Long or Short Capital

One of three teenagers charged with attempting to rob illusionist David Copperfield as he left a performance has pleaded guilty.
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Copperfield, 50, and two female assistants were walking from the Kravis Center to their tour bus when they were approached by the teens April 23. The assistants handed over money and a cellphone, but the illusionist turned his pockets inside out to reveal nothing, although he was carrying his passport, wallet and cell phone.

“He said in depositions that he had things on him, but it wasn’t difficult to make it seem like there was nothing there,” prosecutor Sherri Collins said.

-From Copperfield Tricks Thief on CNN.com

Copperfield may be pulling down $10’s of millions per year from but he could make far more as a Chief Magic Officer at a hedge fund or as a CMO on retainer for multiple funds. What would it be worth for Amaranth to have been able to say, when presented with massive losses, “Are you sure about that?”, at which point investors would recheck and the massive losses would have disappeared.

Or take Jeffrey Epstein, of “manage private money to make billions so I can have Eastern European sex slaves and also have Palm Beach teenagers massage me for cash” fame, who is charged with felonies related to soliciting teenage girls for sex. A Chief Magic Officer could make those charges suddenly vanish. (Apparently he does have a CMO because the charges and bail were amazingly light)

Le Nature’s was a company which focused entirely on its CMO core competency. How else can you turn $30mm of revenues into $300mm of revenues and make the founder millions in the process?

Recommendation: Firms of all stripes can benefit from beefing up their executive team with a Chief Magic Officer and a couple of tastefully attractive assistants. Avoid the “For the same reason you should believe a hundred dollar bill is no more than one hundred pennies!” variety.

I have an idea with a huge market, a totally underpenetrated if not virginal market, which would control the most important component of most business models.

MySpace was bought by Fox (NYSE: NWS) last year for $580mm. Youtube was recently bought by Google (NASD: GOOG) for $1.6bn. Plenty of Fish is pulling $5-10mm per year in topline with a guy, his gf and a couple of servers in their basement. eBay (NASD: EBAY) plods along without having done anything new in half a dozen years, basically living off it, while Friendster had it, and then failed to detonate it at the right time. None of these entities offer anything that can’t be or hasn’t been replicated by dozens of pretenders and assorted Indians in Bangalore.

What is the key ingredient these successes have which the failures strewn on the road behind them lack? Critical mass.

The best way to make money in today’s world bar none would be to become a supplier of critical mass. Companies thrive on reaching the point at which they have such a base of customers that use their services that their services become an order of magnitude more valuable to every marginal customer than their competitors’ services which lack critical mass. So why not supply this input which is so crucial to success?

• Fact: Most ideas hinge upon “getting critical mass.” For most business models this is achieved in the 18th month of projections, or the Null Set month of reality. This ensures that demand would be high.
• Fact: Critical mass is cheap to manufacture, requiring only one critical mass machine based on a shifting flywheel design, no associated ongoing capex, no labor, no operating costs. This insures that the cost would be low.
• Fact: Critical mass is an intangible if not entirely asbtract concept. This ensures that achievable supply may be infinite (or non-existent).

Recommendation: Supplying critical mass is an extremely attractive business due to the high demand (no substitutes, mission critical input), low fixed costs, and marginal costs of zero. The key to becoming an effective supplier of critical mass is getting large enough that everyone will go to you as a supplier of critical mass. We expect that after building your own critical mass machine or using the design we depict above, this would happen roughly 18 months into the life of your startup firm.

You want to know how to commit corporate fraud? Gregory Podlucky, founder of Le Nature’s / evangelist / genius, shows how to get it done. A little background, Le Nature’s is a bottled water company, based in Pennsylania that was about to be sold for $1.2bn until all this came out. This story is not getting any coverage despite being a huge fraud and an even huger source of absurdity.

WTAE Channel 4’s news exchange partners at the Tribune Review reported Podlucky was escorted out of the building last week, and the locks were changed.

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Mr. Podlucky was evicted Oct. 27 after the company’s minority shareholders presented evidence of widespread accounting fraud and document destruction implicating Mr. Podlucky.

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Le-Nature’s “reported revenue of $275 million to the outside world when it had [revenue of] $32 million,” Mr. Basta said.

