Long or Short Capital

We are reiterating our buy recommendation for Google (GOOG), following their release of Google Lucy (beta). Google Lucy (beta) is the latest in real time girlfriend simulation technology and is run by proprietary algorithms from a single server in Palo Alto. This latest offering is a disruptive technology aimed squarely at displacing women from the heterosexual romantic market.

Features:

Light from above shines on Google Lucy at all times

Provides social humping in the convenience of your own plane

Source: Dealbreaker.com.

On Net Neutrality:

To me it boils down to this:

The best employees at Yahoo, eBay, Google, and other major content providers are engineers.

The best employees at Comcast, Cox, SBC and other access providers are lobbyists.

For both of these types of companies, everyone else they hire is just good enough to support and monetize the work of their best employees.

–Derek Scruggs

Past Quotes Entirely Relevant to Investing

This report is gratis, Microsoft (MSFT) .

1. Change your name. Microsoft sounds like something that happens to me after too much El Tesoro Silver in the hot tub. Why not show your strength by fortifying your name with a masculine element, like Hard. To convey that you will no longer be an insular company, one narrowly focused on operating systems, video game systems, office software, server software, photo software, optical mice, keyboards, co-branded television stations, tablet computing, online search, video games, online content and personal finance software, you should consider an element that suggest a willingness to expand your focus more broadly, an element like Macro, which means “more broadly.” Macrohard.
2. Change the packaging of your products. Very few women buy your products, Mr. Ballmer, and you are missing out on their money, or as we like to call it “the Pink Dollar.” You may assume that the key to attracting the Pink Dollar is to improve the content of your offering or to tailor your content to women. WRONG! Substance matters little to the average female. Focus instead on the superficial aspects. Make all your packaging pink, and have a little bow. They eat this crap up. Something that has worked for us on occassion is to put in a little note that says “Sorry.” You don’t have to specify what you are sorry for. It’s important to note that while it’s tempting to enclose a $100 bill, this will only insult and irritate the average female consumer.
3. Social networking. You need to start developing your MyFortune500Space page so that it is cooler. AOL (TWX) is never going to be receptive to your advances until your profile is cooler than this.
4. Start releasing random, barely functional free products. People already have have calendars, finance sites, shareable spreadheets and instant messaging software, etc. Take it up a notch. There are 127mm people who have diabetes. What about digital insulin (beta)? Or P2P lasik treatment? Think of how many people could use something like that. Or what about a robot that gives people hugs for free?
5. Get it done.

I was eating in a pizzeria the other day, run by a family of Greeks, when I spotted my opportunity.

The people who don’t understand private equity think it’s just a matter of finding and buying X Corp*, levering up X Corp, doing a recapitalization to take a dividend 6 months later, underperforming, doing another dividend recap 6 months later, canceling your sponsor fees while doing a third dividend recap, then taking X Corp public while paying for Czech models to be taught how to count your money in French. But it’s about that and so much more. It’s about VALUE, and looking for value everywhere.

I perused the menu and listed the normal core competencies of a towny Greek pizzeria. Large Cheese pizza $9.95. Pepperoni pizza $10.95. Baklava $3.95. But then it struck me, buried under layers of sub-offerings, their calzones were horribly underpriced at $4.50. The basic cheese calzone was not dissimilar in caloric content, cheese density or sauce metrics from a small cheese pizza, yet it was priced at a 20% discount and placed in a non-strategic location on the menu. The spinach and cheese calzone was a higher margin product with tangible value-add to the end consumer through its superior health content.

I could see that it would be a slam dunk to realize value if I could get Nikos to spin off his non-core calzone assets; I would only have to properly structure the deal and wait. Unfortunately, I could also tell from the look in his eye that he wanted me to take on his spanikopita assets as well. This was obviously a dicey proposition. Spanikopita were difficult to market and historically a more labor intensive product that had little pricing power. But they were, in fact, tasty.

I decided I could take on the spanikopita assets, but only if he offered me an exclusive negotiating window. I was not going to let another investor swoop in and eat my pie after I had gotten this far, both in terms of my time and due diligence. Nikos consulted Constantin and had no problem granting this. I started putting out feeler offers of 4.5-5x EBITDA, and could sense that these Greeks were not financially savvy enough to understand fully how to extract value from their calzone assets and how much smarter I was than they were. A quick call to Bank of America and I had already gotten backing for 2.5 turns of senior secured leverage, and 2 turns of subordinated debt; I could practically smell triple digit levels of IRR. They accepted on the spot.

