Long or Short Capital

From the comments of Le Nature’s Disaster.

My father worked there. He was in constant fear of losing his job, because the Podlucky brothers constantly threatened to fire anyone who did not submit to everything they wanted. Anyway, now my father is on the verge of filing bankruptcy because he cannot [pay] his bills after being furloughed earlier this week. I cannot wait to see Greg Podlucky, John Podlucky, and the rest of the corrupt board (who were all related) go down hard.

On a side note: those performing the inspection of the company are the same people that did Enron and they said that what Podlucky was doing is 10 times worse than Enron and will be in college textbooks and taught in colleges/universities for the rest of time.

Recommendation: Le Nature’s sold bottled water. How do you fake selling a physical object and not have it bite you in the ass for that long? Amazing.

Le Nature’s continues to trade at significant discount to other well known frauds such as Worldcom, Tyco and Enron on the All Time Scandal Exchange. We chalk this discount up to the fact that the company was privately owned with only bank debt and a couple hundred million of senior bonds. We maintain our position that any company which can turn $30mm of actual sales into $300mm (an unheard of 10x topline fraud multiplier) without being a blackbox or service type company deserves a first ballot entry into the Fraud Hall of Fame. We expect the Le Nature’s fraud to realize substantial fraud appreciation as sophisticated investors begin to take notice, and institutional money begins to flow in.

Domino’s (NYSE: DPZ) is widely known as a chain of delivery aligned pizza restaurants which used to use Satan as its mascot. Their new “brownie” substitute product has alternately enthralled and repelled us. According to our research, Domino’s Brownie Squares represent the first ever instance by a food company to legally market and distribute fecal matter. If you haven’t had the pictured product yet, it tastes exactly like what it resembles– glazed pooplet souffle.

This is a brilliant attempt to improve margins by selling human (animal/alien?) waste to the Drunk/Stoned market, which is known to be both price and taste insensitive. We are still trying to unravel whether Domino’s is making money coming and going, being paid to take the waste and then selling the processed waste to their customers. Either way we are attracted to what may be a delicious high margin business model for the entire food industry.

It is difficult to ascertain how successful Domino’s efforts have been at this time so if you have any experience with or knowledge of their current or future fecal delivery platforms, please share it within the comments below.

One of three teenagers charged with attempting to rob illusionist David Copperfield as he left a performance has pleaded guilty.
…
Copperfield, 50, and two female assistants were walking from the Kravis Center to their tour bus when they were approached by the teens April 23. The assistants handed over money and a cellphone, but the illusionist turned his pockets inside out to reveal nothing, although he was carrying his passport, wallet and cell phone.

“He said in depositions that he had things on him, but it wasn’t difficult to make it seem like there was nothing there,” prosecutor Sherri Collins said.

-From Copperfield Tricks Thief on CNN.com

Copperfield may be pulling down $10’s of millions per year from but he could make far more as a Chief Magic Officer at a hedge fund or as a CMO on retainer for multiple funds. What would it be worth for Amaranth to have been able to say, when presented with massive losses, “Are you sure about that?”, at which point investors would recheck and the massive losses would have disappeared.

Or take Jeffrey Epstein, of “manage private money to make billions so I can have Eastern European sex slaves and also have Palm Beach teenagers massage me for cash” fame, who is charged with felonies related to soliciting teenage girls for sex. A Chief Magic Officer could make those charges suddenly vanish. (Apparently he does have a CMO because the charges and bail were amazingly light)

Le Nature’s was a company which focused entirely on its CMO core competency. How else can you turn $30mm of revenues into $300mm of revenues and make the founder millions in the process?

Recommendation: Firms of all stripes can benefit from beefing up their executive team with a Chief Magic Officer and a couple of tastefully attractive assistants. Avoid the “For the same reason you should believe a hundred dollar bill is no more than one hundred pennies!” variety.

I have an idea with a huge market, a totally underpenetrated if not virginal market, which would control the most important component of most business models.

MySpace was bought by Fox (NYSE: NWS) last year for $580mm. Youtube was recently bought by Google (NASD: GOOG) for $1.6bn. Plenty of Fish is pulling $5-10mm per year in topline with a guy, his gf and a couple of servers in their basement. eBay (NASD: EBAY) plods along without having done anything new in half a dozen years, basically living off it, while Friendster had it, and then failed to detonate it at the right time. None of these entities offer anything that can’t be or hasn’t been replicated by dozens of pretenders and assorted Indians in Bangalore.

