Motley Fool Hidden Gems Investing - Motley Fool Money: 03.19.2010

Episode Date: March 19, 2010

Investors move out of US stock funds. Pepsi makes a not-so-sweet move.  And Fedex sees some positive moves in the economy.  On this week's Motley Fool Money Radio Show, we tackle those stories, share three stocks on our radar, and talk with best-selling author Michael Lewis about his new book, The Big Short: Inside the Doomsday Machine. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. everybody needs money that's why they call it money from fool global headquarters this is motley fool money welcome to the show thanks for being here i'm your host chris hill and i'm joined by motley fool senior analyst seth jason james early and shannon zimmering guys good to see you good to see you chris coming up bestselling author Michael Lewis talks about his new book, The Big Short, and tells us how a few people made big money off the financial crisis. Plus, we'll give you an inside look at the stocks that are on our radar. But we begin with the Fed's announcement earlier in the week that it would

leave interest rates unchanged. The Fed said the economic recovery may be slow and the Fed funds rate, the interest rate that banks charge each other, is likely to stay low for a while. James early? What's the takeaway for investors? Well, Chris, to use a banking analogy, no Fed chairman wants to be accused of early withdrawal when it comes to a stimulus. And Bernanke is certainly not among them. But I think the real question is, where do we go from here? Where are we now? Yes, the Fed funds rate itself is low, but the Fed has pulled out of its $1.25 trillion mortgage-backed security purchase plan. And for perspective, these are Agency MBS is backed by Fannie and Freddie, and $1.25 trillion is a quarter of the entire agency MBS market.

And to remind folks out there, that's important because by buying these things and providing a big market for them, it helped keep rates low. And it was essentially manipulation of the mortgage market to keep rates low to try and clear houses off the market. It almost makes you wonder what they have learned since they raised the discount rate about this time last month. And I was concerned then that, you know, they were beginning to err on the side of fiscal restraint, which can prolong problems. I mean, as FDR found out, if you listen to your deficit hawks a little too closely, you can make a bad situation worse. And I think that would be the case now. I'm pleased with the announcement. I'm pleased with the way they seem to be coloring in or walking back any inclination to err on the side of fiscal restraint.

Because if anything, the risk is, as risk always is, to the downside, but to the economic downside when you have unemployment that's near 10 percent. Although to present the other side of that, the thing I worry about now, and maybe I'm a little bit of a hawk, but the government has spent so much money to pull us out of this crisis. Maybe we fix that problem. That's great. But now we've got the new problem of a huge Fed balance sheet and just a huge debt. Well, we don't have that problem yet. It'll get bigger before we get there. Because if listeners out there, if you are having trouble falling asleep tonight, you can go to the Federal Reserve website and just download this press release, which is the longest one-page press release.

That's some good reading. You will ever read, and I'm going to put you to sleep right now, so I hope you're not driving your cars. They admit that bank lending continues to contract, but somehow safe financial market conditions remain supportive of economic growth. This is important. Bank lending has continued to contract, and it is tough to have a recovery without that. Exit question. Alan Greenspan defended his policy of low interest rates when he was at the Fed. And this week he said the Fed had gotten complacent because of the modest, his word, the modest effects of the 87 crash and the dot-com crash. Does he have a point? That wasn't the problem.

Low interest rates weren't the problem. The problem was that he and the rest of the Fed board, Bernanke among them, completely abrogated their responsibility to keep an eye on what was going on in the rest of banking. And that is what allowed all this credit derivative mess to happen, and they bear the brunt of that blame. James? Chris, if I recall his point exactly about low rates, it was something like, yes, I had rates very low, but that didn't necessarily spread into all these other rates like you saw in mortgages and whatnot. But my question is, if not, then what's the point? I mean, the whole idea of the Fed is to set this low rate that then trickles everywhere else throughout the economy.

So I'm not buying it. That wasn't the trickling they had in mind. No, no, no, no, no. No, he has no credibility, or Mr. Andrea Mitchell has no credibility. So, why we continue to be interested in him, I do not know. You're listening to Motley Fool Money. We're talking about some of the week's big stories. Guys, according to a Morningstar report, investors pulled an estimated $3.7 billion from U.S. stock-based mutual funds in February.