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the custodian found the situation at the company “far worse than imagined” when it took control. He cited “widespread document destruction” at a company that kept two sets of books and has less than $1 million in cash on hand. Le-Nature’s has nearly $750 million in bank and bond debt, lease obligations and other liabilities.

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two safes were found at the company that contained watches, jewelry and a considerable amount of cash

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“We’re in a bit of a corporate governance mess,” Mr. Basta [incoming custodian CEO] said.

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LeNature’s was sued earlier this year by two investment groups, George K. Baum Capital Partners and S.W. Pelham Fund, which had invested $13 million in the company as part of LeNature’s expansion plans, which included construction of a plant in Arizona and plans for a third in Florida.

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LeNature’s also is accused of “fraudulently inducing” a lending company to loan it $25 million for the purchase of equipment for its proposed Florida plant, according to Strine. The money, according to the judge’s order, was placed with an equipment manufacturer.

Then using forged documents, LeNature’s got the equipment company to transfer more than $20 million of the loan to LeNature accounts, Strine said.

Strine also found evidence that LeNature “intentionally doctored” minutes of a board meeting.

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In its lawsuit, Baum and Pelham demanded an accounting of whether any corporate funds were used in the purchase of land for Podlucky’s proposed Grace Community Church of the Valley in Ligonier.

The land was purchased through Missy’s Place Foundation, named after Podlucky’s late daughter, Melissa. Tax records indicate that the company contributed $440,000 to the foundation.

and my favorite part

The firm, founded in 1989, was up for sale last November, but Podlucky rejected a $1.2 billion offer and refused to allow potential buyers to inspect the company’s records before making an offer.

You know how I know you are gay committing widespread corporate fraud? You don’t let me see your books when I am a bidding on your assets. Also, having your VP and your legal counsel threaten random bloggers who write negatively about your product is never a good sign either. It sounds like there is a lot more bizarre stuff going on with this case than what has been released in the wire reports, so if you know anything else of amusement value please post it in the comments or email it to johnnydebacle@gmail.com.

Snippets compiled from ThePittsburghChannel.com, PittsburghLive.com, Post-Gazette.com and the WSJ. Also the WSJ has a Le Nature’s entry on its Law blog.

Watching Sunday night football, I saw an ad which exhorted Pfizer’s (NYSE: PFE)) BENGAY’s deep, penetrating heat. I don’t use the product, I’ve never bought it and I couldn’t believe that this unfortunately named product could be so consciously compounding its problem. This is akin to Richard Army’s decision to be referred to as Dick, with no irony. Actual Marketing for Ben Gay:

BENGAY® patches and creams target deep, penetrating heat right at the source of your pain so you can get the relief you need.

I can only imagine that the heavy suggestive nature of the subtext is intentional. What market are they going for? And what copy did they turn down in favor of the above?

BENGAY® bends over backpain, until your body reaches a climax of relief.

BENGAY® fills every crevice of your body with hot creamy soothing power.

You will enjoy BENGAY® patches and creams spread all over your old achey body. Not that there is anything wrong with that.

Do you know the saying, ‘man’s reach exceeds his grasp’? This is not true – rather, it is that man’s grasp exceeds his nerve.

-Nikolas Tesla in The Prestige

Past Quotes Entirely Relevant to Investing

Long or Short Capital’s fiscal 1st Quarter ended on 10/31/06, and the company reported its results in a press release:

Mister Juggles: “Good morning everyone, let me welcome everyone on the line to hear me talk about our best quarter ever. Last call I introduced you to what I think is a really swell statistic, sequential same store traffic, and I put it forth as the key metric we use internally to gauge our success. Last quarter the figure was a strong 21%; this quarter that metric came in at a Googlesque (google that word with MSN Search or Yahoo if you don’t know what it means) 146%. When you consider that 146% came on top of a 21% comp, you really see the power of our model. We have maintained the highest same store traffic rate of the entire Online Financial Humor/Abstract Investment Recommendation Industry.

We generated earnings per subscriberholder of $0.60 compared to $0.38 in Q4’06 and $0.32 in Q3’06. We generated $350 in revenue for the quarter, a 222% increase YOY, and 178% sequentially. We continue to faces headwinds in our contextual advertising due to low click through rates and our experiment with Adsense has yielded lower than historic ECPM’s, but we leveraged our increased traffic volume to increase segment revenue 185% on a sequential basis.

