Long or Short Capital

The press is bad enough when asked to handle simple things like NFL contracts with non-guaranteed money which consist almost entirely of hugely underwater option years or the compensation of retiring Exxon Mobil CEOs. But conflating geological based wealth and sports seems to lead to a whole ‘nother level of stupidity as evidenced by this sensationalist headline Dodger could be first billionaire player.

The player, Matt White, is a marginal one who owned property in Western Mass that happened to be situated on 24mm tons of goshen rock, which is used in landscaping and is sold for $100 / ton. So $100 times 24mm equals $2.4bn in value to the AP. Simple. Obvious. Right?

Wait…you are saying it actually might….cost something to pull that goshen rock out of the ground? Hmmm. And permitting for mining may be an issue? But he could still be the first billionaire ballplayer right? No? Then how does this help the article? You and your facts, factman! I hope the AP will just ignore the reality and continue to write almost all of their news ex anum.

I will say this unequivocally, there is no chance he makes a billion off this. There is no chance he makes $100mm off this. It is unlikely, in my relatively uninformed estimation, that he makes as much from his goshen rock as even the average earnings of a baseball player who squeaks out a 10 year MLB career.

Recommendation: Short the press. Long brains.

During my commute, I am frequently left to wonder about why it is that fellow travelers are talking to themselves. Are they crazy, maybe burdened with schizophrenia or with the tourettes? Or are they simply business professionals affecting the trappings of insanity by talking to the open air in front of them with the vehemence, volume and animation reserved for discussions with the voices within their head?

Hence Crazy Person or Bluetooth Headset.

This morning I was treated to two such travelers, allowing for two rounds of CPBH.

Round 1:

Man in his early 30’s, nattily dressed but in a casual fashion. Dark curly hair a little bit unkempt but not overly so. He sat on the train having this conversation with open space: “Father, you are up. It’s good to hear that [laughing a little crazily].” He continued but was cut-off by a cloud of people and background noise. Was he crazy or just bluetooth equipped?

Crazy person!

Round 2:

Asian man on the street, in a normal looking coat, mid-40’s gesticulating wildly while screaming things in Chinese or whatever. But his hair gave him away. Too well-coiffed to be a crazy person.

Bluetooth Headset!

In business flight terminals, you can play the sister game Bluetooth Headset and/or Total D-Bag.

Private Equity shops are primarily known for their ability to take public equity markets (or unwieldy conglomerates) in one hand and squeeze the coal out of them to create diamonds, while in the other hand, taking the leveraged loan market and squeezing it to get super-low cost debt financing out of it, and then riding off into the Billionaire Sunset…or onto their mega-yachts. But sometimes their tactics are much more base and straightforward than spotting a good deal and getting it done.

Witness TXU. How did Kravis Kohlberg Roberts and Texas Pacific Group get their TXU (NYSE: TXU) strategy done? With low cost guerrilla tactics as outlined below.

Step 1: Find a public company to take private that would be a viable member of Satan’s Portfolio due to a combination of its not politically correct products and its current disfavor with public sentiment. In this case, power company TXU, with its plan to build up to 11 new coal power plans (of which less than a handful had a realistic chance of happening) and to raise prices to the levels commensurate with the demand for electricity was a cruel and horrible agent against Mother Nature and the working class. A natural target.

Step 2: Hire “performance artists” thugs and hooligans to protest against this company for reasons of social justice or the environment or racism against robots or whatever is popular today. In this case, the hired hands staged a “die-in” in front of the offices of the largest mutual fund holders of TXU stock, which coerced these companies to reduce or terminate their exposure to TXU creating downward pressure on the stock price. For those not in the know, a “die-in” is where you simulate death as a form of protest. Think low budget live versions of television anti-drug and anti-smoking scare ads which have been trotted out for the past 20 years.

Step 3: Buy the company at the reduced level created by the protesting campaign you bankrolled on the sly.

Step 4: Ride off into the sunset on your mega-yachts.

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.”

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.

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.

