Long or Short Capital

Submitted by reader MGW

The vatican has issued a new list of seven deadly sins. The updated sins include:

1. “Bioethical” violations such as birth control
2. “Morally dubious” experiments such as stem cell research
3. Drug abuse
4. Polluting the environment
5. Contributing to widening divide between rich and poor
6. Excessive wealth
7. Creating poverty

Recommendation: The publication of these new sins has led us to upgrade all of the firms listed in Satan’s Portfolio to date from “Yes” to “Double Down”. As these firms surely commit at least one of these new sins, we expect they will realize significant previously unbudgeted “sinergies”, boosting valuations across the whole class.

Also, we are downgrading Wall Street firms to “Manual” down from “Spit” in light of the fact that they appear to be reformed sinners, the kind which have no place in Satan’s portfolio. Though they once “contributed to the widening divide between rich and poor” and created both “excessive wealth” (think Stephen Schwarzman) while also “creating poverty” (think everything they do to other people who aren’t either them or Stephen Schwarzman), their recent sub-prime losses have resulted in them actually narrowing the divide between rich and poor while destroying a whole lot of excessive wealth.

Here is an explanation of Johnny’s Satan’s Portfolio Investing Thesis.

Rick’s Cabaret (NASDAQ: RICK)

Rick’s Caberet is a $50mm market cap company which operates strip joints gentlemen’s clubs aimed at Wall Street and at executives at large. The firm’s online division owns/operates “adult entertainment Internet Web sites, including xxxPassword.com that features adult content; CouplesTouch.com, a personals site for those in the swinging lifestyle; and NaughtyBids.com, an online adult auction site that contains consumer-initiated auctions for items, such as adult videos, apparel, photo sets, adult paraphernalia, and other erotica”.

Pulled directly from the last RICK conference call: “I would like to invite everyone out tonight to our New York City club for our Due Diligence Ball at 50 West 33rd in New York.” A publicly traded strip club and porn supplier which offers investors a “Due Diligence Ball”? Satan says “Giggity giggity…alright.”

PetroChina (NYSE: PTR)

Does your company ruthlessly seek out oil assets in the ickiest places in the world? Check. Did Harvard’s Corporation Committee on Shareholder Responsibility recommend that the Harvard Management Company divest itself of PTR? Check. Does your company look the other way when it comes to genocide in Darfur? Check. Does your company have the explicit backing and support of the world’s 2nd most ruthless government? Check. Welcome to Satan’s portfolio.

Textron (NYSE: TXT)

Textron is an $11 billion market cap firm who “primarily manufactures general aviation aircraft worldwide” but the Bell segment supplies and makes “helicopters [and] weapons, airborne and ground-based surveillance systems, aircraft landing systems, hovercraft, search and rescue vessels, armored vehicles and turrets, reciprocating piston aircraft engines, aircraft and missile control actuators.” And for the kids, Clusterbombs!

Sometimes we don’t have to make the call, the public will do it for us. In this case, Brown students staging die-ins outside Textron’s offices let us know exactly what Textron is all about. One of the protesters signs leadingly asked “Are you in the business of killing?” The answer is yes, and the lucrative blood of innocents is what makes Satan’s Portfolio’s returns so juicy.

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.”

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.

Since last January, we have put forth the Satan’s Portfolio theory of investing (see related series of articles Satan’s Portfolio), which follows this:

Ethical and socially responsible investing has made a lot of buzz as a way of dollar voting for a better world. My instinct as an investor says that those fund flows are going the wrong way and their returns since inception back up my argument.

The more profitable questions to answer are: What does Satan invest in? How does he fund evil? Satan’s Portfolio will track the perfomance of the stocks which Mephistocles is proud to put his money into, namely, companies who benefit from suffering, death, war, tobacco, nutrasweet and fraud.

Today’s WSJ has an article (Sub required) which states that the PAX fund, the negative model for Satan’s Portfolio, is going to look to put more sin into its sinvesting:

Now, Pax wants to tone down that objective. Shareholders in August were sent a proxy statement to vote on whether to eliminate a zero-tolerance policy specifically against alcohol and gambling. The change would enable Pax to selectively invest in these industries based on a company’s “entire social-responsibility profile.”

But in other areas, the fund is trying to add new ways to screen out companies it might disapprove of. Shareholders will also vote on whether fund managers should consider a company’s record on environmental issues, for instance.

These shifts illustrate how SRI funds are trying to tweak their strategies amid sagging returns. SRI investors are sometimes willing to exchange a few points of returns for socially conscious stock picking.

…

By contrast, funds like Vice Fund — which actively seeks out sin stocks — have handily beaten most SRI funds recently. In the past three years, Vice Fund has posted a 20% average annual return.

A host of other SRI funds are also fiddling with their approaches. In December, Domini Social Investments LLC will abandon its traditional approach of passively tracking an index of socially responsible companies in its Domini Social Equity Fund, and instead will become an actively managed fund, picking its own stocks to invest in. Last year, it launched a new fund, Domini European Social Equity Fund, which was actively managed from the start. In May TIAA-CREF, the teacher’s-pension giant, announced the formation of a new social and community investing department, and Ariel Capital Management LLC started Ariel Focus Fund last year.

Recommendation: We expect Socially Responsible Investment funds to continue to be forced by their meager returns to invite more and more sin into their portfolio, but at that point, what’s the point of social investing? It either is or is not socially responsible. “Kinda” Socially Responsible Investment funds just leaves a fund with poor returns and doesn’t have the value of making your Democrat friends applaud your refined sense of social responsibility.

Hat tip to Dealbreaker.com.

Here is an explanation of Johnny’s Satan’s Portfolio Investing Thesis.

