Long or Short Capital

More magic from Steve Wynn — slightly delayed due to our summer escapades — on his 2Q09 conference call.

The Administration is more of a problem than they are of a help usually, if you read the headlines. Everyone is frightened to death about runaway inflation if these deficits are allowed to take place. The good news is the Senate seems to be slowing it down.
But we can’t see where it’s good for business to have that debt as a percentage of GDP go from 30% to 60% or 70%. That sort of makes us an emerging country. But maybe wiser heads will prevail and some of the things that are on the table, these amazing misunderstandings of how the system works, will get slowed down in Washington.
Right now, we are more afraid of Washington that we are the economy. We’ve got people on our backs saying don’t go to Las Vegas, which is preposterous. And people are beginning to ignore this kind of bombastic rhetoric from the White House and from the Administration, and that is encouraging.

Translation: Politicians suck and are doing their best to destroy American business.

My own feeling is the government of Macau will protect and so will the central government of Beijing and the regional government in Juhai at Guangdong province, at Guangzhou. The government will do a very enlightened and thoughtful job of protecting the interest of the citizens and the business enterprises that support the health of those businesses.
In America, we have a government that has decided that anybody that creates jobs must be bad, that the job creators should have a target painted on their back. What a remarkable misunderstanding of how the United States of America works. I tell you that that is not the case in Macau, and it’s not the case in the People’s Republic of China. And maybe we could all learn a lesson by watching what happens there.

Translation: I currently prefer to do business in a People’s Republic than the USA.

I think that the Encore tower when it debuts in a few months is going to give people a really clear insight as to what we will do next, and the level at which we will be operating in China. It is a great place to do business — really wonderful. None of the anxiety that we have at the present time in America.
I have been self insuring my employees, up to 40,000 of them, for 40 years. And everything I am reading about Obamacare is a train wreck. And I say that as an insurer — a train wreck.

Translation: No, seriously, I prefer the communist country.

We put Beyonce in here on the toughest weekend other than December 19th of the year. We did it on purpose. This is — conventions and stuff like that start the first part of August. We picked a real trough in the traditional revenue seasons. And so she is a special event as opposed to an ongoing entertainment event. And a remarkable, and as I said, lovely, lovely lady.
…
I should tell you that we own the life rights to the Bee Gees. And we’re working on a show about that. Garth Brooks was here as a friend. He didn’t charge. That was just a buddy singing. As a matter of fact, Garth is going to be here tonight to watch Beyonce with his wife, with Trisha Yearwood, and his three daughters — going to sit with me.
And I think that Garth Brooks is a stay-at-home dad, and take his kids to school every morning — he really does actually take his children to school every single morning — an extraordinary fellow, really extraordinary.

Translation: Please allow me the luxury of dropping a few names to remind you that I am richer and having a more interesting life than you.

Mr Juggles: “What do you think about X stock?”
JP Sales: “Oh, I am so sorry. We lost our internet analyst. He’s in bed.”

Mr Juggles: “What do you think about X stock?”
[Mr Juggles hears a bunch of typing, as in typing on a Bloomberg]
JP Sales: “It seems to be hitting the bottom now.”
Mr Juggles: “You’re just looking at the share price on your Bloomberg.”
JP Sales: “Yes, that’s true.”

Recommendation: Don’t talk to your Japanese SalesGuy(s) too often.

Corporate Speak: “No one in the marketplace knew how swiftly the housing market would fall — not the Federal Reserve, not the Treasury,” said Ted Eliopoulos, head of Calpers’s real-estate portfolio, in an interview.
Translation: I have just invested tons of money at the absolute top and lost 103% of what I put into the deals due to using recourse debt. I am a moron. I could not have predicted the housing market would fall. No one could have…other than Ron Paul, John Paulson, Robert Shiller, and Long or Short Capital.

Corporate Speak: “Could our margins go up? They could absolutely go up.” -CEO of Take-Two Interactive (NASDAQ: TTWO) on 12/16/08 conf call.

Translation: Have you noticed that we have lost money for the last four, seasonally strong holiday quarters? Our margins are definitely not going up.