What is the key ingredient these successes have which the failures strewn on the road behind them lack? Critical mass.

The best way to make money in today’s world bar none would be to become a supplier of critical mass. Companies thrive on reaching the point at which they have such a base of customers that use their services that their services become an order of magnitude more valuable to every marginal customer than their competitors’ services which lack critical mass. So why not supply this input which is so crucial to success?

• Fact: Most ideas hinge upon “getting critical mass.” For most business models this is achieved in the 18th month of projections, or the Null Set month of reality. This ensures that demand would be high.
• Fact: Critical mass is cheap to manufacture, requiring only one critical mass machine based on a shifting flywheel design, no associated ongoing capex, no labor, no operating costs. This insures that the cost would be low.
• Fact: Critical mass is an intangible if not entirely asbtract concept. This ensures that achievable supply may be infinite (or non-existent).

Recommendation: Supplying critical mass is an extremely attractive business due to the high demand (no substitutes, mission critical input), low fixed costs, and marginal costs of zero. The key to becoming an effective supplier of critical mass is getting large enough that everyone will go to you as a supplier of critical mass. We expect that after building your own critical mass machine or using the design we depict above, this would happen roughly 18 months into the life of your startup firm.

You want to know how to commit corporate fraud? Gregory Podlucky, founder of Le Nature’s / evangelist / genius, shows how to get it done. A little background, Le Nature’s is a bottled water company, based in Pennsylania that was about to be sold for $1.2bn until all this came out. This story is not getting any coverage despite being a huge fraud and an even huger source of absurdity.

WTAE Channel 4’s news exchange partners at the Tribune Review reported Podlucky was escorted out of the building last week, and the locks were changed.

…

Mr. Podlucky was evicted Oct. 27 after the company’s minority shareholders presented evidence of widespread accounting fraud and document destruction implicating Mr. Podlucky.

…

Le-Nature’s “reported revenue of $275 million to the outside world when it had [revenue of] $32 million,” Mr. Basta said.

…

the custodian found the situation at the company “far worse than imagined” when it took control. He cited “widespread document destruction” at a company that kept two sets of books and has less than $1 million in cash on hand. Le-Nature’s has nearly $750 million in bank and bond debt, lease obligations and other liabilities.

…

two safes were found at the company that contained watches, jewelry and a considerable amount of cash

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“We’re in a bit of a corporate governance mess,” Mr. Basta [incoming custodian CEO] said.

…

LeNature’s was sued earlier this year by two investment groups, George K. Baum Capital Partners and S.W. Pelham Fund, which had invested $13 million in the company as part of LeNature’s expansion plans, which included construction of a plant in Arizona and plans for a third in Florida.

…

LeNature’s also is accused of “fraudulently inducing” a lending company to loan it $25 million for the purchase of equipment for its proposed Florida plant, according to Strine. The money, according to the judge’s order, was placed with an equipment manufacturer.

Then using forged documents, LeNature’s got the equipment company to transfer more than $20 million of the loan to LeNature accounts, Strine said.

Strine also found evidence that LeNature “intentionally doctored” minutes of a board meeting.

…

In its lawsuit, Baum and Pelham demanded an accounting of whether any corporate funds were used in the purchase of land for Podlucky’s proposed Grace Community Church of the Valley in Ligonier.

The land was purchased through Missy’s Place Foundation, named after Podlucky’s late daughter, Melissa. Tax records indicate that the company contributed $440,000 to the foundation.

and my favorite part

The firm, founded in 1989, was up for sale last November, but Podlucky rejected a $1.2 billion offer and refused to allow potential buyers to inspect the company’s records before making an offer.

You know how I know you are gay committing widespread corporate fraud? You don’t let me see your books when I am a bidding on your assets. Also, having your VP and your legal counsel threaten random bloggers who write negatively about your product is never a good sign either. It sounds like there is a lot more bizarre stuff going on with this case than what has been released in the wire reports, so if you know anything else of amusement value please post it in the comments or email it to johnnydebacle@gmail.com.

Snippets compiled from ThePittsburghChannel.com, PittsburghLive.com, Post-Gazette.com and the WSJ. Also the WSJ has a Le Nature’s entry on its Law blog.

