Long or Short Capital

After a heady Katrina-a-Rita induced rise, hurricanes have plateaued and can only go down from their hyper-inflated levels; expect Wilma to further underwhelm its hype. Earthquakes are the steady unsexy FCF generating natural disaster, the kind that the Berkshire Hathaway of Disasters would look to acquire opportunistically. They kill more people. They do more damage. They release more energy (“A Richter 12 [earthquake) would be the equivalent of a fault half way to the center of the earth or about the same amount of energy as the Earth receives from the sun in a day”). They can cause derivative disasters such as mudslides, rockfalls, tsunamis (last winter a 9.0 earthquake iniated the tsunami) and super volcanoes.

Super Volcanoes? (from here)

Immediately before the eruption, there would be large earthquakes in the Yellowstone region. The ground would swell further with most of Yellowstone being uplifted. One earthquake would finally break the layer of rock that holds the magma in – and all the pressure the Earth can build up in 640,000 years would be unleashed in a cataclysmic event.

Magma would be flung 50 kilometres into the atmosphere. Within a thousand kilometres virtually all life would be killed by falling ash, lava flows and the sheer explosive force of the eruption. Volcanic ash would coat places as far away as Iowa and the Gulf of Mexico. One thousand cubic kilometres of lava would pour out of the volcano, enough to coat the whole of the USA with a layer 5 inches thick. The explosion would have a force 2,500 times that of Mount St. Helens. It would be the loudest noise heard by man for 75,000 years, the time of the last super volcano eruption. Within minutes of the eruption tens of thousands would be dead.

Let’s see the “wind” try and do that.

Recommendation: Long earthquakes; Donate money to the forgotten natural disaster in Pakistan.

We are working on the technical elements of investing in actual websites, but in the meantime, we recommend an Accumulate position on The Stalwart, based on his recurring greatness and on his especially insightful recent post whose analysis synthesized the world of gossip and capital markets to find that celebrity bimbette markets are the most efficient of all. Paris Hilton’s Invisible Hand is ripe with truth.

Recommendation: Long the Stalwart and US Weekly, Short Barron’s

Juggles has his investment commandments, I’ve got my Lending No-No’s, and it’s all you need to manage the risk in your debt investments.

Lending No-No #1a: Consider the collateral. Never take stock as collateral for a loan if it’s offered by the CEO of a company who is at the center of a multi-billion dollar securities fraud.

Examples:

The ongoing Refco Securities Fraud Stock Scandal hinged on CEO Phillip Bennett’s (Refco) status as an unreported debtor of $430mm to the company. When this came to light on Monday, Bennett repaid the $430mm with cash money. Where did he get this cash money from? Per this NY Post article:

On Monday, Bennett paid back the $430 million plus interest by pledging 43 million Refco shares in return for a loan from The Bank for Arbeit and Wirtschaft AG in Austria.

The Bank for Arbeit and Wirtschaft committed a classic lending no-no and forgot to consider the collateral. It is likely they hedged their position but it was still a bad loan.

Lending No-No #1b: Consider the collateral. That trademark which is part of your security package? If you ever need it, it will have no liquid value.

Examples:

Frequently, companies with trademarks will include them as collateral in loans. So a company such as The Gap Stores would hire a third party to perform a valuation of their brand and come up with a figure say $XYZmm dollars. We all know that $XYZ dollars is a lot of money, but that brand’s value is really only a barometer for how well the company’s stores are doing. If you ever needed to sell that trademark to make a recovery on your high yield bonds or whatever paper you foolishly hold, you can expect to get $XYZmm – $XY0mm for it. That would leave you with just $Zmm left over (see our earlier research on $Z); you can’t win with math like that, which is why you always have to consider the collateral.

That picture of Amazon CEO Jeff Bezos was taken in November 2002. How do you reconcile that with this AMZN Stock Perf Chart:

Discuss.

Edit 10/17: Kaiser sent me this picture which may show that riding the Segway produces a similar reaction in Bezos as staring down Anna Kournikova. If you notice, it’s quite possible that he is riding a segway in that shot. That is the beauty of the segway, you just never can tell.

A number of online photo companies have recently been threatening to delete my photos if I don’t make a purchase. For instance, I received the following in an email from Kodak Easyshare:

We’re happy to store all your memories at the Kodak EasyShare Gallery, but because you haven’t made a purchase in the last 12 months, we may begin deleting stored images from your account. Don’t risk losing your photos!

Maybe I’m the exception but deleting my photos doesn’t qualify you for my bi-annual “happy to store your memories” award. In fact, I will probably send you an email telling you that I never plan to use your service again. Here was their response:

Thank you for contacting the KODAK EASYSHARE Gallery Customer Service Team.
We wanted to let you know that we’ve just received your message. A Customer Service representative will not respond to this email. [My emphasis]

What a followup! Thanks for emailing me to tell me you won’t be responding. And what, pray tell me, is the purpose of a customer service email if no one checks it!?! I appreciate your attention to my concerns; I will never purchase another Kodak product as long as I live.

Recommendation: Short Kodak. Short bad customer service. Short automated responses.

….was that uncool?

Full disclosure to our readers; I actually owe Long or Short $430mm. In a confidence business such as the delivery of genius, our customers (you) have to be worried about whether our lack of internal controls will affect the delivery of future content, or if this will delay or otherwise hinder the release of my next set of Investing Commandments. Rest assured that this kind of thing is totally cool because we all do it. I asked our internal auditors about it and they actually used the phrase “Dude, that’s totally cool.”

According to these same auditors, the whole Refco (ticker: RFX) stock thing is totally overblown, and Tyco’s internal controls were “wicked awesome,” so our controls are probably pretty good. In light of this, we rate our own stock as market outperform. Go long the equity, but be sure to short the bonds.

