With His Severance, ex-CEO Could Buy Four BOREF’s And Still Have Plenty Left Over to Make "Help! Help!" October 31, 2007March 10, 2017 THE DEBATE It won’t surprise you that I thought any one of the Democrats on stage last night would be a vast improvement over what we have now or what the other party is offering up. My concern is that we continue to lay the groundwork to be sure that whichever one emerges as the nominee wins next November – and that we widen our lead in the Senate and House. Toward that end . . . In case you are deciding between the Bentley and the BMW, please choose the BMW – better yet, the 1998 BMW – and fly to New York to COME WRITE HISTORY – AGAIN (as in, let’s repeat in 2008 our success of 2006) . . . a wildly expensive dinner in early December . . . with writers like Edward Albee, Nora Ephron, Oliver Sacks (Awakenings, The Man Who Mistook His Wife for a Hat, the just-published Musicophilia), Liz Smith, John Berendt (Midnight in the Garden of Good and Evil), Marie Brenner, Andy Borowitz, Justin Frank (Bush on the Couch), Arthur Frommer, Lisa Birnbach (The Preppy Handbook) – and many more. (For example, the Pulitzer-prize winning author of Proof; for example, the Pulitzer-prize winning poetry editor of The New Yorker; for example, a remarkably mirthful blind rabbi; for example, the co-author of ‘Jersey Boys’ and of ‘Annie Hall’ who, oh, by the way – this boy from Brooklyn – laid down the banjo soundtrack for ‘Deliverance.’) And, of course, Howard Dean (You Have the Power), chairman of the DNC. But let me stress, you should only do this with money with which you can truly afford to win. If you happen to be rolling in it, click here. MERRILL’S $8.4 BILLION LOSS – II So the CEO takes responsibility and plunges a sword into his gut. No wait, that’s Japan. Here he left with $161 million, on which, thankfully, the Republicans have seen fit to lower taxes. Some may call this capitalism at its best, but one of my friends suggests it reminds him more of the stultified cronyism Ayn Rand railed against in Atlas Shrugged. John Galt would have been appalled. ANDREW SULLIVAN Here’s why my friend Andrew Sullivan – though dazzlingly bright – is an idiot. In 2000, he spent a lot of time bashing Gore, helping to tip the balance to Bush. Friday on Bill Maher he said Hillary Clinton is ‘Cheney in a pantsuit.’ Really? Separately, in the same show, he said he was no longer a skeptic on global warming because ‘the data is now overwhelming.’ (To which Maher replied, with a bit of dry exaggeration, ‘Welcome to the party. Because you dragged your feet, we’re all going to die.’) Why did it take an overwhelming case for him to be alarmed? What if there were only a modest chance of disaster? Would it not have been worth getting an earlier start on the problem? ONE FEWER THING TO WORRY ABOUT In a throwback to a camp, porn 1970’s horror film spoof a friend urged me to invest in decades ago – tastefully titled, ‘Help, Help the Dykes Have My Daughter’ (I declined, saving my cash to one day buy Borealis) – it seems that Fox News has found a new way to bring alarm into the living rooms of America: More than 150 lesbian gangs in the Washington, D.C., area alone. And yet, whatever you may have heard on Fox, it turns out (in briefest summary): Md., Detective Patrick Word, president of the Mid-Atlantic Regional Gang Investigators Network, an intelligence-sharing organization of 400 criminal justice professionals in Maryland, Washington, D.C., and Virginia, said there is no evidence whatsoever of a lesbian gang epidemic in his region. “Our membership reports only one lesbian gang,” Word told the Intelligence Report. (Thanks, Stephen Willey, for the link.) ANOTHER $7 MILLION FOR ROCHE BAY DEVELOPMENT The Chinese have put up a little money and agreed to buy 1.5 million tons of iron ore annually (vaguely $150 million worth) if/when it can be produced. Click here for details. That’s on top of the 2 to 3.5 million ton off-take agreement already in place with a British steel maker. So in case all this happens – a big if, of course – a few years from now the joint venture, half-owned by Borealis subsidiary Roche Bay, could be grossing $400 million or $500 million a year. Advanced Explorations, the joint-venture partner, saw its stock jump 42% yesterday, to $2.70, on 888,801 shares. (Ironically I no longer have to apologize that that’s $2.70 Canadian.) Borealis was, as usual, essentially unmoved by the news, trading 625 shares.
