LST Year in Review – and Considerations for 2014

Although Wall Street may be the last place to go, for those seeking introspection, I find year-end to be an excellent time for investors/traders to process and reflect on all the good, bad, and ugly investment/trade decisions that were made in 2013. it’s an excellent time for introspection on Wall Street. Everyone is subject to bad/good luck; happens to the best of us. The real question is: when I fail, can I pick myself up? Can I determine how much was my fault, vs. what was beyond my control? What could I/you have done differently, and what can I/you differently going forward?

Or, if and when I am doing exceedingly well, how much of my success is simply a result of luck? Skill? Future success (independent of bad/good luck) seems somewhat dependent on figuring these things out, as it pertains to applying to future actions/decisions. That is, until one encounters a black swan that renders one a fool of randomness…

I find it time-consuming and painful, but ultimately valuable to examine all investment/trade decisions… it helps me figure out the underlying ’cause and effect’ relationships behind wins/losses (answering the “why” questions). Or not (“I don’t know” is a perfectly acceptable answer/belief, in my view). By the way, luck is fine… self-honesty is what matters, in my opinion. As long as one is aware of return attribution… staying power/replicability may be within reach.

PERFORMANCE ASSESSMENT SUMMARY

  • Public and Private Statements – Mixed bag. Made some very bad public calls, and made some good calls (statements made via verifiable fashion, e.g. tweets, posts, e-mails, in-person statements, etc). See below, “THE UGLY, THE BAD, AND THE GOOD” for more.
  • Actual Returns – Great job, but can do better going forward, especially on the long side. My overall batting average remains poor, but as some guy named Stanley Druckenmiller said: “I’ve learned many things from him (Soros), but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” A friend earlier this year told me, “try harder.” He’s right, need to try harder. Also need to consider scale-ability and replicability. Shorting the Yen is very scaleable. Other, lower hanging fruit? Not so much. I had an interesting discussion with a quant about scale-ability. Despite the fact we do very different things, we understood each other…I gather his fund seriously ‘models’ scale-ability for each implemented as well as prospective strategies.

THE UGLY, THE BAD, AND THE GOOD

THE UGLY

THE BAD

  • Short CAT – This idea generated positive alpha, but in absolute terms, this has been a bad (but not ugly) short.
  • Short OSTK – I tweeted, “$OSTK has this huge “SHORT ME” sign all over it… but I’ve thought so all year, and haven’t pulled trigger yet.” – the stock has been flat/down slightly since. Yes, alpha. But abysmal.
  • Long JCP – I wrote, “If you have some “moolah to torch”, methinks you start building a long $JCP position next hour, if not early next week. No Ch.11 over wknd.” – The stock drifted further, before going slightly positive from the point I stated. T
  • Short China – China definitely underperformed relative to the US, but my timing was perfectly bad, as it was in July.
  • Long $ – I wrote https://thelongshorttrader.com/2013/07/08/make-way-for-the-coming-of-king-dollar/ – Another terrible call (though I stand by it, going forward).

THE GOOD

LESSONS LEARNED FROM PAST MISTAKES (a.k.a. “trader’s tuition”):

  • Value Traps (long housing 2005/2006) – In 2005 and 2006, I went long some housing related names because they looked cheap on book value, etc. basis. I was the patsy on the table. I lost nearly 100% of my invested capital in these names. Lessons learned: cheap can get cheaper (and go to zero), book value can erode, earnings can go negative (despite past results), macro matters, true fundamental/securities analysis is NOT merely looking at numbers/ratios. Cyclicality matters, and structural discounts to valuations on cyclical names are often well warranted. Risk management and diversification are NOT a linear function of # of securities one owns.
  • Risk Management and Humility Critical with Short Selling – In 2011, I was overly concentrated in a short that I believed was going to zero. As the stock went lower and lower, I grew my position substantially (“It takes courage to be a pig” so I thought). I initiated the short at 100, added some at 67, added more at 50, and a lot more at 29. I felt like a genius. It went down to 18…and hit a temporary low at 18. I considered taking profits around 20… but did not. As fate would have it,  I was incidentally on a flight most of that day. I had about a 20-30 minute window of time to decide whether to cover or not. Woe be the day I did not cover, because the stock went up 4x-5x before eventually going to zero. I realized a loss on this trade. It almost single-handedly destroyed my 2011 performance. Fortunately, I learned my lesson quickly (after taking my loss), and actually ended up handsomely in 2011. As Kyle Bass said (regarding a similar experience he endured), “and it was the most important lesson in short selling that anyone could ever learn. It taught me the humility and the respect that you must have when you’re on the short side of anything. It wound up being one of the best things that ever happened to me.”

