Keeping a Casual Eye on ASUR, Part III

As I mentioned in a previous post ("Keeping a Casual Eye on ASUR"), I closed out my positions in Asure Software (Nasdaq: ASUR) at .25, but I planned to keep a casual eye on the stock to see

if Red Oak succeeds in unlocking some shareholder value here. If so, it might be worth considering piggybacking on their next venture in micro cap shareholder activism.

David Sandberg and his associates have succeeded in ousting ASUR's management: "Shareholders oust Forgent’s board". Now it will be interesting to see if Sandberg can make the company profitable again and increase shareholder value. If memory serves, his average cost on this is about 18 cents per share.

Looking for Co-Authors for a New Blog about Small Stocks

Something I've realized: posts such as the previous one ("A Conversation with USEG Management") are valuable, because they offer original reporting/commentary on a stock that's not widely followed, but they won't have much of a place on the entrepreneurship/business-oriented blog I'm starting. Post such as that have also been fairly sporadic on this blog, partly because I don't have time to follow more than a few companies that closely. So here's what I have in mind: a team-written blog focused on stocks that aren't widely followed. I just bought a nice domain name for this new blog -- one that's relatively short, easy to spell, and lends itself well visually to a logo.

Guidelines for the stocks:

- Under $100 million market cap; preferably, under $50 million.

- Little or no analyst coverage.

- Must have potential multi-bagger upside, in the author's opinion.

Guidelines for the authors:

- Write about 1 to 3 stocks, no more. If you find a 4th stock you like better than the first three, kick one of the first three off of the list.

- Do original reporting. Call the company's management occasionally and post notes on your conversations. Call elsewhere. Be a sleuth. Don't regurgitate aphorisms from Warren Buffett. Save that for other sites.

- Post as often as you have something new or useful to write about your companies, but no more. Don't just post for the sake of posting.

- Engage with your commenters and seek out the answers to their questions.

- Don't run and hide if your stock tanks. If you're still a believer, explain why; if not, explain why.

If you're interested in contributing to this new blog, send me an e-mail with "Obscure Stocks" in the subject line. Thanks.

A Conversation with USEG Management

Today I spoke with U.S. Energy Corp. (NASDAQ: USEG) CEO Keith Larsen, CFO Scott Lorimer, and Director of Investor Relations Reggie Larsen, who initiated the call. Some notes from the conversation follow.

- The Brigham Exploration (NASDAQ: BEXP) is intended to make USEG profitable as an oil company alone. CEO Keith Larsen said the company looked at about a hundred oil deals, and looked closely at ten, before picking this one.

- Estimated cumulative revenue from the first six wells (assuming oil prices stay at about ~$70 per barrel) is $1.7 million to $2 million per month, dropping off to about $1 million per month after a year of production.


- USEG is close to a financing deal that will let it borrow $15 million against its Remington Village development at about 5.5% interest. This money may be used for follow up investments in the Bakken field with BEXP. Occupancy there has drifted below 90%, but the management is working to get it back up (by allowing pets, etc.).

- Keith Larsen predicted that USEG's investment in Standard Steam Trust would be a ten-bagger within two years. He noted the advantages of Geothermal versus other alternatives such as solar and wind (Geothermal's always on, so it doesn't need a back up power source), and mentioned that a Canadian geothermal company, Magma Energy recently raised over $100 million in an IPO.

- Re the molybdenum project, Keith and Reggie said that they've been moving forward with preliminary steps on it, but have eschewed publicizing most of them to avoid stirring up the vocal radical environmental opposition. They noted that local blue collar workers have stopped by their offices looking for work, expressing support in the mine project, and asking what they could do to help make it happen. With a weak economy, opposition to the creation of numerous high-paying jobs may lose some political valence.

USEG News

Shares of U.S. Energy Corp. (NASDAQ: USEG) rose about 32% today on about 13x average volume on the news that the company had entered into a drilling participation agreement with Brigham Exploration (NASDAQ: BEXP) in the Bakken oil field. From the release:

"We are delighted to be teaming up with one of the best and most technologically advanced operators in the Bakken oil field," stated Mark Larsen, President of U.S. Energy. "Brigham has proven itself to be one of the premier companies in the Williston Basin through the advancement of their multi-stage frac completions and their consistent improvement of production rates. We look forward to a long term relationship with Brigham and developing low cost reserves well into the future," he added.

"Our patient search for a sound investment in oil and gas has now come to light with today's announcement," stated Keith Larsen, CEO of U.S. Energy Corp. "At a time when natural gas appears to be poised for an extended period of low prices our main focus has been to expand our oil production and reserves. This agreement does just that by providing us with the potential to rapidly expand our oil production and increase our reserves by participating with an experienced operator that has a track record of lowering its finding and development costs. Furthermore, I am confident that our drilling schedule for the balance of 2009 will allow us to reach our corporate production goal of 7,000 MCFED or approximately 1,200 BOED by year end," he added.

This is a pretty large commitment by USEG -- according to the press release, USEG's "expenditures are anticipated to approximate $17.6 million for the first six initial well program." That's a little less than half of USEG's remaining cash and Treasuries, going by the company's most recent balance sheet. Judging by the relative performance of USEG and BEXP today though, without drilling down further, I'd assume this deal is on pretty favorable terms to USEG. Which would make sense, since it appears that BEXP had a more acute need for the cash than USEG had for the participation deal. I'd venture that some BEXP shareholders bought into USEG today.

I got a voice mail about this today from Reggie Larsen at USEG, but we didn't get a chacne to speak. If he and I connect tomorrow, I'll update this post accordingly. Investor relations via social media: just like in those trendy marketing books.

