Thursday, December 23, 2010

Business hating free markets.

Here. h/t to Baldridge for this.

It's like the Petition of the Candle Makers... but real!


Take the Fanjul family, which controls Florida Crystals Inc. and Domino Sugar, owns more than 400,000 acres of sugar cane farms and produces one-third of Florida’s sugar. Yet, the federal government protects them against competitors by imposing U.S. import quotas that maintain sugar prices at artificially high levels. U.S. consumers and businesses have had to pay twice the world price of sugar on average since 1982, according to economist Mark Perry.

Why? The fact that the sugar industry spends millions in lobbying might be one reason.

The U.S. sugar lobby contributes millions of dollars to political campaigns to maintain federal support for the subsidies, according to the Center for Responsive Politics. The Fanjul family alone spent $715,000 on lobbying in 2008 and has spent an estimated $2.6 million on political campaigns from 1979 to 2006.

Tuesday, December 21, 2010

Cost Basis of Securities and the IRS.

Now, the IRS is requiring brokerage firms to report the cost basis of shares that their clients sell.

There looks to be some wiggle room in reporting which shares you sell, but, this will indeed require some new thinking when looking to sell off positions in various equities...

Tuesday, December 14, 2010

the rational addict.


Cable vs. Internet.

Much like cell phones overtaking land lines, cars outselling horse and buggies, and spears being better than clubs, the internet is overtaking cable.

Somewhat ironically, I am typing this over a cable internet connection, while having Arrested Development on in the background via Netflix... hmmm...

An Interesting Governor of the FED


In a speech in 1999, shortly after Congress repealed the Glass-Steagall Act, the Depression-era law that separated investment banking from commercial banking, he warned that “in a world dominated by mega-financial institutions, governments could be reluctant to close those that become troubled for fear of systemic effects on the financial system.”

Sure enough, in 2008, the Fed helped sell Bear Stearns to JPMorgan Chase, rescued the American International Group and, after the collapse of Lehman Brothers, bailed out the financial system.

The crisis has only made the biggest banks even bigger. “They have enormous power,” Mr. Hoenig said. “Just look at their lobbying expenses. I use the word — and it’s a fairly flammable word — oligarchy. These things are huge and powerful, and that’s where the money is. This country through its history has abhorred concentration of financial power, and for good reason.”

Tuesday’s Fed vote will be Mr. Hoenig’s last, because the presidents of the Fed’s regional banks, other than New York, share votes under a rotation system. Mr. Hoenig does not have a vote next year, and he must retire after he turns 65 in September.

As for his future, Mr. Hoenig is certain that he will not follow other Fed veterans who have gone to work on Wall Street. “I can tell you one thing,” he said. “I’ll never work for a too-big-to-fail bank.”

Saturday, December 11, 2010

Biglari's latest letter.

Here is the 2010 Chairman's Letter from Biglari Holdings.

I can't wait to see what this guy does in the coming years. Should be impressive.

Disclosure: I am long BH. This is not advice of any kind. You should always do a ton of your own research regarding anything that I say, do, write, or so much as think about.

Friday, December 10, 2010

ITEX Dissidents Lose Proxy Battle.

Here. It will be interesting to see the distribution of votes in the coming days.

Sorry guys, I thought that you made a great case. :)

Disclosure: None.

God Save Julian Assange.

Apparently, it looks like US officials are going to bring spying charges against Assange... I got this from their Facebook page, become a fan!

Additionally, have you tried to go to Yeah, you CAN'T.

Here is a link to the site:

Government openness is in our best interest. The more facts that the populous is given, the better kinds of decisions that will be made. When, in a democracy, people are not given information, how can they give an informed opinion for the public opinion polls that our leaders generally use when making some controversial decisions.

For example, had 40% of the country been against the war in Iraq, would we have invaded? Had the public access to more information about the situation at hand, would we have been in favor of military intervention? The answer is "no." And, as a result of this invasion, way to many people died, not only Iraqis, but Americans, British, and many others... Furthermore, we are probably dealing with a much more boisterous Iran as a result (which it looks like, from the leaks, is probably going to be in a world of hurt in the coming years).

Wikileaks shows that nations involved in diplomacy are like high school students; but instead of having clothing from Hollister and Abercrombie, they have nukes.

God save you, Mr. Assange.

Tuesday, December 7, 2010

A Review of "The Bed of Procrustes"

I just received my copy of Nassim Taleb's "The Bed of Procrustes". When opening the box that it came in, I was originally disappointed that the book was so small; additionally, I was on the verge of being upset when seeing that it was (in my mind) "only" a bunch of aphorisms... When I pre-ordered the book, I didn't read a thing about it; I simply saw that it was by Taleb. Given that I generally get a lot out of his other books, essays, and lectures, I immediately ordered it (without even reading the title, which told me that it contained a bunch of aphorisms!).

However, once I got to reading it, I was quite happy, and, to some extent, would consider it to be a modern, more random version of "Poor Richard's Almanac". The book is great. While it takes little time to read, I will be thinking about it for a long time.

In regards to the name of the book the story of Procrustes is an interesting one. Taleb argues that we often try to artificially fit things into beds in which they don't belong. In my own case, my initial negative reaction to this very good read serves as a good, and most immediate example of my being stupid.

I am sure that I will revisit this book many times, as there are so many things in it that should be thought on for a long period. Much like with Walden, I find it best to read a few pages (if that much), stop, and then simply think.

Here are some of my favorite snippets:

"In science you need to understand the world; in business you need others to misunderstand it."

