Archive for March, 2006

Are Phantom Bonds Right for My Portfolio?

A lot of questions have been coming in about so-called Phantom Bonds and where they fit in the asset allocation of a personal investment portfolio.

The answer is that it depends.

If you have a 20 year plus horizon, then you probably want an allocation that is heavily weighted towards equity, say 90-100%. But you could supplement a 100% equity allocation with an incremental 20-30% of phantom bonds, without disrupting your asset allocation. How is that possible? Well one of the unique features about phantom bonds is they don’t actually exist. So in addition to the existing equity level rate of return, phantom bonds would be adding both non-existant diversification AND non-existant fixed income payments.

Phantom Bonds

Applying this to someone with a shorter investing horizon, for example a 45 year old CEO of a company who has 3-5yrs before he gets jailed for financial fraud, you could go 40% treasuries, 60% equity and 35% phantom bonds just to top up your returns a bit. You could also add leverage with the equity as collateral, but only if you could find the right bank to supply you the worst loan ever.

Recommendation: Phantom Bonds should become a cornerstone in 401k’s, but read up on them to make sure they are right for you.

Revising Snoop Dogg Down

Like a company that has expanded outside its core business, Snoop Dogg has overextended himself. He has peaked and is ripe to be shorted.

Snoop Dogg has rebranded himself repeatedly, going as:

  • C. Broadus
  • Calvin Broadus
  • Snoop
  • Bigg Snoop Dogg
  • Snoop Doggy Dogg

He lacks focus and recently has gone even further afield. He has appeared in advertisements for Chrysler, promoted hot dogs, and performed cameos in multiple movies. He even went so far as to produce his own porno film.

Snoops Returns are the big Double Drizzle

All this means that Snoop Dogg’s returns on incremental capital have been falling rapidly and are much lower than those in his core competency, the writing and production of degrading but catchy gangster rap. Furthermore, his frequent name changes have diluted his core brand.

Recommendation: Short Snoop because his returns are the big double drizzle.

GOOG, No Means Yes Baby Part 3

(Read GOOG, No Means Yes Baby Part 1 and GOOG, No Means Yes Baby Part 2 )

Intrigued by the reaction of Mr. Moncrief, in Part 1 and the general inability of these analysts to take “No” for an answer, this analyst arranged for an interview at Mr. Moncrief’s midtown offices. We were particularly interested in the impact personalities might have on sell-side professionals. What was the model for their attitude about these stocks that seemed to defy all caution? Ignore all negative news? The transcript is attached below.

Prescott R. Moncrief III (on phone): “…c’mon Bateman. We’ll kamikaze over to Nell’s, chase some cotton underwear. Charlie Cushing knows this 18-year-old bimbette that’s gor-geous. Hold on. WOAH! This skirt who looks just like Ailcia Witt back when she was still hot, like in that Sopranos ep, just walked in, let me call you back, Patrick. Hello. What have we here? I’m Prescott R. Moncrief III, the administrator of this facility. And who might you be?”

Julia Mezzanine Tranche: “Julia Tranche, from Long or Short Capital. We had an appointment to discuss your comments on Google’s recent…”

PM: “Woah, woah. She meant nothing to me. Really. Please, have a seat. Buy me a drink?”

JT: “A drink?”

PM: “Why, yes. I’d love one. Thank you. Vodka Martini. Up. Olives. Dirty. No shitty vodka either. Use the Grey Goose or the Chopin. Chopin, you know, isn’t grain vodka. It’s potato. Much smoother. And much more expensive. Put the money in that tip jar over there.”

JT: “Uh, it’s 10:30 in the morning.”

PM: “It’s 7:30 p.m. somewhere in the world.”

JT: “Er, I really don’t think…”

PM: “Hey, look, honey, I don’t buy drinks for women. Haven’t you read Neil Strauss?”

JT: “Really, just a water is fine for me.”

