Saturday, January 31, 2009

Georgia Family (Almost) Sells All Its Possessions To Fund Child Health Expenses

The Peters family, swamped with medical expenses associated with their two disabled children, first joked that they should sell everything they owned to stay solvent ... and then started taking the notion seriously. Bidding on everything they owned besides their house -- clothing, car, baby stroller, and apparently everything except the current-sized car child seats and their mattresses -- closed at $20,000. And the Georgia family stood ready to deliver.

The purchasers, a Texas family, paid the Peters in full. However, they declined to take delivery.

"They are apparently not willing to take our stuff," Brittiny Peters said. "They're purchasing them to give them back to us."
via Associated Press

The purchasers -- if the term can be used -- seemed sympathetic to the Peters' position:

"They've worked really hard to get those things and we're in a position to help them," Donnia Blair told The Associated Press on Friday. "She can just act like they're my storage facility."
via Associated Press

The Peters are also trying to figure out what to do with money raised by the administrator of the web site, and have reportedly irritated some people with efforts to return donations. Impressed by the generosity of donors, the Peters will be donating a number of items to appropriate charities in honor of those who have been so generous to the Peters.

The Jaded Consumer's view is fairly simple: the Peters' efforts to make good on their obligations without resort to bankruptcy protection and entitlement programs might ultimately prove futile, but it is certainly heroic. The fact that the Peters seem able to contemplate donating items to charities suggests that between existing earnings and recent donations, the family seems in pretty good financial shape, so perhaps their situation is more survivable than one might suspect at first glance. The fact that the Blair family exists, and the host of donors responding to, suggests that some of the more cynical commentators on modern society in the United States have a less than complete view of the whole. Something in the community is obviously whole and functioning and unbroken, and the Peters' good-faith efforts to stay financially afloat while prioritizing their family members over their interest in their material goods show that some people continue to demonstrate even in the twenty-first century a set of apparently sound values.

The upshot: the country isn't dead yet. Too many things seem to be working properly. Hope is alive.

Costly Chinese Bird's Nest

Last year, the Chinese-hosted Olympic Games showed off a glitzy new open-topped stadium known (due to the twig-like appearance of externally-visible steel lattice supports) as the Bird's Nest.  It turns out that the soccer team set to play in the stadium has backed out of the deal, and the structure's operators are struggling to make money in a venue with an $8.8 million dollar maintenance cost.

Currently, the main business there is ticket sales to tourists who want to walk around and buy trinkets in a gift shop.  The hope is apparently that the structure will within a few short years anchor a major shopping district.  The fact that the planet is plunging into a major international credit crunch and financial depression makes the creation of a major new shopping district something of a puzzle -- perhaps the brainchild of command-economy strategists -- but we'll see.

The decision to make the costliest Olympics ever might yield more expense yet.

Charlie Wilson's War

Charlie Wilson's War shows that Americans in policymaking positions had actual knowledge of the risks of abandoning Afghanistan to the Taliban following successful ejection of the Soviets, and simply failed when they tried to sell the need to protect long-term U.S. interests after Afghanistan's victory in the same way the U.S. protected long-term interests after securing objectives in Germany, Japan, and Korea. The film does show the significant impact asserted by a few people in the right place in thwarting a significant effort to expand Soviet influence in the world. And it's got some great characters.

The impact of a relatively miniscule number of CIA personnel in formulating and implementing strategy to change the fate of millions is something to think about. Looking for a few good men? The fact a story like this is nonfiction is simply boggling: if you'd written this as fiction, it would have been dismissed as implausible.

Mike Vickers, interestingly, isn't retired. He currently serves with the Department of Defense as the Assistant Secretary of Defense for Special Operations/Low-Intensity Conflict & Interdependent Capabilities.

Enjoy it!

For my part, I'm going to have to add the book to my reading list.

Low-Bloodshed Elections In Iraq

Iraq recently concluded an election in which lots of people voted, and apparently no-one died. Five candidates were assassinated in the days leading up to the election, but voters were able to cast their ballots without significant incident. Well, mortars fired near Tikrit might have been an incident, but mortar operators apparently lacked either the competence or the luxury of opportunity needed to bring fire to bear on actual polling places or voter congregations. The old lady pictured in the second link probably remembers Iraq before Hussein, and I hope she has a long opportunity to direct the country toward the kind of enlightenment that will keep women voting in Iraq for generations.

As for the current voters, they include folks who didn't participate in prior elections due to fear of violence:
"I just voted and I'm very happy," Mukhalad Waleed, 35, said in Ramadi, the capital of Anbar Province. "We could not do the same thing the last time because of the insurgency."
via International Herald-Tribune
Broadening participation should encourage broadening feeling that the public is being represented. The decline in abstention from the elections seems to indicate both increased confidence in the safety of participating, and the improved view that democratic government (as opposed to participation in opposition militias) is the answer to the problems of Iraq.

Some Sunnis, like Khaled al-Azemi, said the boycott last time had been a mistake.

"We lost a lot because we didn't vote and we saw the result - sectarian violence" he told the BBC.

"That's why we want to vote now to avoid the mistakes of the past."

via BBC


Extended an hour due to heavy turnout, Iraq's elections were hailed by its Prime Minister as a victory for the whole country.

Hear, hear.

Flushing Gold in Japan

One man's trash is another man's treasure.

A sewage processor in resource-poor Japan has discovered ... well, it's not a gold mine, it's better. Ash left over from sewage incineration at the Suwa sewage processing facility northwest of Toyko yields 1890 grams of gold per ton, dwarfing the 20-40 grams per ton that Sumitomo Metal Mining Co. Ltd. recovers from its highly-productive Hiskikari gold mine.

I met a physician once who said there was a lot of money in diarrhea, if you had the patience (patients?) for the work.  It seems he was right.

Eating Enemy Resources

Serious Attack, or Just Chinese Water Torture?
In Charlie Wilson's War, the title character is amazed the CIA station chief in Afghanistan appears to have no interest in ejecting the Soviets from Afghanistan, and learns that the local station chief seems to hope the Soviets will stay in Afghanistan a long time, suffering expense and frustration as they spend good money on bullets mowing down mostly helpless locals until the Soviets are too tired to pull the trigger or too broke to reload.

Maybe in a shooting war this is a shocking strategy, and escalation is warranted to achieve ejection of the enemy.  Hence, Charlie Wilson's War.

Outside the context of shooting wars, though, there are some amusing applications for this strategy of wasting enemy resources.

Spam is a nuisance because (a) it wastes your time, (b) it consumes storage and CPU resources for your server or (if administering your mailserver isn't your problem) your client software.  It also makes it harder to spot legitimate emails.  Daniel Hartmeier responds to automatic-harvested email addresses (including mailing list addresses) with relaydb, which shunts connections from spammers -- even if they come through desirable mailing lists -- to be ministered to by a daemon designed to protect him from the spammer's attention.  He cleverly looks at the mail headers not to find out where the email claims it originated -- this can be forged -- but based on where his computer actually received the email (which he knows, because his computer made this record).  If that address is not on the blacklist, his software assumes the connection is good and looks at the immediately-prior connection (assuming that the good connection is telling the truth about where it got the message).  The minute one of the connections turns out to be on the blacklist, the email is given second-class treatment.  In the case of an active connection involving a known spammer (the link explains how Daniel builds this list -- or rather, how his software builds this list for him), his computer services the connection with a daemon that pretends to be a mailserver, but just wastes spammers' computing resources pretending to have intermittent errors, or pretending to have a terrifically slow connection that tends to lose packets.  Daniel eats up spammer resources without having to spend much time or attention at all, and avoids most of their junk mail in the process.

One of the benefits of avoiding spam is avoiding the scam attempts they contain. 

Those who don't successfully avoid spam will encounter scam efforts.  Possible response to email scams is to game the scammers -- including as Daniel does with their connections, but instead with the human scammers themselves.  To waste scammer time and energy entertainingly one can mislead scammers that you've fallen for it, and have them run around like a chicken with their heads cut off chasing funds you never sent.  In an escalation of this game, one can run actual scams against scammers themselves.  The administrator of an anti-scam site has acquired a number of African carvings of Western-themed objects by tapping the same greed scammers ordinarily leverage to get victims to jump through hoops.

