Long or Short Capital

Global warming has been a hot topic recently and everyone seems to be focused on the high-profile sources of carbon emissions: cars and power plants (see related research Make Emissions Delicious, Stop Global Warming).

What people are forgetting is how much of global warming is a result of flatulence, belching, dung, and other forms of so called “poop-lution”. Ever seen a steamy terd? We know they’re gross but more importantly they are warming the globe and ruining both the o-zone and your favorite ski area. Let’s take a look at factual graphs designed by science.

As you can see methane is responsible for 13% of greenhouse gases and 35% of methane comes from poop-lution, that means almost 5% of global warming is from steaming pooplets.

Recommendation: Until the ingenious Kyoto Protocol, collecting and burning dung was just a fashionable hobby. Now it’s an outrageously profitable enterprise and we want in. AgCert (LSE: AGC) is a $100mm market cap company who’s sole source of revenue is burning dung. We are long them. We also have put seed capital in an apparel company that sells hats that say “No Farting”. We think trendy fad marketing like this will generate millions of cubic cms of provable methane reduction which we can monetize on the European Emission Credit marketplace.

NEW YORK — The stock of [Company Name] is down [Number greater than 4]% in trading today. The movement is reportedly due to a Chinese market meltdown on concerns that government regulators would [increase taxes / curb investment / invade Taiwan / destroy the Earth’s environment] and fears of [a recession / inflation / deflation / a war with Iran / an emerging market bubble / that purple bastard Grimace]. Also contributing to the market decline today were [former Fed wizard / the man responsible for this mess / old Jewish man] Alan Greenspan’s recent comments that the economy is [ headed for a recession/ doing OK right now / irrationally stable].

While no one is sure what the recently released report on [Economic Indicator] really means, since the statistics are vague and have almost no conclusive predictive power anyway, stock brokers across the world should live in fear of being thrown out of the windows of tall buildings.

We are initiating coverage on the 4th dimension with a sector rating of “Yes Please“. We believe the 4th dimension is under-followed by the Street partly because it’s existence is based on string theory and currently, not empirically verifiable. When people get nervous about the existence of a company or industry, that is when LoS starts looking to lay down the big bones.* This thesis has previously worked well for us in the hot boobs sector where several years ago people were calling surgically enhanced boobs “fake.” Through extensive due diligence we determined that you could touch, taste, and smell silicon/saline boobs and hence they aren’t “fake” at all, they are just glorious, we’ve been long them and it’s paid off, HUGE.

This time it’s the 4th dimension everyone is calling fake and once again we don’t buy it (figuratively) because we recommend buying it (literally). We think the 4th dimension is the lowest cost location in the world. One artist in San Francisco is selling real estate in the fourth dimension realizing profit margins of 99.8% — without any expertise or track record as a 3D real estate broker.

Recommendation: We recommend anything you can get your hands on in 4-D, especially if you can get your hands on a pair of (3)4-Ds. If you’re having trouble identifying direct investment in the 4th dimension, try derivative plays in tessalation which lets you travel through the fourth dimension via a Wrinkle in Time or in 3-D glasses which look sweet and when used in the 4th dimension make everything 12-dimensional, i.e. decadimensional +2.

*This thesis is consistent with Mr Juggles Investments Commandments 5a and 5b because while we would never invest in a company with a fictitious CEO, if a CEO was nearly rumoured to be fictitious, this may well be the kind of mania we would like to bet against.

A reader email prompted this entry in our favorite anonymous Private Equity blog with “Going” in the title:

A loyal reader, “S,” joins with me in frowning on “social investing,” and backs up the collective distaste in our mouths with some interesting data on portfolios borrowed from the always entertaining Long or Short Capital. Long or Short’s semi-famous “Satan’s Portfolio” is the hedge against the Pax World Funds nonsense, and a good thing too. Looking at the graphic S forwarded me, it is pretty obvious that “investing” in Pax World Funds amounts to giving your money to charity, but without the tax deduction.

While this is only a partial demonstration of Satan’s Portfolio, we continue to believe in the strength of the investing thesis that backs it. Long Satan(‘s portfolio), short “social investing.”

Many traders aim to get out of harm’s way by avoiding exposure to rare events – a mostly defensive approach.

I am far more aggressive than those traders and go one step further; I have organized my career and business in such a way as to be able to benefit from them.

-Nassim Taleb whose new book Black Swan: The Impact of the Highly Improbable comes out April 17th, 2007.

