Tuesday, February 24, 2015

Maximus and outsourced unemployment services in Australia

Maximus (NYSE:MMS) is a large cap and highly valued government outsourcing company based in Reston Virginia (outer suburban Washington). Its second biggest market by revenue is Australia (and I think by the amount of cash trapped in Australia in presumably depreciating Australian dollars the Australian arm has been particularly profitable).*

The stock chart is - well - ballistic. This is a market favourite:





Here is the revenue split from the last Form 10K.


  We operate primarily in the United States, Australia, Canada, the United Kingdom and Saudi Arabia.
        Our revenue was distributed as follows (in thousands):
Year ended September 30,
201420132012
United States
$1,306,026$999,419$775,871
Australia
170,727157,383163,482
Rest of World
224,159174,477110,792
Total
$1,700,912$1,331,279$1,050,145


The Australian revenue is from a government outsourced employment agency business. 

To get welfare payments in Australia you need to be actively looking for work (and sometimes need to appear at minimal job-readiness courses and the like). Until 17 years ago the government had a large bureaucracy (The Commonwealth Employment Service) who administered this.

The CES was effectively privatised with private sector organisations (and sometimes charities such as the Salvation Army) taking this function. The function included sometimes kicking welfare recipients off welfare (something that made the business difficult for some charities).

Last night the Australian Broadcasting Commission (the Australian equivalent of the BBC) aired a program on how this program is working. This was done on "4 Corners" which is far-and-away the lead current affairs program in Australia.

It was not pretty. 

To quote:
"There are credible claims of widespread rorting by some agencies.... we have now completed an investigation which suggest that significant fraud, criminality is going on."
Later it suggested that only 40 percent of the fees paid to agencies were against verifiable activities. The widespread practice of falsifying signatures, falsifying job interviews that unemployed people attended and falsifying disabilities of the unemployed was exposed. [For example an agency collected larger fees for working with more "disabled" people so there was a tendency to suggest people had mental illnesses or the like. More regularly signatures were faked using cut-and-paste methods to show unemployed people attending interviews that they did not attend or training courses that they did not attend and hence to rort fees from the Government.]

The number one target of 4 Corners was a domestically owned organisation called ORS. The evidence (if true) was utterly scathing.

Max Solutions - the Australian business of Maximus - was the second biggest target - but to be fair the claims made against them were far less scathing. Still they alleged that Max was directing unemployed to fictional training programs owned by Maximus and hence rorting the government. For instance they suggested that Max Solutions had enrolled 115 people in a training program in a room that could physically only take 15 people. [They were presumably - although this is not stated - faking attendance or even enrolment records or else they would not have got paid for these services.]

You can find the story (including a video replay) here

All of this is going to be deeply problematic for Maximus though. As the last 10-K disclosed:

We are currently in the process of rebidding on much of our work in Australia. We anticipate that a new contract will commence during the fourth quarter of fiscal year 2015. These contracts are likely to have more contingent revenue streams, less up-front fees and will likely incur losses in early quarters. However, we anticipate that the contracts will be profitable.

It isn't much fun to face such accusations by the National Broadcaster as you are rebidding all your contracts.






John


*$220 million in cash is held in currencies other than the USD. Given the Australian dollar has been very weak that hasn't been particularly nice.

Saturday, February 21, 2015

The epic Retrophin 8-K filing

Martin Shkreli was formerly a biotech short-seller. I know those people. I am one.

They have their eye out for the inflated claim re the efficacy of a drug and the wheeling and dealing in stock.

Unusually Martin became CEO of a biotech (Retrophin) and became a wheeler-and-dealer himself. Martin also kept a twitter account where he recommended Retrophin stock and suggested (often correctly) that other biotechs were worth shorting.

He is a 31 year old - but all the photos make him look 17. The joke about his hyperactive twitter account was that he would tweet if he had a date.

Anyway eventually - and after a saga you can look up if you want - he was ousted as CEO of his own company.

Today the company released an 8-K explaining what the board found after his ouster - and it is already being described as an epic. Here goes for some of it.

