Long or Short Capital

Bear Stearns (NYSE: BSC) shareholders have raised the ante to the ceiling in terms of shareholder activism. Previously, an activist was limited to only inflicting pain on management or the board to eke out concessions and improve the company. But BSC holders have the gun right to the head of the entire US financial industry and it went something like this.

Weekend 0: Listen rest of the world, we stock holders may have negative value and the bondholders should lose money, but that’s just your reality, not ours. It’s pretty simple and it goes like this. If you don’t pay us more, we will bring the whole thing down — we will do it so pay us the money. Pay us $2 and we will go away quietly, and the bond holders would be pleased. You have 24 hours or we blow it all up.

Week 1: JP, we’ve been thinking. No, not about that hooker with the dysentery. Yeah. Haha. No, we never heard that variation. That’s a good one. No really it was good JP, the delivery needs some work but you’ll get it there. Just practice in front of a mirror or your mistress. Anyways, yeah, we have thought about it and that $2 per share for our stock is not enough. What about $10? JP, you got that cash lying around, right? Even if you don’t, here’s what you do, ok? Call the Fed, and ask for Bernanke. Get him to give us at least $29bn in capital, not a penny less. Tell them if he doesn’t do it, we will vote down the deal and blow it all up. Illegal schmegal, he’ll do it. Tell him he has 24 hours.

Week 1.5 to Present: Ok we have $10 but now based on how stable things look, we should be getting at least $15. It’s pretty clear that we’re worth a lot, especially now that the Fed has given us $29bn of the taxpayers money. Btw thanks Taxpayers, we were worried for a sec back there that we might lose some money because we invested in a company that took on way too much risk, never deleveraged enough and that got caught in a squeeze. God forbid, that the equity holders, much less the unsecured bond owners be forced to take a zero or a hit in such a situation. Back to the matter at hand. We want $15 per share in the next 24 hours, or we will blow it all up. All it up. All it. Everything. It. Blown up.

Recommendation:

1. Pick a company that is too big too fail (basically anything publicly traded and kinda banky) that has traded down to sub-small cap levels
2. Purchase the stock
3. Begin hostage negotiation
4. Profit

Pattern recognition and memorization is key…If you do not know the next pattern coming up in a Tron Light Cycle Event…You will lose your life.
-Robert Mruczek in King of Kong

Past Quotes Entirely Relevant to Investing

The movie 21. Normally I don’t care when they do true-story things and take a little poetic license and what have you. Fine, whatever, add a spice of glamor, a touch of Hollywood and tighten reality to make it snappy. But in the case of 21, they made a needless racist edit to the story. The real life MIT blackjack team was mostly asian and middle eastern, and the main guy, Jeff Ma, was asian (he later started PROTRADE). In the movie version, the lead is some banal young white “star” and Kate Bosworth. If an asian dude can’t be the star of a movie about going to MIT by day and counting cards by night…what exactly can he be in except for a kung fu movie? Not to go Stossel, but GIVE ME A BREAK.

Recommendation: Additionally, after almost 20 years of Real World and Road Rules, and several hundred cast members, not one has been an asian guy. Not a single one. Look it up. Surely there are other cool acceptable asian dudes out there in the vain of Bruce Lee and Paul Kariya’s dad!

Upon watching Wile E Coyote and his efforts to catch, kill, skin and eat the Road Runner you may have noticed a recurring theme — Wile was always very very close but never quite caught the Road Runner. While we admire his sticktuitiveness (not a word), we scorn his lack of ever trying the same thing twice. We notice the same flaw in Cobra Commander (CEO of Cobra Inc) and also in Megatron (Chairman of the Board for the Decepticon Group). They all shared the flaw of spending a lot on R&D only to give up upon the first failure of their generally well thought out plans and technology. We always wonder what would have happened if only Wile E Coyote had tried one of these traps/plans more than once — surely the Road Runner couldn’t make the same improbable miraculous elusion TWICE. It’s just not statistically likely that a once in a millennium type of event would happen again. So you should always try a failed genius plan at least one more time per the Wile E Coyote Theory of Management. Well, now we know (and knowing is half the battle).

Now, Mr. Meriwether’s biggest fund, a bond portfolio, has plunged 28% this year….

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Mr. Meriwether’s recent troubles partly stem from borrowing. His bond fund had $14.90 in borrowed money for every $1 in equity at the end of February, according to the March 18 letter.

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Mr. Meriwether marketed his bond fund as a lower-risk version of LTCM’s core strategy, of identifying the next financial crisis and profiting from it by buying securities its managers consider underpriced. Investors were told that the firm would aim to keep borrowings below 15-to-1 even during less-volatile times.

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JWM’s Relative Value bond fund, launched in December 1999, has lost 28% this year through last week after notching a 5.6% return in 2007, according to people familiar with the fund. The recent losses further weigh on the fund’s average annualized return since inception of about 7% through February 2008. The Lehman Brothers U.S. Aggregate Index, a measure of investment-grade bond performance, has returned an annualized 6.5% during that period.

Recommendation: Leverage kills. Short funds that are dependent largely on leverage to generate even sub-adequate returns, especially ones that were amazingly collecting 2 and 20 for it and ones run by people associated with the worst hedge fund blow-up ever, having had their hubris chronicled in a popular book. We recommend that Meriwether be permanently elevated to the role of Chief Investment Coyote and only be allowed to manage the Acme Family of Funds.