Who Got Merrill’s $8.4 Billion? October 30, 2007March 10, 2017 ART Yesterday I noted that all of Borealis is valued at $35 million – and that ‘people routinely pay more than that for paintings.’ I was so proud of my handiwork with those colors (I’ve already been offered $230,000 for the signed original HTML), I didn’t want to risk screwing it up with a hyperlink. Because then it would have looked like this: paintings. Booooooooor-ing. Even so, it’s interesting to see what a good de Kooning is going for these days ($137 million). A grand time to be rich and powerful in America. FX Kathryn Lance: ‘Will you please talk a little more in your column about the foreign bond funds? I have had most of my money laddered in short-term CD’s, and had been doing pretty well, but now I can’t find anything over five percent. So I’ve decided to go for a little more risk and put money into foreign bond funds for a while, since I’m positive the US dollar will keep going south.’ ☞ I’ve put a bunch of my retirement money in four of the exchange-traded foreign currency funds, which is as simple as buying any ‘stock’ with a stock symbol, except that instead you wind up effectively owning a chunk of the currency. The symbols are FXA (Australian dollars), FXB (British pounds), FXC (Canadian dollars), FXE (euros). These are not bond funds, they are like foreign-currency savings accounts. You make a little from the interest, as you would here. But if the dollar does continue to depreciate, you would also one day realize a lightly-taxed long-term capital gain. It makes me feel nervous – and more than a little foolish – that I have come so late to this game. But like Kathryn, I fear the dollar may indeed continue to depreciate. And if we turn out to be wrong, that would of course be wonderful for other reasons. Foreign bond funds might be an even better investment, but evaluating them is a little more complicated. How good is the manager? Is the fund worth its fees? Is there credit risk (i.e., default by foreign corporations if the fund owns their securities)? What is the interest rate risk? (If the general level of interest rates rises, the value of longer-term bonds fall.) If I had more of a need for current income (hey, I only need enough to power two 25-watt CFLs and buy the occasional case of Dentyne Ice), I might look at this more closely – starting with the three Less Antman suggested here a few days ago: ‘Pimco’s Foreign Bond Fund (PFBDX), T. Rowe Price International Bond Fund (RPIBX) and American Century International Bond (BEGBX) are two other solid alternatives for unhedged foreign exposure, assuming someone wants to expose themselves to foreigners.’ But it’s actually not clear these funds will outperform the currency ETF’s, and my brain is clogged enough as it is. MERRILL’S $8.4 BILLION LOSS Mike Shapiro: ‘Who dreamed up those collateralized debt obligations (CDOs)? Who sold them to Merrill? If Merrill Lynch lost $8billion doesn’t somebody else have that money? Who?’ ☞ Well, as to the last part of your question, the answer is basically, ‘the folks who sold their homes, and developers who sold their developments, for more money than they ever dreamed they could.’ Those sales were often financed by mortgages that now cannot be repaid. But the seller has his cash – and if he was smart, did not reinvest it into something even more outlandishly priced. As to the first part of your question . . . how it all happened . . . I refer you to this item from last week: Jeff Bauer: ‘Why bother trying to figure out the subprime mortgage mess when these two fellows present it in such a candid and entertaining way?’
Big Ifs October 29, 2007March 10, 2017 DON’T SELL YOUR BOREALIS From Design News: ‘I know this motor will push the aircraft and I’m confident it will fit in the space we have available for it,’ says Walt Klein, Delta’s director of engineering, quality and training . . . . Klein estimates the system will earn its certification and be ready to retrofit on Delta’s 737s by 2009. ‘It won’t be the most difficult installation we’ve ever done,’ says Klein. But it may be one of the most cost-effective. ‘Financially it’s a no-brainer,’ he says. Und Was Haben Vir Hier? The spelling is a little funny, but I think it’s the Advanced Explorations CEO telling an interviewer he is bullish on Roche Bay. At $7 a share, BOREF’s market cap is $35 million. (People routinely pay more than that for paintings.) If either the Wheel Tug or the Roche Bay project pans out, let alone both – big ifs to be sure – it would be worth well north of ten times what it’s selling for now. DON’T SELL YOUR FMD Of Thursday’s after-the-close quarterly results my guru writes: ‘We got better than expected on both earnings and revenues – even after a negative adjustment in the discount rate, which knocked earnings down by roughly twenty cents a share. (Additional conservatism was added in some of the lesser accounting treatments as well.) All this in a very difficult securitization environment, so, going forward, margins should improve. Also, they reported an impressive inventory of loans available for securitization in December. With $1.80 in earnings already booked for the first fiscal quarter, I’m looking at roughly $5.25 for the full fiscal year (assuming some mild improvement in the asset-backed-securities markets over the course of the year, which seems reasonable since we’re already seeing a little early stabilization). That puts us at a 7x multiple for a 35%+ grower. Really pretty unbelievable. And watch for further dividend increases.’ ☞ If, two years from now, earnings have grown by 25% in each year and the multiple has jumped to a still very staid 12 times earnings – big ifs to be sure – my math puts the stock price at $98, up from Friday’s $39. (And even $39 is up from the $25.50 or so we started at a year and a half ago, with a dollar-fifty or so in dividends along the way.) If it grew at 30% a year for two years and commanded a 15x multiple . . . well, what is life without a dream? DON’T SELL YOUR HAPN WARRANTS In a sense, they are a better value here, at 50 cents, than they were a few weeks ago at 25 cents. Because a few weeks ago, there was the real chance the InfuSystems acquisition might be nixed, rendering the warrants almost immediately worthless. Now, it would take more than three years – specifically, until April 11, 2011 – for the warrants to be rendered worthless (which they would be if the underlying stock were $5 or below). And if the underlying stock hit $8.50 at some point between now and then – a big if to be sure – our 50-cent warrants would be worth $3.50 (because they’d give us the right to buy $8.50 of stock for $5). Even if the stock were ‘just’ $6 (and of course there’s no guarantee of that, either), we’d have a double. There is no question this is risky. But if anything, in my little screeds in this space, I may have been underestimating the warrants’ value a little, for two reasons. First, in my little ‘black box’ calculations, I’ve been using ‘1100’ as the number of days to expiration. Actually, it’s more like 1260 (and 1259 tomorrow and 1258 the day after that). This makes a small difference. Using Friday’s closing price of $5.05 for the stock, and a ‘risk-free interest rate’ of 4.25%, and a volatility of 40%, at 1100 days the black box spits out $1.63. But using 1260 days: $1.75. Hey, every dime helps. Let me quickly remind you that neither of those numbers takes into account the ‘cap’ on our potential profits. (With most options, your gain is, at least theoretically, unlimited. With these warrants, the gain is capped just a little above $3.50, because the company can ‘force conversion’ of the warrants if the stock hits, and for 20 consecutive trading days stays above, $8.50.) But that’s the second place I may have been too conservative. Because in trying to adjust my numbers for it, I’ve been using the suggestion a couple of you offered . . . namely, to use the same black box to calculate the value of a warrant with a strike price of $8.50 and subtract it, since that’s in effect what we’re giving up with the warrants we own – all the gain above $8.50 or $8.75. (I say ‘or $8.75’ not because the terms of the warrant are unclear, but because if the stock does hit and stay above $8.50 for 20 days, it may go a little higher at some point during those 20 days. That’s what happened with GLDD. So our true upside might be more like $3.75. ) Well, one of you with much fancier tools at his fingertips, writes: After reading your warrant valuation analysis this week, I decided to double check your numbers using a fairly sophisticated option valuation modeling system that I use at the investment bank where I work. It can take into account the $8.50 ‘callable’ feature. And it suggests you’ve overestimated the damage that callable feature does. Guessing the correct volatility number is just that, a guess (I think 25% is a better guess than the 40% you’ve been using, given the huge overhang of warrants), so I’ve created a grid showing the value of the warrants at various prices of the underlying stock and various volatility levels: Stock Vol = 25% Vol = 35% Vol = 45% $4.50 $0.83/$0.87 $1.07/$1.19 $1.26/$1.50 $5.00 $1.13/$1.20 $1.35/$1.53 $1.53/$1.85 $5.50 $1.45/$1.57 $1.65/$1.90 $1.80/$2.22 $6.50 $2.13/$2.38 $2.26/$2.68 $2.36/$3.00 The first price in each cell shows what my model thinks the warrants are worth; the second, higher, number, just by way of comparison, shows what the value would be if the warrants didn’t have that annoying $8.50 forced conversion feature. ☞ The bottom line of his endeavor is that ‘our’ back-of-the-envelope method may have been penalizing the warrant a little too much. And that, with the stock currently at $5, under almost any assumption, the warrants are a steal at 50 cents. Then again, I could offer you two-to-one odds on the flip of an honest coin – HEADS YOU WIN $10,000, TAILS YOU LOSE $5,000 – and it would be a great bet for you to take (if you could afford the risk). But that doesn’t mean you would win. So the only real bottom line, at the end of the day, will be how well or poorly InfuSystems performs, and what people are willing to pay for the stock. I’m hoping for $8.50 one day and seven times today’s price on the warrants. At the same time, I am only making this bet with money I can truly afford to lose. DON’T SELL YOUR AII WARRANTS Well, these, too, seem cheap. The stock closed at $9.39, so the warrants, giving you the right to buy it at $7.50 once the Boise acquisition closes, have an intrinsic value of $1.89. (Right? Subtract $7.50 from $9.39 and you get $1.89.) Yet they closed at $1.90, giving a value of just one penny to their ‘time value’ – namely, the right to exercise them any time between now and mid-2011. The reader above says his black box put their current value at more like $3. So tempting as it may be to take a quick 30% or 50% or 70% profit (depending on what you paid for yours this summer), that’s not the point of a bet like this. Fully recognizing that we may lose it all, the point of a bet like this is to make several times our money, lightly taxed as a long-term capital gain.
