Saturday, January 31, 2015

Latest List of Credit Bubble Stocks Book Reviews

5/5 - These Are "Must Read"

4/5 3/5 2/5 1/5

Review of Genuine Authentic: The Real Life of Ralph Lauren by Michael Gross

I said that I was not going to read business biographies anymore, but I didn't say I wouldn't review ones I've already read before I toss them. Genuine Authentic is an unflattering, unauthorized biography of billionaire Ralph Lauren.

You could read this book as a good look into how clothing labels (and brand licensing) work, but here are the highlights that I thought were most interesting:

  • "You have to admire someone who took the 1959 L.L. Bean catalog and a pad of tracing paper and turned it into the best part of a billion dollars."
  • [Michel Zelnik, the president of Bidermann in America] quickly moved production of the most important of those basics [to] Hong Kong. Although Chinese manufacturing was still considered second-rate, Zelnik knew better... [he] showed Ralph samples of knit shirts made in China, and Ralph couldn't tell the difference between them and ones made in Maine. Lower production costs led to lower prices and higher volume. "Ralph would still be a losing proposition if Michel hadn't gone to Hong Kong with the Polo pony to get the gross margins"
  • The mood in the Polosphere was grim at the dawn of 1994. "Sales are falling off, the numbers aren't there, he's pouring millions into Double RL" [...] Ralph's name could still sell goods in significant numbers, indeed more than ever before, but they would have to be at the low-priced end of the fashion market. The profits cheaper goods generated could then be used to support the crucial illusion that Polo was still a luxury brand by, for instance, supporting dubious ventures like Double RL. That illusion, in turn, would sell more low-priced goods to customers who aspired to be better and wore the Polo logo as a totem of their desires.
  • The [outlet] division was named Factory Outlets of America, as a way of separating it from Lauren, who didn't even like his full-price stores. "He hates dealing with customers [...] he's geniunely shy, and, anyway, it shatters the dream because he sees it's not all models wearing his clothes." So the outlets were "[RL exec] Peter's little secret... I'm not aware Ralph knew how many we had. He had no idea what they looked like"
  • It wasn't only employees who felt Ralph's wrath. "He's not the most pleasant guy in the best of times [...] Twenty-five percent of the time, he hates you, he hates his coffee, he hates the world." Once when Michael Ovitz, then the head of Creative Artists Agency, failed to get a star to turn up at a party for Lauren, as promised, "Ralph called him and harangued [...] Just streams of abuse! He wants people to be scared of him and to think he's tough."
  • Walker ended his life with bad feelings toward his boss. "Ralph had no loyalty to him after he wasn't of use anymore [...] the last weekend, everyone knew he was dying, but Ralph wouldn't visit him. Ralph had to be talked into having [Walker's] memorial at the store."
Assuming that these selections really capture who Lauren is, what Polo/Ralph Lauren is, and how they got where they are (riding a wave of WASP nostalgia), then Lauren sounds like a flawed, narcissistic man like Steve Jobs and many other billionaires.

There aren't very many psychologically healthy billionaires. That's because it's hard to become one and still (a) spend time with your family, (b) avoid the risk of ruining them, (c) be loyal to friends/business partners, and (d) not reach a point of diminishing returns on wealth and want to have other pursuits.

I like Drexler a lot better, because he can speak very intelligently about his business, although I haven't read a critical biography of him. I can't imagine that Lauren could sit on a stage and chat about clothing retail the way Drexler does. And I don't think that Drexler hates his customers - you'll notice he is really interested to talk to potential customers in the audience. I suspect that if you spent a day with Drexler and a day with Lauren, you would think that Drexler is the much more successful merchant, when the opposite has turned out to be the case.

I give this a 3/5 for capturing Lauren's character well, but without the type of details that you need the subject's participation to get, and with a sample size of one, there is only so good the book could be.

RadioShack Reorg Watch $RSH

A correspondent writes,

Lots of reports of stores closing or in final liquidation mode from around the country. From the comments below it sounds like they are going to close their mall based stores primarily – that is consistent with some of the other stories that have been popping up. They are definitely gearing up for a large reset of the store base and soon. No inventory in a lot of these stores.
** The two young folks that were working told me that this store wasn't closing. Mostly stores located in malls were closing because the rents are higher there. They told me something like 1100 stores would be shut down.

** They also said the bankruptcy was going to be a re-organization (Chapter 11?)
I think the rumor of a Feb filing makes the most sense. Probably some kind of a prepack involving Salus on the DIP or we would have heard more saber rattling from Salus I expect. It’s the start of a new year so they can go ahead and close another 200 and it doesn’t sound like they made it to 200 last year, so maybe there are some that carry over. I suspect they have a meeting of the minds with Salus and probably SG to file, close a lot of stores and give them enough liquidity to last a year or two. Hope so, would be nice to have a second shot at this one in Chap 22.

[Noteholders will probably not do well.] I’d guess less than 5% of the equity or maybe warrants. I’m assuming that Salus’ current loan doesn’t pay out at par, so the Notes are just going to get paid a nuisance claim, I’d guess. The market value of the notes is $30-35MM, so they aren’t going to get much.
We went to check on our nearest RadioShack (only 2 miles away, naturally) and found that it is... closed.

20 years ago - how did the May 1995 IPOs turn out?

Young money has a fascinating post about Maxis, Sim City, and how the IPOs from May 1995 (almost 20 years ago) turned out.

Friday, January 30, 2015

Bach Passacaglia and Fugue C minor BWV 582 for orchestra

"High Plateau Drifter" Writes On the Federal Reserve's True Priority: Its Own Survival

Correspondent "High Plateau Drifter" was the author of "Skeptics To the Ramparts" (September 2014) and "Fun On the Permanently High Plateau" (December 2014).

