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The Violent Capitalist graduated with a BS in Finance and International Business and a minor in Politics from New York University in 2004. He is also a CFA Charterholder (2009) who has held many roles throughout the industry. He has been a credit research analyst at an independent credit... More
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  • Relative Value Arbitrage Across the Pacific
    Very few people are aware that the largest shareholder in WYNN is a Japanese company by the name of Universal Entertainment (previously known as Azure). These folks have been on my radar for a while as the relative value arbitrage here has been extremely volatile over the past 1-2 years. But since the spread is hard to follow at times, I came up with the chart below (It's not 100% accurate or absolutely perfect).

    Universal, in its most recent earnings release, has stated that it owns about 24.55 million shares of WYNN, which equates to just over 20%. Many other reports would claim that they actually own 19.9%. The comparisions are obviously difficult to make here on historic owneship levels, especially with WYNN being a regular diluter of capital. BUT the story is one the same. On the chart below, I simply assumed (perhaps incorrectly) that they owned a 19.9% stake since 2005. Regardless the data is compelling for a relative value arbitrage investment.

    Some background on WYNN and Universal...

    WYNN is a developer/operator of high end casinos, managing to do so with less levels of debt than some of its peers. WYNN's owner has been in the news for 1) destroying a Picasso 2) an expensive divorce 3) lavish lifestyle and 4) lavish corporate expenditures. This company's motto is the modern day equivalent of supply-side Reaganomics. Spend and others will spend more...?

    That's not to say its a bad company, or that profits won't return. I would just argue that it is a higher beta stock than what the industry has been used to in the past. Universal Entertainment on the other hand is a much more fiscally conservative corporation. Whereas WYNN trades at multiples of 20+, Universal's projected multiples are under 10. Before the investment in WYNN, Universal's main order of business was Pachinko machines. They are 'gambling-like games' that can be played via various outlets in Japan. This business has been slow and somewhat declining but in stable environments provides some cash flow. I'll just consider its worth nothing for simplicity. What is slightly more important, is that the company is holding a net cash position of about 4billion Yen.

    The relationship between Universal and WYNN, allows Universal to gain some inroads to some key relationships in building their own business outside of Japan and outside of their investment in WYNN. It has been pretty much a failure to date, but with the growth of Asia and the popularity of Pachinko in the region, there is some potential for this business. At some point however, it will probably make sense for Universal CEO Okada to divest the Pachinko business and merge his shares back into WYNN (he is also Vice Chairman of WYNN). I figure the Pachinko business is at best worth 20-30% of the WYNN investment. And if it reverses course later in the year returning to a negative cash flow producing entity, it just makes no sense to hold onto it! The result of a divestiture, will allow current investors in Universal to realize the full book value, of course the main deterrent is that Okada will likely lose his stature slightly as he may lose the title of largest shareholder of WYNN. He owns about 35% of Universal, there is another two Okada's that own another 36%.

    The tax story in Japan is also weird. They have a ~1% tax for some types of capital gains and than upwards of 20% taxes for other types of capital gains. I just assume they'll be taxed at 20% if they ever sold their WYNN shares, so I discounted WYNN's market capitalization by that amount.

    The chart:

    ps. 24.55 million shares per 80 million shares of Universal = .307 ratio
    (short .307 shares of WYNN for every Universal share long)

    pss. currency effects are nominal at the end of the day since the underlying asset is in $ in both instances!

    psss. I cannot do this trade because I can't trade companies listed on the JASDAQ


