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Warning – I strongly recommend against trading in any security mentioned in this post. The volatility is enormous and the situation fluid. The stocks are not being driven by fundamentals… The recommendations in this post are made in a somewhat humorous manner. They might even be reckless...
I am horrified - despite this warning at least one person has thought that the trade should be placed. Please take this warning seriously. I have no position.
The Stutz Motor Car Company
There was once a fine American sports car company called Stutz. It made beautiful – even legendary cars. The cars had a reputation for dependability, reliability and punishing speed. I know they look antique – but these were really quick for their day – and they won big races like
Anyway Stutz was controlled by Alan Aloysius Ryan through family holdings. For reasons mostly to do with improved mass production by competitors the company found itself under pressure. Short sellers could smell blood. And they shorted the stock. And shorted some more.
Through this Alan Aloysius Ryan stood firm, buying stock when he could (possibly through options and hidden holding companies so the shorts could not see what he had done). He did this until he declared one day in 1920 that he owned 105 percent of the company and the shorts could settle with him on his terms.
His terms were a price so high that it would bankrupt broker dealers who had stood as intermediaries between the stock exchange and shorts.
Well to put it bluntly the financial market and regulators defended their own. The story is told here and here and here and here in the New York Times – and the amounts of money involved were monstrous for the time. Eventually the New York Stock Exchange –with the threat of criminal proceedings – arbitrarily determined a price to settle the short positions. The shorts even got an officially sanctioned “protective committee”.
That price was way below the top price that Ryan paid – but far more than intrinsic value. The shorts – well – except those that shorted right at the end – lost money. Ryan wound up paying too much for a motor car company which was slowly declining anyway. As he now owned 100 percent of Stutz his debts got intertwined with the car company and both he and the car company went bust. Some family members got a little out but only by suing other family members. The only winners were ordinary longs of Stutz who sold along the way – or even at the final settlement price.
As you might have guessed this looks horribly familiar. Porsche is now firmly in control of Volkswagen – and they did it with non-standard cash settled options and other things they argue that they did not need to disclose. It looks and smells like market manipulation – and Volkswagen – General Motors for
Now I think Porsche is one of the great businesses of the world. They have convinced middle aged richer Americans that they are more attractive – or at least more fun – if they drive that particular fast car. (Viagra is for poorer guys…)
And unlike Ferrari (which spends all of its profits on Formula One) Porsche – like Stutz before it – managed to make its mark with near-production cars in events like
Porsche (the business) is having a rough time at the moment because if you haven’t noticed the willingness of middle aged American men to drop 100K on a car is somewhat reduced of late. But that might be temporary.
Porsche is a company I want to love – a very fine consumer brands company masquerading as an automobile company. And it is not expensive at the moment – especially if you back out their holding of Volkswagen. Indeed its holding of Volkswagen is worth many times Porsche’s market cap – making Porsche one of the cheapest stocks in the world.
But if history is a guide the Porsche and its controlling family are going to go the way of the Ryans. Their behaviour doesn’t look any more criminal than Alan Aloysius Ryan – and that wound up with him – and his company bankrupt. The system has a knack of defending itself – and the family that controls Porsche and indeed the Porsche company itself is every bit as expendable as Alan A Ryan.
I started this post with a warning – which was that nobody should play any security involved in this story – and I want to stick with this warning. But if you want to play – and it pains me to say this – the only responsible trade is to short Porsche. Porsche – the company – and possibly the car – like Stutz before it – will likely get confined to the dustbin of history.
This is a sad thing – because Porsche – as I have noted – is a nicely run and profitable company. But the appearance of criminal market manipulation will have consequences – and Porsche will pay the piper. My guess – some hapless European investment bank (say Fortis or UBS) is at risk in this – the greatest squeeze since Stutz – and the European court when forced to decide between a mid-ranking German car company and a bank that is integrated with a European government they will chose the bank at Porsche’s expense.
Porsche lovers can however console themselves if they are going to live another 40 years. Someone made some pug-ugly cars under the name of the “New Stutz Company” in the 1960s. Elvis Presley loved his. A small consolation – but the name lives on well after any family legacy is gone.
John Hempton
PS. Having spent some time the other day slamming the New York Times I would thank them for making available – for free no less – the original newspaper articles about the Stutz Corner.