Past Quotes Entirely Relevant to Investing

From a WSJ article [subscription] describing the problems that blind pedestrians have in sensing oncoming hybrid vehicles (due to their quiet operation:

Toyota spokesman Bill Kwong says he wasn’t aware of the issue and believes that the responsibility lies with drivers and pedestrians to watch out for each other. Mr. Kwong adds, “One of the benefits of the vehicles is that they don’t contribute to traffic noise.”

[Ed: our emphasis]

Is there money dumber than suburban housewives seeking to invest in overseas films?

For years, Renuka Pullat led the life of a wealthy mother in a suburb of San Francisco. She shuttled her two sons to tennis and soccer games, and volunteered for the American India Foundation.

Now, at 38 years old, she has an unusual new occupation: She is one of a wave of Indians in America pouring money into Bollywood movies here in India’s film capital….Her first movie, inspired by “A Fish Called Wanda,” made it to theaters in 2005. It barely broke even.

….

[“Aryan: Unbreakable”], the movie inspired by “Rocky”…[is being produced by] Poonam Khubani, whose husband is the New Jersey infomercial mogul[.] In the movie, banners advertising the TeleBrands Ab King exercise device are draped around the ring where fight scenes take place.

Ms. Khubani also sings one of the songs on the soundtrack, titled “Ek Look, Ek Look” (“One Look, One Look”).

…

Aryan didn’t break box-office records. A December review on the Web site for the Times of India, one of India’s biggest newspapers, said the movie “almost puts you to sleep with its insipid goulash.”

In late December in Mumbai, at one 5:20 p.m. screening of “Aryan” in a downtown theater a week after it opened, only a few people were in the audience, many talking on their cellphones. Then, during the intermission…they …left the building, skipping the rest of the movie.

“We’re lucky it lasted three weeks” in theaters, said Hitesh Israni, Ms. Khubani’s brother, who lives in India and helped coordinate the project.

Recommendation: Flee the dumb money put up by suckers. We recommend any investor scale back their investments in Bollywood film productions.

Full Disclosure: We ceased all our Indian film financing 18 months ago based on our proprietary Bollywood rhythm-method trading algorithm.

Is your child safe from “scrotum”?

This unsettling question is on the minds of America’s parents today as they wake up to a new dawn, one where their children may one day have to read books with words like “scrotum” or “condom” strewn about with frequency. This new word terrorism is being used to disrupt American society by writers and their ilk. But while bad word censorship is naturally beneficial to civilized society, we also see where it can be beneficial to a forward thinking profit seeking publishing company.

Recommendation: Publishers can benefit by creating the products that parents want for their kids — books that lack “adult” words, “big” ideas, and “foreign” concepts.

The keys for a publisher to profit from the war on word terrorism are simple:

1. Use no “Howard Stern-type shock treatment” in your literature. As an example, a passage about a young couple kissing would be inappropriate and likely be censored as it introduces dangerous themes like “love” and “sexuality”. In its place, substitute a passage about the importance of loving your father and mother or a physical fight between people.

li>Avoid words which have even a taint hint of being “adult”. This includes all tri-syllabic (or greater) words, four letter words, sexual terms and annything else as decided on a case by case basis. Good words include “the”, “Mom”, “war” and “fruit”. Bad words includes “them”, “potato”, “condom” and “scrotum”.

2. Avoid depicting situations which too closely resemble reality; this may startle children who are unfamilar with it.
3. “[You] won’t find men’s genitalia in quality literature”. This is the unbreakable rule. Place a banner with this on it and put it somewhere in the line of sight of each of your workers.

Situation: A Chinese man has been arrested and sentenced to death for bilking Chinese investors out of the 3bn yuan ($387mm) they invested in his sham company. He promised 60% returns on purchases of black ants that purportedly had therapeutic properties. He has (compellingly) defended himself by claiming that “he did not know the first thing about raising ants and was ‘quite unclear’ about the costs.”

Recommendation: Wang Zhendong’s fraudulent sales have roiled the market for magical ants worldwide and in China particularly. We recommend going long ants during this period of confusion. Buying ants that are “a natural remedy for ailments such as arthritis,” given the discounts available right now, is not dissimilar from buying Dynergy pipelines a month after the Enron scandal. Correlation trades in cathartic cephalopods and restorative rodents.

Long or Short Capital’s fiscal 2nd Quarter ended on 1/31/07, and the company reported its results in a press release:

Mr Juggles: “Good afternoon everyone, let me first state:

‘WOW we really killed it’.