A $100 Investment for Your Kids October 26, 2007March 10, 2017 But first . . . FMD Good earnings. Don’t sell. More Monday. HAPN All this napping seems to have paid off. There will doubtless be a lot of ups and downs along the way, but yesterday, as the market for HAPN and its warrants continued to sort itself out, the stock closed at $5.15 and the warrants at 48 cents. Some of you paid as little as 23 cents for HAPNW a few weeks ago, and so have a double. Others paid more like 34 cents (or 42 cents yesterday morning) and so are not yet in the Giddy Zone. Well, hang on. My own sense is that, in the short run, the stock should perhaps be more like $5.90 or $6 – given that some pretty sophisticated institutions preferred to keep their shares rather than exchange them for $5.97 in cash – and that the warrants should be at least a couple of dimes above their intrinsic value, which would put them at $1.10 or $1.20. Not to say I’m predicting that; it just seems to me a reasonable way to think about what the two securities might reasonably be selling for absent new developments. In the quarters and years to come, of course, the valuation will depend at least in large measure on how well the company does. If it grows and is nicely profitable, we almost certainly have a winner. If it stumbles (or the market crashes just when, let’s say, three years from now, the warrants were about to expire and we were about to realize a 1000% gain) – we could certainly still lose all our money. But to me, anyway, the warrants are nowhere near high enough to begin taking profits. Famous last words. And now . . . MICROPLACE.COM Charles and I are enthusiastic supporters of FINCA (‘small loans, big changes’), Shared Interest (‘investing in South Africa’s future’), and Calvert (‘investing in communities’). All three help to seed small enterprise, thereby to help kickstart a virtuous cycle that could ripple out for generations. Well, apparently, eBay is now making this kind of opportunity available to people with as little as $100 to invest. It’s not a way to get rich – you just get a low interest rate on your money. But it can provide a high psychic return. This holiday season, why not give each of your kids $100 to invest this way? Click here. KIVA And here! GREEN LAPTOPS And here!
A Good Day October 25, 2007January 6, 2017 HAPN WARRANTS Yesterday was a good day. The acquisition of Infusystem was approved at long last, so our warrants will shortly be exercisable – and have about three years to run. The stock closed down at $4.96, but think about it. Say you kind of liked this business. Would you risk $49,600 to own 10,000 shares of it? Or just $3,900 to buy 10,000 warrants at 39 cents each? I’d go for the $3,900, both because it’s a lot less cash to have to come up with and because it’s a lot less cash to risk. My own feeling is that the spread still needs to be wider, whether because HAPN stock goes down a bit more or the warrants go up a bit more, or a little of each. The black box says that a three-year option to buy a fairly volatile $4.96 stock at $5 is worth about $1.61 . . . except because we give up all the gain from about $8.70* on up, I subtract from that the 70 cents the box says an option with a strike price of $8.70 is worth. So I get a black-box value of about 91 cents for warrants that closed last night at 39 cents. I’m cheerfully holding on. *I use $8.70 instead of $8.50, even though the company can force conversion of the warrants if the stock closes at or above $8.50 for 20 consecutive trading days, because there’s a reasonable chance it won’t just get to $8.50 and stay exactly there, although it could. Rather, at some point during those 20 days it might hit $8.75 or $9. So I throw in the extra 20 cents as just a guesstimate of what the actual price might reach if there were ever a forced conversion. I won’t repeat my musings of last week of how the stock and warrant might dance around each other (think of the Earth affecting the orbit of the moon but the moon also affecting the orbit of the earth, until they find equilibrium), but I like to think this business might be worth $6 or $7 or $8 or $9 a share sometime within the next three years. If not, well, we made this bet with money we could truly afford to lose. But if so, it will turn out to have been a good, or possibly a great, lightly-taxed long-term gain. My final HAPN thought is that, if the warrants stay cheap, or get cheaper, the company itself might at some point buy a few million of them. Why not? I’m not sure they could actually get many without bidding the price way up, especially once they announced their intention to do so. But say the warrants dipped back to 33 cents. In theory, it would cost the company just $9.9 million to buy all but 3 million of the 33 million that are outstanding. (They’d never get the last 3 million, because you and I own those, “and we ain’t sellin’ for no lousy, steeenkin’ 33 cents.”) It would certainly be a better use of the company’s profits (should they have any) than paying a dividend. So if the business does reasonably well, there could be all sorts of people bidding the warrants up from here, perhaps even including the company itself. It’s still a speculation, and we could still lose everything. But if I didn’t already have so many HAPN warrants, I’d buy more at 39 cents. MORE GREETER CORPS Tobias Brown: “Just a little tidbit on the issue of people visiting America. I live overseas. A Korean colleague in our office is applying for a visa to visit America. I was stunned to see as part of his application he was asked by the US to provide a list of each visit to each country anywhere in the world he had made for the last ten years. Is it any wonder that he decided to toss in the towel and go to the South of France for his honeymoon? I think this is a perfect example of ‘form over substance’ security post 9-11 that sends a staggeringly negative message to the world.” Ernst-Dieter Martin: “One easily fixable problem is taking the fingerprints of all visitors. It is right there that you are made to feel VERY unwelcome. Taking fingerprints is something done to criminals in my country, not to our guests. Taking my fingerprints and then offering me free tea wouldn’t improve it a bit. Stopping this practice would save a lot of money and would also speed up the process. The US is the only country doing this to their visitors besides Brazil, who’s taking them only from US citizens (I love the Brazilians for that move).” Chip Ellis: “Regarding partnering with Disney, it looks like the Administration took your advice before you offered it. From businesswire.com: October 22, 2007 U.S. Government Partners with Disney to Welcome International Visitors Multimedia “Portraits of America” to be Featured in International Arrivals Areas, U.S. Embassies and Other Venues to Welcome Visitors to the United States Athena Archuleta is a member of the Pueblo Tribe of Tesque in Santa Fe, N.M. and speaks their native language Tewa. She is one of