Wednesday, December 19, 2012

FMCN, China, Taiwan, Private Equity and a Lawyer

The expat finance community in Taiwan is very small. Yet, I was lucky to befriend one of them and get to know these guys a bit better. One of them, is a partner for a large global law firm and told me PE firms do some business in Taiwan but not much because it's hardly ever a big success, but they don't expect a large amount of fraud here. Yet, in China they'll do deals expecting some fraud but hoping the growth and their expertise will allow it to be a success.

Maybe, it's too anecdotal, but it fits the description for lots of deals in China. Yes, the accounting is bad and it's probably no where as good as the audited financial statements suggests but at least we can get a deal done and it might still work out. It's important for short sellers to understand that, unless the company is a blatant fraud-- there a good chance the company will be bought out.

Shorting, China -- position size

**Large pile -- blatant frauds that need a good research report to reveal

Medium pile -- horrible accounting, but in a business that's not famous or well known enough to be bought out. Fairly well known financial firms could fit here as well, sine PE firms will probably stay away from financial firms since assets are harder to verify, and trust could be broken with a short report.

Small pile -- accounting issues, ranging from medium to small. Large, well known firm that could be bought out.

 **Even with a great short, I'd suggest keeping the size small (depending on who your clients are, and your ability to withstand volatility -- for me, it's 3-2%) Never underestimate the ability for PE firms in China to do horrible deals that would make Thornton O'Glove faint.

Tuesday, November 27, 2012

Four Corners - Lance Armstrong - Fraud

Four Corners produced a brilliant documentary on Lance Armstrong's drug use and the organized cover up that included doctors, team mates and lots of money.  I highly suggest watching it.

Here is a link the full length documentary on the Four Corner' s website.

Here is a preview of the documentary presented by CNN, unfortunately CNN butchers their editing and makes it look very cheesy and it still frames too long at the end, but at least it's something.

Are there similarities between what Lance Armstrong did and fraudulent publicly traded companies?  more to follow...

Tuesday, October 2, 2012

small collection of Jim Chanos articles

Here are a few Jim Chanos articles. 

New York magazine article called "The Catastrophe Capitalist" Written in 2008. Fairly long and detailed. Good read. 

Riders on the Storm. Short Selling in Contrary Winds. Traits of Excellent Managers.

September 5, 1985, Wall Street Journal piece on Chanos that supposedly pushed Chanos into getting fired from Deutsche Bank.

"The Amazing Story Of Jim Chanos' First, Career-Making Short"


More about the Baldwin United short.

Jim Chanos prepared SEC statement on short selling.

Wednesday, September 26, 2012

reddit Security Analysis page

I just found about about the Reddit Security Analysis page, definitely like it.

Tuesday, August 21, 2012

Short update on Crumbs

Crumbs new 10Q came out and their cash position only fell by a million this quarter. This is good news since they've previously been losing around 2 million a quarter. That bad news they only have 3 million left. At least they got this new risk factor in their 10Q.

Crumbs’ future capital needs will depend on various factors, such as market acceptance of its existing products and any new products that it develops, marketing and sales costs, its ability to reduce operating expenses, and the extent to which it implements its growth and business strategies. None of these factors can be predicted with any certainty.

