Review: Full of Bull by Stephen McClellan (FT Press 2010)

4 Stars

Full of Bull is a great read for individual investors. Stephen McClellan makes a great case about why you shouldn’t drink Wall Street’s Kool-Aid. And Kool-Aid is exactly what Wall Street sells. Learning how the Street works is a vital lesson you must understand to protect your wealth.

Although this book is not targeted to professionals, the book reinforced my long-held views that analysts’ freshly issued opinions should be taken advantage of.

On page 98, McClellan makes the following comment: “Take time off during a bear market. To preserve your capital, stand back and reduce or eliminate your exposure to stock for a while.” This tactic seems inconsistent with the following statements:

• From Shelby Davies: “It is in a bear market you make most of your money, you just don’t realize it yet.”

• From Warren Buffet: “Be greedy when others are fearful.”

I posted a comment on the author’s blog about this inconsistency. The author responded:

I appreciate your interest in my blogs and my book. Yes, my strategy to avoid Bear Markets is contrary to that other advice. My foremost strategy is to protect your capital. It requires a 100% gain to off-set a 50% loss. I would rather miss the bulk of the 50% loss, even if it means I might miss a subsequent 50% rise. The Buffet strategy is for professionals. Individuals need to be more careful.

I think this is a very sensible recommendation for non-professionals.

I highly recommend this book and I will read it again if I start to lose my senses in the next bull market.

Marketplaces as a Hedge against Inflation

It took a few hundred years for the United States to accumulate a $10 trillion debt. That debt has funded all the wars the United States has participated in, including the Iraq war.

In the next five years, this debt will most likely double, as our gluttonous government relies on a $2 trillion annual deficit to jump-start the economy and fund social programs. Inertia has set in, and nothing will stop it.

In addition, the Federal Reserve and its overseas counterparts are printing money aggressively to support the global financial system and jump-start economies. There are no indications that central bankers will raise interest rates anytime soon.

Do not suffer the full effect when the consequences of this excessive money supply are felt. Protect yourself against inflation. The costs of protection are minimal and make these hedge measures worthy of implementation or, at a minimum, some consideration.

Some inflation pundits are recommending buying agricultural products, buying commodities, buying real estate, buying stock, and selling long bonds. These are all fine inflation hedges.

Another area that could thrive during a period of high inflation is the hard-good online marketplaces such as Amazon, Craigslist, eBay, and others. The reasons supporting their potential success are as follows:

1. Traditional retailers will have a tougher time raising prices quickly as compared to their technology-skilled competitors.
2. As the price of hard goods and the volatility of the market increase, activity on the online exchanges should increase.
3. Arbitrage opportunities will abound on the online space to the benefit of the marketplaces’ owners. Traditional retailers will be arbitraged to their detriment.
4. Online supplies of used merchandise should increase as prices increase, as sellers trade hard goods for hard goods.

Google Search might also benefit as a hard-good and price-discovery tool.

Do you know of any other non-obvious inflation beneficiaries I should be investigating? Let me know.

CROCS, INC. SECURES NEW ASSET-BACKED CREDIT FACILITY

"NIWOT, COLORADO - September 30, 2009 - Crocs, Inc. (NASDAQ: CROX) announced today that the Company entered into a new asset-backed revolving credit facility with PNC on September 25, 2009.  The agreement provides for up to $30 million in revolving loans which may be used for working capital needs and other items, as stipulated in the agreement.  Certain of the Company’s subsidiaries were co-borrowers under the agreement." Read the full release at http://bit.ly/aCyHj .

This is another positive piece of the puzzle falling into place for Crocs. As I mentionned earlier this week, I expect the company to show a stellar balance sheet for the quarter ending today. The company increased the size of this facility versus the size of the facility it paid back in the second quarter. This indicates the business is on the mend.

Nike Beats

Nike beats. The stock is up $4. Great news for Crocs, Deckers and the other shoe companies. There is never only one roach in the cupboard.

A Powerful Financial Tool: Application Programming Interface (API)

 According to Wikipedia an “API is an interface in computer science that defines the ways by which an application program may request services from libraries and/or operating systems. An API determines the vocabulary and calling conventions the programmer should employ to use the services. It may include specifications for routines, data structures, object classes and protocols used to communicate between the requesting software and the library.” (http://tiny.cc/F4NXG)

If computer science is not your forte, relax and don’t let this definition intimidate you. I use APIs on a daily basis, and I can’t code my way out of a paper bag. I will introduce you to simple tools that will make APIs work for YOU!

At Bigger Capital we use APIs to integrate our trading platform by incorporating market data feeds, the algorithm, electronic order generation, risk management, and trade capture. The end result is consistency, efficiency, effectiveness, flexibility, integration, reliability, scalability, speed, and, ultimately, money.