Now, Shannon, in January, investors added $2.7 billion to the fund. So, are they taking their gains, or are they feeling more bearish? I think they're doing a bit of reallocation right now. And so, if you look at the amount of money that was pulled from domestic stock funds and compare it with the amount that was put into foreign stock funds, it almost matches up perfectly. So, I think that what's happening here is what historically always happens. Investors are chasing performance. And that is a good contrarian indicator for folks who want to be patient long-term investors like we are here at The Fool.

The thing that is super interesting to me about the fund flow data is the degree to which people are still just piling into bond funds during a period where, notwithstanding the Fed's most recent remarks, interest rates and inflation are more likely to rise than fall, and that's poison for bonds. So, folks, if that's you, reconsider what you're doing with bonds right now, because bonds are not just always safe, and now is the time to maybe think about dividend-paying stocks instead. No, I won't argue with that. Shannon, I think according to that release, $3.7 billion was pulled from stocks, but $19.7 billion was added to taxable bond funds, with another $5 billion to muni bond funds.

So, that's a lot. It definitely is. Wow, everyone is chasing bonds. Shannon, just quickly, what are a couple of signs that it's time to sell your mutual fund? When Alan Greenspan comes out to defend himself. So, when they invest in a fund, they should be investing in the fund manager. People get all hung up on star ratings, but the fact of the matter is, and I should disclose, I'm a former Morningstar employee, that the star rating is purely mathematical.

Just look at the fund's historical performance. It has no bearing on the person who was in charge when it earned that star rating. So check in to manage your tenure, and if the fund's five-star track record owes to a single manager, then that's an interesting and good sign. So you're saying if we see the fund manager sort of on page six with too many martinis and hotties on the arm, that might be the time to sell. Well, you might want to hang out with him. And then the other thing to look for is the price tag.

As assets under management rise, it's a good proxy for how shareholder-friendly a shop is, too. As assets under management rise, expenses should spread across more shares, basically, and expenses should come down. If that's not happening, that's a bad sign in terms of shareholder alignment. And then secondly, it's a free lunch in mutual fund investing. The less you pay, the better your returns necessarily will be. Pepsi said this week that it will remove sugary, high-calorie drinks from schools in more than 200 countries by 2012.

James, Pepsi also said it's raising its dividend and buying back shares. So as our resident health-conscious dividend investor, this is a twofer. Yeah, there's a lot in there for me, Chris, certainly. And even craft is reducing its salt. And I guess my overall question is, if you take these ingredients out, what do these guys have left to sell? I mean, that's the whole point, right? Let me say this. What Pepsi is doing, according to the American Beverage Association, in elementary schools, it's still selling water, juice, and milk.

And secondary schools, plus you're allowed to have diet Pepsi and sport drinks, quote, for children engaged in physical activity. Like walking to the vending machine. The bigger story is that this announcement is sort of like quitting a job after being told you're fired. And that thanks to the American Heart Association and some other agency, Pepsi and Coke have, for the past five years, pulled out 95% of their full-calorie soda drinks from American schools already. So, this is sort of like, I mean, Pepsi, this is a world announcement, but the bottom line is that the deed has been done. This is sort of like the icing on the cake, and it's certainly not a big financial impact on them, as we've seen by the nice dividend raise. Yeah, this sounds like a marketing move. The marketing folks are probably applauding this.

Okay, you much? I'm applauding it. No, it's a great thing. No doubt about it. Obesity is huge. We've got obesity problems here. Obesity is huge. Exactly.

And these are just empty calories. And it's easy for us to, everybody in here weighs about 160 pounds behind this table. But this stuff is really not great. But can I go on my geezer rant? What's that vending machine in schools thing? When I was in high school, there was one vending machine in the teacher's lounge. And the only way to get in there was to trick some drunk teacher into giving you the key and get your soda. And that's what you were bummed about?