PM: “Alright, alright, here. I’ll make an exception. You will be having a Smirnoff Ice. That’s it though. I don’t buy women drinks. Here. Ok. You will have a Jagermeister shot too. Two of them. Ignore that blue powdery residue floating in it.”

JT: “You have a bar in your office?”

PM: “Don’t you? Wait, where do you work again? You’re not one of the bridge and tunnel girls are you?”

JT: “Long or Short Capital, the independent analyst group.”

PM: “Where are your offices?”

JT: “Uh, Midtown?”

PM: “WHERE in Midtown?”

JT: “Fifth and…”

PM: “Hmmm, ok, where do you live?”

JT: “Gramecy.”

PM (getting up): “Get your coat. We’ll go back to my place. I live at the American Gardens Building.”

JT: “Uh, no really, I think it best if we just stick to the interview.”

PM: “I said, I live at the American… Gardens… Building. You know, where Tom Cruise lives? Ok, ok, I hear you. We can take it slow. Let’s just sit for awhile and talk, right? We can just lay together for a while and cuddle. Nothing is going to happen that you don’t want to happen.”

JT: “Uh, Mr. Moncrief, there’s not enough room in this chair for both of us.”

PM: “Well, you’ll just have to sit on my lap then, baby.”

JT: “Look, maybe if there was more room?”

PM: “You want to move over to the couch there eh? Good idea, it’s much more comfortable. It’s a little squeaky though.”

JT: “Maybe we should just keep this meeting professional? Isn’t your assistant in the next room?”

PM: “You want her to join us? She’s cool with that. You think I wouldn’t have fired her already if she wasn’t a good sport? She knows where her bread is buttered. If you know what I mean. Wait, you’re not a working girl are you? I knew it! I knew you were too hot to be true! Damnit.”

JT: “Look, I’m not…”

PM (opening wallet, several $100 bills fall out): “Look, I’ll pay $500, but I expect some serious action. None of this ‘one hour only’ stuff either.”

JT: “Maybe we can just talk about Google?”

PM: “What do you want to talk about that old tramp for? Yeah, yeah, she’s been bucking quite a ride, so what? Lots of last minute resistance. Always with the ‘not so fast, I’m not ready for that’ and ‘that growth is a bit quick for me,’ ‘all you want is a hot piece of dividend,’ or ‘you expect too much too fast.’ She plays hard to get, sure. Lots of people have an interest in her, but those milky thighs always loosen up quick for the right price. Of course, her taste is getting expensive now. All the big bankers are working her. I had her first though, you know, back before the CSFB guys passed her around. Before she got a big head and started throwing big parties and stuff. Her day in the sun is over soon. Trust me. I just talk her up in public. Around the other guys, you know? But don’t quote me or anything. I have a reputation to keep, after all. As long as she puts out for me I’ll talk her up. Why not? She looks better on my arm that way. That’s not going to last forever, of course. But that’s just conversation. How about we get real? You and me, sweating between satin sheets?”

JT: “Uh, Mr. Moncrief, could you please take your hand off my leg?”

PM: “Awww, c’mon baby. What’s the matter? Don’t you know I’m a Vice President at Goldman Sachs?”

Assistant on the Intercom: “Mr. Moncrief, your 11 o’clock is here.”

PM: “Ok, gotta hop honey. You don’t gotta go home but you got to get the hell up outta here. Yahoo is here. Whoo! That issue can draw capital through 50 feet of garden hose. Oh, I don’t give my number to women so, give me your card. Maybe I’ll call. Maybe not.”


Piratery: A Warren Buffett of Booty

In connection with recent recommendations on piracy, Long or Short Capital’s managers have been closely tracking developments in the privateer market. So too has one famous Nebraskan investing guru.

We have uncovered renewed interest by Berkshire Hathaway in piratery and, in fact, the adoption of piracy directly by Berkshire’s Warren Buffett, and therefore we are boosting our recommendation.