While some conflicts with identifiable enemies and known borders might be subject to naked force as a viable solution, some are better approached with thoughtfulness rather than mere money or muscle.  Daniel's relaydb seems an ingenius way to prevent spammers (including scammers) from reaching one's inbox -- a delightful way to avoid the problem without spending a fortune in prosecutorial resources and international legal efforts doomed by virtue of non-extradition caused by China and Nigeria having little interest in having the law enforced on domestic enterprises.  The more labor-intensive efforts undertaken to run individual scammers in circles are probably great therapy for their perpetrators, but unlikely to impact many scammers and unfeasible for the typical spam victim.  

Software vendors should think carefully why they are not offering solutions like relaydb and spamd (both licensable without fee) to their customers.

My own experience suggests that major vendors, including major Unix vendors, simply do not believe improvements to the status quo exist, or are useful.  For example, when Apple's Hubbard (of FreeBSD fame) received my question about improving MacOS X's firewall by looking at one of the stateful packet filters being developed, he responded that there was no reason there should be more than one firewall and that anyone working on a firewall for FreeBSD other than ipfw was wasting resources that could be employed somewhere actually useful.  The fact that the stateful packet filter pf has become (since FreeBSD 5.3 was released in 2004) part of the FreeBSD base system seems a strong indication that actual users of FreeBSD disagree with Hubbard's assessment that competing firewall tools are a waste of time.  (Hubbard's argument to me appeared chiefly based on an argument like how much performance improvement do you expect is possible in a firewall? and utterly ignored that ipfw did not actually conduct stateful packet inspection and thus filtered packets rather than connections, which limits its ability to apply different rules to users capable of proving privilege to access different system resources, for example, and that ifpw does not support failover for firewalls.  Hubbard's answer?  Nobody is using MacOS X for a firewall, so who cares?  The fact someone might be interested in using his company's product for more things if it were more capable seemed oddly off his radar.)

The upshot?

Vendors won't give us what we want, apparently, so we're in for self-help for the foreseeable future.  If you use a Unix-based system, consider delaydb and spamd;  if not, and you have time to kill, try baiting the spammers a bit and see how much fun you can have :-)  

But ... use a throwaway email address!

'Cello Scrotum': British Medical Journal Giggles About Being Hoaxed

The British Medical Journal, hoaxed thirty years ago by a female physician (and now member of the House of Lords) who thought 'guitarist's nipple' was funny, has announced that its prior report describing 'cello scrotum' is bunk.  Apparently the hoaxer saw 'cello scrotum' referred to as an actual malady and realized it wasn't obvious to non-cello players that it was a load of hooey.

Thank goodness.  Now, I can take up the bass.

Thursday, January 29, 2009

Funding the Stimulus

There's been a suggestion that the stimulus package is funded by the folks at the top of the socioeconomic pyramid. The chart is based on the apparent assumption that the existing distribution of income tax rates across the population of U.S. households will be used to fund the stimulus in the year it is spent. A little thought is in order.

Since income taxes are taxes on "income" one needs to make sure stimulus efforts and their associated burdens don't impair those who would pay these taxes -- which will be presumably paid from future earnings -- or the thing is a bust.

On the other hand, my understanding is that Obama expects years of trillion-plus-dollar federal budget deficits, which means funding by borrowing the money (or printing it) instead of charging it to present-day taxpayers. (The assumption that the stimulus would cause an increase atop existing taxes would, in fact, change all the tax rates of everyone in the chart in the first link.) This essentially means the present-day taxpayer households in the chart don't pay the expenses of the stimulus. The stimulus is funded by some future sucker-taxpayer who will face it plus accumulated interest. And it'll be paid back years in the future, during which time more annual deficit will be mounting. The value of the dollar might be rather different by the time this $850B or so comes due.

This thing -- the stimulus package -- is a gamble on the capacity of Americans to make lemonade from lemons while the sun is shining on the hay fields, or something of the sort. There's no specific plan to create taxable profits to fund the stimulus package, there's just a plan to create economic activity in the expectation that Americans will find ways to create long chains of people earning income in the process. Assuming the funds are spent on things involving labor, design, research, and local fabrication, there's a high probability that the funds will indeed circulate in the local economy, leading to numerous serial points of (taxable) profit. To the extent we spend funds on imported raw materials (e.g., fuels) or imported finished goods (vehicles, televisions), we lose the chance of multiple local serial profiteers.

The key seems to be encouragement of spending on things that are hard to outsource. Toward that end, local construction and energy development infrastructure (and associated engineering, architecture, construction, and other service expenses) seem a pretty good bet.

The interesting thing about long chains of serial profiteers is that they don't get smaller and smaller. The little earners, who profit little, spend most of their small incomes on things like food, shelter, and utilities -- recycling the funds back toward the top of the pyramid and enabling the support of more downstream profit-makers. Dividend recipients, new-added employees, capital gains earners, re-employed home remodelers -- all will benefit from these little guys' expenses and will in turn spend the money again.

The question is how long we can keep the expenditures local before they disappear from the taxable pot to Venezuela, China, and other places we'd rather not fund.

This isn't a one-line calculation, and it doesn't fall neatly into a small table. The impact of a trillion-dollar stimulus package is a complex web of calculations that depend in part on the capacity of Americans to satisfy the demands of Americans. Domestic energy production is an example of a way to invest for the future in the capability of Americans to satisfy the demands of Americans, and to create more domestic benefit from each domestic dollar spent.

The whole thing may not be a work of genius, but it's certainly not the laughable folly some urge. At base, it's a bet on the long-term ability of Americans to make money, and that's a bet with some astute investors' money behind it.

Important Austin Safety Alert Just A Hoax?

Commuters provided with a helpful illuminated roadside warning of "ZOMBIES AHEAD" may have stopped off to pick up axes, chainsaws, and other traditional gear for overcoming zombie hordes, but in vain: the sign turned out to be a hacker's hoax.

Just when you think those signs are finally going to tell you something useful, too. This boy-who-cried-wolf stuff is bad for public preparedness, incidentally. Ordinarily, I'd expect red-blooded Texans (even in liberal Austin) to prepare to retake the University of Texas campus in the event impending zombie attack was warned through public channels. Many more false alarms like this, and Texas will be ripe for Communist invasion.

Be Alert!

The last time I saw such a sign warning about problems with a Texas city, the sign was in Fort Worth and was warning drivers not to travel to Houston. Self-serving tripe like that -- the weather was great in Houston just following hurricane Ike -- is clearly intended to capture local economic benefit and should be scorned. By contrast, the zombie warning -- appearing on a sign owned by the City of Austin -- appeared to offer a valuable public service and honestly present some notice of an adverse condition to which prospective travelers seeking live music might want to be appraised.

Can a zombie band offer live music?

This is an important Austin-type question. If not, bars offering zombie bands will need to make appropriate disclaimers to avoid committing a deceptive trade practice.

UPDATE: Local Austin dwellers suspect the zombies are real, and the news that the announcement is a hoax is a public cover-up. Several report this is an ongoing local problem deserving of serious response:
True enough Adrian. At least on the weekends, when in a state of bleary eyed inebriation, I blend right in with the zombies.
The state wants to hide all of the zombie activity. It’s time to teach the controversy. The Texas Board of Education does not want you to know about the zombies wandering our state. We need some disclaimers in our biology textbooks that let us know that the “strengths and weaknesses of the scientific theories only apply to living organisms, and tell us little about the undead.”
by Aaron
This important angle on public education has found an echo in this assertion of a Constitutional right to maintain zombie-preparedness:
People of Texas, don’t take zombie threats lightly. Each one, no matter how small, must be thoroughly investigated! What if this “hacker” was really just trying to warn you of your impending doom? What if he had just been mauled by a large group of brain-hungry walking dead and this was his last act as one of the living? Texans especially should remember: “A well-regulated zombie defense force, being necessary to keep the security of a state, and the right of the people to blast the heads off of undead scum, shall not be infringed”.
By Dain
Perhaps the zombies are in league with the Nigerian goat sorcerer. The problem is definitely international in scope.

Wednesday, January 28, 2009

SBUX Performing Per Prediction

Profit tumbling, Starbucks is slashing jobs.  As previously described, SBUX is in fierce competition with large, highly-capable competitors who have effectively made a commodity of the high-end coffee products from which Starbucks had been deriving fat profits.  The impact of the current economic situation is but salt on SBUX' open wounds.  

I continue to call SBUX bear bait.

Monday, January 26, 2009

Strange Crime

Nigerians don't just scam others, they get scammed.  Local police have custody of a goat suspected of being a transformed wizard hiding in animal form to escape notice following a failed car theft.