Consulting Agreements. Between September 2013 and March 2014, the Company entered into several consulting agreements and releases with individuals or entities that had been investors in investment funds previously managed by Mr. Shkreli (the “MSMB Entities”), or that otherwise had financial dealings with Mr. Shkreli. The agreements provided for the issuance of a total of 612,500 shares of common stock of the Company, and a total of $400,000 in cash payments by the Company. The Oversight Committee concluded that the Company should not continue to treat these agreements as consulting agreements because their predominant purpose appears to have been to settle and release claims against the MSMB Entities or Mr. Shkreli personally, and not to provide meaningful and sustained consulting services to the Company.
And
Litigation Settlements. In the second quarter of 2014, the Company settled two lawsuits involving individuals who had formerly performed services for both the Company and the MSMB Entities. The Oversight Committee concluded that approximately $200,000 in cash payments made by the Company as part of these settlements appear to have been made to cause these individuals to transfer 176,388 shares of the Company’s common stock directly to Mr. Shkreli.
Read the whole lot here... 







John

Disclosure - dumb luck I shorted a little recently. I just figured when he was fired at CEO we were going to find out more. And more.

But the really dumb luck. I got sick, missed the rise when he left, and only read he resigned today - so so only shorted today. I would rather be lucky than good.



Thursday, February 19, 2015

Stock research on Spark Networks (jdate.com)

We are having one of our irregular looks into Spark Networks - the owner of the profitable J-Date dating site (and the unprofitable "Christian Mingles"). J-Date is a Jewish match-making institution.

One step of course is to get the young (and conveniently Jewish) intern to sign up and research possible dates. 

There is not that much activity (especially in Sydney) and some profiles are difficult. My favourite:

My personality is best described as high maintenance.

Seeking advice but J-Date doesn't look like it has much traction with the young (although its proponents argue it is a marriage site and hence of interest to people older than our intern and competes less than brutally with Tinder). 

Whatever: anyone want a high maintenance wife?



John

Thursday, February 5, 2015

Mr Andy Z. Fan is better than you

This is possibly the finest biography ever submitted to the SEC. [You can find the original here.]


Background of Mr. Andy Z. Fan:

Mr. Andy Fan is a prominent Chinese-American businessman with outstanding connections with the Chinese government, long standing relationships with Chinese media, and has a strong fan base in China where he has appeared in various forms of media over the past few years. He was once the interpreter for China's Head of State -- Prime Minister Li Peng. Later, he was awarded a full scholarship to study on the graduate level in the U.S., and was introduced to former U.S. President Bill Clinton by the University President and served as Clinton's Chinese interpreter.   Mr. Andy Fan's popular book "Clinton and My Life" has made him an idol to millions of Chinese students, and a well-respected sought-after public speaker.

Mr. Fan is currently President, Director, and Chairman of the Board of AF Ocean Investment Management Company [OTCBB:AFAN].  AF Ocean’s mission is to help Wall Street investors identify and work with respectable and reputable Chinese counterparts and companies and assist Chinese corporations to understand that the only way to benefit from the world’s biggest capital market is through strict and consistent adherence to the rules and regulations that govern companies listed on American stock exchanges.

His nine popular books in China, including the No. 1 best seller in China in June 2011, also make him a frequent guest on TV, as well as being followed and interviewed by media everywhere he goes. He has been on numerous magazine covers, including “Chinese Business Leader”, “China Celebrity”, “China Private Capital”, “World Chinese Businessman”, “Discovery”, “Commerce”, “The View”, among others. To millions of fans and their parents across the country, Andy is their hero and a super star. Due to his popularity, he is often invited as the guest of honor and speaker by many prominent organizations, such as being invited to Nobel Laureates Beijing Forum and Forbes China City Investment Forum. In 2009, in celebration of the 60th anniversary of the founding of the People’s Republic of China, Mr. Andy Fan was chosen to be one of “China’s 60 Role Models in 60 Years”, and his portrait was printed on a Chinese Postage Stamp that same year.