CONSIDERATIONS FOR 2014

  • Consider sectors and strategies that were out of favor in 2013 – When I say consider, I am not advocating that you blindly invest in everything that didn’t work in 2013… but to understand what did not work in 2013, why it did not work… and why it may (or may not) work in 2014. Try to understand causation. There’s one particular strategy that I’m very “bullish” on… and I think I’m “bullish” for all the right reasons. Hint: unreliable, but often cited hedge fund performance survey claims that performance for this strategy was -20-35% in 2013.
  • Gold and Miners – I say we will see gold go lower in 2014. 10+ years of up, up, and up does not correct this easily. Need to see some miners go the way of chapter 11, and/or massive dilutive capital raising. “Gold tumbled 28 percent this year, set for the worst annual plunge since 1981.” Note that gold declined further in 1982.
  • Endogenous vs Exogeneous – So I think it’s fair to say that the 2006-2008 financial crisis was largely an endogeneous one, whereas 2001 was more exogeneous in nature. I wonder if the proximate cause for the next correction will be of the exogeneous variety.
  • Go Long Active (vs. Passive) Management – The popularity and proliferation of passive management (as evidence by ETFs and similar), coupled with the rise in US equity indices in 2013, provide a rare opportunity for active managers to generate significant alpha in  2014 vs. their passive counterparts. 2014 will favor true alpha seekers.
  • Credit/Rates – I say go long Saba Capital, or some of the strategies/concepts they employ that have not fared so well this year.
  • Bitcoin Implications – I took bitcoin very seriously, before many others did (thanks to a geeky friend of mine who is very much a forward-thinking individual).  I’m thinking through the investment implications, i.e. the 2nd/3rd/4th order implications. Suffice it to say: I believe bitcoin and/or related concepts may end up slaying certain rent-collecting goliaths of the real economy… these behemoths, in my view, have de facto monopolistic power within their respective domains. Their demise/contraction are long overdue. For the sake of society (and capitalism), I would love to see innovators slay them within the next 5-10 years. Innovate or perish. Creative destruction, par excellence. It is the American way.
  • Russia? Turkey?
  • War risk creeping – Investment implications unclear (not the US per se), but for example, Japan is getting aggressive. It seems symptomatic of desperate governments. Certainly rhyming with past history. I personally hope all their unnecessary aggression dissipates…but you never know. It is my understanding that  (?) market prices poorly predict war.

“Trading, like poker is a zero sum game. We have 1,500 employees, spent hundreds of millions on research during 37 years. You are going to have to beat me.” – Ray Dalio, Bridgewater Associates.

And David slew Goliath.

The ACTG Short Thesis

See the email below, which I sent to a well-regarded short seller back in Q4 2010 (fortunately I was not short at the time, but did gainfully short ACTG later on):

———- Forwarded message ———-
From: YYYY
Date: Fri, Nov 12, 2010 at 4:28 PM
Subject: Thanks
To: XXXX

Hi XXXX,

Have you had a chance to take a look at Acacia (ticker “ACTG”)? I believe ACTG may provide a good short-selling opportunity within the next few years, or at least I believe thorough research/analysis would provide a compelling story/thesis to gainfully shorting the name. My take is: “Acacia’s stock price warrants no premium to earnings (or any cash flow metric) because its earnings are low quality (inherently volatile and concentrated), and the market will in time recognize that.” As I may have mentioned, I have had conversations with a private competitor of theirs and have good relationships with them. They state that Acacia historically has only proven to be good capital raisers (via IPO, secondaries, etc.) but poor operators (I investigated the cash flow generative ability, or lack thereof, for their entire history; it’s true). To be continued…(I’m working on it right now)

I’ve been publicly shorting and cautioning people against ACTG since 2011 (and much more vocally in private. To this day, it’s not clear to me how one gets comfortable holding a long position in this name. I recall one shareholder who seemed to gloat about having inside information (it’s unclear if the information was Material Non-public Information). That increased my conviction that this was a long term sell (though entry and exit prices have mattered very much, as it has been a volatile name), as the holders are probably of the fast money variety, and weak hands.

