Block's Conduct Smells Fishy To Me!

[lessthaniv]

James West: The Midas Letter comments.

 

http://www.midasletter.com/index.php/muddy-waters-sino-forest-tsx-tre-nyse-onp-110609/

 

 

[Parsad]

Terrific letter!  Cheers!

[Parsad]

Is this the same William Block as WAB Capital.  The address on the order is Lake Forest, Illinois, whereas WAB is based in Pacific Palisades, CA.  Did they move to California?  Cheers!

 

 

[Parsad]

Interestingly enough, I knew I had heard the name before, including WAB Capital, but William Block is/was a shareholder in Chanticleer Holdings.  25,000 shares acquired back in 2005 when he became a director, but not sure when he left the board.  I'm guessing it's the same one, as it's highly unlikely two William Blocks live at the same address in Pacific Palisades!  ;D  Cheers!

[lessthaniv]

Is this the same William Block as WAB Capital.  The address on the order is Lake Forest, Illinois, whereas WAB is based in Pacific Palisades, CA.  Did they move to California?  Cheers!

 

 

 

Gonna remove that until I can verify it further.

[Parsad]

Yeah, I don't think that is the same William Block.  Cheers!

[Ballinvarosig Investors]

Terrific letter!  Cheers!

Have to completely disagree; it's a terrible letter where the author contradicts himself completely. How can you say you find shorting distasteful, smug, arrogant, and parasitical, yet actually then be able to hold a short position? This position seems equally as contradictary as some of the opinions I have read on here such as a few folks suggesting that shorters should not be allowed to short a stock ahead of issuing a report on it. If we take that logic, then anyone long on a stock should be forbidden discussing it for fears that they're trying to pump it in order to get out at a higher price.

 

What I do agree with you on is that there definitely needs to be more discloure on short position holdings.

[Rabbitisrich]

Terrific letter!  Cheers!

Have to completely disagree; it's a terrible letter where the author contradicts himself completely.

 

Block's short thesis also consisted of refutable, or at least disputable, arguments. Compare his report on Sino-Forest to John Gwynn's claim of massive under-reserving at Fairfax.

[oec2000]

Have to completely disagree; it's a terrible letter where the author contradicts himself completely. How can you say you find shorting distasteful, smug, arrogant, and parasitical, yet actually then be able to hold a short position?

 

Agree. The moment you read his comment that every short he has met exudes smugness, etc, you know his analysis is likely to be biased and flawed. Saying that he could probably make more money if he were a short seller displays his ignorance - most dedicated short sellers do not make money, Chanos being the notable exception and even his returns are nothing close to what regular longs achieve.

 

Our friends at HWIC have notably held short positions from time to time, including their huge CDS positions and no one would call them smug, arrogant, etc. Although Buffett does not do shorts now, I believe there was a time that he tried it.

 

The boring reality is that the community of short sellers is like most other groups of people - it's a diverse and heterogenous group. You have shorts who do their work quietly out of the limelight, those who are decent and honest value investors; you also have the unsavoury shorts who use media publicity to push their agenda. Of course, we see and hear much more of those who do their work publicly.

 

I would venture to say that most shorts, including some here who do it, do it to hedge and reduce volatility in their portfolios; not because they are out to kill companies and bankrupt shareholders.

 

Maybe one day people will treat shorts with as much tolerance and understanding as they now treat witches and people with different sexual orientations. :)

[ubuy2wron]

Terrific letter!  Cheers!

Have to completely disagree; it's a terrible letter where the author contradicts himself completely. How can you say you find shorting distasteful, smug, arrogant, and parasitical, yet actually then be able to hold a short position? This position seems equally as contradictary as some of the opinions I have read on here such as a few folks suggesting that shorters should not be allowed to short a stock ahead of issuing a report on it. If we take that logic, then anyone long on a stock should be forbidden discussing it for fears that they're trying to pump it in order to get out at a higher price.

 

What I do agree with you on is that there definitely needs to be more discloure on short position holdings.

I liked the letter as well. I find that the writers hit the mark pretty closely regarding my take of the dedicated short selling community at least the more public and vocal members of the community. I suspect that all most no members on this board have a problem with investors taking a legitmate short position and profiting from it what I think most find abhorent are the atitude techniques and hyena attack pack like nature of some players. Organized Pump and dump and organized short and distort are both scourges of the capital mkts the perpetrators are often the same parties IMHO.

[Parsad]

...Chanos being the notable exception and even his returns are nothing close to what regular longs achieve.

 

Have you ever seen Chanos' results?  They are horrible.  I had this debate a long time ago with those that supported Chanos, including Tilson.  They said he's got a terrific negative correlation to the markets.  Yet over 20 years between 1985 and 2005, he never made more than 2% or something.  The average value investor would have done far better with minimal volatility and little in the way of frictional costs!