Monday, February 2, 2015

Dear Eurozone officials, Mr Putin is waiting

The FT has a remarkable story today about how Eurozone officials are worried about Greece. To quote:
" the fears of eurozone officials that the Greek government was unaware of the precariousness of its financial situation"

This is kind of amazing. There is an old adage - which is that if you owe someone $100 you have a problem. If you owe someone a $100,000,000,000 they have a problem.

Greece's debt (and hence the German/Eurozone problem) is somewhat larger than that.

Moreover Greece runs a primary budget surplus. The only reason the Greek government needs money (ever) is to roll existing debt.

If they default on existing debt that problem goes away.

Paul Krugman summarised the problem with devastating clarity.

Bluntly he points out the Troika (and the above worried Eurozone officials) can't hurt the Greek Government by denying incremental finance because the Greek Government does not need incremental finance.

--

Krugman does however point out that the Greek banks require finance. As Krugman puts it:

"the power of the creditors over Greece comes via the ability to crash the Greek banking system, which is heavily dependent on the ability to borrow at need from the ECB. Cut off that support, and Greece suffers banking collapse. So yes, the creditors have a large club they can use on a recalcitrant Greece."
But Krugman overstates that club. It is entirely within Alexis Tsipras's power to default to the ECB too. Indeed the pattern for government defaults is to simultaneously force a private sector default.

How about this for a negotiating position... we will pass a law to make it illegal for any Greek bank to repay the ECB. Period.

Then have a one week banking holiday, re-denominate all remaining Greek bank assets and liabilities in Drachma, and if a default event passes any court we will nationalise the Greek banks as-per-Washington Mutual - leaving the obligations in some stripped-down shell from which there is nothing to collect.

Finally, in this environment, depositors will receive shares in the new Greek banks in proportion to their deposits. Those shares will be worth a lot because an obscene amount of bank liabilities will be wiped out.

--

This will crash the Greek economy? You make me laugh. We are already at Great Depression levels and removing the burden of your silly debt schedules will be incredibly stimulative.

Sure we will lose access to clearing but Vladimir Putin is lending us a few billion dollars and we have a clearing arrangement in Singapore. [They will do this for anyone from Libyan dictators down...]

Moreover I was once told by Capital One - a respected US credit card company - that recently bankrupted people make the best credits.* After all their past debts have been cancelled and they are by definition solvent. It won't take two years and the financial markets will be happy to lend to us again.

--

Finally we are not a wildly interconnected economy. Its not like Finmeccanica - the Italian company which makes components for Boeing Dreamliners and thus needs the global financial and payments system to function. We do simple stuff, sell olive oil and feta cheese and lots of tourism services.

It won't take long but we expect our beaches to be overrun with fat often drunk German tourists. And we kind of like it that way. The fatter the better. At we will sell them Retsina. It will be cheap and they might learn to like it. You Germans like to drink, don't you.

--

So what do I want?

Enough money that I am allowed to run primary deficits. Fairly large ones. 1.5 percent of GDP would be nice but I will settle for 1 percent. And of course you know we are never going to repay it.

I don't care how you do this. You can do it as a direct subsidy, you can do it any way you like. But as we are not going to repay it so at some stage you are going to suck it up. For political purposes you probably want to dress it in some "equalisation scheme" so it is less obvious what you are doing. But that is your problem. You know what I want.

I am off to the hotel to read a little. Just kick back. Sunday night I have a flight booked to Moscow but I might go early. I hear the girls are hot there.

And besides Mr Putin is waiting.





Alexis...

*On a personal level I was truly told that by a Capital One senior staffer.

Wednesday, January 28, 2015

Bill Ackman is the Sabrina Rubin Erderly of anti-MLM campaigners

There is plenty of nasty stuff that happens on university campuses - so Sabrina Rubin Erderly wrote a story about a rape at University of Virginia that almost certainly did not happen.

She wrote it because she was ideologically committed to the idea that it did happen.

And in so doing she set back her own cause by a decade. 

