The Hackensack

New blogs. Really, this time.

2010-01-26T03:32:00.004-05:00

Yeah, I can't believe it either. The day has finally arrived. We're moving on up to Wordpress.

For occasional posts about specific securities, with a focus on the tiny, obscure stocks I've blogged about here, see Shadow Stocks. No rush to look there right now though, as I've been too busy for the last several hours trying to figure out Wordpress to think much about any specific securities.

For pretty much everything else, see Steam Catapult. See you over there.

Sex beats stocks

2010-01-25T18:08:00.004-05:00

About a month ago, I contacted one of the founders of Kickstarter about using it to raise funds for a due diligence trip to Alloy Steel International's headquarters in Perth. I wrote,

I know from the Kickstarter site that you're currently only accepting projects through invitations, but I think mine is probably a little different than your typical request, so perhaps you'll make an exception (or connect me with someone who has an invitation to share?). Here's the idea.

I went on to explain that everyone who donated at least $100 to the trip would get a detailed report (one that didn't offer any financial advice and complied with all relevant securities regulations). Those who donated more (say, $300) would get the report along with a conference call with me where they could ask me additional questions, etc. The Kickstarter founder I contacted thought it was an interesting idea referred me to his staff members who review ideas for inclusion on the site.

One of those staff members sent me a rejection note a few days later. She wrote that "projects must also engage the community and offer tangible rewards".

I hadn't thought about that much in recent weeks. I've had my hands full with the launch of Portfolio Armor and a few other things, plus after my conversation with Alloy Steel exec Greg Muller followed by the company's revenue release earlier this month, I feel less of an immediate need to go to Perth. But I was reminded of this by an e-mail from a fellow AYSI shareholder yesterday. So I went to Kickstarter's website to copy its URL to paste in my e-mail reply and saw on the homepage this project, that did pass muster with the staff (and has raised more than double its goal in donations so far):

Coming & Crying: real stories about sex from the other side of the bed

About this project

Meaghan and Melissa (or,¹ "we") met because of the internet and writing, and writing about sex (and blogging about writing about sex). Almost since then, we've been talking about how we need to do a book like this: a collection of stories (and photographs) from the messy, awkward, hilarious, painful, and ultimately true side of sex.

As part of this project, all of the money we raise together will go towards producing the book and to paying its contributors. The more we bring in, the more we can put out -- a prettier book, bigger take-home for our writers and photographers, and fancier packages for all those who pledge.

There's a ~2 minute video at the link above that gives you a better idea of what these two gals are working on.

I feel like a knucklehead now. I could have proposed as a project a documentary about sex in Perth, with its own alliterative title -- "Sexual Perversion in Perth" (betting that none of the Gen Yers on the Kickstarter staff would be familiar with Mamet play that title rips off) -- and then if I got accepted and funded, did my due diligence on Alloy Steel surreptitiously while I was down there.

¹That's a "comma of apposition" for you aspiring grammarians out there.

Traveling without moving

2010-01-22T23:55:00.001-05:00

Thursday afternoon, while working on my laptop at a local Starbucks, I ended up having a conversation with a couple nearby. It turned out they were from Paris, in the U.S. on vacation. Nothing too odd about that, but this particular Starbucks was tucked into a stretch of U.S. Route 46 chockablock with hubcap shops, fast food restaurants, hourly-rate motels, used car lots, a couple of BYO strip clubs, and a recently-demolished massage parlor. I go to that Starbucks sometimes because it gets a lot of late afternoon sunlight, but it's not somewhere I'd think of taking friends from out of town. Not exactly a tourist hotspot.

The couple explained that they had taken a year off to travel around the U.S., and had bought a used minivan (for $3k) at a used car lot near that Starbucks last spring. Now they were back after circling round the country and taking a detour into Mexico. They were planning to drive up to Canada for a couple of weeks to renew their tourist visas, but first they wanted to take their new American friend -- the guy who sold them the minivan -- out for a nice French dinner.

They asked if I knew any good French restaurants and I gave them a few ideas, and then let them borrow my laptop to book a hotel for the night. The husband gave me his business card: back in Paris he's a rédacteur en chef of a magazine. His wife was an editor too. The night before, I had been arguing with Trumwill on his blog that the class distinctions he and one of his guest bloggers frequently make are mostly pointless, partly because the demarcations they try to draw are so porous. And here, as if to underline my point, were two Parisian journalists befriending an American used car dealer.

Recently, on the 4HWW forums, someone mentioned CouchSurfer.org, a site built to connect couch surfers with hosts willing to let them sleep on their couches. In one of the testimonials on that site, a host said that hosting a foreign couch surfer was like "traveling without moving". Meeting that French couple in the Little Ferry Starbucks reminded me of that line, which in turn reminded me of where I'd first heard it: in Dune. Embedding is disabled for this one, but click the link and see 1:47-1:57 of the clip.

Dune: Folding Space

Introducing Portfolio Armor

2010-01-21T19:38:00.003-05:00

What Portfolio Armor is:

A site that enables investors to insure their stock and ETF investments (including ETFs that track indexes such as the S&P 500 and the Dow Jones Industrial Average) against market downturns as well as company- and sector-specific risk with put options.

Why put options?

Only put options protect you against losses when stocks or ETFs jump or "gap" downward. Limit sell orders don't do this. For more on put options, and how they can be used to hedge your risk, see Portfolio Armor for individual investors.

How it works:

You enter your stock and ETF holdings, and the maximum downside risk you are willing to accept for each holding. Then, using its proprietary algorithm, Portfolio Armor shows you the optimal put options to buy to obtain the level of protection you want at the lowest price.

Templates for the new blogs

2010-01-21T18:03:00.003-05:00

Yes, there will be new blogs. The job is now in the hands of my crackerjack project manager Matt from Simande, who sent this list of 100 free WordPress themes to look at (he'll add logos and graphics the logo designer created). I have a theme in mind from this list, but I thought I'd see if anyone else had any favorites from the list.

Hitler on the GOP victory in Massachusetts

2010-01-20T18:39:00.006-05:00

Downfall parodies never get old. This is the funniest yet.

BTW, I caught the last hour or so of Downfall on satellite a few years ago. It was quite good. Looks like Bruno Ganz won the German equivalent of a best actor Oscar for his turn as Hitler. Deservedly so.

Update on the OII/TRMA pairs trade.

2010-01-20T12:39:00.003-05:00

On Jan 11th, I mentioned opening a pairs trade going long OII and short TRMA. Today I got stopped out of OII for a loss of slightly less than 9.5% and I covered my TRMA position for a little bit better than a 16% gain, so I made about 6.5% on this pairs trade. Not a home run, but better than a sharp stick in the eye.

More details on the Short Screen message boards.

More puts

2010-01-19T22:04:00.003-05:00

I mentioned on this on the Short Screen message boards earlier today, but I picked up a few DIA puts today when my limit orders for puts on a couple of distressed companies didn't get filled. If I knew Scott Brown would win as decisively as he did in special election for U.S. Senator in MA tonight, I might have waited a day.

Subway-riding dogs

2010-01-19T21:06:00.007-05:00

Last weekend's Financial Times featured an article by Susanne Sternthal, "A wolf in dog's clothing" (the photo above accompanied the article). I found this to be the most interesting part:

[Animal behavior specialist Andrei] Neuronov says there are some 500 strays that live in the metro stations, but only about 20 have learned how to ride the trains. This happened gradually, first as a way to broaden their territory. Later, it became a way of life. "Why should they go by foot if they can move around by public transport?" he asks.

"They orient themselves in a number of ways," Neuronov adds. They figure out where they are by smell, by recognising the name of the station from the recorded announcer's voice, and by time intervals. If, for example, you come every Monday and feed a dog, that dog will know when it's Monday and the hour to expect you, based on their sense of time intervals from their biological clocks."

I wonder if Kirstin Bakis read Sternthal's article and was inspired.

On the rise of China

2010-01-17T18:36:00.004-05:00

Again via Disqus, another comment I made on Fred's blog last week, this one in response to a comment by serial entrepreneur, civil engineer, retired U.S. Army officer, and current CEO of a bulletin board company¹, JLM:

Interesting you mention James Kynge. I've blogged about his "China Continental" thesis a few times (Most recently, in the footnote to this post, where I also linked to an FT editorial that had a more bearish take on China's economy). I hope Kynge is right that China is transitioning to an economy fueled by internal demand; that would be good for average Chinese and the rest of the world too.

I have a tough time envisioning China becoming a global military hegemon, for a couple of reasons. The first reason that comes to mind is that the post-war status quo of U.S. Naval hegemony in the Pacific has been pretty good for China and its more advanced neighbors, economically speaking. Why mess with a good thing?

The second reason is that it's a lot easier to project power globally when you are surrounded by oceans on two sides and friendly neighbors to the North and South. China is cursed by geography by comparison. Consider some of its neighbors: Japan, which mopped the floor with China in WWII; Vietnam, which fought China to a standstill, if memory serves, a few decades ago; Russia; Mongolia -- sparsely populated, but a country whose ancestors conquered China and most of the rest of the world; India, the world's most populous democracy (and a country China has fought a war or two with in the past, when India was weaker); Pakistan; Afghanistan. Add to that mix separatist Tibetans in China's southwest and separatist Muslims in China's northeast. I suspect the submarine-building (China still spends a pittance on military procurement, compared to us) is more about keeping the steel mills humming.

A more likely scenario -- and a more ominous one -- if current trends (i.e., certain self-destructive American policies) hold isn't China replacing the U.S. as a global superpower, but the world having no such superpower.

¹One that had an Altman Z"-score in the distress zone, last time I checked. I mentioned this to JLM via e-mail, and he said he penned (keyed?) an in-depth response, but it was eaten up by the aether and I never received it.

On charitable donations for Haiti

2010-01-17T18:28:00.004-05:00

It occurs to me that some of my better comments appear on other blogs. Via Disqus (which will be added to my new, much-delayed blogs), here is a comment I made on Fred Wilson's blog on the big outpouring of charitable donations in response to the earthquake in Haiti:

I am curious where all of this money will go. It seems like absolutely enormous amounts of money are being raised for Haiti right now (Whole Foods has its cashiers soliciting donations, for example).

Ideally, Doctors without Borders and other respected charities will get to keep some of these donations for future disasters. There is, in a sense, an inefficient market for charity, and organizations ought to be able to keep some of the surge money they raise for future contingencies (and be honest about that). I remember the controversy after 9/11 when the Red Cross planned to use some of the huge amount of money it raised to build blood banks (if memory serves), but public outcry forced them to spend it all on 9/11, even though government aid was already flooding in. I remember hearing about the challenges the Red Cross had in trying to donate all that money.

Haiti, as a perennial failed state, presents challenges of its own. Once the survivors have been pulled from the rubble, treated and fed; once the dead have been buried -- then what?

The editorial cartoon above, by Peter Brookes, is from the Times Online.

Destiny Media update

2010-01-16T19:12:00.004-05:00

I mentioned last month that I had sold out of Destiny Media Technologies (OTC BB: DSNY.OB). At the time, I noted,

I still like the company's story, and I expect it will post relatively impressive numbers in its upcoming fiscal Q1 (seasonally, its strongest quarter), but I got the sense from the reaction of some Destiny longs to the guidance the company issued back in October that some of them had overly optimistic ideas about the company's growth potential next year. Some seemed to assume that the sequential growth the company had predicted from Q4 to Q1 would continue at the same clip going forward. They also seemed to ignore that Destiny's fiscal Q2 is its weakest seasonally.

I'd like to see what that Q2 looks like. Depending on those results, I may buy back into this if the price looks attractive relative to my sense of the company's forward earnings prospects.

All still true today, though I should add (and probably should have added then) that, in the course of several conversations with him, Destiny Media's CFO Fred Vandenberg struck me a straight shooter and a good guy. Destiny issued this release after midnight on Thursday, Destiny Media Q1 Record Revenues Jump 89%: Third Consecutive Profitable Quarter Shows Over 39% Increase in Operating Income.

The stock had a small bump on Thursday, then dropped 15% yesterday, to 44 cents per share, a penny below the price at which I sold it last month. Perhaps other shareholders are having the same valuation concerns I had last month. With six-tenths of a penny in earnings per share in its seasonally-strongest quarter, I remain skeptical of Aaron Edelheit's estimate of 5 cents in fiscal 2010 earnings. Still interested in seeing what its Q2 looks like.

A couple of updates

2010-01-16T18:11:00.003-05:00

There are still some good people in the investment industry, and I was fortunate to speak with a few real gentlemen this week: Bill Singer of RRBD Law, Marc Mayor of Inside ALPHA, and Mark Sullivan of First Trust. All offered some excellent suggestions, some of which I will be implementing soon. Herewith, a couple of updates:

- The new blogs. Sometimes it's harder to find people to do the simpler jobs than the more complex ones. Things didn't work out with the previous vendor and I have requested a quote from another one. Hopefully, these blogs will be up and running soon. I'd like to start the comment contest soon, because the first prize gift certificate is for dinner at a restaurant chain that has an Altman Z"-score in the distress zone. If I had more time and patience, I'd set these blogs up myself. I may end up doing that.

- Portfolio Armor. We are putting the finishing touches on it. I am excited. I think this will be a useful tool for a lot of investors, myself included.

The limits of un-hedged, long-only investing in a secular bear market

2010-01-16T17:52:00.007-05:00

In the comment thread of a previous post ("Welcome to another lost decade"), commenter Brad Castro wrote,

dividend growth investing (in high quality companies), I argue, is immensely superior to simple growth investing, and especially so during secular bear markets.

I offered this response in the comment thread,

I had the same thought five years ago, when I bought shares of PFE, GE, AB, etc. and set them up for dividend reinvestment in an IRA. Take a moment to pull up the five year charts on those stocks.

Any form of un-hedged, long-only investing insufficient in a secular bear market, unless you time your purchases so you make them at or near the secular market low in valuations.

But a chart is worth a thousand words:

Scene from the real estate bust

2010-01-15T11:36:00.005-05:00

I had a late breakfast today with my sister at the place above, which is located in a working class town nearby. $11.50 for two orders of scrambled eggs with diced tomatoes and onion, one order of Spanish sausage, a cheese-filled pastry, and two cafés con leche. That photo was snapped at about 10:30am today, right after we left. Those are a couple of migrant day workers walking in. Chances are, they won't get any work today. Contractors usually pick up their illegal laborers earlier in the morning.

Nearby, there were a couple of pairs of day laborers lingering, waiting for work. At the height of the real estate bubble, there would be dozens.

Updates on the out-of-the-money put basket

2010-01-13T18:25:00.003-05:00

I've been a little swamped today putting the finishing touches on Portfolio Armor, but here are a few quick updates on my put basket. Recall that in a post at the end of last year ("New short position: UAUA") I wrote,

With the Nasdaq near a 14-month high, and the VIX near a 14-month low, I have been building a basket of out-of-the-market puts on financially-distressed stocks drawn from Short Screen's screener¹. Today's addition to this basket are the $6 strike, JUN 10 puts on United Airlines parent UAL Corporation (Nasdaq: UAUA), UALRK.X. I bought a few of these today at $0.40.

Those puts are now trading at $0.35 -- they dropped 12% last week a day before a report from Continental broke that moved the underlying stock higher¹. UAUA was up ~10% today, but not enough to move my out-of-the-money puts again.

Virgin Media, another company in the put basket, priced a junk bond offering today. I wonder if some income-oriented investors are going to pick up long-dated puts on VMED now, with the intent of buying its junk bonds after the credit markets tighten and yields rise.

