Dear Shareholder: the woman from the Propaganda Department will now provide you information

Universal Travel Group - a Chinese company whose stock is now suspended - is no stranger to my readers.

If you need a background the initial post is much fun:

Travelling through China with the Universal Travel Group

Six months after I wrote that post (which suggested that the Universal Travel Group was complicated) the stock was suspended. The auditor (the fifth) resigned.

Normally this means that the company winds up trading on the pink-sheets and the stock goes asymptotically to zero.

Not this time though. Universal Travel seems determined to clean up its accounts and trade again on the New York Stock Exchange.

They have hired a new auditor.

They appointed a new Chief Operating Officer.

And they appointed a new board member.

This new board member is probably very good at spin - which will be useful as the company tries to persuade the New York Stock Exchange to reinstate its listing.

Here is her CV:

Ms. Moling Shang has served during her career in several jobs in the communications division of the Central Committee of the Communist Party of China (CPC). From 1984 through 1996, Ms. Shang was the Chief of the Propaganda Department in the Information Bureau of the CPC's Central Committee. From 1996 to 1999, Ms. Shang served in numerous positions including Associate Director of News Agency for China Central Television and her previous role as the Chief ofPropaganda. Following her successful completion of her previous roles, Ms. Shang was appointed Deputy Chief of Propaganda in the Organization Department of the CPC Central Committee where she was responsible for the Three Represents campaign from 1999 through 2002. From 2002 to 2010, she served as Deputy Chief of the Information Bureau of the CPC Central Committee. Ms. Shang graduated from the Branch School of Peking University.

She is the former Deputy Chief of Propaganda of the Information Bureau of the Communist Party of China Central Committee.

I am sure she will keep shareholders informed.



John

Stocks: you can fondle them and they might put rohypnol in your drink and steal your wallet. A comment on Warren Buffett's recent fortune piece.

Warren Buffett recently wrote an article in Fortune (a cut from his forthcoming shareholder letter) which explains why he prefers owning businesses (either outright or through the stock market) than owning currency based investments (bonds, cash) or gold.

Buffett's writing and thinking is a model of clarity. Kid Dynamite's highlighting and analysis is a worthy follow-up.

Buffett does not like bonds or cash as investments because they are (in his view) unlikely to retain their real value over the medium to long term. In God we Trust - but the hand that activates the printing press is human. Buffett defines investment return in real goods and services - investment is putting away some spending power now in the expectation of having more spending power later. Bonds and cash make nominal returns. Buffett thinks real returns are unlikely and disastrous outcomes are possible: "[currency based investments] are among the most dangerous of assets. Their beta may be zero, but their risk is huge".

Quoting Shelby Davis he notes that at current yields currency based investments offer return free risk.

Though unstated you can tell Buffett does not predict a Japanese outcome. Twenty years of deflation would make bonds a fantastic investment by Buffett's criteria. That is a possibility he does not even entertain...

Buffett is not fond of gold either - waxing lyrical on its uselessness. The world gold stock if melded together would fit in what he views as a useless 68 foot cube. Think of it as sitting comfortably in a baseball infield.

And he notes the extraordinary value of that cube. At current prices that cube would buy all the agricultural land in the United States, sixteen companies as valuable as Exxon and leave you a trillion dollars in walking-around money. He cannot imagine why you would prefer own the cube than the alternative assets. Similarly he can't imagine why you would want to own a bit of that cube than an equivalent bit of the alternative assets.

Over the next century 16 companies as valuable as Exxon will have thrown of trillions in dividends - and the agricultural land will have thrown off huge quantities of wheat, corn, beef and other valuable commodities.

The gold will just sit there.

The best line in the article is one of Buffett's sexual zingers: you can fondle the cube, but it will not respond.

He is right of course. Some people think that gold is a good investment because it has retained its value (measured in agricultural land) for centuries. That is all the proof you need that the investment is stupid. The agricultural land had a yield all that time. The gold probably got stolen - and had no yield.

Buffett's prescription: own productive assets.

And that is good advice if you pick productive assets with competence. If you don't I think the Buffett prescription can be a recipe for disaster.

You see the gold does not have free-will - or any will for that matter. Fondle it and it does not respond.

Stocks and businesses however have people running them - and people range from clever to inanely stupid. Integrity levels cover the spectrum from someone you would hope would marry your daughter to Bernie Madoff.

Willie Sutton robbed banks because that is where the money was. Now the money is on Wall Street. If Willie Sutton was reincarnated he would come back as some Wall Street scumbag (or an investment banker). And on Wall Street he would almost certainly not be prosecuted. People who rob banks get prosecuted. People who steal via the stock market not so much.

Because the scumbags go where the money is Wall Street is particularly thick with scumbags. Wall Street has tens of thousands of Willie Suttons.

