Talking Your Own Book

Will Page:  Welcome to Bubble Trouble, conversations between the economist and author Will Page, that's me, and the independent analyst Richard Kramer, that lay out some inconvenient truths about how the financial markets really work. Today, we look at the dangers of those who are long and loud about their views in stock. More in a moment.

Last week's trouble forms this week's bubble. And this week we are gonna complete two high fives. Essentially, we've dropped five foundational pieces of plodding along to work out how to understand the sycophants, the stenographers who, so far, Richard, to be fair, seem to be the cause and the consequence of all this bubble trouble. Once we had those five building blocks in place, then we did our second high five, which we're gonna complete today, which is to put these foundations into practice and shed fresh light on the current events that capture the troubles of the bubbles blowing up right in front of our eyes.

Firstly, we went to SPACs and back. Then we scored the poor standards of the rating agencies. Then we looked at adjusted earnings, which take profits from facts to fiction. And then last week we did that courtly dance called the earnings call, or the charade of the earnings call. So to complete our second high five, our tenth podcast and, let's face it folks, we're now in double figures, we're gonna cut to this concept of talking your own book. Those analysts outside the company and those executives inside the company, who are long and loud about their views of their own stock. Why so long? Why so loud? Why should we listen to them? And if we do listen to them, are we putting ourselves at risk? Time for this page, Will Page, to take a, a [laughing] leaf out of a different book.

Richard, welcome back.

Richard Kramer:  Hey Will.

Will Page:  So this week, we're gonna do talking your own book, a concept that you introduced to me earlier today. So it's new to me and it's gonna be new to many of our listeners. So again, we're gonna have to take it easy and, you know, we, we introduce jargon and we spell it out for them. But firstly, I wanna get into the theme of this week's podcast by looking at something I wanna call volume control. When you've got the TV on and it's on the Bloomberg channel or CNBC or you're listening to the financial press on your websites, some advices seem to be louder than others. I'm wondering is that self selection and the cream rising to the top? Should we be listening to those that speak loudest?

Richard Kramer:  I think the first thing to understand is that this is all part of a promotion machine. And we've talked time and again about the way in which parties are expressing their own self interest in the markets. And whether it's the analyst community coming and promoting a stock that they like or love and maybe not as specific about why, but just saying how much they like it, inspiring confidence in it. Or a CEO on a management team coming out and saying that they're bullish about their business. And we talked last time about the misuse of the word strong. It's one of these dog whistle words that is supposed to signify that everything's in good shape.

Will Page:  So when we do hear these voices, and we'll get into those inside the company and those outside the company later on in this podcast, when we do hear them, I'd love to explore again, like, these recurring voices that shout loudest. The timing of all of this. What's the mechanics of the timing of all of this? Is it like a sort of strategy to get these voices heard at particular times during the earnings cycle?

Richard Kramer:  As you can imagine, and as we talked about in the charade of the earnings call, there's four days of the year when a company reports its quarterly earnings that the spotlight is shining on it. Now typically, all of the companies, or all of the large companies, report in the same two or three week period. So this is an incredibly bright searchlight put on the market as a barometer of its health. And in the interim period, either the companies are in some sort of quiet period and they can't say much. Or else they're trying to give their messages directly to investors.

I just had an example from an earnings call the other day where not only did the company select seven analysts to ask questions on their call, all of whom had buy ratings on the stock, the management even said, "I'll see you all later because I'm going to be appearing at your virtual conferences, at five of the seven of you, in the next couple of weeks. So I'm gonna have another chance to talk directly to your clients and give them the good news about my company." Now, in this case, this company's stock was falling 20% at the time. But never mind that because you wouldn't wanna let that spoil the good news narrative.

Will Page:  [laughs] Let's go deeper in this for a second 'cause you've picked up on something there about who gets heard. I mean, there's lots of companies out there. There's lots of earnings calls out there. How do the editors of the news channels pick which person comes on and does their soapbox routine? How does that selection process work?

Richard Kramer:  That I can't speak to because, as you can imagine, I get invited sometimes but not all the times. And I think they try to rotate the analysts who come on from time to time. And increasingly, those news outlets wanna have their own views. So they have their own analysts, whether it's Bloomberg or Yahoo News or CNBC, they all have their own interpretations of the earnings.

Will Page:  And do you think there's a balancing act there between media skills and financial acumen in terms of what they're looking for, which is maybe eight parts media skill and two parts financial acumen?

Richard Kramer:  As we discussed with the earnings call, you really have very little time when a company reports its earnings to properly assess the numbers. And what you're mostly hearing is a predetermined view, if you wanna call it that, that is going to be on balance, in the 90 plus percent of the cases, supportive of the company. And you can see time and again that the vast majority of investment ratings on Wall Street are buy recommendations, even if half the stocks in the market underperform.