"An idea starts to be interesting when you get scared of taking it to it's logical conclusion."

"Pharmaceutical companies are better at inventing diseases that match existing drugs, rather than inventing drugs to match existing diseases."

"If your anger decreases over time, you did injustice; if it increases, you suffered injustice."

"Those who do not think that employment is systemic slavery are either blind or employed."

"The web is an unhealthy place for someone hungry for attention." [how ironic that I am putting this on my non-anonymous blog, eh? ;D]

"Decomposition, for most, starts when they leave the free, social and uncorrupted college life for the solitary confinement of professions and nuclear families."

"What made medicine fool people for so long is that its successes were prominently displayed and its mistakes (literally) buried."

"What I learned on my own I still remember."

"Nation-states like war; city-states like commerce; families like stability; and individuals like entertainment."

"For the robust, an error is information; for the fragile, an error is an error."

"When you beat up someone physically, you get exercise and stress releif; when you assault him verbally on the Internet, you just harm yourself."

"My best example of domain dependence of our minds, from my recent visit to Paris: at lunch in a French restaurant, my friends ate the salmon and threw away the skin at dinner, at a sushi bar, the very same friends ate the skin and threw away the salmon."

"The problem of knowledge is that there are many more books on birds written by ornithologists than books on birds written by birds and books on ornithologists written by birds."

"The ancients knew very well that the only way to understand events was to cause them."

"For Seneca, the Stoic sage should withdraw from public efforts when unheeded and the state is corrupt beyond repair. It is wiser to wait for self-destruction."

"The left holds that because markets are stupid models should be smart; the right holds that because models are stupid markets should be smart. Alas, it never hit both sides that both markets and models are very stupid." (surprising that a libertarian leaning guy would like that, eh?)

"The difference between banks and the Mafia: banks have a better legal-regulatory expertise, but the Mafia understands public opinion."

"For company, you often prefer those who find you more interesting over those you find interesting."

This one is probably my favorite, due to just how simple and obvious it is... Really, it seems to summarize the book:

"The tragedy of virtue is that the more obvious, boring, unoriginal, and sermonizing the proverb, the harder it is to implement."

Disclosure: None. I actually paid for this book AND will receive absolutely nothing if you buy a copy.

Tuesday, November 23, 2010

Gatewood Announces.

Hey everyone.

Wanna know one of the coolest elections in the US, that also happens next year?

Well, here it is... The 2011 Kentucky Governor Race.

Below, is the candidate that am supporting. Read up on the guy, in fact, buy his book here... If you are in the Commonwealth, and are at one of his events, you can usually pick one up, signed, too.

His name is Gatewood Galbraith- he is a political bad ass. Oh, and yeah, Dea Riley, who is running for Lt. Governor, is cool too.

Monday, November 22, 2010

This is out of Atlas Shrugged.

Here, the Chinese government bans the "hoarding" of resources...

Sounds an awful lot like something out of Atlas Shrugged.

The Differences in Siblings.

This one came to me from my brother, of all people.

For those of us that have siblings, or ever wondered why siblings that we know are the way they are, it is a super interesting piece.


Physically, siblings tended to differ somewhat, but they were a lot more similar on average when compared to children picked at random from the population. That's also true of cognitive abilities.

Tom and Eric Hoebbel
Courtesy of Tom Hoebbel

Tom Hoebbel (left) became an artist, while Eric (right) chose finance.

"The surprise," says Plomin, "is when you turn to personality."

Turns out that on tests that measure personality — stuff like how extroverted you are, how conscientious — siblings are practically like strangers.

"Children in the same family are more similar than children taken at random from the population," Plomin says, "but not much more."

In fact, in terms of personality, we are similar to our siblings only about 20 percent of the time. Given the fact that we share genes, homes, routines and parents, this makes no sense. What makes children in the same family so different?

Thursday, November 18, 2010

New developments at ITEX

Here, there is a FAQ from the disident shareholders of ITEX.

Here, a lot of ITEX franchisees are supporting management.

It isn't a good sign for the proxy fighters.

Disclosure: None. This is not advice of any kind. Do your own research before doing anything.

EDIT: Here is a new presentation from the dissident group. It's good, and shows discrepancies in ITEX accounting. I really doubt that the franchisees will care much about it, but rather, the shareholders.

Wednesday, November 17, 2010

Warren Buffett is wrong.

Here, we see a counter to Buffett's latest op-ed.

Thanks to sreenr and DCG for the links.

To me, the whole "give praise to the government for fixing the bubble popping" thing would be like me setting your house on fire, then, calling the fire department and helping them put it out with a garden hose... then, I use your checkbook (which I stole before dumping out the contents of 5 gas cans) to pay the water company with. After this, you would thank me for doing such a good job in keeping the fire from spreading to other houses, because I am an arsonist and don't have much experience in putting out fires, additionally, you would thank me for paying your bills for you.

Bottom line, you still don't have a house and I should be in jail.

Tuesday, November 16, 2010

The Monetary Base

Looking at this while we prepare for the new round of Quantitative Easing 2, one can not help but be scared. Now, check out the expansion that occurred in the 30s...


Thursday, November 11, 2010

Legalize Bounty Hunting.


Seriously, how cool would it be if we had a bunch of people dressed up like Boba Fett running around the world?

Why we didn't put a billion dollar bounty on Osama Bin Laden's head nearly a decade ago escapes me. If broken up into increments that every American would pay, it would equate to a little more than $3 bucks a person. I'd be willing to give up a single beer at my favorite dive bar to have his head on a pike... how about you?