Not the fact that there were drunk teachers at your school? Well, I'm just saying these kids know you don't need soda. And make it a challenge. Make them sneak around. All right, guys. Let's hold it there. Coming up, we'll talk FedEx, Starbucks, and yes, Scrooge McDuck. What's the word? Pepsi. Anywhere. Everywhere. Everybody asks for and drinks Pepsi-Cola for its swingin' taste. Pepsi's what's going on and you know it.

You're listening to Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in studio with Seth Jason, James Early, and Shannon Zimmerman as we break down some of the headlines from this week. Guys, FedEx reported better than expected earnings and raised its forecast for the year. Shannon, FedEx said it expected a continued modest recovery in the global economy. Is FedEx a good bellwether for the economy? Yeah, I think that you can think of FedEx as a proxy for the overall health of the economy. Every company is a cyclical to some degree, but FedEx has economic sensitivity written all over it. You look at the numbers, and even discounting for the easy year-ago comps that we've discussed on the show in the past,

it was a great quarter. Profits more than doubled. Interestingly, and not to bring a dark cloud, but the thing that is interesting about this is that even though profits more than doubled, revenue was up only 7%. Magic. And I think that bears looking into. Obviously, they're enjoying some operational efficiencies, but if they're getting the bulk of their profits by wringing out more from what they already have, not really selling more widgets or delivering more packages, that's an interesting thing going forward. As is, and FedEx called this out too, fuel prices. That's obviously a big input cost for FedEx. And as those go up, that's going to ding the bottom line there too.

If I can toss in one comment I've made about FedEx on the show in the past is that watch the capital spending when you read this, because over the past few years, FedEx has spent pretty much all the cash it's earned from operations on new stuff. And if they keep buying new stuff and they don't have any money left over for shareholders, well, then the stock's just not worth as much. Unless they're buying more fuel-efficient jets, in which case that's a hedge against rising commodity prices. Guests reported stronger than expected quarterly results thanks to fewer discounts and growing business in Europe. Seth, you're our apparel guru. I'm the guest man here. Can you see my stonewash? Thankfully, no.

Were you surprised by these results? I wasn't. In fact, we recently added guests. I've been a portfolio candidate at Hidden Gems for a while. I've owned it for years, and we recently added it to our real money portfolio, despite the fact that it's not really cheap-looking, because I expected them, frankly, to do better than everybody expected. And I have to be lame, but just read some of the highlights from their press release.

In North America last quarter, they had a comparable store sales increase of 5.3%. Big improvements in operating margin globally for the year. They actually got an increase in revenues to another record. Margins went up again. They have half a billion in cash on the balance sheet right now. So a $4.3 billion company, you're talking about 12% of the market cap in cold, hard cash. They upped the dividend, yielding a little over 1% at this point. and they gave good-looking guidance coming up for the future.

So luckily, it's still a stock that people make fun of or try to ignore, but they're great operators, and they're selling more stuff everywhere in the world. I think it's still worth a buy. And, Seth, for the record, when I think of Guess, I think of tight, acid-wash cutoffs from the 80s, which I did not own, to be clear, but that's what I think about. Is it the 80s have come back into fashion, or is Guess just so much more than that? Well, the thing about Guess is they are really fashion forward, and so that's the interesting thing about the stock. That is the association a lot of people have in their heads, but what Guess is selling is something that's vastly different.

Of course, their product portfolio is much bigger than it used to be. It includes shoes and other accessories and jewelry and handbags and all sorts of other high-margin items. So they're just one of the best companies in this business, and people just don't seem to appreciate them. But will they sell you the pants off the mannequin? Remember, we got their comment. Oh, that's right. It was absolutely. I love it.

It's nice that they're fashion forward since none of us are. Yeah. Thank God someone is. Speak for yourself, Chris. The word bankruptcy appears 17 times in Blockbuster's most recent 10K filing with the SEC, and the company admits it is an option. Of course it's an option. Is Blockbuster on its last legs?

Is this it for them? You can never say that for sure, but let me read you some horrifying numbers. This is, first of all, a company with a $50 million market cap, but 6,000 locations. Come on. There are probably dental offices out there that the equity value is more than $50 million, a billion dollars in debt interest coverage. In other words, the amount of cash they're bringing in is creeping very down to the level of that they have to pay just in interest.