Just to elaborate on the above thesis: ACTG seems like nothing more than a intellectual property hedge fund, but with the illiquidity of a long duration private equity/venture capital firm. ACTG’s earnings are inherently more volatile than a hedge fund’s, and its holdings are more illiquid than a private equity firm’s holdings. ACTG represents the worst of both worlds. If you’re a hedge fund owner, how much are you willing to pay up for a hedge fund? How much are you wiling to pay for a “stream” of cash flows that is lumpier than your own, and harder to liquidate?

CATastrophe: Why Caterpillar, Inc. is a Strong Sell

A few friends and I have been bearish Caterpillar, Inc. since at least Q1 of this year. The full report in the embedded document below includes information and opinions provided by said friends of LST. We believe:

  • Questionable revenue recognition practices between CAT & its foreign subsidiaries seem ripe for malfeasance.
  • 54% of CAT’s assets belong to Caterpillar Finance, yet management rarely mentions its existence. Shareholders seem unaware of its existence (just as many of GE’s shareholders were unaware of GE Capital before 2008)
  • CAT’s customers are slashing spending & are in cash conservation mode. Some are at risk of filing chapter 11. 70% of sales originate from outside the United States.  Take FCX for example which just announced it is reducing, deferring capital expenditures, and seeks asset sales.
  • CAT does not generate enough free cash flow to cover its dividend.
  • CAT completed $9 billion in failed (including one fraudulent), value-destroying acquisitions since 2010.
  • Channel checks from 4 sources show backlog worse than the lower end of expectations.
  • Compensation targets mis-aligned and far beneath management’s guidance and stated goals.
  • CAT shares are worth no more than $28.00/share (67.4% downside) & face further downside risk depending on how China & the commodity bust play out.

Do You Know What You Don’t Know About China?

Over two weeks ago, I wrote a post suggesting going long US Municipal Bonds and China , as a “knife catching” trade . Those trades haven’t fared too poorly since. I recently listened to a fund manager who is (arguably) the most bearish manager out there (on China). I won’t pretend that I’m suddenly a China expert, just because I sat through a very detailed, and well-researched presentation on China. In fact, you should assume I’m the patsy, or closer to being the patsy in the room rather than the proverbial  “smartest guy in the room”. That said, all prospective investors in China should ask themselves the following questions:

  • Do you know what’s going on in China?
  • Specifically, do you know how China’s banking system works?
  • Do you know how large China’s banking system is? In absolute terms? In relative terms?
  • Do you know what a ‘deposit’ in China is? Do you know how comparable said deposits are compared to a US bank’s deposits?
  • Do you know why short term rates skyrocketed recently?
  • As far as vacant properties go, if Ordos is NOT the exception, and actually indicative of what’s going in more populated centers within China… what would you do?

I currently believe longer duration players (specifically over next 2 years’ time) should stay away from going long China until there has been some cleansing in its banking system and/or some drastic Renminbi actions. This doesn’t mean there is no room for violent counter-trends to the upside (which should be taken as a gift to SELL; we are in one right now, so I think). But being too cute can backfire.

Thesis: China’s banks will have to take some pain, or its currency must take a hit, before going “all in” long China as a “buy and hold” makes sense. That is the set of events I’m watching. I don’t think there there is any other way around China’s banking situation. Steer clear of China and related long plays (for longer duration purposes; speculators, do as you wish!) until either happens.

For the more speculatively inclined: shorting is always and everywhere a precarious undertaking. That said, there is more than one way to skin this China cat… in equities, FX, and commodities land(s).

DO YOUR OWN WORK

Linn Energy – The Brouhaha Edition (Working Version)

A certain Keith McCullough and Jim Cramer recently got into a very public brouhaha over Linn Energy LLC (“LINE”) and LinnCo LLC (“LNCO”). I personally enjoy these battleground stocks very much (in part, because I’ve demonstrated the ability to make money off some of them) and wanted to post my initial thoughts. I may update this post periodically, and keep it as a ‘working version’ document indefinitely.