Another succesful day in the delicious life of private equity.

*X can be any noun, verb, conjunction, article or random combination of letters that may or may not be an entity which produces anything or even exists. It just doesn’t matter.

The wicked smart economists at Marginal Revolution have made a critical breakthrough, improving the CAPM model commonly used by financiers.

The Capital Asset Pricing Model specifies that the expected return on an asset is a function of the market rate of return plus another factor (“Beta”) for the covariance of that asset with the market portfolio. The intuition is that pro-cyclical assets are riskier and thus they must give you higher expected return. But I don’t buy the whole Beta bit, especially not for equity markets:
…
For risky equity assets in the United States, my preferred economic model is simple. Expected return equals seven. That is my model, “Seven.”

Here at Long Or Short, we don’t generally use CAPM due to our proprietary – and superior – 126 factor model. However, we sometimes use CAPM to see what the plebes are thinking and, in such cases, we will use a Beta of 1 and Expected Return of 7.

Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.

-Milton Friedman

Past Quotes Entirely Relevant to Investing

Banker hoes L-O-V-E Udon noodle soup because it’s just like them: An emaciated, white, bland peace of Tofu, surrounded by other Udon sisters waiting to be gulped down by someone with a severely suppressed palate.

-Anonymous from The Leveraged Sell-Out

Past Quotes Entirely Relevant to Investing

6’7″ English footballer Peter Crouch is heavily oversold by English fans who discount his fantastic nambly-pambly running style, his stork like touch and his dance moves. We expect that his contributions to England’s World Cup 2006 cause will put pressures on the shorts and launch Crouch to new highs on the strength of the broad-based global appeal of his classic dance moves, which have not been matched since John Roberts’ son busted a move at the White House (Click for related report, I’m Long Supreme Justice Dance Parties).

Due Diligence:

Watch the first video from slightly before the halfway mark, then follow with the second video.

Recommendation: Peter Crouch embodies long, and we recommend accumulating as much of him as possible. Concurrently, we recommend placing a trailing stop on your position, due to potential intermediate term volatility.

The Web 2.0 Conference in San Francisco has become a hotbed for entrepreneurs eager to separate venture capitalists from their cash. With business models dependent on flashy graphics and Google Adsense revenues, these startups often appear more like interesting features for existing products than standalone companies (Click for previous research on What is Web 2.0?). Still, innovation must continue and the forward-thinking Web 2.0 Conference organizers have sent out the call to begin defining the Web 3.0.

Long or Short sees no reason to look ahead only one generation. We have instead decided to begin defining and building the Web 8.0. Our new concepts will be a full 5.0 generations ahead of current thinking. Discounting the Web 8.0 at the prevailing web generation discount rate (10%) gives us a present generational value of Web 3.39

We recommend a long position in Web 8.0 with an expected return of 13% (= 0.39/3.0).

Please note that we are simultaneously downgrading the Web 2.0 Conference to Web 1.3 after finding out that the initial roster of speakers includes Jon Miller (AOL, a Web 1.0 company) and Arthur Sulzberger (NYTimes, a Paper 3.0 company).

Note that this post is still in Beta

Some of you may have heard that working at a hedge fund you can make “a lot of money”. Well it’s true. Now some of you might be saying to yourself: “Wow, how am I going to get a job at a hedge fund so I can make all that money?” which is a good question. But, there are a few of you who are more foresighted that are saying “Wow, how am I going to SPEND all that money?” And that’s really the more important question, because let me tell you, it’s not easy.

The first step you need to take to make sure you’re good at spending money is to properly categorize yourself, I believe there are two socio-economic groups which are important here: “Ballers” and “Mini-Ballers”.