So it's bad. And I think it's going to get worse. And I don't think there's any hope for Blockbuster. The only possible takeaway for very industrious investors is to dig into the balance sheet and try and figure out if perhaps the property is worth enough and if there would be any value left for the equity if the debt holders sort of took this. So what is the end game for Blockbuster? Because if this was 10 years ago, maybe a competitor is looking to buy them so that

they get the land and the DVDs. but we already know that Netflix is moving towards a day when they're going to be streaming most of their content. So, I mean, is this just a long, slow death or maybe a quick, slow death? It's a medium-term, slow death, I think. Michael Jackson's estate signed a deal with Sony that could be worth as much as $250 million over the next 10 years. The deal calls for 10 albums over 7 years,

and the albums will be a mix of unreleased songs and old songs. Shannon, you're our resident music critic. Is Sony going to get its money's worth? Yeah, that seems like a low price tag for the star of Captain EO. Whoa. Wow, you're going way, way into the archives. The original Epcot Center days. No, I think it's a good deal, and they'll endlessly repackage these things,

Christmas after Christmas after Christmas. And Michael Jackson wasn't just a solo artist with the Jackson 5. He was the star of that show as well. So any number of combinations that they can issue this material in, and they will do just that. You think about the great success of Elvis Presley after his death. In fact, the legend is that on the day that Elvis died, Colonel Tom Parker, his infamous manager, got the staff together

and said, this changes nothing. I think in some ways the same is true of Michael Jackson. This changes nothing? This changes nothing. Just like if I died in here. I think the same will be true of Michael Jackson, at least in the realm of commerce. Well, I think Seth is right because, I mean, if Seth just dropped dead,

we've got audio clips of him that we can just keep playing. for years to come. Hey, hey. Cogitate new words. The wait is over, coffee lovers. The Wall Street Journal reported this week that Starbucks will now allow you to customize your Frappuccino.

Guys, there's no real material business story about Starbucks this week. I'm just stunned that this story was even on the wire because I always thought I could customize my Frappuccino. The Frappuccino's the thing in the glass jar, right? People customize everything at Starbucks already. Listen to them make their orders. It takes 10 minutes.

I have no idea what anyone's saying in there. Yeah. So, I mean, so we couldn't customize them to this point? What's the deal? Well, you know, here's the way I look at Starbucks. That's a nice idea, but they do a good enough job making up the drinks for me. I walked in the other day, there was a sign that said, admit it, you want one. And it was something like a black- A black cherry mocha. Cherry mocha. I saw the same sign.

And I hated myself, but I did want one. So they do fine. I'll let them do the customization. If you're looking at the stock at about 25 bucks, I have to say I sold around 20. It looks a little pricey. So maybe they should just open up a new division that just does marketing? Kind of like Nike makes really great commercials. Yeah. And last week, it was Forbes' list of the richest people. This week, it's the Huffington Post's list of the richest cartoon characters.

The top three, Scrooge McDuck, Richie Rich, and Montgomery Burns from The Simpsons. The list also included Lex Luthor and Bruce Wayne, who we, of course, all know is Batman. Anyone from the list that we admire the most? I suspect they're forgetting that episode where I had to collect tin cans. That's probably why Mr. Burns is number three on the list. Ah, maybe, yeah. He did get back with that little Lisa slurry plant. James?

I don't know if he was on the list, but my favorite cartoon guy was Roadrunner. I think he was actually on the list. For wealthiest? That's what it said. Yeah, it was like, you can afford to buy all this acne material. Oh, true. He's got a secret source. This was not a high science list, I don't think, but I like him.

Shannon, did you have a favorite? Well, no, but I think that Foghorn Leghorn would have made the list, except that all of his money belonged to his wife. She had a fat nest egg. Oh. I can't believe Stewie Griffin. That was for my daughter. I can't believe Stewie Griffin from Family Guy is not cracking anyone's list of favorite cartoon character ever.

No Family Guy fans here? I hate myself when I laugh at that program, too. Really? Yeah. I watch it, and I don't want to like it, and I find myself laughing, so I have to leave the room. You know what? If we could buy shares in Seth MacFarlane, the creator of Family Guy, we would be stinking rich. Oh, I don't know.

