Category Archives: Financial

Too Easy

Bill Browder’s best investment made his fund more than 10,000% in only 5 years. Over $100,000 for every $1,000 invested initially invested.

Interested? Bill’s book (which I strongly encourage you to read in full) explains in detail exactly how he did it.

“Gazprom was eight times the size of ExxonMobil and twelve times bigger than BP, the largest oil companies in the world— yet it traded at a 99.7 percent discount to those companies per barrel of reserves.” – Bill Browder from Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice

How was this even possible in modern times? Aren’t the markets now so perfectly efficient that even Warren Buffet can no longer beat them.

“Why was it so cheap? The simple answer was that most investors thought that 99.7 percent of the company’s assets had been stolen.”

An oil and gas company in a country run by Vladimir Putin and the Russian Oligarchs.  A company where management was not only working against shareholders, but brazenly transferring out entire assets.

“Based on an extremely conservative estimate, we determined this subsidiary was worth about $ 530 million, yet a group of buyers was allowed to buy 53 percent of Sibneftegaz for a total of $ 1.3 million— a 99.5 percent discount to our calculation of its fair value! Who were these fortunate buyers? One was Gennady Vyakhirev, the brother of Gazprom’s CEO, Rem Vyakhirev.”

Against a macro backdrop of extreme inflation, a recent debt default and fleeing foreign capital.

Still interested?  It gets better.

After spending months investigating the extent of the Gazprom asset thefts by interviewing competitors, customers and ex-employees, he took all he had learned about the corruption in Gazprom and turned it over to the press.   Bill went public about the extreme corruption at Gazprom all the while living in Moscow and endangering the safety of himself, his firm and everyone he worked with in Russia.  Going public eventually led to the investment paying off but also to horrific costs which are detailed in the book.

I apologize if you were hoping that 100x returns could be achieved with no more effort and risk than entering a few EBITDA screens into a Bloomberg terminal and clicking a “buy” button.  But did you really think you were going to find tremendous opportunities in the same securities that any 10 year old with an iPhone can pull up the last 10 years of financials for in the time it takes for a red light to change?  That would just be too easy.

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Balanced Portfolio Risks

Great post by Michael Stokes at MarketSci Blog on the impact that historically low treasury rates could have on Tactical Asset Allocation (TAA) models.  A large portion of historical gains from both backtested TAA models and balanced portfolios have been from the huge increase in treasury bond values over the past 30 years as yields have fallen from a peak of over 15% to less than 2% today.

If yields were to stay relatively stable, the lack of increase in the value of treasuries combined with the low yield would significantly reduce the returns contributed by the bonds portion of a balanced portfolio.  Barring any significant stock market out-peformance, this is likely to bring balanced portfolio returns down significantly from what investors have previously experienced.

A worse scenario is if yields rise rapidly and drive down the value of an investor’s existing bond portfolio.  The yield would be higher but it would take years for the extra yield just to restore the loss in principle value.  A large rise in treasury rates could also lead to a reduction in equity PE ratios to offset the increased rates of “risk free” returns.  Meaning that investors could see simultaneous losses in both the bonds and equites portions of their portfolio.

As the saying goes – “Whenever you figure out the key to Wall Street, they change the locks”.  Most investors and advisors believe the current key is to have a large bond position to provide steady and consistent income, a plan that has worked well for 30 years.  What will happen to these portfolios if the bond portions begin to earn minimal returns or become money losers?

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Can JC Penney double revenue?

I just finished watching Bill Ackman’s CNBC interview where he described the current state of JC Penney (JCP). Prior to watching the interview most of the comments about it were surprisingly negative. I felt he did a good job making the bullish case and I appreciated that he actually took the time to explain the situation in depth with real numbers instead of providing the usual CNBC sound bites.

The core of the thesis is that JCP is in the process of rolling out 100 “mini brand stores” inside each current store. They have currently rolled out 10 of the “mini brand stores” and those stores are seeing $270 in sales/sq-foot versus $135 for the rest of the store. The assumption is that as they roll out the other 90, the overall store will now be at ~$250 in sales/sq-foot.

What I wish was better explained is what the breakdown of merchandise currently is between the 10 “mini brand stores” and the rest of the store. If the most desirable JCP merchandise is in those new stores, then it makes perfect sense that they would show a huge increase in sales/sq-foot versus the rest of the stores. But as they roll out another 90 stores, they can’t all be premium in relation to the overall store so what will that do to the sales/sq-foot. Are the 10 current mini stores currently generating a disproportionate percentage of total revenue available to JCP?

The second issue is that if they do scale the sales/sq-foot linearly it becomes a very large number. Ackman mentioned taking it from 7 million sq/feet to 111 million sq/feet. Adding $115 per sq/foot across 104 million of space generates an additional $13 billion in revenue. That’s a huge number and to achieve it they have to add more revenue in the next 3 years than Bed Bath & Beyond currently generates.

Where will that revenue come from?  Unlike in Johnson’s previous experience in Apple where the iPod and iPhone were part of new categories, $13 billion in department store style retail sales does not just materialize. It will have to be composed primarily of lost sales from other retailers.  Which ones is still to be determined.  One last thing to consider as the JCP press continues to be negative is that the list of big names lined up in support for the turnaround continues to grow. Both Lee Ainslie of Maverick Capital and Ricky Sandler of Eminence capital bought a significant number of shares last quarter.

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The Danger of Madoff style “Clawbacks”

Think back to Enron. Many investors made large sums of money off Enron stock in the late 90’s, gains that in retrospect were at least partly due to fraud being committed by executives at Enron. Many investors (and employees) lost large sums of money on the same Enron stock in 2001 as the aforementioned fraud unraveled. Should those investors who sold at the peak in 2000 have to give part of their gains to investors and employees who were either unwilling or unable to sell their shares? Continue reading


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My thoughts on the SEC’s short sell proposals

A few of my thoughts (and others) on the SEC’s new proposals

Reuters – Reuters – Short ETFs under microscope as SEC pounces

Dallas Morning News – Experts sound off on SEC’s potential curbs on short-selling

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Bernanke Goes Nuclear

While Congress spent another day playing political “Clue” — Senator Dodd — with the red pen — in the backroom, Ben Bernanke reminded us once again why the Federal Reserve is currently the most powerful institution on the planet. Many of us have been led to believe that the foundation is being laid for economic recovery, however recent acts by the Fed amount to a significant escalation in our war against deflation and are additional indications that our economic situation may be more grave than most of us believe. Continue reading

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The Mythical Manufacturing Job

Much has recently been made of the decline of manufacturing as a percent of GDP in our country. Along with being a pivotal issue during the election in the traditional battlefield states of Ohio, Michigan, Pennsylvania and the rest of the rust belt, it’s a rare article about the cause of our current economic issues that fails to lament the decline of “good manufacturing jobs that have been shipped overseas”. Continue reading

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Too Big to Succeed

The constant creation and destruction of companies, industries, and ideas is a force known as creative destruction and is a cornerstone of capitalism. Without the risk of failures like bankruptcy, where is the incentive to work harder, to develop a better product, to improve efficiency, to take chances? Bankruptcy also provides another important function: it frees up capital and talent to pursue better opportunities. Think of Google’s parabolic growth over the past eight years. How many of those new employees were from companies that had failed when the dot-com bubble burst? Would there have been money to fund the next round of companies like YouTube or Facebook if venture capitalists had not allowed many of their earlier investments to fail, instead of continually throwing good money after bad? Continue reading

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