In a sudden fit of humility, suitable perhaps for a Sunday morning, I've decided to remind you of a prediction I made a month ago that has proven false.
Crude oil prices.
I noted the ongoing fall of crude oil prices. They had been at around $150 at their mid-summer peak, but by last month had dipped into the upper $90s.
With my customary brilliance, I said, this has "likely gone as far as it is going to go."
Oops. It has lost another $30 per barrel. And, even better, the fall has shown up in the price of gasoline at the pumps. I'm delighted to have been wrong.
The effective halving of the price of crude might be the only thing keeping our economy going at all at the moment, given the credit squeeze and consequent Wall Street meltdown.
Sunday, October 19, 2008
Wednesday, October 15, 2008
Orient Express and its shareholders
I reported last week in this place that two hedge fund shareholders in Orient-Express Hotels Ltd. had offered a proposal to dismantle the dual-class shareholding system in play there.
OEH held its shareholder meeting Friday. Based on the preliminary results reported by the independent inspector, 70% of shareholders supported that proposal.
But of course the vote is of psychological rather than managerial experience. A scheme devised to effectively disenfranchise class A shareholders can't be effectively dismantled by the vote of the class A shareholders!
In a statement yesterday, the principals of the two hedge funds demanded a meeting with the OEH board. They also said: "We continue to believe that the Company’s circular ownership and voting structure – in which an entrenched Board controls 80% of the shareholder vote and remains accountable only to itself – is unlawful."
The company's response is that the board and its management "consider the matter addressed by the Special General Meeting to be closed, and [they] will continue to focus on delivering shareholder returns and managing the business in the best interests of all [their] shareholders."
Nothing very revealing has happened in terms of the stock chart in the two business days since the meeting. The price of a share of OEH gained some ground Monday and lost that ground again Tuesday.
I wouldn't want to get on a goo-goo high horse here, and I've offered the usual caveats in some of my earlier posts. But OEH's structure does seem uniquely unresponsive, and I wonder how long the market will support that. Presumably, the recourse of class A shareholders unhappy with the situation is to sell. If OEH wants to support its stock price, it should concern itself with the archaic nature of this arrangement.
OEH held its shareholder meeting Friday. Based on the preliminary results reported by the independent inspector, 70% of shareholders supported that proposal.
But of course the vote is of psychological rather than managerial experience. A scheme devised to effectively disenfranchise class A shareholders can't be effectively dismantled by the vote of the class A shareholders!
In a statement yesterday, the principals of the two hedge funds demanded a meeting with the OEH board. They also said: "We continue to believe that the Company’s circular ownership and voting structure – in which an entrenched Board controls 80% of the shareholder vote and remains accountable only to itself – is unlawful."
The company's response is that the board and its management "consider the matter addressed by the Special General Meeting to be closed, and [they] will continue to focus on delivering shareholder returns and managing the business in the best interests of all [their] shareholders."
Nothing very revealing has happened in terms of the stock chart in the two business days since the meeting. The price of a share of OEH gained some ground Monday and lost that ground again Tuesday.
I wouldn't want to get on a goo-goo high horse here, and I've offered the usual caveats in some of my earlier posts. But OEH's structure does seem uniquely unresponsive, and I wonder how long the market will support that. Presumably, the recourse of class A shareholders unhappy with the situation is to sell. If OEH wants to support its stock price, it should concern itself with the archaic nature of this arrangement.
Tuesday, October 14, 2008
Overstock and Gradient: Friends at Last
Overstock.com Inc., the discount retailer based in Salt Lake City, Utah, has announced the settlement of its lawsuit against Gradient Analytics, of Scottsdale Arizona.
Fans may recall that Gradient is the independent stock analyst formerly known as Camelback Research Alliance Inc. Overstock's complaint, brought in a state court in California, was that in 2005, Camelback conspired with hedge fund Rocker Partners to issue falsely negative reports about Overstock in order to benefit Rocker's short positions.
The settlement comes after an unsuccessful effort on Gradient's part to persuade California's courts to set aside the complaint on first amendment and/or SLAPP grounds. [SLAPP is an acronym for "strategic lawsuits against public participation," and a California law aimed at discouraging the practice of stifling public debate by such means.]
According to the statute: "A cause of action against a person arising from any act of that person in furtherance of the person's right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim."
The word "probability" in that statute appears to mean something different for this court than it means to, say, a casino manager. The court said it isn't making a decision about which side has the better hand, but that for purposes of deciding the motion, it accepts as true all evidence favorable to the plaintiff.