Corporate Speak: “Moreover, I think we’re trying to emphasize that these times are indeed very uncertain. Without trying to sugar coat the story, because it’s not our nature. We feel really good about the position we’re in.” -CEO of TTWO
Translation: We are sugar coating our story and it is, in fact, our nature.

Corporate Speak: “I am qualified to be Senator of New York.” -Caroline Kennedy
Translation: My qualifications for this position include a fancy last name, not holding a full-time job, not holding any political office, and writing books for children. I am definitely not qualified to be Senator of New York.

Lam Sai-wing is the head of Hang Fung Gold Technology, a retail jewelry company based out of Hong Kong, famous for its Swisshorn Gold Palace. The WSJ caught up with him to talk about his golden romper room.

Corporate speak:

Building a gold toilet, I realized…would be like an investment, plus we could let people see it for an admission fee, and we could use it to launch our brand. [Besides gold prices were so low they could only go up; buying gold at $200 an ounce would hedge against inflation]

-Lam Sai-wing

Translation:

This was the perfect way for me to stoke my ego plus it was a sizable risky speculation in a commodity which, as a retail jewelry business, is not what we should be doing — another reason it was a great idea! I knew that if gold went up, I would look like a genius and likely get a nod from the Wall Street Journal who eats up these zany stories; if gold went down or stayed the same, I would look like the guy with the crazy big ego but I’d still be rocking a gilded room. A classic win-win situation for me, win-lose for the shareholders. It’s all in the game.

Corporate speak:

The toilet and the Guan Yin statue are the most valuable pieces[.] As for the toilet, that’s the cornerstone of our company[.] It’s an icon. It will never be taken apart.

-Lam Sai-wing

Translation:

As for the toilet, that’s my throne. It will be taken apart if the price is right.

In February, we pointed out Steve Wynn’s colorful and frank commentary on his company’s quarterly call. Today, we follow up with more from the CEO of Wynn (Nadaq: WYNN).

First, if you recall, Wynn issued $660mm of shares at $154 at the end of September after his stock had doubled in 6 months. Explaining his reasoning, he said at the time:
“No company gets to be worth twice as much in 60 days as it was before to any intelligent person, so when that happens, we take advantage of it.”

Smart. Now, one quarter later Wynn has repurchased 2.4 million shares. As he said on this quarter’s call:

“Look, we issued 4.4 million shares for 660 million and promptly distributed it, which was really nice for us shareholders. And a return of capital. We have now bought back at 50 or $60 a share [cheaper] those shares that we issued.”

Translation: You were idiots to buy my shares at $154. But I appreciate you selling them back to me at $95. Thank you.

Additionally, while most companies talk up their own business and exaggerate the prospects and profitability of the business, Wynn opts for honesty.

We report and talk about these EBITDA numbers with our chest puffed out as far as we can get it as an industry. I suppose it tells you how much money you can afford to pay in interest. But the public needs to understand that the profitability, the real profitability of these businesses are much, much less than these puffy EBITDA numbers. Interest expense is very large. And depreciation, I know office building guys and shopping center guys and apartment guys, they get to spend part of the depreciation. But, believe me, in my 40-year history and in the history of every other gaming company here, Kerkorian would agree with me. We spend depreciation. It is a real expense. And when you take the profitability of a hotel like the Venetian or Wynn or Bellagio or any of us it’s a much smaller number when you subtract depreciation and interest. And amortization. We have to pay back the people who lend us the money eventually. It’s a much smaller number. But I know the Wall Street folks, you all like to talk about EBITDA.

Translation: I don’t understand why you think my capital intensive company should be valued on metrics that exclude any measurement of capital intensity. I would use a different approach than you muppets, but then again, your approach is lining my pocket and I will restrict letting you know this explicitly such that no one will pick up on it except those who can parse my words with some kind of proprietary translation algorithm for corporate speak.