    Univ Ent Price shares Market Value Yen/$ $ Market Value
    WYNN Close shares out Market Cap 19.9% stake 20% tax Premium
    Apr-2010 1,469.00 80,000,000 117,520,000,000 93.08 1,262,569,832  
    86.00 120,189,996 10,336,339,656 2,056,931,592 1,645,545,273 30.33%
    Mar-2010 1,360.00 80,000,000 108,800,000,000 93.42 1,164,632,841  
    75.83 120,189,997 9,114,007,473 1,813,687,487 1,450,949,990 24.58%
    Feb-2010 1,154.00 80,000,000 92,320,000,000 89.11 1,036,022,893  
    63.57 120,189,998 7,640,478,173 1,520,455,156 1,216,364,125 17.41%
    Jan-2010 1,123.00 80,000,000 89,840,000,000 90.33 994,575,446  
    61.88 120,189,999 7,437,357,138 1,480,034,070 1,184,027,256 19.05%
    Dec-2009 1,152.00 80,000,000 92,160,000,000 92.43 997,078,870  
    58.23 120,190,000 6,998,663,700 1,392,734,076 1,114,187,261 11.75%
    Nov-2009 1,196.00 80,000,000 95,680,000,000 86.38 1,107,663,811  
    64.54 120,190,001 7,757,062,665 1,543,655,470 1,234,924,376 11.49%
    Oct-2009 1,210.00 80,000,000 96,800,000,000 90.99 1,063,853,171  
    54.22 120,190,002 6,516,701,908 1,296,823,680 1,037,458,944 -2.48%
    Sep-2009 1,469.00 80,000,000 117,520,000,000 89.51 1,312,925,930  
    70.89 122,610,000 8,691,822,900 1,729,672,757 1,383,738,206 5.39%
    Aug-2009 1,074.00 80,000,000 85,920,000,000 93.26 921,295,303  
    54.13 122,610,001 6,636,879,354 1,320,738,991 1,056,591,193 14.69%
    Jul-2009 750.00 80,000,000 60,000,000,000 95.72 626,828,249  
    51.17 122,610,002 6,273,953,802 1,248,516,807 998,813,445 59.34%
    Jun-2009 738.00 80,000,000 59,040,000,000 95.87 615,833,942  
    35.30 122,386,000 4,320,225,800 859,724,934 687,779,947 11.68%
    May-2009 858.00 80,000,000 68,640,000,000 95.91 715,670,942  
    37.06 122,386,001 4,535,625,197 902,589,414 722,071,531 0.89%
    Apr-2009 816.00 80,000,000 65,280,000,000 98.18 664,901,202  
    39.23 122,386,002 4,801,202,858 955,439,369 764,351,495 14.96%
    Mar-2009 485.00 80,000,000 38,800,000,000 98.56 393,668,831  
    19.97 112,568,000 2,247,982,960 447,348,609 357,878,887 -9.09%
    Feb-2009 525.00 80,000,000 42,000,000,000 97.46 430,946,029  
    20.95 112,568,001 2,358,299,621 469,301,625 375,441,300 -12.88%
    Jan-2009 774.00 80,000,000 61,920,000,000 89.72 690,147,124  
    30.08 112,568,002 3,386,045,500 673,823,055 539,058,444 -21.89%
    Dec-2008 898.00 80,000,000 71,840,000,000 90.79 791,276,572  
    42.26 109,440,000 4,624,934,400 920,361,946 736,289,556 -6.95%
    Nov-2008 903.00 80,000,000 72,240,000,000 95.46 756,756,757  
    39.82 109,440,001 4,357,900,840 867,222,267 693,777,814 -8.32%
    Oct-2008 873.00 80,000,000 69,840,000,000 97.47 716,528,163  
    60.40 109,440,002 6,610,176,121 1,315,425,048 1,052,340,038 46.87%
    Sep-2008 2,265.00 80,000,000 181,200,000,000 106 1,709,433,962  
    81.64 104,270,000 8,512,602,800 1,694,007,957 1,355,206,366 -20.72%
    Aug-2008 2,835.00 80,000,000 226,800,000,000 109.55 2,070,287,540  