What I want to know is, if he can transform into animals, why does he need to steal a car?  He can just fly, right?

The police are withholding judgment until the transformed-wizard theory can be scientifically tested.  Meanwhile, the goat remains in custody.

Friday, January 23, 2009

Another Plea For Federal Knife Control

Virginia Tech, no stranger to on-campus murder, has suffered another student killing. Like the last one, this was also perpetrated by an Asian.

In an eatery and before witnesses, a male doctoral student stood from an apparently non-confrontational discussion at an on-campus coffee shop, and decapitated his companion, a new female student with a kitchen knife.

So, do you think there will be a knife-control rally before Congress soon?

Thursday, January 22, 2009

Delicious Apple

Apple recently announced its earnings for the quarter ended December 31, 2008. For the first time ever Apple exceeded $10 Billion in quarterly revenue. Record iPod sales and second-best-quarter-ever Mac sales helped push earnings to the highest level ever, despite a drop-off in iPhone sales. As anticipated here, foreign sales grew; they now represent 46% of Apple's total revenue.

International iPod and Mac growth seemed to be the leaders. US iPod sales actually contracted 3% year-over-year, while domestic Mac sales grew 2%. Foreign Mac growth was 16%, with several countries turning in growth over 20%. (Apple's overall year-over-year Mac growth was 9%.) Despite the US iPod sales, worldwide iPod sales were up 22.7%. All that growth was international. (A 300% growth in AppleTV might look interesting until you look at the small base from which that growth occurred; Tim Cook made clear that "we still consider this a hobby.")

Apple now holds about $31/sh in cash. Apple is adding cash on a quarterly basis; even as it amortizes iPhone profit over 24 months, it's receiving all the payments up front. Apple's cash conversion rate is -43 days (that's right, negative 43 days); free cash flow from operations was $3.6 billion.

For the rest of the year, I expect Apple to make significant high-margin software revenue from its Snow Leopard operating system upgrade, and I think the operating system could serve to encourage hardware upgrades and optional software packages (e.g., iWork). The countervailing wind is, of course, a deepening worldwide economic depression. People who use computers for work (like me, or like these guys taking over an office in D.C.) may be perfectly happy to buy upgrade hardware in this environment, but "toys" might fare differently. On the other hand, so long as the market for four-figure handbags is holding up, hundred-dollar music players still have some hope. Apple's margins -- stable from the year-ago-quarter at 34.7% gross margins -- remain high, and Snow Leopard should help.

Depending how the world's economic situation develops, and what Apple offers for sale, we could get all kinds of possible outcomes in 2009. With $1.78 per share earned in the first quarter of the 2009 fiscal year (compared to $1.40 projected by analysts, and an Apple-projected range from $1.06 to $1.35) and $0.90 to $1.00 forecast by Apple for the next quarter, one has to look out into the last half of the fiscal year to foresee whether Apple wins or suffers in its high-selling back-to-school period. Apple's future isn't independent of the world around it. Assuming Apple's guidance continues to be a bit conservative, Apple could unsurprisingly turn in a fiscal-2009 earnings of $6. (The back-to-school quarter is huge for Apple; the lamest quarter for Apple historically is the one Apple has forecast at $1.) The after-subtracting-off-the-cash price of Apple suggests a forward P/E of about 10.

Is Apple a P/E 10 stock in these markets? Better? Worse?

Over the long term, I think Apple's platform offers strong reason to see worldwide growth. As foreign countries' standard of living approaches the range in which Apple finds customers -- and as Apple offers more products and services interesting to people with lower and lower incomes -- Apple's worldwide appeal should continue to do very well. I continue to see Apple growing.

In the event of a news-lull price slump over the next quarter, I'll be interested in picking up shares on the theory that the shares have become a bargain.

Wednesday, January 21, 2009

Don't Watch Watchmen -- Read It

The Watchmen is coming to a theater near you.  But you can get the real story right now.  (Note:  an animated series exists.  I don't know a thing about it.  I have no data on it.  This piece does not address it.)

The trailer promises a film from the "visionary director of '300'".  If you want an idea what kind of visions those are -- 
... seriously, Dr. Manhattan, who lacks even a corporeal body, with a love scene?  In the what-happened-to-my-body love story Ghost at least there was a spiritual medium's body to borrow.  And since when was Manhattan interested in women? The whole point of his character works against the motives 300's director ascribes to him. 
-- look no further than The Jaded Consumer's excoriation of 300.  300's director may have "vision" but it's certainly not good vision.  It's a fun-house vision that distorts beauty queens into homely freaks.  Don't be fooled.

Buy the graphic novel.  It's a hell of a story.  It's a tragedy in the original sense of the word, whose self-unmade noble is cast from the mold of a savagery so pure it approaches sainthood, or madness.  The genius of the tale isn't its special effects extravaganza.  Christopher Nolan's Batman flicks are wonderful in large part because of the exotic techniques (disguise, martial arts, poison, high-tech gizmos, complex interpersonal manipulations, etc.) the various characters employ to achieve their objectives.  Even as characters in the Batman universe are complex, deep, and broken humans for whom we easily care, the thrill of the tale comes in large part from the exotic elements brought to bear by the bat-billionaire and his enemies.  The Watchmen, by contrast, is a largely low-rent assemblage of mostly not-really-super-heroes whose attractiveness results from their purely personal decisions to decide who is worth saving and when.  The irony of the story is part of its genius:  the character with the moral high ground is the most ruthless, vicious, and spiritually worthless of the lot.  Acquiring real power doesn't mean acquiring real judgment, we learn.

Quis custodiet ipsos custodes?

The Watchmen -- the real one, the graphic novel -- is genius.  The work deserves better, and it's clear that graphic novels can be translated effectively to film.  If you rent the flick, make sure you know what the real deal is first.  Don't be taken by the director and his mad lust to "amp" graphic novels by adding gratuitous nitwittery.  If his defilement of Watchmen is anything like his abysmal treatment of the graphic novel 300, you won't want to get close enough to the resulting tripe (or ill-cooked kidney pie, take your pick) to see or smell it.

Swearing In Public: Obama and Roberts In The Spotlight

As wonderfully described by NPR in advance of the Inauguration, the oath administered to incoming Presidents is a carefully-crafted work as old as the Constitution itself.  The Oath, administered by the Chief Justice of the United States Supreme Court, has stood unchanged (there's some debate as to who added "so help me God" to the end, and some folks still grouse about that practice) ... until Tuesday.  

Sort of.

President Obama -- having no doubt practiced so he had his rhythm right, which may explain why he began speaking over Chief Justice Roberts while Roberts was still saying "I, Barack Hussein Obama, do solemnly swear" -- knew exactly what he wanted to sound like.  There's been a little debate who is to blame in botching the Oath by putting the word "faithfully" in the wrong place, and how bad a gaffe was suffered in the ensuing moments.  What we bargain for when we elect a President is to hear this in advance:
I do solemnly swear (or affirm) that I will faithfully execute the office of President of the United States, and will to the best of my ability preserve, protect, and defend the Constitution of the United States.
United States Constitution, Art. II §1
What we got was Roberts starting thusly: "I, Barack Hussein Obama do solemnly swear --" but Obama, hearing the pause after "Obama" and before "do solemnly swear" as an invitation to begin repeating after Roberts, began speaking over Roberts.  And I think it's there that Roberts got flustered and dropped "faithfully" from his next recital.  There's no question Roberts missed it -- everyone has a tape and you can follow the links above, too -- but that's just where the fun begins.

Obama, just having learned a lesson about dancing with a new partner in public (they might have thought to practice together in advance, no?), followed where he was led.  He continued to repeat what Roberts said ... until he hit the point Roberts had dropped the word "faithfully".  Obama's pause seemed like it might be an invitation for Roberts to try again, but in light of subsequent events was likely an awkward what do I do pause.  For when Roberts repeated it for Obama with the word faithfully in the right place (forgetting this time, I think, the word "execute" -- this wasn't getting much better, but thank Goodness it's short, right?), Obama repeated the oath as originally recited to him, with faithfully at the end of the clause rather than next to the verb.

(Now, some nutballs will seize on this to say Obama isn't the President until he says it right.  Whatever effect Article II Section 1's oath requirement might have had before the adoption of the Twentieth Amendment may be an interesting academic exercise to argue, but the Constitution as it now stands is clear.  The incoming president's term begins at noon on January 20 following the election.  Period.)

