Secrets Of The Trade
Submitted by Mark Grant, author of Out of the Box
The Balance Sheets
After almost four decades on Wall Street I believe I can read and comprehend a balance sheet. In my experience when I have studied one and then found the numbers to be inaccurate I back-up from any investment like a man running from flowing lava. If the numbers are not real then I want nothing to do with whoever represented them to me. If someone is going to play funny numbers with the state of their company then they will do other things that are not on the up and up as well.
In America we have certain laws about these things. If GE or IBM has guaranteed something and it is not on their balance sheet then it is Fraud and litigation may be pursued both criminally and civilly. Then if the company is guilty of fraud the CEO and the CFO can find themselves in jail. They also have similar laws in Europe but they are not applied to sovereign nations and often times not to banks in Europe. Much more so than in America; politics is above the law in Europe. It is not necessary to argue about this or to assess their motives or even to take a particular ethical position; it is just the way of it.
When we receive the official debt to GDP ratios for any country in the European Union they are inaccurate and inaccurate as a matter of official European policy as enumerated in the documentation of the EU’s official statistic agency, Eurostat. All of the nations in the European Union do not count derivatives, sovereign guaranteed bank bonds, sovereign guaranteed corporate bonds, sovereign guaranteed regional debt or any other contingent liabilities. While I note that this would be totally illegal for any American corporation; this is the way numbers are counted in Europe. I take no ethical stand here but just point out the truth of it so that judgments can be made based upon complete information and so that the debt to GDP ratios are not taken as Gospel when handed out by Europe.
The right hand side of the balance sheets is not all of it however. When the European Union counts up the left hand side of a balance sheet it is also inaccurate. Here the promises to pay, the contingent assets such as the Stabilization Funds are counted as if they are fully funded. The EFSF and the perhaps coming ESM are not funded and have never been funded and money only is sent by the nations in Europe as needed such as for Greece, Ireland, Portugal and now Cyprus and Spain. The Europeans proclaim in loud rhetoric that they have these firewall funds in the great hope that speculators will not become involved with their bond markets because of their much shouted wall of Euros which, not only is obviously untrue, but it also obviously did not work as a grand scheme. In other words Europe counts their promises to fund as real assets and does not count what they have actually guaranteed as guarantees, so in their rather arcane world, they are not liabilities. Further, as we have seen in a number of European nations, if the government loans money to some bank or regional government then it is not counted as a loan and applied to the liabilities of the sovereign but it is categorized as an “investment” and placed upon the left hand side of the balance sheet as an asset. Now they can do anything they like, of course, and my musing will change absolutely nothing in the way they conduct their business but I can point out and I do point out that the European balance sheets are inaccurate which is one reason why I am unwilling to suggest that money be put in these enterprises.
I don’t know, in my rather straight down the middle Kansas City mind I prefer a reality where one plus one is two and not where some European auditor, when asked about the sum of one plus one says, “What number would you like?” This was the way of it in “Alice in Wonderland” of course as the meaning of the word was determined by the speaker but this is not a wise path to be followed by an investor. Recently I wrote about Firewalls and the hocus pocus of their being touted as the cure-all for Europe. Europe missed the train on this one altogether as no amount of money, either pledged or funded, will do one thing to help the worsening financial crisis of the countries in Europe. You may think of the nations of Europe as horses in a corral. What is the value of a bigger and bigger fence that surrounds them if the horses are full of cancer? The fence, of whatever size, does nothing and I mean nothing to help the sickness of the horses. Europe is battling with windmills when they should be addressing the financial health of each country. “The horses are sick,” I say, “forget fiddling with the fence.”
As each month passes and financial projections are proved to be whims of fantasy and as people and institutions alike look at the balance sheets in Europe with an ever growing nauseous feeling there are real consequences for how Europe has behaved. It is not the speculators that are hurting Europe but Europe itself as real money investors, in scores, are departing the scene for other pastures due to Europe’s bad manners. My commentary goes to some 5,000 large financial institutions in forty-eight countries and I can report with absolute certainty that many, many major money managers, of all types, are just not willing to invest money in Europe anymore and while the governments of Europe can pressure and “suggest” that their own institutions keep up the flow of cash into European investments and auctions these same money managers, in the end, are accountable to their clients and consequently the numbers begin to look quite dismal as yields back up and as European equities seriously decline. Given the massive amount of money that needs to be raised during the next twenty-four months in Europe we are going to see great difficulties in funding and the Europeans will have no one to blame but themselves when the capital does not show up!
July 4 in America
This is our Independence Day of course. We have forgiven the Brits long ago and no grudge is held and so much time has passed that we do not even mention them in our celebrations. I am reluctant to admit it but many Americans may not even know who we are independent from but that is the way of it in myopic America. I do have worries about many of my friends on Wall Street on this day however as this is the day of the Great Grill Off in America. Sad but true that while Wall Street is full of many agile minds that the dexterity of our bodies has not kept up as we spend the day sitting behind desks and staring at screens. Consequently I have turned to the Wizard for some help.
First the attire must be correct. Do not head out to your grill in shorts. It may be warm or even hot where you are but if you are wearing shorts you will get scalding grease on your legs as you try to impress family and friends with your manly grilling skills and the result will not be good. People are not impressed when their host needs to be rushed off to the hospital with third degree burns or when he goes up in flames in the middle of the cocktail hour. The fireworks come later in the evening and, in any event, they are not you.
