The Excesses Of Capitalism And The Concept Of Sheepdogs
This is weekend macro and thought piece. I share my view on how a select few profiteers are poising the well. I provide three examples of bad actors that hurt investors directly and indirectly . In the 2014 film American Sniper written by Jason Hall and directed by Clint Eastwood, at an early age, Chris Kyle’s father teachers his then two younger sons the about the three type of people in the world (wolves, sheep, and sheep dogs). Compliments of IMdb, here is a snapshot of the quote directly from the movie. Although this quote is used in the concept of war, I am going to apply it to investing. I have written many articles here on Seeking Alpha where my investment thesis was to recommend that retail investors “sell” the underlying stock. In the disclosure section, I write that I am not short. This is the case as a family member works for a Tier 1 U.S. investment bank, so I am restricted from shorting any security, period. There are no exceptions. Therefore, many people have doubted or questioned my motives and accused me of secretly shorting the stocks. Otherwise, what would my true motivation for writing these articles be. Trust me, I am not short and I am not going to violate the investment bank’s policy. Some people might then question why would I write a negative piece about a company if I can’t short it. Why would l suggest that someone else take the medicine, but I myself wouldn’t take the medicine. They say isn’t this hypocritical. Here is where the concept of the sheepdog comes to play. Although I only I have five direct years of professional experience, working as a Senior Investment Associate in Liberty Mutual’s investment grade group, I acquired a lot of experience and observed a lot that I want to share. This along with the fact that I have passionately been following markets since high school (I graduated in 1999 – so I am now 35) is why I write these articles. Unfortunately and perhaps sadly, Wall Street and the investing community is made of up wolves, sheep, and the rare sheepdogs. No question, at least in my mind, the concept of capitalism is the greatest system for lifting people up and creating economic opportunities. During my career, I have worked or informally come into contact with many different interesting and diverse individuals who came to the U.S. for educational and economic opportunities. I don’t want to sound like a politician and start spouting off platitudes, but I do truly people that U.S. is the great place in world for anyone with a dream of working hard, getting an education, and trying to make economically. What makes our country great is how we are a melting pot of immigrants and we welcome people with varied backgrounds, religions, ethnicities, political views, etc. The economic opportunities, the rule of law, and the upside optionality for entrepreneurs and the educated are second to none here in United States. However, no system is perfect. Given the Federal Reserves policies of QE and the fact that the fed funds rates has been zero since December 2008, has created many excesses, which have led to the misallocation of capital, and led many people to reach for elusive yield. This yield reaching has taken the form chasing equity dividends, REITs, MLPs, bonds, leveraged products, or simply capital appreciation. Given the reality that there is this massive pool of idled savings and capital that could no longer generate low risk adjusted returns, investors were forced to wade into the riskier pool, a pool with undercurrents and sharks, and risk getting in over their heads. When I think of the economic income inequality pioneers, people highlighting and framing the issue, I think of French economist Thomas Piketty and U Cal Berkeley’s Emmanuel Saez. As Seeking Alpha is not a political website, I am going to move away from this line of writing, as I don’t want the court room to object and get called out by the judge. However, I simply wanted to raise the topic of income inequality, as it is very timely, especially given the phenomenon of Bernie Sanders’ improbable meteoric rise into the political lime light. That is all I will say about the topic and I will get back on point now. So, now I will get back to the concept of wolves, sheep, and sheepdogs. Wall Street and the financial industry in general is a no holds barred place full of wolves. There is plenty of regulation designed to help protect individual investors from bad behavior, but no amount of regulation or policy can prevent or stop the wolves in the financial industry from trying to slaughter the retail sheep. I don’t want to be overly dramatic or patronizing, as after all, I only rose to a Senior Investment Associate level at a second tier insurance company. After all, how can have these strong opinions when I have worked on Wall Street and never had a storied career or a Managing Director’s title? I am not a true insider and I don’t know what I am talking about, right? I can envision skeptical people thinking that I am embellishing my experience and over inflating my strong opinions. Look, everyone is entitled to their views and opinions, but trust me I am a rare sheep dog, at least at heart. Yes, I like buying securities that appreciate in value. However, I only write what I truly believe and my money is where my mouth is as I eat my own cooking. Even during my time at Liberty Mutual I was very vocal about the bad behavior and the first to bring to my boss’s attention the misdeeds within the financial industry. Of course, I was the first person on the bond desk to read Michael Lewis’ The Big Short. I still can’t believe that Goldman Sachs (NYSE: GS ) was selling securities to clients and then shorting them. At least Morgan Stanley (NYSE: MS ) believed in what they were putting their clients into as they took their medicine in the form of big losses. You get the idea. Although some people may have shared my views, although with less fervor, when you work in the industry no one want to hear about this stuff. I wasn’t supposed to highlight and discuss this stuff. This was like Don Draper’s famous “We are Quitting Tobacco Letter” to the New York Times. Everyone agreed with what he wrote, but he greatly diminished his future prospects to other firms the moment he the letter was published because he took a principled stand. Ok, enough sizzle, here is the beef. The financial industry is full of wolves and the many member of our country practice the art of avarice. However, my target of my criticism isn’t Wall Street investment banks per se, it is actually private equity, some not all corporate insiders, and some hedge funds. I am actually much less critical of Wall Street Investment banks as their clients are sophisticated institutional investors not the retail public. Wall