Mr. Moore said it was possible that Yahoo, in its race to compete with Google, was simply overoptimistic in its forecasts and too eager to appeal to investors. “You are expected to grow every quarter,” he said. “There is a law of large numbers. It just gets tougher and tougher to please the Street.”
-NYTimes article, Ad Sales Fall Short at Yahoo

Every day I hear some wannabe business guru citing The Law of Large Numbers. Listen to the 3Q’06 Google (NYSE: GOOG) conference call and you will not fail to hear the Law mentioned and referenced numerous times by Wall St analysts. However, in each instance, this is a case of silly business people trying to sound knowledgeable and failing miserably.

These empty suits are trying to describe the situation when a company’s increased size makes it more difficult for them to grow, perhaps because it has already penetrated most of its potential market. However, saying just that would be far too straightforward and they instead opt for convoluted and misguided jargon.

Here’s a mini-lesson, dumbed down for the target audience:

The Law of Large Numbers states that when taking a random sample from a population, the observed mean will converge towards the actual mean as the sample size increases. Dumbed down even further: you get better estimates from larger sample sizes. This is The Law of Large Numbers.

Recommendation: Short The Law of Large Numbers. Upgrade Eric Schmidt, CEO of Google, from “Sell on Extreme Arrogance” to “Hold”. After invoking The Law of Large Numbers on one of Google’s initial conference calls, he has changed his rhetoric to focus on The Law of Diminishing Returns, a more appropriate rule for the discussion.

Executives and companies love to obfuscate (see related research Translating Corporate Speak: Auto OEM’s and Translating Corporate Speak: MOVI & BBI). Since it’s hard to understand the real meaning of their statements, we have provided a handy translation. Here are the words of the Hewlett-Packard (NYSE: HPQ) Board of Directors run through our propietary translation algorithm.

Corporate speak:

HP used an unidentified private investigator, who in turn hired a contractor who used pretexting to obtain directors’ and reporters’ phone records.

Translation:
-HP’s Board hired a 3rd party to “pretext” a fellow Board member and reporters to whom they believed he was speaking. And by “pretext” they meant falsely impersonate. The 3rd party was hired to offload risk.
-The 3rd party firm, which was hired to falsely impersonate a Board member and reporters, wisely hired a 3rd party to perform this illegal task. This 3rd party (6th party?) was hired to offload risk.

Corporate speak:

[Patricia Dunn, Chairman of HP’s Board] said she only found out Wednesday night that investigators hired by HP had also used pretexting to gain access to reporters’ phone records.

Translation:
She only meant to illegally access the accounts of her fellow Board member and never intended to anger reporters for large, national newspapers who could end up forcing her resignation.

Corporate speak:

HP said a board committee investigating the matter was ‘advised by the committee’s outside counsel that the use of pretexting at the time of the investigation was not generally unlawful (except with respect to financial institutions), but such counsel could not confirm that the techniques’ of outside investigators ‘complied in all respects with applicable law.’

Translation:
Damn, that was definitely illegal. Let’s start blaming outside counsel.

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.

From a very earnest, deep-voiced P&G (PG) advertising executive on a recent conference call:

“When a girl starts menstruating, we want to be there…on the radio, in print, and on the web sites with relevant advertising.”

From a very earnest, eager McKinsey consultant:

“Now we’re focused on figuring out what it is about Metamucil that makes it so attractive.”

(Read GOOG, No Means Yes Baby Part 1)

Quiz: Place the two statements in chronological order.

Statement 1: Google (Related Reports) Letter to shareholders-

We will make decisions on the business fundamentals, not accounting considerations, and always with the long term welfare of our company and shareholders in mind. Although we may discuss long term trends in our business, we do not plan to give earnings guidance in the traditional sense. We are not able to predict our business within a narrow range for each quarter. We recognize that our duty is to advance our shareholders’ interests, and we believe that artificially creating short term target numbers serves our shareholders poorly. We would prefer not to be asked to make such predictions, and if asked we will respectfully decline. A management team distracted by a series of short term targets is as pointless as a dieter stepping on a scale every half hour.

Statement 2: Associated Press Story-

Google Inc. executives provided investment analysts with a bright outlook Thursday in a display of confidence that appeared aimed at defusing growth concerns raised by the search engine leader’s chief financial officer earlier this week.

