Amit Chokshi

Wal-Mart Goes For the Gold In China

There seem to be conflicting reports on the $1bn number, Marketwatch said it was $1bn for the stake and Reuters said "Financial terms were not disclosed, but a source familiar with the deal said Wal-Mart would eventually pay $1 billion for all of Bounteous, which operates 101 hypermarkets in 34 Chinese cities." So to me that means that their 35% stake is valued at just $350mm and eventually they hope to own all of Bounteous/Trust-Mart and will do so for a $1bn total.

That's not unusual for WMT, they entered Central America by buying a small stake in Royal Ahold's subsidiary down there before taking majority control within a few years.

I don't know that I agree with you about retail not requiring a partner. Previous failures by WMT and Carrefour in other foreign markets show that having a partner makes sense. The stakes in China and India are high and more importantly the regulation/legislation landscape is probably difficult to navigate. In India WMT is teaming up with Bharti Enterprises, India's largest telecom while other competitors like Carrefour and Tesco are expected to team up with Wadia and the Tata Group respectively.

'Perky' Stocks: Do Country Clubs Make a Difference?

You're using 6 weeks to determine whether perquisites have any impact on a stock's performance? I am not sure what the overall answer is but my plain opinion is that CEOs don't deserve to have their tax bills paid and all of these other perquisites paid for by shareholders. Mainly because at the end of the day they really just don't add much value. The market direction (cyclical bull/bears) has far more to do with the stock's performance as opposed to any CEO's management plans.

Short Lived Economic Pessimism: Pollyanna is Back - With a Vengeance

What regulation would you suggest? The easy private equity money was made from 2003-2005 when rates were lower than they currently are. Regulation for LBO firms and hedge funds is frankly due to legislators being jealous of how much money these guys can make with their bigger funds now as opposed to any "protection" angle. Their ears pop up when they hear about the returns and the money made and they need to take a peek to learn more so that when they get out of office they can hook up with one of these outfits.

Alt investments go through cycles nobody will deny that. The 1998 vintage LBO funds performed horribly and Forstmann Little was done in by some bankruptcies and other firms barely eked out a 5% IRR over the life of their 98 funds but LBO shops are in my view the least likely to crash and burn. KKR was brought to testify in Congress in the 1980s because of all of the leverage, the job cutting, etc. they did to generate returns but more importantly they were brought in because of the money these guys made off their investments. It's the same thing going on as private equity is the hot thing now but all of the easy money was made from 2003-2005. In those years firms could buy a company and recap it within weeks taking their entire equity out and still maintaining full ownership (look at PanAmSat satellite deal for instance).

Don't get me wrong, I'm very neutral/bearish on the overall market but any fall out will be more harshly felt by hack financial advisers and their retail clients than guys running alternative investments. I've been to a few conferences over the past few months and people love to reference Amaranth but it's a talking point that generates little value, the market absorbed the deal and people made money off it, I would think it is zero-sum, the $6bn didn't evaporate did it? JPM, GS, etc all made money off of that implosion.

I'm not complacent by any means but I don't see any LTCM on the horizon because the field is filled with bigger and more diversified players. Even in the hedge fund world, it's like 80+% of the capital is controlled by about 15-25 firms? Cerberus and Citadel and other competitors are not one trick ponies and do all sorts of stuff so a blow up in one area, yes, correlations go to 1 during crisis, but these guys have better portfolios than most retail investors with their 60/40 stock/bond portfolios. They are principal investors, lenders, etc. they are doing it all these days so are practically institutions in their own right similar to a GS or MS.

Will Sub-Prime Loan Defaults Create Another Amaranth?

Why would GS or MS sue JPM? Did I read that righ in that MS lost $4.3mm due to Amaranth? That's a rounding error. As for GS, they were working hard to take over Amaranth's portfolio the whole time that implosion was occuring, think they'd have a tough case to sue to JPM when they were trying to do the same thing.