I mentioned this on Short Screen earlier, but I added a few out-of-the-money JUN 10 puts on TBSI to the basket today.

¹Andy Swan has described options as the "'tells' of the underlying".

News from Alloy Steel

2010-01-12T19:32:00.005-05:00

Alloy Steel International (OTC BB: AYSI.OB) issued this press release less than an hour ago, "World First Product Secures Growth for Alloy Steel". The full text of it is below, but according to the release, despite shutting down for at least the last week in December, revenues for the company's fiscal Q1 2010 (which corresponds to Q4 calender 2009) were up ~37% sequentially from Q4.

PERTH, AUSTRALIA--(Marketwire - 01/12/10) - The introduction of the new thicker Super Alloy Arcoplate onto the market this year has cemented Alloy Steel's (OTC.BB:AYSI - News) standing as a world leader in bi-metallic overlay technology.

As the first company to develop and manufacture the thicker alloy, Alloy Steel is now in an unrivalled position and set to continue on a growth path in coming years.

The past 18 months have been difficult for mining and mining service companies worldwide due to international economic conditions. However, Alloy Steel has not only weathered the financial storm but has improved and strengthened its market position. The company has increased its market share in Western Australia from 20 percent to an estimated 80 percent in just two years as a result of a concerted effort from the entire team.

According to Mr Kostecki, the company's founder and CEO, this year's result is "truly a remarkable achievement given the difficult times which were experienced by clients and ourselves in the downturned economy.

"The company is now well placed to face 2010 in a very positive manner to achieve increased sales, and continued growth and market share across the entire mining and mineral processing spectrum."

New Super Alloy Arcoplate was developed to solve problems caused by wear and hangup. These two issues can plague mining, quarrying, power generation, cement production and other industries, and can cause immense productivity and profit losses.

Alloy Steel used cutting-edge technology to create an alloy overlay over 3/4 of an inch thick in a single pass operation. Conventional methods involve multi-pass overlays using layer-upon-layer welding methods.

Field trials for the new product show outstanding results. The Super Alloy Arcoplate outperforms conventional weld overlay in abrasive wear applications of similar alloy thickness between two and twelve times.

Alloy Steel is currently negotiating supply contracts with major iron ore mining companies. Super Alloy Arcoplate will be used for upgrades and continuing wear plate requirements. There is increasing demand for the product in Western Australia, an area with vast iron ore resources and home to some of the largest iron ore mining companies in the world.

However, as reported from previous filings, Alloy Steel has not been immune to the effects of the economic crisis. This is evidenced by the depressed commodity markets in the first nine months of the financial year.

Investors should be aware that the new Arcoplate Mill was completed and commissioned in the current financial year. Costs required by accounting standards have been expensed to profits resulting from the operations. This has reduced the company's bottom line result accordingly.

Costs incurred from developments were settled using internal cash flow and cash reserves. Alloy Steel used available staff and facilities, and achieved considerable cost savings by carrying out this work 'in-house.'

The following comments should be considered when considering the company's financial performance for the year.

After add-backs for once-off items, the company shows an approximate net profit before tax of $2,150,000.

Add-back items include materials and other costs that have been expensed in relation to completion of the new machine and include:

�
-- Commissioning and testing of the new machine
-- Diminution in listed investments
-- Foreign exchange loss due to the appreciating Australian dollar compared
with a small foreign exchange gain in the previous year.

The first quarter of the 2010 financial year (Oct to Dec) has shown sales of:

�
Oct $ 1,910,330 USD
Nov $ 2,997,347 USD
Dec $ 831,639 USD

Total for quarter: $ 5,739,316 USD

December is a short trading month because of Christmas and New Year holidays.

Extrapolating these figures shows an excellent potential result for the full year.

To give 2010 a flying start, the company is pleased to advise that Synohydro Corporation of Beijing - China has confirmed a second supply contract for Arcoplate as part of their dam enhancement program in the Sudan.

This contract to the value of USD 921,000 is a direct result of the performance of the product previously supplied and the ability of Alloy steel to provide on time delivery of quality price/performance product.

The contract is also based on favourable payment terms to Alloy Steel.

The company and the directors are highly confident for the future for Alloy Steel.

For further information please contact CFO Mr. Alan Winduss +61 412949225

Coming soon to Madison Square Garden?

2010-01-12T15:34:00.004-05:00

New York Governor David Paterson has been struggling with his state's bleak fiscal outlook, and now wants to lift New York's 13-year-old ban on mixed martial arts exhibitions in order to collect sales tax revenue off of it.

Back when New York banned MMA, if memory serves, participation in the sport was limited to men only (I believe that's still the case with the UFC league). Today there are women fighting too, and some of them are pretty impressive. One of the ladies below does a nice job of finishing the fight (this fight took place last fall, but I just caught a replay of it on Showtime last week).

"Welcome to another lost decade"

2010-01-11T20:08:00.001-05:00

Vitaliy Katsenelson recapitulates his secular range-bound market thesis on GuruFocus today ("Welcome to another Lost Decade"), this time with a slight twist: he thinks a 1990-? Japan-style bear market is also a possibility going forward. As I noted in the comments there, Katsenelson's diagnosis makes sense, but his prescription ("active value investing") seems limited:

why rely on any form of long-only investing -- even his active value investing -- if we are in for possibly another decade like the last one? How did long-only value investing fare in 2000-2002 or 2007-2008? How will it fare when the current cyclical bull rally inevitably leads to another cyclical bear correction?

Altman Z"-score pairs trade: Long OII; Short TRMA

2010-01-11T09:44:00.000-05:00

As of Friday's close, Short Screen showed an Altman Z"-Score of -0.13 for Trico Marine Services (Nasdaq: TRMA) and an Altman Z"-score of 9 for Oceaneering International (NYSE: OII). Recall that Z"-scores below 1.1 indicate financial distress and risk of bankruptcy, and scores above 2.6 indicate financial strength (scores in between are in the gray zone). Today I shorted TRMA at $5.31 per share and bought an equivalent dollar amount of OII at $64.70 per share.

An acquired taste

2010-01-10T23:31:00.005-05:00

After noticing one of my tires was getting flat, I stopped by Costco today to have it fixed. There was a three hour wait at the tire center, so I called a cab and took a walk through Costco's liquor store while waiting for it. A Korean gentleman walked over when I was looking at a six pack of this,

And he recommended it. So I bought it. Just opened it a few minutes ago. The first surprise was finding this inside the box:

Here's a close up of that:

It's some sort of face mask, apparently. Odd to find in a six pack of an adult beverage.

Apparently, this stuff is an acquired taste. To me, it tastes like what a rocks glass of vodka tastes like after the ice melts. Which makes sense, considering that this Korean beverage is distilled from sweet potatoes and is about 20% alcohol -- about half the alcohol content as a typical 80 proof vodka. This stuff might work as a component in a sake sangria though.

Another example of clever searching from that submarine book

2010-01-08T00:03:00.002-05:00

In the previous post on Blind Man's Bluff: The Untold Story of American Submarine Espionage, by Sherry Sontag and Christopher Drew, I mentioned an example from the book of a clever approach to finding a needle in a haystack (the use of Bayesian analysis to find a lost nuclear weapon). There was another example in the book, that employed an entirely different sort of cleverness.

In 1970, James Bradley, the director of undersea warfare at the Office of Naval Intelligence, thought there must have been an undersea telephone cable connecting the Soviet missile sub base at Petropavlovsk, on the Kamchatka peninsula, to the Russian mainland across the Sea of Okhotsk. Bradley figured such a cable would be at most 5 inches thick. How do you find a 5 inch thick cable at the bottom of a sea?

It turned out that, as a boy, Bradley had killed time hitching rides on riverboats on the Mississippi, and he remembered seeing signs on the shore occasionally that warned, "Cable Crossing: Do Not Anchor". So (after some political maneuvering the book recounts in detail) Bradley sent a submarine crew to look for a similar sign on the shore of the Sea of Okhotsk. They found one, found the cable, and successfully tapped it. The Soviets hadn't coded their communications through the cable, because they never expected it would be tapped.

A young, European Ahmadinejad

2010-01-07T23:24:00.002-05:00

At the end of last year, lefty blogger/policy wonk Matthew Yglesias mentioned Camera Obscura's song French Navy as one of the best of 2009. I had never heard of them, so I looked them up and listened to the song, which is quite catchy and retro. Below is the video, which features some scenic shots of Paris and Rome. Below the video are a few observations about it.

Observations:

- The band's lead singer reminds me a little of a JetBlue flight attendant with her outfit.

- The blond fellow behind her reminds me a little of the blond guy from Trainspotting (perhaps partly because the band is from Scotland).

- Cheryl mentioned this one first, but I concur that the bearded young man gallivanting around France and Italy with his girl in the video looks sort of like a young, European version of Iranian President Mahmoud Ahmadinejad.

Response from Alloy Steel's CEO

2010-01-06T14:25:00.003-05:00

In the previous post I mentioned I received a response today from Alloy Steel International (OTC BB: AYSI.OB) CEO Gene Kostecki to the e-mail I sent him on 12/23 asking if the company was still planning to build two additional mills in 2010. Below is his response.

Hi David,

We are still planning on increasing our production capacity by an additional two mills in 2010 subject to orders being received as in the last half of 2009 with BHP. It must be remembered that AYSI is no ordinary company -- the technology that is being developed in-house is like comparing the normal weld overlay manufactures to the original IBM punch card computers, whereas the technology that has since been developed by AYSI can be compared to the latest quad core computers which puts our product light years ahead in terms of price, quality and performance of our nearest competition. With our outstanding field test results across the entire spectrum in mining and materials handling having established this technical lead, it is our intention to grow this company with the absolute minimum overhead.

The beauty of all this is that our mills do not need any more additional staff other than that needed to support another mill with 3 additional support bodies.

By the way David, rumor has it that we are driving our main competitor nuts as they have not won a major contract since we launched out new mill and the new super Arcoplate project.

Kind Regards and wishing you all the very best in 2010,

Gene Kostecki

An assortment of updates

2010-01-06T11:31:00.009-05:00

First, a request: if any of you know of a finance professor who is an acknowledged options expert and might be willing to consider a quick consulting project (shouldn't require more than an hour of his time), please e-mail me at contact[at]shortscreen.com. Thanks.

Now, on to some assorted updates and musings.

Sorry for the lack of posts over the last few days. I meant to post something last night, but after a late, gluttonous, feast at George's favorite New York restaurant (Balthazar) last night I was too beat to post or check e-mails when I got home. Before dinner, I had taken George to meet my developers at Simande. George is considering making some modest updates to his business's computer system (he's currently running it on DOS). I mentioned to the Simande guys that George first set up his system when Tronwas playing in the movie theaters. After a beat, Matt asked, "When did that come out, early 80's?". "Yeah," I replied. "That's when we were born," said Matt. For Matt, here is the trailer for Tron:

I believe a remake of Tron is in the works.

After leaving Simande HQ, we met George's old friend Frank at Balthazar. Balthazar is sort of an upscale version of the French Roast, but Balthazar has its own excellent bakery (located, conveniently enough for us, in nearby Englewood, NJ.). After a few bottles of Bollinger for the table, Frank, an actor/playwright, was in a feisty mood. He launched into some of the political arguments you might expect from a New Yorker, with gusto.

I remembered from meeting him on previous occasions that Frank had mentioned he was friends with Al Pacino, so in an effort to deflect him from politics, I asked him questions about Pacino's performance in Heat (e.g., Why was his character chewing what appeared to be a half-piece of gum throughout the whole movie? Why did he always hang up on everyone without saying "goodbye"?). We probably would have gone through less of the champagne (which was wasted on my palate; I can get heartburn just as easily from a $10 bottle of cava) if George hadn't ordered one of those multi-tiered shellfish appetizers for the table, which the waiters consolidated to lower tiers Tetris-style as we ate). In any case, it was a good dinner with good company, but I ate way too much. Balancing that out today by just having a piece of toast and some ginger ale for lunch. Onto some updates:

Investment stuff:

- AYSI.OB: Got a belated response today from the CEO re the e-mail I sent him when they filed the 10-K on 12/23. I'll post on that separately in a little bit.

- USEG: Up today on this news from yesterday about the latest positive well result from its Bakken deal with BEXP, and this news from today that it received its $1 million option payment from Thompson Creek related to the molybdenum project, and that Thompson creek has budgeted several million more dollars for preliminary work on the project this year.

- The United Airlines puts: These went against me a little this week, a day before Continental announced its positive results. Steady as she goes though.

New blogs:

After e-mailing my logo designer's gal Friday asking her, essentially, "WTF?", she wrote back pleading technical difficulties and saying that if she could crawl into the computer and push the process along she would. The thought of her and him being sucked into a computer Tron-style and forced to play in one of the movie's Jai Alai death matches brings me a small measure of comfort at this point.

Using Bayesian Analysis to find a lost nuclear weapon

2010-01-02T03:35:00.005-05:00

Ten years ago I picked this book up at an airport bookstore, Blind Man's Bluff: The Untold Story of American Submarine Espionage, by Sherry Sontag and Christopher Drew. Some thinking I've been doing recently related to a project reminded me of this example of Bayesian Analysis described in the book:

[In January, 1966] A B-52 bomber had collided with an air tanker during a refueling operation 30,000 feet in the air off the coast of Palomares, Spain, losing its atomic payload. Three of the four bombs were recovered almost immediately. But a fourth was lost and had presumably fallen to the bottom of the Mediterranean.

[...]

[Naval intelligence officer John P.] Craven called in a group of mathematicians and set them to work constructing a map of the sea bottom outside Palomeres.

[...]

Once the map was completed, Craven asked a group of submarine and salvage experts to place Las Vegas-style bets on the probability of each of the different scenarios that might describe the bomb's loss being considered by the search team in Spain. Each scenario left the weapon in a different location.

Then, each possible location was run through a formula that was based on the odds created by the betting round. The locations were then replotted, yards or miles away from where logic and acoustic science alone would place them.

[...]

[Craven] was relying on Bayes' theorem

[...]

Craven applied that doctrine to the search. The bomb had been hitched to two parachutes. He took bets on whether both had opened, or one, or none. He went through the same exercise over each possible detail of the crash. His team of mathematicians wrote out possible endings to the crash story and took bets on which they believed most. After the betting rounds were over, they used the odds they created to assign probability quotients to several possible locations. Then they mapped those probabilities and came up with the most probably site and several other possible ones.

Without ever having gone to sea, the team now believed they knew where the bomb was [...] in a deep ravine [far from where the first three bombs were recovered].

Long story short, a deep sea submersible found the bomb in that ravine, right where the calculations plotted it would be.

Happiness and social media success

2010-01-01T11:24:00.006-05:00

Happy New Year, everyone. Since he-who-shall-remain-nameless still hasn't finished setting up the new Wordpress blogs (partly because, apparently, he is unfamiliar with Disqus, which Cheryl was able to set up on her own blog in a few minutes), I'll keep posting here for a little while longer. One of the nice things about Disqus, incidentally, is that it makes it easy to follow your favorite commenters as well as bloggers. For example, you can follow my comments on Disqus-powered blogs by clicking here: http://disqus.com/daveinhackensack/. The last few comments that come up at that link (in reverse chronological order) I made a little while ago in the comment thread of this post by Fred Wilson¹, The Happiness Project - A New Year's Resolution.