I think his 15 minutes might be done. Oh, I'll take the other side of that bet. Okay. Drop us an email, motleyfoolmoneyatfool.com, on anything we've talked about, but especially, let's face it, especially the cartoon characters. The guys will be back later in the show to talk about some of the stocks that are on their radar, but coming up, Michael Lewis talks about the big short. Do I have to come and write that out and tell you everything? Give me some money. Give me some money.

You're listening to Mountain Full of Money. The day it started raining, millionaires on Wall Street. The sky grew as gray as ash. Your poor rich papa has become a proper cropper. And he's gone down in the crash. Welcome back to Motley Fool Money. I'm Chris Hill. A few investors made big money off the financial crisis by loading up on things like credit default swaps, insurance-like contracts on mortgage-backed securities. So what did those investors see that others didn't?

Michael Lewis is the bestselling author of books like The Blind Side, Moneyball, and Liar's Poker. His latest book is The Big Short, Inside the Doomsday Machine. Michael Lewis, welcome to Motley Fool Money. Thanks for having me. So, you've said that the subprime mortgage meltdown is a story of mass delusion. How did this happen? It's a big question. I wrote a whole book about it. Do you want me to give you an answer in a nutshell, and you won't have to read the book?

Give me the nutshell answer. I've already got the book. All right, I'll give you the nutshell answer is, Wall Street created a credit laundering machine without completely understanding what it was doing. So, all these people in America needed to borrow money. Given the opportunity to borrow money, they welcomed it. They didn't think twice about it. And the lenders lent the money and the money, the loans then were very risky loans, of course. And Wall Street went about disguising the risk of the loans and in the

end disguised the risk even from themselves. So in fact, ended up holding a lot of stuff that was worthless. It's a long and complicated tale how they did it, but that's the nutshell. Now, there are a few key characters that you profile and focus on in the book. One of them, fascinating guy named Dr. Michael Burry. This is a guy who's a medical doctor, starts out as a value investor, who ends up not only placing the right bets, he's the guy who talked the investment banks into creating a whole new market. How does something like that even happen? Well, because they're ready to create it anyway. I mean, you just put your finger on the most interesting thing about his story, that he came from being a

pretty strict value investor. I mean, in a different age, he would have been Warren Buffett or something like that. But this age demanded that he change what he do. And he figured after a while that the stocks he was looking at were going to be driven one way or another by what was going on in the subprime mortgage market. And he started to study it and quickly figured out that while there were instruments available to short other kinds of bonds, they weren't available yet for subprime mortgage bonds, but Wall Street might create them. And the instrument was called a credit default swap. And so he figured out Deutsche Bank and Goldman Sachs were going to be on the edge of this, which they were and remained. And he pushed and brought Goldman

Sachs and Deutsche Bank to sell him some. And look, this would have happened anyway at some point. It might even have happened right when it happened. But he was the first customer waiting once the contract is standardized. You know, it's an odd story because typically, historically, The last thing you want to be is on the other side of Wall Street's trades. Typically, historically, the Michael Burys of the world would get killed arranging this sort of transaction with a big Wall Street bank. But he didn't. I mean, he made a fortune.

And it was a long and, for him, miserable saga because he was very early into this perception that the subprime mortgage market was a disaster waiting to happen. And a lot of people disapproved of what he did. His investors, his own employees rebelled. But he stuck with it, and now he's a rich man. Well, and that's the thing. I mean, here's a guy who starts out with stocks,

and he ends up going into an area which everyone else thinks is really risky, but it really ended up being a safer bet for him, wasn't it? Yeah, well, there's no question. I mean, you know, he kept trying to explain that when he buys a credit default swap, his downside is known and limited to, you know, over the life of the swap, you know, 10% or 12% of the principal amount, and it's a long life. and he was paying kind of 2% in premium a year. And his investors, I guess they may have basically understood that,

but it disturbed them that this fund manager, who they had placed money with because they thought he was a really shrewd picker of undervalued companies, had morphed into a player in the American bond markets, in a particularly abstruse wing of the American bond markets. And he kept trying to explain to them that, look, it's all tied together. You can't invest in stocks without having a view on this explosion of credit creation that's going to go wrong. And in the end, the irony is that in order to keep his position, the short position he had in subprime mortgage bonds, he had to side pocket it. He had to say essentially to his investors, you can't unwind this trade.

