Sunday, August 30, 2009

Cerberus Capital Management Facing an Imminent Shrinkage

I wrote about Cerberus earlier this year when I was discussing their misadventures with the smallest of the Big Three. Now, remember that if corporate news/filing comes out on a Friday afternoon, it is probably bad news. The WSJ reports, in part:
"...Clients are withdrawing more than $5.5 billion, or nearly 71% of the hedge fund assets, in response to big investment losses and their own need for cash, according to people familiar with the matter.

"We have been surprised by this response," Cerberus chief Stephen Feinberg and co-founder William Richter wrote in a letter delivered to clients late Thursday...

...Cerberus will charge investors a 0.5% annual management fee for the wind-down vehicle, a fee that was added in the last week. That amounts to nearly $28 million per year at the current asset level..."

Well, I am surprised that there are still 29% who do not want out. Is Cerberus a part of Cuomo's pay to play investigation? After all, they invested somebody's retirement in Chrysler, GMAC, Azora (the single largest unsecured Lehman creditor, please take a number for the line) and Mervyn's. Mervyn's is alleged to have been a classic example of tunneling: the real estate was transferred to a separate entity, and then that entity jacked up the rents, resulting in Mervyn's Chapter 7. May be they would have gone BK anyway, I do not know, but I am sure that this will be Cerberus' argument in court.

Oh, and the exit ticket is a 0.5% haircut. Not a big deal, right? We've already lost billions, what's a few million?

Saturday, August 29, 2009

Random Thoughts on Disconnected Events

I have been semi-following the collapse in the pro-sports world which I think will lead the way for a collapse in the entertainment business bubble. There were two pieces of news today that caught my attention.

One, the NY Mets might be up for sale. The owners lost a lot of money with Madoff so they are looking to unload the "asset." I'd rather call it a liability but that is just me. So here is our fair city's perennial also-run coming to market not at a very opportune time. I will keep an eye on the situation. Remember that the Cubs sale has not closed yet. The whole Zell-Tribune deal is coming under intense scrutiny with this suit reported by Bloomberg. I think that there will be whole book on this deal once it is all said and done: it has all the elements of a great drama, from secular decline, egos, tax structuring, and so on. Fees, fees, fees, and more fees.

Second in the news today, the NHL is engaging in its own version of "extend-and-pretend." Apparently, the league is trying to buy the Coyotes, hold on to it for a little bit and then re-sell it. Well, good luck with that. They do not like the likely high bidder so they have been trying any trick out of the bag to circumvent the proper process. This blog has a nice write-up of the absurd smear tactics used by the league. The blog is not related to the Coyotes team.

Dear NHL: the reason why you are in trouble is because (1) people can't see the puck on TV and (2) people find it hard to relate to a sport that they rarely, if ever, played as kids, ex some of our Northern states. Now you can add (3), you participated in the sports bubble by truly thinking you are one of the top leagues (you are not) and thus, running an unsupportable expense structure and sometimes, strange franchising operations. Why do you need a team in the desert when Minneapolis stayed without a team for years, and MN is probably the top market for your product?

Update 9/11/09: Now it seems that the Panthers deal (linked above) with the SPAC is not going anywhere. The NHL wants someone to back the future expected losses. Haha. At least they admit indirectly that in lieu of owning a NHL team, one might as well do a pyre with $100 bills. The Panthers have lost $100 mm since 2001. About the same amount as the Coyotes (as it turns out, the insider group, incl. Gretzky, have pulled their bid. Now it is only the NHL's shell game and the RIMM guy).

The second event that was in the news this past week was Ted Kennedy's passing away. Two commentaries caught my eye. One is over at Falkenblog:
"I often hear the argument that people like Edward Kennedy (who died Wednesday, brother of John F Kennedy), born to wealth and privilege, are to be praised for working for the poor, becoming 'public servants' (see Blogging Heads below). My ideal servant would not spend all his time trying to boss me around, statistically speaking.

Don Boudreaux over at Cafe Hayek nails it:
While Kennedy didn’t choose a life of ease, he did something much worse: he chose a life of power. That choice satisfied an appetite that is far grosser, baser, and more anti-social than are any of the more private appetites that many rich people often choose to satisfy.

A true altruist gives his money or time to others, via friendship or charity. They don't write laws that force me to serve their ends." I hope Mr. Falkenstein does not mind my republishing it in whole.

The second came from Maoxian: ""Over his Senate career, Kennedy wrote more than 2,500 bills, of which more than 500 became law" 47 YEARS, POSTER BOY FOR MUCH NEEDED TERM LIMITS"

The third event in the news was the Fed chairman's reappointment. The Pragmatic Capitalist has published David Rosenberg's "report card" on Zimbabwe Ben:


• 4 million lost jobs
• 4.6 percentage point surge in the unemployment rate
• 20% decline in the S&P 500
• 30% plunge in house values
• A 3.5% reduction in real GDP per capita
• 11% decline in the trade-weighed dollar
• 109 failed banks (almost matching the total from the prior 13 years combined)

Skip the mainstream media headlines about "praise", "competent handling", etc. and head straight for youtube. They have an excellent collection of clips of the chairman going back to 2005. And, as in the video title, why are we still listening to this guy? Send him back to the faculty club.