Running Against Wall Street

In post back in June ("Lessons from the European Parliament Elections") I wrote,

A third area where (some) Republicans may be able to draw a favorable contrast with Democrats, if they are willing to do so, is by running against Wall Street, or more accurately, running against the incestuous relationship between some major Wall Street firms and Washington. I suspect New Jersey's GOP gubernatorial nominee Chris Christie will try a version of this while running against our incumbent governor, former Goldman Sachs CEO Jon Corzine.

Today I got an e-mail from the Christie campaign which included this video:

Life Imitates Science Fiction, Part II

In a previous post ("Life Imitates Science Fiction"), I mentioned hearing about a new gadget that was similar to a futuristic device imagined by the science fiction writer Michael Swanwick. Today I found out about something like another one of the machines mentioned in a Swanwick book.

Swanwick's novel Stations of the Tide mentioned machines called "surrogates" -- robots, essentially, that a person could animate and control remotely. An image of the person's face would appear on the video screen the surrogate apparently had in place of a head; the person could speak, see, hear through the surrogate, and move it around as well. The link above goes to an excerpt from the beginning of the novel, where surrogates are first mentioned. In keeping with his typical M.O., Swanwick doesn't waste much exposition describing the technology, he just mentions it and lets you fill in the details on your own from the context.

See the video below, for something similar to Swanwick's surrogate: the "Chungbot", named after U.S. Army Major Kevin Chung, a physician specializing in the treatment of burns. As he explains in the video clip below (which includes some graphic footage of recovering burn victims), the robot enabled him to check in on -- and assist in the treatment of -- patients stateside while he was deployed in Iraq.

Answering Requests, Part III

NDL11 asks, pithily,

PNDMF

In response, I offer this recent correspondence between me and Aaron Edelheit, from Aaron's blog:

1. DaveinHackensack Says:
August 14th, 2009 at 1:09 am

Aaron,

I saw your comment on the company formerly known as PhotoChannel on the VIC. Do you have an updated target in mind for when the company will start consistently posting positive EPS (not just cash EPS)? Just curious.

2. admin Says:

August 14th, 2009 at 1:48 pm

$2.50 to $3 per share in the short run. If some of their growth prospects such as getting Wal-Mart, the stock would be much higher. They will post positive eps in the December quarter.

amortization blocks it because the company made two acquisitions.

3. DaveinHackensack Says:

August 14th, 2009 at 2:33 pm

Do you envision they will be profitable consistently from the December quarter forward?

4. admin Says:

August 14th, 2009 at 2:40 pm

The march quarter may be their last negative eps quarter because of seasonality. But again, all I care about is cash flow.

Answering Requests, Part II

J.K. asks,

"But maybe something learned from any past attempts at entrepreneurship?"

I haven't learned anything especially revelatory, but one thing I learned is that a good idea isn't worth a whole lot if you can't sell it, and if you can't sell it, it may not even be a good idea.

The idea, in my case, was an invention to protect football players from breaking their necks. I started thinking about this after watching a defensive linemen break his neck during an NFL game. I figured that, with all the advances in protective equipment over the years, there ought to be a way to prevent this. I did some research and found a seminal study by Dr. Joseph Torg¹. Dr. Torg realized that, unlike most cervical spine injuries, football injuries were often caught film, and he used that film to analyze them. From that, he discovered the primary mechanism by which these injuries occurred, which he called axial loading. Essentially, when your head is upright, your cervical spine is slightly curved, like an inverted, elongated "c", and when you tilt your head forward at an angle of about 30 degrees, it becomes more like a segmented column. This is where it's most vulnerable to a blow to the crown of your head, which can compress and fracture your cervical vertebrae.

Equipment designed to protect football players' necks worked by restricting the range of motion of the head and neck, but did nothing to protect against axial loading. So, in consultation with an acquaintance who was an engineer, I invented a solution, an 'over-helmet' shell which would be loosely connected by springs to a regular football helmet underneath (the springs were just there to keep the over-helmet from rattling against the regular helmet), as shown in the goofy-looking CAD drawing above. This invention would permit but limit motion of a player's head and neck in all directions, within the player's natural range of motion, and it would also transfer forces incident on the over-helmet to the player's shoulders, thus sparing his cervical spine.

I thought this was a great idea, but I really had no clue what to do with it. I knew there was a significant market for it if this became standard equipment in football. From a Fermi approximation, I figured there were about a million high school football players in America, and my engineer estimated this contraption, made of fiberglass and steel, would cost about $50 to manufacture. I knew that helmets and shoulder pads each retailed for a few hundred dollars apiece. I applied for a patent on this invention, and then contacted the handful of companies that manufactured helmets and shoulder pads. No interest. What next? I heard later that these manufacturers generally are unimpressed with patent-type drawings and prefer to see working prototypes. Fortunately, there was a shop that made prototypes in my county. Unfortunately, they wanted a six figure deposit to build one, which I didn't have. So this ended up getting filed away in my Grandiose Ideas file, after I spent about $5k in patent attorney fees². And today the goofy CAD drawing smiles at me from my computer screen, as if mocking me.

I still come up with grandiose ideas today. I can't help it. But I can focus my energies on more feasible ideas, and that's what I'm trying to do now. The problem with my neck-protector idea, aside from the cost of getting one manufactured and tested, was that to get it adopted would require a revolution of sorts: you'd most likely sell everyone or no one with this; there likely wouldn't be an incremental adoption. Not an impossible task, but not one I was up to at the time.

¹That link lists Dr. Torg as an emeritus faculty member at Temple, but if memory serves, he was at Penn at the time. Coincidentally, I ended up cold calling his son a few years later, when I was a trainee at a boutique investment bank in Manhattan. His son (a Florida-based attorney) and I had a very pleasant conversation, about Dr. Torg among other subjects, and said he looked forward to hearing an investment idea from me in the future. He never did though. Most likely, he heard one for the fellow I was assigned to cold call for, a former Sbarro's manager with slicked-back hair named Vinny or Frank or something, I forget.