Both the appellate court and the state supreme court have said that Overstock's lawsuit isn't a SLAPP, Gradient responded by filing a cross-complaint this spring, and the parties had been preparing to try the matter on the merits, with a trial date set for this coming April.
Now there's been a sudden outbreak of amity. The terms of the settlement are confidential, though Gradient put out a statement Monday, Christopher Columbus notwithstanding, saying that Overstock's accounting policies "did in fact conform with generally accepted accounting principles (GAAP) and regrets any prior statements to the contrary." Rocker Partners [or, strictly, its progeny, Copper River], remains a party.
The chairman and CEO of Overstock, Patrick Byrne, said in his company's statement: "I wish Gradient Analytics the best in their future endeavors. Overstock.com will now focus on the remaining defendants, Copper River, David Rocker, and Mark Cohodes."
Sports fans can take cheer in that last bit. There will still be a trial. The focus thereof has narrowed a bit.
Fans may recall that Gradient is the independent stock analyst formerly known as Camelback Research Alliance Inc. Overstock's complaint, brought in a state court in California, was that in 2005, Camelback conspired with hedge fund Rocker Partners to issue falsely negative reports about Overstock in order to benefit Rocker's short positions.
The settlement comes after an unsuccessful effort on Gradient's part to persuade California's courts to set aside the complaint on first amendment and/or SLAPP grounds. [SLAPP is an acronym for "strategic lawsuits against public participation," and a California law aimed at discouraging the practice of stifling public debate by such means.]
According to the statute: "A cause of action against a person arising from any act of that person in furtherance of the person's right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim."
The word "probability" in that statute appears to mean something different for this court than it means to, say, a casino manager. The court said it isn't making a decision about which side has the better hand, but that for purposes of deciding the motion, it accepts as true all evidence favorable to the plaintiff.
Both the appellate court and the state supreme court have said that Overstock's lawsuit isn't a SLAPP, Gradient responded by filing a cross-complaint this spring, and the parties had been preparing to try the matter on the merits, with a trial date set for this coming April.
Now there's been a sudden outbreak of amity. The terms of the settlement are confidential, though Gradient put out a statement Monday, Christopher Columbus notwithstanding, saying that Overstock's accounting policies "did in fact conform with generally accepted accounting principles (GAAP) and regrets any prior statements to the contrary." Rocker Partners [or, strictly, its progeny, Copper River], remains a party.
The chairman and CEO of Overstock, Patrick Byrne, said in his company's statement: "I wish Gradient Analytics the best in their future endeavors. Overstock.com will now focus on the remaining defendants, Copper River, David Rocker, and Mark Cohodes."
Sports fans can take cheer in that last bit. There will still be a trial. The focus thereof has narrowed a bit.
Monday, October 13, 2008
What a cool name for a hedge fund!
Noront Resources Ltd., a Toronto-based minerals-exploration company, has a shareholders meeting scheduled for October 28.
Its incumbent board faces a challenge led by a hedge fund named Rousseau Asset Management Ltd., which owns or controls approximately 9.2% of Noront's common shares.
I know very little about the underlying dispute. But I was intrigued by the name. Rousseau Asset Management? Do they often use the acronym "RAM".
I'm reminded of the song "High Hopes." Maybe they should wage a proxy fight against some company that has just finished construction of a million kilowatt dam.
Aside from the acronym: Is "Rousseau" the family name of the founder? Or was he paying a tribute to the famous painter?.
Or perhaps, less likely I suppose, it was a tribute to the philosopher of the state of nature and the debilitating consequences of civil society.
More prosaically, there's an Henri Paul Rousseau who was the chairman and chief executive of Caisse de dépôt et placement du Quebec, from 2002 until earlier this year. Does RAM have any connection to him or his kinfolk?
If anyone in the wide readership of Proxy Partisans knows anyone connected with RAM, let them know I'm curious. About the name, as about the specific strategy and performance record. [I don't see any "Rousseau" in the TASS database.] Curiosity may have killed a cat or two but I doubt its done any harm to a RAM of late.
Its incumbent board faces a challenge led by a hedge fund named Rousseau Asset Management Ltd., which owns or controls approximately 9.2% of Noront's common shares.
I know very little about the underlying dispute. But I was intrigued by the name. Rousseau Asset Management? Do they often use the acronym "RAM".
