Great Work If You Can Find It

I just came across this article on The New Yorker website about the largest leveraged buyout in history – The purchase of TXU Corp in 2007. The price? 44 billion (with a ‘b’) dollars.

I remember when this deal happened, and I remember reading a number of articles at the time about the buyout. The narrative I remember was quite a bit different than the one in this New Yorker article. Here’s the quote in The New Yorker article that really jumped out at me:

Goldman Sachs, KKR & Co., TPG Capital, Lehman Brothers, and others paid more than eight billion dollars in cash, and incurred another thirty-six billion dollars in debt, to purchase TXU Corp., an electric-utility company that provided power to a quarter of Texas residents. They renamed the company Energy Future Holdings. Much like the home buyers who believed, in 2007, that house prices would continue to rise indefinitely, the private-equity firms assumed that the price of electricity, Energy Future’s main product, would keep increasing.

Here’s the truth. It didn’t much matter if the price of electricity kept increasing. Up, down, sideways, the price of electricity just wasn’t very important to those who invested in this deal. Sure, it would have been better if the price of electricity did continue to rise, but even if the price of electricity fell to zero, yes zero, the companies that put this deal together (Goldman Saches, KKR &Co, Lehman, etc) could still make money, and lots of it.

So how does one make money off of an investment in company that goes bankrupt?

The answer is “special dividends”.

What happens in leveraged buyouts is the companies that put together the deal want to turn a profit as soon as possible (which is understandable). They have a couple different paths to do this. But two of them are:

  1. Sell off parts of the business, and then take the cash and issue themselves a “special dividend”. Special dividends are just like dividends with stocks, they’re cash payments.
  2. Issue a bunch of debt on the company’s balance sheet (the company that was bought), and then take that cash and pay themselves a large special dividend. Nice work if you can get it.

So I’m sure Goldman Sachs, KKR, Lehman, etc, would have liked it if electricity prices held steady or increased,  but this was not imperative to the deal being a success for them. The $8 billion in cash they put together in the deal could be recouped with asset sales and additional debt put on TXU Corp’s books, and then issued out to themselves as special dividends.

The business model was pretty simple back in ’06-07, just find someone who would lend you a bunch of money (super easy to do back then), and then buy a company. Start selling that company’s assets, and issue as much debt as you can on their books. Take these proceeds and pay yourself back in special dividends. This is a low-risk, high-reward strategy, and you’d be a fool to pass it up. But it’s not very good for the company that was bought.

 ***

On a side-note, Warren Buffett actually bought debt from this deal. He ended up losing $837 million dollars on this investment. I can’t believe he would have thought this was a good investment. TXU Corp was loaded with debt from this deal, $36 billion dollars to be precise (plus whatever else was added after the buyout completed). So Warren, I’m scratching my head here…

 

 

Follow-Up #1 To “What I’m Watching This Week: A Nasdaq Breakdown?”

(To read the previous post in this series, click here.)

Nasdaq Head-And-Shoulder Pattern

Two weeks ago I posted about the funky hankerings of the Nasdaq. The Nasdaq is forming a text-book head-and-shoulder pattern (read about head-and-shoulder patterns here), and it should be watched in case of  a break below 3,500.

Why 3,500 you ask?

Well the Nasdaq has been on a 5-year plus upward trend since the 2009 lows. A break of this trend, which would occur with a break below 3,500, would be a strong indicator of a bear market coming (20% or greater drop in the markets). The Nasdaq appears to be leading this (possible) trend, as the S&P 500 and Dow look just fine, which is interesting.

What’s Changed in the Past Week Two Weeks?

Pretty much nothing, actually. Two weeks ago the Nasdaq was at 4,121 (4/21/2014), and as of the close on Friday 5/2/2014, the Nasdaq was at 4,123. Hmmm. No clear direction is taking shape here on the Nasdaq. It’s not breaking down further, but on the other hand it’s not taking off for new highs either. So we’re in a wait-and-see situation here (which isn’t very fun or exciting for market observers!).

When Does The Nasdaq Stop Being An Issue?

If the Nasdaq breaks above the head of the head-and-shoulder pattern (see red line below, which is at 4,358), then the pattern is broken and it’s time to move forward. I’m actually leaning toward the head-and-shoulder pattern not playing out and us seeing new all-time highs before we see 3,500 on the Nasdaq. But that’s just a “feeling”, what I sense in my gut, so I’m watching the charts and seeing what they’re telling me in order to keep myself objective.