Some brokerage firms have done a great job of expanding their API menus to facilitate quick and easy implementation of trading strategies using APIs.

Interactive Brokers (IB), the electronic broker Bigger Capital uses, offers several alternatives for connecting directly to its trading system. Its APIs are available for DDE for Excel, Java, C++, and ActiveX. “For traders with little or no programming experience, Interactive Brokers recommends the DDE for Excel platform, as Excel offers a familiar and user-friendly interface and the DDE API is seamlessly integrated into the Excel application.”  (http://bit.ly/DBKmK) To help you get started with the Trader Workstation (TWS) APIs, you can attend IB’s live API for Beginners webinar.

We use both the DDE for Excel platform and ActiveX.

Take a big step today. If you want to learn more about APIs, get your hands dirty. Start using a DDE for Excel platform operating over a trading sandbox. 

Implement your strategy via the API, experiment, and above all, have fun doing it while you are on your way to becoming an expert!

If you need some help with APIs, send me an e-mail at biggercapital@gmail.com. I will be happy to lead you in the right direction.

Crocs Third Quarter Inventory Update

Crocs Buy a Fall Style and Get a Spring Style FREE promotion appears to be successful. We looked at Crocs.com and analyzed all the spring styles affiliated with this promotion. We found out that most of the spring styles are sold out. As a result, Crocs third quarter inventory position might be dropping meaningfully. In addition, this promotion might be creating some excitement over the new fall styles and increasing traffic to Crocs’ website.

Twitter Funding and Skype Valuation.

Yesterday, Twitter announced it closed another round of funding. The rumor says that Twitter, which has about 55 million users, raised $100 million at a valuation of $1 billion. A few weeks ago, eBay agreed to sell Skype with its 500 million users for $2.75 billion. The Skype mathematic doesn't add up. eBay is selling Skype on the cheap.

Disclaimer: Long eBay but I wish I could short management.

How to Make a Few Billions on Skype.

eBay recently announced that it is selling 65 percent of Skype for $1.9 billion. The implied valuation for Skype is $2.75 billion, or about $6 per user. eBay has finally admitted that Skype, a provider of telephony services, just doesn’t fit with eBay’s core businesses.

Skype, which has 500 million users and growing its user base by about 25 percent per annum, is one of the world’s largest communication companies. With its Internet-based business model, Skype is also one of the world’s largest Internet communities. When a Skype user updates his Skype status via the comment box at the top of his Skype screen, he keeps his community abreast of his status. This is very similar to the functions you find on the social media platforms twitter and facebook. Skype offers other community-style features.

The buyer, who will control an approximately 65 percent stake, is an investor group led by Silver Lake that includes Index Ventures, Andreessen Horowitz, and the Canada Pension Plan (CPP) Investment Board. This group is composed of some very smart investors.

I speculate that while eBay sees Skype operating in telephony, the investors see Skype’s potential in its untapped community of users. After all, in 2004, lead investor Marc Andreessen founded Ning, the “social platform for the world’s interests and passions online.” According Ning’s About webpage, http://about.ning.com, “With more than 1.5 million Ning Networks created and 33 million registered users, millions of people every day are coming together across Ning to explore and express their interests, discover new passions, and meet new people around shared pursuits.”

Whether you position Skype as a telephony company or as a social media enterprise matters a great deal for how you value it. If you look at Skype purely as a communication company, the $2.75 billion price tag is probably a fair price to pay for this entity. However, if you look at the latest rounds of funding for twitter and facebook, you get a pretty good idea of the value of Internet communities. Last spring, facebook rejected an investment valuing the company at $8 billion, or about $32 per user. Early this year, twitter raised money at a $250 million valuation, which would value the company at about $50 per user. These numbers are very rough, but they far surpass the $6 eBay is receiving per Skype user.

The investor group will most likely add value to their investment by using Skype’s leading platform and adding more social media features for its users. As they move the Skype needle toward community, Skype’s valuation could expand significantly.

Ok, a return on this investment of a few billions might be optimistic but you get the point.

Cool Financial Tools

1. Interactive Brokers’ Accumulate/Distribute and Scale Trader features: If you want to take advantage of short-term fluctuations and provide liquidity in stocks, options, and futures, you should have a look at Interactive Brokers’ Scale Trader or Accumulate/Distribute algorithms. "The Scale Trader algorithm originates from the notion of buying into a declining market by averaging down at ever-lower prices, or on the opposite side, selling into a rising market to scale out of a long position. But you can use the algorithm for much more, including liquidity-providing strategies that take advantage of profit-taking strategies. Accumulate/Distribute is a flexible and powerful algorithm designed to let you execute almost any complex strategy you can think of. High frequency traders can ramp up the power of the algorithm by running multiple instances of it at once on the same symbol. But this is just the tip of the iceberg of what you can accomplish using Accumulate/Distribute". For more information, including pre-recorded webinars, in-depth algorithm descriptions, and more, go to the Algorithms page on the Interactive Brokers (IB) website: www.interactivebrokers.com/algos.