Friday, August 28, 2009


Ok, AIG is now north of $50 (split-adjusted, of course). I am going to declare that they are a short simply based on this video of their CEO telling an interviewer that he is working just fine from his Croatian villa. I do not know who this guy is, or what he is all about, but he clearly does not get it. The elf should fire him promptly and find someone else to run this taxpayer-owned entity. Or, at least, someone who shows up, and may be even takes vacay after a full year has passed. You know, kind of like the rest of us.

Update: 9/8/2009 AIG is now under $36. Cover some, at least.

Thoughts on Brands and Private Label

The earnings season is behind us with some of the retail companies finishing up their quarterly reporting (for the benefit of our readers, such as my only regular-- hi-- who comes from the NYC law firm of P------n B-----p, retailers usually end their year in January after the Christmas shopping season so their reporting lags the other corporate names). One of my take-away points from this reporting season is that despite the fact that people eat more at home, sales at the branded packaged foods companies (Kraft, Heinz, ConAgra, Sara Lee, General Mills, Kellogg, even Nestle and the like) have not done very well. I am not talking about earnings, EBITDA or anything like that, simply sales.

I think the main reason is that the brands these companies have are not what everyone thought they were. A brand theoretically has the power to make you pay more and/or use more of a certain product because of the brand equity. Brands are in your face with their ad jingles, glossy magazine ads, in-store displays, and so on. Many of the companies I list above for many years have been spending extraordinary amounts of money on brand building, brand awareness, brand extensions, brand promotion, brand this and brand that. In short, The Brand was/is The King. As a matter of fact, if you have any sort of corporate ladder inspirations there, you have to start in a brand-related part of the company.

What is happening now, because of the pressure on the consumers, the old humble private label is literally kicking... and taking names. I am not a brand expert (I was a marketing major as an undergrad so I am heavily skeptical on brands, i.e. I do not have "brand relationships" with any) but I have dabbled around enough to know factually that in most CPG categories there has been a substantial (more than 30% dollar volume) private label presence even before the crisis hit. The number is much higher in categories such as milk and meats, and very low in booze, cigarettes, gum, candy and breathmints. I have not seen any recent data but I have to think that private label has been taking share across all channels, measured and non-measured. Frankly, there are plenty of what I call "non-brands" out there that are functionally 100% identical to the private label products, often made on the same conveyor line. Milk, bread, meats, frozen vegetables, flour, fats and oils, pasta, canned vegetables, etc. are often identical across labels.
How can one play this? Unfortunately, it is a very limited universe. TreeHouse Foods (ticker THS) is one big player, another one is Ralcorp (ticker RAH). Dean Foods (ticker DF) and Flowers Foods (ticker FLO) also have substantial private label businesses. Of these, DF is probably the riskiest player because they are in a 100% commodity business. FLO is the only large public bakery (there is also TAST but they are tiny). Ralcorp is an old spin-off from RalstonPurina. I think it is a relatively well-run business. They scored a homerun two years ago when they did an RMT with the Post cereal division of Kraft. Their shares went wild on the announcement which made me think that this was a big wealth transfer from the KFT shareholders to the RAH shareholders. The only problem with RAH is their investment in Vail Resorts (MTN), which is a company that I am excessively pessimistic on. Finally, you have THS which arguably has one of the best management teams in the packaged food space: a bunch of sharp former Keebler guys that took over a crappy DF spin-off, and have been adding high-quality, fat-margin privately held businesses over the last few years. Unfortunately-- for an investor, their stock has run up drastically this summer. They are also one of the few food companies that do not pay dividends: the money goes for debt paydowns and acquisitions. But I am pretty comfortable that the acquisitions they do are smart which not something I say with ease.

The implications for the branded players could be serious: think how much goodwill is on the balance sheets. Think how much of a higher multiple their EPS "deserved" because of the brands. We'll see how it turns out. I think there might be some brand casualties.

What I said about brands applies strictly to packaged foods. There are areas where brand performance is real: the $19.99 Starter sneakers from WalMart will not perform as well as the $99 Nike AirMax. Of course, Nike will never tell you that they owned Starter for years but this is a different story. Both the Mustang and the MurciƩlago are sports cars and yet one commands a 10-15x price premium. Why? Part of it is performance (you also have cost, fit/finish, exclusivity and other tangible and non-tangible factors). Of course, Lamborghini will never fess up to being owned by Volkswagen (= people's car in Deutsch), and, previously, by Chrysler.

Update (9/13/2009): Yahoo has a Consumer Union story on branded foods vs. PL. PL wins on average.