You can't have your money back. It's an illiquid trade, and I had these provisions in my documents that allowed me to just keep it. And so he just kept it over the objections of his own investors. Winds up making them all rich, and at the end of the day, they all hate each other. And I can't think of too many stories. There are lots of stories on Wall Street where people lose money and wind up hating each other. But it's hard to think of another story where people get rich and wind up hating each other. In fact, it's the only one I can think of, but that's what happened.

How much did he make? Well, by the time in 2007, when he unwound the trade, he puts the trade on in March of 05, unwinds it through 07, and his fund is about, he's got a running fund of about $550 million, and from the position he made $750 million. So what is he, that's more than doubling the size of his fund. For himself, he made about $100 million, because his wealth was, what wealth he had was tied up in his fund. If he had been allowed to do everything he really wanted to do, which he wasn't,

they made him get rid of some insurance, credit default swaps that he'd bought on vulnerable corporates, on subprime mortgage originators and real estate developers and so on and so forth. I mean, there were billions he left on the table. But he made a fortune. I mean, he'd be more than double his money. He got rich himself and then promptly shut his fund. You're listening to Motley Fool Money. We're talking with bestselling author Michael Lewis about his new book, The Big Short, Inside the Doomsday Machine. We talk about Dr. Michael

Burr. There are these characters in your book. Steve Eisman is another one. These people who, of the thousands and thousands of investors out there running hedge funds, working at the big Wall Street firms, there's only a handful who actually saw this coming. How did they do it? How do people like Steve Eisman and Michael Burry see this opportunity when no one else can? Well, Michael Burry has Asperger's syndrome, and Steve Eisman has some other kind of syndrome that has no kind of name on it. But basically, it keeps him detached from ordinary society. His wife had a great line. She said, my husband is rude.

He's rude to everybody. I know it. I've tried. I've worked on it. There's nothing I can do about it. But Eisman was another kind of person who, I mean, just an independent cuss, I mean, just an independent character who remained detached, I think, from the larger financial world. I mean, there was a theme with these characters mostly who remained detached, who were in this position, that they were all a little obstreperous. They were all outsiders.

They were all capable also of imagining a world vastly different than the one we were currently in. So they could imagine great change. So they all had some imagination. But this was the question, the question you ask, how did they do it? How did they see it? Is the reason I got interested in the story. I mean, it did seem to me that one way of telling the subprime mortgage bonds crisis was one of, but it was forced and false, was just kind of totally self-conscious fraud

perpetrated by the entire financial system upon the American people kind of thing. But the problem with that is that all the putative fraudsters, all the big Wall Street firms, ended up owning this stuff. I mean, they bankrupted themselves in some cases with this stuff. So it wasn't as simple as a self-conscious fraud. It seemed to me that really what had happened was that there were a series of facts out there in the financial world for everybody to observe. And the vast majority of people saw these facts in one way, and a handful of people saw it in another. And the analogy that kept popping into my mind was there's a famous drawing. It's an optical illusion.

You look at it one way, and it looks like kind of a beautiful woman in profile. And you look at it another way, and you're staring at the face of an old witch. And it's like everybody comes to that picture, and most people see the beautiful woman in profile, and few see the old witch. Why do some people see the old witch? And I think that people are predisposed to see the world in certain ways. And in these people's cases, they all had some reason why they saw the world the way they did. So Burry was totally focused on data, totally focused on reading subprime mortgage bond prospectuses.

Eisman was totally focused on the cynicism with which lenders treated borrowers on the ground in the subprime mortgage business, but obsessed with it, like nobody else was. So there were reasons why they were predisposed to see it, but the main point is that it wasn't that they had inside information or some such thing. They just used the same facts differently. Stay right where you are. Coming up, more of our conversation with Michael Lewis. You're listening to Motley Fool Money. Welcome back to Motley Fool Money.