There are other advantages to dealing with IB:
1. IB’s trading cost is among the lowest in the industry.
2. IB’s technology is powerful and reliable.
3. IB’s application programming interfaces (API) are extensive and cutting edge.
4. IB offers continuing education via webinars.
5. IB introduces new features frequently.
6. IB’s credit is strong.

2. Google Reader: Build a financial listening station with Google Reader. This software helps you see how people on the web think about you, your company, your investments, and your strategy, and you can also select companies to monitor and anything else of interest to you. To set up a Google Reader account, first open up a Gmail account at www.gmail.com. Then go to www.google.com/alert and perform a search on a subject you want to monitor. On my alert page, after inputting a search term, I set the type to “comprehensive,” with a frequency of “as it happens” to be delivered to “feed.” Google will relay the results to my Google Reader in real time. To monitor the output, open www.google.com/reader on your browser. In addition, Google Reader will update your favorite blogs and websites in your reader by using the RSS (Really Simple Syndication) Feed function. To set up a feed from blogs and websites, look for the little RSS orange button. If this button is available, right click it and select copy link. Go to the Reader and click the “add a subscription” button. Copy the link into the box and click the “add” button. Once added, updates to these websites will be automatically delivered to your reader.

3. Twitter: Expand your financial listening station using Twitter and its API. Twitter is a broadcast station: Twitter often broadcasts breaking news ahead of other news venues. At Bigger Capital, we monitor what goes on Twitter using our filter algorithm. We connect to Twitter via its APIs. You can either do the coding yourself or hire a firm to build a customized Twitter application that meets your needs. Or you can hire the firm that did the work for us. Send me an e-mail at biggercapital@gmail.com and I will be happy to introduce you.

The image below displays the output of our Twitter application on the Zappos filter. Zappos was recently acquired by Amazon.com.

4. Google Docs: Bookmarking links works well for investment and trading research, but I find it messy and cumbersome. When I come across a topic worth storing for future reference, sometimes I prefer to copy and paste the article and its link into a Google document that I name specifically reflecting that topic. When I want to find the document later, Google’s search engine helps me retrieve it quickly. Since the documents are stored in the cloud (in this instance on Google’s servers), you can access them from any computer, anywhere. Make Google Docs your investment and research database.

5. Kindle DX: For investors who read 10-Qs, 10-Ks, and other financial reports in abundance, the Kindle DX is a no-brainer. The Kindle DX’s Auto-Rotation feature allows you to read financial reports in landscape mode, and the rendering is excellent. I love how I can download or send PDF copies of anything I find interesting on the web to my Kindle for on-the-go reading.

There are other benefits as well, including:

• If you print about twenty-seven pages of financial material on a daily basis, you will break even on your Kindle investment within a year by saving on paper and toner costs alone.
• Ever since it introduced Kindle, Amazon has offered free books to Kindle users. I have calculated that the annual savings to me in free books exceeds $200 per annum.
• The tyranny of lugging around piles of work material ends.
• Your fingers are free of newspaper ink.
• There’s no need to fetch the Wall Street Journal before you go to work.
• You can have most of your material at your fingertips since the Kindle DX’s memory can store 3,500 books.
• You will have access to your favorite business publications via your Kindle when you take an overseas business trip.
• The Text to Speech (TTS) feature will come in handy when your eyes get tired.

Based on these features, the Kindle DX is a wise investment for the savvy investor.

In the next few weeks, I will discuss more cool financial tools. Don’t forget to subscribe to this blog and receive automatic updates. The RSS button is located in the top right-hand corner of this page. Also, if you know of any other cool financial tools, I would like to learn about them. Please add your comments and tell me which application you find the most useful and why.

MISCONCEPTIONS ABOUT CROCS (CROX).

If you type the term “crocs” into Twitter’s search box, you will get a comprehensive overview of what the naysayers think about Crocs, including the company, the shoes, and its management. You will identify the following criticisms:

1. Crocs are COYOTE UGLY.
2. Knockoffs are cheaper; there is no need to buy Crocs.
3. Crocs are a short-term fad.
4. The company is mismanaged.
5. In July, The Washington Post reported that Crocs was on its way to bankruptcy. The company is doomed. 