NPR had a nice comment on this:  each trying politely to accommodate the other showed the world what good manners were possible even among adversaries (Roberts received Obama's "no" vote during Roberts' confirmation to his lifelong office).  NPR's take was that both men ended up trying to follow the other when it became clear they weren't working well together.

The good news is that the next time this oath is administered, whomever stands before Roberts will be forewarned not to step on Roberts' lines, and Roberts will have had the practice not to botch it.

The Jaded Consumer thus argues that the future is better secured by small failures that give notice of the need for remedy.  Further, we have a little window into Obama and his Chief Justice before the term gets underway.  We will have years to pick apart genuine policy gripes and judgment lapses either may commit.  But here, at the outset, we have one reassurance that should soften the blow of what must inevitably come later:

Their hearts were in the right place.

Tuesday, January 20, 2009

Antitrust and Refusal To Deal

IBM's recent accession to status as a civil litigation defendant (against T3 Technologies Inc.) raises issues Apple faces in its litigation with wannabe Apple Clone vendors.  Both desktop computers and MP3 players have been at issue in Apple-directed antitrust suits.  

Given that Pystar has been poured out of court for arguing Apple ought to have sold its operating system, I doubt T3's claim to have suffered antitrust injury is likely to fair better under similar facts.  Especially given that Sun's mainframe operating system is now available fee-free.  

Apple Prices Products for China

... by selling secondhand. No joke. I'm not sure how large a market Apple can address with used and refurbished and turned-in-for-recycling products, but it's got to be a better return than simply scrapping them.

Perhaps service revenues make the products' sales worthwhile?

If Microsoft's experience in China is any guide, the money won't be made in software ....

The article's mention of Apple's single-digit share of China's portable music player market is interesting: Apple has a definite market to chase. Moving down the price ladder to reach the market in China will be an interesting feat, though -- one the secondhand products venture will certainly help meet.

Sour on Apple's Accounting?

The Bullish Cross -- a blog I've linked to, and a good source of hard-numbers thinking on Apple -- has gone sour on Apple management. The basic argument is that in choosing subscription accounting for the iPhone, Apple has made it too easy not to understand what a whomping huge business Apple has developed in its cellphone category, and how much money that business is making Apple.

Yes, Subscription Accounting Increases Opacity
Subscription accounting has made Apple more opaque, and thus harder to value. Like Bullish Cross, this blog noted the significant impact of the subscription accounting and drew attention to the fact Apple's subscription accounting decision had led it to make non-GAAP announcements just to make sure people understood how much money Apple was making.

Opacity ... good?
At the time Apple announced its intent to use subscription accounting, I assumed the purpose was to create opacity, in order to prevent competitors from easily working out things like Apple's actual unit cost, margins, etc. associated with the iPhone. Thus, iPhone sales are mixed with other subscription sales and separated from the nearly-identical iPod Touch sales, each of which is given radically different accounting treatment. I didn't think for a minute that Apple's decision was based on a clever scheme to make money on profits while the taxes on them remained deferred by virtue of Apple's accounting scheme, because Apple doesn't make any money with its money (though it's been laudably good at not losing it, either, which says something in this environment). Apple's accounting game made sense only to the extent that it allowed Apple to reap a competitive information advantage during the phase in which it first rolled out iPhones to a market that was prepared to sleep through Apple's assault.

Opacity bad.
Fast forward to today: Apple is a plausible world smartphone leader and has an application store that dwarfs anything in the smartphone space. Bullish Cross is angry that the extent of the profitability of this setup isn't as clear to the folks to whom he'd like to sell his shares. Well, I can understand that.

The real downer is that by the time Apple's subscription accounting allows Apple to call "profit" enough subscription-quarters of iPhone revenue to approximate current sales, the growth that would place such a premium on Apple's shares would have passed. (Graph sales over time looking for the break-even point of subscription and non-subscription accounting for the phones' profit, and you'll see what I mean; it requires a sales decline or a long plateau. The more likely event is that Apple's phone revenues under the actually-employed accounting system don't reach the levels achieved by the one Apple uses for iPods anytime in the foreseeable future.) So, waiting for the future to speak the truth is just not going to happen.

What should Apple do?
Apple could declare that its subscription accounting system was based on flawed assumptions regarding the extent of software updates and simply change accounting principles, restating past earnings (upward) and setting the future straight. On the other hand, might Apple benefit from the opacity its accounting methods give it with respect to competitors? Might subscription accounting enable Apple to spread over time the impact of a subsidy if Apple were led into providing subsidies? Consider a future in which Apple is allowed -- by virtue of its longstanding accounting scheme -- to amortize subsidies across twenty-four months, while taking application and service revenues from a huge and growing user base. Might subscription accounting give Apple some flexibility Bullish Cross isn't thinking about?

This is a complex problem. Knowing what Apple should do with its accounting principles depends in part on what Apple is trying to do with its accounting principles, and whether those objectives remain present and future concerns. As profit per unit declines with per-unit overall cost (even if margins remain high, profit must decline as units drop from $500 to $100), Apple's ability to cushion this with subscription accounting while reaping software revenues could place it in a favorable position with respect to its later earnings announcements.

The kicker is that Apple is so into secrecy, nobody with solid understanding of Apple's internal rationale for the accounting decision can explain why Apple's decision is extremely clever or very stupid without facing the axe. Maybe this is an area in which future Apple leadership can offer improvement.

Monday, January 19, 2009

ACAS: Profit Isn't Cash Flow

Now that The Enlightened American has bailed on ACAS (and after his parting post, and despite continued traffic on the stock, bailed on new analysis;  but this is easy to understand and forgive, as the poor fellow was burned pretty badly in his investment), Nivdung has taken up the ACAS-critic's mantle.  As linked in his recent comment here, Nivdung has offered a rebuttal against ACAS as a prospective investment.

I think Nivdung misses two things.  First, it seems difficult to base a thesis for or against a stock on the basis of a dividend policy when that future dividend policy remains unclear, and thus a matter of speculation.  On the other hand, Nivdung criticizes ACAS for making historic dividend declarations that exceeds its cash flow.  Nivdung seems to ignore two things:  (1) ACAS is required by virtue of its tax status to make dividend payments on the basis of its taxable gains, and (2) taxable gains are a matter of accounting profits -- that is, they are an accounting fiction based on things like basis, depreciation, and the like and ignore the cash outlay made for new investment, which may not be expense-able but may be subject to depreciation or may not impact profit except as the payments form part of the basis for a future exit transaction -- and have no particular relation to cash flow.  The fact ACAS is required to make payments that exceed its cash flow aren't a particular problem, provided the company has access to other sources of cash than cash flow from operations.  Borrowing money to make payroll or to avoid retaining sums that would crate enormous tax expenses is as reasonable in this regard as borrowing to make payroll in a quarter full of production costs while goods are made for sale in a later quarter.  Businesses respectably do this all the time.

The fact that ACAS had profits that exceeded net cash is especially easy to understand when one considers ACAS' effort to (a) grow assets under management (i.e., ACAS was reinvesting profits, including cash, so the cash didn't end up becoming net cash), (b) remain levered to cheap debt to magnify the returns on high-yield debt instruments held in portfolio companies, and (c) close good deals ready for closing, and promising excellent future returns.  As ACAS plows cash and newly-added debt into new deals, ACAS will pour incoming cash into deals rather than purely into tax-compliance-mandated dividends.

But investing in ACAS today isn't about living in the past.  ACAS has announced a much more conservative dividend policy, in which ACAS stands potentially ready to withhold dividend payments as long as ACAS' tax status permits.  ACAS gets to retain cash longer -- still not paying taxes on the profits -- and will decide after each quarter what if anything to declare on a quarter-by-quarter basis.  Investing in ACAS today isn't about whether all the good deals are gone (the old worry was that above-NAV issuance was dilutive because the old deals were better than the new deals), but instead are about whether the crazy prices potentially available during a liquidity crisis will enable below-NAV fundraising nevertheless to provide superior returns (in the form of accretive NOI, future capital gains, etc.).  

The question of prospective investment in ACAS is all about ACAS' management, management's ability to navigate the troubles caused by tightening credit, risks raised by ACAS' net worth covenants, and the like -- and have very little to do with ACAS' past dividends.