Watching Sunday night football, I saw an ad which exhorted Pfizer’s (NYSE: PFE)) BENGAY’s deep, penetrating heat. I don’t use the product, I’ve never bought it and I couldn’t believe that this unfortunately named product could be so consciously compounding its problem. This is akin to Richard Army’s decision to be referred to as Dick, with no irony. Actual Marketing for Ben Gay:

BENGAY® patches and creams target deep, penetrating heat right at the source of your pain so you can get the relief you need.

I can only imagine that the heavy suggestive nature of the subtext is intentional. What market are they going for? And what copy did they turn down in favor of the above?

BENGAY® bends over backpain, until your body reaches a climax of relief.

BENGAY® fills every crevice of your body with hot creamy soothing power.

You will enjoy BENGAY® patches and creams spread all over your old achey body. Not that there is anything wrong with that.

This post is sponsored by ReviewMe.

ReviewMe is a service created by Text-Link-Ads founder Patrick Gavin to offer advertising within blog posts. I don’t mean contextual ads like those offered by Google or Yahoo, I mean actual content created by the authors of a site that is written purposely to exclaim the delicious taste of Lucky Strike cigarettes or the powerful advertising platform that ReviewMe will be.

And now I will tell you why I am short this very concept.

It’s a simple process to get paid to review something.

1. You submit your site to ReviewMe, filling in a brief form containing details about your site.
2. They approve your site and list it on their marketplace.
3. SiteX.com or Service Z browses the marketplace and decides that your site would be perfect to review their product.
4. You get a notice that SiteX.com or Service Z wants you to write a review of them on your blog. You accept the proposal.
5. You have 48 hours to write 200 words about SiteX.com or Service Z and place it on your site and you will be paid 50% of whatever they paid ReviewMe.

But they pay you TO write on something not for WHAT your something says. So they are paying LoS $50 to give the LoS subscriber base the recommendation to SHORT them along with the entire Web 2.0 Index. They just paid me to write that! Genius or Madness? I would definitely opt for the latter.

From their FAQ:

Can I require a positive review?

We do not allow advertisers to require a positive review. The vast majority of reviews are measuredly positive, although many do contain constructive criticism. We view this as a bonus: how else can you quickly and cheaply get feedback on a product or service from influencers?

ReviewMe pays money for people to selectively write from the gut on a product, which is the way things should be. What business worth investing in does things the way they should be? That whole premise runs counter to everything we have learned from the Satan’s Portfolio Theory of Investing, namely that the best way to make money is to make/produce/offer products with the least amount of ethics possible. By these standards, ReviewMe is set to underperform the market and we recommend backing up the short truck.

Clearly, there are still a lot of kinks to be worked out for piganol to be a viable alternative to traditional fossil fuels, but we are cautiously optimistic. This is only a prototype design, but fuel efficiency is reported to be quite good, as is the bacon byproduct (I had some).

As you can see there are some tradeoffs.

The fuel tank is larger than you would expect on such a vehicle and is now a mesh wire cage rather than a fully enclosed tank. This presents an opportunity for vehicles to get into accidents when their pigs get snagged on an incoming vehicle; it’s possible that this could be fixed by dismembering all the pigs but this revision has not yet been incorporated into the design.

The pigs squeal creating noise pollution. We are old school so we don’t see the exchange of one kind of pollution (green house) for another (noise) as a net benefit to society. Pollution is pollution.

Recommendation: Currently, we put piganol as a low probability to become a viable alternative to traditional fossil fuels, but we will continue to monitor piganol, sheepanol and and other live-animal-in-cages fuel sources. There are ways to position your portfolio to benefit from traction gained by piganol without engendering the huge risk associated with a not-yet adopted future technology. The pig byproducts markets will benefit from increased prices when/if piganol takes off. In this space, we recommend Bacon for the strength of its fundamentals and its ability to effectively complement lettuce and tomatoes, an overlooked component of its ability to grow earnings. We see Bacon as a low risk investment with moderate upside, allowing even the most cautious investor a way to play piganol.

Market values of popular candies, serving size is “fun size” unless noted otherwise, based on actual market trading.* Does not include any candy broker fees or other transaction costs.