Altria (ticker: MO)

Why would a $145bn market cap company change its name? If it’s business was selling products to slowly kill its customers through addictive fire-lit tobacco. Satan knows that even that kind of mortal churn is capable of generating a stream of free cash flow to reward its stockholders. He also relates personally to the business strategy implicit behind the name change:

“They are trying to bury themselves. This is a name and brand the objective of which is to make themselves invisible.”

Invisible merchant of death. Play to the Dark One’s ego, Altria, while selling your murderous and addictive macaroni & cheese.

Rambus (ticker: RMBS)

The joys of trade conferences. Open bars lead to both professional and non-professional miscegenation, with ideas and STDs flowing as much as well-liquors. Every company benefits from these exchanges, but some companies realize you can benefit a little more; by attending them, illegally secreting away your patents and watching as the trade conference seek to adopt open standards based on your non-disclosed patents. This is know as THe Rambus Way.

Even better when a company can supplement this by negotiating incredible lock-in contracts with the largest OEM in their industry despite an expensive and laggy product. Rambus was also a pioneer of the “professional patent hostageers” business model that has been adopted by publicly traded firms like the SCO Group (SCO)and private ones like NTP and lawfirms across the country. In Satan’s dream world, no one would create anything, people would only fight over what already exists.

Del Monte (ticker: DLM)

Del Monte is known as a diversified food brand, selling everything from bananas to pet food. But not only are their bananas harvested in the same unethical conditions that permeate the business, but they even operate the acquired assets of the former United Fruit Company, an all-time great. Del Monte also recently acquired Meow Mix for a 12x multiple, a huge discount to the number of times “Meow” occurs in their insidious jingle. You need to fear the the Power of Meow.

Future additions will be in threes, as all bad things come in threes. Here is an explanation of Johnny’s Satan’s Portfolio Investing Thesis.

Rent-A-Center (ticker: RCII)

Rent-A-Center targets the least educated and poorest American demographics and sells them rapidly depreciating consumer goods via installment. Legally, they classify these layaway sales as “renting” to ease their regulatory burden and to ensure they can charge implied interest rates of mulitple hundred percent without being regulated or stopped. The tax treatment of depreciation also eases their tax burden. Screwing the government and the poor. Rent-A-Center is the BEST. True that. Double true!

Gazprom (ticker: OGZPF.PK)

As the saying goes “The Ukraine is Weak!” And that’s not all who is weak. Take a look at where Europe gets an irreplaceable amount of their oil. Russia may or may not be a place to fear, but 1) Satan has no fear and 2) his rule of thumb is that if he puts his money with Russian mafiosa and elected officials who are more evil than he is, than his money is likely to triple as peaking oil and regional scarcity give Gazprom real ultimate power.

Verizon (ticker: VZ)

This one is entirely personal. Verizon has screwed multiple members of this staff with such calling plans as “Nationwide Horrible Customer Service” and “The Dishonest Business Practice In Network” and my personal favorite the “Friends, Family and Fraudulent Charges Plan”. Verizon doesn’t screw customers to make a buck, or because it has to; Verizon screws customers because it wants to. What this means is that Verizon has a high EP ratio (Evil:Profit) which gives them substantial leverage as they ramp up profits. A clear buy signal.

A clear buy signal for Oracle (ORCL) is provided in a SF Chronic Article on Larry Ellison’s spending habits.

In e-mails, which stem from a recent shareholder lawsuit against the technology titan, Ellison’s accountant, Philip Simon, warns the billionaire about his habitual runaway spending. Like a concerned parent, Simon chides Ellison for overextending himself on a new yacht, on his America’s Cup team and on his new houses in Woodside and Malibu.

…

According to documents unsealed by a judge in the shareholder lawsuit, Ellison habitually pushes his credit limit of more than a billion dollars to its maximum to finance his yachts and homes. And that’s not even counting some $20 million a year he burns through in miscellaneous lifestyle expenses.

…

Ellison, who identifies strongly with the company he founded in 1977, has been famously unwilling to sell Oracle shares over the years.

Instead of selling them, he has financed his lavish lifestyle — the 23-acre Japanese-style estate in Woodside, the yachts, the airplanes, the Armani suits — by borrowing against his stock.

…

Getting back to the scary days of 2000, when the tech stock market was imploding, a list of Ellison’s debts as of July 13, 2000, showed that he owed $1.022 billion to five banks: JP Morgan, Bankers Trust, CMB, Merrill Lynch and UBS. At that time, those loans came from credit lines that had a combined limit of $1.35 billion, putting Ellison a mere $328 million from maxing out.

At the bottom of a document that detailed Ellison’s 2000 debt load, Simon had scrawled a rough accounting of Ellison’s lavish spending, according to deposition testimony:

“1) Life Style — annual $20m

2) Interest Accrual — annual $75m

3) Villa in Japan — $25m

4) New Yacht — $194m — over 3 yrs

5) America’s Cup — $80m — over 3 yrs

6) UAD — 12m over 3 yrs.”

It’s not clear what UAD refers to. Since this rough budget, Ellison has reportedly spent $200 million building a Japanese-style estate in Woodside, which includes a reproduction of a 17th-century Kyoto teahouse. He has also bought multiple properties in Malibu — $180 million worth, by one report.

Long or Short Capital LOVES stock secured debt loads incurred by CEO’s. What’s a clearer signal of a stock’s value than a CEO being willing to use it as collateral for a loan to build a $200mm replica samurai house in Northern California? As far as what UAD line item represents, my guess would be “Stanford Freshman Girls.”

Recommendation: Long ORCL per the Satan’s Portfolio investing thesis.