Nasdaq05022014

Nasdaq chart showing the “head” of the head-and-shoulder pattern (in red). Nasdaq is as of 5/2/2014.

Be A Badass and Ignore Them

Ignore People You’ve Never Heard Of

It’s easy to get sucked into the hyperbole of the stock market. It’s exciting. But it’s foolish.

“What hyperbole?”, you ask. How about this CNBC video from January 2013 where Harry Dent calls for the stock market to crash in Q3 2013. Suffice it to say, there was no crash in Q3 2013. And here we are in Q2 of 2014 and still no crash. But it sure was an exciting market call!

So who is Harry Dent? I have no idea, never heard of him before. And neither have you, I’m pretty sure. So please, ignore people you’ve never heard of.

But if you’re inclined to believe a talking head you see on TV, or someone you read about in an article, do some research on them. Something as simple as a Google search will suffice. There are plenty of  “crash callers” (as I call them) out there making these calls all the time, and they’re usually wrong. But they just keep making the calls, because eventually, like a broken clock, they’ll be right (repeated bad market calls were easy to get away with pre-1990′s, but Google has leveled the playing field so you now have a better idea who is the real deal, and who isn’t).

But They’re Not All Wrong

Not everyone calling for a market crash is wrong, so don’t take this post the wrong way. So if someone is on TV, or wrote an article, and you can’t get their market call out of your head, then look for a couple of things:

  1. Do some Google searches on them. What’s their history? Do they make dire market predictions all the time? Or, are they normally bullish on the stock market, and they only get bearish (e.g. scared or fearful) rarely.
  2. If their argument is based on politics and/or emotion, ignore them. If their call is based on statistics and market history, I’m all ears (and bonus points if they discuss, with facts and numbers, how and why they could be wrong).

To sum things up, do your own research. Just because someone is on TV or has an article on a big-name news site doesn’t mean they’re right.

What I’m Watching This Week: A Nasdaq Breakdown?

The Nasdaq’s Acting Funky

The Nasdaq’s acting funky and I’m paying attention. We have a head-and-shoulder formation playing out. Without going too much into what a head-and-shoulder formation is, basically the Nasdaq’s looking like it could roll over and go down to about 3,600 after a brief run up to about 4,200 (the Nasdaq’s at 4,121 as of 4/21/2014).

Keep an eye on this Head and Shoulders formation in the Nasdaq.

Keep an eye on this Head and Shoulders formation in the Nasdaq.

But the head-and-shoulders pattern isn’t what has me worried. What has me worried is if we break much below 3,600, we will break the Nasdaq’s upward trend from the 2009 lows:

Nasdaq upward trend in place since 2009.

Nasdaq upward trend in place since 2009.

A break below the upward trend (see the red line above) will mean that the upward trend that’s been in place since the 2009 lows will have been broken.

The trend is your friend folks, so don’t take the breaking of a 5 year trend lightly.

So What Does This All Mean?

I’m going to be keeping my eye on the Nasdaq. It’s earnings season, so the market’s nervous before all the company’s announce earnings. If earnings are bad, this could propel the Nasdaq down, and possibly even break the 5 year upward trend. If earnings are good, this dip in the Nasdaq is just a little bit of consolidation as market players digest earnings, and then the market will continue going up (or at least not crashing).

Market indicators and market news are on a continuum, there’s no one indicator that tells you a crash is coming. So I’m not going to panic if the Nasdaq does break its 5-year upward trend. If the trend break happens, I’ll keep an eye on the Dow and, particularly, the S&P 500. If those both show signs of breaking down as well, then it’s time to change my investing thesis.

 

Don’t Take Investment Advice From a Marketer

“The Market Crash Is Coming”

Want to be considered a market guru? Here’s the recipe:

  1. Every time the market starts to wobble, every time it looks weak, create a new blog and write article after article about the impending stock market crash.
  2. Go around to all the financial sites (yahoo, cnbc, zerohedge, business insider, bloomberg) and leave lots of comments about the impending market crash, and reference your blog.
  3. When the market crash doesn’t come, delete your blog, create a new blog, and start back at step #1. Wash-rinse-repeat. Eventually you’ll be right, and you can claim market guru status! Start an investment newsletter and convert your guru status into big bucks.