Unless Crumbs can generate a significant increase in cash from sales, it will not have the financial resources needed to fully implement its growth and business strategies. In that case, Crumbs will need to raise additional capital through public or private financings. If Crumbs were to obtain additional capital through borrowings from third parties, then it would have to pay interest, it could be required to pledge its assets to secure such borrowings, and it could have to agree to financial or other restrictive covenants that would not be favorable to Crumbs. These factors could put a strain on working capital, restrict Crumbs’ operations and/or ability to fully implement its growth strategy, restrict Crumbs’ ability to raise additional capital in other financings, and/or restrict Crumbs’ ability to pay dividends on its outstanding securities. If CBS were to raise additional funds through the sale of equity securities, such as additional shares of common stock, then the ownership and financial interests of existing stockholders could be diluted or otherwise materially and adversely impacted. If CBS were to sell debt or preferred securities, then it might be required to pay regular dividends or make other distributions, which could put a strain on cash flow and reduce cash available for operations and growth. Moreover, any debt or preferred securities issued to secure additional capital could have rights, preferences and privileges that are senior to the rights, preferences and privileges of CBS’ existing securities. The amount of capital that could be raised through the sale of securities would depend on the price at which such securities can be sold, and there can be no assurance that CBS will be able to sell such securities at prevailing market prices. Furthermore, CBS’ ability to sell securities could be subject to, or limited by, the rules of the NASDAQ Stock Market, including the rule that requires stockholder approval of securities issuances under certain circumstances. A meeting of stockholders would delay CBS’ efforts to raise capital, which could impact the price or prices at which it is able to sell securities and, thus, the amount of capital that could be raised, and would require certain expenditures related to holding the meeting and soliciting proxies. Any of these factors could have a material and adverse impact on Crumbs’ results of operations and financial condition. Crumbs’ ability to raise additional capital will depend on its results of operations and the status of various capital markets at the time such additional capital is sought. As a result of the foregoing, there can be no assurance that capital will be available to Crumbs from any particular source or at all, or at the times, in the amounts or on terms that are acceptable to Crumbs. If Crumbs is unable to raise additional capital at the times or in the amounts needed or under acceptable terms, then it might have to delay, scale back or modify its accelerated growth strategy, and its operations could consume its current liquidity resources .

Tuesday, August 7, 2012

Short CRMB

I had a long post about the idea of shorting Crumbs Bake Shop, but was hesitate to go short because I felt just any good news would push up the stock. Well, the good news has arrived -- Starbucks will now sell their coffee at Crumbs Bake Shop.

Is having Starbucks coffee all the sudden going to fix their problems? Nope.  In fact, I think it's far less likely Starbucks will buy them out now. (Which was one of my big worries about shorting Crumbs) Starbucks can now sell their coffee through them without having to buyout their stores. Why buy the cow when you get the milk for free? A press release like the one Crumbs sent out, reminds me of crappy companies sending out press releases whenever they have a business relationship with a major company. You'd think it might be a big deal to their customers, but they haven't twitted about it yet (I'm sure they will, they tweet about everything.) It's not that big of a deal, but the market will appreciate it.

What is a big deal for Crumbs is, every quarter Crumbs loses around  $2M -- and they only have $4M left.

Monday, July 30, 2012

(1 min Video) Top Banker Introductions Too Big to Fail

HBO had made a TV special on the book Too Big To Fail. Lots of fun parts in the movie, but I liked this dramatic quick introduction to a few of the CEOs.

Tuesday, July 24, 2012

(youtube audio clip) Angelo Mozilo's defense of Countrywide

For the uber financial nerd (UFN) out there -- there are dozens of interviews done by the Financial Crisis Inquiry Commission that can be found on Stanford's site (here).  There are plenty of interviews for UFNs: Buffett, Chanos, Einhorn and Burry.  Yet, I like to focus on one done by Angelo Mozilo today. For anyone who has followed Bank of America's turnaround, they know it's a pretty good business (large, stable, inexpensive deposit base) that is sitting on a toxic-clean-up-site called "Countrywide."

I thought it would be interesting to hear what Mozilo had to say since he was the former CEO and co-founder of the company. I wasn't let seems Mozilo had huge delusions of how great Countrywide was and/or he was really full of it.

In the interview he says...

1.) Countrywide's stock had a much better performance than Warren Buffett's Berkshire Hathway. (This is true'ish, if you don't consider it would have been a giant zero if Bank of America didn't buy it.)
2.) Boasted that Countrywide's creditors were payed in full. (Which wouldn't have been like if  it wasn't for Bank of America)
3.) Countrywide didn't take any TARP (Bank of America needed to...)
4.) Thinks it's unfair Countrywide is put int he same class of Bear Stearns, Lehman Brothers, AIG, Wachovia, Fannie Mae because these companies went under and Countrywide didn't. (Countrywide would have if it wasn't for Bank of America....)

Bank of America doesn't get enough credit for cleaning up the giant mess left behind by Countrywide.