So no shorts and then your shirt must be black or navy blue perhaps. You will inevitably get grease or the marinade all over your shirt and you will look like a dork if your shirt is some lighter shade. Your wife or girlfriend will frown at you using that grimace that only women can manage when the man they are with looks like a dork and so I am trying to help you avoid this situation. There is no need to look like a sloppy mess in public and this can be avoided with the right attire.
Next you will take the meat out of the refrigerator at about 10:00 A.M. in the morning. You will leave it out and not put it back in and yes I know that your mother told you that you would die from salmonella poisoning if you did this but mom was not correct about this one item. You may recall that restaurants tout their “dry aging” and this means leaving the meat out of the fridge so that the pores open up because they close up when cold. Just trust me here; you will not die if you follow my advice and your family will be just fine.
Now if you want to be the great July 4 Hero and Master Chef I am going to share the Wizard’s secret since 1776 recipe for July 4 success. You will go to the best grocery store that is available and have the meat man, he is also called a butcher but you may not know this, cut you “the first five ribs of the Prime Rib.” Now write this down because you will be thinking about your portfolio and will not remember it or type it in your iPhone so you can play it back later. Having accomplished this goal you will also need some things to help you be the greatest griller since the Indians did Thanksgiving. You must buy a Taylor meat thermometer because you can read it and it has a red line that you can see through the haze and the other thermometers are of lesser quality so do not be cheap and get the “It’s just heat” one or something.
Then go to the spice isle. It is where they have all of those little bottles that your wife fusses around with and they are also in that silly affair that spins around in your kitchen if you bump into it. You will need “Kitchen Bouquet,” garlic powder, Lawry’s seasoning salt, onion powder and paprika. Next wander around and find a bag of wood ships, Hickory or Apple Wood will do. Then go to the cookware isle and buy a large tin pan that can be thrown away because, if not, your wife/girlfriend will not be friendly with you when she has to clean it as you say, “I cooked and cleaning up is for you and it is only fair” which is what goes on in America on July 4. Also buy a “baster” and make sure that the basting part is metal and not plastic as scorched platic on your Prime Rib will not be appreciated by any of your guests. So now you are armed with the tools of the trade and home you go with the Prime Rib.
So it is 10:00 and you are in jeans and a back polo shirt and let the celebration begin. First get an electric knife, and try not to cut off your fingers please, and “score” the top of the Prime Rib. Now this is not like “score” at the game or “score” with your date when you were younger but this means to cut the top fat on the Prime Rib into squares. You can manage this; I have great faith in you and it is easier to do when you first take the Prime Rib out of the fridge. If you screwed up and are taking it out of the freezer then you will have to go back to the store and start all over as frozen Prime Rib just will not do; not do at all.
So the meat is scored and then you take the Kitchen Bouquet and slather it all over the meat. It is a messy affair and paper towels need to be at hand but this is the base for the marinade. Next you liberally toss on the Lawry’s, the garlic powder and the onion powder in no particular order. The last ingredient is then the paprika and then you put the rib roast in the tin foil pan and you leave it sitting out for the rest of the day and far enough in on the counter so that Fido does not claim it for himself and spoil the whole affair. You may also, at this point, take the Taylor meat thermometer and you place it in the thickest part of the roast making sure not to touch any bones which will give you a very inaccurate reading if you do.
Around two hours before you want to eat you must turn on the grill. Meat does not cook on a cold grill and even if you are a contrarian by nature I assure that this ploy will not work. So fifteen minutes goes by, the grill has been turned on and the little dial, yes I know it is not a smart dial, Apple does not make these gizmos, says 325-350 degrees and you are ready to begin. You take the Prime Rib, still nesting inside the tin pan, and you place it on the grill. You then liberally toss around some of the wood chips that have been soaking in a ceramic or metal bowl for the last hour or so and scatter them about on the grill. Then you close the cover and go have a drink or two because the roast needs no attendance for the next forty-five minutes. Then every one-half hour you go check on the meat, look at the thermometer because we do not have self-turning off thermometers yet and baste the meat each time you check on it in its own juices. This means using the baster to extract the juices from the pan and squirt it here and there on the Prime Rib while making every effort to keep it off of yourself. You will also sprinkle some more of the wood chips around because it flavors the meat. The somewhere around two hours after you first put the meat on the grill the thermometer will read “Beef Rare” which is when you take it off of the grill if you want your meat to be medium-rare. Yes, I know there is a trick here and you will be concerned that the meat will be too rare but this will not be the case as the Prime Rib continues to cook when you take it off the grill.
So you have basted and wood chipped and the meat thermometer says “Rare” and off comes the Prime Rib and back into the kitchen and please do not forget to turn off the grill as house fires are unwelcome on July 4 and the fire department is busy attending to the idiots that did not follow the Wizard’s advice. Then have another drink, do not get drunk however as it is so unseemly, and wait about fifteen minutes before you cut the meat. After fifteen minutes you take the Prime Rib out of the tin pan, very difficult to cut it in the tin pan you know and place it upon a wooden platter where you will cut it. I suggest the electric knife again though the more macho of you may prefer a regular knife which works better if it is serrated. If you do not know the meaning of this word please ask your wife/girlfriend and she will explain it to you. Slice it as thinly as you can, after the drinks you have swilled, and serve it along with whatever else you have made on a nice platter remembering, like with your clients, that presentation is an important part of the affair and it will be the same with your guests who will “ooh” you and “aah” you for being the Master of the Grilling Universe. You can serve it with corn on the cob and a Caesar salad or potatoes or creamed spinach or whatever else you can manage.
Finally, keep this in mind; you are host. You grilled the dinner. When you are hosting it may be the fireworks that get lit; but not you.