When it comes to meeting young ladies out at the bars
I won’t lie, I get a nice amount of love

…

So when I do hit the club I ain’t hard to catch
On the dancefloor, spilling my drink, throwing bows
Doing old school dances like the Smurf and Cabbage patch
One shot, Two shot, Three shot, Four
Somebody shoulda stopped me from drinking any more
When I was sober that broad looked like Al Gore
Now she look alot more like Demi Moore

I’m just a regular dude
I do my thang a lil bit, nothin major
I’m not makin excuses
But when it gets like that
You gotta blame it on the Jager.

-From the Soul Position song “Blame it on the Jager”

Past Quotes Entirely Relevant to Investing

A lot of people think “being intelligent” is about having a powerful brain, being creative or being able to understand things. This, like a lot of things a lot of people believe, is false. Being intelligent is about one thing and one thing alone — making other people BELIEVE you are intelligent. That is how you become intelligent. “Being intelligent” is something that anyone can manage their ways into.

1) Do not actively think.

If your opponent says something, it is incumbent upon you not to answer them but instead to position your response in such a way that you maximize the opponent’s ability to interpret what you say as “smart.”

Example:

Opponent: I think Google is gonna break $600 by April 2007.
You: I do not disagree.

In this example, “You” has positioned his answer in such a way that he can never be wrong. If Google does hit $600 in April, he can point to the fact that “he did not disagree” with the assertion and thus it can be interpreted that he believed it to be true. If Google does not hit $600 in April, he can point to the fact that “he did not disagree” with the assertion and thus he explicitly did not agree and thus it can be interpreted that he believed it not to be true that Google would hit $600. “You” put himself in the catbird seat without actively thinking anything on his own.

A lot of people, the same lot from above, think that “having an opinion” or “standing for something” are ways for your peers or superiors to think that you are a man or woman of intelligence. This is a common pitfall of people seeking to be intelligent and it is absurd. “Having an opinion” is just a way to demonstrate to those people how foolish you are for leaving yourself exposed to judgment and to make you an object of ridicule for their merriment or a tool for their advancement. Avoid this mistake by becoming a blank slate.

Most firms produce an object or service which they sell. This is normal “business.” But with margins where they are, is this type of business the best way to do business?

Why sell something which costs something, when you can sell nothing which costs nothing? The margins on selling nothing are 100%, a fact which Rambus (NASDAQ: RMBS) has known for years. Now nothing production has come to the mobile market with silent ringtones:

[Conceptual] artist Jonathon Keats has digitally generated a span of silence, four minutes and thirty-three seconds in length, portable enough to be carried on a cellphone. His silent ringtone… is expected to bring quiet to the lives of millions of cellphone users, as well as those close to them.

Recommendation: We are bullish on firms which embrace this contagion and switch from selling something to selling nothing. The margin improvements are completely post-modern.

Corporate speak:

“I have a fiduciary duty to defend the company. These manipulative activities have caused tremendous damage to Overstock. I believe that this conduct is harming our company and our shareholders deeply, and that investors have been failed by those who have a duty protect them. The best way to address and solve the problem is to get it in front of a jury of 12 Californians.”
-Patrick Byrne, CEO of Overstock.om (NASDAQ: OSTK) in a February 5th 2007 press release announcing a $3.5bn suit by OSTK against Wall Street itself more or less.

Translation:

I am obsfucating my fiduciary responsibility to produce anything but disappointing results from Overstock.com’s operations. The best way to do this is to get worked up about something (naked shorting and related conspiratorial behavior) which would likely have a very marginal impact on any long term long position in OSTK stock. Please ignore the fact that companies are supposed to produce money not lawsuits.

Corporate speak:

“The fourth quarter was a difficult end to a tough rebuilding year. While there are plenty of negatives to report, I believe the company has fixed the problems that began in Q4 2005, and we are entering 2007 with a fresh start….The company is healthier as a result [of actions taken in Q4].”
–Patrick Byrne in his February 5th 2007 letter to OSTK shareholders

Translation:

The company has improved its health from not healthy to unhealthy.