 

The boring reality is that the community of short sellers is like most other groups of people - it's a diverse and heterogenous group. You have shorts who do their work quietly out of the limelight, those who are decent and honest value investors; you also have the unsavoury shorts who use media publicity to push their agenda. Of course, we see and hear much more of those who do their work publicly.

 

I would venture to say that most shorts, including some here who do it, do it to hedge and reduce volatility in their portfolios; not because they are out to kill companies and bankrupt shareholders.

 

I don't think most people have anything negative to say about short-sellers in general, only that there is a certain distastefulness in the way they make their money...from the death of a business.  Both murdering thieves and funeral directors make their living from death, and no one is saying that the funeral director's work is the same as the thieve's.  In fact, one could be considered noble and one incredibly cowardly.  It's just unfortunate that the livelihood of both comes from the same outcome.  Cheers! 

 

[oec2000]

...Chanos being the notable exception and even his returns are nothing close to what regular longs achieve.

 

Have you ever seen Chanos' results?  They are horrible.  I had this debate a long time ago with those that supported Chanos, including Tilson.  They said he's got a terrific negative correlation to the markets.  Yet over 20 years between 1985 and 2005, he never made more than 2% or something.  The average value investor would have done far better with minimal volatility and little in the way of frictional costs!

 

 

This is exactly what I said in my post. Chanos is among the most successful shorts and even his returns are dismal. I used him to make my point that shorting is hard and contrary to the perception that shorts make tons of money killing companies, the reality is far from it. The Midas Letter writer displayed this ignorance in claiming that he could make more money if he chose to sell short.

 

Shorting as an independent exercise does not make economic sense - which is probably why Buffett doesn't do it. Shorting only makes sense for people who want to dampen the volatility of their long portfolio.

 

I don't think most people have anything negative to say about short-sellers in general, only that there is a certain distastefulness in the way they make their money...from the death of a business.  Both murdering thieves and funeral directors make their living from death, and no one is saying that the funeral director's work is the same as the thieve's.  In fact, one could be considered noble and one incredibly cowardly.  It's just unfortunate that the livelihood of both comes from the same outcome.  Cheers! 

 

How can saying that "there is a certain distastefulness in the way they make their money...from the death of a business" not be construed as negative? (The tone of many anti-short posts here are clearly negative). The majority of short sellers do so either (1) to take advantage of an irrational Mr Market (which imo is not ethically different from longs who do the same), or (2) to protect their own position (as FFH did when they did the CDS trade). Although FFH would have made a lot more money if some major banks had gone bust in 2008, I don't think the guys at HWIC were sitting in their offices praying for the death of these institutions. I really don't think they were hoping for a collapse of the financial system.

 

If one is simply taking advantage of the irrationality of markets to profit, I see no difference ethically between a long and a short. The ethical problem arises only when people use underhanded tactics to to discredit their short targets.

 

Given the season, a hockey analogy is appropriate. I am sure you do not think it distasteful for a Canucks fan to root for the total demise of the Bruins.  ;D Like the Canucks, I believe most shorts are just trying to win the game they are playing; most of them are not focused on killing the other side.

 

Cheers! Go Canucks!

[Guest Hester]

Jumping back in... I think, quiet frankly, the letter was disgusting. Shorts serve a very important purpose in the market, and to label them all as parasites is, ummm.... I'll say, not productive. Just attacking all general shorts and calling them all parasites is akin to abetting corporate fraud. Yes, there is some short seller malfeasance, but there are more legitamite skeptics in the market (shorts) and out of the market (journalists) that help end real fraud. To lump them together is irresponsible. I wouldn't underestimate the magnitude of corporate fraud that would go unnoticed and thrive were there not shorts digging around looking to expose it, and profit from it of course. You've got to ask yourself, would Madoff have survived for as long as he had, had his firm been a publicly traded company, with borrowable shares open to short seller scrutiny? Does anyone really think he would have?

 

I think the hockey analogy is a good one. Mainly, because rooting for one team over another doesn't change reality. While shorting and publicizing the negative research will have some effect on a business, raising their cost of capital if the stock falls, any poor effects aren't nearly large enough to justify all the fraud that is ended from short scrutiny.  Since even the most vehemet anti-shorts can't name one legitamite, healthy company driven out of business by a short campaign, then it seems to me that the cost of negative research and the lilliputian amount of short seller manipulation in the markets isn't enough to justify calling them parasites, given all the corporate fraud they end, or at least illimunate. Even Fairfax didn't go out of business, and they were a financial firm that was in "deep doo-doo." If the Seal Team 6 of the short manipulators, according to some, couldn't take down a temporarily ailing financial firm, dependant on the capital markets, can they really take down any (legitamite) company? I think not obviously.