And of course, Ron Paul is way ahead of us on this. :)

Thursday, November 4, 2010

Wednesday, November 3, 2010

Monday, November 1, 2010

Virtually the only thing that I dislike about living in Central Kentucky.

I generally can't see geeky films, like Freakonomics, in theaters. :(

The New Dissident Proxy for ITEX.


My favorite quips that were responding to the statements seen here:

On January 22, 2009, consistent with Rahul Pagidipati’s philosophy of investing in undervalued securities, Mr. Pagidipati contacted the Board of Directors of ITEX to gauge their interest in exploring a variety of strategic alternatives. Mr. Pagidipati believed his background and education could assist the Company. Mr. Pagidipati added that he would like to set up a conference call to discuss any potential future possibilities. Mr. Pagidipati received no response from his email.

On June 18, 2010, Mr. White emailed Mr. Parsad stating “Thank you for sending the agenda. We do not enter into discussions with shareholders about confidential topics” and recommending to us to communicate with the Company’s communications director, Alan Zimmelman. Mr. Parsad responded to Mr. White’s email with the following: “We were extending our hand to the board. We were hoping that if we could agree on some key components of our common vision for ITEX, we would have been agreeable to supporting current management without seeking any board representation. It seems as though you guys are resistant to that idea. I’ll cancel the conference call, and we’ll continue on our current form of contact, either by letter or through Alan. We’ll leave it to the board to decide what type of relationship they want with their largest shareholder group.”

Also, something that you all may find of interest is the specific plan that is presented. Most notably, returning $5 million to shareholders over the course of the first year... $5 million over a year? Wow. That is ~30% of what ITEX can be bought for, in whole right now.

· Return over $5 million in cash to shareholders during calendar 2011 starting with a $1.00 per share special dividend

· List ITEX’s stock on the NASDAQ Capital Market

· Hire a full-time CFO to improve ITEX’s accounting practices

· Expand ITEX’s Board of Directors to five members

· End an ineffective acquisition strategy – organic growth will be the focus

· Refocus the company on franchise-related initiatives

· Actively recruit entrepreneurs with the proper fit to join ITEX’s franchises brokers

Check out for more info.

Overall, this has been a pretty interesting contest. With so much time before the meeting, this may well get to be the muddiest of all the elections we see this year! Naturally, I am pretty sympathetic to the cause of the activists, and hope they win. Additionally, it will be interesting to see what happens to the share price in the next 3 months.

Disclosure: None. This is not advice. Always do your own research before doing anything that I talk, write, or even think about.

Saturday, October 30, 2010

7,000 (ITEXD) for $3k.

Here, we see someone selling just under $7K in ITEX dollars for $3K.

For a company that attempts to market their barter currency as on par with the US Dollar, this is either an exception to the rule, or a really good counter argument for their case... Personally, I have always thought that their currency should realistically be worth some amount less than the USD, simply because it isn't as readily liquid as US Dollars... what that exact amount is, I don't know, though.

I have always wondered what would happen in the ITEX and broader barter communities if there was a round of hyper inflation in the US. Certainly, people would barter more than before, however, I do have my doubts that ITEX dollars would depreciate in value as quickly as the USD.

Please, if anyone knows of any good articles related to this, send them my way for posting... Here is one that I have always found thought provoking.

Disclosure: None. This is not advice. Always do your own research before doing anything that I say, think, or write about.

Thursday, October 28, 2010

Murphy and Krugman debate...

In case you have yet to hear, a bunch of libertarians are holding money that could be donated to a food shelter, until Paul Krugman will debate an Austrian economist... This is awesome. (thanks to Jake for the heads up.)


Monday, October 25, 2010

Apparently, the CIA used modern art as a weapon.

This is one of the most ironic and game theory ridden things that I have ever read. (Thanks to Cody for the link.)

"When I am in my painting, I'm not aware of what I'm doing." -Jackson Pollock.

Apparently, that was truly the case, but, not for the reasons that he said it... Don't get me wrong, I love Jackson Pollock, though. Even if his logic was apparently flawed.

I think that is thought provoking that this is not the sort of thing that was ever mentioned when I was taking classes that discussed modern art; and I took more than a few...

Sunday, October 24, 2010

The ITEX Proxy Contest Heats Up.

ITEX just issued their proxy statement.

I must say, this takes on a different tone than the last time that something with the company went down.

ITEX put forth a timeline about the events that preceded this contest.

Here are some highlights:

On October 4, 2008, Mr. Polonitza phoned Steven White and stated he had an interest in participating in an ITEX “going private” transaction. He informed Mr. White that he had a “couple hundred grand” and would like to receive 8-10% preferred stock plus warrant coverage. Mr. White communicated that going private was not part of the Board’s current strategic plan.

On December 12, 2008, Mr. Polonitza attended the ITEX stockholder meeting. Alnesh Mohan and Sanjeev Parsad of Vancouver, B.C. were also in attendance. Mr. Polonitza joined Mr. White and Mr. Zimmelman for dinner after the stockholder meeting, and the three had general discussions about the Company. Mr. Polonitza voiced his feelings that Mr. White was operating the Company efficiently and was complimentary about the performance during the past year. Mr. Polonitza strongly advised Mr. White and Mr. Zimmelman not to trust Alnesh Mohan and Sanjeev Parsad.

