October 21, 2002 - 10:00 AM
Will Pitt Cross Bush? Is Buffett Out of Zeros?
During his tenure former SEC Chairman Arthur Levitt didn’t accomplish much. However, Mr. Levitt had (has) a knack for telling it like it is -- his efforts were genuine. For example, in a 1998 Speech entitled ‘The Numbers Game’, Mr. Levitt talked about how ‘accounting is being perverted’; how companies manipulate earnings, artificially boost revenues, etc. Granted, few listened to Mr. Levitt. However, this probably had something to do with the fact that lobby groups said he would rue the day he ever forced companies to adopt the purchase rather than the pooling method of accounting for goodwill and Congressman sent him threatening letters, telling him to back off the idea of forcing companies to expense stock options (nearly decade ago). How do we know these things to be true? Levitt told us…
Suffice it to say, Mr. Pitt has not followed in Mr. Levitt’s footsteps. Rather, whereas Levitt attempted to use the media to highlight the reckless pursuits of corporate America, Pitt talks to the media as if he sitting in a defendant’s chair; arguing that his secret meetings with accountants and CEOs were to talk about Bridge, that August 14 was a success even though no one cares about certification anymore, and that his critics are shortsighted – he has a long term plan.
In sum, Mr. Pitt associates with the criminals while Levitt desperately tried to use what little power he had to put them away. Pitt pats himself on the back while Levitt spent his time pulling knifes out of his back that were dug in by politicians and corporate hit men. Most importantly, Pitt is the current SEC boss – a boss that never seems to mention how deceptive current accounting standards are -- and Levitt is publishing books, doing the media circuit, still fighting to try and help the investor.
Bush Wants to Renege on Deal
Mr. Pitt, likely busy trying to find Mr. Spitzer’s coattails, could not be reached for comment after Bush announced last week that he intends to cut previously agreed upon funding plans to the SEC by 27%. A spokesman for Pitt stated that ‘the administration's level of financing will not allow it to undertake important initiatives.’ Are these strong words or carefully chosen words?
Quite frankly, in order for Pitt to silence his critics he must stand up to Bush’s actions. In order to do this he must boldly argue that Enron, as Levitt has suggested, may have never happened if the SEC had had more employees. Only after Pitt attacks Bush, suggesting that the President will be to blame for the next Enron if SEC funding is cut, will investors actually believe that Pitt is on their side.
In sum, it is time for Pitt to get out of his defendant’s chair, stop cozying up to the enemy (corporations and accountants under investigation) and thrash out at Bush. It is time for Pitt to start acting like Levitt, because this may be one of the few times when the SEC’s decisions and rhetoric make a real difference to investors. If Pitt continues to sit idly on the pot, which given his record one fears he will, this will be even further evidence to make the case that he a bungling Bush puppet.
The Week Ahead
Due out this week are leading indicators (Sept), durable orders (Sept), the Treasury Budget (Sept), Fed's Beige Book, new home sales (Sept), and revised Mich Sentiment numbers (Oct). The Fed’s Beige Book could further stoke double dip fears while durable orders and housing data should be positive. That said, a continue deluge of corporate earnings results will likely decide what direction the markets convulse.
Quite frankly, while attempting to formulate a helpful commentary on the markets for the upcoming week I quickly discovered I don’t have a clue. Let’s be honest – there is no consensus by which to draw upon – no contrarian viewpoint to mold. Just violent trading…
The Billionaires Club
Soros is buying United (Airlines) and rumor has it that Buffett is (was) dumping zero-coupon bonds, or STRIPS, to buy corporate bonds (convertibles).
Even as UAL warns it could face bankruptcy Soros has raised his stake (from 36,000 shares in 1Q02 to more than 2 million). It can be easily seen why Soro’s would take a stake in United – he either believes the company will avoid bankruptcy and/or the government will (again) bail the airlines out. What is not easily known, however, is how committed Soros is to UAL. Soros owns 3.5% of UAL at an average cost of $11.44 a share. UAL is trading below $2.
By contrast, Buffett’s latest actions, if any, have been cloaked. And while no on is speculating that Buffett is actually buying stocks en masses (common shares), some have suggested that in addition to Buffett’s reported asset backed debt and corporate bond investments that he is also making a big bet (if Buffett was selling zeros last week) that interest rates have bottomed.
Although everyone is quick to coin Buffett a ‘long term’ investor, the Oracle of Omaha should be just as well known for his market ‘timing’. This isn’t to say Buffett is buying and selling stocks and bonds on a daily, weekly, or even monthly basis. He isn’t. Rather, that he carefully times his long term buy and sell decisions. For example, Buffett sold Fannie and Freddie before their latest problems and stock price collapses occurred, and he dumped Citigroup late last year. Further, he sold McDonald’s a couple of years ago and stated that he sold ‘too early’ – as MCD has crashed lower this year his self criticism appears unwarranted.
With this in mind, the latest ‘timely’ decision by Buffett may have been to dump part or most of position in zeros last week. Since the Buffett rumors began (Oct 14) yields have headed higher in every session. Furthermore, considering that it takes both time and trading volume for these rumors to begin to circulate, it would stand to reason that Buffett has correctly timed the exact bottom in yields -- the 10-Year Treasury yield struck its lowest point in over 44-years (3.58%) on October 12.
Telling it Like it Is
-- Those that claim ‘Buffett is buying!’ are, most of the time, nothing more than myopic bulls looking to falsely legitimize their bullish prognostications. For certain, Buffett has not actively been buying common stocks and/or betting on a stock market turnaround.
-- President Bush wants to decrease the amount of money being handed to the SEC for 1 reason:
1) Catching more corporate criminals and enacting tough new accounting standards, which would be more likely to occur if the SEC had more money, is not good news for an administration. You don’t win votes by cleaning up corporate America. You win votes if, for what ever reasons, the stock markets and economy appear to be strong.
“Corporate misdeeds will be found and will be punished. This law authorizes new funding for investigators and technology at the Securities and Exchange Commission to uncover wrongdoing.”
President Bush. Sarbanes-Oxley Act Ceremony. June 30, 2002.
Wish List Watch
TC Pipelines is expected to report earnings tomorrow and WMS’s call is on Thursday. NAT filed last week.
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