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Posts Tagged ‘arbitrage’

Why Groupon resembles a ‘roach motel’

November 11, 2011 1 comment

The term Roach Motel (“where roaches check in, but they don’t check out!”) was coined by Black Flag pesticides in a decades-old advertisement.  Judging from Rocky’s recent experience, Groupon membership is quite similar.

Groupon (GRPN) went public recently after some substantial kerfuffles with the SEC. In their IPO filing, GRPN said that they had over 50 million subscribers as of December 2010 (page F-37 of SEC Form 424B4) and by September 2011, that number had grown to 143 million!!  Notably, in 2009, GRPN had only 152,000 subscribers (of which 43,000 made purchases) whereas in 2011   29.5 million purchases were made by the 143 million subscribers. This means purchase activity among Grouponers declined from 28.3% to 20.6%. (If one considers that 16 million customers made multiple purchases, the activity percentage is declining much faster.) That GRPN paid people real cash to “join,” and that they have never been profitable is beyond the scope of Rocky’s “roach motel” insight.
Rocky doesn’t  like crowds, and he didn’t like being one of the 143 million Grouponers.  Also, as a bald man,  he loathed  the daily 20%-off Groupons for hair removal services. (There were never any discounts for hair retrieval services.)  Fed up,  he tried to “cancel” his Groupon membership yesterday. Alas, there was NO ability to do that on their website, nor were there ANY  instructions on how to cancel membership.
Rocky sent an email to GRPN “customer support” with the question: “How do I cancel (and close) my Groupon Account?”
The response:  “You will no longer receive any promotional emails from Groupon. Please note that in the future you may receive transactional emails regarding past or future purchases made though your account and important business announcements that could affect your rights as a customer. You may receive an email if we update our privacy statement or our terms of service.”
Presumably this means that GRPN still numbers Rocky as one of the 143 million, but they won’t send him any more emails for nail salons, cooking classes, and discount sushi.
Gone, but not forgotten….
The cancellation experience reminds Rocky of  Antony’s speech from Shakespeare’s Julius Caesar,  “I come neither to bury Groupon, nor to praise them. But the evil email address that Groupon captures lives on after them.”
[Disclosure: Rocky never provides investment advice and currently has no Groupon stock position. He notes, however, that Black Flag Roach killer comes in both “fragrance free” and “fresh pine scent.”  Here, he smells a rat.]

Rocky’s (latest) view on gold

August 23, 2011 5 comments

Knowing that he’s been a gold bull for years, Rocky’s friends keep asking: “What you do think of gold, NOW?” (These people actually think that Rocky and certain other TV commentators can  predict the future.)

Rocky’s answer: “I have no idea, and have NEVER had any idea about what the price of gold will do tomorrow.”

But does he still own gold?

“Yes, and I also own some stocks. And I own some real estate. And I own some bonds. And I own a copy of last week’s People Magazine. And I have no idea what the price of these will do tomorrow either.  My experience has been that pundits who claim perfect knowledge of the future are generally either liars or idiots. (Whoopi Goldberg is the exception to this rule.)  What I’m doing is called diversification.”

But when will he sell gold?

“The PRICE of gold is irrelevant. As I’ve written on this blog, I will sell gold when the gold story (or more accurately, the market’s perception of the gold story) changes!  Gold’s ascent is a confluence of negative real interest rates; undisciplined central bank behavior; a growing loss of confidence in government policies and financial systems; loss of Swiss bank secrecy; an accumulation of economic wealth by individuals in parts of the world without stable property rights and rule of law. Can gold drop $100 tomorrow? Sure it can! Can gold drop $300 next week? Sure it can!  Can gold drop $1000 next year? Sure it can! But so long as these FUNDAMENTAL  factors remain in place, the underpinnings and demand for hard assets that are beyond the reach of governments will remain.”

“Almost all of my really smart friends are very bearish right now. They all think this move is idiotic. Many think this is a bubble. And eventually they will be right. But eventually could be a really really long time. And it could include a trip to unimaginably higher prices first.  Their skepticism is not predictive of anything.  And importantly, they are not betting that gold will decline either. All it tells you is that they aren’t long gold and missed this move.  I’ll admit that I get nervous when prices rise quickly.  And historically, buying after a sharp rally isn’t a good idea. But why should any of this market chatter affect my long-term porfolio construction/diversification?  After all, I’m not afraid to admit that I have absolutely no idea what prices will do tomorrow.”

[Disclosure: Rocky NEVER gives investment advice. He’s owned gold for a long time. And he owns some hedges that will protect him if gold drops sharply while he’s asleep. And some day, he will sell his gold. But whether it’s at $2,000/oz or $10,000/oz is out of his control. It’s in the control of  millions of other investors around the world, and how they react to the policies of their central banks and governments.]

CPI shows women & children first?

April 15, 2011 2 comments

The Captain of the Titanic supposedly said, “Women and children first!” when directing his passengers to the lifeboats.

Rocky, (hardly a chivalrous fellow), thinks recent Consumer Price Index data demonstrate “Women and Children LAST!”

He notes that women’s and children’s apparel prices are declining at a noticeably faster rate than men’s apparel prices. (See the bottom three lines of the chart above.) Although Rocky continues to wear the same ragged grey sweater and chinos, Trophy Wife may find this data to be an impetus for a visit to the shopping mall.