Fundamental Indexing: New Ain't Necessarily Bad

Fundamental indexing is a great alternative to traditional indexing, I doubt the market cap indexers have really looked at how it can work. Only issue I have is that WisdomTree gets a lot of credit for it when I believe Rob Arnott is the guy that really laid the groundwork for it. Fundamental indexing is not just a "value strategy" like some say, you can index across number of employees, revenues, cash flow, book equity, not just the highest paying dividends, etc. John Mauldin's book Bullseye Investing has a great chapter about fundamental indexing based on Arnott's research and that book was written I think 4+ years ago.

The Short Case On Jo-Ann Stores

1) I partially agree, after all I stated that they were able to generate increasing GMs in a declining sales environment by getting rid of clearance items earlier on so this quarter looked ok. But as far as inventory goes, they are not lying but I believe that they are still carrying a lot of stale inventory. From Oct 2005 to Oct 2006, they did bring down a lot of inventory but that was mostly through the holiday season of 2005, since at Jan 06, they had $514mm of inventory, so for most of 2006 they've been working at a much lower inventory level, which is a good job by Webb. The problem I have is that Webb said that they didn't buy a lot of new inventory heading into the fall season which is fine but sales were still extremely slow meaning to me that this current level of inventory is still not being moved and the inventory is mostly out of season stuff. Also, Nov and Dec comp sales were very bad, so I suspect inventory may still just be sitting there. In this type of industry, that stale, out of season inventory loses value fairly quickly so I would not be surprised if they just write off a bunch of it and start clean or Webb decides to aggressive slash prices again.

2) Debt has been reduced from $290 to $200, but it's still levered at close to 4.0x EBITDA. Also, that doesn't include the gross up for the sale-leaseback which now as a lease where they pay rent would essentially represent off balance sheet debt, so the actual leverage is higher than what's represented on the balance sheet. That's fine, it's a common practice but for a business with the industry dynamics and low cash flow JAS produces, that's a lot of leverage.

3) I expect SS to pick up for the same reason but I would not be surprised if the comps come in at 0-2%.

4) Fair enough, I think arts and crafts require more "trendiness" or some sort of "fashion" angle to pick up sales. Groceries has been a tough industry, WINN went bankrupt, etc and there are trends as demonstrated by WFMI and OATS but the bigger guys in my opinion, the traditional stores like Safeway, Kroger, Publix, Albertsons, have been fairly steady players, WMT has been difficult especially when considering the grocery union, but I feel the arts and crafts industry faces different dynamics overall. I am sure Webb will get the operation streamlined but I don't have a lot of faith in doing much on the sales end.

At any rate, good luck with your view on JAS and investment (if you are long).

Nordic American Tanker Shipping: A Dividend Stock With Strong Technicals

The company has over a $1 per share in depreciation charges (non-cash) so the cash dividend vs accounting earnings is not an issue. The only reason I'd be cautious on NAT vs other tanker companies is because they are completely tied to Suezmax tankers and more importantly they have a history of issuing equity to fund new tanker purchases. With tankers you have a hard asset with real tangible value and a real estimate of potential cash flow from the tanker (just go with a comparable locked price as the floor instead of spot prices for lending purposes) so you should be looking to finance new fleet additions with debt.

Gap: The Short Case

I don't think the Appendix made it in, if anyone wants I can provide the transaction comp set for the analysis above.

Whole Foods, Whole Portfolio?

Good idea on the pair trade, if someone wanted to do that they should look to set up a beta neutral hedge, OATS I believe has much more leverage than WFMI so you wouldn't want to do a 1:1 long/short on that.

The Convergence of Hedge Funds Into Private Equity

PE funds get paid a multitude of ways and can easily rival hedge fund managers (and IMO usually exeed) in overall compensation. An LBO fund get paid 1/2% and 20% (after a 6-8% hurdle rate) and what's crazier was that in the beginning of the industry the LBO funds would get paid that on a per deal basis as opposed to the total funds return. In contrast a hedge fund gets 1/2% and 20% on new net profits. Some may say the fund manager gets paid more compared to the LBO firm but consider that in a typical LBO, the buyout firm will charge a % of the total transaction value as the firm's own "M&A fee" to basically compensate the buyout firm's professionals for analyzing and purchasing the company.