²Apparently, patent legal work costs a lot more these days. Recently I consulted with my attorney about getting a patent on an algorithm I'm having developed for a site. He forwarded it to his colleague who specializes in intellectual property and she gave a ball park estimate of tens of thousands of dollars in fees to get a new patent. She also said that since the algorithm would be a "business process" patent, and since the validity of these patents was going to be reviewed by the Supreme Court, it basically wasn't worth pursuing at this point.

Answering Requests, Part I

Paul Price asks,

"Please explain how our president can expect to provide health insurance for 47 million more people while SAVING taxpayers money.

Two possibilities come to mind:

1) The President actually doesn't think coverage can be extended to 47 million more people while reducing costs but he a) is more concerned about extending coverage than cutting costs; b) doesn't expect the big bills to come due for this until after he gets reelected.

2) The President believes that if a public insurance option is established, it will eventually achieve enough market share for the government to become the effective monopsony buyer of health care, at which point it could lower costs simply by lowering reimbursements to providers by fiat.

Anonymous asks,

"Please explain why fools always fall in love. Also, kindly explain why bad things happen to good, gritty people."

1) Because they are fools?

2) For two differing perspectives on this that have withstood the test of time, see Spinoza's Ethics and Leibniz's Theodicy. Their positions in a nutshell though:

Spinoza: Why not? Nature doesn't operate by the laws of human morality.

Leibniz: It could have been worse. We could have had another world where bad things also happened to good, gritty people but ice cream had never been invented. This is the best of all possible worlds.

Three Books for Entrepreneurs

From venture capitalist Fred Wilson's blog:

Books For Entrepreneurs

Last week an entrepreneur named Stephen who reads this blog regularly asked me for recommendations that budding entrepreneurs should read. I gave him a list and then forwarded it to my friends Brad Feld and Jerry Colonna who I knew would appreciate the list.

That led to this post by Brad where he lists his top three book suggestions for entrepreneurs. Go read that post. It's great.

As I was reading Brad's post, I realized that I should have shared my list with everyone, not just Stephen.

So here it is:

Kavalier and Clay

Atlas Shrugged


The Prince (Machiavelli)

any and all of shakespeare's tragedies and histories

Brad's suggestion of Zen and the Art of Motorcyle Maintenance is a great one and I'll include that in the future when asked this question.

The point of this list is that there is way more insight to be gained from stories than from business books. And these are some amazing stories.

I was surprised to see Michael Chabon's novel The Amazing Adventures of Kavalier and Clay recommended in this context, but I thought it was an impressive novel. About two thirds of the way through, Chabon throws in a brilliant twist that sends the narrative in an unexpected, and ultimately quite moving, direction for the next forty pages or so. Worth reading.

Katsenelson's Secular Range-Bound Market Thesis Updated

Below is a presentation of Vitaliy Katsenelson's secular range-bound market thesis, updated as of this month (longtime readers may recall I linked to an earlier version of this last year). It's worth taking a few minutes to scroll through this. I think Katsenelson is right in his diagnosis, and his prescriptions (slide 29) seem reasonable, for the most part, but for me the raise a question: why be net long at all, if we are in a secular bear or range-bound market? Why not be market-neutral¹ or even net short?

Avi Presentation

¹I'm adding this footnote on 12/30/09. After I wrote the post above, I found a professional investor who had the same idea ten years ago, and has produced some impressive returns since then: Marc Mayor of Inside ALPHA. I found out about Mayor when he joined Short Screen as a premium member earlier this month.

Darryl Green and Me

A couple of weeks ago on Ta-Nehisi Coates's Atlantic blog, a commenter posted this clip, of the NFL Hall of Fame corner back Darryl Green running down the Hall of Fame running back Eric Dickerson. If memory serves, at the time this happened, Dickerson was arguably the best running back in the league. Twelve seconds into the clip, you hear play-by-play man Pat Summerall effectively call the TD for Dickerson. If you pause the video there for a moment, and you've spent any time watching football, you can see why Summarall calls out "Goodnight!" at that point: Dickerson, having broken through the secondary, is in the clear. Darryl Green though, in addition to being a great football player, was, at the time of this game (and for much of his 20-year career*) the fastest man in the NFL.

A couple of nice touches at the end of the play: Green taking a second to collect himself after putting everything into that play, and Green and Dickerson congratulating each other as they head back to their respective huddles.

The second-angle replay later in the clip shows that Green didn't even have the best angle of pursuit coming after Dickerson -- Green is aiming too far to the right -- and Dickerson widens the distance a little more by drifting to his left. It doesn't matter: Green corrects and runs Dickerson down. There probably wasn't another man on earth who could have run down Dickerson from the same point on the field.

That's enough of a reason to be impressed by this play. But another reason it impresses me so much is because I've always been such a slow runner. Even as a young and fit high school kid, I was an awful sprinter. If you're an average sized guy and you don't have speed, the most forgiving position for you in high school football is probably inside linebacker, and that position isn't all that forgiving. You can compensate for your lack of speed somewhat by trying to anticipate plays, or by adjusting your angle of pursuit, but only so much. If you don't have speed, all the grit in the world won't do you much good.

