Long or Short Capital

Comrade Kaiser-

Nice reply on how Russia’s recent successes will doubtlessly continue…forever. I mean what trend doesn’t continue on unabated? That was the beauty of the investments my granpappy made in Argentina in 1925, it just kept on going up because where else would it go? And that time in 1979 that pa came home with a flatbed truck full of 1000oz silver bricks which he had bought at $30/oz. The fortune he made selling it all 10 years later (as the trend continued unbroken upward) allowed him to buy a hovercraft. And don’t forget that time in the summer of ’94, when I put my lifesavings in Russian bonds. I love the ruble!

The rule of “Trends Never End” rules. But shouldn’t you look at the relative Russia investment situation now, and decide whether it’s fairly valued or not, or whether there are inherent risks, such as the Russian proclivity for totaltarian rule or their love for vodka, that are not being fully considered or accurately built into prices?

-JD

The CFO of Burger King is named Cedric Burgher. Link BK CFO. This incredibly true truth is even more incredible when you come to grips with the fact that the suffix for Burger King employee emails is @whopper.com.

The founder and CEO of McDonald’s is not the Hamburgler as some people mistakenly presume. Although, it is true that he did attempt to “hamburgle” McD’s in a failed early 1980’s LBO.

1) Order cheese pizza from your finest local supplier.
2) Put it in a bowl.
3) Eat with spoons.

Serves 2.

How does one play Monopoly with real money and a functioning capital market with an interest rate based on the “Trip Around the Board” unit of time all the while maintaining the quirky board specific events?

This is our project.

Long or Short Capital has established these preliminary rules following our initial diligence.

1. The game should use some set a ratio as an exchange rate of dollars to monopoly dollars as an initial buy-in. Players should not be able to exchange money in or out of the game until the game is finished.
2. Players would have to start with very little money forcing them to have to raise capital for anything but the most marginal investments.
3. All asset transactions as well as mergers are permitted, with the stipulation that terms under which all transactions occur are upheld and honored.
4. There should be at least 6 players, 2 of which will be bankers (see below).
5. The game would definitely need one permanent banker, perhas two to prevent monopolistic banking practices. The bankers would have to be judged by the same scale as the players –profits generated through savvy banking. The wrinkle is that you would probably have to judge one banker’s profit making against the others.
6. Game Duration: Time delimited or turn delimited or until one player has a made amount of money or until only one non-banker player is left standing?

Comments from Original Post

Long or Short Capital will continue to revise the game by thinking “Big Thoughts” and by listening to input from both readers and the illiterate, until a proper Capital Market Monopoly Board Game (CMMBG) has been resolved. Then we we will host a game. Possibly online and to a flurry of lawsuits.

This will be a point/counterpoint analysis. Kaiser, unbeknownst to him until now and fresh off a trip to Germany, will supply the counterpoint.

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.

It is an entire nation which channels the ethos of lazy ammoral kleptocracy. When I was there 11 years ago, my main takeaway is that if there is one redeeming quality about Russia it is the null set. When I have studied Russia, it has seemed like a good place to be unhappy, or to be purged, or to be evil, or to die from nuclear fallout, or to have your loans defaulted on and your money swindled.

And Russia is not a place to invest money for these very same reasons. They don’t have ethics. They refuse to live without corruption which would make a Chinese Judge blush. They are both willing and able to expropriate any foreign direct investment. And don’t think they aren’t still cooking up ways to drop Cuban paratroopes into small unsuspecting Coloradan towns.

Russia is a place to FEAR. Avoid buying stocks, bonds, derivatives and any other security or financial interest which are dependent upon Russian assets….Unless you look forward to waking up a year or two for now and opening your personal portfolio account and wondering “Hey where did my Gazprom go!” as you look at a ‘Thank you Comrade’ note signed “Sincerely, V Putin.”

Recommendation: Ask your financial advisor about low cost index funds which track the Moscow Stock exchange. Then, “do not buy” them.

Pirates.

Piracy used to be an important industry providing raping and pillaging services for emerging market economies and sovereign states. Fine countries such as Trinidad and Tobago were built on the pirate economy. Can you imagine England if pirates hadn’t been around? It would now be the United Kingdom of Mexico and London would be New Seville, had it not been for an enterprising fleet of bucaneers.

Pirate Opportunities

Over the past couple decades, shipping companies, luxury cruiselines and international boating have all seen large increases in net profits. However, there has not been a commensurate rise in piratery.

Piratery provides a compelling ROI for the entrepeneurial seaman. For an investment of $20-30k in a boat, some deckhands and rental cutlasses, a pirate captain can realize a 50-60% ROI in one year. Of course, this only holds true given the proper locale. For example, the coast of Somalia is a competitive, if fragmented, market. Investing there is a bad risk reward proposition for a variety of reasons. See Somali Pirates Out of Control or Somali Pirates Free Ship After Month of Captivity or Pirates Attack Cruisership or the free daily paper’s headline from yesterday simply titled “ARGH!” for more details.

But setting up a lair in a place like Isla Margarita, located off the northern coast of Venenzuela, would be an environment with relatively low piratery penetration but proximity to major cruiseline and OPEC oil routes. An added bonus, Isla Margarita is where non-pirate berserker Lope de Aguirre reached his crescendo.

You need to strike while the iron is hot and not be heedin any naysayers or scallywags. Piratery is your path to financial freedom. You’ll be flying the skull & crossbones over a Jupiter, FL mansion in no time.