Ok, we all know how steadfast and generous the Fed has been toward stock investors over the past six years. Well, actually, over the past 35 years! And of course we return the love! Yes indeed. And we all know that the Fed can never ever raise interest rates because that would crash the markets. And momma Fed would never abandon us.

Most stock investors seem to think uber-dove Charles Evans proclaiming that “raising interest rates would be a catastrophe” in an unguarded moment on January 8 is an accurate reflection of what Fed heads will actually do, despite all their talk about raising rates sometime in mid year 2015.

Up until recently all of this Fed talk of “normalizing rates” was just talk.

But funny things are beginning to happen as we drift along that permanently high plateau resting on its bedrock of zero percent short term interest rates. In the past, hyperinflations were enabled by the presence of stable currencies in neighboring countries and the lack of currency controls. But with major currencies such as the Yuan, the Euro and many others pegged to the dollar, most capital and wealth in developed and developing countries is fairly complacent. In a U.S. Fed rigged world it is hard to start a serious inflation in any nation with a significant economy.

But with the Swiss Frank suddenly unpegged from the Euro, and with gold now rising along with – and slightly outpacing – the dollar, two very liquid and secure havens seem to have popped up on the horizon. And the negative interest rates in Switzerland or Denmark will allow the European middle class to hoard Swiss or Danish bank notes at zero percent rather than paying for the privilege of depositing their cash in a bank and exposing themselves to “bail in” risk.

Thus, potential convenient inflation hedges are popping up even in Europe. Once oil starts to rise in price the Russian Ruble – an oil backed currency from a country with very little sovereign debt – will offer yet another very attractive alternative.

Of course the biggest threat to the comfort of mother FED's stock market cradle is the new Greek coalition which insists that any bailout that results in more debt is a non-starter. This means that Greek debt is going to be “restructured” which in turn means reduced-defaulted. But then the only way Greece is going to be able to get back on its feet is to repudiate all of its sovereign debt, abandon the Euro and issue the new Drachma. This in turn will mean a massive bailout of European and American banks which under EU rules may consider Greek sovereign bonds as “money good” collateral backing their massive interest rate derivatives, threatening large and fast interest rate moves which produce bank derivative contract defaults. Therein lies the trigger for PIIGS debt repudiation and massive money printing by the ECB or the German and French national banks not in the form of additional bank debt but in outright grants of cash – the fiscal policy trigger for hyper inflation.

There are numerous signs that the Fed is beginning to worry not only that QE is not working as it should to produce growth and prosperity, but that continued QE might go far beyond just damaging its “credibility” and utterly destroy its continued relevance to and power over the markets. In short the FED is beginning to worry about its institutional survival. Failure means that Congress will monkey with the Federal Reserve Acts which grant it power.

Thus the survival of the FED, its power and continued relevance are the top priority right now. The fate of the stock market is a secondary concern. Any investor who fails to see this is dancing with the devil in the pale moonlight.

The FED heads apparently think that if they raise rates just a wee smidge – that in the next crisis they will at least have some interest rate ammo, enough to be invited to the table and thus remain relevant and perhaps rally the markets a bit.

In short, to preserve their institutional power the FED is going to “Volker” your asses!! Well, maybe just an iddy biddy “Volker” that won't hurt too much, they hope!

In my view the debt balloon problem has grown so large that no tweaking by the FED can fix it.

Welcome to life on the “permanently high plateau” and good luck!
This sounds about right to me. All the Federal Reserve can do is tinker with short term interest rates. With short term interest rates at zero at what is looking like a major market top, they have foolishly positioned themselves to be irrelevant in the next crash. In order to continue to claim credit for "rescuing" the market, they need to be able to use their interest rate tinkering tool at a time that is coincident with a market bottom.

Distressed Offshore Oil & Gas: Energy XXI (Bermuda) Limited

This is EXXI, which has mostly offshore Gulf of Mexico assets.

The crash caught investors and lenders by surprise. Eight months ago, Houston-based oil producer Energy XXI Ltd. sold $650 million in bonds. Demand was so high that the company more than doubled the size of the offering, company records show. The debt is now trading for less than 50 cents on the dollar, and the stock has declined 88 percent.

Energy XXI, which has more than $3.8 billion in debt, is one of more than 80 oil and gas companies whose bonds have fallen to distressed levels, meaning their yields are more than 10 percentage points above Treasury debt [...].
The stocks and bonds of Energy XXI and other struggling energy firms have been bought up by pension funds, insurance companies and savings plans that are the mainstays of Americans’ retirement accounts. [...]

Energy XXI’s second-largest reported shareholder is a group of funds managed by Vanguard Group Inc., the biggest U.S. mutual-fund firm, according to data compiled by Bloomberg. The top reported owner of the bonds Energy XXI issued in May is Franklin Resources Inc. in San Mateo, California, also known as Franklin Templeton Investments, which manages multiple funds that bought Energy XXI’s debt, according to data compiled by Bloomberg.

Energy XXI didn’t return calls and e-mails seeking comment. The company has “plenty of liquidity,” Greg Smith, a spokesman, said in a December interview.

A reckoning may also be in store for Energy XXI’s bank lenders. The company, which drills in the Gulf of Mexico, has tapped $974 million of a $1.5 billion credit line extended by a group of banks including Gulfport, Mississippi-based Hancock Holding Co.’s Whitney Bank; Amegy Bank of Texas, a subsidiary of Salt Lake City-based Zions Bancorporation; and Comerica Inc. in Dallas, according to data compiled by Bloomberg. Energy XXI has also borrowed money from banks in the U.K., Australia, Canada, Spain and Japan.
As goes offshore oil and gas so goes poor old Conrad Industries.

EXXI is interesting because it has a 3% note due 2018 that is trading at 30, and yield to maturity of 40%.