You can click on that link to Fred's blog post for the whole exchange, but I'll summarize and excerpt it here, as it relates to a topic I've blogged about before (e.g., here). After recommending Gretchen Rubin's book "The Happiness Project", Fred wrote about her use of social media to promote it,

I'd like to end with a few words on Gretchen's adoption of blogging and social media during her happiness project. In the second month of her twelve month program, she decides to start a blog. It becomes the Happiness Project blog. She figures out how to set up a TypePad account, she decides to blog six days a week religiously, and she starts using Facebook and Twitter. That's how I met Gretchen. Her husband, who is featured prominently in the book and who I've known for a dedade, emailed me last summer and said "my wife Gretchen is getting totally into this social media stuff and I wonder if you might give her some advice". We met for lunch and I gave her a bunch of advice, but was impressed at how much she had already figured out on her own.

[...]

So let's all buy her book , get a bit happier, and show that social media can put an author at the top of Amazon's bestseller list.

In response, I wrote (in part),

Social media success in this case would have something to do with having the access and support of prominent bloggers such as you and your wife. This reminds me of a discussion I had with Andy Swan in a comment thread on this blog a month ago, in your post about "The Fall and Rise of Media". Back then I noted,

There are still velvet ropes; it's just that top tier bloggers (including multimedia stars such as Breitbart or Godin) have their own velvet ropes now. The average person starting a blog today doesn't have much more voice than he did when his broadcasting options were limited to writing letters to the editor of newspapers, calling into talk radio, or going on public access TV.

Gretchen Rubin got past the velvet ropes of your blog (and signed on the Gotham Gal [Fred's wife, who blogs under that pseudonym] as a legitimate affiliate) in part apparently because you've known* her husband for ten years. Not exactly social media success ex nihilo.

*Edited as per Fred's correction.

Fred retorted that he wasn't exactly friends with Mr. Rubin; he had just known him for ten years. And that Gretchen Rubin's social media success would have happened without his help. Perhaps so, but then Cheryl shared some background with me on who Gretchen Rubin was. As I noted in Fred's comment thread,

BTW, Hackensack Gal informs me Gretchen Rubin appears on Slate (owned by social media start-up The Washington Post Co.), is a former prominent attorney (including a stint as Supreme Court clerk for Justice O'Connor), and daughter-in-law of former Goldman Sachs chief, former U.S. Treasury Secretary, and former Citigroup consigliere Robert Rubin. Again, there's nothing wrong with any of that, but it supports my initial impression that this wasn't an example of social media success ex nihilo

¹Fred's not just a user of Disqus but an investor in it, via his Union Square Ventures.

Two year-end charitable ideas

2009-12-31T07:58:00.003-05:00

Below is a post I wrote on New Year's Eve last year, mentioning two charities you might want to consider for last minute year-end contributions. I'll add a couple of updates on both of them here.

Jim Hake, the founder of Spirit of America, came back as its CEO earlier this year. Spirit of America's main focus now is on fulfilling humanitarian requests by U.S. servicemen in Afghanistan. One example is providing radios that Marines can give to Afghans in remote areas, so these Afghans have another source of information about the world besides their local mullahs. Interestingly enough, a commenter on Fred Wilson's blog recently mentioned that it would be a good idea to provide alternate sources of info to Afghans, but his preferred method, if memory serves, involved some expensive and elaborate infrastructure. Since Spirit of America's requests come from troops in the field, they tend to be actionable and pragmatic, e.g., $18 Kaito KA007L radios. Here's a photo from SoA's site of an Afghan with one of these radios:

Toni Maloney, co-founder of Bpeace, offered this update and request today:

Today's a big day in the non-profit world--as Americans make their year-end tax- deductible charitable contributions by midnight.

So I'll keep this brief and say thank you for supporting us in the past. You have helped Afghan and Rwandan women create employment--1,748 jobs to be exact. The intended positive consequences of this workforce development is less poverty, malnutrition, illiteracy and violence. Your support brought much-needed sustenance into Afghan and Rwandan households that include 13,742 family members.

By creating jobs, your gift literally keeps on giving.

If you squeeze us into your giving today, you can donate at www.bpeace.org/donate or send a check to Bpeace, 5 E. 22nd Street, Suite 9J, New York, NY 10010.

Wishing you and your family a happy and healthy 2010!

Toni Maloney
Co-founder and CEO

You can read more on both of these charities below.

Here are two ideas, in the event you're thinking of making a tax-deductible charitable donation for 2008 and don't have a particular charity in mind:

- Spirit of America. Spirit of America fulfills requests for humanitarian aid for locals from U.S. military personnel operating in Afghanistan, Iraq, and Africa. Some examples have included the provision of wheelchairs for Afghan victims of landmines, water purification technology for Iraqi villages, and solar-powered lanterns for Senegalese. I had the pleasure of meeting Jim Hake, the tech entrepreneur who founded Spirit of America, a few years ago in New York, when he brought with him a couple of Iraqi bloggers (the brothers Omar and Mohammed) he had been working with on a project. What Jim has accomplished with SoA has been impressive. I've also had a chance to meet a couple of Marine officers who have been at the pointy end of the spear, implementing projects with SoA, and what those folks have done has been impressive as well.

- The Business Council for Peace. Bpeace supports women entrepreneurs in Afghanistan and Rwanda. Recall that in a recent post ("Questioning the Conventional Wisdom about the Benefits of Microfinance and Encouraging Entrepreneurship") we noted Professor Bateman's criticism of microfinance, that it funds small, "30 chicken farm" types of businesses at the expense of the sort of small and medium businesses that produce more jobs and economic growth. We also noted Scott Shane's similar criticism of American policies that encourage entrepreneurship without discriminating among those entrepreneurs with the best potential to build sustainable businesses. I suspect Professor Bateman and Mr. Shane might approve of Bpeace's approach, which is to identify and vet the "fast runners" (entrepreneurs with the best chance of building sustainable small and medium sized businesses) and back them. The graphic above, from Bpeace's website, summarizes the charity's approach. Incidentally, if you are a businesswoman, getting involved with Bpeace could put you in contact with the sort of successful American businesswomen it could be helpful to know. If you can do well while doing good, all the better.

I hope everyone reading this has a Happy New Year.

Thanks for reading

2009-12-29T01:26:00.005-05:00

And thanks especially to those of you who left intelligent comments here.

~~I'd been planning to shut this blog down when I started the new ones~~ (which my crack design agency still hasn't finished yet), and link to the new blogs here, but now I think maybe it's better just to start fresh. I got that idea over the weekend, based on the reaction to a subsequently deleted post. I knew blogging was mostly pointless going into it, but that was just another reminder of that.

I'll still be blogging, for a while at least, at the new blogs, as I have a new subscription-based site to promote. Perhaps I'll see a few of you there. Goodbye and best of luck in the new year to the to the rest of you.

Scratch that. Change of plans. I'll post links to the new blogs here. Still waiting on the set-up of them.

New short position: UAUA

2009-12-28T10:15:00.001-05:00

With the Nasdaq near a 14-month high, and the VIX near a 14-month low, I have been building a basket of out-of-the-market puts on financially-distressed stocks drawn from Short Screen's screener¹. Today's addition to this basket are the $6 strike, JUN 10 puts on United Airlines parent UAL Corporation (Nasdaq: UAUA), UALRK.X. I bought a few of these today at $0.40.

Warren Buffett famously noted how awful airline stocks have long been as investments, quipping,

I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did.

Despite Buffett's old admonition, investors have bid up shares of UAL to more than four times their low for the year in June. Like those of many risky companies, shares of UAL have been buoyed by the liquidity-fueled rally this year, despite having persistently weak fundamentals. In addition to having an Altman Z"-score of approximately -2.1, according to Short Screen's calculator (scores below 1.1 indicate distress, according to the model), UAL has lost money in three of its last four quarters, and has a current ratio of approximately .68, indicating that its debt burden is a near-term challenge as well as a longer-term one. Over the last year, according to Nasdaq, there have been 7 insider sales and no insider buys. I expect shares of UAL to decline when the euphoria of the current market rally fades and reality sets in again.

¹For those unfamiliar with it, Short Screen's screener uses the Altman Z-score model (for manufacturing companies) and the Altman Z"-score model (for non-manufacturing companies) to rank stocks according to their level of financial distress. In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years prior to the event, with a Type II error of 6%. In a series of subsequent tests covering three different time periods over the next 31 years, the model was found to be approximately 80-90% accurate in predicting bankruptcy one year prior to the event, with a Type II error of approximately 15-20%. For more detail on the models, and on how Short Screen's screener works, please see here.

VMED Update

2009-12-24T20:20:00.003-05:00

Apparently, I'm not the only one who decided to bet against VMED recently. Short interest on VMED spiked 43% in the first two weeks of December.

What would have been spectacular timing

2009-12-24T12:23:00.004-05:00

A day late. Damn. Details later.

Update: Here are the details I didn't have time to write about earlier. Sorry about not writing this out earlier, but it takes me a while to write these posts, and I just didn't have the time to do that earlier today, so I posted that as a placeholder.

As I mentioned in a previous post, the biggest risk I see with Alloy Steel International (OTC BB: AYSI.OB) is, "a nasty exogenous event (e.g., a big fall-off in Chinese demand for industrial commodities¹)". For companies that have options traded on them, you can of course buy puts on the company to hedge your position. How, exactly, to do that in an optimal way is what the next subscription-based site, Portfolio Armor, is about (Portfolio Armor isn't live just yet, but that's its logo above²). Portfolio Armor's proprietary algorithm tells you exactly how many of which put options to buy to give you the level of protection you specify at the lowest cost.

Of course, Alloy Steel doesn't have any options traded on it, so there would be no way to use options to hedge against any purely idiosyncratic risk, but there are ways to hedge against the exogenous risk. I thought about this last night and figured that a way to do that would be to buy puts on a steel company with significant exposure to China. Then I figured, instead of using just any steel company with exposure to China, why not try to find a financially distressed one? I found just such a company using the screener on Short Screen. To give me a rough idea of how many of which of that company's puts to buy to hedge my AYSI position against the specific exogenous risk I mentioned above, I e-mailed my developers at around 8:30 am, asking them to run the algorithm on the steel company I found. When I got the answer from them later, I went to pull up the option and learned that the financially distressed steel company had announced a secondary offering at around 9am today, and on news of that dilution the stock dropped more than 20%, and the optimal put contract spiked more than 50%. Too bad I didn't think of this a day earlier.

¹That's the big question. We presented the positive view on China this post back in September, "China's new self-propelled economy", and the editors of the FT presented the scary view in this editorial last month, "The cost of China’s excess capacity". In a nutshell, the positive scenario: China's big stimulus this year has helped transition its economy to one fueled more by internal demand, in which case there should be continued growing demand for industrial commodities to build infrastructure in underdeveloped parts of China, manufacture first refrigerators for rural Chinese, etc. And the negative scenario: China's stimulus has been mainly hair of the dog, propping up an unsustainable status quo relying on massive trade surpluses that over-extended Western consumers can no longer support.

²Recall our discussion in this recent post of the initial challenges in coming up with this logo.

Alloy Steel's 10-K

2009-12-23T07:25:00.011-05:00

Alloy Steel International (AYSI.OB) filed its 10-K today. I haven't had a chance to go over it in detail yet, but it looks like the big BHP deal that was announced during the AYSI's Q4 contributed less to earnings that quarter than expected. If my arithmetic is correct (the company didn't break out the Q4 numbers in its annual), Q4 earnings came in at 1.86 cents, which is well below my guess of record earnings that quarter, and well below the result of my small survey which found that earnings of about 5.6 cents would be needed to support the stock price above $2.20. I would expect the stock to drop below $2 today, but we'll see.

The 10-K does note that,

The gross profit and subsequent operating profit has been affected by the expensing as required under US GAAP of the materials consumed in the testing and tuning of the new mill. This would amount approximately to $900,000.

$900k = ~5.2 cents per share, so it could be we all underestimated how much the testing and tuning would eat into earnings in Q4. Then again, as the company doesn't break the numbers down by quarter, it's unclear how much of that cost was incurred in Q4. Something to consider going forward, considering that the company has announced plans for building additional mills next year: the ramp-up costs for the expansion related to the BHP deal and other business may eat into earnings more than previously anticipated in the next few quarters.

Update: Initially, I wasn't going to mention this, but its mention by a commenter on iHub made me think of something: the company also announced in its 10-K that it anticipated hiring 3 additional manufacturing workers in the next year. That's good news on its face, but it does make me wonder if they are still planning to build additional mills next year -- I'd think they'd need more than three additional manufacturing workers to run one new mill, let alone the two mentioned in September's press release. Just e-mailed the company, asking to confirm if they are still planning on building those two new mills in 2010.

Second Update: Alloy Steel's Malaga headquarters is shut down for its Christmas break, but I was able to get a hold of Alloy Steel's Brisbane-based International Manager Gregg Muller. Gregg says Alloy Steel's domestic sales reps report to him and he also handles international sales, freeing up Gene to focus more on R&D and manufacturing. Gregg was kind enough to spend an hour on the phone with me just now, and he answered a number of questions. Some notes from our conversation follow.

New mills:

- The third mill is currently about 3/4ths built. Gregg says these mills take about four months to build and another two months to test. They take that long to build because Alloy Steel builds the mills itself, partly to protect its proprietary technology, and partly because they have to build components that they can't get off the shelf. Greg estimates the third mill will be producing product by March or April. After that, he believes the company will start building the fourth mill. He says the third mill will be bigger than the second mill. Not sure, but he believes the intent is to finance the construction of mills three and four out of cash flow, as the previous one was.

Additional employees:

- Greg says it only takes 3 employees per shift to run a mill. The mills are computer controlled, and not labor intensive. At maximum capacity, they would run two 12 hour shifts. Prior to the Christmas break, the mills were running about 18-20 hours per day. He anticipates they might approach 24 hours per day by the end of January. Prior to the BHP deal, they were down to about 10 hours per day. Gregg agreed that it would seem the company would need to hire more than three additional workers to run two new mills.

Current international business:

- Greg said the company has been active working with distributers in Chile and India, and he expects to close deal with a Brazilian distributer when he travels there in February. He started talking with this distributer six months ago. That distributer would be supplying Vale in Brazil, in addition to possibly other companies.

Indonesia:

- The outpost in Indonesia will start as a sales office, which is scheduled to open at the end of January. Greg says it only takes about 12 days to ship product there from Perth. If all goes well, Gregg says the company may build a mill in Indonesia toward the end of next year. If so, that would be the company's fifth mill.

Mongolia:

- Greg was last in Mongolia in October. The largest undeveloped copper mine in the world Oyu Tolgoi finally got the go-ahead from the Mongolian government a few months ago, after 7 years of delays. Gregg has heard that they are expecting to be moving dirt by 2011. Alloy Steel is looking to circle back with Geomandel in 2010 so they are ready for 2011. Also talking to OEMs that will be working on the project.

3-D cladding process:

- Not currently manufacturing or marketing it; currently focused on wear plates. Believes it could be a logical follow-up product sale to current clients down the road though. Might get more tweaking by Gene before then.

New developments with Super Arcoplate:

- Greg says they can now produce plate with a thickness of 1.25 inches, or 31 millimeters. He says they are trying to perfect producing a plate with 1.5 inch thickness, which will get them into casting, and open up new business possibilities. The 3rd mill is being set up so that it can produce plate an inch and a half thick once that level of thickness is perfected.