the many faces seen in “Welcome: Portraits of America,” a seven-minute film and hundreds of still images, featuring American people from all regions and walks of life. Walt Disney Parks and Resorts commissioned the project as part of the Secure Borders Open Doors Initiative, a public-private partnership to improve the entry experience for visitors. . . . “Travelers form their first impressions of America when they arrive at our borders. Our global reputation therefore depends on making visitors feel every bit as welcome as they feel secure,” said Stewart Baker, Assistant Secretary for Policy, Department of Homeland Security. . . The film and still portraits showcase the diversity, friendliness and optimism of the American people. The film will be shown in the Federal Inspection Areas of U.S. airports, and in U.S. embassies and consulates overseas, while the still portraits will be incorporated in posters, banners and other imagery welcoming visitors to the U.S. The video and images will not feature or promote any commercial entities. The first airports to feature the images will be Washington Dulles International Airport and Bush Intercontinental Airport in Houston, Texas, to be followed by the nation’s other international airports. For the project, Disney attracted a world-class creative team including producer Federico Tió, a highly-regarded marketer of some of America’s best-known motion pictures. Born in Havana, Cuba on May 1, 1962, Tió came to the United States on one of the first “Freedom Flights” in 1965. Tió’s crew embarked on a cross-country odyssey to capture the content for the video, including images of ordinary Americans at work, play, with family and at moments of introspection. Secretary of State Condoleezza Rice and Secretary of Homeland Security Michael Chertoff announced a joint vision to enhance border security while streamlining security processes and facilitating travel for legitimate visitors in January 2006. As part of this initiative, the Secure Borders, Open Doors Advisory Committee was established with participation from the business, travel and tourism and academic communities. One of the goals of the Advisory Committee is to help the Departments of State and Homeland Security establish a friendlier, more welcoming process for visitors from the time they apply for a visa to their entry into the United States. ☞ I’m delighted to know great minds are thinking alike. But it doesn’t sound as though too much progress has been made in 22 months. Maybe it will accelerate from here.
Finally — Something Not Boring October 24, 2007January 6, 2017 WELCOME! Steve Miller: ‘The people in the Greeter Corps for foreign visitors could also act as something of a concierge, [answering questions, perhaps even helping out with their cell phones to make a dinner reservation or two]. My beloved city, Philadelphia, does what is in my judgment a very good job courting tourists, both foreign and domestic.’ ☞ Yes! They could answer basic questions, attempt to make entertaining, welcoming conversation (a multilingual corps would be best), explain how the local phone dialing works (in New York, you need to dial 1-212-345-6789 to make a local call; but in Miami, you drop the 1, it’s just 305-345-6789), how the cabs and public transport from the airport work – all that. And it occurred to me that, in addition to hot chocolate and lemonade, wouldn’t Coke or Pepsi want to sponsor part of this effort? And Starbucks? And perhaps Holiday Inn? Hey, welcome to America. Chip Ellis: ‘I think the euro at US$1.43 is probably a more welcoming incentive to visit the US than tea and lemonade.’ ☞ And yet, right now tourism is down even as our tourism ‘product’ sports a ‘40% off!’ sticker. As my friend Arthur Frommer noted recently (he, of EUROPE ON $5 A DAY fame, where now you can barely get a coffee in Europe for $5), ‘Since 2000, tourism to the United States from abroad has declined by 10%’ – even as tourism to Australia and France (for example) are up 20%. Think of it: the price of our product has been slashed 40%, in foreign currency terms, yet they are attracting more customers even as we are attracting fewer. Hertz and Avis, Marriott and Disney – they should all chip in for the Greeter Corps. (Shouldn’t every kid in the customs line be given a free pair of Mouse Ears?) If we could get the number of visitors up 20%, like France, instead of down 10%, the swing would add more than $30 billion in tourist revenues. Surely that’s worth our spending $1 billion a year to do. (Most of the cost would not be the volunteer greeters, but rather expanding the ranks of the customs agents in order to shorten the wait time in line.) Beyond the $30 billion, there’s the message this would send (you can be sure the initiative would make news around the world): ‘We’re back. We like you and want you to like us. We really do.’ One way to keep the message alive beyond the initial burst of publicity: the Las Vegas Tourist Board could hand foreign visitors million-dollar lottery tickets upon arrival . . . and draw monthly to see which foreign visitor had won. (Or maybe different casinos would do this in conjunction with different airlines. American Airlines might advertise: ‘Las Vegas not on your itinerary this trip? No worries, Mate. Fly American to America this summer and we’ll give you a $1 million lottery ticket, compliments of the MGM Grand – and free first class airfare to come back and spend it if you win.’) Too tacky? Maybe. But I’ll bet news of the drawing would make the front page the winner’s hometown paper. It’s worth trying to think of ways to keep the message out there – that we are a friendly, welcoming people, who ‘are back’ after eight terrible years – because the more people who come here to vacation, to study, and to do business, the more allies around the world we will have for the long run. MORE SUCH THOUGHTS Bob Smouse: ‘Having just returned from New Zealand, we were tremendously helped by the I-Sites (information sites) there. The same thing is all over Europe. These are offices which help visitors find housing, restaurants, tours, etc. for modest or no fees. The employees speak several languages to help the majority of tourists from different lands. The USA should sponsor such offices in every primary city, which would greatly improve the reputation of this country as friendly and helpful, and would probably significantly increase tourism, thereby helping our balance of payments.’ Kathi Derevan: ‘I get angry every time I land at LAX and see the luggage carts corralled, waiting for (I thinks it’s $2 now) AMERICAN money. I can’t think of a foreign airport that demands a traveler have ready cash in a currency other than their own, just to be able to get their bags to the curb! ‘Welcome to American, now pay up!’ ‘ FINALLY, AS PROMISED – SOMETHING NOT BORING Jeff Bauer: ‘Why bother trying to figure out the subprime mortgage mess when these two fellows present it in such a candid and entertaining way?’ ☞ Thanks, Jeff.