You should assume this post is for educational, conversational, and entertainment purposes. Below, I include reasons to:

(A) Buy/Hold

(B) Sell/Short and

(C) Open Questions and Thoughts

A few disclosures:

  1. I currently hold no position in LINE, LNCO.
  2. I am currently short another name in the same or similar space(s).
  3. I have not spoken privately with Jim Cramer, Keith McCullough, or any other bull/bear about LINE/LNCO for the purposes of this post.
  4. This post is subject to change and revision, at my full discretion, at any time.
  5. 1, 2, 3, and 4 may change at any time.

Reasons to Buy/Hold:

  1. High short interest (as a shorter duration risk factor) and/or perceived high high short interest.
  2. High dividend yield (From a behavioral/decision-science perspective, the holders and marginal buyers will hold on blindly until a dividend cut or similar negative event)
  3. Great Management team, and/or the perception of a great mgmt team – A certain “Larry Bird” hedge fund manager told me that the management team says they are the best in the industry and that they have best corp dev team. CEO says he is a 10.
  4. Their dependence on Wall Street may allow them to survive indefinitely (even if it’s a de facto ponzi). It’s a incestuous, unethical relationship between Wall Street/Consultants/Lawyers/Accountants and… Linn Energy. Linn Energy gives them fees, Wall Street gives it life blood. The other enablers provide a sense of legitimacy (“false walls of integrity”)
  5. No one knows how markets will behave tomorrow, so some of these “hedge” positions may end up benefiting them disproportionately and just when they need it.

Reasons Sell/Short:

  1. Flamboyant and promotional CEO (the kind of guy many like to see fail, or are never surprised when they do fail).
  2. Some accounting concerns, specifically pertaining to cash available to meet distributions. Novastar anyone.. or?
  3. Resembles a ponzi borrower* – They depend on external capital. How much would LINN be worth if Wall Street closed indefinitely? If the equity markets fell 20%? 30%? 40%? If interest rates went to ___ ?
  4. Has that roll-up stench.
  5. High short interest (as a longer duration predictive factor)
  6. High dividend yield (seems counter-intuitive, but higher yield means its currency is cheaper, so equity as currency is less valuable)

Open Questions and Thoughts:

  1. Is Linn Energy today more like a Fairfax Financial of 2006/2007, or more like an Enron?
  2. Need to better understand these “hedges” and their entire speculative/securities book. Need to talk to relevant parties with domain knowledge/familiarity.
  3. It’s a “battleground stock” – Jim Cramer/Leon Cooperman and Hedgeye/Barron’s are the public faces of the bull and the bear (a few others have chimed in, and I know it’s been on many people’s radar). I personally like battleground situations, and have demonstrated the ability to make money off of them…but they’re not for everyone.
  4. The equity price does not appear to be at an extreme (high or low), nor is the recent velocity (price change per unit time) noteworthy.. so it seems that on a market price action basis, there is no “fat pitch”.
  5. I’m going to assume I have no edge, and that I am the “patsy on the table”. I assume Kevin Kaiser, Leon Cooperman’s LINE analyst, and the other parties who are not publicly involved know more about LINE than I do.
  6. Some believe their “hedging” is unorthodox, aggressive.

My current opinion: LINE seems like a cross between an O&G operator, roll-up, and hedge fund. I’m not sure if LINE is more of a Fairfax Financial (of the 2006-2008 time period) or an Enron. My understanding of the Fairfax story is that the shorts were correct about most of the facts, but Fairfax nevertheless ended up surviving and prospering for the following reasons (see its stock price since 2006):

  1. The government did not act upon some of the red flags, specifically the tax-related ones.
  2. Fairfax (to its credit) made a very smart bet against subprime, and it paid off asymmetrically.

1. and 2. allowed Fairfax to ‘overcome’ the red flags. It happens. So LINE could also be a situation where the bears are right about pretty much everything, but a series of unexpected and unlikely events lets it survive and thrive indefinitely… or the bears are flat out wrong. Unlike Fairfax, the cost of being wrong seems higher in the case of LINE because you can get hurt badly both on the carry cost (i.e. dividend) and the risk that the principle rises in market value.

*Ponzi, in the Hyman Minsky sense –

Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

The “hedge borrower” can make debt payments (covering interest and principal) from current cash flows from investments. For the “speculative borrower”, the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The “Ponzi borrower” (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.

Tesla – Putting Oneself in a Corner

Elon Musk tweeted the following (posting here in order to revisit at some later point):

I respect and admire CEOs and other executives who eat their own cooking, and align their incentives with shareholders’ interests. They are to be applauded and encouraged. America needs more executives like this… as the majority seem to enrichment themselves, at the expense of shareholders (a tale for another time).