Sunday, July 15, 2012

The Apple Inc Turnaround 3 Steve Jobs Videos: impressive to see Steve Job's thought process

Here are three videos that show the turnaround at Apple Inc. The first video is before he is CEO, the second video is when he was named iCEO and brought in new board members, and the third video is when they show steady profits and show their strategy "Apple Hierarchy of Skepticism"

1.) Apple's  WWDC 1997 -- Steve Job's taking questions. He shows a lot of maturity and a firm grasp of Apple's problems.  Tells the audience to buy Apple stock when the media writes bad articles on Apple.

2.) Macworld Boston 1997. Steve Jobs comes back as the interim CEO and changes up the board of directors. One of the board of directors talks about turning around Citicorp in the early 1990s and seeing a huge rise in the stock price by focusing on the fundamentals (time 15:50)

3.) Macworld July 1998
Steve Jobs introduces his "Apple Hierarchy of Skepticism" survival, stable business, product strategy, product strategy, applications and growth.  This is the general playbook for any turnaround and it is beautiful to see it.

Quick thoughts on turnarounds. (1) Successful turnarounds have a huge survivor bias.  Obviously the turnarounds that people read about are mostly the ones that survive to keep on producing 10-K files for all us. If Apple died before Steve Jobs or if Microsoft never invested into Apple, maybe Apple wouldn't have survived.   (2) That being said on survivor bias, successful turnarounds generally have managers who are in it because their ego is in it. They aren't looking to get rich and are usually able work without profit or relatively little profit for a good period of time. Being a founder because their ego is involved with the company, but it can't be involved too much because you have to practical to make hard decisions during a turnaround (firing people, cancelling divisions/products)

I hope you enjoyed the videos. 

Tuesday, June 5, 2012

Is it too late to short cupcakes? Crumbs Bake Shop Inc (CRMB)

 Jason and Mia Bauer started Cumbs Bake Shop in 2003. In 2011 they went public through a reverse acquisition via 57th Street General Acquisition Corp.

I remember watching this video about a year ago and thinking this could be a great short. You have a crappy business and a fad all mixed in together with a reverse acquisition. It smelled like a great short. Yet, for whatever reason, the idea of shorting Crumbs never went into fruition and I forgot all about cupcake bakeries (there is only one in Taipei, and the cupcakes weren't so good.)

Crumbs Bake Shop had very high hopes of what their business could produce. Look at these estimates they [pg. 7 here also shows their roadshow expectations]

Reconciliation of Adjusted EBITDA to Net Income

The following table reconciles adjusted EBITDA to net income for the time periods indicated:

Years Ended

December 31

December 31

December 31








Net income (1)

$ 1,640,000

$ 3,452,500

$ 8,522,500

Income taxes, including any gains or losses resulting from the change in estimate relating to the Tax Receivable Agreement (2)






Accelerated Depreciation of Abandoned Leasehold Improvements






Interest income



Interest expense



Equity-based compensation



Acquisition costs




Adjusted EBITDA as presented

$ 2,500,000

$ 5,000,000

$ 12,300,000
[page 7]

Jason Baurer was very aware of their past growth and what they estimated as their future growth. They started going to road shows, like Rodman & Renshaw, showing their investor presentation.  Jason went on Bloomberg saying, Crumbs was a "perfect public company story." He knew very well, that Crumbs would be getting sweet valuation as a public business and that going public through a SPAC, would allow him to go public quicker and with less scrutiny from the underwriters who would need to vet the business.

( One of the most important documents 423B3s or the prospectus files you get from the SEC. In the 423B3 there is great bit of information called "Use of the Proceeds". If the common stock they are selling is from the company to expand the business: that's generally a good thing. If the common stock they are selling is from the insiders to sell the public: beware. In this case, it was from the insider, 641,394 shares were being sold. The selling shareholder was not the Bauers, but their partner Edwin Lewis, who bought 50% of the company for $10M)

By the way, how much did shareholders of Crumbs get when they sold it to 57 Street?