This basically sums up the chat-room discussions. Readers might accept these ideas, dismiss Crocs, and believe the Washington Post’s thesis. However, if you look at the company’s stock performance in 2009, the market clearly anticipates something else for Crocs. How do you reconcile market expectations with the above-mentioned negatives? You simply drill down into each issue, focus your analysis on the facts, and separate the wheat from the chaff. Let me address each issue individually.

 

1. Crocs are COYOTE UGLY.

Some people like the Crocs Clog style; others simply hate it. This is fair. However, a quick look at the Crocs website will convince you that there is more to Crocs than clogs. Crocs sells comfortable, durable shoes in a wide variety of appealing styles for men, women, and children, and the company offers great value. The naysayers seem to view Crocs merely as a clog marketer. Nothing could be further from the truth.

2. Knockoffs are cheaper; there is no need to buy Crocs shoes.

Crocs’ customers are convinced imitations DO NOT feel as good as the real Crocs shoe. That is as true with Crocs as it is true of some other companies. For example, some people will spend much more money on a Tempur-Pedic mattress than on a cheaper imitation. They believe the satisfaction they get from using the real thing surpasses the money they save by using the fake thing. This trade-off is worth it to them. Crocs are no different.

In addition, as Crocs diversifies its product line into more than the 120 styles currently available, the imitators will have their work cut out for them to keep up with Crocs’ pace. As Crocs introduces styles more frequently, its product life cycle shrinks, making it more difficult for imitators to put products on the shelves on a timely basis. The retailers might not want to deal with this complexity for the low-margin product.

3. Crocs are a short-term fad.

Ever since its shoes became popular, people have labeled Crocs as a fad. However, in a “Best of 2008” list, Crocs appeared in two categories:

1. Bestselling Products: Categories Shoes and Handbags (Amazon.com and Endless.com): Crocs Cayman Sandal.
2. Most-loved Products: Categories Shoes and Handbags (Amazon.com and Endless.com): Crocs Athens Thong Sandal.

As of today, Crocs are still at the top of the chart at Amazon.com. The company’s second-quarter results confirm the shoes are selling briskly. For some customers, Crocs are simply an addiction. John Duerden, Crocs’ CEO, commented, “There are more than 100 million consumers in 125 countries that love our product. The Crocs brand is only five years old, and already it’s almost as well-known as Nike and Adidas. It’s an icon and whether people love it or hate it, they talk about it.” In short, Crocs has products that resonate with consumers. To put the company’s achievement in perspective, it took a hundred years for Citibank to achieve its hundred million customers mark.

4. The company is mismanaged.

Crocs’ challenges are deeply rooted in the company’s torrid growth prior to 2008. Since the company could barely meet demand in 2006 and 2007, management overestimated the amount of inventory needed to satisfy demand. Therefore, when the economy turned south in 2008 and Crocs’ clog business matured, sales fell sharply.

To address these issues, on February 25, 2009, Crocs announced that it had appointed John Duerden to serve as the company’s president and chief executive officer. Crocs released this statement: “Duerden has more than 20 years of senior level management experience across a variety of industries, including thirteen years as president or CEO. From 1990 to 1995, Duerden served as president and chief operating officer of Reebok International. During this time, the company’s worldwide sales tripled to $3 billion and Reebok became established as a pre-eminent international sports brand.”

Duerden quickly took action to address the company’s challenges. He focused on aligning its production capacity to meet demand, reducing its overhead expenses and its workforce, paying down debt, and managing its product life cycle tightly.

Duerden’s strategy is bearing fruit. The company’s inventory, which topped $250 million in 2007, is now standing at $116 million, and it is decreasing.

5. In July, The Washington Post reported that Crocs was on its way to bankruptcy. The company is doomed. 

Crocs has always been a debt-light company, considering its size. That was the case before The Washington Post published its report. While the Post was busy penning its article, Crocs was repaying its debt. When Crocs reported second quarter results, it announced it had paid back its debt and had $77 million in cash. Inflammatory headlines sell newspapers, and they create investment opportunities. Judging from market activity, market participants regarded the article as having no value. 

In closing, Crocs enjoys one of the best mindshares in the shoe business. As Crocs successfully overcomes its main challenges, expect the business to strive. While I am sure the skepticism about and criticism of the company will continue, at least until such time as it becomes more clear that Crocs’ transformation is gaining traction, Crocs’ fundamentals are improving, and the company is well positioned to thrive and deepen its sustainable advantage.

Michael

Disclaimer: This article is not a recommendation of CROX the stock but an opinion about Crocs as a business. The author owns CROX in different legal entities and his hedge fund.