Recommendation: Depending on your investing horizon, commence pirate raids on commercial trading routes immediately or ask your financial advisor about low cost index funds which track the piratery index. Swig a few shots of Mount Gay, if need be.

People who decry the fact that businesses are in business “just to make money” seldom understand the implications of what they are saying. You make money by doing what other people want, not what you want.

This is Thomas Sowell’s succinct and accurate rebuttal to all those who decry the manifold splendor of capitalism and stuff. Amazing.

But this statement is equally true about monkeys throwing feces. Especially when I change the words.

People who decry the fact that monkeys who throw feces are throwing feces “just to throw feces” seldom understand the implications of what they are saying. Monkeys who throw feces throw feces by doing what other monkeys want, not what they want.

This Marketwatch headline just caught my attention.

Game over for Chinese Internet game operators?

I have no opinion as to the veracity of that statement, but it got me thinking: why do these silly little journalists even bother hiding the fact that they don’t actually do any sort of journalistic research? Instead they just take the subject matter for an article, figure out a pun title and and have a team of monkeys* fill the rest.

Do newspaper firms even do old-school style journalism anymore? Why not shift the paradigm overtly and stop paying lip service to research? Just report the world based on low hanging puns. Think of the brave new world we could create! Everything reported would be thin slice reactions based not on events but the visceral vocabularic responses which they inspire.

You wake up, put on your mumu and go straight to marketwatch.com to see the latest news:

RIMM results are Berry Good

Lack of Toy Sales Spell ‘Dr Doom’ for Marvel

When I buy a newspaper company, or, more likely am handed one for free as I walk up from the subway, it’s going to be amazing. Investors will thank me, ladies will love me. Truth is much harder to produce and less marketable than superficial entertainment.

Recommendation: A savvy private equity firm should pick-up some newspapers on the cheap and apply the Game Over Paradigm; it would be Game Over for the competition.

Mr Juggles advised on this article

* People know monkeys for their proclivity for eating bananas and flinging their feces, but few know of the unparallelled productivity which a properly incented monkey is capable of. A few bananas go a long way

I believe strongly in applying six sigma to everything, from ironing my dress shirts to creating this website. But, there is a limit to how much efficiency improvement I can squeeze out of my creative stone and past that limit I have to look to source my content from other channels, even overseas. Thus, my official position on outsourcing is brought to you by Jack from EZGone in New Delhi whom I hired through elance.com. He has has prepared a series of short speeches on outsourcing, which he has injected with humor, rhetoric and truth, according to my exacting specifications. What follows is Part 1. Read it aloud with a Brtish accent for maximum effect.

Outsourcing Outsourcing: What Is Outsourcing And Why It Is Growing?

Friends, I hope that I am not sounding vague to some of you. I know, I know most of my learned audience knows about outsourcing, but let me give it a try.

In purely religious terms, it could be seen as one of believers and non-believers. And both sides, there is no doubt in my mind, have very strong, logical arguments as why they are believer and non-believer.

Friends, at the outset, let me make clear to you that I belong to the camp of believers and I would like to focus on a crucial strand of this outsourcing business — why it is great for firms who believe in outsourcing and actually do it.

The making of things was outsourced decades ago to foreign nations such as India, China, Japan, Philippines etc. Today, we Americans are hardly aware that most of the things that we see today around us, like our TVs, computers, cell phones, underwear, dentures, cartoons, financial analysis, investment advice etc., must come from somewhere, but we have no real clue who is making them, or how. We are really busy in hiking, trekking, vacationing or any other activities of our choice that we hardly get time to consider these things seriously, and perhaps, we have enough trouble figuring out how to remove the packaging.

Experts believe that even humor is being outsourced.

Perhaps, the modern day hip-hop youngsters won’t believe this, but there was a time when Americans actually made physical things called “products” right here in America. Once upon a time, right here, workers would go to large grimy and encrusted buildings called “factories,” where they would take a raw material such as iron ore and perform industrial acts on it, such as “forging” and “smelting” to make their own things. And, as you can easily imagine, by the end of the day, they smelt terrible (not perfumed) but they were satisfied that they had turned the ore into something useful, for example a bicycle.

But now, we don’t make anything. Rather, we have learned, intelligently, how to get the things done at much lower cost and much faster speed. Credit, of course goes to outsourcing.

Dear Johnny,

Investingly,
Your theoretical female reader

Dear Reader chick,

It looks like this.

-JD

Recommendation: Short Moviegallery, Long Mammals.

The stock secured loan to Phillip Bennett mentioned in my Lending No-No article was, in fact, unhedged, according to this RefCo article in the Journal.

The Refco stock Mr. Bennett pledged as collateral for the loan is now nearly worthless, damaging Bawag’s own financial situation. Earlier this week, ratings firm Moody’s Investors Service said the loan exposure represents a material proportion of the bank’s core equity and more than two times Bawag’s estimated 2005 earnings. Moody’s is concerned that the potential loss content of this exposure could negatively affect the bank’s capitalization.”

Given what should have been known by the lender, that may have been the worst loan in modern Western World history. At some point, I’m going to have take nominations for worst loans ever. I would definitely count the 57 different Chinese banks that lent money to one guy (which he used to speculatively buy apartments in Hong Kong) as one loan.

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.

“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.