Upon consummation of the Merger, the Members of Crumbs received consideration in the form of newly issued securities and approximately $22,080,060 in cash. The securities consisted of (i) 4,541,394 New Crumbs Class B Exchangeable Units (the aggregate of which is exchangeable for 4,541,394 shares of our common stock, and 641,394 of which New Crumbs Class B Exchangeable Units have been exchanged for shares of our common stock and are being sold by a selling stockholder), issued by Crumbs and (ii) 454,139.4 shares of Series A Voting Preferred Stock (each such share entitling its holder the right to vote 10 votes per share in all matters for which the holders of common stock are entitled to vote), issued by us (64,139.4 of which have been surrendered and cancelled by us upon the exchange of 641,394 New Crumbs Class B Exchangeable Units for the 641,394 shares of common stock issued to a selling stockholder). In addition, Crumbs, as the entity surviving the Merger, received as a capital contribution from us, the sum of $13,724,513.92 (not including refunds receivable after the closing of the Merger) after giving effect to the retention of $53,156.01 by 57th Street for future public company expenses and the payment of $148,752.72 for 57th Street’s then outstanding franchise taxes.


Fast forward to the present, a random cupcake reference and the idea of Crumbs comes racing back to my mind. I check out how they've done and the chart says it all.

What has happened since their IPO?

For one, their founder is no longer the CEO of the company. In November 2011 Julian Geiger became the appointed CEO, in what seemed to be a sudden decision.  On the Crumbs website, Jason and Mia Baurer are still part of the management team but my guess the entrepreneurial zeal is gone with the new CEO, Julian Geiger;   Julian is a sixty-six year old ex-CEO of AĆ©ropostale and not the man investors envisioned as their entrepreneurial leader. (The conference calls are filled with CEO babble: business acronyms, strategies and six part plans)  They have also stopped giving out information on same store sales. Not a very good sign when you are withholding crucial information for a retail operation.

So now the question is, at current prices, is Crumbs still a good short? Crumbs currently trades at $2.30 a share with a market value of $13.2M and 4M in cash according to the last quarter filing. Leaving an enterprising value of 9M (Of course, leases should be included as part of the debt of the company, but for now let's just say it's debt free). Although it isn't currently profitable, it does have 41M in TTM sales (higher now with store growth), which means if it could just get an profit margin of 5% you are looking at 2M in income for a company with an enterprise value of 9M. I am guessing 5% margins are not likely and if they were, they wouldn't say this in their last 10k:
In light of the decline in operating performance at a number of the Company’s stores, management continues to evaluate and, as necessary, address weaknesses and implement improvements in the Company’s operations and growth strategies as part of its efforts to maximize overall profitability and shareholder value.

One of the most startling problems Crumbs faces is the rapid decline in cash.

The foodies of the world are calling for the end of the cupcake bubble as well, for the start of the pie bubble. Although people have been calling the cupcake bubble for a while, I think the founders knew they were at the peak and that's why they sold Crumbs. 

My guess is, the cupcake market is highly saturated and becoming increasingly competitive. It's going to be harder for these bakeries to keep their quality consistent as they grow and customers will start to tire of the coolness of a cupcake bakeries when they are littered all over the street. The man who made the smartest trade here was Jason Bauer by selling out right at the top of the cup cake craze (all while denying the existence of it's bubble.)

Some people might say, that Cupcake business might grow to be as big as the doughnut business. Yet, that doesn't make much sense. I think the doughnut business is already in the cupcake business, or could very well go into it -- how much harder would be start selling cupcakes at doughnut stores? It also, without a doubt, ever get as big as the coffee business. For one major reason. Coke and coffee has one huge advantage over food. It has no taste memory and for that reason, it allows people to drink 5-6 cans a coke a day. I can't say that for muffins.

I enjoyed this comment/questions during the 3rd Quarter 2011 conference call. Where the caller states the obvious: Crumbs was sold at the height of the hype and now the shareholders are seeing the results of a crumbling cupcake market.

 The current borrow rate from Interactive is 2.16% which shows there is some people interested in shorting this stock already, but it is fairly cheap compared to other names. (I believe TSLA is in the double digits.)

Even though I think this company will die an eventual beanie baby death, there is still a possibility of being acquired (Starbucks?) or a pop if they show a surprise quarterly profit.  I doubt either of these two things will happen, but they are real risks to be concerned with if you are shorting.
Tell me what you think about shorting CRMB. Leave comments or email me at

Wednesday, May 23, 2012

(video) David Sokol - Lubrizol Affair - Wall Street 2

Remember the Lubrizol affair with David Sokol? For those who do, you might smirk at this clip from Wall Street 2.