On January 22, 2009, Rahul Pagidipati sent an unsolicited email to the Board of Directors of ITEX to see if they would be interested in exploring a PIPE investment or other type of recapitalization from the Pagidipati family. Mr. Pagidipati referenced the tender offer from Sardar Biglari of Western Sizzlin Corporation, and stated “but I think we make a much better partner.” The email stated “We could invest between $1M+ as a PIPE or we are also interested in a buyout of the firm based on the terms/valuation. For example if the existing management team is interested in doing an LBO, we could help with the financing and get involved as a partner.” The Board did not respond to Rahul Pagidipati.

On December 11, 2009, Alnesh Mohan and Sanjeev Parsad attended the ITEX shareholder meeting. Mr. Parsad asked whether the Board had considered a capital allocation strategy utilizing a holding company. He recommended a holding company structure which would allow surplus cash generated by ITEX to be channeled to the parent for reallocation and deployment in pursuit of attaining a higher return on investment. Mr. White responded that removing cash to a holding company was not part of the Board’s strategic plan.

On March 23, 2010, a letter was sent by the group to the Board of Directors of ITEX applauding management for adopting some of its initiatives and seeking additional changes. Issues raised by the group included increasing franchise locations and improving franchise profitability, improving corporate governance, providing additional services to members, managing the SuperMedia relationship, managing cash flow differently, separating the CEO and CFO positions, and improving member retention rates.

On April 1, 2010, Mr. White sent a letter to the group to correct the record and respond to several inaccurate statements. Mr. White reminded the group that ITEX had adopted its corporate initiatives as a result of the Board’s strategic plan and not in response to their group suggestions. Mr. White noted that the suggestions of the group did not offer any clear execution plan.

Then there was this, which, BY FAR, was my favorite:

As noted above under “Background of the Solicitation,” we fundamentally disagree with the capital allocation strategy advocated by certain members of the Pagidipati Group of utilizing a holding company structure to allow cash generated by ITEX to be channeled to a parent for reallocation and deployment in pursuit of attaining a higher return on investment. This was the same strategy previously advocated by Western Sizzlin and Sadar Biglari when an exchange offer for all outstanding shares of ITEX was commenced in December 2007 an offer that was rejected by over 95% of ITEX stockholders. It was Mr. Biglari’s intention to use his own holding company to operate ITEX as one of several subsidiaries engaged in a number of diverse business activities. Mr. Parsad, a member of the Pagidipati Group, was a stockholder in three of Biglari’s companies, Western Sizzlin, Steak'n Shake and Biglari Holdings, and operates an investment community board whose members study and advocate this investment philosophy. (Bold and Italics mine.)

I understand where ITEX management is coming from in regards to the relationship of the CEO to the franchisees, I also understand that he has a great amount of experience in the barter industry. However, it does seem that the dissident shareholders have made a good case, and, frankly, could replace management with no problem... The statement though, just seems absurd.

Normally, I would question the investment acumen of a management team that truly doesn't understand why you would want to earn high returns on invested capital; I am gonna give Steve White the benefit of the doubt on this one... I don't think that he is stupid, and, I am guessing by what seem to be obvious and huge fallacies in his stated logic, probably hopes that shareholders are. It seems as if he is trying to get a lot of the return on their investment in the company in the form of a salary and share price appreciation, rather than only on the later. Even if he gets canned after the contest, I won't feel too bad for him, as, he has a nice departure package lined up.

Certainly, I would imagine that the dissenters would be happy with dividend payments and share repurchases in lieu of a holding company. I find it unfortunate that, when rejecting the idea of a holding company, ITEX mentions that it is the same philosophy espoused by Sardar Biglari... as if the whole concept if evil, simply because they feel that a value investor low balled them for the company. After all, that is kind of the idea behind value investing.

Furthermore, on a personal note, I don't know why anybody would want to take such a great franchise model, which is pretty low risk, and then try to make it capital intensive, as has been the case with ITEX... Not all businesses are meant to become empires. Presently, ITEX seems to be dragging shareholders along for a historically capital destroying journey to build a revenue generating empire, while giving no real evidence that they can raise earnings in step.

Disclosure: I am long Biglari Holdings. This is not advice. Always do your own research in when thinking about doing anything that I talk, think or write about.

Wednesday, October 20, 2010

How Government Home Loans Screw The Public.

When in the process of growing up, people buy houses. As this is the case, 2 of my friends, who are happily married, decided that it was the time to take the plunge and buy a house. Since that is the sort of thing that I have done more than a few times (buy a house), I had various conversations with them about the whole process. They ended up with a really nice, newer, 3BR 2BA ranch house, which sits on just under an acre of land. Not only did they get a pretty good deal, but, they also got my envy, as, I wouldn't mind living there myself!

When our conversations went to financing, the loan package that they described basically amounted to 100% of the sale price, with a 30 year amortization, at an interest rate that was less than 4.5%, which was to be provided by the US Department of Agriculture. I think that this is a GREAT financing package for my friends to take advantage of; if I could borrow money on terms like that, I would borrow, quite literally, as much as I could. I am pretty sure that I can grow just about any amount of money at 2% more than what has historically been about our inflation rate...

The situation got me to thinking though. Where is this money coming from? The government. Is this a good deal for tax payers? NO.

Lets assume that for simplicities sake, that it is coming directly from debt that the government is issuing. A 30 year treasury (the same as the term of their loan), on the rough date of their offer, was a whopping 3.75%.

Put another way... the spread on this loan, if it cost no money to service, originate, or administer (i.e. 100% efficient, with no costs) is UNDER 75 BASIS POINTS.

A bank (which, by definition, needs to earn money), on the other hand, is buying money for ~2.5% and lending it out at over 6% to investors, IF they will actually lend it out. This is a spread of well more than 3x that of the governments...

