Friday, May 31, 2013

Practical lessons in assessing exotic risks

I am having a few days of surfing lessons in Bali on the way home from a business trip. Its actually quite productive because I get back from two hours of lessons pretty close to wrecked at 9.30 AM and eat. Then it is work for a bit, have a massage, work for a bit more, go out and be a tourist, eat, work and sleep. I have taken to calling my room at the surf camp "the office" which horrifies the other guests (mostly younger European - especially German speaking backpackers).

Yesterday however was unproductive. I rode a motor-scooter to Tanah Lot - a kitsch bunch of markets and an unusual coastal Hindu Temple. Now riding a motor-scooter in Bali is not risk free - indeed it is exhilarating with risk. However I thought I could reasonably list all the risks.

I could not.

I rode past a horse-drawn cart and the horse lent over and bit my shoulder.

Lesson 1: Its the risks that you can't see that get you. No risk assessment is complete without leaving space for what Donald Rumsfeld called the "unknown unknowns".

Anyway a quick perusal of the internet raises my alarm. Bali was rabies free until 2008 when what was probably a single rabid dog came from Java. Bali being Hindu has dogs roaming around - symbols of good luck. They would not be tolerated like that in most of Moslem Indonesia. There have been well over 100 deaths from rabies in the past few years in Bali. A tourist recently died after being bitten by a monkey.

A further perusal of the internet suggests that it is possible to get rabies from horses - indeed several cases have been confirmed in Canada. Horses it seems are curious creatures and have been known to walk up to strange-acting foxes leaving them vulnerable.

After some advice from some regular Bali goers I wind up at the Bali Clinic in Seminyak (a suburb of the tourist-and-flesh haunt of Kuta). This clinic is run by a mix of Western and local trained doctors and the triage process sends infectious disease cases to one of the local doctors trained at Sriwijaya University in South Sumatra. Now I know nothing about that school and little about South Sumatra other than that it is a well known Petri-dish of infectious tropical diseases (and some very good surfing). My guess is that the average doctor coming out of a university in Sumatra knows more about infectious tropical diseases than all but a handful of Harvard graduates.

So with some discomfort I conclude I am in the right hands.

The doctor sends me home. He is aware that rabies is transmitted by horses sometimes (but rarely) in North America. He is also aware that bats are a vector in some parts of the world. But to his knowledge there has never been a case of rabies in Indonesia from any animal other than a dog, a cat or a monkey. He does however clean out the wound and gives me the expected superficial iodine treatment.

The doctor is almost certainly right. Indeed I would put the chance of him being right at over 99.99 percent.

But if he is wrong I die.

This is a risk I hate taking. Every piece of my being hates taking this risk. In financial markets if you take a risk no matter how seemingly small where an outcome is total failure if you are wrong and you are taking it at the advice of a so-called expert you are likely to blow up.

Partly that is because financial experts exist to make medical experts look good. And it is because financial experts are conflicted in a way that medical experts are not. Indeed it is often because most financial experts are really just salesmen selling you the risks that their employers do not want to take.

Finally it is also because financial risks are distributed so abnormally and in financial markets you take them repeatedly - day-in-day out. Where I only got bitten by a horse once. And things you do repeatedly will get you in the end - but things you do only once probably will not if the risk-level is low enough. If you get into the habit of taking repeated wipe-out risk in financial markets you will eventually be got. I guess if I got into the habit of being bitten by strange animals in Bali I would eventually be got too.

But here I am, lying in the "office" in Bali taking precisely a risk that I promise my clients I will never take: the risk of blow-up on the assurance of an "expert".

Maybe this is the hypochondria of exotic risks. I am flying home with Garuda Airlines - and some will tell me that is an unacceptable risk too. They are now quoted as an airline with a "much improved" safety record. Whatever. It is a plane. I am in the hands of "experts" and I do it all the time.


Thursday, May 30, 2013

Spark Networks and the strange failure of sex-starved Jewish computer science undergrads...

Whitney Tilson suggested Spark Networks - a dating company - as a long at a value investor forum recently. For the life of me I could not fault it. (Here are some details on Whitney's presentation...)

Spark owns one of the truly great franchises in online dating - JDate - a Jewish Singles dating network is utterly entrenched in its community - mums buy their daughters subscriptions - at least then the boy will be Jewish. I know several users - people who would not consider using another site. A subscription to JDate is a rite-of-passage almost as important as a bar or bat mitzvah.

JDate has been around for a long time - and still goes strong.