Lately, we’ve witnessed a trend towards an increasing an amount of things being hailed as Contrary Indicators. Recent examples include the cover of the Economist (cover says “Wall Street: A Ten-Page Report on the Crisis), the Bearishness of analysts, our own Time Barrons Investing Thesis and the list goes on. Here’s a news flash — almost nothing is actually a contrarian indicator. That’s right. Easy to assume, difficult to prove. Most things are just noise. Just preemptively, here is a list of things that are not contrarian indicators.

• Everyone saying it’s a bottom
• Everyone saying it’s a top
• Everyone saying they’re a top
• The fact that the Democratic party has been labeled a shoe-in to win the Presidency
• A comet hitting the earth (“time to go long solar energy!”…idiot)
• The US winning a Gold in Karate Chops at the Olympic Games this summer
• Everyone agreeing that dragons really do/did exist
• And lastly, everyone thinking that we are not at risk from squids (we invest in squids on their fundamental merit, not because they are a contrarian play)

8. That’s it. 8. They are all worth 8.

All financials stocks are worth 8. (Fast forward to minute 6 or so, it all will become clear by minute 7)

Recommendation: If a financial stock is above 8, short it until it is 8. If it is below 8, maintain a buy until it is at 8.

And you know it hurts my feelings, if nothing else, that the Swiss franc is worth more than the dollar.
-Paul Volcker in an intereview this week with Charlie Rose

Past Quotes Entirely Relevant to Investing

For those of you who are worried about our humor liquidity, let me put it to rest. We will be able to continue to make our articles the best ever because the Fed has agreed to backstop all humor liquidity from their newly opened “The Window” Window. We can use as much as we want. Additionally, the restrictions have been lowered on the quality of the underlying jokes required to be used as collateral; pathetic wordplay jokes pertaining to regression such as “I’m regressing” now qualify along with the more traditional nuanced satirical jokes. “The Window” Window will be open to us for the period of one month from today. Also, “Today” resets every day. As a result of the fact that it is always “Today” we will have infinity months of federally guaranteed humor and we hope to remain humor solvent until this crisis abates. Thank you for sticking with Long or Short in this harrowing time.

The market today was, in technical terms, acting like a drunk. The most common explanation — found on the front page of the WSJ, top headlines on Bloomberg, etc. — concerns the complete destruction of a storied investment banking franchise and the Fed’s move to both lower rates and offer to loan money to anyone who hasn’t blown up yet.

There’s an alternate explanation though and applying Occam’s Razor (but not implying that anyone actually bothered to use it to shave) we believe this alternative explanation to be the more likely driver of today’s madness. Both the Fed and the Market got up early today, hung-over after a rowdy weekend of carousing wherein they had a few too many Guinness and a few too little corned beef and cabbage. The Fed told the Market that what she needed was an eye-opener. Then, not feeling much better, the Market was convinced that what it really needed was TWO eye-openers. 47 pints of guinesses, several 100+ intraday swings of the DOW, a bloodbath in commodities, and a literally immorable blackout later, the Market passed out on her couch with only the after taste of roofies and the burning sensation across her cheeks and lips of having made out with someone with a scruffy, likely peppered, beard.

Things you can buy for $2:

• 2 limes
• 1 organic avacado
• 15% of a drink at a bar
• A pound (sterling)
• A day’s worth of labor from a farmer in the Indian countryside
• Nothing at a strip club
• A payoff of that persistent newspaper boy who wants his $2
• 2.3 cheeseburgers from McDonald’s
• Medicine for an African child for a whole month
• Oh yeah and these guys….

Amazing Bear Stearns (NYSE: BSC) Fact: Their building is worth 3x more than what their equity was sold for.

Well, I vote not to approve the sale.
-Random Bear Stearns (NYSE: BSC) shareholder during the conference call to discuss the acquisition by JPM (NYSE: JPM)

Past Quotes Entirely Relevant to Investing

A life, Jimmy, you know what that is? It’s the shit that happens while you’re waiting for moments that never come.
-Lester Freamon on The Wire

Past Quotes Entirely Relevant to Investing

We thought it might be helpful to our readers and subscribers to review the collateral that currently underpins some of Bear Stearns “assets”.

Doesn’t look bad from far away. Definitely some promise. Let’s get a closer look.

Again not so bad, am I right? This whole thing is overblown.

Does anyone know Russian? Looks like a friendly welcoming sign that points out that they want YOU to come into their town.

A ferris wheel! Fun! And conveniently located next to the 3HEPEAMUK building.

A little landscaping, some paint, a geiger counter or two…

Our earlier research, Are Walruses Efficient, seemed to indicated that the walrus knows how to get it done, without actually having to do much of anything. This video is further testament to their greatness — Dancing Walrus. All it takes is a few good dance moves, and a walrus can go cross-species and pull any human tail he wants.

Recommendation: Walruses are emerging as a potential threat to Squid Hegemony. Were recent efforts to cross-breed Walruses and Cameles into Walmelruses are successful, we would revise our rating on Squids while a downgrade of the Human species would be inevitable.

HT to TQ