Additionally, the government is losing tax revenue from my friends and their former landlord. This is because they will be able to deduct their mortgage interest from their income taxes, and, had they not bought the house, they would have been paying rent and their landlord, who would have more of a tax liability.

In light of this, I have to ask: "is the government really that much more efficient than a bank? Are they that much better at assessing the risk of loan impairment? Can they predict the price fluctuations of the real estate market? Are they really looking to keep tax payers off the hook for a bad mortgage?"

The only answer that I can come up with, is a resounding "NO."

Lastly, it seems pretty obvious to me that the FDIC would shut down a bank that had the lending practices of the US Department of Agriculture- and really, the greater federal government.

Disclosure: None. Always do your own research. This is not advice in any way shape or form.

Bartering for Activism.

In one of the more interesting activist campaigns as of late, The Committee to Enhance ITEX has basically told ITEX management "We don't need you."

This is an interesting situation that has arisen. When I first saw that The Polonitza Group was launching a proxy fight for not a fraction of, but all of the board seats, my initial question was "Well, they are right in most all of their criticisms of the company, but, what if they win? Will Steve White leave with his tail between his legs? If so, what will they do?"

Certainly, in the event that a CEO is ousted from the board, it will create a lot of distention in the company. Furthermore, what would the franchisees think? This is the sort of press release that was needed, as I am sure that a lot of people involved in the company had the same question that I did.

Now, it seems that the hard part here, is convincing people that they can make ITEX significantly better. In this case, you have a company that is doing well, but can do so much more. With a company like Steak 'n Shake (now, Biglari Holdings), the case was obvious, as it was on the verge of bankruptcy... ITEX has a great business model, is has a super nice balance sheet, and quite frankly, is a company that about anyone would want to own outright.

As has almost always been the case in the past, I am quite sympathetic to the cause of these activists and sincerely wish them the best of luck in their endeavors. Really, the whole slate of candidates seem pretty darned impressive.

I look forward to seeing more press releases. I look forward to seeing if things get as nasty (and interesting) as it did a few years ago when Sardar Biglari tried to buy the whole company. I look forward to seeing who wins and, more importantly, what happens to the price of the company!

Disclosure: Long Biglari Holdings. This is not investment advice. Always do your own research when thinking about doing anything that I think, talk, or write about.

Tuesday, October 19, 2010

Another Reason Why Warren Buffett Kicks Ass... part 2

From here:

"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?" - W.E.B.

While I still want to back our currency with a combination of raw materials (including gold), this is a great way to examine the intrinsic value of metal.

Tuesday, October 12, 2010

Round Eleventy Billion in the BH Buyout of FMMH.

Here is a link to the latest letter from Biglari to the board of Fremont.

Biglari to FMMH: screw you.

Disclosure: Long BH. This is not investment advice, always do you own research... especially if it is something I talk, write, or think about.

Monday, October 11, 2010

Nevada Gold... Under followed, with a ton of catalysts...

One of the things that I have noticed, is that when researching a security, there is a strong temptation to only do a skimming bit of financial research. By this, I mean, scanning over the financial statements, then, if they meet your criteria, then examining the SEC filings for a corporation. Finally, if this proves worthy, then you might Google items on said company, talk to management, etc. Often times, just looking at financial statements will give you a great company that is obviously cheap, such as International Baler (IBAL), but other times, looking at more interesting, complex investment ideas will give you other, potentially rewarding ideas.

Here is an example from my own portfolio, that I am glad I didn't look at the financials of, then take a pass: Nevada Gold (UWN).

Looking at the previous financial statements, is not enough with this company. Frankly the last 3 years of financial statements look horrendous, but, there is a lot more to the company than some bad results... They are in the midst of a turnaround, that, really is more like the late stages of a restructuring. Here are some videos where Robert Sturges talks about it: 1, 2, and 3.

One of the most important parts of my thesis on the company comes from having listened to management in the 2 most recent conference calls on their website. (1 & 2) Here are some snippets:

"We are not done with acquisitions... We are going to remain disciplined on purchase prices..."

"The acquisition environment does remain robust."

"Other than the North east, I wouldn't preclude getting involved in any area of the US and even beyond."

"Where we think we have a real opportunity to lever our operating expertise... We are not buying as a well oiled machine, but rather, a machine that needs to be fixed."

Many times, I believe that expansion, using debt, is a dangerous strategy, however, it seems that from looking at their past performance, and the changes they are making at the newly acquired casinos, that they will do a good job at fixing whatever comes their way. A reputation for fixing problems in casinos will also go a long way in landing management contracts in the future. When looking at capital allocators that make a living of fixing problems, you can do quite well.

When looking towards acquisitions, they will go up to the $20 million EBITDA range, with the help of the company's senior lender. The lender has indicated that under the right circumstances they would step up to the plate for the company. Sturges notes that the company's debt to the lender went from $55 million, down to $6 million and that the lender is happy about that. This should be very true, when so many companies have recently defaulted on their debt.

To put this in perspective, if the company is able to buy a huge place, at nearly 2x what they have been paying, their acquisition is gonna be for $120 million; while there are a lot of factors when converting EBITDA to owner earnings, there are many ways of going about it, however, I am not worried about them covering their interest charges, check out the following numbers

All numbers are based on EBITDA of $20 million for a potentially acquired entity.