Street is simply a consultant or a conduit for market participants to conduct their business. They actually play an important role of helping global investor more efficient allocate capital. They underwrite important deals for investors to raise capital for economic growth, they are deal makers for mergers and acquisition, they take companies public, they write research, and they facility trading and provide liquidity so market participants can transact more easily. The real wolves and they are allowed to roam free because of the unfortunate spill over effects of the Fed’s excessively accommodative policies are a select group of bad actors in the private equity and some hedge funds realms. Let me be clear, I am not painting a broad brush and saying all private equity and hedge funds are bad actors. Some are brilliant long term investors that generate consistent risk adjusted outsized returns on behalf of noble pension funds and endowments that help John Q. Public fund their retirement. However, avarice and outright profiteering of some private equity funds is abhorrent. The short term quarter to quarter managing your stock prices so insiders can exercise their stock options and ride the wave of riches until it blows up is another major issue for another piece, but it exists. In this greedy and short term vortex, many, many retail investors get hurt. Unfortunately, some mutual funds are unwittingly enablers of this bad behavior by their apathy and lack of passion for fighting proxy wars. No question Mr. Icahn is as savvy as he is greedy, but I give him credit for playing an important Gordon Gekko role. He pushes management teams and through the power of his brand, his capital, and outspoken approach, important issues bubble to surface and find their way onto the front page of major newspapers. Anyway, I wrote this piece to call out the profiteering of some private equity funds and two hedge fund managers. There are many others and I sincerely hope in the comments section, if readers have enough stamina and interest to have read this far along that they too will join me as sheepdogs to protect those that are in the earlier stages of their enlightened investment education process. Please help me in my quest to shine the light of transparency for the world to opens its eyes to this profiteering. These bad actors are poisoning the well by their self serving and greed. Let’s call it out. I trying to fire the proverbial first shot and I will only highlight a few examples. Here are probably hundred if not more examples. Exhibt A – Axovant. Axovant (NYSE: AXON ) made big splash with the largest ever U.S. biotechnology IPO in history earlier this year. Nathan Vardi of Forbes wrote a well balanced piece on Axovant’s CEO and its 11 employees. Aron Pinson, CFA actual was one of the first to write an excellent piece published on June 12, 2015 called “How bubbles are blown: Biotech Edition (NASDAQ: III )”. I was so outrage when I read about this that spent twenty minutes ranting about this at work, even though the industry I work in has nothing to do with biotechnology. That that morning the stock was $30 and I said it would be single digits within six months. It isn’t yet, but we are close. Also here is a snapshot of a comment I made in the comments section of another Seeking Alpha article. I’m sure most readers are aware of Axovant because it is so ridiculous and Vivek Ramaswamy is the quintessential profiteer using his god given high IQ, Harvard and Yale educations to get rich selling expensive high priced lottery tickets, in the form of Axovant common shares, to retail investors. This is and always was a Hail Mary low probability bet. Anyone that buys this stock (lottery ticket) is better suited betting it all on “red” in Las Vegas. Either way, through sheer audacity and the underwriting of tier 2 Jefferies , this gem of an IPO was taken public. I’m not one bit surprised that Jefferies led the deal as the Tier 1 I-banks wouldn’t want their name on a bad deal like Axovant. Either way, of course, readers can read up on the topic and form their own view. Exhibit B – Shake Shack I have written two articles on Shake Shack (NYSE: SHAK ), so I will keep my gripping brief on this one. Shake Shack is a perfectly legitimate and real business. They offer a simple menu and offer hamburgers, hot dogs, fries, and shakes. Yet because of its cult following in Manhattan, a land of high disposable incomes and population destiny they have sporty 30% contribution margins in their Manhattan store base. The market has incorrectly extrapolated these financials and falsely assumed that the concept can be rolled out nation wide. Investors incorrectly took the 30% gross margin figure and multiplied by some nonsense pie in the sky 2030 unit count and figured the stock must be worth three or four billion. What is a billion dollar between friends. Lo and behold, yours truly, your honest broker and opinionated sheep dog decided to act like Don Quixote. I spent the time searching through the SHAK IPO documents. Sure enough insiders contributed laughably low amount of capital and the early insiders own shares at $0.38. Besides the fact that people have to be on LSD to buy stock in a hamburger and hot dog joint with a then $3 billion dollar valuation, these profiteers are cashing out as fast as humanly possible before this house of cards collapses. The truth is that the model and margins aren’t scalable. Here is my recent article published here on Seeking Alpha about Shack Shake. Exhibit C – Turing Pharmaceuticals Led by former hedge fund manger, Martin Shkrelli, this company had the audacity to raise the price of Daraprim from $13.50 per pill to $750. There was no new R&D expenditures or any new science that went into the drug. This is simply profiteering at its finest. Only in America can you legally bilk patients and system of million of dollars, yet if a poor kid from a disadvantaged background steals a TV from Wal-Mart (NYSE: WMT ) then they face jail time. What kind of bizarro world do we live in? I wrote this piece to share more about myself and thought process. More importantly, I want to unite the other sheepdogs. I’m not the New York attorney general, or a power politician. I am just a simple man, with simple ideas, that strives to have integrity and do the right thing. I am deeply flawed just like everyone else. Yes, I am throwing stones and live in a glass house, but I would argue I am throwing pebbles not baseball sized rocks. As a society we need to be vigilant to this type of profiteering and bad acting as it gives capitalism a bad name. I think most people try to live meaningful, principled lives, and strive for high ideals. Through the collective power of Seeking Alpha’s platform and network, will you join me in my investing sheepdog quest?