Postscript: This video is met for entertainment. I believe Sokol got worse than he deserved.

Wednesday, April 25, 2012

(VIDEO) Australia's BankWest and the harm it caused.

Australia's Four Corners (think Frontline) did a special on BankWest and the ramifications of their horrible underwriting.  BankWest was formerly owned by the Royal Bank of Scotland which provided the bank with cheap money (supposedly, I can't verify) and pushed them to make loans. This resulted in giving loans to people who really couldn't service their loans or were giving loans for doomed projects.  During the crisis BankWest was sold to the Commonwealth Bank of Australia which then had to review prior loans only to find out a mad hatter was underwriting.

John Hempton of Bronte Capital has posted about the Royal Bank of Scotland before and never had nice things to say about the way the bank. After watching this documentary, I wanted the people of BankWest and their parent company, Royal Bank of Scotland, tarred and feathered. How can you live with yourself with such abysmal underwriting? 

If anything, this is a good lesson of the damage lending institutions can make to themselves and to others. 

Tuesday, April 3, 2012

Bank of America -- Seen From Arizona

[This is a horrible post. No real analysis, just a commentary of my Thanksgiving 2011 trip]

Home. It's where I want to be, and I was just already there. 

Naive Melody was the theme song when I went back home.  My mind goes loopy in Taiwan. When I am here, I think the whole world lives in apartment buildings, drives a scooter and pays their utility bills at 7-Eleven. Yet, when I am in Arizona it's the reverse. People live in small mansions, drive SUVs, and hate Bank of America. 

Below is the picture of the Bank of America by my parents house. 

If you look at this picture and smirk at the broken Bank of America sign, you aren't alone. The whole time I was there I suffered from a deluge of Bank of America hate. I went out to eat with my uncles for a pre-Turkey lunch and when I tried to bring up BAC, these were their responses:  "Aren't they already bankrupt?", "Josh, you have no idea how much I hate that bank."

My uncle Bob was the most passionate about his hate. He owns an auto body repair shop and had a business account with BAC for over ten years.  Yet, when the credit started to become tight they pulled credit lines from his business and demanded stricter terms on collateral. At every juncture they would also fee him for special statements and banking fees. He is currently working on switching banks and when I asked him for a deposit bag he was more than happy to oblige.

I had opened a Chase savings account because I came up with a brilliant scheme to bypass international wire fees by depositing travelers cheques with QuickDeposit -- unfortunately my master scheme failed and needed to come inside a Chase branch. 

The Chase branch was absolutely beautiful. The ATM seemed hi-tech, the branch was very clean and even though I was only waiting in line for a couple minutes, one of their employees opened a new teller window for me.

  Using a Bank of America ATM or going into a branch is a whole other matter. The ATM machines were scoffed up like someone had taken their keys and scratched up the whole interface. I also had trouble using the ATM since the functionality was a bit awkward and therefore trouble making a deposit. (granted, I am a bit thick)

  Going inside an actual Bank of America branch was unpleasant. For one, there was security guard outside the bank which made it feel very unfriendly (I didn't see a security guard at any other bank.) The second reason was the bank teller was very inexperienced. I had several old pennies that were underwater for a long time and when I went to deposit them, the teller told me they wouldn't accept it. She said they could accept "mutilated currency" but not "mutilated coins." Mutilated currency?! Are coins not considered currency?  I literally had to argue with the bank teller to deposit eleven pennies. It ended with her having to ask the manager if the coins were acceptable.  The whole time the bank line had gotten pretty long and no one offered to open a teller window.  Needless to say, the BAC branch seemed downright bogan compared to the ritziness of Chase. 

Maybe these branches are doomed to be cut as part of the New BAC plan. Maybe BAC isn't sufficiently investing in branches to prepare for Basel III capital requirements. Either way, BAC looked like crap compared to the Chase branch. If my experience with BAC was common, it's no wonder everyone has such negative view of the bank. If this anecdote represents the branches nationally - Moynihan has plenty of work to do.

[Long BAC]