Probably the first semi-competent play I made as an aspiring inside linebacker in high school was making a solo tackle on a right sweep play during a JV game. I 'flowed' to my left with the play, but I was afraid if I dived at the ball carrier I'd miss him so I grabbed his jersey and swung him to the ground. The next day at school, during study hall, I sat down at the library table where the JV coach was grading papers. "Coach," I said, "Did you see my tackle last night?". The coach, a 6'5", 300lb+ Irish guy who had been an offensive lineman at an Ivy League school, looked up from the papers he was grading, leaned back, and acted out my unconventional tackle with his hands, indicating he'd seen it, while implying by his facial expressions that I had been surprised that I had caught the guy. Then he said, "You're a linebacker, Dave. You're supposed to make tackles." And he went back to grading his papers.

*One of the related videos that pops up along with this one is of Green running a 4.2 second forty yard dash when he was forty years old. He retired at forty two.

Rajesh for the Win

My man in Kerala got a follow up job. After a few tedious hours late last night of wrestling with another spreadsheet, I went back to Elance. I posted the details of the job, and also invited the fellow who did the previous job. He said he could get it done by Sunday night if I gave him the word today. I also got a few other bids -- another one from India, and one from the Philippines at almost the same price point as Rajesh, and one from Australia for 250% more. Only the Aussie promised to get the job done quicker than Rajesh. Checking the time where Rajesh lives via Wolfram Alpha, I realized his business day would be over by the time I woke up. So rather than wait for additional bids, I awarded the job to him.

Sorry for the Paucity of Recent Posts

I've been busy with other things. If anyone has requests for post topics, feel free to make them in the comment thread below and I'll try to take a stab at them as time permits.

Thanks.

Adventures in Outsourcing.

In his book The Four Hour Work Week, Tim Ferriss extols the benefits of outsourcing and, as an example, quotes Esquire editor AJ Jacobs describing his experience working with a virtual assistant named Honey, from one of the leading Indian outsourcing firms, Brickwork:

When I open Honey's file, I have this reaction: America is f*cked. There are charts. There are section headers

[...]

If all Bangalorians are like Honey, I pity Americans about to graduate college. They're up against a hungry, polite, Excel-proficient army.

Apparently, they're not all like Honey. Here's my recent experience with this same firm. Last Thursday night, I requested a quote for a fairly simple project, the creation of a couple of spreadsheets of stock information. I got an e-mail back a few hours later, telling me they would get back to me by Sunday night with a quote. Still no word from them.

My guess is that Brickwork didn't have much bench strength, and when the inquiries came in from the readers of Ferriss's best-selling book (Brickwork's website asks if that's how you heard of them), the firm had to lower its standards in order to staff up.

Last Thursday I also contacted another Indian outsourcer Ferriss mentioned, Your Man in India. First I tried to request a quote via the "ask us" feature on the company's website, but got a server error, so I e-mailed the company instead. They referred me to their sister company, Get Friday, and someone from that company wrote back to say my request was beyond the scope of their abilities.

India is still in the running though, as I'm currently corresponding with an Indian individual about this project via Elance (in all, I received 5 proposals from India, 2 from North America, and 1 from Eastern Europe for this project).

Les Paul, RIP

Just heard the news on the radio. The Iridium, where Les Paul used to play every Monday night until recently, has a classy obituary up.

About five years ago, I went to see Les Paul at the Iridium with a few colleagues and clients. I'm glad I got the chance. RIP.

The photo above of Les Paul comes from the Iridium's website.

Possible Names for New Blog

I've mentioned this in a couple of the comment threads, but I'm going to be moving to a new blog soon. The new blog will probably be on Wordpress with a professionally designed logo and a customized theme, and the content will have a somewhat tighter focus on business and entrepreneurship. Here are three domain names I've purchased and am considering for the new blog:

- HackensackVentures.com

- LaunchingInnovation.com

- SteamCatapult.com

The first name has the tie-in with the name of this blog, of course, and continues the semi-ironic attempt at treating Hackensack as a brand. I say semi-ironic, because Hackensack, for those who are familiar with the place, does connote a certain grittiness and lack of concern about image; to the extent that you can spin that in a substance-over-style direction, that's a positive. It's also an ironic take off on the name of prestigious venture capital firms such as Union Square Ventures¹.

The second name is more straight forward, and describes what I plan to focus on: launching innovative business ideas of my own, and helping others launch theirs.

The last one is a play on the second one: a steam catapult is what launches aircraft off of carrier decks. As the unshaven fellow in the video on the homepage of this naming company, A Hundred Monkeys² says, a name ought to have some "mystery". Steam Catapult would have the most "mystery" of these three names. One downside though is that the Navy is apparently moving toward electromagnetic catapults, so when that transition happens, steam catapults might connote retro, which could clash with the innovation theme -- or not, perhaps, since steam catapults will still have been innovative in their time.

I thought I'd take an informal poll of my small handful of occasional commenters and see what you guys thought. Fire away.

The photo above, of a F-14 about to get launched by a steam catapult from the deck of the USS JOHN C. STENNIS, comes from Wikipedia Commons.

¹When you are attempting to attract wealthy investors, you generally use a name that connotes wealth or sophistication, or a combination of both. Hackensack, of course, connotes neither. I knew a Manhattan-based financial planner who came up with the name for her practice by combining the name of a prestigious prep school and adding the word "hill" to it, because rich people often live on hills, or in towns with "hills" in the name.

²I read about this company a few years ago in the Wall Street Journal. Nice work if you can get it, no? This, as with most public relations and traditional marketing businesses, seems to be made possible by OPM. I can't imagine a scrappy entrepreneur starting off with his own savings of those or his friends and family writing a big check to someone to name his business. But if a business is venture-funded, that's a different story.

I have been too harsh

I have been too harsh in a few recent posts. Specifically:

- "How to Promote an Online Business": I was a little too sharp with this PR man. He did raise some good questions in our phone conversation last week, and although the services he subsequently offered me weren't what I was looking for, our conversation did spur me to do some more research on topics he brought up. Also, I should remember that most business services vendors are geared toward big corporate clients instead of entrepreneurs, and for good reason. Entrepreneurs tend to be more results-oriented and tight-fisted, and less likely to be in business a few months from now. All good reasons to focus on selling to big corporate clients instead. Sorry, M.