EBITDA Multiple

Acquisition price
$60 Million

Interest Rate/Expense
6% = $3.6M
8% = $4.8M
10% = $6M
15% = $9M

EBITDA Multiple

Acquisition price
$80 Million

Interest Rate/Expense
6% = $4.8M
8% = $6.4M
10% = $8M
15% = $12M

EBITDA Multiple

Acquisition price
$100 Million

Interest Rate/Expense
6% = $6M
8% = $8M
10% = $10M
15% = $15M

Now, even if they screw up on the acquiring front, lever the company to the hilt, interest rates soar, AND they can't make the acquired entity more efficient, they will still roughly double what looks to be the coming year's EBIDTA, even when you account for interest. Put that in comparison to their market cap, and we see that their EBTDA (remember, we accounted for interest) is roughly their present market cap... To me this represents one of the worst possible scenarios for the company; and it isn't terrible. If and when an acquisition does happen, I am not to worried about it being a terrible one, as, the Wynnefield Partners are involved in the company, and UWN already has an established track record with the last 2 acquisitions.

One concern that may be out there in the investment community, is that of the company being able to repay the recent debt that was taken on to buy all of the Washington mini-casinos. If you take a look at this presentation, page 25 shows that there shouldn't be any real concern about the company covering said debts, the cash flows from operations and cash on hand, without any of the company's proven initiatives, will cover all of the debt, which is already bearing a high interest rate (over 2/3 is @ 11%). I think that this will also do well when going to bankers to justify a transaction; if the bankers see that they can cover interest and principle at 11%, it should put them at ease for funding a new transaction...

Another item that came up in the conference call, is that there is still a chance that there will be a new management contract, as well as equity share, which may happen by years end. Furthermore, there are a lot of strategies and synergies that are not reflected in the company's results for the newly acquired casinos.

The development of the Las Vegas Speedway is getting ready to go to the capital markets; it's a pretty big project, which has a ton of potential for UWN.

The bottom line with this company is that there are a ton of things that can go right for it... any of which, will be big news for the stock. While I don't know exactly what the company will be earning in a year's time, I am sure, provided there isn't an interest rate shock or a bunch of horrendous legislation passed, they will be in business and earning money for a substantial amount of time (even without any more acquisitions). Given the leverage that this company is taking on, I view this as a classic Pabrai "Heads, I win a ton, tails, I probably won't lose much."

Disclosure: I am long UWN and IBAL. This is not investment advice. Do your own research before doing anything that I so much as write, talk, or even so much as think about.

Tuesday, September 28, 2010

College and Debt.

Here is a post that I shelved a while back:

Go over to Pink-Sheets to see a great blog post. Unfortunately, the posts are generally few and far between, enough so to make me look like a regular blogger. ;P Fortunatly, his write ups there are always incredibly insightful (add it to your reader!). This particular post, stands out to me, as I graduated from college in the past few years.

In the article, the issue of a new bubble forming is addressed. It is noted that inflation is going to come, rearing it's ugly head someplace, and that it is just a matter of time before we figure it out. The part that is most compelling, is where he talks of this guy named Glenn Reynolds, who wrote a piece on how higher education in the country is in a bubble. And how that is where a lot of inflation has occurred.

Here are some snippets:
A New York Times profile last week described Courtney Munna, a 26-year-old graduate of New York University with nearly $100,000 in student loan debt -- debt that her degree in Religious and Women's Studies did not equip her to repay. Payments on the debt are about $700 per month, equivalent to a respectable house payment, and a major bite on her monthly income of $2,300 as a photographer's assistant earning an hourly wage.
And, unlike a bad mortgage on an underwater house, Munna can't simply walk away from her student loans, which cannot be expunged in a bankruptcy. She's stuck in a financial trap.
First, it may actually make them more economically productive by teaching them skills valued in the workplace: Computer programming, nursing or engineering, say. (Religious and women's studies, not so much.)
Second, it may provide a credential that employers want, not because it represents actual skills, but because it's a weeding tool that doesn't produce civil-rights suits as, say, IQ tests might. A four-year college degree, even if its holder acquired no actual skills, at least indicates some ability to show up on time and perform as instructed.
And, third, a college degree -- at least an elite one -- may hook its holder up with a useful social network that can provide jobs and opportunities in the future. (This is more true if it's a degree from Yale than if it's one from Eastern Kentucky, but it's true everywhere to some degree).
Yet today's college education system seems to be in the business of selling parts two and three to a much greater degree than part one, along with selling the even-harder-to-quantify "college experience," which as often as not boils down to four (or more) years of partying.

Take it from a guy who has a worthless degree from a university in eastern Kentucky, who also definitely lived the college experience... This is article is totally right. I was fortunate enough to come out of school (after just over 5 years... eeek!) with a useless BA in General Studies. Being dissimilar to the subjects in the article, I was able to do so with no student loan debt. Simply put, I was lucky. Despite having 2 teachers for parents and being what most would consider solidly middle class, my family made it possible for me to go to school without loans, grants, financial aid, or scholarships. Not only that, but, they (in addition to my brother and sister in law) somehow succeeded in un-forcefully keeping me in school emotionally- I can't remember ever wanting to be in a cinder block institution of learning, let alone being excited to attend college... and believe me, my grades reflected it. The types of support that I received are the reasons that I am able to invest in stocks, have some rent houses, and able to occasionally write things on this blog that are on the verge of being 'not dumb'.