Our strategic focus has been on growing our static ads, specifically the text link ads. Text link advertising accounted for 40% of our Q1’07 revenue, and on a runrate basis, it should rise to 50%+. This revenue is such a focus to us because of how the associated revenue tends to be recurring and very sticky, while the ads themselves are unobtrusive. Our subscribership increased from 282 to 381.

We continue to work on getting better payment terms from our ad vendors; we have had some challenges in this sector with some of suppliers of static ad inventory but we are optimistic that we can bring working capital down to 10-15% of sales. Historically, it has ranged from 25-35% of sales. In terms of liquidity, we reduced our PIK (“Payment-in-kind”) debt to zero and now have cash on the balance sheet of $114.38, despite working capital being relatively flat.

We had our best quarter ever in terms of revenue, free cash flow and qualifying traffic. We think we have established the platform both operationally and financially to build an online powerhouse, and our goal is to do 5-7% better than your expectations every day, on every post and in every quarter. If not, we will cook the books to make you think we did that.

Note that the financials below are unaudited and may contain non-GAAP measures. All numbers comply with Seldom Accepted Accounting Principles (SAAP).

Unaudited Financial Results for Q1’07

Income Statement

Contextual CPC Revenue $109.45

Static Ad Revenue $214.33

Other Revenue $27.31

Total Revenue $351.09

Cost of Sales $19.55

Marketing Expense $100.15

Operating Income $231.39

Balance Sheet

Cash $114.38

Accounts Receivable $140.36

Inventory $0.00

Prepaid Marketing/Hosting/Reg $163.05

Accounts Payable $0

Cash Flow Statement

Operating Cash Flow $222.17

Capex $0.00

Dividends $X.00

Performance Metrics

Visits 16,900

Pageviews 31,850

Clicks on ads 100

Ad impressions served 55,000

Subscribers by Email 68

Subscribers by XML 313

Inbound Links per Technorati 345 from 65 Sites (+65 on Blogger)

Inbound Links per Google ~214 sites (plus 62 on Blogger)

Past Results (due to our reliance on SAAP, previous unaudited financial results are not reliable)
Long or Short Capital Q1’06 Results
Long or Short Capital Q2’06 Results
Long or Short Capital Q3’06 Results
Long or Short Capital Q4’06 Results

This post is sponsored by ReviewMe.

ReviewMe is a service created by Text-Link-Ads founder Patrick Gavin to offer advertising within blog posts. I don’t mean contextual ads like those offered by Google or Yahoo, I mean actual content created by the authors of a site that is written purposely to exclaim the delicious taste of Lucky Strike cigarettes or the powerful advertising platform that ReviewMe will be.

And now I will tell you why I am short this very concept.

It’s a simple process to get paid to review something.

1. You submit your site to ReviewMe, filling in a brief form containing details about your site.
2. They approve your site and list it on their marketplace.
3. SiteX.com or Service Z browses the marketplace and decides that your site would be perfect to review their product.
4. You get a notice that SiteX.com or Service Z wants you to write a review of them on your blog. You accept the proposal.
5. You have 48 hours to write 200 words about SiteX.com or Service Z and place it on your site and you will be paid 50% of whatever they paid ReviewMe.

But they pay you TO write on something not for WHAT your something says. So they are paying LoS $50 to give the LoS subscriber base the recommendation to SHORT them along with the entire Web 2.0 Index. They just paid me to write that! Genius or Madness? I would definitely opt for the latter.

From their FAQ:

Can I require a positive review?

We do not allow advertisers to require a positive review. The vast majority of reviews are measuredly positive, although many do contain constructive criticism. We view this as a bonus: how else can you quickly and cheaply get feedback on a product or service from influencers?

ReviewMe pays money for people to selectively write from the gut on a product, which is the way things should be. What business worth investing in does things the way they should be? That whole premise runs counter to everything we have learned from the Satan’s Portfolio Theory of Investing, namely that the best way to make money is to make/produce/offer products with the least amount of ethics possible. By these standards, ReviewMe is set to underperform the market and we recommend backing up the short truck.