News Corp’s newspaper advert numbers are bad – but they are not catastrophic. They have got markedly weaker very recently – but until then they were down single digit percentages – and low single digits in most papers. Some were up - but they were local property papers and the like. The death of newspapers looked exaggerated if your benchmark was News Corp.
The WSJ is doing
The New York Times is a paper I want to like, but in fact like less and less. It is falling into catastrophic disrepair and the stock price shows it.
The New York Times has become the poster boy for the demise of newspapers everywhere. Revenue and profitability is weak – and the paper looks doomed.
Well is it possible – just possible – that the NYT editorial policies are giving us all a false read about the demise of papers?
And that is when I get to the editorial policy. Need I repeat that this was the paper that employed Jayson Blair (who just made it up with little consequence for the world) and Judith Miller (whose seemingly made up stories helped propel
The New York Times is failing – and the newspaper is failing.
In the past the New York Times would be forgiven their failures – because there were few alternative sources of information. But now there are plenty… competition is rife.
Competition is seldom good for shareholders. It hurts well run businesses but competition has a knack of totally disposing of badly run businesses. Indeed that is the real charm of competition.
I want to ask a question: how much of the awful results of the New York Times are because of the demise of newspapers generally – and how much are newspaper specific? How would we know?
John Hempton
PS. Rupert Murdoch would tell you that ultimately content is all that matters. It suits his business mix to say that. But maybe there is far more to this than the internet causing destruction...
Buffett by comparison is fairly bearish about the newspaper Berkshire owns.
In August – which in this market seems like years ago – I did two posts on MGIC – the largest mortgage insurer and a company colloquially known as Magic.
These posts are here and here…
I concluded that I did not believe in Magic – but I outlined the bull case (which was that the companies had something close to positive cash flow) and had a readers who tried to convince me that the bull case was right. (I was and remain short.)
In the second post I made an observation about statutory capital and possible shortages thereof.
My further objection is that statutory capital deficiency happens way earlier than this - and stat capital deficiency will close the business as per TGIC.
It is an innocuous line – but two readers (both of whom I respect) followed me up on it – and one was sure that statutory capital was going to be adequate (he was long). The other modelled it with brackets for his own uncertainty – and we thought that statutory capital might run short.
Anyway MGIC’s results contained a new disclosure on this issue:
Some states that regulate us have provisions that limit the risk-to-capital ratio of a mortgage guaranty insurance company to 25:1. If an insurance company’s risk-to-capital ratio exceeds the limit applicable in a state, it may be prohibited from writing new business in that state until its risk-to-capital ratio falls below the limit.
We believe that our 2006 and 2007 books of business will continue to generate material incurred and paid losses for a number of years. The ultimate amount of these losses will depend in part on the direction of home prices in
That is slightly worse than the worst end of the models my readers created for me in August.
In other words it is bad out there. And if you look its bad not in Magic’s subprime book (where the number of delinquent loans are up only a little in year – because the bad loans have been mostly foreclosed). It is bad in the prime book (which is really a near-prime book). Delinquent so called “prime loans” are the problem as they were when I wrote the original posts. In that category the delinquency (by which they mean edge-of-default delinquency) has nearlydoubled and the loss per claim has also nearly doubled in the last 5 quarters… [For those interested in actual loans – a year ago they had 11,700 subprime near default loans. Now they have 12,700. For “prime loans” the near default pool has risen from 36,700 to 71,100 loans.]
Anyway the disclosure about needing more capital is super-bad. If the company is forced to stop writing business it will end nastily because the holding company is levered. And I doubt very much it can raise capital now.
The stock is down less than 50% in the past two months – so I can’t crow about the short. (Plenty that is that levered is down more.) But if the long investors can explain to me why they shouldn’t run for the exits right now I would appreciate it.
There is also some disclosure that appeared far more prominently. I looked for it before and it was in footnotes. I know I should read the footnotes but…
Anyway it says more about Fannie and Freddie than it does about Magic. It is a definition of “full documentation” that could only exist in the twenty first century mortgage industry:
In accordance with industry practice, loans approved by Government Sponsored Enterprise and other automated underwriting systems under “doc waiver” programs that do not require verification of borrower income are classified by us as “full documentation.”