Throughout my college and post college years, I have seen many people take out loans for degrees that can not possibly pay enough to live the lifestyle that our country thinks a college grad deserves, save for any kind of retirement, and pay student loan debts; just as the article points out. Hell, if I took out loans for my degree, what would I do with it? Manage a store of general studies? I have yet to see a prospective employer look for a General Studies major; which is a similar story to a lot of other degrees out there. Often times, people will get degrees in subjects that they don't enjoy, or take jobs that they will hate, simply to pay for their debts. I know that if I had to lever up for school, I probably would have been burnt out quickly and been unhappy for the rest of my life.

From where I sit, the business of taking on debt for an uneconomical degree appears to be common place; people get degrees in things that they like and stimulate them intellectually, but also don't pay well. Hence, they will get to live in a cardboard box. There is even a sarcastically made facebook group devoted to this very idea. Additionally, this cycle seems to eventually lead to credit card debt. The stuff piles up from everything ranging from simple splurges to more necessary purchases; say, a busted car radiator, repair of an HVAC system, or medical bills.

I know that there are people out there with college bound kids that read this blog. If you are one of them and have kids that are thinking about taking out loans for school, I hope that you consider paying the tuition yourself, or even lending your kids the money out of pocket. Your kids may not give school their best effort and you may feel like you are wasting your money, but I can say with a great amount of certainty, that they will appreciate what you are doing for them (even if it is just state school). This will be especially true after they see the sort of cash flows that they generate, relative to those their peers- how is that for an investment related metaphor?

Maybe you would rather think of it as a call option on your kids' gratitude and appreciation. Maybe one day, they will have a blog and give you some of the credit that you deserve for putting up with their shit for so long. Maybe, they will end up being able to afford to have a job that doesn't make them want to kill people. Maybe they will end up living in the street. Who knows? Regardless, you won't hurt them by paying for their schooling. Still not sold? Here's a kicker: you drastically reduce the chance of them not moving back into your house after graduation...

Notice, I never said anything about people not working while in school... unless they are going to do something important, like curing cancer or something, then, they probably should devote their time to studying and research rather than working. :)

Disclosure: This is not advice of any kind. Always do your own research when thinking about doing something that I so much as thing about!

Sometimes, It's Best To Take A Pass #2: Northeast Auto Holdings

One of my favorite things to do is to run a low p/b, low market cap, stock screen on companies that are still earning money. Today, I found an interesting nano-nano-cap: Northeastern Auto Holdings. At the time I am writing this, the market cap is just a hair over $55K. When I saw that the P/E was so low that one could feasibly pull out the earnings of the company after ~2.5 months and get their investment back, I must say, my interest was perked!

Northeast Automotive Holdings, Inc. engages in the wholesale purchase and sale of used vehicles in the United States. It involves in purchasing late model used vehicles from dealers and institutional sellers in Northeastern states, as well as in transporting the vehicles for resale in the Pacific Northwest. The company buys used automobiles at auctions, and repairs, cleans, transports, and resells them in wholesale. It sells vehicles through third-party auctions, which act as a marketplace for used vehicles. The company is based in Merrick, New York.

When looking at the financial statements, the company is generating decent returns, and, despite having a tough time in 2008, business prospects seem to be on the up and up. The company seems to have a decent manager, who not only founded the business at the ripe young age of 25, but only takes a salary of $46K... on the face of things, it seems that he is looking to get rich with shareholders, rather than off of them. WOW!

Now, we delve into the 10K... and find this summary of a big monstrosity:

In April of 2008, to aid the company in paying off a small amount of debt and retire some shares of common, the board decided to issue 10 million shares of preferred stock. Now, when reading a little bit, these shares are able to be converted, 1 for 1, into shares of common stock. Additionally, they automatically convert after 3 years of issuance! So basically, what will happen sometime in the next 7 months, is that the share count of the company will increase to over 10.5 MILLION from just over 550K... thats right, roughly a 20 fold increase in share count.

This dilution takes a company that earned $413K on 555K shares, or, 74 cents a share over the past 4 quarters, to one that is earning 4 cents a share and is still superbly illiquid. Literally, over the past 3 months, the company has averaged 8 shares a day trading hands.

But how could something like this happen? The preferred share's conversion rights are not effected by share splits... Isn't it odd that the company, less than a month after the preferred shares were issued, approved a 1 for 30 reverse stock split? Regardless of the intent of the decision, this was certainly a stride that aided in delivering the bulk of the company's shares to the Solko family.

The great thing about this for Solko, is that after this transaction, will go from owning just under 57% of the company's shares(scroll to item 12), to owning ~96% of shares; basically, for just retiring 100K in debt that the company owed to him and retiring a few of his own shares! At 4 cents a share, the conversion is worth $400K in stock. Even after the retirement of the shares he had to give in order to get the preferred shares, that ain't a bad payday.Basically, he is taking complete control of the company, in a way that only bankruptcy could allow. However, even if the company was insolvent, there isn't anyway that a self respecting bankruptcy judge would ever sign off on this.

Still not enough for you? The company had to restate it's financial statements for the year ending in on December 31, 2008, due to a dividend on the preferred shares! Now, normally, one might be able to overlook this... however, we must remember that the accountants at Kempisty & Company audited these statements, and somehow, missed it. It shouldn't be a surprise that the audit firm came under investigation either. Furthermore, the person that discovered the error, was William Solko himself- the very person that the dividend was paid to! This mistake was for just over $400K; is it plausible that someone can forget to account for such a charge, when it went directly from the company into his pocket?

Additionally, in the previously mentioned 10K, we find that the Board has no committees, has 3 members, and one of them is the wife of the founder of the company. In the past, she took home a very nice salary; well over 2x what her husband made. Given the both of their job descriptions, eyebrows could be raised. Without any independence of the board, a history of habitually making late filings with the SEC, and a bunch of weird share issuance, how can one properly value the company?