Corporate speak:

“Based on our preliminary January numbers and our internal 2007 plan, I expect our 2007 results to improve. Specifically, we should:

• Achieve immediate and substantial gross margin improvements;
• Reduce sales and marketing as a percentage of revenue;
• and Reduce technology and G&A expenses from 2006 levels.”

-Patrick Byrne in the same letter

Translation:

After spending Christmas studying with Yoda on Degoba, I can channel the force to see the future like a powerful Jedi. We should:

• Achieve an immediate reduction in gross margins;
• Spend more on marketing as a % of revenue
• Have one time increases in technology and G&A expenses which I will describe as mud pies in some future shareholder letter;
• Claim in next quarter’s letter that after a disappointing quarter (which relative to now would be “next quarter”) that next quarter (which relative to now would be “next next quarter”) will be the quarter we finally turn it around.

In closing, having seen the future, I can assure our investors that Overstock.com will never ever turn the corner.

(Pointer by Gary-Weiss.com)

“Capitalist” is a loaded word.

Some people think a “capitalist” is a pig. Some think a “capitalist” is someone who takes advantage of others and exploits any resource he can to get wealthy. Some people think a “capitalist” is someone who believes in hard smart work. Some people conflate it with entrepeneur. Some people think it can be a woman. Still others think “capitalist” defines a type of person who sees fit to crush the weak. The glorious thing about being “capitalists” such as ourselves, is that ALL these things are true. Except the ridiculous part about being a woman; a woman cannot be a capitalist. We looked it up.

This week, we exploit the position as host of the Carnival of the Capitalists to give you the 15 best submissions (of 56 non-spam entries) related to capitalism. These are the best and in a competition with all the other articles, these are the winners. That is not to say the people whose articles did not get posted are losers, but in this case, they did in fact lose and are in fact losers. These are facts. We looked it up.

In no order here are the entries of this week’s “Carnival of the Capitalists”:

Tomorrow’s News Today provided by Avant News: Ford Motor Company Preemptively Recalls 6.1 Million 2011 Models.

“As part of our continuing Way Forward policy,” the spokesman, Philip Vaughn, said, “which encapsulates our commitment to economy, responsibility and quality assurance, Ford Motor Company will preemptively recall every vehicle we plan to produce in the next year. By holding the recall before a single consumer ever gets behind the wheel of one of our cars, Ford is proving its commitment to these important values.”

Charles Green speaks to how American Idol is empowering incompetents:

One contestant, asked why he believed his (miserable) performance rated a “yes,” replied, “because I love it [the song].” If I believe, it will happen.

It’s the same in business. Empowerment is great—to unleash organizational talent. But empowering incompetents is absurd—an attempt to defy reality….

The “just believe” message is ubiquitous: in self-help books, sports (“I guess the other guys wanted it more than we did”), movies (“if you build it, they will come”), fuzzy-think gurus (“start believing and acting like you’re already a millionaire, and you will get there!”).

Axed Idol contestants blame the judges, anyone but themselves. The reality-distortion field is huge.

James Hamilton of the excellent Econbrowser asks What would Milton do?, especially appropriate on Milton Friedman Day.

And what about right at the moment? Friedman was concerned not just that excessively rapid money growth would cause inflation, but also that decreases in the money supply were often the cause of an economic recession. By that standard, if M2 had been growing less than 1 or 2% over the last year, the Friedman perspective would lead me to have additional concerns that the Fed had gone to far in the recent tightening episode.

SoxFirst puts forth that maybe companies going private or out of business as a result of Sarbanes-Oxley isn’t a net positive for the public.

The disturbing part about that trend is that it undermines one of the great strengths of the markets in the US, Canada, Europe and Great Britain and Australia with the rise of the citizen investor.

The Big Picture gives a real life example of a tax credit that could be straight out of Catch 22:

It is ironic – and patently unfair – that a technology could be denied credit precisely because the company has the ability to pull it off.