    95.42 104,270,001 9,949,443,495 1,979,939,256 1,583,951,404 -23.49%
    Jul-2008 2,915.00 80,000,000 233,200,000,000 108.1 2,157,261,795  
    97.48 104,270,002 10,164,239,795 2,022,683,719 1,618,146,975 -24.99%
    Jun-2008 3,150.00 80,000,000 252,000,000,000 106.17 2,373,551,851  
    81.35 112,365,000 9,140,892,750 1,819,037,657 1,455,230,126 -38.69%
    May-2008 3,450.00 80,000,000 276,000,000,000 105.46 2,617,106,012  
    100.03 112,365,001 11,239,871,050 2,236,734,339 1,789,387,471 -31.63%
    Apr-2008 3,820.00 80,000,000 305,600,000,000 104.53 2,923,562,614  
    105.34 112,365,002 11,836,529,311 2,355,469,333 1,884,375,466 -35.55%
    Mar-2008 3,080.00 80,000,000 246,400,000,000 99.85 2,467,701,552  
    100.64 113,648,000 11,437,534,720 2,276,069,409 1,820,855,527 -26.21%
    Feb-2008 3,370.00 80,000,000 269,600,000,000 104.19 2,587,580,382  
    100.70 113,648,001 11,444,353,701 2,277,426,386 1,821,941,109 -29.59%
    Jan-2008 3,430.00 80,000,000 274,400,000,000 106.74 2,570,732,621  
    114.98 113,648,002 13,067,247,270 2,600,382,207 2,080,305,765 -19.08%
    Dec-2007 4,240.00 80,000,000 339,200,000,000 111.71 3,036,433,623  
    112.13 112,690,000 12,635,929,700 2,514,550,010 2,011,640,008 -33.75%
    Nov-2007 4,100.00 80,000,000 328,000,000,000 111.02 2,954,422,627  
    126.94 112,690,001 14,304,868,727 2,846,668,877 2,277,335,101 -22.92%
    Oct-2007 4,950.00 80,000,000 396,000,000,000 115.27 3,435,412,510  
    161.43 112,690,002 18,191,547,023 3,620,117,858 2,896,094,286 -15.70%
    Sep-2007 5,120.00 80,000,000 409,600,000,000 115 3,561,739,130  
    157.56 110,881,000 17,470,410,360 3,476,611,662 2,781,289,329 -21.91%
    Aug-2007 4,300.00 80,000,000 344,000,000,000 115.83 2,969,869,637  
    123.73 110,881,001 13,719,306,254 2,730,141,944 2,184,113,556 -26.46%
    Jul-2007 3,790.00 80,000,000 303,200,000,000 119.13 2,545,118,778  
    96.56 110,881,002 10,706,669,553 2,130,627,241 1,704,501,793 -33.03%
    Jun-2007 3,830.00 80,000,000 306,400,000,000 123.39 2,483,183,402  
    89.65 112,111,000 10,050,751,150 2,000,099,479 1,600,079,583 -35.56%
    May-2007 4,000.00 80,000,000 320,000,000,000 121.76 2,628,120,894  
    96.50 112,111,001 10,818,711,597 2,152,923,608 1,722,338,886 -34.47%
    Apr-2007 4,270.00 80,000,000 341,600,000,000 119.44 2,860,013,396  
    102.21 112,111,002 11,458,865,514 2,280,314,237 1,824,251,390 -36.22%
    Mar-2007 4,110.00 80,000,000 328,800,000,000 117.56 2,796,869,684  
    94.86 112,348,000 10,657,331,280 2,120,808,925 1,696,647,140 -39.34%
    Feb-2007 3,430.00 80,000,000 274,400,000,000 118.33 2,318,938,562  
    98.02 112,348,001 11,012,351,058 2,191,457,861 1,753,166,288 -24.40%
    Jan-2007 3,930.00 80,000,000 314,400,000,000 121.02 2,597,917,700  
    111.74 112,348,002 12,553,765,743 2,498,199,383 1,998,559,506 -23.07%
    Dec-2006 3,420.00 80,000,000 273,600,000,000 119.02 2,298,773,315  