I'm Chris Hill, and I'm talking to Michael Lewis, bestselling author. He's out with his new book, The Big Short, Inside the Doomsday Machine. Michael, you worked on Wall Street for a few years. You're not some novice to this whole scene. What surprised you the most when you were working on this book? Well, you know, surprise might be a really strong word because I had kept kind of in touch, loosely in touch with the financial world because of Liar's Poker over the years. But I was taken aback by the level of the degree of conformity.

I mean, just how like-minded so many people in the financial world had become. It was a kind of global financial monoculture had been created with these big firms filled with similar sort of people all behaving in similar sort of ways in which deviant or variant views were considered rude. And this is one reason why so few people are able to see the truth. They're all kind of, there's this kind of group think that's evolved. And this is very different from the Wall Street I left. I left a Wall Street filled with colorful characters and outrageous behavior, and in which eccentricity, if not prized, was at least tolerated. I mean, the Salomon Brothers trading floor was a wild and woolly place.

And a lot of the people who were on the Salomon Brothers trading floor would not be tolerated on the modern trading floor. So that struck me. I guess the other thing, but it's also one of the reasons why I wrote the book, so I was aware of it from the beginning. It's amazing that the big Wall Street firms have become the dumb money at the table, because they used to be the smart money. They used to be who you didn't want to bet against. And somewhere along the way, they became a little stupid. And I think the two things are related, the conformity and the stupidity. What are two or three things that need to change in terms of the culture on Wall Street?

Because I think that when stuff like this happens, it's easy to point to individuals. But unless the underlying culture changes, then we're just going to get this again in five years or even sooner. Well, I think that the changes should be directed at the bond market. I mean, it's the bond market where all these problems occurred. And if you look at the problems in the bond market, they're pretty obvious. The total absence of transparency in some of the markets. So I think, for a start, anything a Wall Street firm is trading should be traded through a clearinghouse or an exchange.

You should be able to see the prices on a screen because the minute the transactions become over-the-counter transactions between two parties conducted in a dark room, there's room for real abuse of the customer. And the minute the customer is sort of in that position, The minute the investor dealing with a Wall Street firm is dealing with really inadequate information about what he's buying and what the right price is for it, there's a huge incentive for the Wall Street firm to create bad stuff for the customer to buy. I guess the second thing that is a really big and obvious change, that the Volcker rule, named for Paul Volcker, that's sort of being kicked about on Capitol Hill right now,

it seems to me a kind of madness that a Wall Street firm is allowed to trade for itself in the same securities it is advising its customers to buy and sell. That the minute that happens, you create the sort of environment in which relations are going to become poisoned and deceitful. And I don't see why the financial world can't be divided up pretty cleanly between, you know, the Schwab's of the world that advise customers and hedge funds that trade for their own account and that the two aren't under the same roof. You know, the firms will tell you that they're kind of Chinese walls between things, but that's just baloney.

And so those are two obvious things. I mean, the Lehman Brothers story that broke a couple of days ago is kind of amazing, That these people were essentially disguising the risks they were running, you know, maybe not fraudulently, but certainly deceitfully, and that it took not just bankruptcy, but a year and a half of studies of their books to figure this out. It just makes you kind of wonder what the other firms are doing, because it seems very unlikely in this highly homogenized, conformist environment that one firm was doing things radically different from other firms. Final question, where do you see the big money going now? What is the next big thing for the Michael Burrys and the Steve Eismans that are out there? Well, they're all very skeptical because the problems have been papered over rather than dealt with. I mean, the crisis thus far has been a matter of addressing symptoms rather than cause.

And so, you know, instantly, a year and a half ago, all of them were talking about European sovereign risk, which is now much more in the front of investors' minds than it was then. They're all dubious about the long-term capacity of the U.S. Treasury to meet its obligations. So they think dark thoughts, but then their experience they just had predisposed them to think dark thoughts, so maybe they're not the best ones to ask. Stephen Perlstein, the Pulitzer Prize-winning business writer for The Washington Post, wrote last week. If you only read one book about the causes of the recent financial crisis, let it be Michael Lewis's The Big Short. Michael Lewis, thanks so much for being here.