Math without end, amen

2009-12-23T03:13:00.003-05:00

In the comments of a previous post, Commenter J.K. linked to this Discover interview with cosmologist Max Tegmark, "Is the Universe Actually Made of Math?". Worth reading in full, if you are interested in this sort of thing, but here are a few excerpts from the interview that start in media res.

That brings us to the last level: the level IV multiverse intimately tied up with your mathematical universe, the “crackpot idea” you were once warned against. Perhaps we should start there.

I begin with something more basic. You can call it the external reality hypothesis, which is the assumption that there is a reality out there that is independent of us. I think most physicists would agree with this idea.

The question then becomes, what is the nature of this external reality?

If a reality exists independently of us, it must be free from the language that we use to describe it. There should be no human baggage.

I see where you’re heading. Without these descriptors, we’re left with only math.

The physicist Eugene Wigner wrote a famous essay in the 1960s called “The Unreasonable Effectiveness of Mathematics in the Natural Sciences.” In that essay he asked why nature is so accurately described by mathematics. The question did not start with him. As far back as Pythagoras in the ancient Greek era, there was the idea that the universe was built on mathematics. In the 17th century Galileo eloquently wrote that nature is a “grand book” that is “written in the language of mathematics.” Then, of course, there was the great Greek philosopher Plato, who said the objects of mathematics really exist.

How does your mathematical universe hypothesis fit in?

Well, Galileo and Wigner and lots of other scientists would argue that abstract mathematics “describes” reality. Plato would say that mathematics exists somewhere out there as an ideal reality. I am working in between. I have this sort of crazy-sounding idea that the reason why mathematics is so effective at describing reality is that it is reality. That is the mathematical universe hypothesis: Mathematical things actually exist, and they are actually physical reality.

[...]

But why do some equations describe our universe so perfectly and others not so much?

Stephen Hawking once asked it this way: “What is it that breathes fire into the equations and makes a universe for them to describe?” If I am right and the cosmos is just mathematics, then no fire-breathing is required. A mathematical structure doesn’t describe a universe, it is a universe. The existence of the level IV multiverse also answers another question that has bothered people for a long time. John Wheeler put it this way: Even if we found equations that describe our universe perfectly, then why these particular equations and not others? The answer is that the other equations govern other, parallel universes, and that our universe has these particular equations because they are just statistically likely, given the distribution of mathematical structures that can support observers like us.

The limits of "buy what you know"

2009-12-22T20:14:00.004-05:00

Peter Lynch famously advised investors to "buy what you know". For most of us, that generally means looking at companies that produce the consumer products we buy, but for those with specialized knowledge, it opens up other possibilities. One challenge with that is that the company with the best product isn't always the best investment. I was reminded of that by an e-mail this week from occasional commenter Y./The Rivers.

A fellow shareholder in Alloy Steel had mentioned another holding of his to me, a development stage biotech company, so I asked Y., a microbiologist/biotechnologist, his opinion of it. After offering his assessment of the company, Y. added this cautionary note,

I'm a pretty bad judge of stocks, particularly in the biology realm. a few years ago, I bought some shares in Affymetrix (AFFX) because they had the best microarray platform hands-down, and were about to acquire a big new customer (Merck). Then they made some bad business moves and got way behind the up-and-coming tech (next-generation sequencing, NGS). Their main competitor, Illumina (ILMN), with a much inferior microarray platform, did everything else better, and is now the biggest NGS company, I think. If you compare their stocks over the last few years, it's quite disparate.

Sold the rest of those GLD puts

2009-12-21T18:33:00.003-05:00

In a post earlier this month ("Buying a lottery ticket to bet against gold") I mentioned buying a few puts on the gold ETF GLD. Those puts I bought were the Jan 10s with a strike price of 108, GCZMD.X. I got them at $0.74. I sold half on 12/11 at $2.92 for a gain of about 390%. Today I sold the rest at $3.20, for a gain of about 430%. I'd send Buffetteer17 a nice bottle of scotch if I knew his address.

From a mess to the masses

2009-12-21T01:11:00.005-05:00

A catchy tune from the French band Phoenix. We heard this in the car last night, and Cheryl mentioned that this band's songs don't get airplay in France because the band sings in English. A quick search to confirm that lead me to this USA Today article which includes another bit of trivia: the band's front man Thomas Mars has a child with director Sophia Coppola.

One of the recent commenters on this video on YouTube complains that others have compared Phoenix's latest album to Radiohead's OK Computer. That reminded me of this exchange on Bijan Sabet's blog last month, where I was surprised to find that I wasn't the only one who thought Radiohead peaked with The Bends.

A paradox of atheism

2009-12-20T19:02:00.008-05:00

Ben Stein's documentary Expelled, about the censuring of scientists who speculate about intelligent design, was on cable this weekend. I had it on while I was doing some work on my laptop. Toward the end of the film, Stein interviewed the famous atheist Richard Dawkins, and asked him how life began. Dawkins conceded that no one knew, but said it was possible that some advanced civilization elsewhere in the universe had initially seeded life here on Earth¹. Stein was too satisfied with this admission of the possibility of some form of intelligent design by Dawkins to ask the more interesting follow up questions. For example, if some alien civilization seeded life here, who seeded life there -- or is it turtles all the way down²?

¹This idea was dramatized, in Epcot Center fashion, in one of the favorite movies of occasional commenter Y./The Rivers.

²You could raise the same objection about theistic or deistic explanations, as Bertrand Russell did in his quote on that Wikipedia page, but the point -- and the paradox -- is that atheists still end up faced with incredible stories to explain enduring mysteries. How fun can Flying Spaghetti Monster mockery be when your alternative explanation is space aliens?

Another update on the new sites

2009-12-18T18:31:00.005-05:00

Still waiting on the new blogs. My designer does some nice work, IMO, but he is not always the quickest in terms of turnaround time. Which is too bad, because I was considering him for another project, one with which time will be of the essence, if I decide to pursue it.

Re the new blogs, I mentioned in the last update
that I'd be offering prizes for commenters. I picked up the prizes for the first contest already. First prize will be a $50 gift certificate to McCormick & Schmick's. Second prize will be a pair of movie tickets. Third prize will be a McCormick & Schmick's cookbook¹.

As far as the new subscription-based site, that one's coming along. A static site is up for it now, and the developers are putting the finishing touches on the functionality based on a proprietary algorithm I had commissioned for the site. The logo for this site was done by the same designer who did the Short Screen logo and who is currently working on the new blogs. His final logo for the second subscription-based site was great too, but it got off to a rough start. My initial idea was a piggy bank wearing a medieval knight's suit of armor, but after playing around with that, the logo designer said that didn't scale down. His next stab at the concept was the preliminary sketches above. Those got a chilly reception from my developers (who have done site design work for Showtime, CNN, Mercedes, and some other well-known corporate clients). One of the developers said that Figure 1, which I thought was the best of that bunch², looked like "an S&M pig".

Incidentally -- I mentioned this a few days ago to a reader who contacted me looking for a financial adviser -- the new site will offer individual investors the ability to search for and contact financial advisers who are members of the site (financial advisers will not be able to search for individual investors though). It will also have a link to FINRA's BrokerCheck, so individual investors can check the backgrounds of FAs. Financial Advisers will be able to upload profiles including summaries of their backgrounds, professional designations, a thumbnail photo, and a link to their own site.

¹There may be multiple third prizes, as I have a trunk full of those, since you used to have to buy the cookbook to get the gift certificates at Costco (as part of its current cost-cutting campaign, McCormick & Schmick's no longer includes the cookbooks in that deal).

²Though I thought the Philips head screws the pig had for eyes had an awful connotation: they reminded me of the X's used to denote a dead or passed out comic strip character.

Learning from people who piss you off

2009-12-18T17:25:00.003-05:00

In a post a couple of weeks ago ("How not to negotiate"), I mentioned a potential vendor who had pissed me off. As I noted in a later comment on that post, in retrospect I had handled our interaction poorly. I knew the right negotiating tack (as I've used it successfully before) and took the wrong one instead. The right response when asked by a potential vendor what your budget is is to say, as I have on previous occasions,

I prefer not to specify a budget ahead of time, so as not to prejudice your estimate.

Instead, for some reason I took the bait and made a low ball offer. In a post yesterday on her Atlantic blog ("The Naive Negotiator"), Megan McCardle explained the problem with low ball offers:

There is a zone of possible agreement (known to those who study this sort of thing as the ZOPA). You can't negotiate your way out of that zone no matter where you start. Nor does starting from a more aggressive bargaining point always mean that you will do better in the negotiation. It can often mean you do worse, because you poison the process.

My mother used to sell real estate, and you'd see this a lot with stupid buyers, particularly men using newbie agents: they'd submit an unrealistically low bid on the notion that this would force the buyer to bargain down. What it actually did was convince the buyer that it was a waste of time to negotiate with you, and/or make them angry.

The people that you knew at Elaine's

2009-12-17T00:30:00.004-05:00

Any else old enough to have been subjected to a steady diet of Billy Joel songs on the radio will recognize the lyric in the title of this post. Forty six years after Elaine's opened, Cheryl and I finally went, guests of George (last mentioned in this post, though we also saw him a couple of weeks ago at a brunch at his place in Brooklyn). My advice: if you want to go to say you went, have a drink at the bar and then head somewhere else for dinner. You can get better Italian food for half the price at Maggiano's¹. I was hungry though, so I finished off a plate of penne carbonara, which is sitting like a brick in my belly as I write this. One nice touch: after we settled up, the manager offered a digestif on the house, so I had a Macallan for the road.

¹Maybe Elaine's is still good for spotting celebrities, if that floats your boat, but we didn't recognize anyone famous there tonight. We did once see Danny Aiello at the Hackensack Maggiano's once though. Cheryl thought it was odd that an Italian who was in Moonstruck would eat at an outpost of a chain Italian restaurant where neither the chef nor the manager are Italian (judging by their last names). Then again, neither Moonstruck's director nor its great screenwriter -- nor its two Oscar-winning actresses -- were Italians either.

More Alloy Steel

2009-12-15T17:46:00.005-05:00

Bought a few more shares of Alloy Steel International (OTC BB: AYSI.OB) at $2.18 today. I am curious what Q4 earnings number it will take to support the current price. My initial guess was 7 cents, but my small survey (n=4) on iHub resulted in average of 5.6 cents as the earnings number needed to support the current price. Maybe I'll try a similar survey on AYSI's Yahoo message board (if anyone reading this owns the stock, feel free to leave your guess in the comment thread -- remember though, this isn't your guess of what the earnings will be, but what they would need to be to support the current share price). The company had announced that it was running two mills at full blast after landing its huge supply deal with BHP, but that wasn't the case for the full quarter. The company's highest quarterly earnings were 6.8 cents in Q2 of 2008, and that was with one mill running at full capacity. That was with an earlier version of the company's product though.

My guess is that the company will release record earnings and trade higher on that news, which is why I picked up a little more here. If it disappoints on the quarter, but the longer-term thesis remains intact, I'll buy more on the drop. Barring a nasty exogenous event (e.g., a big fall-off in Chinese demand for industrial commodities1), I think I will do well adding at this price.

¹That's the big question. We presented the positive view on China this post back in September, "China's new self-propelled economy", and the editors of the FT presented the scary view in this editorial last month, "The cost of China’s excess capacity". In a nutshell, the positive scenario: China's big stimulus this year has helped transition its economy to one fueled more by internal demand, in which case there should be continued growing demand for industrial commodities to build infrastructure in underdeveloped parts of China, manufacture first refrigerators for rural Chinese, etc. And the negative scenario: China's stimulus has been mainly hair of the dog, propping up an unsustainable status quo relying on massive trade surpluses that over-extended Western consumers can no longer support.

The Sea Artist

2009-12-15T16:49:00.005-05:00

I read the new, posthumously-released Crichton novel last week, Pirate Latitudes. One character in the novel, which is set in the Caribbean in the 17th century, is a helmsman, who is so intuitively skilled at reading the sea and driving ships that the other characters call him "The Sea Artist". I don't know if Crichton came up with that term himself, or he came across it during his research, but it struck me as a fine turn of phrase. It would be great to be a stock artist, and have a similarly intuitive skill at investing. Maybe that's something that comes with looking at things long enough, until the patterns finally emerge.

On occasion, I think I've seen a pattern here and there, among two or three obscure stocks I follow. I still have DSNY on my Yahoo portfolio page for some reason, and when I saw it hit .52 today my immediate thought was, "If I still owned that I'd sell it right there". Of course, I sold a couple weeks back at .45, so I didn't have any intuition then that it would soon hit .52. A few weeks before that though, buying DSNY at .305 looked like a slammed dunk, so I bought it.

When I saw USEG dip below $5 earlier this week, I had half a mind to buy more there. I didn't though, and now it has traded higher on yesterday's news of the high initial production of its latest Bakken well. That one's a little trickier though. I've owned and have been following this stock for about a year and a half, but since the BEXP deal a few months ago, it's almost a new stock: new shareholders, much bigger volume, an imminent secondary offering, etc. My average price on it now is about $2.80, I think. I don't think I'll be able to buy more for less than that anytime soon. So at what price should I buy more?

The textbook value investing approach would be to come up with an intrinsic value for the company, and figure out where the current stock price is relative to your intrinsic value figure. That approach has some merit, but it also has a couple of drawbacks to it. The first is that it would be a pain in the ass, as it was to do my initial write-up of the company back in the summer of 2008. Back then, I did that with the prospect of getting paid in mind: I submitted that write-up to the Value Investor's Club when they were offering $5k for the best idea of the week. That was also my application to membership in the VIC. It was rejected, so of course my USEG write-up didn't win best idea. In any case, a similar write-up today would be a little more involved because it would have to account for the dilution of the secondary offering(s) and the inclusion of new ventures.

The second drawback of that approach is the false sense of precision inherent in any intrinsic value calculation (I didn't see the need for even attempting one with my initial write-up, as the company was trading at a ~50% discount to its book value then). To do one with USEG, you'd have to speculate on the success, or lack thereof, of additional wells drilled in its Bakken deal; you'd have to estimate production rates and oil prices going forward; you'd have to ballpark the value of its Standard Steam Trust holdings by looking at comps with publicly-traded geothermal companies; you'd have to speculate about molybdenum and uranium prices for its properties in those areas, etc. In short, you'd be stringing together a lot of subjective assumptions to come up with an objective-sounding number.

USEG news

2009-12-15T00:01:00.004-05:00

Last week, U.S. Energy Corp. (Nasdaq Capital Market: USEG) announced that it had priced a secondary offering of 5 million shares at $5.25, and its stock dropped on the news, as it had on the company's initial announcement of its (larger) shelf registration in October, on fears of dilution¹. The main reason USEG is raising additional capital is to fund its participation in additional Bakken wells with BEXP. After the close Monday, USEG announced the latest results from that drilling program:

U.S. Energy Corp. Announces Initial Production Rate of Approximately 3,394 BOE/D From the Williston 25-36 #1H Well

Those are the highest initial production rates so far on this drilling program.

¹When I spoke to him on the day USEG announced its shelf registration, CEO Keith Larsen said he'd been getting a number of angry calls about it. I reminded him of the old Michael Milken quote, that the best time to raise capital is when you can.

TCFKAP's Q4 and fiscal 2009

2009-12-14T18:08:00.003-05:00

The company formerly known as PhotoChannel, PNI Digital Media (OTC BB: PNDMF.OB) announced its Q4 and year-end numbers today, PNI Digital Media Announces Fiscal 2009 Year-End and Fourth Quarter Financial Results. It earned 2 cents in the quarter. In the previous comment thread, commenter Homer315 noted that Aaron Edelheit's prediction of a sequential doubling of EBITDA came to pass and noted the company's warning about currency effects in its conference call. I missed that part of the conference call, but I assume the warning related to the challenges of having costs in Canadian dollars and revenues in U.S. dollars when the USD is weak relative to the CAD.