Second, let me welcome everyone on the line to hear me talk about our 2nd consecutive best quarter ever. In the Q1 call, I let you know that we had been internally focused on the so-called “sequential same store traffic figure” and we delivered a “Googlesque” 146%; this quarter we delivered a 50% increase in SSST on top of that that elevated level. I’d like to reiterate the fact that we really killed it and you should say things like “Great quarter guys” and “Thanks for letting me talk in this Q&A, I promise to ask ticky tacky irrelevant questions to perfect my model and not any questions about your sketchy use of SAAP”.

But this quarter was not all about traffic. Our new primary internal focus was on a metric known as the “Eyeball Monetization Conversion” ratio. It’s a proxy for Long or Short’s efficiency at turning our readers into dollars. Last quarter our EMC ratio was $8.43 per thousand readers — note this is not based on page views; this quarter we launched initiatives and improved our mix to drive our EMC to $18.39. None of our competitors can say the same thing, proving that we have maintained our best in class performance.

We generated earnings per subscriberholder of $2.12 compared to $0.60 in Q1’07 and $0.38 in Q4’06. We generated $1,150 in revenue for the quarter, a 489% increase YOY, and 228% sequentially. We re-experimented with Adsense starting in October, and while we eked out decent performance through December, revenue per a click fell off a cliff in January forcing us to switch our ad sourcing back to the Yahoo! Publisher platform. Our timing turned out to be perfect as our revenue per click increased by 3-4x while our CTR increased reasonably, the latter more unexpected than the former. Text link advertising became the stalwart of our topline, although a smaller % contribution than expected. We sold all our inventory for the first time to date and are positioned for a round of price increases. We also exceeded expectations in some of our one-off initiatives including “Operation Sell Our Christmas Spirit Through Amazon.com” and our late in the month experimentation with CPA ads for Valentine’s Day.

Our subscribership increased from 381 to 508.

Our free cash flow took a big hit from working capital, which was unavoidable due to our topline growth. At 81.5% of sales, this is an area we know we need to improve and I’m confident we have the people in place to get it done and effect the necessary changes. Three weeks into February, we have already made headway towards this goal. We want to be at 30-35% of sales maximum.

We had our best quarter ever in terms of revenue, free cash flow and qualifying traffic. This may sound familiar because I said the same exact thing last quarter. Let me tell you something, I really hope to be on this call with you guys and gals three months from now saying the same exact thing for the third time in a row. Thanks for your time, and have a great afternoon.”

Note that the financials below are unaudited and may contain non-GAAP measures. All numbers comply with Seldom Accepted Accounting Principles (SAAP).

Unaudited Financial Results for Q2’07
Income Statement

Contextual CPC Revenue $239.24
CPA Revenue $120.32
Static Ad Revenue $783.41
Other Revenue $8
Total Revenue $1,150.97

Cost of Sales $19.55
One Time Charge $45.00
Marketing Expense $7.55
Operating Income $1,078.87

Balance Sheet

Cash $557.55
Accounts Receivable $787.43
Inventory $0.00
Prepaid Marketing/Hosting/Reg $150.95
Accounts Payable $0

Cash Flow Statement

Operating Cash Flow $470.70
Capex $0.00
Dividends $X.00

Performance Metrics

Visits 62,570
Pageviews 134,555
Clicks on ads 313
Subscribers by Email 109
Subscribers by XML 399
Inbound Links per Technorati 461 from 132 Sites
Technorati Rank 25,370
Inbound Links per Google ~367 sites
Google PageRank 5

Past Results (due to our reliance on SAAP, previous unaudited financial results are not reliable)
Long or Short Capital Q1’06 Results
Long or Short Capital Q2’06 Results
Long or Short Capital Q3’06 Results
Long or Short Capital Q4’06 Results
Long or Short Capital Q1’07 Results

The way for a young man to rise is to improve himself every way he can, never suspecting that anybody wishes to hinder him.

-Abraham Lincoln

Past Quotes Entirely Relevant to Investing

Long or Short Capital receives a lot of reader email asking us how to trade using insider information. Naturally, we are experts in this field and we find that insider trading is a strategy which is extremely effective, especially when you route all your trading through a bevy of untraceable Cayman Island shell corporations. Many readers already know and practice buying and selling on material non-public info, so we thought it would be more helpful if we explored how to hold on material non-public info.