Will Page:  So talking up the market gets viewing figures, talking down the market loses those viewing figures.

Richard Kramer:  No one wants to hear bad news all the time.

Will Page:  All right, before we get to the break, let's just tackle two pieces of jargon here. And where you had to sort of [inaudible 00:06:06] earlier on. You, you came up with two terms which I found amusing but intriguing. The first one was pump and dump. And I guess what that's gonna mean but you can walk me through it and make sure the listeners are fully appreciative of that term. And then the second one was puff and stuff. Take those two and break them down for me.

Richard Kramer:  Basically they're both expressions of the same process, which is to talk up a company's prospects, whether from the inside, as one of the management team, talking about the tremendous opportunities or fantastic optionality or tremendous potential of the company. And then, obviously, as is the case with many companies and you can see with fairly detailed numbers on insider buying and selling, that the management will be taking money off the table, selling their own stock, issuing options to themselves and their management colleagues. The analysts have every incentive to be positive to the company because they want them to show up at their investment conferences. And they want to be able to say that they have access to the company, that they are able to chat with the CFO personally. Even though under regulation fair disclosure, regulation FD that is, the SEC's requirement that all companies give the same information to all analysts-

Will Page:  And no preferential treatment.

Richard Kramer:  ... so there's still ... There's no preferential treatment under the law but there's the expectation that some analysts get a bit more insight just by the virtue of the time that they are able to spend with a company. And, of course, most companies don't want to face down or even acknowledge the existence of critics.

Will Page:  Okay. Puff and stuff.

Richard Kramer:  And puff and stuff is a similar phrase, if you will. You're effectively puffing up the company, inflating its prospects or its opportunities to be greater than it- they potentially are. Or making, as we talked about in Themes and Dreams, an appeal to something that will come in three, four, five years down the road. And usually the stuffing on the back of that is when the company issues additional equity, raises more capital, or places some of its shares with a large institutional shareholder who may be convinced about these prospects, rightly or wrongly, thanks to their favorite analysts.

Will Page:  So pump and dump is essentially getting your cash out by playing the market, eh, for what it is. And then, secondly, puff and stuff is buying more time when you desperately need more time to make that theme or dream become a reality.

Richard Kramer:  You can see this in the case of many technology companies that simply don't make money. And you and I were talking about this, uh, why doesn't anyone get on the call and ask the simple question, "Hey, when are you guys gonna make a profit?"

Will Page:  [laughs] Actually y- that concept of the going concern, right?

Richard Kramer:  It's like cursing in church. It's a blasphemous type of question to ask on an earnings call. We're investing for the future and we see a tremendous opportunity ahead of us and profitability in the near term is really not our top priority.

Will Page:  I think after the break I'm gonna come back to another term that I heard. A, a, a big fan of the Theranos documentary, Blood on Your Hands, which is fake it until you make it. But that's it for part one. Part two, I wanna explore the inside out/outside in dynamic here. We have people inside the company who are long and loud. And we have people outside the company who are often longer and louder. And I wanna understand the balance between the two. But that's it for part one. Back in a moment.

Back again with Bubble Trouble, our tenth episode this week, Long and Loud, those who talk their own book. Those who talk up their own businesses for their own self interest. And we learned about, you know, pumping and dumping just before the break. And puffing and stuffing company's future prospects. I wanna come back to the Theranos documentary which is this concept of fake it until you make it. Richard, that term, you must have seen quite a lot of faking going on, right?

Richard Kramer:  Absolutely, Will. And a function of the technology market is to make big promises about the future. That's not the case with a retail business, a utility, a telco. Lots of other sectors of the market are simply not as reliant on future promises the way technology companies are. Whether it's a software company developing its road map or a chip set company working on the next generation of its processors, or an internet services company that just wants to pull together all these different features and make them into one really usable product. They all have to sell some sort of futures. And those futures requite a lot of investment and a- a bit of a vision. That's why there's such a celebration of these entrepreneurs that have those visions.

But, of course, when you come to these pesky questions about how much it's gonna cost or when companies get the magical operating leverage that turns them from loss to profit, companies tend to play pretty coy. And they tend not to like to get pinned down on specifics of what you would call their guidance or their outlooks.

Will Page:  And back to those cheerleaders as you would like, those Sycophants and Stenographers, you need a whole queue of cheerleaders lined up there-

Richard Kramer:  Yeah. And as you know, from companies you've seen yourself, companies will put out a long term operating model that's a vision for their business. But there's often that chasm to be crossed between the current business, which may not be generating profits or cash, and that long term operating model at some point in the future, which is typically built, as an economist, on some relatively static assumptions because it's really hard to capture how dynamic the economy and the wider market and all the competitors might be.