 

Obviously not all short positions are fraud shorts, but many are. If one believes that a company is committing illegal fraud, ripping people off, the only ethical thing to do is root for their demise. Betting against someone doing something unethical (although maybe not illegal) or foolish is not unethical. Nobody considers John Paulson or Michael Burry unethical, even though they made most of their fortune off of betting against the American dream, home ownership.

 

Mark Benioff, pumping his stock all over the place to dumb investors, many of them retail, using deceptive non-GAAP financial measures, while being the 7th largest seller of his company's stock last year. Is betting against this scheme and others that are similar unethical or distasteful? (I pose this particular example for a reason)

[lessthaniv]

RBC Analyst Paul Quinn issued a comment on Friday:

 

https://rbcnew.bluematrix.com/sellside/EmailDocViewer?encrypt=f1d4803d-b219-4fe2-a5bc-82147f58202a&mime=pdf&co=rbcnew&id=replaceme@bluematrix.com&source=mail

 

 

[Ballinvarosig Investors]

Have you ever seen Chanos' results?  They are horrible.

That's because being short is not an natural investment position to be in. The market increases by 6-7% on average. Just to break even, he needs to outperform the market by 6-7%, and that's before you even consider his costs.

[Parsad]

That's because being short is not an natural investment position to be in. The market increases by 6-7% on average. Just to break even, he needs to outperform the market by 6-7%, and that's before you even consider his costs.

 

Thus the reason he shouldn't exist.  He adds no value to his investors, and they could get the same results with fewer frictional costs by just buying ETF puts.  Cheers!

[stahleyp]

anyone know Chanos annualized return since inception?

[lessthaniv]

From Oct 1/1985 to May 31/2005 (Audited results 1985-2004 and 5 unaudited months in 2005) Ursus Partners compound annual growth rate was 2.1%. This result is reported;

 

1)  before fees and expenses,

2) includes reinvestment of dividends.

 

Over the same period, the S&P 500 was 12.7%.

 

The fee structure at the time was a 1% management fee, 20% incentive fee over a high water mark, no hurdle rate.

 

So, net of fees, the 20 year return would have been easily outperformed by a simple GIC.

 

I don't have any data what's transpired from May 2005 to date.

 

________________________

 

Perhaps the horrendous 20 year result is why Jim resorted to those "Fairfax is a zero" comments.

 

<IV

 

[Parsad]

Perhaps the horrendous 20 year result is why Jim resorted to those "Fairfax is a zero" comments.

 

Lessthan, don't you know that negative correlation is a valuable service he provides to his institutional clients.  Along with providing room and board for Spitzer's hookers during the summer months!  ;D 

 

And don't forget the liquidity he adds to markets that would normally be trading in bubble territory.  Not sure how the world managed without him and Herb Greenberg.  Even Batman wouldn't be able to nail down frauds like Fairfax, but Chanos and Greenberg did it!  That Prem Watsa is one evil dude.  You know Prem even had a website at one point talking about how evil he was. 

 

Some people suggested that there was a coordinated attack against Fairfax, but everyone knows Prem just orchaestrated the whole thing because he had to hide all the flaws in Fairfax's business model.  You know he was leveraged and had too much in recoverables.  Not enough cash...I think he was playing the horses or something.  The really smart investors always have enough cash.  Then he got lucky with these credit default swap thingies and saved the company, otherwise Chanos, Greenberg, Eavis, Hempton, Gwynn and Taylor would have all been right. 

 

He's one smart, evil dude!  But his ponzi scheme will come to an end one day.  Maybe not tomorrow, maybe not ten years from now, maybe not when Prem has passed on and left this world...but some day...you watch, someday Fairfax will prove to be a fraud!  Ppphhhhtttt!  Cheers!

[zippy1]

Perhaps the horrendous 20 year result is why Jim resorted to those "Fairfax is a zero" comments.

 

Lessthan, don't you know that negative correlation is a valuable service he provides to his institutional clients.  Along with providing room and board for Spitzer's hookers during the summer months!   ;D 

 

And don't forget the liquidity he adds to markets that would normally be trading in bubble territory.  Not sure how the world managed without him and Herb Greenberg.  Even Batman wouldn't be able to nail down frauds like Fairfax, but Chanos and Greenberg did it!  That Prem Watsa is one evil dude.  You know Prem even had a website at one point talking about how evil he was. 