Thanks for having me. A Wall Street firm fired their CEO. Now he's living on his yacht down in Key Largo. He packed up his bags once he was accused. And now he's tan, fat, and happy with them sublime blues As always, people on the program may have interest in the stocks they talk about. Don't buy or sell stocks based solely on what you hear. Chris Hill, and joining me in the studio once again, our trio of senior analysts, Seth Jason, James Early, and Shannon Zimmerman.

Guys, time to talk about the stocks that are on our radar. Shannon Zimmerman, I will start with you. All right, this is a bit of a two-for-one, Because it's about a mutual fund and a particular holding. The fund is Fair Home, F-A-I-R-X, which is a favorite around the full. Yeah, they're in our 401k plan. A lot of us own Fair Home through that fund. And we were talking before the show about folks who are sort of cultivating a reputation for themselves as the next Buffett,

whenever Buffett is no longer with us to be Buffett. And the person who is the chief manager at Fair Home, Bruce Berkowitz, is probably a leading contender for that, and rightfully so. But interestingly, he's been staking out a position in Distressed Financials, has a big stake in Citigroup, and this week announced that he was building a position in AIG as well. AIG? I know, exactly. Wow. The only way I would want to be invested in that company,

and I'm not sure I want it this way, is through his fund, but that's on my radar now because Berkowitz has made a purchase. And that's right. Fair Home was one of our three choices in the 401k plan. We have. No, we have more now. We do. James Erling?

Chris, the stock on my radar is prepaid legal services. The ticker is PPD. Are you telling us something about your situation in life? You know, I used to have it. a long time ago, I worked at a different place. It was just like a benefit, so I never used it. But $400 million market cap, 3.1% yield, 11% insider ownership, which is always good, and very high returns on equity. I haven't looked too much into it, but so far, so good. What's the ticker symbol?

PPD. And are you sure you don't have anything to confess? Because, you know, confession's good for the soul. If you need legal services, we can help you, James. You know, I'll remember that, Chris, but so far, I'm clean. Is it just me, or is there just sweat pouring off his forehead? Yeah, I know. Let's get the lie detector out here. All right. Seth, Jason? Well, those are great ideas.

I went with the pork belly futures, actually, in my retirement account. Before the enactment of the Eddie Murphy law? I was going to say, watching Trading Places again, were we? But I would like to talk about a Hidden Gems portfolio candidate called Atrion Corp. The ticker is A-T-R-I, a fairly small company that makes a series of tubes. Really? He's making this up, like a tricorder corporation. We're all fans of series of tubes, and these are tubes that are used to transport medicine and other fluids into you when you're in the hospital, when you're in surgery.

So this is invasive. This is an invasive company. Yeah, it's the only way to get stuff in you through a tube. And so I like the revenue streams. There's obviously a little bit of risk with health care reform, and this is also a pretty competitive market. But Atrion is a small company that's been very shareholder-friendly over the years, has grown at great rates for a long period of time. We looked at it first back in January or late December at Hidden Gems. And I noticed now that it's sort of the price is back where it started, so it's a good time to take another look.

When I was following under the anesthetic during one of my knee surgeries, I was told later on that the only thing I was saying was, please, no catheter. Now, we talked on a recent show about Abercrombie & Fitch and on their investor relations page, two shirtless guys and the word fierce. Fierce. Seth, if we go to the investor relations page of this company, Are we going to see, like, graphic pictures?

I can't remember what's on there. And if so, what's the website? What's the URL? But there is the funny thing that they also own, like, a gas transportation pipeline out in the middle of nowhere. Okay, now you are making it up. They've got a lot more to say than just making it up. It's a medical tube company, but they have a gas pipeline, too? They're just into tubes.

There's a whole tube thing going here. This sounds vaguely like Enron. All right, Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. You're welcome. Thank you, Chris. Thanks to our special guest this week, Michael Lewis. If you missed any part of the show, you can find it at our website, MotleyFoolMoney.com.

You can also get a copy of our free report, The Motley Fool's Top Stock for 2010. All that and more at MotleyFoolMoney.com. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. Thanks for listening. We'll see you next week.