I suggested the stock to a friend (who probably wishes to remain anonymous) and here is what he said:

I cannot think of a sector more likely to be disrupted in any industry. 
The thing about dating is that the lifespan of a dating person is roughly 18-25 years old (or at least that will always be the median so that demographic will set social norms, even for 40 year old divorcees). So you are dealing with people who live and breath technology and 'live' for only seven years. 'Science advances one funeral at a time' same with tech but here everyone dies young. So the base rate of innovation and cultural evolution is super high. There is a huge backlash against static dating pages as they are inaccurate (i.e., everyone loves travel, hiking no one says they love dungeons and dragons) ; every girl finds the one amazing photo of themselves.  
Secondarily, you are at the beating heart of the mobile revolution. Dating requires physical proximity so there are a wave of companies trying to do stuff like meetups of 4-6 people for a drink and then they can assess each others dating potential.e.g., (one could do six Jewish people meeting up too). 
Thirdly - the over representation of Jewish entrepreneurs is insane- Ballmer. Zuckerberg, Page and Brin etc. Zuckerberg only invented FB to get a date! You are literally betting against every sex starved Jewish computer science undergrad. Bad bet.

My friend is almost certainly right - at the end a bet on Spark Networks is a bet against every sex starved Jewish computer science undergrad (SSJCSU) and that is likely a very bad bet. Flatly stupid even.

But so far legions of SSJCSUs have not succeeded in knocking JDate off. Sure they invented Facebook - but the original JDate franchise is still there - robust through all of this. I am sure that some SSJCSUs have tried and indeed are still trying.

So why does JDate still exist? Why this strange failure?


Wednesday, May 29, 2013

An undisclosed cause: Mr Mulacek and Interoil

Today Interoil published a solicitation of proxies. Buried in this - about twenty pages in - is the following extract regarding the recent resignation of Mr Mulacek - the CEO.
Phil Mulacek – Chief Executive Officer 
In February 2012, we entered into an employment agreement with Phil Mulacek as then Chief Executive Officer. No contract had previously been in existence governing our employment relationship with Mr. Mulacek. The employment contract provided for an initial three year term and for automatic one year extensions thereafter in the absence of notice of termination from the Corporation.

The employment contract provided that if during the term of employment Mr. Mulacek's employment was (i) terminated by us except for "Cause" before or after a “Change of Control”; (ii) terminated due to "Disability"; (iii) terminated by him for "Good Reason"; or (iv) terminated within 3 years following a “Change of Control” of the Corporation, then Mr. Mulacek would be entitled to be paid, in the aggregate and within 30 days, (a) a lump sum amount equal to $3,600,000, (b) all accrued and unused annual leave which leave had accrued at the rate of 60 days per year from the commencement of the employment agreement, (c) an amount equivalent to 365 days’ paid annual leave as a “Foundation Leave Benefit”, and (d) an annual bonus amount equivalent to 50% of Mr. Mulacek’s base salary pro-rated from the commencement of the calendar year until the date of termination.

Payments were subject to certain conditions including, (i) provision by Mr. Mulacek of a general release to the Corporation in an agreed form within 21 days of termination, (ii) not competing with the Corporation’s business or soliciting its employees for 90 days after such termination, and (iii) maintaining confidentiality of the Corporation’s “Confidential Information”.

In the event of Mr. Mulacek’s death during his employment under the employment contract, his estate beneficiaries would be entitled to receive a lump sum payment of $3,600,000, together with any other accrued and unpaid benefits existing at his death.

We were permitted to terminate Mr. Mulacek's employment contract for "Cause". Cause includes wilful neglect or misconduct resulting in material damage to the Corporation, wilful and repeated refusal or failure to perform or wilful disregard of his duties, conviction of any felony, acts of fraud, embezzlement or misappropriation, conviction for discrimination against or harassment of any employee, or breach of the covenants in the agreement. 
Mr. Mulacek retired as an employee of InterOil effective 30 April 2013.
So what "wilful neglect or misconduct resulting in material damage to the Corporation, wilful and repeated refusal or failure to perform or wilful disregard of his duties, conviction of any felony, acts of fraud, embezzlement or misappropriation, conviction for discrimination against or harassment of any employee, or breach of the covenants in the agreement" permitted Interoil to terminate Mr Mulacek's contract for cause?

That is of course interesting - but this is downright peculiar from the same document:
Election of Directors
Our Articles of Continuance provide that we must have a minimum of three and a maximum of fifteen directors as determined by a resolution of our Board. The number of directors is presently eight. Directors elected at the Meeting will serve until the next annual meeting of Shareholders or, if earlier, until they resign, are removed or are disqualified. The term of office of each of our current directors who is not re-elected will expire at the Meeting.

The Board has set the number of directors to be elected at the Meeting at eight. Management of InterOil proposes to nominate each of Gaylen Byker, Phil Mulacek, Roger Grundy, Roger Lewis, Ford Nicholson, Sir Rabbie Namaliu and Samuel Delcamp (each of whom is currently a director), and Sir Wilson Kamit, as directors of InterOil. Mr. Christian Vinson, currently a director, and also Executive Vice President Corporate Development & Government Affairs, has indicated his intention to retire as an employee and director of the Corporation and will not seek re-election as a director at the Meeting.
It will be interesting to see how these observations from the same document are reconciled.