- "Get Mad You Sons of Bitches" and "A Critique of Pointless Blogging". In both cases, I could have shared my criticisms and suggestions via e-mail first, or, just kept them to myself, I guess. There's an old saying about the folly of offering advice: wise men don't need it and fools won't head it. That saying is probably right about the folly of giving advice, but perhaps not precise enough in the reasons why offering advice is often folly. Neither of the subjects of those two posts were fools: Stearns has an MBA from a top-20 school (Georgetown) and Persky has a degree from MIT. Being intelligent, though, doesn't necessarily make you receptive to advice or criticism. You have to be ready to hear it. This I know from experience. I've had friends who meant well give me good advice in the past, and watch me ignore it because I simply wasn't ready to hear it. So it shouldn't be a surprise to me that Persky deleted my comments on his blog, and continues to paste in filler text without offering any of his own insight or other commentary, or links to the original sources.

Being unemployed and looking for work, as Persky and Stearns are, is, in a sense, a form of purgatory. A quote from a film comes to mind here [consider this a half-assed spoiler alert: the film, Jacob's Ladder, is nearly 20 years old, but if you haven't seen it by now stop reading here]. Before I get to that quote, take a minute and three quarters to watch the original trailer for the movie, to set the table for it:



OK, now here's the quote, from a character named Louis (played by Danny Aiello) who is the protagonist's (played by Tim Robbins) chiropractor/friend/guardian angel:

Louis: Eckhart saw Hell too. He said: The only thing that burns in Hell is the part of you that won't let go of life, your memories, your attachments. They burn them all away. But they're not punishing you, he said. They're freeing your soul. So, if you're frightened of dying and... and you're holding on, you'll see devils tearing your life away. But if you've made your peace, then the devils are really angels, freeing you from the earth.

Similarly, in a non-eschatological sense, sometimes the trappings and pretensions of your old life need to burn away before you can move on.

More Robot Chicken: Not for the Easily Offended

In the previous post I mentioned the show Robot Chicken. These are two of the funnier clips I've seen on the show. Don't watch if you are offended by scatalogical humor or cartoon violence.

John Hussman, Kool-Aid, Jonestown, Robot Chicken

In his market commentary today, Dr. Hussman mentions he has re-established his "anti-hedge" of index call options comprising 1% of his equity fund's assets. He then offers this comment:

Frankly, our call option allocation here is something of a paean to a notion – a sustained economic recovery and new bull market – that I have no belief in whatsoever. But at this point, the broad strength in the major indices, even lacking volume sponsorship or favorable valuation, requires that we allow for the possibility of additional investor speculation.

[...]

[E]stablishing investment exposure here with anything but call options amounts to a game of trying to “ride” the market higher and to get out before it returns to or below current levels. With the market strenuously overbought already, that game strikes me as exquisitely difficult to get right. Hence the use of a modest allocation to call options only, without closing our downside hedges.

Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP. That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.

Dr. Hussman, who I assume didn't grow up drinking Kool-Aid¹, misspells the name of the drink. For those who are unfamiliar with this beverage, here's a Kool-Aid commercial from the 1970s:



And here are few spoofs of those Kool-Aid spots by the guys at Robot Chicken². You Tube only had this Russian-dubbed version, but you don't need to understand Russian to get the joke (though it does help to know that, in the middle skit, the characters have just survived a nuclear war in a fallout shelter); you just have to have seen one of the original commercials:




¹The phrase "drinking the Kool-Aid" of course comes from the mass suicide at Jonestown, but according to Wikipedia, the cult members drank poisoned Flavor Aid, not Kool-Aid.

²I just discovered this show recently, which is often funny and original. It includes a lot of parodies that will resonate with Gen-Xers.

Alloy Steel's 10-Q

The company (OTC BB: AYSI.OB) swung to a loss of ($437,951) on sales of $1,307,160 in the quarter ending June 30^th, but the 10-Q includes this news:

The Company has recently been advised of its successful tender for a significant contract with BHP Billiton Ltd, with the first order release being received by the Company to the value of approximately $3,200,000 subsequent to the reporting date.

Alloy Steel was also the subject of this longer, recent post.

Sometimes You're lucky to have Your Business Idea Shot Down

Four or five years ago, I thought I had an interesting business idea: private unemployment insurance. Fortunately, before I spent any time or money pursuing this idea, I was promptly talked out of it in a conversation over dinner with reader S.L., who was kind enough to act as a sounding board. As a seasoned businessman and investor, he spotted the flaw instantly: adverse selection. The people most likely to get laid off would be the ones most likely to apply for private unemployment insurance, which would wreak havoc with your loss ratios.

Yesterday's New York Times featured an article by Ron Lieber ("Good Luck Getting Private Insurance for Unemployment") about an entrepreneur who wasn't lucky enough to run his idea by S.L. before starting his own private unemployment insurance business. The article mentions that this entrepreneur, an insurance industry veteran named John Hartline, started his business in the Spring of 2008, only to have his reinsurers cut him off a year later:

Mr. Hartline said his reinsurance provider, Munich American Reassurance, forced him to stop writing new policies in April of this year.

Why? It turns out that the biggest problem with private unemployment insurance is something that industry insiders refer to as adverse selection. That is a fancy way of saying that the people who take out this sort of policy are the ones most likely to need it.

S.L. could have told him that, and saved him a lot of money and time. Sometimes the best thing a trusted mentor can do is tell us when we have a bad idea.

Update:: Cheryl was nice enough to mention a previous post, "Hedging against Job Loss", in the comment thread of the NY Times article mentioned above.