Incidentally, I recently received an interesting document in connection with my ACAS holdings.  The long-term capital gains ACAS withheld in the end of 2008 turn out to have been rolled-over from 2007, and the tax ACAS paid on behalf of its shareholders in connection with this "deemed dividend" is capable of being credited against shareholders' 2007 tax obligations.  Since those tax forms have been turned in already, shareholders are in a position to get a refund -- a dividend received by way of the United States Treasury, if you will -- by virtue of the fact that individual shareholders' long-term capital gains rate for 2007 (e.g., 5% or 15%) is much lower than the rate ACAS delivered to the Treasury (the corporate rate, 35%).  ACAS' non-dividend is a pretty good deal.

I'm interested in a discussion about ACAS' likely future prospects.  Debating ACAS' past prospects isn't exactly sporting:  we know how ACAS suffered while it entered the last third of 2008 levered to assets whose valuations were squeezed by bond-yield analysis and comparables-based valuations when the whole world entered a liquidity crisis, and the (apparently still performing) debt instruments in which ACAS enjoyed substantial holdings became nearly-worthless because no other lender would issue such debt anew during the trough of a credit crisis.  ACAS' past, and the impact of its illiquid holdings on near-term NAV, may be lamentable but it is past.  To ask about the future, we need to know things like this:
  • Will ACAS' NOI remain solid?
  • Will ACAS' ECAS transaction increase NAV as expected?
  • What will ECAS do to ACAS' NOI?
  • What will non-ECAS transactions entered with funds raised below NAV do to NOI?
  • Will ACAS' below-NAV issuances occur substantially above market price, or will they be near market price?
  • What is ACAS' NAV as the ECAS transaction is approached?
Some of these questions are simply beyond outsiders' ability to know, particularly as ACAS' activities to navigate its liquidity crisis remain known only to the parties involved.  The challenges of valuing ACAS' illiquid portfolio probably make some of these questions hard for even insiders to do better than estimate.  This makes ACAS considerably more speculative than when ACAS' price and dividend chart showed a slow march toward the heavens and the company stood barred from below-NAV issuance.  (Of course, the complaint then was that above-NAV issuance could still occur below market price, and thus was potentially "dilutive", presumably on the theory that all the good deals were gone.)  If ACAS' management is able to build shareholder value by new issuance above share price, ACAS might be a terrific entry prior to such issuance simply because the fact of issuance is likely to raise share price toward issuance.  Moreover, as ACAS becomes more clearly capable of avoiding destruction in bankruptcy due to a liquidity crisis, ACAS' ability to obtain near-NAV market price improves.  

I suspect that ACAS' NAV exceeds $15, that ECAS will positively impact both NOI and NAV, and that modest issuance (whether to raise cash, or as in the ECAS transaction to issue shares in lieu of cash consideration) will enable some transactions to enter crazy-good deals ACAS' management just can't in good conscience allow ACAS to bypass.  I think NOI will come under the same pressure of any company's NOI in a depression, but that ACAS' effort to enter countercyclical and acyclical portfolio acquisitions will support ACAS even as this occurs.

By the way, look at the athletes on the big football games on your set.  Those Riddell helmets are all good ACAS products:  following an exit at a 20% compounded return, ACAS retains a 2.4% equity interest in Riddell.  Portfolio companies like Piper Aircraft, on the other hand, are suffering terribly at present -- but may serve as a springboard once the economy turns around in a few years and investment is again contemplated in aircraft training fleets and the like.  The task for potential investors is to examine what ACAS currently is worth, its prospects for the future, and the possibility that short-term worries have hammered current prices well below reasonable valuation.

In my view, ACAS will be approved to conduct the below-NAV issuance needed to close the ECAS deal and others like it;  the result will be ACAS surviving its liquidity and net-worth crunch;  and the due diligence that has produced ACAS its historic returns will continue to produce future returns, possibly amplified by the availability of insanely good deals during a time of broad economic crisis (though mediated by the possibility that access to capital is particularly costly at this time, whether measured by the price of debt or the dilutive cost of new equity).  The most serious question is not whether ACAS' profits and net worth make $3 a steal, promising excellent investment returns in the next three years (I view this as certain), but whether management manages its below-NAV issuance authority to grow NOI and NAV rather than to allow NAV to be eroded by entry into deals that aren't worth the cost to existing shareholders.

Microsoft's Antitrust Crop Still Blooming

Microsoft is again in the news for antitrust issues, this time in a browser-based antitrust prosecution involving the EU -- one of the jurisdictions that's actually held Microsoft to a financial penalty.

Microsoft's enormous cash flow is hardly staunched by paltry couple-of-billion-dollar penalties, but it raises interesting questions about Microsoft's intended strategy to lock clients into proprietary file formats (e.g., crippled, patent-governed XML schemas no other vendor can access), and the like.  Assuming Microsoft plans building market power on the basis of MSFT-only formats protocols, Microsoft will continue to march its business plans into the offices of EU regulators.  Heck, maybe into other regulators' offices, too, assuming anyone cares to conduct genuine enforcement.

What's the future like if Microsoft actually tries to avoid antitrust problems?  How would Microsoft compete if its users had -- hard to imagine, I know -- genuine choice in vendor?  Is that even a viable model for Microsoft?

Saturday, January 17, 2009

Apple's Platform

As previously commented here, Apple's real asset is its platform (Apple has been able to walk the path of platform-building, as opposed to Dell, which I view as a commodity vendor). A recent Business Week article points out how attractive the iPhone has become as a development platform in the short time third parties have been able to sell applications:
  • There are 13 million iPhone owners
  • iPhone owners have downloaded 500,000,000 applications
  • To reach a half-billion smartphone applications dowloaded on non-iPhone smartphones, you need an installed base of 1.1 billion users
  • Because there are only a quarter-billion non-iPhone smartphone users in the US, there is no way to replicate the sales footprint of the iPhone user base within the United States
As I mention here, Apple's platform's support for multiple languages places it far ahead of competitors in the fight to reach a worldwide customer base. As iPhones get less costly, Apple's ability to reap the benefit of applications revenue will grow. As iPhone application quality and diversity improves, the value of iPhones will improve and with it the attractiveness of whatever price Apple is able to offer.

The fact Apple isn't the dominant platform for desktops may matter less and less as handhelds are tasked with doing more and more. The future will certainly be interesting.

Friday, January 16, 2009

ACAS As A Prospective Investment

Nivdung wrote a comment suggesting that (a) ACAS' dividend strategy was a foolish waste of cash, and (b) that share issuance harmed existing shareholders.

Issuance that raises NAV is good for NAV. Issuance that enables high-return investments is good for NOI. The fact that taxable profits are largely returned to shareholders in the same manner as under a REIT does not mean there is not profit, it simply means that profit must be delivered to shareholders.

ACAS' current strategy -- paying dividends as late as the regulations allow -- means that ACAS has for about a year and a half tax-free and interest-free use of gains. This is a positive move for the enterprise and its cash flow even as it is a terrible blow to those who came to ACAS for quarterly dividends.

The idea that ACAS is a poor investment thesis because it has paid nearly $30 a share in historic dividends does not make sense. The investment thesis on ACAS depends on management's success in keeping NOI up, and in protecting NAV. Management's announced initiatives appear directed at accomplishing both.

Nivdung's primary evidence that ACAS is a bad investment is the assertion that (1) equity has come from share issuance and (2) dividends have been funded by taking money from Jane to pay John.

Point (1) is frankly silly: every company's equity comes from the owners. That's why the company issues shares, to get equity. This is only a problem if the equity issued is dilutive. When issuance is accretive as has historically been the case at ACAS (and the stock-swap plan with ECAS, though in theory a below-NAV issuance, is calculated also to raise NAV), dilution requires quite a bit more examination than has been given in the trivial accusation brought in the comment. Presumably Nivdung is upset ACAS can't retain more earnings, but if it retained more earnings it would pay taxes, and then dividend recipients would see their receipts taxed twice: once in ACAS' hands at corporate rates, and once at the recipient's rate for dividend income. The result would be to require quite a bit more risk to produce the same dividend.

Point (2) is disproven by the evidence: Although ACAS is required to distribute more than 90% of its taxable earnings to retain its tax status, ACAS has in fact distributed less than 100% of taxable earnings. This means that ACAS has earned more than it has paid in dividends. This isn't the case with Ponzi schemes that depend on late investors to pay off early investors, which is evidently the assertion intended by this post (linked in his comment here) and this comment.