Does that P/E of .18 or even 2.5 (post conversion) look so good now? For me, the answer is no.

Disclosure: NONE. This is not investment advice. Always research everything that I so much as think about.

Sunday, September 26, 2010

Oh, how far, The Finish Line has moved.

Shares of The Finish Line (FINL) were down 9% on Friday- reportedly, over not having enough inventory. When looking at the year over year results, they seemed pretty impressive, as the company earned over $17 million more for the quarter, despite having revenues only increase by $2.3 million.

Personally, I wouldn't be too upset with those sorts of results, as, the company is trading for well under 15x earnings...

Despite what seems to be a pretty effective turnaround, I can't help but remember back a few years, when this company was in net-net territory. The Finish Line was in the process of not buying Genesco for a hefty sum. Due to the merger agreement, which would lever FINL to the hilt, and probably destroy the combined entity. The markets were valuing FINL at what seemed to be an insanely low price, relative to book value. The greater part of the blogging value investing community looked at the company's balance sheet, and almost universally opined that this was a deep value stock.

But hold on a minute... There was a catch. Yes, FINL was earning money, but, with credit markets beginning a mortgage rust induced sieze up and the economy going south, how could this combined behemoth of shoe retailing survive? GCO was showing disappointing earnings, which, were used to try to get out of the merger. It may well have been one of the quicker merger then bankruptcies in history. Of course, this merger had to be axed, but at what price? Was the market rational? What were the chances of the companies settling this dispute in or out of court?

Naturally, lawyers were bound a determined to make a bunch of money off of this dispute, that was tied up in court or a not insignificant amount of time. A few bankers probably got canned, just to move on to making dumb loans elsewhere. Ultimately, shareholders of both companies were in limbo, not really knowing what was going on with the merger. How could intrinsic value of either corporation be calculated not knowing if there was a merger happening, and if not, what the terms would be.

Long story short: In March of 2008, UBS and Finish Line settled with Genesco, for $175 million in cash and a boatload of stock from FINL. FINL share went up and then down a year later. GCO shareholders were better off then they could have been, but, also, not as well off as if they had just been bought out for cash.

This story of acquisition, a bunch of legal hassle, stock issuance, then both companies doing well after a few years seems to symbolize everything that has happened in the economy in the past handful of years.

Disclosure: This is not investment advice. I have no positions in any of the companies mentioned.

Friday, September 24, 2010

Friday, September 17, 2010

Signature Eyewear Update.

Having addressed Signature Eyewear's complete lack of transparancy in regards to the Bebe contract in a previous post, the company finally came clean in their most recent 10Q filing:

"Our licenses for bebe and Hummer eyewear expired June 30, 2010. Under the license agreements, we may sell existing inventory of those lines in the United States through December 31, 2010. In addition, we may continue to sell our existing inventory of bebe eyewear internationally through December 31, 2011. The loss of these licenses will have a material adverse effect on our revenues. In the fiscal year ended October 31, 2009, and the nine months ended July 31, 2010, these lines represented approximately 45% of our net sales.

We are actively taking a number of actions to replace the bebe and Hummer revenues. These include: (i) increasing our marketing and sales efforts of our other eyewear lines; (ii) increasing our efforts to obtain other third party licenses; (iii) increasing our efforts to develop our proprietary Signature lines; and (iv) considering the viability of marketing other fashion accessories. We are also taking actions to reduce operating expenses to offset as much of the loss of revenue as possible. No assurance can be given that we will be successful in these efforts to replace the lost revenues. If we cannot replace a material portion of these revenues over the next twelve months, we will have to implement drastic cost cutting measures in an effort to maintain profitability and positive cash flow."

Looking back at my brief experience with the company, I can't blame the CEO for not returning my calls or emails. Would you want to talk to a guy that was curious about something that you probably knew you were going to fail at? I am guessing 'no'. Furthermore, when you own a significant chunk of the company, it is probably all the more painful to have to deal with such an unfortunate circumstance (which happened with a Coach contract years back, as well). As a side note, the company has shed over 1/2 of it's market cap in recent days.

Somewhat sadly, this shedding of market capitalization probably is not enough given the company's bloated compensation structure, especially when looking at what future revenues will be and how bad of a job executives did in retaining very valuable contracts. All I know is, is that I wouldn't want to be a debt holder of SEYE and would rather gamble my money away at a mini-casino owned by Nevada Gold than own SEYE common... I would not only have a good time, but also probably come out with more money in the end! :)

Generally, I don't like these sorts of middle man businesses which rely on a few customers to generate all of their revenues. In the case of Signature, you can kiss almost 1/2 of their revenues bebe-bye (get it!? haha!). Granted, there are always exceptions to the rule; I once bought a regional airline that wasn't burning much cash and was trading at something crazy- like, 1/10th of tangible book.

Regardless, I am looking forward to see if the company will be able to stay solvent. I am guessing that it will, but will have a much lower market price than at present. Who knows? Maybe if the stock gets hit much more, management will take it private, and then suddenly, the company will announce some new contracts? It isn't like that sort of thing never happens with Pink Sheet and OTC companies.

"In looking for people to hire, you look for three qualities: integrity, intelligence and energy. And if they don't have the first, the other two will kill you." W.E.B.

Disclosure: I (very enthusiastically) own shares of UWN, but own no other securities mentioned. This is not investment advice. Always do your own research when contemplating doing anything that I so much as muse about on this blog, or even in real life...