Recommendation: SOX rocks!, long white collar prison sentences, short “the bonds” and private equity’s due dilligience

PS if this post was incomprehensible, start here.

I go out on Saturday night and being that I’m awesome and that my company’s eye insurance lets me buy excessively expensive eyewear, I decide to wear sunglasses to the bar. I’m on the upper east side and there are hot babes everywhere. I’m chatting up one of the hot babes when a meathead from Long Island comes over and taps me on the shoulder. He says to me:
“Hey, only two kinds of people wear sunglasses inside, blind people and assholes.”

So I quip back, “I’ll give you one guess which one I am.”

Then he punched me in the face. Now I have two black eyes and a broken pair of really expensive sunglasses, but boy was I clever. What I learned is that being skinny, clever, good looking and rich is a tough combo in a bar full of meatheads with nothing to lose.

Recommendation: Long me and my sunglasses, short poor people and tough guys.

“It’s great to be back in the cab. First day back since my license got taken away.”
-heard as I got in a taxi yesterday

He was a 55yo drugged out looking cabbie, and he managed to get me to the BCBG Max Azria investors’ meeting, while talking to himself and with his mood oscillating between jubilation and severe angritude. I survived, but I wouldn’t buy stock in the likelihood that all his passengers survive.

Recommendation: Short insane people driving me places.

Scotts Miracle-Gro is a manufacturer/marketer of branded lawn and garden products. You would probably recognize some of their brands like Scotts, Miracle-Gro and Ortho as stuff you put on your lawn. Their CEO Jim Hagedorn (who owns a ton of the stock), is a retired Air Force pilot and is wont to ramble. In his closing remarks at last year’s Investor/Analyst Day, he created an epic meditation on fertilizer, the power of greed and war:

“I didn’t get out of flying fighters to be a fertilizer salesman. I got out of fighters because I think it’s a more pure form of conflict here.”

I don’t disagree.

“It’s like the purest form of conflict in that like nobody really dies, but think how many volunteers you’d have if you could go over to Iraq and you could take all the money you could find?”

Perhaps becoming President or at least Secretary of State would be an even purer form of conflict than the fertilizer business, because we need to get these ideas into policy ASAP.

“This is what it’s like! I really like this business. I may be scaring you, I’m sorry.”

No, not at all. We already said how much we agree, Jim.

“But think about it! We get encouraged to basically compete — it’s a good thing. It’s okay to win. It’s okay to take market share which is just real estate — it’s imperialistic.”

This is exactly the kind of CEO I want in charge of a $2bn revenue, $300mm EBITDA, $2.5bn market cap company. He should also own ~40% equity in the company. Thankfully, he does, that financial imperialist son-of-a-gun.

Recommendation: Long inappropriate analogies

-JD

ps. As an investor, this is a pretty stock chart.

“They’re doing ok in pickles, getting their ass kicked in fish”

First person to name the company being talked about gets a link in this post. Update: Mara was the first to name the company and here is her link which you must click.

Recommendation: Long pickles and Mara, short fish.

Smooches,
JD

Legalese always contains redundancies but the findings by IPG’s accountants in their recent restatment take this to a new level. The accountants listed 18 areas of weakness needing improvement including:

Keep in mind that these comments all appeared in the section devoted to the assessment and identification of weakness in controls.

In fairness to the flight attendants whom I maligned in my last post, accountants shouldn’t be considered professionals either. The section on controls is one big CYA move.

Kaiser inadvertently raised another point in his post (below). When did flight attendancy become a profession? Yes, the word can be used in a broad sense but doesn’t a “professional” usually hold as an occupation requiring specialized training? Lawyers, doctors, scientists; those are people you can call “professionals.” Flight attendants are (sometimes) lovely people but last time I checked they didn’t have to attend graduate school, pass any grueling exams, or even show me how to buckle my seat belt now that they have those new-fangled TV screens.

Recommendation: Short unions and pretension, in size.

The Association of Flight Attendants and Transport Workers Union has this week called for a national boycott of the new Jodie Foster movie, Flightplan. In a press release announcing the boycott the TWU claims that

“The film, which portrays a flight attendant and Federal air marshal as terrorists and the lead villains, also depicts flight attendants as rude, unhelpful and uncaring.”

I couldn’t agree more. Ever since I saw Flight Plan I don’t trust flight attendants further than my oxygen mask will reach. And this isn’t the first time it’s happened to me either. After I saw Boiler Room I hated stock brokers, after Tombstone I hated cowboys as well as cowgirls, and after Aladdin I had a severe distaste for Royal Viziers (ie. Jafar).

After all, movies shouldn’t be about good stories, they should be about positively depicting individuals with important professions, especially unionized professions.

Recommendation: Long Anything, Short Unions.

Executives and companies love to obfuscate. Since it’s hard to understand the real meaning of their statements, we have provided a handy translation. Here are the words of automakers Ford and GM run through our propietary translation algorithm.

Corporate Speak:

Employee Discount for Everyone

Translation:

-We give back to you the profits that we weren’t making anyway.
-Step 1 in our five year plan for bankruptcy and continued diminution.
-Step 2 will be new models of even bigger cars which nobody wants to buy.

Corporate Speak:

Ford Family Plan

Translation:

Selling today for much cheaper, that which would have been sold tomorrow.

Corporate Speak:

We will not do business with suppliers who are in bankruptcy.

-GM’s Purchasing Chief Bo Andersson

Translation:

Since most Tier 1 and Tier 2 auto suppliers are either in bankruptcy or on the brink thereof, and since we are a big reason for that situation, we plan to compromise our principles shortly.