Welcome! October 23, 2007March 10, 2017 ONE OF THE FIRST THINGS There are so many things our next President should do first, some big, some small. Here’s a small one: ‘Under my predecessor,’ he or she should say, ‘it became notoriously difficult and unpleasant for foreign guests to enter our country. Yes, we need to protect our citizens by careful screening at customs; but not at the expense of hospitality. The following steps will be taken to improve the welcome of foreign visitors to ours shores. First, the number of customs agents will be increased as needed to cut the standard wait time to 15 minutes or less. Second, while our visitors are in line, they will be offered complimentary hot chocolate and tea in the winter; complimentary lemonade and iced tea in the summer. Folding or rolling chairs will be provided to those desiring them. We anticipate the added cost per incoming visitor to be less than $25 – a small price to pay to create a favorable first impression on people who, on average, spend $2,000 while they are our guests. We will do this, first, because we are a warm and welcoming people. Second, as a small but real signal to the world that ‘we’re back’ – we are rejoining the community of nations. And third, because we want the word to spread that America is a great place to vacation, a great place to study, a great place to do business. ‘ It would be smoother than that (and I just pulled the $2,000 figure out of the air). But we’d try to find ways to make every visitor feel welcome and well treated. A volunteer Greeter Corps might even be formed – people proud of their country who want to show it off at its best. FOREVER STAMPS And while we’re at it – how about saying, in a long list of big and little things that first week, that hereafter all first class stamps, including those already issued, would be valid for first class whatever the prevailing rate had risen to? YOUR IDEA? ‘End the war’ is already on the list. Can you share a few more? DENTYNE ICE As argued previously, it is the perfect food. Phil: ‘Did you check with your dentist?’ ☞ He gave it a toothy grin. And one of you wrote in to say that Costco has it for what works out to 69 cents a pack. Let’s see. I go through a pack a day, so would save $100 or more on a year’s supply. This is getting better and better.
Boring! October 22, 2007January 6, 2017 HAPNing SOON? The latest: I-Flow itself, which has been trying to sell InfuSystem to HAPN – has now itself bought 15% of HAPN from holders-of-record-August 6, along with their rights to vote in favor of the merger. Nothing is certain until it’s certain, but on a day the Dow dropped 366 points (nearly 3%), HAPN closed up 8 cents, at $5.45, and the warrants, HAPNW, held firm at at 37 cents. Another stock that did okay Friday was AII – Aldabra 2 – unchanged at $9.43 on more than half a million shares . . . while the warrants (symbol AII+ on Ameritrade) closed up 12 cents at $1.85 on good volume. Not to say they won’t all plunge today. Or that other of the stocks I’ve suggested did as well. They did not. Wa-Moooooo was down to $29.09 (and the smart friend who likes it bought more). FMD and CBH were both off half a dollar to dip under $39. And Borealis, at $6 and change, is now barely double where it was when I first started writing about it eight years ago (!!!), before the plane moved or the iron ore was more than lore. But is any of this giving me gray hairs? Not if you judge by my photo, upper left, which looks no different from when it was taken 10 or 15 years ago. FOREIGN FUNDS Last week, with the Dow around 14,000, I wrote: ‘The dollar has fallen spectacularly under Republican management. Where the euro bought just 85 cents when George Bush appeared to win the presidency at the end of 2000, it bought $1.42 last night. (So in euro terms, the Dow is not 14,000, up from 11,000 – it’s 8,400, down from 11,000.)’ A couple of you questioned the math. But here’s what I meant. At the same time the Dow was 11,000, in November of 2000, the euro bought only 85 cents. If it still did, then it would be fair to say that – to someone holding euros – the Dow had risen smartly to 14,000 . . . which nominally it has. But the euro does not still buy only 85 cents, it buys about $1.42. So the euro has appreciated 67% against the dollar. Or, looked a different way, the dollar is down 40% versus the euro. If you knock 40% off 14,000, you get 8,400. Jeff Schwarz: ‘But what if Hillary (or other responsible person) is elected President and closes our deficits (either with tax raises, cost cuts, growth, other, or mix). Wouldn’t the dollar start to do better?’ ☞ Very possibly, but I think this aircraft carrier will not be quick to turn around. PS – I promised to be less boring this week – but I didn’t say which day this week.