I'm reminded of the song "High Hopes." Maybe they should wage a proxy fight against some company that has just finished construction of a million kilowatt dam.
Aside from the acronym: Is "Rousseau" the family name of the founder? Or was he paying a tribute to the famous painter?.
Or perhaps, less likely I suppose, it was a tribute to the philosopher of the state of nature and the debilitating consequences of civil society.
More prosaically, there's an Henri Paul Rousseau who was the chairman and chief executive of Caisse de dépôt et placement du Quebec, from 2002 until earlier this year. Does RAM have any connection to him or his kinfolk?
If anyone in the wide readership of Proxy Partisans knows anyone connected with RAM, let them know I'm curious. About the name, as about the specific strategy and performance record. [I don't see any "Rousseau" in the TASS database.] Curiosity may have killed a cat or two but I doubt its done any harm to a RAM of late.
Sunday, October 12, 2008
GM news
I found the stock price drop-off on Thursday surprising. If you'll read my commentary Wednesday you'll see why. I had thought the fall-off earlier in the week was the result of a one-time event: pressure on a lot of hedge funds to liquidate some of their equity holdings in order to satisfy end-of-quarter redemption demands from dissatisfied investors.
I had hoped/expected some levelling off by Thursday. Instead, the DOw fell another 600-plus points.
Allow me then to make the point that this proves how I don't know nuttin'. So don' take this blog (or any other blog!) as a dispensary of investment advice. Please.
My best guess about Thursday is that the market was spooked chiefly by an S&P announcement in the late afternoon Wednesday. Standard & Poor's put General Motors, a US corporate icon if ever there was one, on "credit watch negative."
By the end of the week, Barclay's had lowered its loss-per-share estimate for GM for 2008. It had previously predicted that when this year's books are done, GM would lose $15.68 per share. Now it's guesstimating $15.87.
How has GM responded? Officially, thus: "Clearly we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets. But bankruptcy protection is not an option GM is considering. Bankruptcy would not be in the interests of our employees, stockholders, suppliers or customers."
Unofficially, GM is said to be in talks with Chrysler -- or rather with its parent company -- about a merger. How will that help? Won't that simply absorb badly-needed cash (or strain the credit that S&P just put on watch)? Apparently, the idea is that GM will pay for Chrysler with its remaining interest in its financing arm, GMAC. General Motors spun off GMAC two years ago, selling a bare majority of the equity, retaining 49%. So now it will give Cerberus that 49% and ger Chrysler.
Why? To increase its market share, presumably, though that hardly amounts to a cure to its ills. Chrysler suffers from the same ills, which is why it isn't part of Daimler-Chrysler any more.
The reported talks leave me wondering: why has it still occurred to no one that the most logical business combination of the world would be a takeover of the auto industry by the petroleum companies?
I've raised this before, hoping to get some explanations of why I'm wrong. Still nothing. But it seems to me that the logical model here is that of the shaving-blade industry. Gillette sells the razors at a loss. It can afford to do so, because the economic significance of a razor is to lock a consumer into buying a stream of blades that fit it, and the profit from those blades more than compensates the loss on the razor.
If Exxon-Mobil and its peers bought up the US auto industry, they could afford to sell automobiles for a loss, for the same reason. The economic significance of a car is to lock a consumer into the purchase of fuel.
So get to work, deal makers!
I had hoped/expected some levelling off by Thursday. Instead, the DOw fell another 600-plus points.
Allow me then to make the point that this proves how I don't know nuttin'. So don' take this blog (or any other blog!) as a dispensary of investment advice. Please.
My best guess about Thursday is that the market was spooked chiefly by an S&P announcement in the late afternoon Wednesday. Standard & Poor's put General Motors, a US corporate icon if ever there was one, on "credit watch negative."
By the end of the week, Barclay's had lowered its loss-per-share estimate for GM for 2008. It had previously predicted that when this year's books are done, GM would lose $15.68 per share. Now it's guesstimating $15.87.
How has GM responded? Officially, thus: "Clearly we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets. But bankruptcy protection is not an option GM is considering. Bankruptcy would not be in the interests of our employees, stockholders, suppliers or customers."
Unofficially, GM is said to be in talks with Chrysler -- or rather with its parent company -- about a merger. How will that help? Won't that simply absorb badly-needed cash (or strain the credit that S&P just put on watch)? Apparently, the idea is that GM will pay for Chrysler with its remaining interest in its financing arm, GMAC. General Motors spun off GMAC two years ago, selling a bare majority of the equity, retaining 49%. So now it will give Cerberus that 49% and ger Chrysler.