Do yourself a favor and don't click on this

2009-12-13T02:10:00.002-05:00

Via Ilkka: Gimme Friction Baby.

Acting like an owner

2009-12-12T00:13:00.003-05:00

We went to the Hackensack Maggiano's for a late dinner tonight. There was a half hour wait for a table, so we ate at the bar. The whole time the bartender was loudly complaining about how busy it was, about a particular customer who asked him if he had some cordial, etc. Normally when something like this happens, I say I'm going to write the restaurant and never get around to it, but tonight I grabbed one of the manager's business cards and fired off a quick e-mail to him at 11:51pm. Seven minutes later, I got this response from him:

Thanks for letting me know about this situation. I am still in the restaurant and will immediately follow up on your feedback which I appreciate.

I am so sorry that it was not a more pleasant experience. The bartender should be happy it was a busy night!

I would love to send you a gift certificate to make up for this. What is the best address to use?

Can't handle it better than that. Brinker must do a good job of incentivizing its restaurant managers to act like owners.

Andy Swan on why you're screwed

2009-12-11T23:23:00.003-05:00

From Andy Swan's blog:

An endless fountain of ideas. I’ve lost count, but I’d guess an average of 2.5 killer businesses come forth from your brain on an annual basis. Unfortunately, they get mugged by reality and disappear into the vapor of lost dreams just as quickly as they were formed.

Obviously, there are several reasons for the canyon between your “entrepreneurial” vision and your accomplishments:

1. Geographic location — no one where you live can code or invest like the hippies in San Fran. Why fight that?
2. Debt obligations — Far be it from you to actually take your standard of living down a notch while trying to do something “revolutionary”…..meanwhile, men jump on grenades.
3. Muted enthusiasm — If your friends aren’t instantly enamored with the 6th complex idea that you describe without having built anything yet, how will anyone else “get” your brilliance?
4. Idea pirates — Obviously, your idea is so unique and valuable that everyone will steal it, take it to the hippies in San Fran and have it built and funded (but not as good) before you finish the sentence.
5. Family — Apparently you married someone that needs a lifestyle that ratchets up slowly and predictably in order to love and support you. And, ya….your infant children would be devastated if you put money into anything other than granite counter-tops and a paper thin computer with a glowing fruit on it.

The list goes on and on.

You’re screwed. All that genius and no chance to execute on it.

Poor you, born into the country that rewards, encourages and celebrates entrepreneurship more than any other in human history.

You are an old man in a lazy-boy, so damn comfortable you’re afraid to move.

Cruise-control into the coffin it is. Enjoy.

Playing with the house's money

2009-12-11T16:31:00.006-05:00

In a post last Thursday ("Buying a lottery ticket to bet against gold") I mentioned buying a few puts on the gold ETF GLD. Those puts I bought were the Jan 10s with a strike price of 108, GCZMD.X. I got them at $0.74. Sold half today at $2.92 for a gain of about 390%. Letting the other half ride a little longer.

Nigel Andrews on Where the Wild Things Are

2009-12-10T18:51:00.002-05:00

From his film review in today's Financial Times:

Maurice Sendak's fantasy picture-book was a marvel: an enchanted Träumerei set in a monster-mad forest. Sendak's creatures were and on page still are cuddly, scary, indelible. Jonze, formerly of Being John Malkovich , and his co-screenwriter Dave Eggers, a gold-chip novelist who with this and Away We Go is becoming a Hollywood liability, do everything wrong. They come at it like killjoy opera directors wanting to set The Magic Flute in Auschwitz. Little Max (Max Records) runs from a quarrelling home to a remote fantastical island, reached across rough seas in a sailboat. We are bursting to go "Oo-er!" at the awaited ogres, combined with "Coochy-coo" for the cute ones. Instead we go, "What the hell are these?" Performers in manky creature-suits, wearing oversize soft-toy heads, waddle into frame and spout banal, tetchy dialogue. The familiar voices (James Gandolfini, Forest Whitaker, Catherine Keener) somehow add to the sense of cheat and cheesiness.

The scenery is dead-leaved trees in a dun wilderness, with ashy dunescapes for variation. Has the Bomb gone off? Something has blown the plot to pieces. I wasn't sure what the creatures were quarrelling about, but quarrel they do endlessly, sometimes with dirt-clod fights, sometimes with verbal abuse. The Jonze/Eggers message must be that Max's fantasyland duplicates his home life and that maybe mimicry and reflection will exorcise reality. But shouldn't therapy, at least in art for or about childhood, be fun? The book was entrancing. The book deserved better. Happily there is still time, before the world ends, for someone else to film it.

Andrews's mention of Away We Go calls to mind A.O. Scott's review of that movie.

Jim Rogers, dollar bull

2009-12-10T18:42:00.002-05:00

At least in the short-term. Here he is on CNBC (which I haven't watched since we got Bloomberg TV). Hat tip: @TheStreet_LA.

Bought Puts on Virgin Media

2009-12-10T10:33:00.004-05:00

Virgin Media (Nasdaq: VMED) caught my eye on the Short Screen screener last night. In addition to having an Altman Z"-Score in the distress zone, the company has been losing money for the last four quarters (though those losses have narrowed somewhat over the last three), and has a fairly high debt load (about $9.5 billion in net debt, versus trailing revenue of $6.6 billion and a market cap of about $5.5 billion). Despite that, its share price has rocketed up from a low of $3.76 back in March, to $17 as of last night's close¹. A quick search on Twitter showed several bullish tweets on the stock over the last few days, based on its technical trends.

Since Virgin Media has options traded on it, I figured I'd buy puts on it instead of shorting it to cap my downside risk. I bought a few of the Jun 10 put contracts with a $10 strike price (NUDRB.X) this morning for 30 cents each.

¹The shares of a number of financially distressed companies have had similarly explosive run-ups from their March lows, including one we mentioned here previously, BAGL.

Update: Perennial contrarian "Commodity" makes the bullish case for VMED in this comment thread on GuruFocus. He could be right, so if you're thinking of going long or short VMED, you may want to check out his comments first.

Update on new sites

2009-12-10T01:26:00.003-05:00

The two new blogs that will replace this one should be up next week. The plan is to post new investment-related content on one, and everything else on the other. Initially, I was just going to keep everything on one blog, but I got a package deal on the logos, and I think there may be a way to monetize an investment-themed blog down the road. I have a thought on how to do that, but more on that later.

There will be a couple of technical differences on the two new blogs. Both will use Disqus for comments. When I first came across Disqus on Fred Wilson's blog, I didn't get the point of it, but now I think it adds value. For those unfamiliar with Disqus, it allows you to embed a reply to a particular comment; it sends you an automated e-mail when someone responds to one of your comments; and it allows commenters to rate each others' comments. The first of those features makes longer comment threads easier to follow; the second keeps older comment threads alive longer (because commenters know someone will be made aware of their comments) and obviates the need for comment moderation on older posts; and the third of those features will give me a metric by which I can encourage readers to leave more intelligent comments. I'm planning on offering a prize to the commenter who earns the most points commenting on the new blogs at the end of the first month. More on that next week.

The other technical difference will be that the new blogs will be on WordPress. I don't know if that will make a difference to you as readers, but it will mean some new things for me to learn, I suppose. The main reason for the move to WordPress is that there is a greater choice of templates there, and the one my designer picked to semi-customize wasn't available on Blogger.

Finally, the second subscription-based site is currently in development and should launch... maybe by the end of the year, if all goes well. We'll see. More on that later too.

Update on that bet against gold

2009-12-09T02:35:00.005-05:00

In a post last Thursday ("Buying a lottery ticket to bet against gold") I mentioned buying a few puts on the gold ETF GLD. Those puts I bought were the Jan 10s with a strike price of 108, GCZMD.X. I got them at $0.74 and they closed yesterday at $2.65, so they're up about 350% since last Thursday. So far, so good for Buffetteer17's idea. When to sell is another question.

Time for tariffs?

2009-12-09T02:11:00.004-05:00

Calls from some quarters for tariffs on Chinese imports to the U.S. are nothing new, but this one in yesterday's Financial Times, from a former University of Chicago professor named Robert Aliber, caught my attention, "Tariffs can persuade Beijing to free the renminbi". Excerpt:

Americans have been patient - too patient - in accepting the loss of several million US manufacturing jobs because of China's determined pursuit of mindless mercantilist policies. The absurdity of the current situation is that China's currency protectionism has more of an impact on American manufacturing employment than US fiscal policy.

The US can help China make the necessary adjustments toward a reduction in imbalances by adopting a uniform tariff of 10 per cent on all Chinese imports, based on their values when they enter the US. Six months after the establishment of this tariff, the rate would increase by one percentage point a month until the Chinese trade surplus with the US declines to $5bn a month.

The precedent is clear. In August 1971 the US adopted a 10 per cent tariff on dutiable imports to induce Japan and several European countries to allow their currencies to float. The measure quickly accomplished its goal - the European countries stopped pegging their currencies immediately and the Japanese allowed the yen to float a week later. The tariff was eliminated after a few months.

[...]

It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods. Virtually all of the goods that the US imports from China could be sourced at home or in Indonesia, the Philippines or South Korea. China would find it difficult to find other foreign markets for the goods that it no longer sold in the US.

The Chinese might huff and puff about US protectionism and threaten that they will no longer finance the US trade deficit - but that chatter would be hollow because the single most important cause of that deficit is Chinese purchases of US securities. Such an initiative by the Obama administration would be much more significant as a jobs-creation measure than anything else it could adopt.

The Chinese authorities can hide behind the smokescreen of American protectionism to undertake the adjustments that some in the People's Bank of China must already recognise is inevitable. The experience of the early 1970s suggests that once the logjam has been broken and imbalances reduced, the Americans and the Chinese can focus on North Korea, Iran and other contentious issues.

Stupid Cheap?

2009-12-05T20:24:00.005-05:00

That's how Aaron Edelheit ("issambres839") describes shares of Destiny Media Technologies (OTC BB: DSNY.OB) in his latest comment on the Value Investors Club:

I estimate that Destiny can earn 5 cents a share in fiscal 2010 (ending August 31st), on at close to 100% revenue growth. The revenue growth will be driven by more music being sent digitally and an increase in their international business. Destiny only trades at around 8 times my earnings estimate, despite tremendous growth and operating margins around 50%. Operating margins in the last quarter were already 34% and trending higher. That is why the company announced a buyback as well. I expect Destiny to continue to announce great results and the share price to keep bouncing higher.

This stock is stupid cheap.

Attempting to value a company based in its future earnings makes sense, particularly for little-followed micro caps such as DSNY (or AYSI¹, for that matter). If you think you can see future earnings that the market hasn't priced into the stock yet, you can profit by buying the stock now, before those earnings materialize and the market values the stock accordingly. As Niels Bohr said though, "Prediction is very difficult, especially if it's about the future.". For an example of that, let's look back at what Edelheit wrote about DSNY at the beginning of 2008:

Trading at seven times my fiscal 2009 (ends August 31st) earnings estimate, Destiny Media with its 90% plus gross margins and recurring revenue stream is a undiscovered gem for both technology and value investors alike.

[...]

The company currently has a market cap of around $30 million. Assuming my revenue estimate of $11 million is correct, the company will earn $0.10 in pre-tax profits in fiscal 2009. The company should probably be valued at a multiple of 15 to 20 times that number. That would give you a valuation of $1.50 to $2 per share.

Using a price to sales measure on $11 million, 10 times price to sales for a 90% gross margin, highly recurring business seems fair, giving the company a value of $2.11 per share.

[...]

If the company can continue to grow to my revenue estimate of $16 million in 2010, it will earn $0.20 per share, making $4 per share an easy target in 18 months.

[...]

Whether the stock goes to $2 or $4 is really a moot point with the stock at $0.68 per share.

So, two years ago, Edelheit predicted that DSNY would earn 10 cents a share in its fiscal 2009 (and 20 cents in its fiscal 2010). It ended up earning 1 cent per share, in its fiscal 2009, most of which was the result of a refund of previously paid taxes. I don't fault Edelheit for getting those predictions wrong -- like Niels Bohr said, predictions about the future are tough. But I don't see how confident he can be in his current earnings prediction. Edelheit seems unchastened by his 2009 predictions being off by an order of magnitude. I tried to ask him about this on his blog, but for some reason my comment didn't post.

To reiterate a point I've made here before about Destiny Media Technologies, I like the company's story, and it has been moving in the right direction recently by becoming profitable, growing its revenue and earnings, etc. My concern is its price relative to its future earnings.

¹I could certainly be off with AYSI, but the math seems simpler and clearer to me in its case. During its best quarter it earned 6.8 cents per share. That was with one mill running at full capacity. Now it has two mills running at full capacity, spurred in part by a long-term supply deal with one of the largest mining companies in the world. Let's say the company earns 10 cents per quarter next year with two mills running at full blast. Annualize that and give it a 10x multiple and you have a $4 target (that doesn't take into account the other two mills the company says it plans to build, its recent deal in Indonesia, other possible business, etc.). An exogenous event (e.g., China's economy falling off a cliff) could nix that scenario, but in the event that doesn't happen, I doubt my low-end prediction of 40 cents in 2010 earnings will be off by a factor of ten. We'll see though.

A brief word from our sponsor

2009-12-05T19:49:00.000-05:00

If you're new here, take a moment to click on the bear over there and look around -->

Short Screen offers tools and ideas for short sellers, including a screener that pulls up companies predicted to go bankrupt by their Altman Z-scores. Here is a link to a third party review of the site, Screening Stocks for Short Selling. Here is a link to a post dealing with some common questions about short selling and risk.

The second draft of history

2009-12-05T19:23:00.004-05:00

In yesterday's New York Times, Stephen Holden reviewed a new movie called Serious Moonlight, the screenplay of which was written by the late Adrienne Shelly. About her murder, Holden wrote,

Three years ago Ms. Shelly, who was 40, was killed in her New York apartment by a construction worker bent on robbery

That wasn't the story I remembered, so I did a three second search, and came up with this contemporaneous account of the crime from Gothamist, which includes a quote from the New York Times:

Yesterday, the police announced that the death of actress-director Adrienne Shelly was murder, not suicide. Shelly's husband had found her body hanging from a shower rod in the Greenwich Village apartment she used as an office last week, leading the police to initially suspect she committed suicide. But they did find an unknown shoeprint in the bathroom, and the shoeprint turned out to belong to a construction worker doing renovations on a downstairs apartment

Diego Pillco, an Ecuadorean immigrant, was confronted by Shelly about the noise he was making. They apparently got into a physical fight where Shelly slapped him and Pillco punched her unconscious. Worried that he would be deported, he dragged her body back to her apartment and staged the hanging. From the NY Times:

Detectives from the Sixth Precinct in Greenwich Village were particularly troubled by an unexplained footprint found in the bathroom. They examined the shoes of everyone who had entered the apartment, including police officers and emergency workers, but found no match for the print.

They canvassed the building, and found that renovation work was under way in some apartments. The detectives matched the footprint from Ms. Shelly’s bathroom to one they found at one of the work sites, and then used the match to track down Mr. Pillco, the authorities said.

Newsday reports that Pillco was 5 feet, to Shelly's 5 feet 2, and "had trouble trying to situate her body to fit a suicide scenario, so he had to step on the toilet, leaving behind the sneaker print."