SKITTLES : 2.9 MILKY WAYS
SNICKERS : 15 units of CANDY CORN
CHARLESTON CHEW : 0.46 SNICKERS
ROLO’s : 0.7 SKITTLES
APPLE : 1/30 of a SNICKERS
M&M’s : 1.3 CHARLESTON CHEW’s
M&M’s : 1.01 PEANUT M&M’s
REESES PIECES : 0.6 SKITTLES
5 GUMMY BEARS : 7 units of CANDY CORN
KIT-KAT : 11 units of CANDY CORN
NESTLE CRUNCH : 2 SNICKERS
FUN-DIP : 3g of CRACK
HERSHEY’S MILK CHOCOLATE BAR : 20 APPLES
THREE MUSKETEERS : 0.20 SOURPATCH KIDS
SWEDISH FISH : 0.78 SOURPATCH KIDS
POP ROCKS : 0.30 FUN-DIP’s
SMARTIES : 4 units of CANDY CORN
TOBLERONE : 2 APPLES
REESES PEANUT BUTTER CUPS : 95 MOUNDS
Oh HENRY : 4.5 units of CANDY CORN(3-6 bid-ask spread)

*We will update this based on current market data. Updated 11/2 1:25PM

When my kids get back from trick-or-treating, you can bet they will have countless candy bars of a variety that they never choose to consume on their own. For my money, the worst of these is the Charleston Chew. While Tootsie Roll Industries Inc., the company that makes this confectionary abomination, produces many delights and is a model American business, their Charleston Chew is a crime against dentistry.

I have never willingly purchased a Charleston Chew, and I’m not aware of ever observing anyone buying one for their own consumption. But rest assured, folks across America will be shoveling them into trick-or-treaters’ bags.

Perhaps, you might say, it is just that people are taking the opportunity that Halloween offers to dispose of a menace. Rather than consume the Chews themselves, individuals foist them on unsuspecting youngsters.

-From a piece on Halloween by Kevin Hassett on Bloomberg (no link)

This is a clear case of moral hazard, where the dispensers of candy treats do not bear the full cost of their decision to dispense the tasty Chew during Halloween, namely the impact on the dental bills of the consuming children’s parents. But this report reveals another trend we find to be compelling, and a potentially delicious investing opportunity — the perpetual undervaluing of the Charleston Chew candy bar.

CC has some of the most desirable attributes of a candy asset:

• Medium width milk chocolate coating
• Artificial vanilla-mallow alloy filling
• Cross-selling opportunities (selling vanilla-malloy alloy to chocolate lovers, vice versa)
• Above industry avg SPCC (sugar per cubic centimeter)
• Freezability which increases the size of market demand for CC (people who like their candy assets frozen)

Despite this, Kevin Hasset heaps scorn upon the Charleston Chew, scorn which would have been unthinkable in CC’s heyday. How will the Halloween market react to the Chew? And how does one properly play the Chew?

Recommendation: This apparent dip in CC’s popularity without any corresponding dip in the core value of its assets are combining with temporarily distorted market forces (halloween, moral hazard) as an opportunity to pick up Charleston Chews on the cheap. Currently trading at 0.46 Snickers, we think CC is a great value at these levels, and we recommend accumulating CC at these levels. See our related report on Candy Asset Exchange Rates.

The US has been fighting a quixotic war against drugs for ages now, focusing on tougher penalties for both dealers and users and targeting the supply in a global game of cat (e.g. DEA) and mouse bigger cat(e.g. drug dealers). The only things which have been accomplished are hollow political “victories”, a huge expenditure of public money and an epic waste of limited police resources. A persistent suggested alternative is to legalize drugs (and tax the sh*t out of them) since they don’t hurt anyone but the user anyway and most of the violent crime related to the drug trade only exists because it is illegal. It might also counter-intuitively reduce the use of drugs. Cigarettes have had so much sh*t taxed out of them that their use has been declining consistently — see it works!

Why stop with cigarettes and drugs? Everything illegal should be made legal and have the sh*t taxed out of it.

Suicide? Who does it hurt but me? Let me do it whenever I get that feeling, but be sure to tax the hell out of it. This is called turning a cost center (all the government expenditure associated with oppressing consumers who want to enjoy some suicide in the confines of their own home or the public’s bridges) into a huge profit center.

Murder is a crime and a horrible thing….but at what price is it a great deal for the Government? I work in a high stress environment and I would pay a tax to let me kill a homeless man with a shiv when the blood urge compels me. A human life has an assignable dollar value — tax me that value for taking one. This would better allocate murderable resources with murder demand.