    93.85 111,630,000 10,476,475,500 2,084,818,625 1,667,854,900 -27.45%
    Nov-2006 2,995.00 80,000,000 239,600,000,000 115.55 2,073,561,229  
    87.85 111,630,001 9,806,695,588 1,951,532,422 1,561,225,938 -24.71%
    Oct-2006 2,430.00 80,000,000 194,400,000,000 116.82 1,664,098,613  
    73.54 111,630,002 8,209,270,347 1,633,644,799 1,306,915,839 -21.46%
    Sep-2006 2,200.00 80,000,000 176,000,000,000 118 1,491,525,424  
    68.01 111,702,000 7,596,853,020 1,511,773,751 1,209,419,001 -18.91%
    Aug-2006 2,540.00 80,000,000 203,200,000,000 117.35 1,731,572,220  
    77.41 111,702,001 8,646,851,897 1,720,723,528 1,376,578,822 -20.50%
    Jul-2006 2,140.00 80,000,000 171,200,000,000 114.44 1,495,980,426  
    64.01 111,702,002 7,150,045,148 1,422,858,984 1,138,287,188 -23.91%
    Jun-2006 2,490.00 80,000,000 199,200,000,000 114.51 1,739,586,062  
    73.30 99,830,000 7,317,539,000 1,456,190,261 1,164,952,209 -33.03%
    May-2006 2,540.00 80,000,000 203,200,000,000 112.26 1,810,083,734  
    71.20 99,830,001 7,107,896,071 1,414,471,318 1,131,577,055 -37.48%
    Apr-2006 2,785.00 80,000,000 222,800,000,000 113.79 1,957,992,794  
    76.11 99,830,002 7,598,061,452 1,512,014,229 1,209,611,383 -38.22%
    Mar-2006 2,700.00 80,000,000 216,000,000,000 117.48 1,838,610,827  
    76.85 98,736,000 7,587,861,600 1,509,984,458 1,207,987,567 -34.30%
    Feb-2006 2,300.00 80,000,000 184,000,000,000 115.82 1,588,672,077  
    66.45 98,736,001 6,561,007,266 1,305,640,446 1,044,512,357 -34.25%
    Jan-2006 2,385.00 80,000,000 190,800,000,000 116.88 1,632,443,532  
    64.58 98,736,002 6,376,371,009 1,268,897,831 1,015,118,265 -37.82%
    Dec-2005 2,425.00 80,000,000 194,000,000,000 117.88 1,645,741,432  
    54.85 98,310,000 5,392,303,500 1,073,068,397 858,454,717 -47.84%
    Nov-2005 2,390.00 80,000,000 191,200,000,000 119.66 1,597,860,605  
    55.83 98,310,001 5,488,647,356 1,092,240,824 873,792,659 -45.31%
    Oct-2005 2,100.00 80,000,000 168,000,000,000 116.36 1,443,795,119  
    46.63 98,310,002 4,584,195,393 912,254,883 729,803,907 -49.45%
    Sep-2005 1,835.00 80,000,000 146,800,000,000 113.29 1,295,789,567  
    45.15 98,472,000 4,446,010,800 884,756,149 707,804,919 -45.38%
    Aug-2005 2,080.00 80,000,000 166,400,000,000 110.84 1,501,263,082  
    47.72 98,472,001 4,699,083,888 935,117,694 748,094,155 -50.17%
    Jul-2005 2,335.00 80,000,000 186,800,000,000 112.25 1,664,142,539  
    56.30 98,472,002 5,543,973,713 1,103,250,769 882,600,615 -46.96%
    Jun-2005 2,345.00 80,000,000 187,600,000,000 110.91 1,691,461,545  
    47.27 98,203,000 4,642,055,810 923,769,106 739,015,285 -56.31%
    May-2005 2,360.00 80,000,000 188,800,000,000 107.97 1,748,633,880  
    46.85 98,203,001 4,600,810,597 915,561,309 732,449,047 -58.11%
    Apr-2005 2,340.00 80,000,000 187,200,000,000 104.64 1,788,990,826  
    52.94 98,203,002 5,198,866,926 1,034,574,518 827,659,615 -53.74%