Schmidt underscored his optimism at one point by saying Google someday might generate $100 billion in annual revenue as it expands into a variety of new advertising channels, including television, radio and publishing. The 7-year-old company’s revenue totaled $6.1 billion last year.

Analysts are apparently panting down the trail for some “hot Google action.” Our attention was piqued by reactions of leading sell-side analysts to Google (GOOG) CFO, George Reyes, at a recent Merrill Lynch investor conference.

Reyes initially commented that, Google is “getting to a point where the law of large numbers starts to take root…” He continued to say that “At the end of the day, growth will slow…” and that “We’re going to have to find other ways to monetize the business.”

The sell side responded with comments including:

“We don’t believe there is any new or faster slowdown in Google’s growth than what we have already modeled.”
-Safa Rashtchy at Piper Jaffray, who has an “outperform” on Google

“Our thesis, growth expectations, and implied value of $500 are unchanged.”
-Goldman Sachs’ Anthony Noto, who has an “outperform” rating on Google

“We believe comments made at a competitor’s conference this morning, by George Reyes, were likely not intended to reset investors’ expectations about growth prospects.”
-Oppenheimer’s Sasa Zorovic, who rates Google a “buy”

“I’d hit it.”
-Unnamed Analyst

Goldman Sachs’ Prescott R. Moncrief III upgraded Google to “Technically Legal” from “Legal.”

The general analyst sentiment abounds with Corporate Date Rape Logic:

GOOG, I know you want to take it slow, but I’ve had three shots of jagermeister, you look hot and I’m thinking that you and I have at least a couple more quarters of stellar growth. I’m talking 50-60% per quarter and a price target of $1400. I’ll tell you what — have a couple more sips of your Smirnoff Ice and we’ll try just the earnings tip — if it doesn’t feel right we’ll take your price target right back down.

Google responded to the above analysts with the following clarification in a written statement:

“…moreover, as we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels.”

One Goldman Sachs analyst, who answered Pres’ phone insisted “He’s busy with Yahoo at the moment. Wait this isn’t his wife, is it?” but then replied:

“Off the record, it’s clear that Google’s revenue growth rate has not declined over time and I don’t think she will have any difficulty maintaining growth rates on a percentage basis even as their revenues increase. My target price of $950 stands.”

Stay Tuned: We interview Prescott R. Moncrief III in Part 3.

This came across the wire yesterday.

Shares of home video rental chain Movie Gallery Inc rose nearly 8 percent on Thursday , two days after a data tracking firm forecast that the U.S. rental industry in 2006 would be “flat but strong.”

Let me translate what “flat but strong” means in this case and in all cases. It means flat. And it’s not surprising that today (the day after yesterday’s move up) shares of both Moviegallery (MOVI) and Blockbuster (BBI) have traded off about 5% each and are swiftly approaching their pre-“flat-but-strong” levels.

Here is an earlier post of Johnny’s on Moviegallery’s Stock Decline.

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

A number of online photo companies have recently been threatening to delete my photos if I don’t make a purchase. For instance, I received the following in an email from Kodak Easyshare:

We’re happy to store all your memories at the Kodak EasyShare Gallery, but because you haven’t made a purchase in the last 12 months, we may begin deleting stored images from your account. Don’t risk losing your photos!

Maybe I’m the exception but deleting my photos doesn’t qualify you for my bi-annual “happy to store your memories” award. In fact, I will probably send you an email telling you that I never plan to use your service again. Here was their response:

Thank you for contacting the KODAK EASYSHARE Gallery Customer Service Team.
We wanted to let you know that we’ve just received your message. A Customer Service representative will not respond to this email. [My emphasis]

What a followup! Thanks for emailing me to tell me you won’t be responding. And what, pray tell me, is the purpose of a customer service email if no one checks it!?! I appreciate your attention to my concerns; I will never purchase another Kodak product as long as I live.

Recommendation: Short Kodak. Short bad customer service. Short automated responses.