Plus think of all the job creation which could come about! A whole new industry would be created because in order to collect the tax revenue generated by legalized crime, you’d have to be able to account for it. Governmental life valuations agencies, third party appraisors, a whole new subindustry would have to be built to support this initiative, leading to job creation.

Recommendation: This concept is still in the infant stage, and we are working internally to see how this can best make Government provide greater freedom and greater choice to its citizens.

Editor’s Note 10/31/2006: This is in state of revision due to constructive reader feedback, bear with us as we make this idea better and basically make it work.

Our Hungarian friend Anonymous emailed us this question:

When I come out of the [subway] station, there is always a middle aged man selling Boston Herald’s wearing a YANKEES hat. With such a cheap discretionary purchase, one that is marginal and dependent [on] conveniece and low transaction costs, why would anyone doing [that for a living] think it was wise to wear a Yankees hat? What would the equivalent be in business? It’s even worse because the Herald is such a rag that is often given away for free later in the day.

In a situation where you were closing a deal or pitching a fund, the only thing that would compare would be saying something like “I would love to bang your wife/husband….again” and then handing him/her a glossy shot of you banging his/her wife/husband. As for a comparable act in the greater business world, maybe a company with a catalog driven sales model putting a white powder in all their catalogs? Or Panda Express replacing their banner with a biohzard logo; this would also have a high social benefit. (Panda Express was the 47th largest chain in the US in terms of revenue in FY’05. Just think about how many cases of food poisoning that likely represents….)

Sample Probability Question for the CFA Exam

The probability that the CFA alone lands you a better job is 1.6%. The probability you will use skills you learned from the CFA (which you did not already possess or use in your job) in your future work is 4.8%. The probability that you pass the CFA is 70%. Calculate the probability that your time on the CFA is well spent and you shouldn’t be drinking more and studying less.

A) 17.2%
B) 4.442%
C) 4.443%
D) I have made a total mistake in where my life is headed and I need to rethink everything. It’s not this problem that I find hard, it’s waking up in the morning, staring at spreadsheets all day and living in the suck. I don’t even know where I end and my job begins. It’s like my nightmare relationship with a woman, except all the humiliation and feeling of ineptitude is not offset by sexual favors. I am trading my soul and my youth for a financial merit badge and a few golden shekels.

Explanation:

Based on the formula P (A | C or B |C) = P (A | C) + P (B | C) – P (AB | C), the correct answer is closet to the mean of B) and C), so you should answer with a symbol which was half B and half C. If filling in a bubble, be sure to fill in a half circle in both the B and C bubble. D is true but not correct. As a CFA holder it is important to be able to discern between what is true and what is correct; the subtlety between the two is what will define your ability to thrive in your chosen profession. This is testable material so be prepared to face it on the CFA exam and in the exam of life.

A year ago, I published a report entitled Is Russia a Place to Invest or a Place to Fear? which dealt with the rise of Russia as a popular destination for Western capital. The precis is as follows:

A common investing theme is that Russia is the place to put your money. Why?

Burgeoning middle class!!
Favorable demographics!!
Heavily educated human capital base from which to draw!!
More oil than T. Boone Pickens!!
Business friendly, and otherwise unfriendly, Dictator Tsar General-Secretary President Putin!!
Tradition of outlining and executing 3-5 year plans!!
Tradition of strongly protected property rights, economic openness and political stability!!
Literature with greats like Aleksandr Solzhenitsyn!!
And for the kids…GULAGS!!

Well sorry to be the turd in the blinchiki but Russia is jockeying to try and do the only thing they know to try and do: nuke the USA and rule the world. They don’t care about economic openness. They don’t care about working hard and they don’t believe in capitalism. They want three things, in no specific order.

Vodka.
World Domination.
To do evil.

Well, it took a year but the Ruskies found my article and posted it on the livejournal page of an alleged (by me) member of the Kremlin. The comments are mostly in cyrillic, but running some through babelfish led to this disconcerting discovery:

it is necessary to survive from the mind in order, after pursuing after the visibility of large dividentov, to pack money into vostanovleniye of the potential of the imperial militarism

Their plan is to use Long or Short Capital’s own dividend policy against us, and “pack money” into “the potential of the imperial militarism,” e.g. raze Long or Short and perhaps the Western World.

Recommendation: Short Long or Short?