Pillco, not seen at the 15 Abingdon Square building since the killing, was arrested at his Brooklyn apartment and charged with second degree murder. He confessed to the police, "I was having a bad day. I didn't mean to kill her. But I did kill her." The ME's office is still looking into the cause of death (from the punch or the hanging).

Shelly's family was doubtful she would kill herself, and husband Andrew Ostroy said, "We are incredibly grateful to the New York City Police Department for their dedication, professionalism and tenacity in following up on every lead in this case. We hope everyone will respect that this is a difficult and private time for our families."

Update: Commenter "frailingminda" on Ta-Nehisi Coates's Atlantic blog brought this New York Times article to my attention: "In Guilty Plea, Actress’s Killer Changes Story to Robbery". Excerpt:

His original confession had the ring of truth: He was an illegal immigrant working on a renovation job in a Greenwich Village building when the imperious woman upstairs confronted him over construction noise.

They argued. She scratched him. Panicked that she would call the police and that he would be deported, he punched her and pushed her to the floor. Mistakenly thinking he had killed her, he hanged her from the shower rod of her bathroom, in a staged suicide.

But in a courtroom on Thursday, the construction worker, Diego Pillco, 20, told a very different story of how he killed the woman, Adrienne Shelly, a filmmaker, on Nov. 1, 2006. Ms. Shelly, who was 40 and the mother of a 3-year-old daughter, had just finished a film, “Waitress,” which opened to warm reviews after her death.

Mr. Pillco, a short, boyish-looking man, speaking softly through a Spanish translator, told a judge in State Supreme Court in Manhattan that the argument had not been over noise, but over a robbery.

He told the judge that Ms. Shelly had caught him stealing money from her purse after he had slipped into the apartment at 15 Abingdon Square that she used as an office.

When she picked up the phone to call the police, he said, he grabbed it and covered her mouth as she started to scream.

“When she fell to the floor I saw a sheet and decided to choke her, and that’s what happened,” Mr. Pillco said.

The judge, Carol Berkman, prodded him: “And you tied a sheet around her neck and strung her up?”

“Yes,” Mr. Pillco replied, “and I made it look as if she committed suicide on her own.”

So, long story short: Stephen Holden's original description of the murder was correct. I stand corrected.

How not to negotiate

2009-12-04T13:55:00.003-05:00

Don't ask "what's your budget?". That's a spectacularly unsubtle way of asking what's the most you can shake someone for your product or service. A potential vendor asked me that a couple of days ago, and after that inauspicious beginning to our correspondence, he doesn't have my business and I don't want to deal with him.

Say what you think your product or service is worth, and justify it. Then we can negotiate and come to a price we both think is fair. It's not just about the money. The amount I'm up on my little anti-gold bet today is probably more than what that vendor was fishing for. There are enough a-holes in the world. You can differentiate yourself by not being one.

The best game by an RB in Giants Stadium this year?

2009-12-04T11:46:00.003-05:00

Could have been the performance by Ramsey high school's senior halfback Zach Donnarumma, who had 25 carries for 266 yards and 4 TDs in Ramsey's win over River Dell in last night's North Jersey, Section 1, Group 2 state championship which was held at Giants Stadium. I wouldn't have known about if I hadn't ran out to Sonic around 11:30pm last night, and heard a bunch of ecstatic kids celebrating some sort of victory. Out of curiosity, I checked out NJ.com when I got home to find out what all the excitement was about. Here's the Record's highlight clip from the game:

Ramsey beats River Dell to win North 1 Group 2 NJ HS football final

A little more Alloy Steel

2009-12-04T11:33:00.004-05:00

Picked up a few more shares of Alloy Steel International (AYSI.OB) today at $2.27 when my limit order hit. I had been trying to pick up a little more at that price for a couple of months.

Buying a lottery ticket to bet against gold

2009-12-03T19:24:00.006-05:00

I've mentioned the pseudonymous GuruFocus commenter Buffetteer17 before, noting that he is probably the savviest and most numerate of the commenters on that site. There's a lot more chaff than wheat on GuruFocus, but I usually read Buffetteer's posts with interest. He wrote this in a GuruFocus comment thread today:

According to the Sornette bubble detector formula, the gold price bubble is nearing a critical point, meaning there's likely to be a large correction in the next few weeks. I applied the formula to GLD price history going back to March and got several high quality fits, with an R-squared in the range of 92-94%. You can clearly see the faster-than-exponential price rise on a log price plot. The critical dates range from 11/27 to 12/4. I bought a few Dec 09 and Jan 10 put options on GLD as a lottery ticket.

At this point, a commenter mentioned the devaluation of the dollar as the cause of the spike in gold prices. Buffetteer's response:

Gold prices in dollars are going up super-exponentially, way too much to be explained by dollar devaluation. Maybe dollar weakness is an underlying cause, but the gold price is now disconnected from that. We're seeing herding behavior. The motivation seems to be buy gold because other people are buying it and the price is increasing.

As I noted in my own comment on that thread,

I had a related exchange with Aaron Edelheit, after he wrote a post saying people should get out of cash because of dollar weakness. My guess is that when we get the inevitable stock market correction, the dollar will rise as it did last time, and gold will drop. The longer term trends might be different, but that seems like the most likely near term scenario.

I piggybacked on Buffetteer17's idea here and picked up a handful of Jan 10 puts on GLD today.

Out of Destiny

2009-12-02T16:54:00.006-05:00

Sold out of Destiny Media (OTC BB: DSNY.OB)@ $0.45 today. In the comment thread to the previous post, Paul Price brought up some points I had been thinking about for a while, and which I had discussed with other commenters here on previous occasions. The last two quarters have established Destiny as a viable company, and one that I think may be consistently profitable going forward. But do its future earnings justify its current price? I don't know. As I noted in the comment thread of the previous post, with an inherently high margin business, profits should grow nicely, but they are starting from a low base. At $0.305, having a feel for the stock, it looked cheap ahead of what I expected would be a positive report, so I increased my position by about 50%; at $0.46, I'm not so sure. I took advantage of the high volume today to exit at $0.45.

I still like the company's story, and I expect it will post relatively impressive numbers in its upcoming fiscal Q1 (seasonally, its strongest quarter), but I got the sense from the reaction of some Destiny longs to the guidance the company issued back in October that some of them had overly optimistic ideas about the company's growth potential next year. Some seemed to assume that the sequential growth the company had predicted from Q4 to Q1 would continue at the same clip going forward. They also seemed to ignore that Destiny's fiscal Q2 is its weakest seasonally.

I'd like to see what that Q2 looks like. Depending on those results, I may buy back into this if the price looks attractive relative to my sense of the company's forward earnings prospects.

Looking for a new post on Destiny Media?

2009-12-01T04:34:00.000-05:00

Here you go.

Green Destiny

2009-11-30T08:54:00.003-05:00

Destiny Media Year End Results Exceed Guidance. From that release:

Q4 Revenue up 77% Over Prior Year; EBITDA Increases to 266% of Prior Quarter

* Press Release
* Source: Destiny Media Technologies
* On 1:08 am EST, Monday November 30, 2009

* Companies: Destiny Media Technologies Inc

VANCOUVER, British Columbia, Nov. 30 /PRNewswire-FirstCall/ -- Destiny Media Technologies (OTC Bulletin Board: DSNY - News) is pleased to announce results for the quarter and year ended August 31, 2009.

Revenues of $2,560,447 were 62% higher than the prior year and quarterly revenues of $872,569 were 31% higher than the prior quarter. Net income was $610,831 for the company's first profitable year. Earnings before interest, taxes depreciation and amortization (EBITDA) grew to over $300,000 for the quarter ahead of management's preliminary results. The company has had quarter to quarter revenue improvement in eleven out of the twelve most recent quarters and quarter to quarter growth in Play MPE® access revenue in fifteen of the sixteen most recent quarters.

Destiny is also announcing that its board of directors has authorized a program to repurchase up to 1 million shares of the company's common stock at a maximum share purchase price of $0.80 per share. The repurchases will be at times and in amounts as the company deems appropriate and will be made through open market transactions.

[...]

Based on preliminary Q1 financial information, Destiny believes it will achieve first quarter fiscal 2010 revenue of at least $1,000,000, representing an increase of at least 14% over the previous quarter and 102% over Q1 fiscal 2008.

Recall that we added more DSNY.OB at $0.305 a couple of weeks ago, noting that we suspected it would trade higher after it released its earnings.

The higher education bubble personified

2009-11-29T23:11:00.005-05:00

The higher education bubble personified.

From Friday's New York Times, Again, Debt Disqualifies Applicant From the Bar. Excerpt:

[A] panel of five New York judges [denied] one would-be lawyer, Robert Bowman, admission to the bar because his debt approached half a million dollars.

“His application demonstrates a course of action amounting to neglect of financial responsibilities with respect to the student loans he has accumulated since 1983,” the judges wrote in a decision issued late last week. They went on to criticize his “dealing with the lenders.”

The decision, which comes as students borrow ever larger sums to cover the cost of higher education, blocked Mr. Bowman’s effort to have his bar application reconsidered after it was initially denied earlier this year. His long struggle to enter the legal profession was the subject of an article in The New York Times in July.

Without practicing law, Mr. Bowman said it would be difficult to earn enough to repay his debts which, because of fees, penalties and interest, were growing by about $10,000 monthly.

“This has destroyed my life,” Mr. Bowman said. “Everything I’ve worked for, every effort, every fight that I’ve taken to make this progress, has been for nothing.”

The photo above, of Mr. Bowman posing alongside his expensive wall decorations, accompanied the previous article about him in the New York Times and was credited to Suzy Allman.

More on short selling and risk

2009-11-29T13:31:00.004-05:00

In the comment thread below John Chow's follow up post on Short Screen, a commenter wrote,

If you go long the maximum you can lose is 100% of what you invested. (As I did with my smart investment in Enron!)

If you go short, but the shares rise in value, you then have to purchase them at this higher amount. How much is that higher amount? It is limitless. Thus you are exposed to a massive risk that is unknown at purchase.

Imagine you had decided to short Volkswagen before the massive swing in its share price saw its market capitalization hit $364 billion, making it the most expensive company in the world. Many experienced hedge fund managers were on the wrong side of this trade.

Shares prices do move sharply, particularly those thinly traded and small caps. If you are going short, then you could well be in for a nasty shock.

I recommend The Intelligent Investor by Benjamin Graham (first published in 1949).

In response, I wrote,

Questions about short selling and risk came up in the comment thread following Michael Kwan’s original review of Short Screen. I summarized those questions and addressed them on my blog, if you would like to take a look, “Short selling and risk”.

The Intelligent Investor by Benjamin Graham is an excellent book. I have read it and would recommend it as well. Regarding Graham, you may be interested to know that one his first teaching assistants and proteges, Irving Kahn, is, I believe¹, still an active investor at over 100 years of age. Kahn is no stranger to short selling. In fact, an article in Smart Money several years ago noted that one of Kahn’s first big investing successes was with a short:

Along the way, Kahn got to know many of Graham’s famous disciples, including Warren Buffett. A gutsy Kahn wasn’t swept up in what he calls the “crazy market” of the late 1920s. In fact, his first trade in the summer of 1929 actually was a short sale of Magma Copper that turned out to be a winner in a few months.

¹Kahn is still listed under the investment personnel section on the Kahn Brothers website, so I assume he is still alive and investing.

Whatever happened to 'Girl in Your Shirt'?

2009-11-28T23:11:00.004-05:00

I read about Girl in Your Shirt a couple of months back on Mark Cuban's blog. An enterprising young woman was recording video clips of elevator pitches like this one below for various businesses:

That video was posted on her site at the end of May, and it appears to be the last one she's done. I e-mailed her via her site a while back to see about doing one of these clips for Short Screen, but never heard back. If she gave this up, another young woman who's comfortable in front of a camera ought to run with the idea, preferably on some sort of CPA basis.

John Chow on Short Screen and Tim Sykes

2009-11-27T15:21:00.005-05:00

John Chow on Short Screen and Tim Sykes, as resources for investors looking to short stocks: "Going Long on Going Short".

High-end chef adapts to new economy

2009-11-26T06:49:00.005-05:00

Hat tip to Cheryl for this article from NJ.com about how Craig Shelton, the chef/owner¹ of what was once New Jersey's most expensive (and one of its best reviewed²) restaurants, The Ryland Inn, is now working in a diner. About nine years ago occasional commenter Y./TheRivers, who had won a $150-off coupon to the restaurant, treated me to dinner there for my birthday. If memory serves, he ended up paying $350+ out of pocket, even after getting the $150 off -- and we had ordered the less expensive of the two wine pairings offered for the tasting menu. We did get a couple of free cigars from the chef though, when he found out that Y. and him belonged to the same secret society/fraternal organization. From the NJ.com article,

The Skylark Fine Diner and Lounge on Route 1, with its 60s airport lounge-meets-the-Jetsons interior — flying saucer-shaped lights, retro tables and chairs, and clocks showing the time in Tokyo, Moscow, Paris, London and elsewhere — is one of the more striking diners in a state that boasts more than any other.

But still, a top chef in a Jersey diner? What’s he going to do, offer $25 patty melts?

Far from it.

Shelton, the Skylark’s guest chef, has added dozens of eclectic, globe-spanning, reasonably-priced dishes to the diner’s menu since early September. Constantine Katsifis, the Skylark’s owner, says he and Shelton are "inventing a new category of diner."

"The restaurant business across America is a horror show — down 60 percent, down 40 percent," Shelton said.

The thought of working in a diner makes Shelton laugh heartily.

"But it’s a good idea for any chef ... to have a more diversified portfolio."

After a water line break shut down the Ryland Inn in early 2007, Shelton was working on his high-end coffee line and ideas for food-related TV projects when Katsifis invited him to a restaurant trade show in Chicago.

I remember Shelton's high-end coffee line, from articles about it a couple of years ago. He was offering two types of coffee, actually: one allegedly blended and roasted for enjoyment on yachts and the other for stables. $20 per lb. for each, I believe. Back to the article,

Over dinner, Katsifis outlined a plan for the Skylark that was still evolving in his own mind.

"(There are) 20 chefs as accomplished as he is in the country," Katsifis said. "We came back from that meeting and decided to take the Skylark to the next level."

A commenter on at NJ.com wrote,

This is a welcome change. The French have bistros, the Italians trattorie and we have - diners.

NJ diners prove that anyone with a deep fryer, a can opener and a griddle can go into the business.

Well, not exactly. The most successful diners have loyal clientele who will only eat mediocre food from their favorite diner's deep fryer.

Edison is a little bit of a haul from here, but we'll have to head down there and check out the new Skylark diner.

¹A commenter on NJ.com writes that Shelton is no longer the owner of the Ryland Inn, having lost it to bankruptcy. I don't know if that's the case or not.

²From that link to the New York Times review:

Did I say words fail me? I seem to have gone on for five paragraphs about a tomato salad -- a dish you probably won't get to eat, by the way, for 9 or 10 months, the season having passed. But this is what it's like to eat at the Ryland Inn. You lose yourself in this food -- its colors, its textures, the way it works with the wine and the way the flavors seem to change and broaden with each mouthful.

[...]

Amid such riches it's easy to forget your surroundings. The 200-year-old inn, once a stagecoach stop on the road from New Brunswick to Easton, Pa., is a fine white clapboard building with Gothic touches and a green awning. The garden, open for strolling, occupies 2 of the inn's 50 acres; the rest is rolling pasture shaded by ancient trees. On a clear weekend afternoon in the fall, watching hot-air balloons drift over the forested hills of Hunterdon County, you can imagine yourself in France.