So in one of the megabuyout deals, an M&A fee could be $25-$50mm dollars that rivals the sellside ibank fee that goes into the pockets of the buyout firm before any value has been created. Secondly, the privately held funds are then charged a "management fee" to the buyout fund which can range from a few hundred thousand to millions depending on the company size. What makes these even more ridiculous is that in certain instances both the M&A fee and the management fee are 100% pocketed by the GP and the LPs (the insitutional and HNW investors) don't get a penny from that. So again, no value created yet but plenty of cash going into the buyout firm.

On top of that, with the current credit markets, buyout firms can run leveraged recaps to redeem their initial equity investment and still retain control of the firm such that between ultimately deleveraging the holding + dividends will allow the fund to sell the business in 3-5 years at an even lower valuation multiple and still make 20+% IRRs. That's why I'd say LBO firms are not "very interested in the strategic direction of the companies and industries in which they invest." It's a basic financial engineering process that can be applied to steady cash flow businesses. It's the same process for a newspaper company, a donut shop (Dunkin Donuts), a financial software company (SunGard), it's just certain, steady cash flows with limited capex. That's why a mattress maker has had about 6 different PE owners over the past 10 years or so.

If anything, I'd say hedge funds that take a long-term approach to investing (ValueAct, Bill Ackman, Second Curve Capital, Lisa Rapauno, Greenlight Capital) take an intensive approach to their investments since the holdings are marked to market every day and since they don't have control of the managment team/board, they will have to be that much more detailed in their analysis.

Also, hedge funds are not an asset class in the same regard as buyout funds. Buyout funds have some pretty strict rules in place in their fund documentation. It's really just buyouts and the occasional PIPE that are allowed and some other rules regarding public equity positions. Whether it's a $50mm or a $15bn LBO fund, the process is the generally the same, it's just the deal sizes are smaller and you'll use more bank than bond debt. But when people talk about hedge funds, they lump a variety of strategies into one asset class that can have no relevance to one another. A hedge fund that focuses on energy trading or FX may have nothing to do with a vanilla long/short fund or a distressed debt fund or short-only or a value/long-biased fund yet they will all be lumped together in many press articles (institutional investors generally have allocations for strategies, however).

So the belief that some hedge funds use complex trading strategies is just a broad generalization that may only refer to a few strategies and not even the majority of hedge funds. Kynikos and Sea Breeze are not lilkely using complex trading strategies outside of sizing/balancing their shorts and Cerberus, which is widely known for distressed debt, is probably not trading off minute spreads. You have the SACs, Renaissances, and DE Shaws of the world that command a lot of capital and have a lot of trading velocity but that still will not apply to every hedge fund. Also, guys like Cerberus have been buying whole business for a few years at this point, they bought one of Georgia Pacifics business back in 2004, and have teamed up with/bid against PE firms. Same with guys like Five Mile Capital.

Executive Compensation Will Continue To Be a Hot Button Topic in 2007

It's a hot button topic that nobody does anything about. As can be expected, our government will grandstand and talk and debate about it and nothing will be done or they will do the exact opposite. Just like Bush talking about simplifying the tax code but in reality expanding it by 30%, our government officials can be bought, and/or just don't have the intellectual horsepower to do anything of true value, and/or they use their intelligence to fatten their purses at shareholders expense.

Your article omits perhaps the biggest gaffe by the SEC this past week with their rule change in regards to reporting compensation through option packages. They didn't even bother to seek public comment before implementing this new rule which takes place immediately. So as investors we can expect more problems with transparency as executives that are granted the same value of option compensation will be able to manipulate the reporting of it based on the vesting schedule.

So in 2007 we'll see reduced compensation figures since the expense will be deferred over time with no need for real disclosure. The useless board of directors will have their backs covered to continue pouring money into the pockets of their brethren and of course in about 2-3 years some scandal will occur when someone realizes that several hundred million in option expense was put in some cookie jar through and wasn't properly recognized and when shareholders thought some CEO was just getting $10-$50mm in option comp it was really 5-10x that figure.