Why? To increase its market share, presumably, though that hardly amounts to a cure to its ills. Chrysler suffers from the same ills, which is why it isn't part of Daimler-Chrysler any more.
The reported talks leave me wondering: why has it still occurred to no one that the most logical business combination of the world would be a takeover of the auto industry by the petroleum companies?
I've raised this before, hoping to get some explanations of why I'm wrong. Still nothing. But it seems to me that the logical model here is that of the shaving-blade industry. Gillette sells the razors at a loss. It can afford to do so, because the economic significance of a razor is to lock a consumer into buying a stream of blades that fit it, and the profit from those blades more than compensates the loss on the razor.
If Exxon-Mobil and its peers bought up the US auto industry, they could afford to sell automobiles for a loss, for the same reason. The economic significance of a car is to lock a consumer into the purchase of fuel.
So get to work, deal makers!
Wednesday, October 8, 2008
Redemptions
What was the selling Tuesday on Wall Street all about?
On Monday, the market spent most of the day going down, but had a significant uptick in the final minutes.
But then yesterday ... boom. The Dow, the S&P, and Nasdaq all declined by more than 5% of their total value which, in the case of the Dow, amounted to more than 500 points.
As usual, the pundits have their theories:
1. The big one-day decline was a response to an announcement from Bank of America that it was cutting its dividend, or
2. It was a reaction to a rumor that MUFG is pulling out of a deal to acquire a large chunk of Morgan Stanley, or
3. Bernanke scared the traders with his mid-day statement, or
4. all of the above and other stuff.
None of that looks persuasive to me. One can hypothesize that one of those butterflies caused this hurricane, but I think there's a much larger wing than any of those flapping about.
Call this the hedge fund capitulation. Hedge funds have lock-up periods, sometimes for months at a time. As the term suggests, hedge funds are by design illiquid. An investor, having put his money in on Monday, can't simply say, "I've changed my mine, I want to liquidate my interest" on Wednesday.
Well, actually, he can say it on Wednesday if he wants, but he can't expect the managers will act on that demand any time soon thereafter. They're entitled to wait until the lock-up period has expired, i.e. that the "redemption" date has arrived.
This can have a systemic impact on the markets because it is natural for hedge fund managers and investors to agree on the end of a financial quarter as the redemption date. Much of the hedge fund industry was committed to allowing hedge fund withdrawals on October 1, AND much of the industry had just had a lousy third quarter, making it very likely that they'd receive demands by September 30.
Those hedge funds that didn't have enough cash hanging around in the office furniture to meet the redemption demands they've just received have taken to selling shares of stock to obtain the liquidity needed to pay off these exiting investors. Hence the downward pressure we've seen of late.
I call this the hedge fund capitulation , because the italicized term is used in finance-world jargon to mean a particular sort of crash -- one with a valuable cleansing effect. It means the final shuddering sell-off after which everybody who can be scared away has been scared away. All the selling likely to be done any time soon will have been done, and a floor established.
October 1987 saw a capitulation. The Dow lost 20% of its value in a single day. Within 1.5 years, it had returned to the pre-crash level.
We didn't have 20% at one clump this time, but the market has lost almost that in about two months. But as August of this year began, the Dow was at 11,500. It is now at 9,447, which is about 18%. Let's hope that's enough, and that with the final kicking-in of this hedge fund liquidation component, capitulation has been accomplished.
On Monday, the market spent most of the day going down, but had a significant uptick in the final minutes.
But then yesterday ... boom. The Dow, the S&P, and Nasdaq all declined by more than 5% of their total value which, in the case of the Dow, amounted to more than 500 points.
As usual, the pundits have their theories:
1. The big one-day decline was a response to an announcement from Bank of America that it was cutting its dividend, or
2. It was a reaction to a rumor that MUFG is pulling out of a deal to acquire a large chunk of Morgan Stanley, or
3. Bernanke scared the traders with his mid-day statement, or
4. all of the above and other stuff.
None of that looks persuasive to me. One can hypothesize that one of those butterflies caused this hurricane, but I think there's a much larger wing than any of those flapping about.
Call this the hedge fund capitulation. Hedge funds have lock-up periods, sometimes for months at a time. As the term suggests, hedge funds are by design illiquid. An investor, having put his money in on Monday, can't simply say, "I've changed my mine, I want to liquidate my interest" on Wednesday.