And so this is why I don’t write articles with hyperbolic titles like, “The Market Crash Is Coming”. It’s a gimmick, a marketing trick. It’s something done by people who are, at their core, marketers. And they’ve found their marketing recipe works well with the stock market.

I don’t know about you, but I don’t want to take investment advice from a marketer.

Review of Jeremy Renner’s Movie “Ingenious”

Movie Review

So if you’re thinking,  “What the hell is a movie review doing on a site about entrepeneurship and startups?”, just hold your horses. Gives this a minute or two to play out…

I was flipping through Netflix, trying to find a halfway decent movie to wind down to, and after starting 4 movies and stopping them after less than 5 minutes because they were so bad (that’s Netflix streaming for ya), I came across this movie.  It held my attention past the crucial first 5 minutes, then another 5 minutes, and another, until I said to myself, “Hey, this movie has Jeremy Renner in it, and it’s pretty good so far, how come I’ve never heard of this before?”

The Plot in 3 Sentences

This movie follows two guys as they try to turn ideas into million dollar businesses. One guy is the inventor of this entrepreneurial duo, the guy who comes up with crazy product ideas  (a handbag in the shape of a hand, a mini-tv that clips onto the front of your baseball hat so you can jog and watch tv, theme watches – like a “Lotto Watch” that generates 6 random numbers for playing the lotto). The other guy is the salesman of the group, he’s got the gift of gab and a total lack of self-awareness (perfect!).

At The 30-Minute Mark I Almost Turned It Off

I don’t like movies about losers, and after 30 minutes the two main characters were sure starting to fit the bill. They were entrepreneurs who came up with crazy inventions. Nothing wrong with crazy ideas, nothing at all. But here’s the problem – the inventor “Matt”, played by Dallas Roberts, kept making loser decisions. He’d have inventions that showed promise with solid sales (i.e. his “dreaming dog” themed watch). But he needed money to expand his product line – potential customers were all telling him they wanted a variety of dog breeds, not just the one breed they currently offered.

So Matt, the inventor, gets several thousand dollars from his wife to expand the product line from one dog breed to 4 breeds. 20 breeds would be better, but they simply can’t come up with that kind of money.

What does Matt do with that seed money? Does he do the prudent thing and expand his product line to 4 breeds, then take the profits from those watches to expand his produce line one-by-one? Of course not –  Matt’s business partner (the salesman, played by Jeremy Renner) convinces Matt to go to the casino and play blackjack, and turn the few thousand dollars his wife gave him into the $36,000 they’d need to expand the product line to 20 dog breeds.

And of course this doesn’t work out. All the money is lost. No new dog-watch product lines. Just broken dreams, and a husband who is terrified to go home to his wife. This is apparently a pattern in Matt’s life. He only knows how to go for the home-run or strike-out. And he’s no home-run hitter.

I Thought the Movie Was About 2 Guys Who Would Never Make It

These two guys, the inventor and the salesman, made bone-headed decision after bone-headed decision. They didn’t take good deals offered to them. They gambled away seed capital. They did every stupid, foolish, and ridiculous thing you could imagine.

But they kept plugging along. Sure, they shot themselves in the foot every chance they got. But they wrapped those wounds in the proverbial duct tape and kept doing what they did as if nothing happened, oblivious to their horrible decision-making.

They were always just a few degrees off from amazing success. I was convinced there was no way two guys with gambling problems and such horrible decision-making skills could ever start a successful business. And this is crux of this article

Entrepreneurs Are Reckless. No Avoiding That. Here’s How They Turn The Corner

What’s really interesting is what turned their success from mediocrity to lightning in a bottle.

The movie misses the point here. The movie implies the great success came because of their final idea, a talking beer bottle opener (see it here).

That’s just silly. The product was almost inconsequential, this could have been any one of their earlier ideas. Sure, they had a very good idea with good execution. But the talking beer bottle opener was far from genius.

The reason for their great success was they finally had some discipline to go along with their (reckless) entrepreneurism. See the inventor’s wife started showing a prototype of the talking bottle opener around to friends and co-workers. Everyone loved it. It also just happened they were separated at the time (you can only gamble away your spouse’s hard-earned savings so many times).