Recommendation: The piratery theme is approaching the mania stage, and as such, we think that it may be time to adjust your investments from direct piratery to investing in the enablers of piratery. Note that value investors like Berkshire Hathaway (BRK.B) are noting this as well. As we recommended in our Long Mudpies analysis, in sectors with a “gold rush” mentality, it’s the producers of the “picks and axes” that benefit the most surely. One way to play this would be to pick up some long dated call options on both tier 1 and tier 2 eye-patch manufacturers; currently, options on the brewers of the finest rums in the seven seas are all trading at premiums that make them less attractive, but still delicious.

A Guide to Boring Conversations with Financial Professionals

You: So did I tell you about my portfolio? It’s totally kicking ass, and that Oil Conglomerate Search Engine company is going to be the name of my new boat. Also that Commodity Producer Consumer Electronics company has been generating stellar returns over the last 6 months. It’s green every day. I should just start my own fund. I AM THE MAN.

You: So I read in the Journal today, [insert anything].

You: So I’m mulling over this fantasy baseball trade. My definite keepers are Abreu, Ortiz, Mariano, Chavez, Podsednik (not a solid keeper at all, but will take care of steals). Then I have King Felix (for whom I’ve gotten offers from 4 people) Buerhle, Clemens, Schilling, Damon, Brian Roberts, Ensberg as my potential 6th keeper. I’ve done everything I can to move either Chavez or Ensberg starting 2 seasons ago and no one will bite.

So I can keep King Felix, or trade him for Buerle, the third pick who would hopefully be someone who slipped down, and a 9th round pick. My thoughts are that these picks will help me fill my roster a lot faster so I can get more closers and potential sleepers earlier than other people. But, I’d be trading away the best prospect in baseball. What should I do?

You: [Any story involving golf or fish or boating where someone does not die or at least get maimed by sonar]

You: My son/daughter/dog did the cutest thing yesterday…[insert anything].

You: I killed a family of four and my company covered it up.


Quotes Entirely Relevant to Investing

If one is forever cautious, can one remain a human being?

-Aleksander Solzhenitsyn

Past Quotes Entirely Relevant to Investing

Sell Out Saturday: Q3’06 Mid-Quarter Earnings Update

We are revising our guidance down for our Q3 revenue projections. Current contextual CPC advertising is down 60% sequentially period over period. Although our spirits are buffetted by our Infinite% improvement in YOY Q3TD growth, this is probably due to a slight misunderstanding of basic principles of logic and arithmetic. Static text ads are performing as expected, while Blogads is only slightly below plan at $Pretty Good in attributable operating cash flow.

After an unstensive SWOT analysis provided by a NDA-bound third party consulting firm, we have reached a 5 Step Plan to Profit, which we will refer to as Operation Sir Click-A-Lot.

Step 1. Improve efficieny and apply six sigma concepts to our process; scrap Kanban JIT manufacturing concepts and move to scheduled content delivery, while keeping enough capacity to provide humor to the spot market selectively when prices are attractive.

Step 2. Headcount reduction. We have reduced our staff by 14% by rationalizing our call centers and by cutting our Chief Compliance Officer, who provided neither Compliances or Offices in his 2+ months on the job. This has realized cost savings on a pro forma annual runrate basis of $Div/0.

Step 3. Seek strategic relationships and selective syndicating and licensing opportunities. We have some initiatives going on behind the scenes, and one consumated deal to announce as as the details are finalized. We expect this deal to be cash accretive out of the box, as well as both traffic and awesome accretive: expect a whole lot of accretion action. Our IPO is in the works but will be delayed until the market is more robust.

Step 4. Implore our readers to reread the name Operation Sir Click-A-Lot and beknight themselves.

Step 5. Hope our readers aren’t Stanford Grads. Profit.

As it is, dividends are under pressure due to our high subscriber growth without in-line revenue growth; at these depressed levels we are at risk of a hostile takeover from a consortium of well-funded private equity firms, or a possible restructuring play by a savvy distressed investor whose first move would be to crush the equity.