There may be good reasons to hate ACAS -- Enlightened American bailed on it based on loss of confidence in management, for example -- but claiming that the company didn't earn the money it paid in dividends is just not backed up by the data.

The interesting question going forward is whether the NOI will continue as NAV is hammered by valuation calculus. If the NOI continues, NAV becomes irrelevant: the company will flush with income and shareholders will benefit either because the truth wins out, or because ACAS is required (even if with a substantial lag) to pay taxable profits as dividends to retain its tax status.

The question going forward is whether ACAS' management will invest to maintain income. ACAS' movement up the balance sheet during portfolio company exits, to become debt holders due regular interest payments, seems to suggest ACAS has been interested in obtaining a higher-priority claim on the companies' free cash and to maintain regular income. The move into countercyclical and acyclical businesses (the dental practice management company, for example, is going to get regular money).

Since I've seen NOI maintained, I'm still of the opinion the shares are undervalued. I will be watching NOI as my primary barometer of management performance until the markets move (possibly years from now) into a mode in which portfolio company valuation offers a source of gain.

Apple After Jobs

Cringley -- whom I regard as so wrong about Apple that he's nearly an inverse-barometer -- says Apple will be stronger without Jobs. This may be so, but what he's got to say about Jobs' strengths doesn't really address how Apple will change with him gone.

Contrary to Cringley's claim, Jobs didn't learn hands-off management from his experience with Pixar. At Pixar, his subordinates learned how to keep him away so they could work. Alan Deutchman's The Second Coming of Steve Jobs makes this pretty clear. The extraordinary thing Jobs did at Pixar was to notice, after the Netscape IPO, that you didn't need several years of profitable books to raise money any more, so he raised enough money to make Pixar financially strong enough to renegotiate its deal with Disney, then negotiated to extend Pixar's contract for Disney-distributed films, and increase its share of profits formerly retained by Disney (by accepting a share of the promotion expenses, which had been Disney's leverage to take the lion's share of near-broke little Pixar's film receipts). Jobs saved Pixar not because he learned some new management technique, but because he discovered a new pitch and made good on it.

Likewise, NeXT didn't teach Jobs how to be frugal, it simply taught him that personally guaranteeing an insolvent company's debt was a good way to drive yourself into making yet another pitch. This time, the pitch was not to an existing partner but to a suitor: Apple. Jobs pitched to Apple executives the same technology he pitched to developers he recruited to NeXT, complete with the object-oriented delight of re-usable development product and the possibility Apple would become beloved by developers again instead of shunned. It was a pitch he'd made before, and he updated it to sell not a workplace to an engineer, but the whole company to a buyer dying for a solid operating system with a modern development platform.

Jobs is a pitch man. Jobs is so good at it everyone believes he has an RDF. (Google "Reality Distortion Field" and see what you get. This is a very well-known phenomenon documented for decades.) According to Deutchman's interviewees, even Pixar's sophisticated Ph.D.-level subordinates left meetings with Jobs with their eyes glazed, until later while discussing the details driving home and could really think about what he'd said ... and realized each iteration was a hopeless fantasy. You see, Jobs thought Pixar's product was multimedia storage tools, not multimedia content. Jobs' Ph.D. employees just made the animated short films to demo the storage tools, you see ....

What Apple will lose is a great pitch man. What Apple might gain is genuine management expertise at the very top. This could be a good trade-off, especially if Apple continues to make products that seem so nearly to sell themselves.

Incidentally, Walt Mossberg gave a short interview on Jobs' health and Apple, and praised Jobs as a product-oriented leader with an eye for design, but pointed out that Jobs' subordinates are doing the detail work that makes the execution at Apple what it is: the retail boss running the Apple Stores, the design team led by Jonathan Ive, and the component deals worked out by Mr. Cook. All the things that go right at Apple seem lined up to keep going well, just as when Jobs last announced he was on a health-related departure.

Thursday, January 15, 2009

On Jobs' Health and On Apple

Apple investors have doubtless heard that Steve Jobs, who skipped MacWorld for the first time in a decade, has taken a leave of absence for health reasons. (No, I lied about Apple canceling Christmas. That was a joke.)

Jobs, who was diagnosed with pancreatic cancer and tried to "treat" it with new-age therapy until someone whacked sense into him and got him to a surgeon, initially declared himself cured. When his appearance didn't bear that out, folks worked out that Jobs had a not-too-uncommon post-treatment complication that impacted his ability to keep weight on. Jobs' statements about his health have been upbeat throughout -- from his hospital-bed email announcing both his diagnosis and its cure to his holiday announcement that he was skipping MacWorld.

There are a bunch of people who now want to say Steve is a liar. The truth is that Steve has repeatedly said things that turned out to be inaccurate later. Uninterested in entering the PDA space, for example. Steve is all about managing information. And Steve is famously protective of his private life, which is something of a problem for a high-profile personality.

There is another possibility I might suggest. Like other entrepreneurs, Jobs likely finds the ever-present possibility of failure in every undertaking to be a drag on the actual work of trying to make new ideas work, and is in the habit of simply proceeding every day as if the current projects will succeed. If you assume anything else, you will stop, right? I suspect Jobs simply emoted outwardly the same line he'd been feeding himself inwardly.

That positive attitude they tell you to cultivate when you are in treatment doesn't seem to go over quite as well when examined by potential shareholder litigants.

Apple has some excellent lieutenants. (Like Eddie Cue. Or Jonathan Ive.) The question is whether Apple has other generals. Maybe this guy recently recruited from IBM has the right stuff.

Just as Jobs was iCEO for a long time before the mantle was officially passed, I expect Jobs to retain the mantle for some time before anyone admits the temporary leave of absence is anything but. Apple doesn't need the distraction from its opportunities, but Apple definitely needs to lose the instructions from the top that Apple doesn't need to take seriously opportunities to sell to businesses. Good things could come from this.

Remember, Jobs can't write code and can't design hardware. The details that make Apple competitive are all coming from other folks. The trick is to retain enough motivation at the top to keep everyone hungry to do good work. That's not an engineering problem, it's a management problem. Recruiting good managers may not be a strength of Jobs, but many on the Board have seen it done and, in the absence of Jobs, will be in a position to ensure the process doesn't go too awry.

Expect More China Headlines

I saw this today, and was completely unsurprised. China has surpassed yet another industrialized country in the size of its economy -- this time, Germany -- and now stands as the third largest economy on the planet behind the United States and (close to China's grasp) Japan. China has been working to move production from textiles and toys to heavy industry, and to be a finished goods producer rather than a source of raw materials.

When Warren Buffett explained why the United States is a long-term buy, he pointed out that the United States adds three million households per year -- three million households needing homes, home repair, transportation, food, fuel, entertainment, clothing, education, and every other thing humans need. Because the US is growing, the businesses that serve it successfully will do well. Q.E.D. Now, think about the size and growth of China, which is not only growing in size but increasing in consumption and in quality-of-life demands.

The movement of China into the ranks of first-class industrialized economies will be the major project for the 21st century. (Africa could in theory, but in practice remains at present too consumed with internal struggle to make genuine quality of life gains.) China won't find it easy -- personal freedoms will continue to be a problem -- and China's efforts to put on a respectable public face may lead it into embarrassment or at least into foolishness for years. However, China will become a major economic power as its people increase in productive capacity (from improvements in infrastructure, education, and investment) and its national output increases in quality.

Made In Japan was kind of a joke for a while in the postwar period, an indicator of cheap knock-off products not of the quality one expected from domestic producers. City names like USSA, intended to enable truthful location-of-manufacuture labels to fool unwary Americans to think they are buying a domestic product, were a symptom of the quality gap. But think about today. Would you be more confident in the quality of a Detroit-assembled GM engine, or a Japanese-assembled Toyota engine? In increasing numbers, Americans are voting for the Japanese products on quality grounds.

China will follow the same path, and for the same reasons.

Saturday, January 10, 2009

Shocker: MSFT Delays Next OS Beta

Microsoft announced its next OS (apparently now in beta) wasn't being released to the public when previously promised. The interesting thing is that the delay isn't based on the inability of the code to do what's expected, but on Microsoft's online infrastructure.

Is taking a page from MobileMe neé .Mac?

High-availability service is something I'd have thought Microsoft had learned after buying Hotmail, during the years in which it beat its head against its operating system to try to make it do what FreeBSD had been doing successfully on the site for years. Based on the service outage notices folks saw recently at, the lesson wasn't apparently taught across the broad range of MSFT's web services team.