So instead of the wife just giving her husband the money to manufacture these bottle openers, she approached this invention as a business partnership. She gives her husband the money needed to manufacture the bottle openers, and she gets a percentage of the profits (it was implied they were on the verge of divorce at this point, so this makes sense).

And lo and behold, this was the discipline the inventor and the salesman needed to get to that next level. They were presented an offer, and instead of going for the home-run like they always had, they went for the single. And it turned into a grand-slam: They sold millions, and made tens of millions.

The Market Is Crashing, The Sky Is Falling, aahhhhhhh……

Big Down Week For the Market

The market is down big-time for the week (week-ending 4/11/2014).

The Dow is down 372 points for the week, or 2.2%.

The S&P 500 is down 46 points for the week, or 2.5%.

But this drop is even more severe if you look at the drop in the market over just the past two days. The Dow opened at 16,420 on Thursday morning (4/10/2014), and ended today (Friday 4/11/2014) at 16,027, for a drop of 393 points, or 2.4%, in just two days!

The pattern is the same for the S&P 500 which opened Thursday (4/10/2014) at 1,869 and closed today (Friday 4/11/2014) at 1,816, for a drop of 53 points, or 2.8%, in two days.

Ouch! So it’s time to panic, right? Time to sell all stocks and start hoarding drinking water and canned goods, eh?

A Little Perspective on Crashes

Nah…it’s time to just go out and enjoy spring. Sure, this could be the beginning of a huge drop in the market, 2008 all over again. But probably not.  According to The Reformed Broker, since World War II there have only been 11 times where stocks dropped by more than 35%, and 27 corrections where stocks dropped between 10% – 20%.

Stock market, schmock market. Go out and enjoy Spring.

Stock market, schmock market. Go out and enjoy Spring.

I’ll keep an eye on the market, as I always do, and if things start looking iffy, if the technicals start doing funky things breaking through key support levels, then I’ll change my tune. But until then I think this is just normal market behavior, where the market shakes some people out, keeps the fear alive, setting up the market for future gains.

3 Reasons The Stock Market Will Crash This Year (2014)

Bubbles and Crashes

I recently wrote an article about Bubbles and Stock Market Crashes, and how the next Stock Market Crash will not be caused by a Stock Market Bubble (“You Don’t Need A Stock Market Bubble To Have a Stock Market Crash“). In that article I made an off-hand remark that I didn’t think the stock market would crash this year.

IMG_0201

If the stock market doesn’t spook you, maybe this tree will.

The point of that article wasn’t to predict when the next stock market crash would be, but it was only natural to mention my current views on the next crash and when it might be. My view stands, I don’t think the stock market crash is going to happen this year (a crash to me is the S&P 500 declining by more than 20%). But a good market observer is fluid with his or her views, and as things change in the market (which they do pretty much daily), one must be ready to change their thesis.

That being said, what are the best arguments against me, e.g. that there’s a good chance the market will crash this year? Well here they are:

  1. The January Indicator (also called the  “January Barometer”) - This basically says that when the market is up for the month of January, there’s an 80% chance the market will be up for the year. And when the market is down for the month of January, there’s only a 42% chance the market will be up for the year. Well guess what the market did this January (2014)? It was down for January, so look out! (Read more here about the January Indicator)
  2. Curse of the New Fed Chair - When a new Fed Chairman is sworn in, markets tend to tank. This happened to Paul Volcker in 1979, Alan Greenspan in 1987, and most recently to Ben Bernanke in 2007-08. Well guess what we just got? That’s right, there’s a new Federal Reserve Chairman for 2014 – Janet Yellen. This “curse” hasn’t always happened right away, Ben Bernanke was sworn in as Federal Reserve Chairman in February 2006, and the stock market peaked in October 2007. But still, the trend is your friend folks, and don’t overlook this trend!
  3. Average Bull Market is about 4 years (or maybe it’s 3.2 years, or 5 years 7 months) – Apparently there isn’t exact agreement on what the length of the average bull market is (I’m hoping this is due to differences in definition of what constitutes the ending of a bull market). But the point is, even using the highest number I’ve seen for average bull market length (5 years 7 months), the current bull market is getting long in the tooth. The current bull market is right around 5 years and a few weeks, and everyone knows all good things must come to an end. (A counterargument to this point is the bull market that started in 1990 and went just under 10 years. Also, with how bad the last decade (2000-2010) was for stocks there’s enough pent-up resentment toward stocks to keep incremental buyers trickling into this market, and thus the market climbing the proverbial “wall of worry”.)