Well, actually, he can say it on Wednesday if he wants, but he can't expect the managers will act on that demand any time soon thereafter. They're entitled to wait until the lock-up period has expired, i.e. that the "redemption" date has arrived.
This can have a systemic impact on the markets because it is natural for hedge fund managers and investors to agree on the end of a financial quarter as the redemption date. Much of the hedge fund industry was committed to allowing hedge fund withdrawals on October 1, AND much of the industry had just had a lousy third quarter, making it very likely that they'd receive demands by September 30.
Those hedge funds that didn't have enough cash hanging around in the office furniture to meet the redemption demands they've just received have taken to selling shares of stock to obtain the liquidity needed to pay off these exiting investors. Hence the downward pressure we've seen of late.
I call this the hedge fund capitulation , because the italicized term is used in finance-world jargon to mean a particular sort of crash -- one with a valuable cleansing effect. It means the final shuddering sell-off after which everybody who can be scared away has been scared away. All the selling likely to be done any time soon will have been done, and a floor established.
October 1987 saw a capitulation. The Dow lost 20% of its value in a single day. Within 1.5 years, it had returned to the pre-crash level.
We didn't have 20% at one clump this time, but the market has lost almost that in about two months. But as August of this year began, the Dow was at 11,500. It is now at 9,447, which is about 18%. Let's hope that's enough, and that with the final kicking-in of this hedge fund liquidation component, capitulation has been accomplished.
Tuesday, October 7, 2008
The Orient Express
Yes, the hotel management company, Orient-Express Hotels Ltd., is the company that operates the famous tourist train, the Venice Simplon Orient Express.
More germane to my concerns in this blog, though, the company has an annual meeting scheduled for Friday, Oct. 10.
Two hedge fund shareholders, DE Shaw and CR Intrinsic Investors, have offered a proposal that would dismantle the dual-class structure of the company.
RiskMetrics, known until recently as ISS, has supported that proposal. Its report on this particular dispute reads in relevant part: "Irrespective of whether the current structure would be deemed legal or not, the proponents have made a strong case with regards to how the elimination of Class B shares would benefit the company in terms of good governance, which may in turn have a positive effect on the firm's value. The company, on the other hand, has not sufficiently justified how the current share structure benefits Class A shareholders."
Glass Lewis, on the other hand, supports management. Its report: "We suspect that most shareholders both understand and accept the nature and extent of Orient-Express Holdings 1 Ltd's control over the Company and the composition of its Board, particularly since this structure has been in place for a considerable period of time."
The company trades on the NYSE with the ticker symbol OEH. Its value is now at only one-third what it was a year ago.
Yes, everybody has had a bad year. But not that bad. The Dow Jones Industrial Average, for example, is at about 75% of where it was a year ago.
Yet the tourist industry is notoriously fickle, since it represents the first item many families cut when they start worrying about jobs, security, etc.
The question for shareholders asked to choose sides is: does the corporate governance issue that the activists have raised spill into performance, and thus into stock price? If not, why should I care about the abstract rightness of a dual stock structure?
More germane to my concerns in this blog, though, the company has an annual meeting scheduled for Friday, Oct. 10.
Two hedge fund shareholders, DE Shaw and CR Intrinsic Investors, have offered a proposal that would dismantle the dual-class structure of the company.
RiskMetrics, known until recently as ISS, has supported that proposal. Its report on this particular dispute reads in relevant part: "Irrespective of whether the current structure would be deemed legal or not, the proponents have made a strong case with regards to how the elimination of Class B shares would benefit the company in terms of good governance, which may in turn have a positive effect on the firm's value. The company, on the other hand, has not sufficiently justified how the current share structure benefits Class A shareholders."
Glass Lewis, on the other hand, supports management. Its report: "We suspect that most shareholders both understand and accept the nature and extent of Orient-Express Holdings 1 Ltd's control over the Company and the composition of its Board, particularly since this structure has been in place for a considerable period of time."
The company trades on the NYSE with the ticker symbol OEH. Its value is now at only one-third what it was a year ago.
Yes, everybody has had a bad year. But not that bad. The Dow Jones Industrial Average, for example, is at about 75% of where it was a year ago.
Yet the tourist industry is notoriously fickle, since it represents the first item many families cut when they start worrying about jobs, security, etc.
The question for shareholders asked to choose sides is: does the corporate governance issue that the activists have raised spill into performance, and thus into stock price? If not, why should I care about the abstract rightness of a dual stock structure?
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