Rocky theorizes that women can wear men’s clothes (which support the price of shirts and pants), whereas most men wouldn’t be caught dead wearing a dress or skirt. However, if this trend continues, Rocky’s miserly nature will prevail, and he’ll try on a kilt or two.

Japanese stocks yield more than US stocks

March 15, 2011 1 comment

For the first time in decades, the dividend yield of Japanese stocks exceed the dividend yield of US stocks. As of the close on March 15th, the S&P-500 dividend yield is 1.86. After last night’s 10% decline in Japan (and the horrific catastrophe unfolding there), the dividend yield on the Nikkei-225 is now 2.02%. (The chart above shows the S&P-500  dividend yield minus the Nikkei-225 dividend yield  using monthly data. It doesn’t include the post-earthquake  price moves.)

Determining whether this represents an investment opportunity, or an accurate reflection of the long-term prospects for Japanese industry,  is left as an exercise for the reader. Rocky notes that  Japanese 10 year bonds yield 1.21% and US 10 year bonds yield 3.24% — which makes this dividend phenomenon even more striking.

[Disclosure: Rocky never provides investment advice. He will also forgo  any jokes about the dismissal of the Aflac Duck because it would be inappropriate — as the Japanese people suffer the aftermath of a historic disaster. ]

Efficient markets meet efficient yogurts

March 7, 2011 2 comments

At the behest of his daughter, Rocky sampled his first “Pinkberry” frozen yogurt in New York City’s Greenwich Village on Sunday. Pinkberry has a cult following, and it was time for Rocky to audition for the cult.

The small cup of plain with two toppings cost $6.25 — and while Rocky found the concoction uninspiring — he found the profit potential intriguing.

An unscientific 10 minute demographic survey revealed all of the customers in the store were ultra-skinny women under the age of 30 and just one skinny man (whose attire and makeup were sexually ambiguous.)  Judging from their fluency in Pinkberry nomenclature, all were regular customers. The tiny store was grossing over $300/hour — on a cold, rainy March afternoon!

Rocky started salivating. Not from the yogurt. From the profit potential!

But before he could grow lascivious about live cultures, Rocky looked out the window and noticed two stores across the street with “Opening Soon” banners in their window.  Red Mango and “YourGurt” had Pinkberry’s prodigious profits in their sights.  A frozen yogurt war would soon commence — and monopoly yogurt profits would undoubtedly become the first casualty….

[Disclosure: All that glitters isn’t gold, and all that shines isn’t Pinkberry pomegranate with strawberries. But the jingle is worth a listen: click here. ]

Rocky’s coif makes the Financial Times

February 24, 2011 3 comments
Rocky’s daughter insists that Rocky is fake. He has a fake name. He has fake friends. He even has fake hair.
On the last point, a real reporter at the Financial Times agrees. Ms. Lindsay Whipp wrote a serious article in Wednesday’s FT about Japanese Government Bonds and quoted Rocky:

The bald facts

Numerous investors who have shorted the Japanese government bond market have lost lots of money, writes Lindsay Whipp.
Some, such as US-based hedge fund manager who writes a blog under the pen name Rocky Humbert, literally lost their hair.
In 1996-97, he took a bearish view on JGBs. He recalls: “I aged badly, went bald and kept waking up my wife to check my Bloomberg.”
However, he had a very profitable 2008, having learnt “how markets can move in ways that don’t make sense to ‘reasonable’ people”.
[Disclosure: So is Rocky “real?” As the Clairol ad goes: Only his hairdresser knows for sure!]

Blended whiskey meets blended crude

February 8, 2011 Comments off

American v. London Crude Price

An interesting oil trade reminds Rocky of the song “America” from West Side Story (the Broadway show): “I like to be in America!  OK by me in America!, Everthing free in America! For a small fee in America!”

Rocky notes the price of WTI crude oil in America is at a record discount ($15/barrel) to London’s “Brent”  Crude Oil —  even though the London oil is worth slightly less to refiners. Oil’s not  yet “free in America,” but 17% is a remarkable discount.

Some  production problems in the North Sea and an inventory overhang in Cushing, Oklahoma explain  this discrepancy. Since America imports crude oil, Rocky believes it’s just a matter of time before cargos get diverted  from the USA to Europe, and this price spread collapses. Hence, Rocky is slowly buying crude oil futures in America, and shorting crude oil futures in London.

If the spread doesn’t collapse in the next few months, Rocky’s Plan B is to fill his many empty Scotch Whiskey bottles with crude oil and “deliver”  the recycled bottles to London…(which will also force the aribitrage to close.)  Of course he’ll have to convince airport security screeners that  the duty-free bottles of crude oil don’t pose an in-flight threat, and will explain that instead of a blended whiskey, it’s the  “Brent blend.”  He’s also prepared to hear  the TSA Agent recite Anita’s words from West Side Story: “I know a boat you can get on.” See: VLCC.

[Disclosure: Rocky never gives investment advice, and these sorts of trades entail considerable risk not to mention a nasty hangover.  Nonetheless, this trade is a “Rocky V.”  (See “definitions”  tab at the top of this page.)]