Photon Courier points to evidence of an ultracap capacitor energy solution coming to market:

EESTOR’s system claims an energy storage capacity of 280 watt-hours per kilogram: this compares with 120 for lithium-ion and only 32 for lead-acid gel batteries. It is, however, still far below the energy storage per kilogram achieved by gasoline, even when the poor conversion efficiency of the engine is taken into account. Still, if these numbers–cost as well as energy density–can really be achieved, then the implications for transportation and for other energy-related fields could be pretty profound.

The Digerati Life examines their own investment portfolio, which looks a lot like LoS’s portfolio but with substantially less returns and substantially higher risk:

Interestingly, the growth of this portfolio — the total increase being 40% in the last 20 months — is attributed mainly to two reasons: stock market gains and stock option sales which we were forced to apply when my spouse resigned from his corporate job to strike it out on his own.

Lip-sticking provides some commentary on how to market to women, but oddly not one mention of the Pink Dollar:

Do you talk to the women you want to sell to? No, I mean really. Not just announcing new products or writing sales copy or mouthing off in your blog. Do you talk to your female customers on a regular basis? Do you have monthly events to which you invite customers – giving away ‘free’ stuff, including spa coupons, or dinner coupons, or mall coupons – and then create a conversation around a topic that is important to them? Do you do this? Or, do you read blogs and newspapers and magazines and think you have us figured out?

SportsBiz undertakes the implications of DirecTV’s pan-sport exclusivity with MLB soon to be undertheir belt:

All signs now point to Major League Baseball following the path first laid out by the NFL and moving its Extra Innings package of virtually unlimited games broadcast with local announcers exclusively to Direct TV, in return for a mere $700 million.

Overseas Property points to budding enthusiasm for Brazilian real estate:

Budding property hotspots continue to garner international investor interest with up and coming locations such as Morocco and Turkey making their presence felt in the survey. Brazil property however has risen from obscurity to second place behind Bulgarian property to overtake property in Dubai, whose marketing overdrive has assured its potential overseas property all-star status.

InsureBlog gives a point by point commentary on the healthcare portion of this week’s State of the Union:

But many Americans cannot afford a health insurance policy.

Actually, most CAN afford health insurance. They just need to be reasonable in the way they approach managing their money and risk.

Moneyandfinance talks about the Social Security tax in the context of tax brackets:

By looking at hard numbers we can try to remove politics from it and see its effect on people and society. Increasing the social security tax rates will burden even more our lower income people and will create an ever flatter curve. Not doing something to fix social security now will create bigger issues to solve that will make society do hard decisions: like increasing retirement age or increasing social security tax, burdening people even more.

Searchlight Crusade gives an example of what happens to your home equity during a foreclosure which given the current real estate climate is worth knowing:

So if you cannot afford your payments, and you’re looking down the road at a trustee’s sale, it is usually in your best interests to get the property sold before that happens.

Small Business Trends shines the light on pet industry trends for 2007 — expect strong growth as baby boomers continue their self-indulgence using their pets as a proxy.

3. Growing interest in pet health care.

This includes non-invasive surgeries, human medical devices and services being applied to pets, super-premium foods aimed at specific ailments, and alternative therapies, such as acupuncture, massage, and behavioral therapies. High end diagnostics, such as MRIs, will become more widely available for pets, with the price dropping accordingly. Online veterinary pharmaceuticals will become more main stream. Pet lovers want, and are demanding, the same treatment options for their pets as they can get for themselves.

Last but not least, Innovation Zen points to a lead indicator as to who will win the format war between HD-DVD and Blu-Ray — Can Porn Affect Innovation:

The question then becomes: will the adult movie industry play an equally important role on the format war between Sony’s Blu-Ray and Toshiba’s HD-DVD?

It is not clear yet, but should the answer turn out to be “Yes” Sony will need a lot of lucky to avoid losing again. Most of pornographic movie producers, in fact, are going with the Toshiba HD-DVD format after Sony refused to give Blu-Ray licenses to porn movies.