Mud, Paper — “Not Dollars” — and Ambulatory Infusion Pumps October 19, 2007January 6, 2017 MIND-READING THE TAPE Yesterday, the market decided that HAPN’s InfuSystems acquisition will go through. I infer this from the fact that the stock traded 3.4 million shares and closed down 27 cents at $5.37. The selling would have come from owners who had been holding on for their nearly $6 in cash in a few months if the deal failed – but now no longer expected it to fail and, thus, no longer expected a cash pay-out. Meanwhile, more than two million changed hands, closing at 36.5 cents, essentially unchanged. Anything’s possible, of course, but by the time you read this, we may well be in the ambulatory infusion pump business. From the company’s web page: InfuSystem is a rapidly growing healthcare services company that provides state-of-the-art electronic continuous ambulatory infusion pumps, supplies and support to oncology practices and clinics throughout the United States. More than 60% of oncologists across all 50 states turn to InfuSystem as their single, full-service source for cost-effective infusion pump management. InfuSystem maintains a complete inventory from every leading manufacturer, including single and dual-channel portable pumps and supplies. Oncology-certified nurses staff our Call Center 24 hours a day, every day of the year. The self-monitoring pumps supplied by InfuSystem reduce the need for costly home care and lower health plan costs and patient out-of-pocket expenses while improving the quality of patient care and eliminating the need for your practice or clinic to maintain costly equipment inventories. My current plan is to hold the warrants for quite a while, hoping to see the stock eventually get past $8.50 to repeat our success with the Aldabra warrants that put us in the mud-moving business with GLDD (currently $8.96). This may of course never happen. But with the warrants selling for zero premium over their intrinsic value, it seems to me they are – albeit only with money you can truly afford to lose – a steal. Meanwhile, the Aldabra 2 warrants that some of us bought around $1.47, and then again perhaps as recently as last month at $1.18, closed last night at $1.73, and should soon put us in the paper business when that acquisition closes. Mud, paper, and ambulatory infusion pumps. Such a portfolio! (With AII, the underlying Aldabra stock, closing last night at $9.43, the warrants – which will give you the right to buy the stock at $7.50 – currently sell for 20 cents less than their intrinsic value. You get the three years of ‘time value’ for free.) Finally, just to be clear, can we all just chant it in unison? Although these seem to be reasonable bets to take, there is absolutely the chance with any of them – or even all of them – that you will lose all your money. So don’t take risks you can’t comfortable afford to take. WA-MOOPS Which is the perfect segue to my dreadful timing on Washington Mutual 2010 LEAPS. The bank announced even worse earnings than expected and the stock – about $36 when I suggested the January, 2010 $30 calls at $8 last week – closed last night barely over $30, with the LEAPS down to about $5.70. I bought some of the stock today. If the dividend can be maintained, it’s a 6.7% pay-out. And if the bank gets through the next couple of years’ turmoil (expect turmoil!), there could be nice price appreciation to boot. Today may have been the bottom, or with hindsight my purchase may turn out to have been nothing more than an attempt to ‘catch a falling knife’ (in common Wall Street parlance). FOREIGN FUNDS The dollar has fallen spectacularly under Republican management. Where the euro bought just 85 cents when George Bush appeared to win the presidency at the end of 2000, it bought $1.42 last night. (So in Euro terms, the Dow is not 14,000, up from 11,000 – it’s 8,400, down from 11,000.) Unfortunately, as we have discussed, the dollar is going to keep falling, most likely for a long time. Such is the structural damage that has been done. Earlier this month, I mentioned a foreign bond fund, PFUIX, with a $5 million minimum. Less Antman: ‘I assume you know that PFBDX is a low-minimum alternative to PFUIX, but just couldn’t resist a good joke. T. Rowe Price International Bond Fund (RPIBX) and American Century International Bond (BEGBX) are two other solid alternatives for unhedged foreign exposure, assuming someone wants to expose themselves to foreigners.’ (Less can’t resist a good joke, either.) Smart friends I’ve consulted suggest that foreign currency ETF’s – Exchange Traded Funds – are the best way to keep your cash in . . . well, ‘not dollars.’ Click here and here for just a couple of easy places to get a start thinking about this.