Another Update: S.L. adds this comment via e-mail:

Munich Re-Insurance Co. is one of the oldest, largest Re-insurance operations in the world.

Amazed that Munich had to wait a year before they took action. Probably after experiencing large losses.

The Management Leisure Suit

The Yes Men are anti-capitalist provocateurs and pranksters (or, "culture jammers"). According to Wikipedia, their real names are Jacques Servin and Igor Vamos. Vamos is an associate professor at Rensselaer, and Servin is, I assume, independently wealthy. They can be pretty funny though. I was reminded of them by a review of their new movie in the Financial Times earlier this week. Here's an example of one of the Yes Men's pranks from a few years ago, while impersonating WTO officials at a conference in Finland. If you are impatient and want to skip the set-up, the management leisure suit makes its first appearance around 6:24. From there, well... you'll see.

How to Promote an Online Business

Although my sites are still in development, this is something I've been working on. This week I explored a couple of options: hiring a public relations professional and commissioning a short animated clip. The jury's still out on both of those options, but here are some preliminary thoughts.

First thought: good animation is expensive. If a clip is catchy enough that it gets some viral circulation, it could pay for itself many times over, but that's a lot money to put on one spin of the roulette wheel (e.g, the cost I was quoted by an animator this week for one 30 second clip was almost as much as it will cost to develop one of the programming-intensive sites). I think I've got a clever concept, but it's what everyone else thinks that counts.

Second thought: when looking for a public relations pro (or any vendor, for that matter), try to find one who thinks like an entrepreneur. To put it in military terms, look for a commando, not a REMF. I remembered reading an article a couple of years ago about a commando-style PR guy, someone who generated millions of dollars in sales for his clients through his work alone. I contacted him, but my sites aren't in his sweet spot (he focuses on off-beat household products). He did refer me to a colleague though.

Earlier this week, I had a pleasant conversation with his colleague, who was bright and personable, but no commando. A few days after our conversation, he sent me an e-mail saying he enjoyed our conversation and suggesting some services he could offer me. These were two of them:

Messaging Workshop and Media Materials Development

A messaging workshop will help identify the primary and secondary messages that will help both services further develop their brand and identity. The Messaging Bible we develop as a result of this workshop could also be shared and used by your entire team so you are communicating with one voice throughout all communications vehicles (blog, website, social media platforms, newsletter, bylined articles, etc.). Once these messages are identified we recommend developing a comprehensive online press kit that can help supplement any pitching and marketing efforts.

Fees: $3,500 for a ½ day messaging workshop plus any travel expenses

$1,500 for the initial development and ongoing edits of all materials

Executive Communications & Media Skills Training

Executive communications and media skills training enable your spokespeople to be well prepared to handle media interviews and become a better all-round communicator in your day-to-day life and during speaking opportunities. Such training is based off of the Messaging Bible and allows you to proactively tell your story to existing partners, clients, consumers and especially with the various media audiences while launching both brands throughout the U.S.

Fees: $3,500 for a ½ day communications training plus any travel expenses

He went on to suggest more REMF services in that e-mail. This was what I wrote him in response:

Thanks for getting back to me. It was nice speaking with you as well.

To be candid though, what you've sketched out below isn't what I'm looking for. I'm looking for results, and I'm willing to pay for them. The specific results I'm looking for are getting articles about my online businesses placed in established media. I'm not looking for workshops, boot camps, messaging bibles, etc.

I appreciate you taking the time to speak with me though, and wish you the best of luck with your business. Perhaps we'll be able to work together in some other capacity in the future¹.

¹Offhand, I can't think of a capacity where he and I might work together, but you never know; so instead of burning this bridge completely, I just left it a little charred.

Dean Kamen on Health Care

From an interview with the prolific inventor in Popular Mechanics (HT: Megan McCardle):

Popular Mechanics: Yet health-care costs do keep rising. Is there a point at which we simply can't afford the most advanced treatments?

Kamen: Diabetes alone, if you include all of the long-term, insidious consequences of a lifetime of diabetes, is responsible for about 30 percent of the federal reimbursement for healthcare. Taking care of the diabetic every day is a small piece of it. But what if tomorrow we could wipe out diabetes, suddenly everybody takes a pill and it cures the people that have it, and it inoculates the other people so they'll never have it? Forgetting what a great life that would give people and their families, you take care of 30 percent of what now we project as this insurmountable problem of healthcare, which they project is going to kill us.

Well, it would kill us if we look at the 30-year actuarial data based on our 19th century confidence in technology. But I'm sure in 1920 if you asked actuaries to say what percentage of our GDP are we going to spend taking care of people with polio, they'd say: "They get polio, it goes to their lungs, they sit in iron lung machines, they could live a whole lifetime with three people watching over them. We can't support them all."

But what did it cost to deal with everybody with polio? Oh, $2 apiece. We gave them the Salk vaccine. But in the 1920s Salk wasn't around yet.

I'm with Kamen on the importance of market incentives in spurring innovation in health care, but I don't know if the Polio vaccine was the best example for him to use here: Salk refused to patent it¹. Nevertheless, even if he had patented it, the cost of the vaccine could still have been far less than the cost of keeping people alive in iron lungs, so Kamen's point still stands. He could have used a better example though to support his point. Back to the interview:

PM: In other words, R&D spending now may save money later?

Kamen: If you project forward these horrific costs of treating everybody and you want to assume we are not going to respond to that by making the therapies better, simpler and cheaper and in some cases completely wiping out the [diseases], well you know what? We might actually get to that situation—if we stop investing in technology, if we stop believing that the future ought to be better than the past.