That said, I can’t help wonder if Musk is unnecessarily putting himself in a corner, and risking the appearance (or actuality) of uber-hubris. Why proclaim such to the world? Just do the right things, and people will notice.

just ask Bill Ackman what the appearance of hubris does, and what putting oneself in a corner looks like. People react. It’s one thing if Tesla or Elon Musk were in need of attention…which they don’t. In fact, I can’t think of a company as widely followed by fans and critics alike, as Tesla is. People will notice (and reward) good corporate governance and management integrity. Promotion, hubris, and hype… well, we shall see how people react to these things.

Few Additional Observations:

  •  “I’m not dating Cameron Diaz” – Elon Musk
  • There was a Google Finance error which at one point displayed SolarCity (“SCTY”) having a trillion $ market cap. Musk tweeted about that, with (what appeared to be) gusto.

Unconventional Idea Generation

A former classmate of mine (who was fairly popular) seems to be the ultimate short idea generator (all his employers ended up being exceptionally great shorts). If you look at his resume, he looks like the guy you’d want to hire… I’ll let the world (and the all-knowing head-hunters) believe that. As far as I’m concerned, he’s an incredible idea generator. For short ideas…

Employment history

2006-2008 – Bulge-bracket, “too big to fail” investment bank (phenomenal short)

2008-2009 – Private equity (phenomenal short)

2009-2011 – Obama Administration – Clean-tech investments (phenomenal short… think Solyndra)

2011 – GroupOn (Phenomenal short)

2011-Present – Mobile/Social Commerce …. 

Originally posted on May 31, 2013

::UPDATED:: June 3rd, 2013

It seems that a certain Carson Block, and Muddy Waters Research LLC  (directionally) agrees:

It (Silicon Valley) has “a lot of truly innovative companies, but there are also a number of companies in the Valley that are more pretenders,” he says, adding that tech companies won’t be Muddy Waters’s exclusive focus.

Though we share a coincidental interest in tech companies (that may or may not be HQ-ed in Silicon Valley), Salesforce.com’s recent acquisition makes you really wonder.

The Great Frauds Are Not Relics of the Past – History is Doomed to Rhyme

Two people, whose opinions I respect very much, independently made the following claim to me recently: “The great frauds of the late 1990s/early 2000s (Enron, MCI-Worldcom, Lernout Hauspie, etc) are a thing of the past… those types of frauds are likely never to happen ever again.”  My gut reaction to their belief was that they are wrong, and I told them as much (isn’t it ironic these two made this claim, just as US markets hit all time highs?). Rather than relying on my instincts, however, I decided to look into the evidence.

To sum it up: the evidence does not support their opinion. Look no further then the fraud implosions of the  2006-2008 period as proof that falsifies the belief that the late 1990s/early 2000s somehow marked the end of the great frauds (not to mention, there have been some more recent frauds as well).

Some of  you may wonder, “So what? That’s all in the past.” Others will wonder, “Why? Why didn’t Sarbanes Oxley, etc. prevent some of the fraud-driven implosions from occurring in 2006-2008?” I will not discuss the “why” question, but I will express the following opinion:

I believe we’re entering a period where we will see a wave of some truly great fraud implosions (like we did in the late 1990s/early 2000s), within the next few years.

The following is a summary of my research (I tend to focus on how to monetize via single names, which I do not cover in this post):

  • Macro Matters – Frauds seem to unravel (come to an end) in cycles, usually clustering around market corrections/crashes. We’re due for a correction, and the faster and higher we go, the greater the risk of a disruptive crash.
  • Short Sellers, Whistleblowers, and Regulators Matter – Frauds are less macro dependent when  (1) regulators do their job (i.e. enforce existing rules) (2) short sellers speak out &  are taken seriously, and (3) whistle-blowers act . When short sellers/regulators/whistleblowers win, absolute return investors/speculators win as well, as fraud stocks decouple from the overall market.
  • Poor Regulation/Enforcement Increases the Frauds’ Correlation to Macro – Frauds seem to become pro-cyclical when regulators are complacent, incompetent, or (in some cases) corrupt. In these cases, frauds grow larger and last longer than they otherwise would/should have. Adds to market instability, volatility, and reduction of confidence.
  • The Short Sellers’ Pain, is No One’s Gain  – Going long highly shorted stocks has been a very fashionable trade since Q4 2012. Yet history clearly shows that “get shorty” is not the path to long-term prosperity… “get shorty” almost always precedes market corrections/crashes (the sole exception to this seems the beginning of a secular/structural, multi-year bull market; and if you believe we are entering one, I encourage you to express your views accordingly). If you try to get shorty, the market will get you. And then some.
  • Vilification of Short Selling and Free Speech Precede Market Turbulence – If you think it through very carefully, short selling is a form of free speech (a subset, if you will). The ridiculous and absurd vilification of Rocker Partners by Overstock.com/Patrick Byrne, and Greenlight Capital by Allied Capital and the SEC… well, those things occurred 1-2 years before some serious market volatility. If you think “this time is different” … time will tell.