Short Novartis to the Nth Degree

The Wall Street Journal is reporting “Novartis to Pay Infinity to Develop Cancer Treatments”


While we are all for cancer research, it will be really hard to get attractive returns for shareholders on an initial investment of infinity dollars. However, Google (GOOG) may reach the point where a stock-for-stock deal could make sense. Calculating this accretion will require more analysis.

Recommendation: Short Novartis because projects requiring Infinity dollars tend to disappoint; Infinity-1 remains our price target for GOOG.

Have you read the book on how right Long or Short is? I bet you’ve at least seen the MOVI

Our previous pieces on Moviegallery (MOVI), are looking pretty damn good (see our earlier reports Corporate Tarpit and Translating Corporate Speak: MOVI & BBI) given MOVI’s performance since we released our market moving analyst reports. Same thing happened with our recent Pirate recommendations and our coverage of Cephalopods. What kind of investment firm would we be if we didn’t selectively highlight our brilliance?

Question: Where is the bottom?
Answer: There is no bottom.

GOOG, No Means Yes Baby Part 2

(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.


Mr Juggles Investing Commandments (#3 & #4)

In this installment (Read Mr Juggles Investing Commandments #1 and #2), the focus is what you can discern from a company’s investor relations team.

Commandment #3: Stocks with attractive IR women are no more likely to appreciate than average, but they are more fun to cover.
Stocks are, in the end, a good that is subject to the normal laws of supply and demand. A CEO who hires an attractive IR woman understands marketing and is stimulating demand; after all, his target demographic — financial analysts at large investment firms — is almost exclusively male and geeky. Unfortunately, these same CEOs have a propensity to overspend and have questionable judgement (tending to, say, sleep with members of the IR department). Thus, on balance, these stocks are not any more likely to perform better than stocks with unattractive IR women or men but, if you are in the aforementioned demographic, you are more likely to enjoy your time with the company. That’s a net win for you. Half of investing is picking the right asset class.

Commandment #4: Do not invest in companies where the IR team is larger than the management team.
Good examples of this phenomenon include the Old Media Cabal ( Time Warner (TWX), Viacom (VIA.B), and Disney (DIS)). A company that needs 12 experienced finance professionals to explain its operations, spin results to the press, coddle investors, and organize field trips to the studio lot probably does so because the business itself won’t produce stellar results.

GOOG, No Means Yes Baby Part 1

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.

Chinese Military TV Announcers

Pickup any newspaper and you’ll see stories about the rapidly growing Chinese economy. Most observers also know that the Chinese advertising sector has particularly strong prospects since advertising tends to comprise a much smaller part of developing economies relative to developed countries and this gap closes over time. But pundits have overlooked another key driver for the Chinese media and advertising sectors: the military host. These military hosts were a secret until Long or Short ventured onto the mainland in order to obtain shots directly from the CCTV feed. As you can see, military officials regularly appear on television, exhorting viewers to continue watching or risk imprisonment. This bodes well for advertising generally. Can you imagine the ratings “Good Morning America” would get if Rumsfeld hosted and those who didn’t watch were drafted into Iraq?

Recommendation: Long Chinese media and TV advertising plays. Long snappily dressed military announcers. Short Katie Couric.

Improving Our Diversity Metrics

Long or Short Capital continues to diversify ethnically which we think is crucial to any investing strategy. We have renamed Equity Private to Julio Mezzanine Tranche, but you can refer to Julio as “the Mezz,” or alternatively, Senor Tranche. The last title may be a little too formal for Julio given his status in the capital structure and the extent of his legal rights, but we’ll see, as the possibility always remains that he will be a real bitch in a workout. Julio remains the anonymous author of Going Private which is an epic meditation on intangibility and private equity.

Full Disclosure: We are both long AND short Racialistness.

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