    Disclosure: No positions in the above stocks
    Apr 08 4:08 PM | Link | Comment!
  • Can Palm Survive?
    Now that the company has been making a slight recovery... I believe its time to reiterate why this company does not deserve its current valuation.

    To begin the pointers from my last instablog:

    - they are a 1 product company 
    - are steps behind the competition in every respect
    - financially weak mid-cap company
    - can't compete on the R&D scale of large caps
    - only partnership is with Sprint
    - a competitor would rather poach the personnel than buy the company whole

    Well, all in all, they are now a 2 product company - Pre and Pixi. And have added one other carrier, Verizon. BUT everything else is the same. AND Pixi is a relative failure given the dramatic price cuts that product has seen (not even to mention the Pre's dramatic price cuts as well).

    So I belive everything pretty much holds the same. Remember there isn't much risk for a mobile carrier to add a Palm phone to their lineup, especially if terms are in their favor to do so (more choices, more opportunities to sign a customer). Admittedly, the launch of Pre did make me nervous... it was a semi-successful launch - one that generated some interest in the brand but fell short of actually making the company a sustainable enterprise.

    Why is it so tough for Palm to succeed? Simply because of the entrenched competition. Entrenched relationships with their carriers, consumers, and R&D departments leave little room for error for the handset sector's "little engine that could." Despite the positive reviews of the Pre, how many were willing to gamble that they wouldn't have to switch back to a Apple/Blackberry/Motorola/Nokia phone once they renewed their contract and/or sought a new phone??

    Not me.. Not a large percentage of us because the switching costs are high for mobile phone users, and in particular for smart phone users. So now comes around product #2, and they fall harder than the first time around. This is now a major problem. Even analysts now concede the the best hope for Palm is some sort of M&A transaction, hoping that someone would bite on their software... really??

    Well what about the software side? Palm competes with Apple, Blackberry, Google, Symbian, and Microsoft. Of the 5, 4 are also marketing their own exclusive hardware (Apple, Blackberry, Nokia-Symbian, and Google). Microsoft is purely licensing their mobile OS systems. Google and Symbian also license out their software, remember Symbian is owned by Nokia. A breakdown of the market share is here.

    Now some folks may say that a 3% market share ain't too bad against Google. Do you reallyyyyy want to bet against Google?? Just how many firms can survive in this space?? For PC's we have 3 competitive operating systems: Microsoft, Apple, and Linux. And Linux was built on open source - FREE open source software. That is what Google's Android platform is akin to!

    Couple all of this with the fact that Palm also:

    - faces losses
    - has negative book value
    - is issuing stock (please will someone  decipher the "series C derivatives"???)

    By all means its your money to gamble with...



    Disclosure: short PALM
    Jan 22 11:22 AM | Link | Comment!
  • PALM or NAPALM?

    The trajectory on this stock is pretty stupid, they are a 1 product company - a 1 product company that is steps behind the competition in every respect, to think that a financially weak mid-cap company can compete on the R&D scale of large caps without the weak balance sheet is just plain stupid.

    If your long PALM I hope your praying each day that their partnership with Sprint.... pause as I chuckle...will actually amount to anything in the long-term. Short-term both companies are positioned poorly, but I'd rather invest in Sprint as a turnaround/buyout story than PALM.

    Sprint...if the PRE was so awesome it will be offered by at least one other carrier by now.

    Fact is that no one major, profitable, financially-well-to-do carrier really gives two cents about PALM, simply because all the other carriers have already developed working relationships with the larger players that will be sticking around for much longer - Apple, Blackberry, Samsung, Google, HTC, and whoever else is out there. It's just a matter of time they'll realize that PRE was a one-hit, hard-to-follow up product for a financially disastrously positioned company.

    Not to mention their $190 mil in goodwill (probably worth what is in my toilet), actually makes their book value at -$600mil. Iphone margins are reportedly at about 20+%, good luck to you palm on beating that #, cuz without it your dead water (their current margins are 20%+). Who wants to bet that the other carriers will only give them a sub 25% (I'm being coy) cut to protect their working relationships with the larger handset players?

    Talk of a buyout offer? Seriously? With all this info what kind of idiot buyer will take on this company? For all its losses and negative book value, a potential acquirer is better off just making an initial investment of their own by stealing the 2-3 employees that probably made the PRE work ($20 bucks Motorola is already on it).

    I wonder if it would be considered insider trading to short $200 million of PALM and offer Rubenstein $25 million 1 yr contract to sit at home...$$$

    Disclosure: I am currently short PALM stock, possibly selling more call options (another short position)

    Jul 13 4:40 PM | Link | Comment!
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