Who would have guessed?

Thursday, January 8, 2009

ACAS hitting bottom?

A recent aanonymous comment invited the Jaded Consumer to speculate whether ACAS had hit bottom. I've consistently claimed (and my ACAS purchase timing has -- haha -- backed this up) to have no idea at all how to time trades. I only want to own companies I would not fear being stuck in for years. ACAS was attractive both because of its internal diversification, but also its track record for providing consistent and growing returns. 2008 has been a bad year for the latter, especially if you actually exited (creating a loss), but I planned to be an ACAS owner for years, so I didn't really consider selling until I saw the dividend suspension and realized everyone would bail on the news and that no good news would hit for the rest of the year ... but I still didn't sell because my thesis hadn't really been changed or challenged. So on that question about ACAS hitting bottom ...

... you only live once. I'll bite.

If GM can get GMAC approved as a bank holding company to qualify for TARP, then perhaps ACAS' financing operations -- including some of its portfolio companies -- could be qualified similarly without blowing ACAS' status as a BDC, and thus the debt covenants that depend on BDC status (see the proxy statement linked therein). I don't know enough to speculate on the plausibility of this, because I don't know what requirements face bank holding companies and whether they can be assets of a tax-pass-through entity like ACAS (which is a BDC). But liquidity miracles like TARP availability aren't what management is depending on to right the ship. The fact that ACAS is taking steps to do things that will create liquidity to protect it as a going concern has folks shedding their fear of its collapse; the stock price has more than doubled in a week. Crossing the Rubicon into below-NAV (but above trading price) share issuance excites new buyers, perhaps, though it justifiably makes high-basis owners concerned about the dilution management would accept to acquire liquidity. I think the real question will be how absurd a deal will management have to find before it will be willing to invest such dilutive capital. If the deal is crazy enough (in a good way) then everybody wins -- everybody. But ho-hum deals just don't cut the mustard. Ho-hum deals murder high-basis buyers' returns, even if they're acceptable to folks who bought at $5 or $10. This is the $64,000 question. Well, more, maybe, depending what you've got tied up in ACAS.

Incidentally, anyone here around long enough to remember what happened to this initiative? Has ACAS ever actually IPO'd a portfolio company? Mind you, I don't see this particular year as inviting high-dollar IPOs, but it was interesting to notice. This might be a way for ACAS to end up owning non-controlling, minority stakes in publicly-traded growth companies as the economy turns about. This would enable ACAS to maintain diversity (it would not shuck old portfolio companies entirely) while improving liquidity (publicly-traded companies would offer a more immediate exit than an ACAS-financed buyout in which ACAS realizes a gain but ends up with illiquid debt obligations).

Mind you, IPOs not priced as bargains might not attract a lot of initial interest, and it's to ACAS' interest that portfolio companies sell dear. In that regard, an ACAS-financed buyout that leaves ACAS with high-yield debt in a performing growth company also leaves ACAS with diversity, and offers better security of a return than an equity holder. It just caps the upside to the rate on the note, which is kinda a drag for equity fiends like myself.

On the other hand, debt obligations can be manipulated into crazy returns, as ACAS has proven with AGNC, which cranks out over 20% yield while investing solely in government-backed mortage instruments. Maybe being stuck with debt isn't such a bad deal after all, eh? The downside is that while illiquid private debt is considered a scary asset, ACAS' NAV will be under pressure by bond yield analysis' impact on modeled asset values. As credit turns around, of course, ACAS' NAV will be set to bloom -- but this could take years, and it could get worse first. This is the down side of the long-term strategy: your short term can be very, very ugly.

However, I think the panic of October is over. I think we're in for a dull year of bad economic news, but I don't see us falling off another cliff in that time frame. I think the return of liquidity will mean a lot to financials, including ACAS' potential buyers. Performing companies will always be interesting to companies looking for merger opportunities, growth, or solid investments -- the only question will be, at current costs of capital what multiples can be placed on earnings or cash flow? Since ACAS regularly models for exits under worse conditions than ACAS made its entries, ACAS is in a pretty good position to do well on its portfolio exits. If not, the NOI has been pretty good and ACAS can wait to sell.

I'm patient. You?

Wednesday, January 7, 2009

On Raising Cash

Connected to the last entry here on ACAS is an interesting comment by rktoledo:
Why doesn't ACAS sell their AGNC shares for $150mil to obtain some quick liquidity. I would prefer this step first over a sub-NAV dilution. ACAS also mentions in the filing that they are in different stages of asset sales. Why not complete some of these asset sales by lowering the sales price.
Investments ACAS manages are generally (and AGNC and ECAS are the exceptions to the rule) not-publicly-traded entities that have no ready market. To sell one of these takes months of careful work: finding prospective buyers, informing everyone about the state of the company being sold, allowing buyers to conduct their own investigations ("due dilegence"), and so on. The pace isn't set by the price tag unless the price is the stumbling block. I'm willing to wager that in many cases the parties both have some rough idea what the right value is, but the time is consumed making sure the product being sold is as advertised.

Meanwhile, ACAS holds something like 7,500,000 shares of AGNC. These shares pay (apparently) over a dollar a quarter while the company retains some earnings (!). That means that ACAS is getting ... oh, let's say $8m/q as an AGNC investor (I don't know what the future dividends hold, whether they'll be relatively stable, or will continue to increase), for an annual receipt exceeding $30,000,000. The fact that ACAS could, in theory, dump the shares for $150,000,000 right now might not make a lot of sense, if ACAS (as the manager, and being particularly informed about the investments of AGNC) believes that performance is likely to do as well or better in the future. Moreover, ACAS' basis in AGNC is $20. Why is a sale close to $20 an example of good stewardship of assets? ACAS expects to realize a small fortune, I'd think, if its current returns are in the northward of 20%. With the returns being all cash, this is especially valuable. I think continuing to hold AGNC is a Good Thing™. On the other hand, what benefit does ACAS get from dumping AGNC? It doesn't get an increase in book value, as it's simply turning one liquid asset into another. All it would do is enable ACAS to pay down some debt that's a couple percent above LIBOR. Wouldn't you rather have ACAS getting the 20+% it can achieve on its managed funds?

Likewise, ACAS could dump ECAS for cash. Like AGNC, ECAS is creating cash. Unlike AGNC, ECAS is trading below book. I think ACAS' smart move is buying the rest of ECAS to avoid the book value drag of the low share price, as it is forced to value on the modeled basis rather than the trading price. Note that the modeled basis has the same kind of artificial depression built into it that ACAS' own portfolio does: in this tight market, the high-yield debt ACAS holds (and ECAS) is valued terribly harshly because credit is tight and the terms of the existing notes would not be available in the current market. On the other hand, ACAS (and ECAS) are being paid on these obligations, so their value is (to ACAS or ECAS) really based on the expected return through maturity, not current liquidation value. On that basis, ACAS could reasonably conclude that its long-term success is enhanced by keeping -- and building on -- these depressed assets.

Assuming there are firms without the patience to sit on depressed assets, ACAS would not harm shareholders by acquiring more, assuming the depression of the assets is greater than the dilution of the new issuance. That's a calculus we have to trust to management. If we don't trust management, we must vote them out or sell.

I for one have a certain amount of confidence in current management, and in its long-term horizon. Until I see below-NAV strike prices on insiders' options, I don't expect to have cause to re-evaluate this.

Saturday, January 3, 2009

Issuing More ACAS?

While I was traveling for the holidays, I got this comment from babycondor asking what I thought about ACAS' solicitation of shareholder proxies to approve issuing new ACAS shares below NAV. (The "and transact other business" language doesn't strike me as alarmingly as it might strike some, as it smacks of ordinary boilerplate. The real question is whether you think management is unworthy of confidence, in which case you must sell regardless the seeming merits of the current proposals.)

In the past, I've scoffed at folks who said ACAS' share issuance harmed shareholders by diluting their value, because ACAS' management is limited to issuing shares above the net asset value of the pre-issuance shares. Thus, shareholders always ended up with more value per share just after the issuance. (That is, unless you ascribe to the "all the good deals are gone" theory, in which case the old deals are more valuable than the new cash that exceeds their paper value; I just don't think all the good deals are gone, and ACAS' 10-year track record of NOI and -- until this quarter -- increasing dividends seems to bear this out).