There is of course a possibility that the words "were permitted" do not mean what they appear to mean. Indeed this is almost the only way I can reconcile the two observations above.


Sunday, May 26, 2013

Charlie Ergen, patriot, scoundrel, thief: some comments on the Softbank vs DISH battle for Sprint

It seems fitting that the best case that Charlie Ergen and DISH can muster for their bid for Sprint is false patriotism. Softbank they say will be a national security risk. Fitting because Samuel Johnson warned us almost 240 years ago that patriotism is the last refuge of the scoundrel - and Charlie Ergen is a scoundrel.

The misdirection from DISH was from the beginning. Here was the pitch for the DISH offer from the beginning:

The case for the DISH's offer is that it offers $4.76 per Sprint share in cash plus 32 percent of the surviving company. Softbank by contrast offers $4.03 per share in cash plus only 30 percent of the surviving company. 

More cash and a larger proportion of the surviving company - what is not to like about that?

Calling Charlie's bluff on this - plenty actually. You see the surviving company in the Softbank case is Sprint after Softbank has injected $8 billion into it. It is a highly credible competitor for AT&T or Verizon. 

And the surviving company in Charlie Ergen's example is a highly levered beast called DISH-Sprint. DISH Sprint will be bereft of cash and loaded with debt because the cash part of the offer comes largely from leverage.

So it is worth understanding what DISH is.

DISH is a second-tier satellite provider that lost the battle for quality subscribers to DirecTV. Charlie always had an inferior offer based on low cost - when DirecTV had The Sunday Ticket, and was first to market with high definition and other quality-improving features. The Sunday Ticket was a clear - albeit expensive differentiation - it allowed you to watch your home team NFL game even when you did not live in your home town - a great offer in a country with as much upper-income job mobility as the USA. That combined with relatively poor service and lack-of-speed with high-definition meant that DISH found itself caught in a low average revenue per user (ARPU), low growth world. 

Until Charlie hit upon a new business model. The Hopper.

The Hopper is a standard personal video recorder (PVR) attached to the satellite receiver - however it records live the whole of prime time television every night. It then allows you to watch the TV with the advertisements removed for you. To quote DISH's website:

Hate commercials? DISH created commercial-free TV so you can save an hour each night! Now you can instantly skip commercials in recorded primetime TV. Only DISH gives you ad-free TV with the Hopper®.

What an offer - the TV you were going to watch anyway without those pesky little adverts. 

But there is of course a problem: the TV networks did not agree to this. Indeed this is as much a threat to the business of commercial TV (which is still advertising supported) as Napster was to the music business. It is thievery, nothing more. And all four networks are suing DISH for this. You can read the story in The Hollywood Reporter if you wish under the unsurprising title of Charlie Ergen is the most hated man in Hollywood.

The Hopper has done wondrous things for DISH. Subscriber numbers are growing sharply after stagnation. The question of course with the Hopper is how does it end? Does it end with Charlie having to stop it after lawsuits, or some legislative change or the death of commercial TV all up. Either way it looks to be an unsustainable advantage built on an unethical and possibly illegal business model.

It is small wonder Charlie is in the game of diversion. He claims his offer is superior but he is offering crappy DISH stock and is diverting with Patriotism in the time honored method of scoundrels and thieves.

And he is doing it for a reason. He doesn't want anyone looking at DISH (and hence DISH-Sprint) too hard. Because unethical and arguably illegal businesses should trade at a discount - and - dear Sprint shareholders - you should not accept stock in one in exchange for your perfectly good phone company.


PS. Disclosures - Bronte owns both Sprint and Softbank. I have not communicated with anyone from Softbank - but Masa Son, if I am in Tokyo you owe me a sake. 

Our big holding is in Softbank.

Friday, May 17, 2013

The end game for Universal Travel: Ms. Yan, 47, has had many years of experience in financial engineering

Universal Travel was the first Chinese reverse merger company I mentioned on this blog. Here is the original post (Travelling Through China)...

The company has since collapsed. It traded up after my original post - something that seems amazing until you work out that an elderly and formerly rich retired car dealer in the Central Valley of California (a man since deceased) spent almost $10 million dollars buying shares.

Those shares are down 98% and the charities that man left his money to wound up nearly empty handed.

Universal Travel's dynamic CEO Jenny Jiang has since resigned. You can see her dynamism in this now classic film of her ringing the opening bell of the New York Stock Exchange:

The 8-K announcing Ms Jiang's resignation also announced her (temporary) successor - a Ms Yan - who used to be the Finance Officer and also the Chief Operating Officer.

Here is what they say about her:

Ms. Yan, 47, has had many years of experience in financial engineering...

So now they tell us...


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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.