Pfizer's $199m Payout To McKinnell is Unacceptable

That's exactly why many CEOs want to go out on buying sprees with their companies. Irrespective of how the stock performs, if they run a larger company they can use the market cap size as justification for their pay. I like Drucker's view that no CEO should be paid more than 40x the average production worker. Of course its risen to about 400x now.

Add the idea that a study by HBS suggested only 14% of a company's value is driven by a CEO (nearly 20% by the industry) and CEO comp really can become an issue.

The only way to deal with it is to radically restructure boards. Even having boards suggest compensation packages shareholders vote on would not do much in my opinion because of the current DNA of these board members. Boards are just saddled with other CEOs and top management of other companies which leads to massive group think across the board. Some senior mgmt guy on the board for company x isn't going to ding the CEO since he/she knows he'll be in the same "club" once his turn comes up. Midlevel company members should get board representation in some capacity as should common shareholders. I think most importantly, boards should have risk capital representation. Either board members should be forced to buy a minimum level of shares if they agree to be selected or allow significant shareholders to outright bring on their own board members. Why do you think the Icahns, Kerkorians, Daniel Loeb's, etc are so much more forceful when they want to effect change. Having real risk capital represented in the board is huge and the fact that most of these bozos get grants along with a stipend is flat out ridiculous.

Pfizer's $199m Payout To McKinnell is Unacceptable

The only way that can change is if certain shareholders can successfully sue individual board members to set a precedent that this negligence on their part is not acceptable. Secondly, the establishment of gross paying severance packages is outrageous and should be done away with completely. The CEOs at many big companies already have access to the private jet for personal use, have their taxes paid for by the firm, and a multitude of other amenities and constant stock and option grants. I don't think I've ever seen a fortune 100 CEO actually buy a meaningful amount of shares in his/her company, it's outright pathetic. At the end of their term, I don't think any of them should be given some big send off.

The problem is that the majority of institutional shareholders (mutual funds) like Fidelity are rollover investors. They are frankly, pathetic. Rather than stick around with their tremendous risk capital at stake to effect change in stocks that underperform, they bail out and move on to the next company. And more importantly, when it comes to proxy voting, I doubt the Fidelities of the world even consider what is being held on panel to vote on and just vote yes across the board.

First Marblehead: Little Risk Priced In

Bankstocks.com is not really an "analyst" website, it's Tom Brown's blog basically. I am not up to speed on FMD but given Brown's track record with his hedge fund Second Curve Capital I wouldn't want to be on the other side of that trade. Those guys only invest in the fin svcs sector so I'd assume they have a firm grasp on the valuation drivers of their holdings. Still, plenty of people agree with you since a good portion of FMD's float is usually sold short.

Does the Recent Spate of Buyouts Signal that Stocks are Underpriced?

The megap PE funds have given up on returns based investing for years and have generally focued on cash on cash returns, basically a double in 5 years. These funds have had billions to invest in their predecessor funds, too. They have been doing billion dollar deals for a while, whether it's Carlyle, Blackstone, TH Lee, KKR, Permira, these firms all had multibillion dollar funds before this was front page news. Now that they are closing or have raised double digit billions people are turning to see what's going on but the same stuff happened in 1998 with headline capital raised only to see firms like Hicks Muse and Forstmann Little crash and burn a few years down the road due to bad investments.

Even with stocks fairly valued, with high yield and leveraged loan markets pricing risk so low in recent years, PE firms can still pay a fair price and make killer returns. The point is really seeing if the returns are that great on a risk adjusted basis. Leon Cooperman of Omega did his own study back in the 80s which showed if you levered the S&P500 to the same capital structure of typical LBOs, it would beat average PE fund returns. I also believe Prof Kaplan at U Chicago has done some research questioning how strong PE returns really are.

PE funds just take the "market" aspect out of the companies they buy, add some leverage and wait for the returns to be generated. I think the biggest reason it's so easy for PE funds to take these cos private is because investors are so myopic and will take a 20% premium rather than allow management/company to continue doing what they are doing and ultimately wait for the market to assess a higher valuation.