What Investors/Speculators Should Do

  • Limited Partner types (Endowments, family offices, pension funds, etc) should start adding exposure to funds with short selling expertise… there aren’t that many out there. This can come in form of net short/short only, long/short, volatility, credit, event-driven, special situation, opportunity, and even macro vehicles. The key is finding a fund that has a natural short seller on board (short sellers are probably born, not made; many famous short sellers have said as much). Even better if the person at the top (the head PM/CIO) is a short seller, who has subsequently branched to do other things. Those who tout AMZN as shorts are to be avoided…as they’re not short sellers (a red flag). They are closet value, long-only  guys looking to “learn” how to short (at your expense), and justify 2 and 20 compensation structure.
  • General Partner types (hedge funds and family offices) – Most professionals in the hedge fund world are blessed with not possessing the short seller “gene”. You might want to start looking to add someone who does though. You will likely have to throw out your normal hiring criterion: most of the great short sellers have very… non-traditional backgrounds, especially on paper. A few look kinda, sorta normal on paper, but the vast majority don’t. Just take a look at the Feshbach Brothers, Citron Research, Muddy Waters Research, and many others, to see what I mean.
  • Do your own homework, and/or spend the necessary $ and time resources. There’s a fine line between being cheap, and being stupid. You buy insurance when you (think) you don’t need it. You’re smart to buy insurance when it’s cheap (when valuations of the lying are higher, not lower). Compare buying index options, short ETFs, vs. paying a short seller with an inverted 2/20 structure (see Kynikos). You’ll find that it’s actually cheaper and more effective (in the case of short selling, not all hedge funds) to pay a short seller, rather than do it yourself.
  • Be a risk manager, not a career risk manager. Investors seem to, time and time again, buy insurance at market lows, and sell insurance at market highs. The ever trend-following types, added short exposure in late 2008/early 2009, not 2006/2007. In 2001/2002, not 1999/2000. You don’t have to follow the crowd, if your goal is capital preservation AND enhancement.
  • Consider reducing exposure to funds that have performed exceptionally well the last few years.

On a lighter note: word on the street is that women make just as good (if not better), short sellers as men.

::UPDATED:: 2013 05 29

Here are a few things that contextualize why I believe that history is doomed to rhyme:

(1)  “Covenant-lite” loans have soared to more than 50% of all loan issuance so far this year, twice the level seen during 2007”

(2) SEC accounting focus returning – “Congress also added to the SEC’s responsibilities when it passed Dodd Frank. So Congress both gave the SEC more to do and fewer resources.” –

http://online.wsj.com/article/SB10001424127887324125504578509241215284044.html#articleTabs%3Darticle

(3) Harvard study shows high levels of cheating (i.e. bad behavior is omnipresent wherever there is “pressure, opportunity, and rationalization” – the fraud triangle… Harvard isn’t the problem; it’s merely a microcosm) http://www.thecrimson.com/article/2013/5/28/senior-survey-2013/?page=single#

(4) Free speech and media under threat ( and a badboy from the Allied Capital days holds position of power) –

U.S. Attorney in Phone Leaks Has Seen Both Sides – http://www.nytimes.com/2013/05/21/business/us-attorney-in-phone-leaks-has-seen-both-sides.html?pagewanted=all

Leak Inquiries Show How Wide a Net U.S. Cast – http://www.nytimes.com/2013/05/26/us/leaks-inquiries-show-how-wide-a-net-is-cast.html?pagewanted=1&_r=0&adxnnlx=1369505313-YF0G3tpKU8tum4wASCh6yA