If we want to sit here and keep assuming we should be fighting, and that we should be striving to spend less of our intellectual power and our money on great achievements to come in healthcare—that we should be fighting to make it a smaller piece of our economy—I want to know what you want to make a bigger piece of our economy. What do you want to see the future look like?

I think this debate shows a fundamental lack of vision, a lack of confidence, a lack of understanding of what's possible.

Coincidentally, Tim Ferriss blogged about Kamen today, and in the comment thread I mentioned that Kamen was featured on an episode of the Sundance Channel series Iconoclasts (he was paired with Isabella Rossellini). Kamen is a fascinating character, which made this a fascinating episode to watch. Here is a brief clip from that episode.

The photo above of Dean Kamen accompanied the Popular Mechanics article.

¹If Salk's research weren't funded by the University of Pittsburgh and National Foundation for Infantile Paralysis -- if, say, he had been the founder of a start-up pharma company -- he would have had to patent the vaccine in order to recoup his and his investors' investment in the drug's development.

News from Alloy Steel

The company (OTC BB: AYSI.OB) filed this 8-K earlier today:

Mill Commissioning

The company advises that the new ARCOPLATE manufacturing plant specifically designed to produce extra thick (up to 20/11mm) and super alloy wear plate has been commissioned and has commenced production.

The new mill is the only one in the world capable of producing a bi-metallic fused super alloy wear plate in a thickness of application of up to 20 mm (just over ¾ of an inch) in a single continuous casting operation.

The conventional method used to produce a hard surface overlay is by a welding method which can only achieve a weld surface which at best is ¼ inch or 6mm thick in a single pass and is flawed with major quality technical limitations.

The new AYSI new technology has overcome all the known technical difficulties and is capable of fusing 20mm or super wear resistant alloy onto a ½ inch or 12mm steel backing plate.

This is a significant technological breakthrough which should see this plate be specified consistently in new mining projects and become the norm for replacements in upgrades for existing mining operations.

Mr. G Kostecki C. E. O. of the company is very encouraged with the strong interest being shown by all the major producers who have seen the test samples and the technical reports and predicts a large future demand for the product.

Mr. Kostecki was responsible for the technical innovation and development of the new process and alloy formulation.

These reports have been carried out by independent laboratories.

Whether any of the demand predicted above will be apparent in the 10-Q Alloy Steel is going to file next week remains to be seen, but this is good news. More generally, the surge in Chinese steel production and the recovery of iron ore prices has been good news for Alloy Steel's mining company customers (how sustainable Chinese demand will be remains to be seen).

I picked up a few more shares of Alloy Steel at .325 on Tuesday, when the stock dipped about 20% on no news. Still keeping most of my powder dry for investing in another asset class though.

Incidentally, a couple of weeks ago, I mentioned Alloy Steel in a comment thread on Fred Wilson's blog, in response to a comment by Mark Cuban about how he'd be more interested in investing in a Rearden Steel¹ than the next social media start-up. That was a brain cramp on my part: Even if Cuban could buy all of Alloy Steel, it wouldn't be a big enough investment to be worth his time. Plus, Cuban (wisely) likes to invest where he has an information advantage², so unless he has connections in the wear plate or mining industries, he probably wouldn't seriously consider investing in this sort of company.

¹An allusion to Hank Readen's company in Atlas Shrugged.

²Writer, entrepreneur, and angel investor Tim Ferriss seconded Cuban's point in a post last fall. Ferriss wrote that he feels more comfortable investing in tech companies where he has some inside knowledge and connections than swimming with the sharks in the stock market.

Life imitates Science Fiction

Not quite, but close: The Atlantic's James Fallows blogged recently about the Livescribe Pulse Pen pictured above. His description of it reminding me of a futuristic pen described in the science fiction short story Radiant Doors by Michael Swanwick. First, here's Fallows describing the Pulse Pen:

Here's how it works: The somewhat plump looking, cigar-sized item, propped on a pack of special notebooks above and below, is both a ballpoint pen -- and a very sensitive, high-quality, high-capacity tape recorder.

[...]

The pen I have holds up to 2GB worth of recordings -- many many many hours' worth.

But in addition to recording sound, the pen also includes a very small camera at its tip, which many times per second takes pictures of whatever you are writing in the special notebooks.

[...]

[T]he pen registers exactly what sound you were hearing at exactly the moment you are writing a certain word, letter, or doodle. Then when you want to hear the recording, you can point the pen to that word and hear what was being said at the time. More on how it works here.

What does this mean in practice? Suppose you're having an hour-long interview, in my case -- or listening to an hour-long lecture as a student, or sitting through an hour-long business meeting. When something comes up that you want to remember, you can write a note at just that point ("Interesting point about Poland") and later go back to get just that part of the conversation. You do so by touching the pen's tip to the relevant phrase in the notebook, or moving your cursor to it on a stored online image of the page. No searching through the whole hour's recording; no need to make sure you write down every detail in real time.

Now here's a brief excerpt from the Swanwick story that features a pen from the future that performs a similar function. The premise of the story is that refugees from the future start appearing through "radiant doors", and governments have set up refugee camps for them. In this excerpt, the speaker/protagonist is interrogating a refugee about future technology:

I sat interviewing a woman whose face was a mask etched with the aftermath of horror. She was absolutely cooperative. They all were.

[...]

"What do you know about midpoint-based engineering? Gnat relays? Sub-local mathematics?"

Down this week's checklist I went, and with each item she shook her head. "Prigogine engines? SVAT trance status? Lepton soliloquies?" Nothing, nothing, nothing. "Phlenaria? The Toledo incident? 'Third Martyr' theory? Science Investigatory Group G?"

"They took my daughter," she said to this last. "They did things to her."

"I didn't ask you that. If you know anything about their organization, their machines, their drugs, their research techniques -- fine. But I don't want to hear about people."