Fondling stocks can be very profitable if you know what you are doing - especially over very long time periods. But the proviso is there ... if you know what you are doing.

Previously Warren Buffett observed that risk comes from not knowing what you are doing.

And gold is pretty easy to understand. It just sits there. People however are difficult to understand and sometimes dangerous - and people and the stock market are intertwined. And you are more likely to find a scumbag in the stock market than internet dating (the scumbags have Willie Sutton motives).

If you do not know what you are doing fondling stocks can be either as much fun or as dangerous as fondling people. Some may respond by being nice back. Some will spike your drink, lift you wallet and sodomize you on the way out.

Mr Buffett makes it seem simple. I love reading him - but sometimes I think he is dangerous because he makes it seem so easy that it lulls people into a false sense of security...




John

PS. Positions: no gold. Long companies with high levels of management integrity and decent valuations. Short scumbags, slimeballs and villains. Names can be left out of this piece.

Diamond foods - what the press releases says and does not say...

Diamond Foods is a short-battle-ground stock. Anyone who looks at Herb Greenberg's twitter feed can see that. Herb loves battlegrounds.

Today the company made a repetitive press release that has me reading between the lines. Here is the guts of the release:

[The company] today announced that the Audit Committee of its Board of Directors has substantially completed its investigation of the Company's accounting for certain crop payments to walnut growers. The Audit Committee has concluded that the Company's financial statements for the fiscal years 2010 and 2011 will need to be restated. Over the course of the last three months, the Audit Committee has carefully reviewed the accounting treatment of certain payments to walnut growers.  The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and  the Audit Committee identified material weaknesses in the Company's internal control over financial reporting. 

The Board of Directors is taking a number of corrective actions including the appointment of a new Chief Executive Officer and Chief Financial Officer.  Effective immediately, the Board has appointed Director Rick Wolford to serve as Acting President and Chief Executive Officer and Michael Murphy, of Alix Partners, LLP, to serve as Acting Chief Financial Officer. The Company is commencing searches for permanent replacements for the CEO and CFO positions.  The Board has also appointed Robert J. Zollars, who previously served as Lead Independent Director, to the position of Chairman of the Board. Michael J. Mendes and Steven M. Neil have been placed on administrative leave from the Company.

I have read the whole release - but there is no additional information.

I know relatively little about this company - indeed I did not bother looking because the short was crowded and the product (Kettle chips and walnuts) seemed OK. But this release had me puzzled.

The offence as described - moving $20 million of expense from one year to another in one year and $60 million in another year seems relatively minor. But the sacking of the CEO and CFO and the appointment of Alix Partners seemed less minor.

Still timing offences (and they admit timing offences) must be measured relative to earnings.

The last 10K (since amended and now withdrawn) shows nicely growing income in excess of $50 million.

$26 million in net income and about $50 million in the next year. If you were to add $20 million of expense to 2010 and $40 million (the net amount moved) to 2011 and tax-effect those amounts the profits drop from a net $26 million to $14 million for 2010 and $50 million to $22 million for 2011.

That is pretty nasty. But not terminal. Still there are 21 million shares outstanding and at the after-market price ($21 down 42 percent) that is still 20 times earnings.

It does not look like a salivating buy at 20 times. Not close.

And the loss of the CEO and CFO does matter. There is seldom only one cockroach.

The thing that gets me though is the appointment of the new CFO. Michael Murphy is from Alix Partners and his CV makes it very clear that he specializes in restructuring debt. Alix do a lot of bankruptcy work (though that is not the only thing they do).

The last balance sheet (also since withdrawn) is amusing.

It shows cash of just over $3 million, some short term debt and long term obligations of nearly half a billion dollars. And - given the restatement - we can guess this thing only earns just over $20 million a year - and even that presumes the absence of further cockroaches.

I shorted some in the after-market. Don't do that often - but am quite pleased with myself.



John

Lightsquared - some comments

I usually find Senator Charles Grassley's attempts to provoke spats with big-name hedge fund managers tendentious. But in his spat with Falcone and Harbinger he is right on the money. Lightsquared deserves to fail and Grassley knows it.

If you don't know the background start with Bethany McLean's excellent article on Phil and Lisa Falcone in Vanity Fair. I think McLean tries too hard to be balanced on the key policy issue of spectrum and Lightsquared - but McLean offers a good introduction to the issues. By contrast Grassley is not balanced but he is right. Here is why.

There is an international body that administers a binding international treaty on how spectrum should be allocated. That body is the International Telecommunications Union.

The rules need to be binding because otherwise one country's communications build-out could jam communications from another country. This is particularly important where countries are densely packed (like Europe) but is also important in the Americas especially regarding satellite spectrum. (After all spectrum use by Argentina could interfere with spectrum use by the United States if that spectrum is used by a geostationary satellite.)