Gawker.com is soliciting suggestions to replace “Douchebag” as their go-to description of everyone who acts like they do but isn’t actually them. Douchebag has proven to be the most versatile insult currently available on the public market, gaining ground in all parts of the insult cycle. While the force of the insult has been diluted by mass adoption over the last several years, trade volume has spiked recently due to the increased popularity of Investment Banking jobs and several political scandals.

As I have a personal affinity for this word, I would hate to see it replaced by a shiny new insult. To illustrate the lasting power and versatility of the word, allow me to quote a passage from my own memoirs, “Equity A-Go-Go:”

I had called him a douche.

‘You are a douche’

The insult hung in the space between us for an eternity.

As my foe absorbed the force of the word, his anger tensed to repel the familiar antecedent that he knew would follow. He leaned in, bracing himself. But there was no “Bag”.

He faltered, doubt racing from his mind through to the depths of his soul. As he fell, he cursed that word, that fickle ender of arguments. Beaten by a bag-less douche. Shame would surely overcome his family.
(Go, Sir Equity. “Equity A-Go-Go:” Oxford University Press, 1993).

Recommendation: While holding “Douchebag” seems like a good strategy in itself, we are in favor of holding a basket of “classic insults”. Classic insults seem to be undervalued due to a temporary drop in demand. We like this insult class due to their historic ability to evoke humiliation across a broad base of recipients, without needing to be micromanaged. The insult class should also benefit from the absence of any exposure to the insult backdating scandals in which insulters would retroactively replace the actual insult they delivered with ones that were perfectly tailored to humiliate their insultee and improve their reputation as someone not to eff with.

Recommended picks in this space include “Douchebag”, “Ass”, “Dick” and in the industrial end of the market, “C***sucker”, “Mother***er” and “A**hole”. Unsexy, classic, consistently generating returns with low volatility — these are the insults Warren Buffett would love to use.

Clearly, there are still a lot of kinks to be worked out for piganol to be a viable alternative to traditional fossil fuels, but we are cautiously optimistic. This is only a prototype design, but fuel efficiency is reported to be quite good, as is the bacon byproduct (I had some).

As you can see there are some tradeoffs.

The fuel tank is larger than you would expect on such a vehicle and is now a mesh wire cage rather than a fully enclosed tank. This presents an opportunity for vehicles to get into accidents when their pigs get snagged on an incoming vehicle; it’s possible that this could be fixed by dismembering all the pigs but this revision has not yet been incorporated into the design.

The pigs squeal creating noise pollution. We are old school so we don’t see the exchange of one kind of pollution (green house) for another (noise) as a net benefit to society. Pollution is pollution.

Recommendation: Currently, we put piganol as a low probability to become a viable alternative to traditional fossil fuels, but we will continue to monitor piganol, sheepanol and and other live-animal-in-cages fuel sources. There are ways to position your portfolio to benefit from traction gained by piganol without engendering the huge risk associated with a not-yet adopted future technology. The pig byproducts markets will benefit from increased prices when/if piganol takes off. In this space, we recommend Bacon for the strength of its fundamentals and its ability to effectively complement lettuce and tomatoes, an overlooked component of its ability to grow earnings. We see Bacon as a low risk investment with moderate upside, allowing even the most cautious investor a way to play piganol.

Rumors are flowing in that the CMU (Candy Monetary Union) is on the verge of adopting candy corn as its standardized measure of candy value and the de fact reserver currency of the global candy market. This has nothing to do with the intrinsic value of candy corn, but reflects its unique properties:

• Candy corn melts neither in your hand nor in your mouth; in short it doesn’t melt.
• Candy corn is ubiquitous.
• Candy corn comes in a form of small indivisible units, which lend themselves to representing precise values.
• Candy corn exhibits historic economic stability and strength.

As the candy market switches from a bilateral exchange market to a monetized market, the transactions demand for candy corn stands to go through the roof. Trade gummy bears for candy corn (current exchange rate is 5 gummies for 8 candy corn). A perfect hedge for this trade (given that the CMU may not in fact monetize) would be to simultaneously trade candy corn for gummy bears.

Adapted from the comments of Candy Asset Exchange Rates.