Will Page:  Mm-hmm [affirmative].

Richard Kramer:  But those static assumptions, assuming we get to this many subscribers or this scale in our business, or our product works as promised and our sales force is able to find enough customers for it, then we'll have this target business model, which will generate a level of profit which justifies the valuation of our company.

Will Page:  And you're being selective in economic language here. You're being very selective about what you put inside the bracket of that model as opposed to what you leave outside.

Richard Kramer:  Absolutely. And part of the reason you leave a lot of stuff outside is because you don't wanna legally be pinned down to promises you make. So that's why-

Will Page:  So what happens if interest rates return back to five, six percent base rate and a seven, eight percent lending rate? How does the world work then? That question's never being addressed, correct?

Richard Kramer:  No. And indeed, the reason you get these uses of the words like strong or solid, versus gaseous or plasma, is because those are legally undefinable phrases. We have a tremendous opportunity. Well what does tremendous mean? We see a lot of optionality. How do you define optionality? And options on what? How do you value those options?

Will Page:  [laughs]

Richard Kramer:  So all of that is glittery generalities drawn into the service of promoting the company without being nailed down to a number that a company has to achieve by a specific time.

Will Page:  Let's go back to our cast of characters here. We, we have these people who are long and loud, who stand above the noise, acoustically speaking in terms of shouting out a company's prospects. Now, we have them inside the company. I would guess the CFO would be a likely candidate. But we also have them outside the company, like a chief analyst, one of the big investment banks. Walk me through who these people are, how to spot them, and what makes them different given they're on different sides of the fence, if indeed they are different at all.

Richard Kramer:  With respect to what I've observed with CFOs of companies, and that is they broadly fall into two categories. One category is frightening. That's the guy with the thousand yard stare.

Will Page:  And it is always a guy, right? It is always a guy-

Richard Kramer:  Well, it can be a woman, absolutely. I don't mean to be sexist in my language because I've certainly run into some formidable female CFOs. But it's the executive with the thousand yard stare, who looks you in the eye and you know that he or she knows the expense receipt you submitted for the business trip to Malaysia. You wrote down the tip but you didn't actually keep a receipt for it.

Will Page:  It's the bean counter who's counting bigger and bigger beans as they climb up the career pole-

Richard Kramer:  They know every penny that flows in and out of the company. They know every line item of their cost base. They know all the salary structure. They are on top of the numbers. And they are a proper controller of the business. Oftentimes, they are effectively the Chief Operating Officer. Because they're the ones who have the tap on the bank account and say yay or nay, this is going to happen.

Now there's another kind of CFO, which has come into vogue more recently, which is, for a lack of a better word, the story teller. Oftentimes it's an ex analyst or ex equity salesperson whose financial acumen may not go far beyond knowing how to use an Excel spreadsheet or having a team beneath them that know how to do detailed financial planning or scenario analysis. But they're there to tell the story. They're there to issue the coded language to the market that says, "We've got this. We've got it under control. There's a positive surprise I'm cooking up for you. But I obviously can't tell you that directly, so I'm just gonna hint or imply it to you."

And frankly, those sorts of CFOs tend to be the puppets of stronger CEOs or boards. And they tend to be there working off a script of FAQs, frequently asked questions. And the sort of phrases that they'll drop in, time and again, like, "We see a lot of tremendous optionality in that business segment and we'll be investing appropriately." Just the, the kind of language that is, is at the face of it, meaningless but it gives enough of a hint to investors that they can feel, "Aw, this guy's got my back."

Will Page:  [laughs] Investing appropriately. I love that one. Yeah. So that's people who are inside the company. What about those who are outside the company?

Richard Kramer:  Well, as we learned talking about the accounting firms and talking about what companies choose to report, the deck is really stacked in favor of what the companies see inside their own businesses and the timing with which they show that to the market. So there may be quarterly earnings, but as you know, companies have tremendous latitude in terms of revenue recognition of what they report at the end of the quarter and what they may save up for the next quarter. And what they may put into deferred revenue or maybe recognize a little earlier so that they can make their numbers.

There was a terrific case very recently with Under Armor, just to name one company. Because the SEC called them out over inflating future sales by shipping product that hadn't actually been made yet to distributors and getting them to agree to pay for it in the future. And they kept rolling it over, until after about five or six quarters, they just simply couldn't get their potential distributors to promise to take any more product and they got caught out.

Will Page:  Now, John Lore raises his ugly head once again.

Richard Kramer:  Absolutely.