1. You don’t have a savings account, just a HUGE checking account
2. You make use of private air travel
3. You have outrageously expensive clothes, all of which were given to you for free
4. You’re dating a smoking hot babe
5. You’ve never heard of a mini-baller

1. You choose to live paycheck to paycheck even though you have a six figure salary. You have a 1% money market savings account with a few thousand dollars, meanwhile you overdraft your checking account on a regular basis.
2. You buy your flights on expedia but you don’t like to, you use miles to upgrade to economy plus, you buy vodka tonics on the plane
3. You have outrageously expensive clothes, all of which you paid for and most of which you buy because you saw a mini-baller the previous night who was wearing that outfit and “getting it done”
4. You say “get it done” all the time. You’re not sure what this means, but you know its important, and when you say it . . . you mean it.
5. You aren’t dating a smoking hot babe but you want to, so on saturday nights you call your mediocre looking girl friends and ask them to help you get into Marquee hoping you can meet a hot babe there. You look at the liquor list and almost order Absolut, then you remember you’re here to get it done and so you pony up for the Goose. You always hit on the waitress and you always tip her over and above her 20% grat, then usually you go home with one of your mediocre friends. You like it, but you tell other mini-ballers that you regret it.
6. You refer to yourself as a mini-baller, you tell other dudes that you’re a mini-baller and suggest to them they start calling themself a mini-baller too.

As you can see, once you’ve established that you’re a mini-baller it’s important that you make some mini-baller friends. Then if you’re ever hesitating with a big purchase, you can count on one of them to lean over and tell you “dude, it would be so mini-baller if you got that done, chicks love that sh-t, get it done buddy”. And you’re off to the races . . .

Next week: How to Live The Jet Set Lifestyle.

There is not so much difference between the ideologies of capitalism and communism, you know. The difference is simple. Capitalism is the exploitation of man by man, and Communism is the reverse.

-John Gardner, in his book The Man from Barbarossa

Past Quotes Entirely Relevant to Investing

Long or Short Capital has been conforming to Generally Accepted Accounting Principles (or GAAP) for all financial disclosures up through May 2006. However, beginning in June 2006, Long or Short Capital will be changing to Seldom Accepted Accounting Principles (or SAAP). While we acknowledge that most of our readers and subscriberholders invest most commonly in companies using GAAP, we have come to the conclusion that our unusual equity structure requires SAAP to more accurately portray our financial strength. Our previously stated financials are not to be relied upon. We will be issuing new guidance shortly which we expect will be signficantly higher than past results.

Our statements will continue to be audited by the Cambridge, MA based accountancy Dewey, Cheetham, & Howe.

I have read two articles today, which is my daily limit.

Linked from Going Private was this article on hedge fund and private equity shops investing in big budget movies. The second article I found while Googling a rationale for the existence of the catastophe bond .

The articles contained these excerpts respectively. 1st excerpt:

For its part, companies such as Virtual see Hollywood as a potentially lucrative place to diversify investment portfolios. And Virtual is pursing that strategy in a significant way, investing in Leonardo DiCaprio’s “Blood Diamond,” Brad Pitt’s “The Assassination of Jesse James,” and George Clooney’s “The Good German.”

……

As a result, Virtual covered about $125 million, or half of the $250 million it should cost to make and market “Poseidon” around the world. At the current rate of ticket sales, Virtual could end up with $75 million or so from “Poseidon” — meaning it could lose more than $50 million on the movie, said two people familiar with the film’s finances. A Stark executive disputed that worst-case scenario and also said its Hollywood investments should not be judged on the domestic box office of one movie.

2nd excerpt:

Advantages of [catastrophe] bonds are that they are not closely linked with the stock market or economic conditions and offer significant attractions to investors. For example, for the same level of risk, investors can usually obtain a higher yield with CAT bonds relative to alternative investments. Another benefit is that the insurance risk securitization of CATs shows no correlation with equities or corporate bonds, meaning they’d provide a good diversification of risks.

I can provide some other investments that would provide attractive diversification for these companies — the roulette wheel. Some secondary thoughts: If you have a proprietary algorithm that picks Poseidon as a likely hit, it’s time to get a a new algorithm. Libor+230 is an insanely low risk premium for the chance of losing all your money if Mexico has an Earthquake in the next three years; to compare the market pricing for secured near investment grade debt is L+220. If a Mexican offered me that deal, I’d build a fence around him on the spot.

There is lots of things to take into account? Do you even know what your EBITDA is? EARNINGS BEFORE INTEREST TAXES DEPRECIATION AND AMORTIZATION? Gives the true picture of a company’s profitability.

-Paulie Walnuts, Season 6 Episode 4 of the Sopranos

Past Quotes Entirely Relevant to Investing