These 3 arguments are so convincing you’re probably wondering why I think the market won’t crash this year. The answer is this – we’re getting close, but it just doesn’t feel like the end to me…not quite. I still don’t see enough craziness in the market. Sure, crazy things are happening, like Facebook buying Whatsapp for $345 million per employee. But there’s just not enough of this craziness happening for me to get worried. And more importantly, the public at large isn’t getting in on the craziness, only the super-connected, super-rich are part of this craze of buying unprofitable startups for exorbitant sums. The craziness needs to go mainstream for the bubble to pop.

So if you see financial craziness that is mainstream, please let me know (ie “.com” stocks like in the 1990′s, or housing in early 2000′s). But until then, the trend is your friend, and we don’t fight our friends.

 

Assorted Links

  • If customers are ignoring your company, turn things around by… making them hate you?? You read that right, make your customers hate you to improve your company’s success. Mike Moyer writes a very interesting piece about how he purposely pissed off a customer so he could then turn around and provide amazing customer support. That customer turned into his best, and most loyal customer. A great quote from the article, “If your company isn’t growing it may be because your product works well enough that there aren’t issues that require customer service, but the product sucks enough that nobody really cares about it“. I’ll leave you with one more thought on this article – Are haters an invaluable tool, that without, your company will flounder and fail? Just try to think of a company these days that doesn’t have big-time haters (Apple, Facebook, Google, Twittter, Microsoft, etc, etc, etc).
  • Should you pivot (or shut down) your startup? It’s tough to admit your ‘baby’, your ‘amazing idea’, is not doing as well as you thought it would when it was just a thought in your head. But that’s why there’s the saying “Careful what you wish for”. It can be very tough to create something (create a new company, a ‘startup’), only to see it be a dud and go nowhere. But it happens, so turn lemons into lemonade.

My New Quirky.com Submission – App Enabled Blood Glucose Meter

A Little Background on Quirky.com

Back in early February I wrote a post on Quirky.com, where I submitted my invention idea for The Steak Plate. You can read more here. In that post I described Quirky.com like this:

Quirky.com is a site where you submit an idea for a product (say, a bicycle turbine light), and Quirky.com will then engineer, design and manufacture the product, and get it onto the shelves of major retailers like Home Depot. All you need is an idea. How fun is that!

In that article I wrote about how wonderfully smooth and easy the process was for submitting an invention idea. And lo and behold, my Steak Plate idea is currently in Expert Review (being reviewed by Quirky.com employees), after making it past the first stage of getting enough votes from Quirky.com users.

App Enabled Blood Glucose Meter and The New Submission Process

I had another invention idea, and after my great experience with Quirky.com and The Steak Plate, I decided to submit the idea to them. The idea is an App Enabled Blood Glucose Meter, check it out by clicking on the link.

App Enabled Blood Glucose Meter.

App Enabled Blood Glucose Meter.

What I learned while submitting my new idea is that Quirky has made some changes. When I submitted my Steak Plate idea, I had 30 days to get 200 votes. Their new process is you have 7 days to get…. an undefined number of “Thumbs Up’s”. The “Thumbs Up’s” are just a different name for the same thing (votes), but now you have no idea how many votes you need to make it to the next level. Very strange, I can’t make heads or tails of this.

To make things even more confusing, you can’t even tell how many “Thumbs Up’s” you’ve received. That’s right, you have no gauge for how successful your idea is.

I’m assuming these changes are because Quirky.com is getting bigger and bigger, there are more and more submissions, and they need to cut down on the number of ideas making to to Expert Review by making the process much harder. That being said, the lack of a clear goal, and no gauge of how successful your idea is (no tally of “Thumbs Up’s”) still seems strange.

I still think Quirky.com is the absolute best option to turn an idea into a real-world product, a product available on the shelves of Home Depot and Target. I expect Quirky to continue to make changes to their submission process as their site becomes more and more popular, making the process harder and harder. So go check it out, take 15 minutes to submit an idea, and you’ll be one-step close to being an inventor!