The biggest conflict is between satellite spectrum and terrestrial spectrum. Satellites are a long way away (in geosynchronous orbit they are 35,786 kilometres above the equator). Because they are a long way away the signal is not very powerful and you often need a dish to catch enough signal to make it usable. Being a very weak signal you need to ensure that there is no very powerful signal in the same spectral region. A powerful signal will block a weak signal just as surely as a big city radio station can drown out a less powerful regional station a little further up the (frequency) dial.

The ITU's job is to make sure this does not happen. The treaty for instance stops Canadian land-based radio devices jamming distant (and hence much weaker) American satellite devices and vice-versa.

The first thing the ITU does it allocates some spectrum as global spectrum (mostly for satellites but also for communicating with ships at sea and similar) and other spectrum as terrestrial spectrum which member countries can allocate however they want. After all there is little international issue in land-based spectrum because interference is basically local. (A cell phone in New York does not interfere with a cell phone in London or visa-versa – so the allocation of terrestrial spectrum in London can be done independently of the American Government or vice-versa.)

Generally satellite spectrum is given away or sold very cheaply – but it comes with obligations. The main obligation is to build out some (normally global) social network (eg communication to remote areas or ships at sea). Terrestrial spectrum is auctioned by local governments and often carries the right to build a cell phone network. That spectrum is hugely valuable and is auctioned for billions of dollars.

There is an underlying global policy issue here – which is that cell phone use is growing like crazy and the real shortages of spectrum are for cell phones rather than for satellites. The iPhone and other internet devices are the core culprit and the inability of many of my readers to use their iPhone in New York City is testament to that.

In an ideal world some of the spectrum allocated to satellites would – over time – be shifted to domestic use and auctioned by the local authorities. This can't be done fast because businesses have satellites in space at the cost of several billion dollars and you can't just render them useless by drowning their signal with (nearer and hence much stronger) domestic signal.

Enter Phil Faclone and Lightsquared. Lightsquared gets access to some satellite spectrum cheaply and then ploughs headlong into a loophole in spectrum laws. The loophole is this: satellite spectrum licenses allow the construction of ground-based booster stations to retransmit their signal and hence make it more useful. The example envisaged is say a remote town in Alaska needs a 6 foot dish to receive the signal (and hence say get high speed internet). Rather than have everyone in the town install a six foot dish they install a single dish and then retransmit the signal around the town – and that way everyone in the remote area can use the signal cheaply. Seems sensible enough.

But in the eyes of Falcone this gives him the right to use 40 thousand plus booster stations all they way across America so he can retransmit to everyone. Of course these booster stations will also be connected to ground-based fibre networks where appropriate. And so Falcone plans to build another US national cell phone network or at least to sell spectrum to the existing networks.

This is – to put it mildly – audacious. And there is little doubt that American consumers would benefit from more wireless spectrum capacity.

But also to put it mildly it is a massive lean on the American taxpayer. You see if the spectrum had been auctioned like traditional spectrum the taxpayer would have received billions of dollars – dollars that will might now flow to Lightsquared and Falcone. Rarely have I seen taxpayers give away larger gifts to corporates (and that includes the banks) but in this case they are giving the gift to one slightly compromised billionaire and his hedge-fund clients. It is really hard – nay impossible – to see any policy basis for that gift.

But the FCC (the relevant regulator) rolled over and granted Falcone permission. McLean points out the political donations involved (they were large my the standards of most people, but tiny when billions of dollars are on the line). Falcone also hired the husband of a key FCC staffer to be a lobbyist. I shouldn't be surprised – this is they way some billionaires make money in the US. But the regulatory birth of Lightsquared will cast a stain across its future and its financing – a stain that I hope Falcone can't avoid.

The first stain is possible interference between Lightsquared's terrestrial network and GPS. There is not much spectral distance between Lightsquared and much GPS signal – but GPS signal is weak (it comes from satellites) and Lightsquared will be much stronger (it is domestic and it needs to carry lots of information). That means that Lightsquared will potentially interfere with GPS networks. Serious people including the defence department object to Falcone's use of the spectrum. Falcone – quoted in McLean's articles – accuses the critics of making up the GPS objection to protect their privileged domestic spectrum positions. Two responses: those critics include the defence department and clearly Falcone is stretching it there, secondly the other critics paid good money to taxpayers for their privileged spectrum position – Falcone relied on a loophole.]

But the GPS stain is not going away. I don't know whether the spectrum interference is terminal or not – but the loophole-political-donation issue raises makes it more believable. After all this spectrum was not allocated according to standard international practice.