"They did things." Her dead eyes bored into mine. "They --"

"Don't tell me."

"--returned her to us midway through. They said they were understaffed. They sterilized our kitchen and gave us a list of more things to do to her. Terrible things. And a checklist like yours to write down her reactions."

"Please."

"We didn't want to, but they left a device so we'd obey. Her father killed himself. He wanted to kill her too, but the device wouldn't let him. After he died, they changed the settings so I couldn't kill myself too. I tried."

[...] This was something new. I tapped my pen twice, activating its piezochronic function, so that it began recording fifteen seconds earlier.

"Radiant Doors" was one of the stories in Swanwick's Tales of Old Earth collection.

Your Ideas as an Asset Class

This is something I've been thinking more about recently as I've been investing in a couple of my ideas. Before the unemployment rate doubled in the last year, there was a financial pundit or two who suggested that your job could be considered an asset class (I'd provide a link here, but I already wasted ten minutes on search engines only to find articles about Kit Bond, Barry Bonds, etc.). The pundits' point, if memory serves, was to think of your job as a bond, since it pays a regular coupon (your salary) and then invest more aggressively in equities since your job is your fixed income allocation. Of course, unless you are a unionized government worker, your job is probably a lot riskier than the average bond, since those coupons can stop coming at any time.

Investing in your ideas is of course risky too, but can have high potential returns. Perhaps the rough analogue among securities would be a call option: inherent leverage on the upside if events go your way, versus the possibility your investment will expire worthless if they don't. Today I found myself in Manhattan with some free time on my hands, after a business meeting canceled, so I visited a couple of 'call options' that worked out for their investors: Sarita's Mac & Cheese, and Joe.

I'd been to Sarita's Mac & Cheese (S'MAC, for short), a few times before. Sarita and (her husband) Caesar Ekya were both engineers before quitting their jobs and starting S'Mac. You can read more about that in their bios here, but I was fortunate to hear the story from Sarita's mother once. I went to S'MAC a few times the year it opened, and back then, I'd always see Sarita and Caesar behind the counter. One time, while waiting for an order, and older Indian woman sipping coffee at a table nearby said something to me. We started talking, and she explained that she was Sarita's mother, and gave me the scoop behind the place. Today was the first time I'd been to S'MAC in several months, and business apparently has been going well: now they have an additional storefront on the same street, to handle the takeout and delivery business. Here's a short video clip from the S'MAC site of Sarita and Caesar telling their story:



The other business, Joe, I hadn't been to before, but had read about a few years ago in this New York Times article, "Forging a Coffee Chain Just a Few Links Long". The founder of Joe, Jonathan Rubinstein, was, according that article, a talent agent before starting the business. His idea was that a higher-end, local coffee place could successfully compete with Starbucks¹. I actually stopped by two Joe outposts: first, the one on East 13th Street, which was so crowded there was no place to sit, and then the one on Waverly Place in the West Village, which started to fill up after I got there. The espresso at Joe was better than Starbucks -- it had the rich, chocolate-like feel of a well-prepared Illy espresso. My palate isn't refined enough to differentiate it beyond that, but suffice it to say it was good. No WiFi at Joe though, perhaps to discourage customers from lingering too long?


¹This point was also made by letter writer to the Financial Times, as I noted in this post last December.

Infimum Jest

For the math lovers out there, this post is for you. In the footnote to a recent post ("A Visitor from Redmond") I referred to an infimum function. From Wolfram Math World¹, here's a definition of infimum (Hat tip to M.I., my finance consultant):

Infimum

The infimum is the greatest lower bound of a set S, defined as a quantity m such that no member of the set is less than m, but if epsilon is any positive quantity, however small, there is always one member that is less than m+epsilon (Jeffreys and Jeffreys 1988). When it exists (which is not required by this definition, e.g., infR does not exist), the infimum is denoted infS or inf_(x in S)x. The infimum is implemented in Mathematica as MinValue[f, constr, vars].

Consider the real numbers with their usual order. Then for any set M subset= R, the infimum infM exists (in R) if and only if M is bounded from below and nonempty.

More formally, the infimum infS for S a (nonempty) subset of the affinely extended real numbers R^_=R union {+/-infty} is the largest value y in R^_ such that for all x in S we have x>=y. Using this definition, infS always exists and, in particular, infR=-infty.

Whenever an infimum exists, its value is unique.

SEE ALSO: Infimum Limit, Lower Bound, Supremum

Note that Blogger converted some of the symbols in that definition to text, e.g., writing out the Greek letter epsilon instead of showing the Greek symbol for it.

Had I known of this back in December, when I wrote this post, "Infinite Connections or Infinite Jest", I could have used "Infimum Connections" as an alternative, obscurer post title.

The Higher Education Bubble: Not Bursting Yet

In previous posts (e.g., this one, this one, etc.) I've questioned the benefits of higher education and speculated that it might be the next debt-fueled sector to see its bubble burst. Not just yet, apparently, according to this front page article in today's Financial Times. Excerpt:

Americans are going back to school, choosing to sit out the worst employment market for 25 years in colleges, universities and business schools in the hope of better job prospects when times improve.

A spike in higher education enrollments has shown up this week in earnings announcements from companies in the otherwise hard-hit media sector, whose education divisions have far outperformed their better-known news brands.

On Friday, the Washington Post disclosed a further $89m in quarterly losses from its flagship newspaper and a $5m loss from Newsweek, its news magazine. By contrast, its Kaplan higher education division saw profits up 74 per cent to more than $70m.

The article goes on to give other examples of media companies' education divisions cleaning up, including the example of Pearson (the parent company of The Financial Times) which runs the NY Institute of Finance, among other educational ventures.