As described previously, ACAS is trying to navigate a serious liquidity crisis. The extra color we got in the post-quarter Merrill Lynch Q&A hasn't made the crisis disappear. There's also a considerable range of viewpoint on whether ACAS' management continues to deserve credit for diligent work on behalf of shareholders. The history of posts on this shows, for example, that I view ACAS' management as pursuing reasonable efforts to address a serious ship-on-fire/sinking-hotel armageddon in progress, whereas the Enlightened American views management as having exposed itself as unworthy. Note that both blog writers had exposure to short puts :-( (see the comment following mine on his blog). It's not like either of us has enjoyed the current implosion.

The Enlightened American concluded his last comment on this topic with a challenge: "Care to put odds on the likelihood of forced selling or worse?" And I'm here to tell you that the odds of an event like that has now reached unity: management is trying to sell shares below NAV, which is guarantees to dilute the value built up in the shares. That is, there is a 100% chance that following a below-NAV share issuance (and ignoring for a moment any financial miracles that might be achieved with the cash) the NAV and NOI per share will decrease.

Or ... is that chance actually 100% of increase?

The secret lies in the ACAS/ECAS transaction (described here; ACAS by taking ECAS private will change how its value is booked, creating instant improvement in reported book while acquiring NAV and NOI below ECAS' booked value due to its continuously-depressed trading price). This is an all-stock deal, but the stock ACAS is getting in the deal has a market value -- which is less than the NAV of ACAS (but, like ACAS, is depressed).

So far, so good. I liked the transaction before, and a vote to permit this is a step in the right direction. The next question is whether the permission to issue shares below NAV, not being clearly limited to shares needed for issuance to close the ECAS deal, is rational for shareholders. This part should alarm the thoughtful reader.

The really funny thing is, this actually makes sense. In the proxy statement, ACAS explains how ECAS' credit has been renewed only on really nasty and increasingly onerous terms, and ECAS like ACAS needs to lend money to portfolio companies (at a spread) to make money. ACAS itself has seen its borrowing rates worsen, cutting into its margins on loans even as its net worth is hammered by valuation rules to the point its net worth covenants threaten to obliterate its lines of credit. Thus, servicing ECAS (and ACAS) investment lending obligations without getting stuck with nasty terms could torpedo either the deal (because owning shares of an ACAS that is about to implode in a liquidity crisis would seem a bad deal to ECAS shareholders, who will balk) or the future of the combined entity is a factor seriously impacting the ECAS transaction and desperately driving ACAS to find cash -- anyplace. ACAS' net worth covenants are much easier to satisfy if it has cheap capital (from you, of course, not from the greedy banks!) to further de-lever ACAS and to increase its net worth.

Is this a good deal for existing shareholders?
This is where the money is: this is the question that people like me -- who actually hold these shares, and for whom this isn't an academic exercise -- need answered in order to know what to do as this meeting approaches. The easy answer -- that all ACAS' issuances have been accretive, and that there's no dilution -- simply no longer applies.

The only applicable security against insane pricing is an issuance condition (spelled out in the proxy materials) that prevents below-trading price issuance. When ACAS traded above NAV, issuing below trading price was no big deal: shareholders still had more equity per share after the deal closed, so ... no harm, no foul -- right? Now that ACAS is trading at such a steep discount to its NAV, and nobody will pony up above-NAV cash for the shares, ACAS is looking at an alien landscape in which the rules of navigation require a lot more thought.

Is there a case in which below-NAV issuance could benefit shareholders?

There are only two cases here. If not, one must vote no. If so, one must know whether those conditions exist. To examine the possibility of the second case, let's have a look at what the alternatives are and what benefits -- other than immediate-term NAV changes, which will be in the wrong direction -- might accrue.

If ACAS doesn't have cash, can't revive ECAS lines of credit on commercially useful terms, and sees its own valuation squashed to the point its own credit disappears (due to net worth covenants that are breached as bond-yield analysis and comparables analysis make even properly-performing ACAS investments seem nearly worthless), then the place to look for a bargain in ACAS will be in the court hearing ACAS' bankruptcy proceedings. If ACAS' net worth drops below the magic threshold (or ACAS changes from being a BDC to change its accounting rules, something also disclosed in the proxy statement), the unsecured creditors will be in line ahead of common shareholders and will seek liquidation of whatever ACAS owns to pay back amounts borrowed under the line of credit. I'm assuming here that ACAS hasn't got more than a quarter to make its books look good to creditors in the event it has a probem meeting the net worth covenant, and can't magically solve its problems with financial re-engineering. Moreover, I assume that the large investors in which ECAS shares are concentrated are aware of ACAS' financial condition as a result of due diligence activities, and won't help until it's clear ACAS is going to survive the quarter without imploding with a liquidity crisis.

Since ACAS' deleveraging efforts have reduced ACAS' debt to the point ACAS is still in the vicinity of 1:1 leverage despite its valuation problems, there is some theoretical possibility that after liquidating ACAS' assets there will be some non-zero value in ACAS and that ACAS could continue to collect, e.g., a management fee for externally-managed funds like AGNC, which is trading above NAV on the investment acumen of ACAS' managers (and in light of its easier-to-value government-backed assets). However, these activities are likely to produce modest income. For example, AGNC yields ACAS something like 4¢/share, but most of that is a result of dividends paid to ACAS as a shareholder. Those shares should be expected to be liquidated in bankruptcy to raise cash, leaving ACAS with something like a half-penny a quarter in management fees on the investment. Compared to the >70¢ a share we've seen from ACAS lately, this isn't much different from zero.

In short, the illiquidity case looks pretty grim.

What would ACAS do with cash raised while diluting your shares?
One answer is to retire debt. Lowering interest expense and decreasing liabilities to pump up net worth will protect ACAS from the dangers associated with the vaporization of its existing lines of credit. This in and of itself has a certain value, in that it is insurance against the company's dissolution. If one views the existing investments as dramatically undervalued, and expects them to perform well and continue to create income and worth, then accepting some dilution to prevent their loss in a bankruptcy proceeding brought on by a liquidity crisis triggered by the calling of substantially all of ACAS' unsecured credit may make sense.

I haven't seen whether there are any limits on ACAS' issuance -- a certain amount of money, a certain number of shares, or what have you -- so I think ACAS would continue to cruise about looking for opportunities to invest. I do not think ACAS plans just doing the ECAS deal. I think assuming that in the absence of clear limiting language is naïve.

Given the investment opportunities presented by distress among market participants -- ACAS' quarterly valuation efforts surely give it a special point of view on these opportunities, making it an especially sophisticated examiner of this kind of investment -- it's possible that management is right in thinking that money invested at these levels will be worth significantly more when markets behave normally again in a few years. The point of view we need to look at here -- as we trade around $3 -- isn't whether we'll quickly see $45 again after dilutive issuance, but whether we can protect so successfully against risks that would drive the shares to $0.05 that we see $15 again in a plausibly-rapid time frame.

The need to create liquidity is real. The future of the enterprise depends on increasing tangible net worth, which is the key to avoiding having ACAS' loans called and thus becoming insolvent. Wilkus made a comment about going to zero leverage, but I doubt that will materialize: the deals are just too good for a savvy due diligence team in an ocean of distressed sale opportunities. So long as ACAS can avoid becoming one of those distressed sale opportunities, this is a great time to be in the business of doing the deals on which ACAS has built its business.

ACAS' proxy material contains language touting the great buys out there, and you can bank on ACAS wanting to buy, buy, buy all the good stuff that folks on hard times are forcd to dump in an illiquid market. I think $1 in cash in this market is arguably worth quite a bit more -- in purchasing power -- than $1 in a liquid market with higher multiples. I think the future income streams ACAS can acquire with current liquidity can, with careful management, make current shareholders happy they stuck with it. WARNING: this is the view from the bottom. Looking down to here from $48 and asking when the bus will return is another question entirely. But as viewed from the bottom, this is a very positive position.

Bottom Line
The upshot is that if you don't trust ACAS' management, you need to flee -- now. If you think they have their stuff together, then entrusting them to keep it afloat makes enormous sense. I think ACAS will turn out to have been a great bargain at $3, and I'm not jumping ship just when the buying opportunities -- that is, the future returns -- look most attractive. I still believe (and the performance of ACAS-managed funds like AGNC bear this out) that ACAS' sharp folks can quickly adjust to strange times and find the opportunities lying therein. I want to be there when they prove me right.