Sunday, August 2, 2009

Huron Consulting Group (NASDAQ: HURN), Cash For Clunkers, And Other Disasters From The Past Week

So another week here in Absurdistan passes by.
One individual security which captured my attention was Huron (NASDAQ: HURN). It is basically a bunch of old Arthur Andersen guys doing consulting work. The business model is typical for a consulting firm (or a law firm or an M&A shop or an accounting firm): a few revenue producers bring in business, and the little people do the work. The revenue-producer and the company make the difference between what they charge for their services and the cost of labor for the little people. They compete with a number of substantially better branded private names, such as McKinsey and BCG (yes, also with Deloitte, Booz Allen, etc. yes, even CRA, Diamond Cluster, Opera, and so on). Anyway.

So HURN on Friday closed at $44.35, and went on tank massively after-hours, something like 60% off. So what happened?
-- fired CEO, CFO and CAO (aka "resigned immediately")
-- turns out Huron employee/s have been getting kickbacks from the firms they acquired (and they have been growing massively by acquisitions)
-- expecting the auditors to find material internal control weaknesses (wow! you mean PwC were asleep at the wheel? I am shocked!)
-- non-reliance on previous financial statements warning
-- preliminary EPS impact: '06 -14%; '07 -42%; '08 -75%; Q1 - 37%
--they also guided down for the year after reaffirming in June: either the business tanked or they are clueless about it. Either one is bad.

My prediction:
-- with this scandal, they will not be able to generate as much new business: every competitor will kick them
-- consulting right now is pretty slow anyway and these guys shot themselves in the foot
-- whole teams will be jumping ship to competitors, and that is revenue gone forever
-- I think they are levered around 2.6x-3.6x their adjusted '08 EBITDA, which in my view on the high end of the spectrum for a service business with no hard assets. Note that this is my adjusted EBITDA (EBITDA + bribe payments). They adjust their EBITDA by adding back stock-based comp which is complete and utter B.S. Yes, it is non-cash but it is something that would have been paid in cash as a compensation expense if there were no options
-- Heavily into healthcare and education consulting, which I think will be getting trimmed much more in the future

Now on to cash for clunkers. Is Congress largely a collection of lunatics? It sure seems so. I wrote about how dumb/thinly veiled this program is back when it first came about in early May, and I was hoping that it would not go through. Well, it did and it they just tripled the size of the program. Idiots. The auto companies learned the hard way over the last year and a half that heavy incentives simply pull demand forward. They do not create new demand. New demand comes from gradual amortization. Now people are turning in perfectly good running cars which get junked purposefully. This is the most retarded thing ever for a program ostensibly created for ecological improvements. And Congress is patting itself on the back because it is so successful! Well, how about simply sending checks to the taxpayers and see how many people cash them. I bet it would be over 99% so it would have a way better reach than an auto program (which inherently discriminates against mass transit users, as well as people who were smart and bought good mpg vehicles as I described earlier this year.) I am against stimuli of any kind BTW. How about reducing government spending, huh? The idiots that are in charge of the federal government came up with brilliant ideas, such as double-sided copying to save $100 mm. Innumeracy, I guess. Cutting $1 out of every $10,000 is more than insignificant: it is insulting.

Now on to the economic reports. The two numbers this week were the initial claims and GDP. What you need to know about the unemployment numbers is that once the benefits run out, a person is no longer considered "unemployed" by our brilliant, well-fed statisticians at the BLS. Only in Absurdistan, of course. So what has been happening actually? One, the auto sector messed up its traditional lay-off pattern for the summer so the seasonal adjustments are off. Second, and more important, you have people using up not only the 26 weeks of standard unemployment aid but the 72 weeks of extra federal and state aid. But...they are not part of the "number." They will continue to grow: anecdotally, someone I know at big bank X had a decent opening (MBA-level associate). In a few days, they got over 600 applications for this one place.
The best graphic representation of the expanding periods of unemployment is here towards the bottom. More green shoots believers added daily.

The second number is the GDP. Here again we have our brilliant, well-fed statisticians moving the goal posts. The GDP calc was revised, and they went back to restate the numbers from the last few years. Turns out that the decline in the GDP was much more severe and started out earlier than before. Second, only declining net imports and government spending helped. This is not a good way to progress in an economy. See this and this. Now remember that the government does not have the money it spends: it borrows a part from China/ROW and it prints the rest.

Everything's great, folks, buy, buy, buy! Yahoo says the recession is over or nearly so. "Recession end seen..." Let me spell it out. There will not be a recovery. Things are not going back to "normal." This and worse will be new normal. You will not have stabilization until both residential and commercial RE prices have stopped falling, the banks have taken the losses (instead of suspending MTM accounting), the U/E rate has peaked, the deficits are under control and there is an economy-wide debt to equity conversion. It has not been painless and it will not get any better for a long time. Partially because of the neverending cluelessness of the people in charge. Ever wonder why oil is at $66 in the midst of the worst recession since the 1930's? That's another topic.