Will Page:  Okay. So we now understand inside out/outside in, similar people, same sides of a rather different coin. But now we have to wrap up the podcast with our smoke signals. And on this occasion, I think our audience really needs it. Because after all, these are the people they're gonna be hearing. These are the people that are longest and loudest in media, talking about companies, talking about stock prices, on our 24/7 news cycle. So when they are switching over to Bloomberg after listening to this podcast, what are our smoke signals that they can use to spot when people are pumping and dumping and puffing and stuffing their way through company reports?

Richard Kramer:  Okay. I, I think the first one to bear in mind is look for companies that are willing to address critical comments and not simply deflect them. And not answer a question they wanted to answer as opposed to the one that was, if this is indeed gonna happen at all, put to them in a critical fashion.

So we had this just recently that a company was, again, on its conference call. The CEO was talking about being more bullish than at any time on his business in its history. And how inspired he was to be part of the movement that his business represented to the market as a whole. And his stock was going down 20%. And no one dared to address the elephant in the room, the basic issue of, like we talked about before, "Hey, why is your growth slowing down so much?" And the companies that want to avoid that discussion, that difficult discussion, are the ones that you should take a step back and say, "Well, I'll wait 'til the dust settles." And, as they say in the market, you never wanna be the one to catch a falling knife.

Will Page:  [laughs] Okay. Smoke signal [inaudible 00:19:18] number two.

Richard Kramer:  The other smoke signal is to look at the management team and be wary of the story tellers. It's very easy to find someone who can tell an enticing story. But are they gonna be on top of things? Again, looking at the two types of financial managers you've seen in companies, you have those controllers who really are on top of their business. They know the numbers and they're gonna be acting presumably in the best interest of all the shareholders, of which you'd like to see that they're also one of them.

And then you have the story tellers that are willing to pander to the leading questions from the analysts, along the lines of, "How great are you going to be in the future?" Or, as I said about the stenographers, they ask the question, "How should we think about the opportunity in your business?" And instead of just accepting their, their claims at face value, I'd look for the companies that are run by folks which are a little bit more pragmatic and hard headed and not simply so reliant on the themes and dreams that get us into bubble trouble.

Will Page:  Excellent. Back to something I said in the first part of this podcast is that trade off between who do you want to address the audience? Who do you want to draw the crowd? Is it somebody who is 80% media trained, 20% financial skills or 80% financial skills, 20% media trained? And just listening to you, Richard, it just makes me think of those people at that first characteristic that you described, that person who's on every single expense, know every single financial detail. Often those people, yeah, very competent in terms of internal finances but least aware of the competitive forces they're dealing with. Equally the story teller is really aware of the competitive forces they're dealing with but has no clue about the actual financial engine room of their company works.

Richard Kramer:  Let me finish with one analogy I'd like to use here. If the CEO of the company is like the composer, he's the one who wrote the score, who wrote the lyrics, who wrote this terrific music, the CFO is the conductor of the orchestra. They've gotta stand up in front of this disparate cast of characters that constitutes, could be 100,000 people working in their company, and get them to sync up and deliver time and again. Because the composer, whether it was Beethoven or John Williams or whomever, wrote the score once. They had the great idea. But you need that CFO to stand up in front of the orchestra and conduct them through performance after performance. And believe me, the great conductors, they know when someone's playing out of tune. And they're aware of it. And a story teller just isn't going to cut it, standing up every night in front of an audience.

Will Page:  They'll say, "These results are strong, stronger than they've even been. More optionality than we've ever seen. And we're investing appropriately." [laughs] I just love that term.

Okay, so, wrapping up this podcast, I have to say it's this has been a joy to learn about these terminologies. Puff and stuff I'd never heard about. Long and loud I'd never even thought about. But I see it everywhere. I see it and I [laughing] obviously hear it everywhere too.

And the lasting comment for me is just, it's one of my favorite films of all time which you can't actually get anywhere other than buying on a DVD, if anyone sells DVDs. It's called Triple Crossed, starring Christopher Plummer. And it's basically a prelude to the James Bond series. It features many of the cast that appeared in Goldfinger. But Christopher Plummer's playing this bank heist thief who's put in jail in Jersey during World War II. And Jersey changes hands from the Brits to the Germans. So he can triple cross. He can spy on the Brits and he can spy on the Germans. What's he got to lose? The whole film is about somebody who's always on the edge of being caught. And just when he's in that moment of about to be caught out lying, he says, "Whenever somebody suspects me of lying, I simply raise my voice." Loud and long.

I want to thank my colleague Richard Kramer. And remember, this week's bubble is next week's trouble. I'm Will Page. If you're new to Bubble Trouble, we'd encourage you to follow your podcast wherever you listen. Bubble Trouble is produced by Eric Nuzum and Jesse Baker at Magnificent Noise. You can learn more at bubbletroublepodcast.com. See you next time.