:36am, the next morning, a person from the SEC called me and said that the SEC had not approved the previous accounting.
He, also, volunteered that the information I had presented was the stimulant that led to the charge.

The auditors for both companies were Ernest & Young.
I had conversations with the partners who were in charge of each audit, and the CFO’s of both CCE and Coca-Cola. Each of the partners suggested I talk with the other partner and the respective CFO’s and nothing was admitted, of course.

Bottom-line, Coca-Cola, in selling the assets to CCE at stepped-up prices, robbed Peter (CCE) to pay Paul (itself, i.e., Coca-Cola) and then had to support Peter until it (CCE aka Paul) could survive upon its own.
In 2001, I estimated that it would take 8 to 12 years for CCE to be able to stand upon its own, i.e., without “subsidies” from Coca-Cola.
Just recently, CCE took a substantial charge regarding its goodwill. The most probably reason for the timing is that CCE had built up enough equity to be able to absorb the charge without reflecting insolvency.

Enjoy,


Michael
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