Hunterdon County is old money horse country (unlike hardscrabble Sussex County, where this pony lives).

10 things you need to stop tweeting about

2009-11-24T21:25:00.006-05:00

Hat tip to the Fourth Checkraise for this:

Covered short of KITD

2009-11-23T10:31:00.004-05:00

On October 8th I mentioned that I shorted KITD at $11.55. Today I finished covering it at $10.31 for a slightly better than 10% return. I tried to cover in the $9s a couple of weeks ago for a 15% return, but didn't get a fill - one of the challenges of shorting a low volume stock. Not exactly a home run, but not a bad return for a short position during this increasingly frothy cyclical bull rally.

I may decide to short KITD again, but in the meantime, I'll check the screener and message boards on ShortScreen and look for some more attractive short candidates.

SNL on President Obama's China visit

2009-11-23T00:43:00.003-05:00

Hat tip: Kid Dynamite.

The Half Kelly bet

2009-11-22T20:07:00.004-05:00

One of the smartest and most numerate commenters on GuruFocus is the one who goes by the pseudonym "Buffetteer17". Here is Buffetteer17 recently expounding on the merits of a modified version of the Kelly formula for optimally sizing bets or investment positions:

The half Kelly bet has some interesting mathematical properties. For risk management purposes, the nice property is that it cuts your risk of temporary loss (i.e., volatility) by a large amount while reducing your return expectation only a little. The other important property of the half Kelly bet is that it gives a large margin of safety in the risk estimate. If you are off by a factor of two on your risk of loss estimate, a full Kelly bet will reduce your return expectation to zero. But a half Kelly bet will leave you with 2/3 of the return expectation. Not surprisingly, underbetting is far, far safer than overbetting.

With the full Kelly bet, your probability of temporary loss is a linear function of the amount of loss. For example, you stand a 90% chance of losing 10%, an 80% chance of losing 20%, a 50% chance of losing 50%, etc. Not many investors are comfortable with the prospect of a 50% probability of losing 50% of their money. With the half Kelly bet, your probability of temporary loss is a quadratic function of the amount of loss. For example, you stand a 81% chance of losing 10%, a 64% chance of losing 20%, a 25% chance of losing 50%, etc.

Your expected gain with the half Kelly bet is reduced by 25%. For example, if your expected gain is 40% with the full Kelly, it is 30% with the half Kelly, if your expected gain is 30% with the full Kelly, it is 22.5% with the half Kelly, and if your expected gain is 10% with the full Kelly, it is 7.5% with the half Kelly.

The quarter Kelly bet is even safer. You cut your volatility by a quartic factor while reducing your return expectation by half. For example, you stand only a 6.25% of losing half your money. If you can find enough uncorrelated bets to get all your money invested, you can still invest 100% of your stake with a high safety factor with multiple quarter Kelly bets. The rub, of course, is that it is hard to find truly uncorrelated bets during a market crash like 2008.

In his brief book The Dhando Investor, Buffett wannabe Mohnish Pabrai devoted a chapter to the Kelly formula before concluding that, rather than follow it exactly, he was motivated by it to aim for a 10x10 portfolio (ten positions each comprising 10% of his portfolio). According to notes on his annual investor meeting earlier this year, Pabrai has moved further away from the Kelly formula, to a 3-5-10 set up, where he will only allocate 3% or 5% to most positions, and only occasionally allocate 10% to one idea under extraordinary circumstances.

A problem I have with this gets to a key difference between investing in stocks and betting. Stocks have their own idiosyncratic risks and potential upsides, and the more of them you own, generally, the less informed you will be about them. Better to dig deep and bet big on a handful of stocks with high upside potential, in my opinion, than to broadly diversify as Pabrai is doing. Even broadly diversified index investors got their heads handed to them last year. Idiosyncratic risks aren't the only ones out there, and in over-diversifying to eliminate them, you also diversify away the idiosyncratic high potential returns associated with individual stocks.

Mandelbrot Set, animated

2009-11-21T19:05:00.004-05:00

I've mentioned Jonathan Coulton's song Mandelbrot Set here a couple of times before, but I just found this video for it animated by a self-described "math dude" at Cornell. For any math geniuses reading this, be sure to listen to what Coulton says over the credits.

And a pony

2009-11-20T18:40:00.002-05:00

Video of a young pony (I think it's a year and half old) having a snack. Cheryl took this last Sunday. If anyone is interested in diversifying into ponies, I think this one is for sale.

Did political correctness facilitate the Fort Hood massacre?

2009-11-20T18:32:00.002-05:00

The Atlantic's Ta-Nehisi Coates isn't sure. Neither are most of his commenters. In about an hour of my life I won't get back, I took a slightly different view in the comments there.

A neglected asset class?

2009-11-20T15:04:00.006-05:00

In an exchange with Aaron Edelheit on his blog earlier this week (in the comment thread of this post of his, "Why are you sitting in cash?"), I pointed out that, even if one were bearish on the U.S. dollar, it might not make sense to diversify out of it now if one believes that the stock market is overvalued. That's because, if history is a guide, the dollar will rally (at least temporarily) when the stock market corrects. At that point, after the dollar rally, it might make more sense to diversify into non dollar-denominated assets.

Richard Bernstein made a similar point in his column in yesterday's Financial Times ("Lessons of investing are ignored"), noting the negative correlation of U.S. Treasuries to stocks and other asset classes:

Investors should be trying to emulate their Chinese and Japanese overweight positions in Treasuries. Instead, Wall Street is striving to get the Chinese and Japanese to “diversify” like everyone else. In my opinion, the Chinese and Japanese should ignore the advice and stick with their Treasuries.

[...]

Treasuries are today’s “alternative” asset class. Treasuries’ returns continue to be negatively correlated to equities, yet they remain widely underowned because investors consider them overly risky.

Update: Yahoo! Finance's current headline: "Stocks fall for 3rd day as dollar strengthens".

Added Destiny

2009-11-19T13:44:00.002-05:00

Picked up some more Destiny Media (OTC BB: DSNY.OB) shares at $0.305 today. I suspect they will be trading higher after the company releases its earnings later this month. We'll see.

New Mexico soccer brawler speaks

2009-11-18T19:01:00.004-05:00

Yahoo! Sports reports that Elizabeth Lambert, star of the clip in this post, "Girl's soccer gets rough", was interviewed by the New York Times about her exploits during that game against BYU: Vilified New Mexico soccer player breaks her silence. Excerpt:

The junior was deluged with calls and letters after the video went viral. Some of those were threats, but others came from men who wanted to ask her out. She was disgusted by both.

The screen cap above, of Lampert drilling a BYU player in the back, accompanied the Yahoo! article. If memory serves though, that shot at least was in retaliation for an elbow strike. That video featured more blatant stuff by Lambert than that.

For value investors and online entrepreneurs

2009-11-18T07:00:00.000-05:00

A couple of new products profiled by TechCrunch may be of interest.

For value investors, particularly the ones who enjoy investing in big companies everyone already knows about: Trefis might be of interest as a GUI way of playing around with discounted cash flow estimates.

For online entrepreneurs who want a more professional way to accept payments than PayPal and don't want to deal with the hassle of setting up the gateway, payment processor, security certificate, etc. from scratch (as my developers did with ShortScreen.com): Recurly (currently in "private beta"). I didn't look at all of the comments in that thread, but a couple of commenters mentioned a competitor to Recurly that's already live, Spreedly.

Never seen a football play like this

2009-11-17T21:22:00.003-05:00

Via Yahoo! Sports. Amazing:

Business is business

2009-11-17T19:08:00.006-05:00

This was a pleasant surprise. Fred Wilson's resident bouncer, conspiracy theorist, and occasional target of my disapproving comments Kid Mercury signs on as an affiliate of ShortScreen.com. Welcome aboard, Kid.

Bakken Black

2009-11-17T00:26:00.004-05:00

U.S. Energy Corp. Announces Initial Production Rate of Approximately 1,544 BOE/D From the Lee 16-21 #1H Bakken Well.

I believe that's three-for-three so far on USEG's Bakken deal.

Incidentally, one thing you notice using ShortScreen is that a number of natural resources companies appear on its screener, including BEXP, USEG's Bakken partner. Indeed, when you consider the generous terms USEG got on this deal, it's not too surprising when you consider both companies' respective Altman Z"-Scores: USEG's score was in the financial strength zone and BEXP's was in the distress zone. Not surprising that USEG would get good terms on its deal given that it was negotiating from a position of financial strength.

Rethinking Belichick's call last night.

2009-11-16T07:16:00.003-05:00

For those who didn't catch the end of the Colts-Patriots game last night, here's the recap from Yahoo! Sports:

Needing a first down to seal the game, Belichick decided to go for it on fourth-and-2 from his own 28 with 2:08 to go. The Patriots called their second timeout of the drive, leaving them with none, to set up the play: A short pass from Brady to Kevin Faulk(notes), something the 2007 NFL MVP had repeatedly used to burn Indy’s young, depleted pass defense all night.

Not this time.

Faulk made a juggling catch but safety Melvin Bullitt(notes), who replaced Bob Sanders(notes) in the lineup, came straight up the field and drove the Patriots running back into the ground a half-yard short of the marker.

[...]

The miss gave Manning 1 minute, 57 seconds and all three timeouts—an eternity for the three-time MVP—and he went right to work.

Manning hooked up with Wayne for 14 yards. He let Joseph Addai(notes) carry the ball for 13 yards, down to the Patriots 1. He sent Addai inside again on first-and-goal, the same play Addai scored on to win the 2006 AFC Championship game, but he got nothing. So Manning went back to Wayne in the end for the win.

The Pats got the ball back on the kickoff after that last TD with something like 9 seconds left, and the clock promptly ran out after one in-bounds completion by Brady.

After the game, play-by-play guy Al Michaels asked a couple of analysts about Belichick's decision -- former Colts coach Tony Dungy and someone else, whose name I forget. Both agreed that Belichick made a bad call, not punting on 4th & 2 from his own 28. I thought so too, at first, but re-thinking it, I think Belichick made the right call given the amount of time left in the game (just over 2 minutes). He probably figured that, if the Pats didn't convert, the Colts would likely score a TD -- but starting from his ~28 yard line, they'd score it quickly, leaving plenty of time for the Pats to get into range for a game winning field goal afterwords. And that's probably what would have happened had Pats defenders not stopped Colts RB Joseph Addai at the 1 yard line on his 13 yard run.

Advice, and a request

2009-11-14T20:32:00.005-05:00

If you register a domain name because you plan to build a website with that domain name later, something to watch out for: if you plan to host your site elsewhere, but your domain registrar parks your domain on a "coming soon" page first, it can impede your search engine optimization later. That appears to be the case with ShortScreen.com, which is taking some time to get indexed by search engines (this has also held up Google Adwords/Microsoft adCenter keyword ads). If you have your own site, and wouldn't mind posting a link to ShortScreen ( http://shortscreen.com/ ) in a post there, I'd be grateful, as my developers tell me that will help with the search engine indexing. Thanks a lot.

To head this issue off for the next site (which is currently in development), my developers moved the domain from the registrar early, and put up a quick one page site for the domain hosted on their servers.

Covered short of a David Einhorn stock for 27% profit in less than two months.

2009-11-13T12:27:00.006-05:00

On September 17th, I mentioned that I had shorted one of David Einhorn's holdings, Einstein Noah Restaurant Group (Nasdaq: BAGL), at $13.78. I found BAGL initially using ShortScreen's screener: at the time, it was one of the 50 most-distressed stocks trading at $10 or above. Earlier today I covered my short position at $10.05, for a 27% profit in less than two months.

If you had followed me on this particular trade but shorted only 100 shares, your capital gain would have paid for an annual membership to ShortScreen more than twice over.

Time to retire the football helmet?

2009-11-13T07:07:00.005-05:00

Old friend and new reader of this blog (if he's still reading it) Y./TheRivers e-mailed me this WSJ story a few days ago, "Is It Time to Retire the Football Helmet?". He sent it to me because he remembers that I was awarded a worthless patent (the CAD image above is from the patent) years ago for a football helmet-related invention. From the article:

"Some people have advocated for years to take the helmet off, take the face mask off. That'll change the game dramatically," says Fred Mueller, a University of North Carolina professor who studies head injuries. "Maybe that's better than brain damage."

Mueller's right that this is an old idea. 15 years ago I wrote a paper about my invention where I mentioned some expert (it might even have been Mueller, I don't remember) advocating removing the face mask. I do remember that whoever this expert was advocated teams doing so unilaterally, and for coaches to tell their players that this way they'd have a greater field of vision (in my paper, I suggested that those who took this unilateral tack would come to grief and they would be better off using my invention).

I mentioned to Y. via e-mail that I believe there have been for years rubber shields that can be worn over the top of current helmets and that these shields reduce the impact from collisions by, if memory serves, 40%. Why they aren't worn more often, I don't know.

What Jeffrey Sachs doesn't get

2009-11-13T03:13:00.005-05:00

I'm a couple days late to this, but Columbia's Jeffrey Sachs went one-for-three in his recommendations in his Financial Times op/ed Wednesday ("Obama has lost his way on jobs"). He also made a pretty glaring omission. From his essay,

The past week brought news of US double-digit unemployment and the Federal Reserve’s decision to maintain near-zero interest rates. Both pieces of news expose the inadequacy of US economic policymaking. The Obama administration’s stimulus policies are not well-targeted.

[...]

During the previous bubble, the US consumer was encouraged to over-borrow. Recreating a new bubble is like offering just one more drink, on the government’s account, to overcome a mass hangover. With budget deficits of about 10 per cent of gross domestic product, government spending needs to be far more consequential than temporary boosts to consumer spending.

The Republican alternative is equally fatuous. For every problem there is a single Republican answer: tax cuts.

OK, so far so good, though it's worth noting that Sachs's characterization of Republicans doesn't apply to all (e.g., Bruce Bartlett).

Sachs goes on to recommend a three part solution:

1) An increased emphasis on exports and infrastructure (makes sense).

2) " " Education (doesn't make sense).

3) " " Green energy (doesn't make sense, except, perhaps if it's limited to nuclear which many environmentalists don't consider to be green. Spain, the world leader in wind power, had 19.3% unemployment as of October).

On education, Sachs writes,

The unemployment rate among college graduates is only 4.7 per cent, while it is 15.5 per cent among those without a high-school diploma. The US woefully under-invests in education outlays for the poor, who drop out of school and then cannot find gainful employment.

First, I'm not sure what Sachs is talking about with respect to under-investment. We spend plenty on education -- 7% of GDP, versus 4% for defense. We spend more per student on primary and secondary education than Japan does.

Second, this is the kind of thing I guess someone might write if he had never gone to public schools growing up and were ensconced in a sinecure at Columbia University. It must make perfect sense from Sachs's perspective: unemployment rates are lower for college grads, so let's just turn those high school dropouts into college grads. It probably has never occurred to Jeffrey Sachs that most high school dropouts dropped out because they didn't have the aptitude for college prep work in high school, let alone college itself.

Sachs seems unaware of the higher education bubble (As Sheila Tone noted recently at Hit Coffee, even last week's Florida shooter had been a participant in it).

Now for Sachs's glaring omission:

The president has lost the economic initiative, weighed down by a tedious fight between two outmoded ideologies: Keynesianism and supply-side tax cuts, as well as by the president’s excessive deference to Congress.