 

Some people suggested that there was a coordinated attack against Fairfax, but everyone knows Prem just orchaestrated the whole thing because he had to hide all the flaws in Fairfax's business model.  You know he was leveraged and had too much in recoverables.  Not enough cash...I think he was playing the horses or something.  The really smart investors always have enough cash.  Then he got lucky with these credit default swap thingies and saved the company, otherwise Chanos, Greenberg, Eavis, Hempton, Gwynn and Taylor would have all been right. 

 

He's one smart, evil dude!  But his ponzi scheme will come to an end one day.  Maybe not tomorrow, maybe not ten years from now, maybe not when Prem has passed on and left this world...but some day...you watch, someday Fairfax will prove to be a fraud!  Ppphhhhtttt!  Cheers!

 

 

This must be in the sarcasm mode. :D

[stahleyp]

From Oct 1/1985 to May 31/2005 (Audited results 1985-2004 and 5 unaudited months in 2005) Ursus Partners compound annual growth rate was 2.1%. This result is reported;

 

1)  before fees and expenses,

2) includes reinvestment of dividends.

 

Over the same period, the S&P 500 was 12.7%.

 

The fee structure at the time was a 1% management fee, 20% incentive fee over a high water mark, no hurdle rate.

 

So, net of fees, the 20 year return would have been easily outperformed by a simple GIC.

 

I don't have any data what's transpired from May 2005 to date.

 

________________________

 

Perhaps the horrendous 20 year result is why Jim resorted to those "Fairfax is a zero" comments.

 

<IV

 

 

Wow! I assumed (incorrectly) that he was a pretty decent investor. As is the case, all too often, I was wrong!

[Parsad]

This must be in the sarcasm mode.

 

I'm guessing the "raspberry" at the end gave it away!  ;D  Cheers!

[lessthaniv]

Perhaps the horrendous 20 year result is why Jim resorted to those "Fairfax is a zero" comments.

 

Lessthan, don't you know that negative correlation is a valuable service he provides to his institutional clients.  Along with providing room and board for Spitzer's hookers during the summer months!   ;D 

 

And don't forget the liquidity he adds to markets that would normally be trading in bubble territory.  Not sure how the world managed without him and Herb Greenberg.  Even Batman wouldn't be able to nail down frauds like Fairfax, but Chanos and Greenberg did it!  That Prem Watsa is one evil dude.  You know Prem even had a website at one point talking about how evil he was. 

 

Some people suggested that there was a coordinated attack against Fairfax, but everyone knows Prem just orchaestrated the whole thing because he had to hide all the flaws in Fairfax's business model.  You know he was leveraged and had too much in recoverables.  Not enough cash...I think he was playing the horses or something.  The really smart investors always have enough cash.  Then he got lucky with these credit default swap thingies and saved the company, otherwise Chanos, Greenberg, Eavis, Hempton, Gwynn and Taylor would have all been right. 

 

He's one smart, evil dude!  But his ponzi scheme will come to an end one day.  Maybe not tomorrow, maybe not ten years from now, maybe not when Prem has passed on and left this world...but some day...you watch, someday Fairfax will prove to be a fraud!  Ppphhhhtttt!  Cheers!

 

 

;D

Ha!

[Guest Hester]

Does anyone know if a long-short fund like Greenlight or Pershing Square has ever broken out their shorts.vs.longs performance?

 

I think running a pure short fund is a very silly thing to do over the long term. Since the market rises about 9% give or take over the very long term, just breaking even on a portfolio of nothing but shorts would be some massive outperformance. What's the point?

 

I think the real value of shorting would to add a couple of points of alpha to an already long portfolio, without any extra capital needing to be put up, as the longs act as collateral and would be there anyway. Also, many funds reinvest some of the cash recieved from shorting, the 130/30 model. If one can break even on the shorts, they've just achieved free leverage to invest in good longs, sort of like insurance.

[oec2000]

That's because being short is not an natural investment position to be in. The market increases by 6-7% on average. Just to break even, he needs to outperform the market by 6-7%, and that's before you even consider his costs.

 

Thus the reason he shouldn't exist.  He adds no value to his investors, and they could get the same results with fewer frictional costs by just buying ETF puts.  Cheers!

 

This is not accurate.

 

Take a long investor in ETFs who decides to hedge his position with a 100% short.

 

If he uses Chanos (who earns 1% p.a. after costs, roughly), his total return would be the long ETF return + 1%.

 

If he goes with your method of buying ETFs, his return will be the long ETF return - the cost of the ETF puts. My guess is that cost of the ETF puts would leave the long investor with a return that is less than the risk-free rate of return. This makes sense intuitively - otherwise, we would have found the solution to alchemy by creating a riskless return.

 

This is the reason why Chanos exists and his business model works. In my former example, the investor has enhanced his returns while at the same time significantly reducing his volatility.

 

Cheers!