Press Sees Chilling Effect in Justice Department Inquiries –  http://www.nytimes.com/2013/05/25/us/politics/reporters-see-chilling-effect-from-justice-dept-inquiries.html?hp&_r=1&

(5) Skyscrapers…gotta love them skyscrapers –  http://www.businessinsider.com/skyscrapers-that-predicted-financial-crises-2013-5?op=1

If LOTE Can Do It, So Can You! (Until the Regulators Come Knockin’)

In case you were wondering, here are the facts concerning Lot78 Inc:

  • ~$1 billion market value as of 5/21/2013 close.
  • $0.5 million in ANNUAL revenue (that’s right, something like 2000x revenue), DOWN from prior year.
  • LOTE borrowed $40,000 (yes, that’s not a typo) from its founder just to stay in business.
  • LOTE’s auditor expressed doubt on its chances of survival.

And there’s plenty more.

 

Now some of you might wonder, how is the stock up? Here’s a theory:

“box job” – promoters obtain hidden control of the entire supply of a public company’s securities creating a a secret monopoly. Control of the shell corporation and its stock is concealed by the use of nominee officers, directors and shareholders, who hold their stock in their own names, but are secretly controlled by the promoter. Hidden control of a public “boxed” shell company is a very valuable commodity, one that can be sold to unscrupulous individuals who use this hidden control to manipulate the company’s stock price. (loosely quoted from a random DOJ brief)

Source: seekingalpha.com/article/1394981

We’ll leave you to think through the moral and legal consequences, if true…

 

Claim: Wellington Management Raises Their Unipixel Stake to 14%, Therefore Unipixel isn’t a Fraud

Penny stock pump and dumps are somewhat of a guilty pleasure of LST… so enter Unipixel (“UNXL”), a ~$300 million market cap stock with the following characteristics that a long-term investor would love:

(1) $16 million in total assets (of which $12 million is recently infused cash via an equity raise)

(2) a management team with a long history of failure/capital misallocation

(3) Price/Sales multiple in the 3,000-4,000x range

(4)  Laundry list of other red flags

UNXL has nevertheless returned over 400% to shareholders within just 1 year. 

Despite the stock’s impressive performance, an SEC filing yesterday showed that Wellington Management increased their stake in UNXL to 14% stake up from 5%, essentially indicating they expect more upside. To the unexperienced market participant, this would seem to support the prevailing belief that the critics’ concerns (and laundry list of red flags) are much ado about nothing. The market is efficient, it discounts all information, big money is smart money… right?

LST believes that facts speak for themselves. Here are a few facts about Wellington Management’s track record, when it comes to frauds:

Sino-Forest Shares Surge After Wellington Management Discloses 11.5% Stake – Bloomberg News July 5, 2011 (Sino-Forest’s price today: $0.00)

And if you think Sino-Forest was an isolated case for Wellington Management (after all, we all make mistakes), here’s an excerpt from Six Big Investors Who Lost Big on China :

The gigantic investment manager Wellington Management has made some pretty hefty bets on a number of Chinese stocks that are now halted or delisted. The firm built an 8.2% stake in China-Biotics, the yogurt-culture company in Shanghai, despite the fact that China-Biotics had spent the previous year defending itself against report after report by short-sellers and the Chinese media alleging that the company isn’t what it says it is. The Nasdaq exchange halted trading in China-Biotics last week after it failed to meet the deadline for filing a 10-K report with the SEC.

But it doesn’t stop there for poor Wellington, a spokesman for which declined to comment. The firm holds 5% of Jiangbo Pharmaceuticals (JGBO), whose shares have been halted since May 31; 3.7% of Yuhe International (YUII), a provider of “day-old chickens” whose shares were halted on June 17; and 2.2% of Puda Coal (PUDA), whose shares were halted on April 11.

Wellington also recently unloaded an 800,000-share position in China Electric Motor (CELM), a company whose auditor resigned after finding alleged irregularities. CELM was delisted by Nasdaq earlier this month.

If you’re long UNXL, you should be fearful that Wellington has bought into UNXL. The real question is: whoever the analyst/pm that ultimately pulled the trigger… are they just simply uninformed “believers” in UNXL (cults exist too), or are they the slick/cunning variety  trying to orchestrate a short squeeze (ignoring the moral and legal considerations) ?