Can you think of another domestic policy initiative that has preoccupied the President this year (Hint: it rhymes with "stealth care")? I suspect Sachs knows that, as Tsinghua University Professor Yu Qiao warned back in April, the administration's emphasis on social spending could "delay sustainable recovery". But he probably is in favor of the Democrats' proposed health care reform and figures that, politically, this is their best chance to enact it, even if it's the wrong priority economically. Hence, Sachs's omission.

The sirens call a sailor to die

2009-11-13T01:39:00.004-05:00

The backbone of America

"So, what's your favorite Cult album," the guy standing to my right asked. We were waiting for the concert to start at the Wellmont in Montclair, NJ Tuesday night. I told him it was between the album the band is playing in its entirety on this tour, 1985's Love¹, or Sonic Temple. "I like them all" he said. A hardcore fan. "Do you have the white boxed set?" I confessed I had never heard of it. "The black boxed set?" Ditto. And so on for a few minutes.

I introduced him to Cheryl who wasn't sure what her favorite Cult album was, and he said his name was Chris. He said he was a sales rep for Otis Spunkmeyer, up from Orlando on a business trip he scheduled around the concert (he said he was going to see the band again in Orlando this weekend with his wife). "I spread happiness and joy," he said. "I sell cookies and baked goods. The cookies in Subway restaurants? That's us. If you've ever had a muffin in a Hampton Inn, that was ours too." If you've ever stayed at a Hampton Inn, you've also seen guys like Chris there, men who make the American economy move.

The last fan

On the way to the show we had parked on some residential street and ended up having to walk a half mile or so detour² to the theater, so after the concert, we stood outside for a moment trying to orient ourselves. A small crowd had formed, waiting for the band to emerge. We figured we'd stay around for a few minutes and watch. The roadies or the theater staff fenced us in with bicycle racks on two sides so no one would get in the way of the equipment being loaded up. After a few minutes, the back up guitarist and the bassist walked out, signed a few autographs and posed for a few photos. Then the fierce and precise drummer John Tempesta came out. He looked a lot smaller in person than he did glazed in sweat, pounding away behind the drum kit. He posed for a few photos too with a couple of fans, and I shook his hand and complimented him on his performance. Then he walked off into the Montclair night with some young lady about half a head taller than him.

That left two tour buses for the core of the band, lead singer Ian Astbury and lead guitarist Billy Duffy. Cheryl quipped that one bus was for Astbury's ego. The little crowd started to thin out when Astbury and Duffy didn't appear after a few minutes. At that point I started to wonder who would be the last fan waiting around on a Tuesday night. The guy who broke out his leather pants and jacket for the show? The little gaggle of Eastern European guys, one of whom had a sheet with all the songs on the Love album taped to his shirt? I had to go to the bathroom by that point, so we didn't stick around to find out.

¹This one sounds much better live, incidentally. I suspect that the band will take the best versions of each of the songs on it from the concerts on this tour and release a 25th anniversary live version of it next year. That I would buy. The title of this post comes from the lyrics to the last song on the album, btw.

²We walked past some pottery cafe and Cheryl asked, "Why can't we have something like that in Hackensack?" "We have more diversity than Montclair," I said, by way of consolation. "I'd rather have a pottery cafe," she said.

Ill-equipped to act, with insufficient tact

2009-11-13T00:59:00.004-05:00

This didn't last long. On the advice of one of my developers I deviated from the personalized tweeting and sent the same reply to 20 or so folks on Twitter yesterday. I searched for people tweeting about short selling and then suggested they might want to check out shortscreen for other short ideas. In fairness to my developer, he didn't suggest to do that, exactly: he suggested to tweet a handful of folks at once. In any case, my Twitter account has been suspended, which frankly surprised me.

Judging from 100% of the tweets I received from 30 individuals over my few days-long Twitter career, my tweets were better targeted and more relevant than pretty much any of them. For example, unlike the fellow who managed to send me -- someone hasn't golfed in maybe four years and has a set of Costco clubs gathering dust somewhere -- 20 links to golf tips in two days, I only contacted actual short sellers about a site geared to short selling. That's not to suggest that all of the tweets I received in the last few days were commercial in nature: some were just inane bits of trivia, e.g., the one from a woman in the Southwest who mentioned that she had moved that day and asked if anyone else liked moving.

I appealed for clemency to the powers that tweet, noting that after reading the TOS I understood my mistake. The form for contacting Twitter about stuff like this includes a field asking "how do you feel"¹. I entered "chastened". But I am of two minds about this. On the one hand, the ratio of visits to Shortscreen from Twitter to my tweets was pretty high -- about 50%. On the other hand, the whole Twitter enterprise seems like a pointless time suck. So I leave it to the folks at Twitter to decide if my tweeting days are over. If they are, so be it.

¹This question reminded me a little of that test the reincarnated Spock takes at his parents' house on Vulcan in Star Trek IV. He gets a series of questions, one of which goes like this, if memory serves, "Adjust the sine wave of the magnetic envelope so that anti-gravitons can enter and anti-protons cannot". And then he is stumped by the last question, "How do you feel?".

Alloy Steel expands into Indonesia

2009-11-12T17:22:00.011-05:00

Special message from our sponsor to visitors from iHub:

If you don't want everything in your portfolio tanking at the same time during the next market correction, you may want to consider adding some selective shorting (or put buying). See Short Screen to screen for companies predicted to go bankrupt by their Altman Z-scores.

You may remember that the Altman scores accurately predicted both AYSI's survival and VBDG's demise

Alloy Steel International (OTC BB: AYSI.OB) filed this 8-K today:

Quantum Leap for New Super Alloy

High demand for new Super Alloy Arcoplate products has prompted Alloy Steel International to expand their operations into Indonesia by the appointment of a company to carry out functions on its behalf and under its direction.

The first overseas engineering office, based in Jakarta, will house both marketing staff and engineering professionals.

The Indonesian capital was chosen as the hub of operations due to its proximity to the expanding South-east Asian market, the lower manufacturing costs and the availability of highly qualified technical staff.

Possible sites for the manufacturing facility are undergoing analysis regarding capital costs of construction and fit out.

The Arcoplate Super Alloy, released in July this year, can be manufactured thinner thus lighter and more durable than older white iron type products. A one inch Arcoplate Super Alloy plate can replace white iron products up to six inches thick. Successful laboratory tests and field trials have shown cost and energy savings by reducing friction, greater ease of handling, and less production shutdown time for plate replacements.

Mining clientele have indicated they will specify Arcoplate in their plant expansions, upgrades and in new mining and mineral processing applications worldwide. The new thicker sizes are in heavy demand worldwide.

The new Indonesian branch of Alloy Steel International will cater for clients extending their mining operations into Indonesia and will allow for further expansion into the Chinese, Indian and Mongolian markets.

Alloy Steel International Chairman, Mr Gene Kostecki, estimates that once the company has the facility to service the Indonesian market from a local base, demand for Arcoplate in Indonesia could exceed $10 million per annum.

There was some question on Alloy Steel's i-Hub message board about whether this is a licensing deal or not. I suspect it isn't, but I sent an e-mail to the CEO asking if he could clarify. If I hear back from him, I'll update this post accordingly.

Update: Alloy Steel International's CEO Gene Kostecki responded via e-mail saying that this was not a licensing deal. He said the company was avoiding those out of concerns about protecting its intellectual property, which he said was the company's highest priority. He said that this expansion would enable AYSI to take advantage of Indonesia's lower labor costs and proximity to markets in China and India. If I get his permission to do so, I will quote his e-mail verbatim here, but those were the key points.

Second Update: I have his permission, so here's his e-mail:

Dear David:

We are all very excited with our expansion program into South East Asia as it will give the company a great stepping stone into the entire ASEAN Market which is one of the fastest growing economies in the world.

The new government in Indonesia is fast tracking all economic development and investment in Indonesia. With Indonesia’s low labour costs and proximity to China and India it will place the company in a very competitive position to capitalize on Asian markets in this part of the world without sacrificing quality and margins, yet still being price competitive against low end products that portray themselves as wear plate.

David, we do not see the need to enter into any licensing agreements with any third party as this could potentially compromise our position in protecting our intellectual property rights in this part of the world. Protecting our intellectual property rights is the company's top priority.

Sincerely,

Gene Kostecki

A charitable giving idea for Veteran's Day

2009-11-11T18:14:00.003-05:00

There are a number of charities dedicated toward helping recent veterans of Iraq and Afghanistan, but less attention paid to the elderly veterans of past wars. This article from the Record represents a noteworthy except. Maybe some of you in other parts of the country will be inspired by it: Donations pour in to support veterans' home happy hour.

The photo above accompanied the article and was credited to Record staff photographer Chris Pedota.

Short selling and risk

2009-11-11T17:37:00.004-05:00

At the suggestion of my developers, I requested a review of Shortscreen by John Chow's site. You have to pay to have your site reviewed by John Chow, but he and his team are free to write whatever they want about it: they have complete editorial control. The review is up now; you can read it here: Screening Stocks for Short Selling.

A couple of the commenters raised reasonable questions about the risks of shorting. I addressed those questions in the comment thread there, but it's worth recapping here too.

Question/comment: Additionally, short selling as a whole is risky because you can lose an unlimited amount of money because a stock can go up an unlimited amount theoretically.

Answer: There is a way to limit your downside, if you want to bet against stocks: you can buy puts on them instead of shorting them. As with shorting, you’ll profit if the stock drops, but in the case of buying puts, your maximum loss is limited to what you paid for the put. You can use Shortscreen to screen for candidates to buy puts on as well as to short.

I personally don’t limit myself to buying puts, because I believe there are often better short selling candidates among stocks that aren’t big enough to have options traded on them. There is of course a risk that I will lose money on some trades, but by limiting myself to shorting stocks that a highly accurate model predicts are headed for bankruptcy, I believe the odds are on my side.

Question/comment: Selling stocks short is a good way to also LOSE A LOT of money.

Answer: Although there are risks involved in short selling, it’s important to note, as a previous commenter alluded to above, that, for knowledgeable investors, adding short selling (or buying puts) can reduce the overall risk of your portfolio.

For example, although it is risky to own (i.e., to be long) one stock in a particular industry, and it is risky to short one stock in the same industry, it may be less risky to do both at the same time. As Investopedia notes, this strategy, called a pairs trade, is often used by professional investors to hedge against sector and overall market risk.

For more on this general concept, see, for example, this essay by Ken Hawkins: Make Your Portfolio Safer With Risky Investments.

Insomnia and social media

2009-11-10T15:18:00.004-05:00

Couldn't sleep last night, so I signed onto Twitter. Yeah, I remember what I said about it here, but my developers suggested I use it to help get the word out about shortscreen.com. So I searched for phrases related to short-selling, and then looked up the profile or blog of the senders for the individual's name and other details. Then I sent them a personalized tweet inviting them to check out the site.

The funny thing about Twitter is that this sort of unsolicited contact gets an entirely different reception than it would if it were e-mail. People start to "follow" you, (i.e., sign on to receive your tweets; apparently, you have to immediately follow them back, otherwise they may feel hurt and un-follow you). I guess everyone wants to have a large number of followers and pretend those folks are actually reading their tweets.

Ft. Hood

2009-11-10T14:42:00.005-05:00

I've avoided writing about this here so far, though one comment I've made elsewhere is that the U.S. Army's policy of keeping most of its troops unarmed stateside isn't a new one. Back when I was in the Army Reserve, in the run-up to the first Gulf War, there were worries about terrorist/irregular attacks here in the U.S. We had someone from the Army's CID lecture us about being vigilant, and the Army Reserve Center started posting reservists at the main entrance, but our rifles remained locked away in an arms room in the basement.

Even so, if someone had tried to do what Maj. Hassan did in Texas last week at my unit, he would have been stopped a lot quicker: about half of the guys in the brigade were cops (mainly NYPD, plus some state troopers, sheriff's deputies, local cops, and assorted others), and most brought their police weapons to drills.

I was reminded of that a few minutes ago by seeing the photo above on Yahoo!. I wonder if the rifles set up as part of the memorial for those Ft. Hood soldiers might have felt like rubbing salt in the wound for some of the survivors and relatives of the victims. If the troops had rifles when Maj. Hassan started shooting, certainly a lot fewer of them would have gotten shot and killed.

Girls soccer gets rough

2009-11-10T05:27:00.004-05:00

Watch what happens at 1:04. HT: Trumwill @ Hit Coffee.

I mentioned this over there, but one of the players mentioned in the voice over (I think the one who got yanked down by her pony tail) was named Shumway. There’s a noted finance professor whose work I came across in doing research for Shortscreen named Tyler Shumway. Maybe that name is more common out west.

A Cat Post

2009-11-10T01:05:00.008-05:00

Since I had the $20 digital camera with me on Saturday, and Cheryl hadn't seen her cats in couple of weeks, I snapped a few shots of them. Since a cat site is ranked among the top 800 websites in America according to Alexa, I figure it can't hurt to post the pics here.

The first two pics are of the blue gray male cat, Buster Catlett¹ Johnson. His pics didn't come out too well, partly because he wouldn't sit still and partly because I was using a $20 camera. This cat happens to be blind. Unlike some non-blind human actors who ham up their characters' blindness (e.g., the actor² who played Jody Foster's character's blind friend in Contact), it's not immediately obvious that Buster is blind. He "looks" at you if you address him, and he navigates pretty well, including walking up and down stairs. Apparently, he has memorized the layout of my mother's place. Oddly, there's not even a false step when he gets to the top or bottom of the stairs; it's almost as if he knows how many steps there were. Also, his eyes appear fairly healthy and normal (though if you look closely, you notice his pupils are a little dilated).

Incidentally, some woman recently got a book published about her blind cat, but her cat looks pretty dreadful (it was born with no eyes and had them sewn up). She also targeted her book to adults. I think a book about a blind cat would work better as a children's book. I just need to find an illustrator and some time and I'll be in business.

This photo is of the female cat, Buster's sister Polly. This came out better because she was at eye level on a cat condo, and perched up there, was less inclined to move around. She isn't blind. The only thing that she can do that Buster can't do in terms of moving around is that she can jump. Buster gets to the same places by climbing.

¹That middle name, "Catlett" is a new addition. I had Cheryl read this exchange from a comment thread on Fred Wilson's blog between me and a fellow who "would give an appendage on the left side" of his body to have ever met "George Catlett Marshall". I never knew that was George Marshall's middle name. Cheryl decided it would make a good middle name for a cat.

²William Fichtner, same actor who played Van Zant in Heat:

Neil McCauley: What am I doing? I'm talking to an empty telephone.

Van Zant: I don't understand.

Neil McCauley: 'Cause there is a dead man on the other end of this fuckin' line

What's with the music at Starbucks?

2009-11-09T19:23:00.002-05:00

Sitting in one now doing some work on the new site, and they are playing something that sounds like Celtic Woman on suicide watch.

TV viewing tip for West Coast viewers

2009-11-08T21:44:00.004-05:00

Seth and Alex's Almost Live Comedy Show was pretty funny. Below, via Fox's YouTube channel, is Jackson Douglas, Alex Borstein's husband, and director of some sequences, on the show:

Jackson Douglas also played a character called Jackson on The Gilmore Girls. Cheryl informs of this bit of trivia: the character who ends up marrying Jackson on that show (Sukie something -- she was a loudmouthed chef and Jackson was her produce guy) was originally going to be played by Alex Borstein, but Borstein couldn't get out of her Mad TV contract.