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You Can’t Trust Anyone

Podcast Length: 31 minutes

Today I spoke with my good friend John Del Vecchio about his new book What’s Behind The Numbers: A Guide To Exposing Financial Chicanery & Avoiding Huge Losses In Your Portfolio.

Although John runs the Active Bear ETF (Ticker: HDGE), this book is not really about short selling. Long-only investors will benefit greatly from John’s insights and especially how to get out of their losers quickly just by following a few simple fundamentals on the balance sheet and income statement.

One of John’s most impressive skills is that he spends his days as a forensic accountant looking for the chicanery that is a lot more prevalent that you may care to believe. Then there’s the fact that he’s a short seller in the face of QE “infinity”, but that’s besides the point.

One of his biggest shorts (below) is Green Mountain Coffee Roasters (Ticker: GMCR). They are offering big discounts to generate revenue and as we mention in the podcast, that’s robbing Peter to pay Paul. As he states, “eventually there will be an earnings shortfall, like there always is with companies like this, and the stock will tank.”

Green Mountain Coffee Roasters

Green Mountain Coffee Roasters, Weekly Prices

The WSJ just ran a story a few days ago called Coffee Standoff Tests Growers’ Grit that discussed Brazil’s coffee producers hoarding physical until prices rise.

If coffee prices rise, and GMCR is offering discounts, they are going to have their top line revenue growth squeezed in a vice, especially if they don’t hedge by purchasing coffee futures contracts to offset higher prices. You can’t pass on higher costs to the clients in this regard and concurrently offer them discounts.

GMCR had this to say about their basis risk in their most recent 10-Q: “At June 23, 2012, we are exposed to approximately $73.5 million in un-hedged green coffee purchase commitments that do not have a fixed price as compared to $119.9 million in un-hedged green coffee purchase commitments that did not have a fixed price at September 24, 2011. A hypothetical 10% movement in the “C” price would increase or decrease our financial commitment for these purchase commitments outstanding at June 23, 2012 by approximately $7.4 million.”

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