And the stain is going to make it really hard for Falcone to finance the use of this spectrum. After all if the network interferes with GPS that will make it less useful. After some pilot too trained to use his GPS gets his signal jammed and crashes a plane Falcone will find it much harder to maintain his ill-gotten spectrum position. Money lent against Lightsquared might be lost because the underlying spectrum ownership is ephemeral.

Carl Icahn it seems has been buying Lightsquared's debt. That will be a fantastic investment if Lightsquared can get past the stain of its birth. But I doubt it.

Anyway I hope this post contributes to the end-failure of Lightsquared. Dirty or incompetent regulators make bad capitalism. If Falcone had obtained the spectrum the usual way, paying the usual number of billion dollars and dealing with interference issues (like GPS) in an open and transparent manner I would have no problems. As it is Falcone sickens me and Grassley is right on the money.

Dear Mr Falcone....

As a manager of a small hedge-fund to one of the leaders in my industry: I will respect you again when you make your next entirely straight billion dollars.

It is not this one.



John

Mr Fred allows me a victory lap...

Sir Fred was not a good man -
He had his little ways.
And sometimes no one spoke to him
For days and days and days.
And men who came across him,
When walking in the town,
Gave him a supercilious stare,
Or passed with noses in the air -
And bad Sir Fred stood dumbly there,
Blushing beneath his frown.

Sir Fred was not a good man,
And no good friends had he.
He stayed in every afternoon ...
But no one came to tea.
And, round about December,
The cards upon his shelf
Which wished him lots of Christmas cheer,
And fortune for the coming year,
Were never from his near and dear,
But only from himself.

(Apologies to AAMilne...)

Some links:

The fourth post ever on this blog in which I say Sir Fred Goodwin should be sacked for cause and denied his retirement benefits. I argue he is (now was) the worst CEO of any major bank anywhere.


And the end game as reported by FTAlphaville: Introducing Mr Fred Goodwin - Former Knights of the Bachelor...



John

Does my butt look fat in this?

Kid Dynamite summed up the case for lululemon athletica inc (always spelled in fashionable lower case) very simply. His sister, and presumably many other women, thought the clothes make their butt look good. I gather this is not original - Howard Lindzon has also turned a few choice phrases in bullish promotion of the stock.

I thought this was crass - but for the life of me I can't think of any better explanation for the stock price.

Background

lululemon athletica it is a remarkable company. The website describes the product (in lower case) as "yoga clothes and running gear for sweaty workouts" and it sells its products in the three fattest nations in the world (USA, Australia and Canada). You would think a specialist yoga and running clothes retailer in those markets would be playing to a limited audience.

But if you thought that you would be wrong.

lulu had sales of $629 million for the nine months ended October 30. This was up about 35 percent from last year. This is a retailer so the fourth quarter matters. Last year they did 245 million in sales in that quarter and this year (at a guess) it will be 35 percent higher - say 331 million. Annual sales will be somewhat shy of a billion dollars.

A billion dollars in sales is a lot of "yoga clothes and running gear for sweaty workouts". Nike by contrast does just over 20 billion in sales but shoes are a much bigger category - and their market is seemingly much wider. After all Nike also makes shoes for yoga and running (and my guess is the shoes should command more gross dollars of margin than the leotards).

Scale and stock price

A billion dollars in sales is huge for such a narrow category. But even that is small compared to lulu's stock price. You see lulu market cap is now almost $10 billion. The stock is priced at 10 times sales. That is amazing for a fashion company. Nike by comparison has a market cap of $46 billion and a price to sales ratio of just over 2. And Nike is not a thin margin business. No other clothing company comes close.

Here is a chart of Apple's price to sales ratio:

Apple spent most the time at about 1 to 3 times sales (currently just over 3) and never exceeded 7 times sales.

Apple was never as richly valued as lulu lemon athletica.

So I want to play the valuation guessing game.

*  What is the value of the end market for yoga and running clothes. Is it $5 billion per year at which point lulu will be priced like Nike or is it larger or smaller?
*  Can you explain the stock price in any terms other than a play on female vanity? Is Kid Dynamite's explanation of the brand appeal and the stock right?
*  Even as a play on female vanity is it overpriced?
*  What if anything keeps the competition out of yoga clothes?

I would really like to know what any of the big institutional holders are thinking. Maybe their butt looks fantastic but their brain looks a little suspect.

I have no position. Shorting female vanity is not something I have ever done successfully - and I sure as hell would not want to be long this. Besides the entire "it is overpriced" argument applied 50 percent down from here.




John

Sky People Fruit Juice and the trials of a short seller

Just a link for today - to Roddy Boyd talking about Kevin Barnes and Sky People Fruit Juice.

Roddy is someone I always read.

If Sky People issue a rebuttal I will - in the interest of fairness - link that as well.


John