1. Have a position in a company which issues tradeable public securities (stocks, options, bonds, etc).
2. Obtain material non-public information from insiders of this same company.
3. Do not buy any of this company’s tradeable public securities.
4. Do not sell any of this company’s tradeable public securities.
5. Profit.

Susan Solovay, a woman by trade, has started a fund of funds whose mandate will be to invest only in hedge funds run by women. Solovay is marketing this FoF on the claim that women manage investments better than men. (quotes from Business):

Solovay commissioned extensive academic research into the performance of hedge funds run by women and claims that it showed that women fund managers performed consistently better than those run by men.

Other examples of commissioned “academic research” show that:

• Cigarettes taste great and are healthy
• Lead is perfectly safe for the lining of our water pipes
• Corn based ethanol makes any sense whatsoever for reasons other than padding the pockets of Archer-Daniels-Midland (NYSE: ADM) and making idiots feel better (wrongly) about the environment

More from the article:

She claims that the research showed that male-run hedge funds managers tended to shoot from the hip making big returns one year and poor ones the next.

So what Susan Solovay is saying is that the men she has been with have not had consistently “big enough” returns. In this case size does matter and obviously Solovay has not invested in Long or Short Capital. Along with our investment strategy of “not losing money”, we use the tactic of “making returns so big that the next year we can lose as much as we want, whenever we want”.

For non-abstract financial advisors and managers, performance problems are understandable and not infrequent. But these problems are not due to male analysts and portfolio managers alone. Women are involved in these funds too. If not where would the coffee come from? Who would do some of the back office functions and the bulk of secretarial work? And who would provide massages to male analysts and male PMs? And how would any large investment manager be able to adequately staff their investor relations department? Women are part of the performance of these funds and it is sexist to abdicate them from responsibility just because they are never put in positions to drive actual investment decisions or because nobody takes them seriously.

Recommendation: Setting aside my qualms about Ms. Solovay’s rampant sexism, Pomegranate Capital seems to be a dubious gimmick. As an investor, you have two layers of fees and you have a restricted pool of PM talent.

LoS has witnessed the success of our Satan’s Portfolio thesis against opposite minded strategies such as those embodied by PAX Fund and we see Pomegranate Capital as a similar opportunity. Although different in composition, we think a great play would be to go long the all-in return of the Vice Fund and short the all-in return of Pomengranate Capital, effectively creating a “PC spread” of sorts.

Recently, recruiters at top universities and college administrators alike have recognized a growing trend in the student job market, namely the adoption of “adjusted” GPA figures. It appears that students have realized what investment bankers have known for years: if you don’t like a number, you can change it.

Say you are an investment banker at a large Wall Street Firm, like Silverman Sachs or Layman Brothers, and you are trying to syndicate Theoretical FCF Corp’s bonds. The problem is that Theoretical FCF Corp seems to lack any actual cash flow and will almost certainly never actually pay down any debt. What do you do? Just pro forma their EBITDA to what their cash flow would be if they actually generated cash flow, as you kinda expect they may sometime in the future. And if that doesn’t get your bond customers to a number that makes them want to write big tickets, adjust that number for “one-time” expenses like “bad debt”, “restructuring charges” or the vague but powerful “fees”. This is how you get it done when syndicating debt or selling IPOs.

Now for a student, their GPA is basically the equivalent of a firm’s 4 year trailing cash flows. The number itself carries huge weight in job interviews, yet for decades students have reported GPA exactly as it appears on their transcript. While entirely accurate, this is a huge mistake. Job applicants are now realizing that adjusting their GPAs can give a more accurate misrepresentation of their performance and expected future production.

Why should an employer hire an average of you over the last four years, when what they should be interested is a real misrepresentation of what you could be now if not for certain events? Here are some ways students are making themselves look better on paper:

1. Add-Backs for non-recurring GPA deductions, such as getting drunk at a final, or anything that happened freshman year
2. Pro forma GPA for dating someone smart or at least someone who wears glasses in the morning.
3. Projected GPA levels for future years using the same class load. Surely a student would be more efficient in those classes if the student took them again. Thus the student should adjust their GPA to better match their future production.
4. And the most common move, arbitrarily making their GPA a 3.6 – good enough to get by, but not good enough to raise suspicion.

Recommendation: If you are serious about a job in finance, it’s important to signal that “you get it” before you even arrive. We heartily endorse the use of adjusted and PF GPAs for this reason. Remember, it’s not what you did or will do, but what you can convince people you did or will do.