Thursday, December 31, 2009

Two year-end charitable ideas

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 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.

Tuesday, December 29, 2009

Thanks for reading

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.

Monday, December 28, 2009

New short position: UAUA

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.

Thursday, December 24, 2009

VMED Update

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

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.

Wednesday, December 23, 2009

Alloy Steel's 10-K

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.


- 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.


- 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

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.

Tuesday, December 22, 2009

The limits of "buy what you know"

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.

Monday, December 21, 2009

Sold the rest of those GLD puts

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

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.

Sunday, December 20, 2009

A paradox of atheism

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?

Friday, December 18, 2009

Another update on the new sites

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

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.

Thursday, December 17, 2009

The people that you knew at Elaine's

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.

Tuesday, December 15, 2009

More Alloy Steel

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

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

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.

Monday, December 14, 2009

TCFKAP's Q4 and fiscal 2009

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.

Saturday, December 12, 2009

Acting like an owner

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.

Friday, December 11, 2009

Andy Swan on why you're screwed

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

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.

Thursday, December 10, 2009

Nigel Andrews on Where the Wild Things Are

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

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

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

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.

Wednesday, December 9, 2009

Update on that bet against gold

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?

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.

Saturday, December 5, 2009

Stupid Cheap?

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.

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The second draft of history

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.

Friday, December 4, 2009

How not to negotiate

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?

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 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

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.

Thursday, December 3, 2009

Buying a lottery ticket to bet against gold

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.

Wednesday, December 2, 2009

Out of Destiny

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.