The Most Boring Column I Ever Wrote October 18, 2007March 10, 2017 This column will be really boring if you don’t own HAPN warrants. I apologize for that, but I promise to try to be less boring next week. (What can I say? It took forever getting through security today, and then when I finally got to Gate A7 the flight was conveniently moved to gate D42, less than a mile away, and then they kept adding 20 minutes to the expected departure time – so never quite enough time to get set up with the computer – and then, my dog, which I thought I had managed to find a home for with Ellen DeGeneris, came back and ate my homework.) HAPNW So one of three things happens tomorrow: 1. HAPN’s deal to acquire InfuSystems is definitively nixed. The warrants go to a nickel. I require one of InfuSystems’ IV drips. I don’t expect this to happen, but I didn’t expect America to elect George Bush. 2. The deal is delayed again. My hunch is that this may not happen – that we may actually, finally, be good to go. But my hunch was that ostrich burgers would be offered at McDonalds and that Ugly Betty would be off the air after one abbreviated season. 3. The deal gets done. There is a mad dash by the holders of 33 million warrants to take at least some of their money off the table . . . which means driving the stock down to around $5.40 or so for a while. Here’s why. With 3 years to run, the warrants should sell at a hefty premium to their intrinsic value. But there are so many of them, and so many people may want to take profits, that they may be willing to sell with no premium – or even for a penny or two below their intrinsic value. So let’s say the stock bounces from its current $5.64 to $6.30 on news of the deal. (It may not bounce at all, it may dip.) At $6.30, the intrinsic value of the right to buy it for $5 would be $1.30. But if the best bid is $1.20, what would people do? They would exercise their options for $5 and immediately sell the stock for, say, $6.25. So now the stock is $6.25 and maybe the best option bid is $1.18 by a market maker who buys your warrants for $1.18, exercises them at $5, and sells the stock for $6.20. And down and down it’s chased (or not, see below) until it gets to around $5.30 or $5.40 or $5.50. At that level, a lot of warrant holders might reluctantly decide to wait for a higher pay-out. And some might even decide to buy more. After all, with the stock at $5.40, their theoretical value would be above a buck (but see below for some cautions). Surely, at $5 or below no one would be exercising their warrants (why exercise your right to buy shares for $5 that you can already buy for $5 or less on the open market?). So at that level, while the stock could certainly fall, none of the downward pressure would be from warrant holders. (Well, that’s not true. Some warrant holders might sell the stock short, figuring that if it went up they couldn’t lose – they could always cover at $5 by exercising their warrants – and if it went down, they’d make a profit on their shorts.) What I’m trying to say is that if the deal does close, there would likely be a fairly strong pull on the stock to trade in the $4.75 to $5.50 range for a while, and a pull on the warrants to trade in the 40-cent to 70-cent range. Of course, if the underlying business does well – or poorly – the stock good go a lot higher – or lower. But with 18 million shares outstanding and an overhang of 33 million warrants, it will face a headwind. By the same token, with so long to run, the options should retain value even if the stock hits a downdraft. Even if the stock dropped to $3, the warrants’ theoretical value with 3 years to run could be higher than last night’s 35-cent price. Here’s the black box to play with again with that example plugged in. Notice that to get the warrants to be worth 46 cents, I used 40% as the volatility. Forty percent of what, you ask. I asked the asked the same thing of a friend who does this for a living. ‘It’s very complicated and truthfully, I don’t understand it either,’ he said. ‘Use 40%; that’s about right.’ (One of you, I know, will send in all the math and standard deviations.) In using the black box, two of you sent in a good back-of-the-envelope way to adjust for the fact that the warrants don’t have unlimited upside, the way normal options would. (With a normal option, if our HAPN went to $70, our profit would be $65. With these warrants, because the company can force conversion if the stock stays above $8.50 for a while, the practical upside is approximately $3.75 or $4. That’s still twelve times what we paid for the warrants, so not too bad. I have a rule: whenever I make twelve times my money in under three years, I don’t complain.) The method you suggested was to use the black box to figure out what an HAPN warrant with an $8.50 strike price would be (since effectively you’re giving up all the gain above $8.50 or a little more) and then subtract that from the value of the warrant with a $5 strike price. With the stock at $5.64, the $5 strike price warrant theoretically may be worth about $2.11, while using the same 40% volatility assumption, the $8.50 strike is $1.03, so subtracting one from the other gives you a theoretical value $1.08 for our warrants. If the deal gets done tomorrow and if the stock stays at $5.64. But with 33 million of them, I’d be surprised if they traded at their theoretical value. So I guess even if tomorrow brings good news, it may not bring an immediate retirement on the Amalfi Coast. But we might not want to take an immediate profit anyway – we’ve not held the warrants nearly long enough to qualify for long-term capital gains tax treatment. Finally, let’s not entirely discount brighter scenarios. The underlying business could do well, and the same institutions that liked it enough to pay $5.97 a share last week might buy more if it got cheaper – or might buy the warrants themselves. And others, seeing a fine business with an accelerating growth rate (in case that’s what InfuSystems turns out to be) might bid the price up regardless of the warrant overhang. Anyway, let’s see what happens tomorrow.