--

There are plenty of abuses at multi-level marketing schemes. I have seen a few.

So Bill Ackman picks on what is probably the straightest MLM and bluntly makes up stories. In the first presentation Shane Dinneen (Ackman's staff member) got up and said that there may not be a single legitimate consumer of Herbalife products anywhere on the planet.

I promise you they are really easy to find. Daily consumers.

He did this after months of "research" which can only be like Sabrina Rubin Erderly's research - research to get your pre-determined opinion confirmed. Easily falsified research.

At some stage the anti-MLM campaigners will need to distance themselves from Bill Ackman's false research.

Sooner is better.





John


Friday, January 23, 2015

Herbalife after options expiry - Part III: What is UBS's game?

We now know one of the the new shareholders that Herbalife has after option expiry. My count is that there are more new and large shareholders.

That shareholder of record is UBS Group AG on behalf of itself and its wholly owned subsidiary UBS Securities LLC, UBS AG London Branch and UBS Financial Services Inc.

Note that this is UBS Group on behalf of bank and trading companies and not on behalf of their asset management companies.

Bluntly there is no way that the banks are holding that much Herbalife stock (over 6 percent of the company) unhedged. That is not what banks do. [Even Michelle Celarier - a reliable Ackman shill - has tweeted that UBS holds it as part of its market making.]

So UBS hold the stock and they have entered a total return swap or similar with some undisclosed party. I have my guesses as to who (but that is for a later post).

And it likely that the stock they hold they have in turned lent to an investment bank (which I will call Bank A) which wrote the put options to Mr Ackman. Bank A needs to borrow the stock because they need to be short the stock for the purpose of hedging the options they wrote to Mr Ackman.

--

The new holding was disclosed under rule 13g which is only for passive holdings. (Activist actions such as trying to influence the board are prohibited if you file on 13g rather than 13d.)

However the nature of the filing neatly falls into a widely discussed whereby an activist investor who would normally have to disclose on form 13d can hide their identity. [See this article from Harvard law blog on activist abuse of Rule 13d.]

--

So what do we know.

(a). There is a new shareholder.
(b). They have gone to some lengths to hide their identity and fit their holding into a loophole in the disclosure rules.

Also when I count shares I think there is more than one new shareholder. I keep counting shares and there is a missing large block.

Most new shareholders would have ten days to disclose. I would say the clock is ticking but my guess is that the UBS swap agreement might last a few months.





John

Thursday, January 22, 2015

Herbalife after option expiry - Part II: counting shorts and longs

With Herbalife at $31 then any puts that Ackman has (and we know the prices of them) are in the money so far that their delta is almost one.

This means if you have written a (say 100) put options to Bill Ackman and you are hedging your position you are short almost 100 shares.

If you are not short 100 shares then the puts will be exercised on you and you will wind up long 100 shares.

And if you have written 10 million puts (100,000 contracts) and you are not hedged you will wind up owning 10 million shares.

And if you take delivery of five or more percent of a company it likely you have some intentions towards it.

You may however own them deliberately (selling puts with the hope they are delivered) or accidentally (selling puts with the hope of keeping the premium).

Indeed it likely there is some deliberate and some accidental ownership of the stock.

--

We also have some idea of the size of Ackman's position. It was originally in excess of a billion dollars and between 20 and 25 million shares.

We know from various articles at the time his break-even was around $50. [This was corrected to $47 later as you will see.]

As the stock went up he restructured his position - some short, some puts.

In February 2014 he said that his position was much bigger than originally. To quote:
“We actually now have a much larger position notionally than we had initially. If it were to disappear tomorrow, we’d make a lot more than had it just blown up the day after I gave my last presentation.”
We also have an idea of where his break even currently is. Recently he told Reuters this:
"We shorted it at $47 but because of option premium, borrowing costs, dividends, investigative expenses, our break even is around $31, $32," 
You can do the maths. If it was a billion dollar position at $47 per share (and we know it was at least that) he was originally short 21.3 million shares.

His break even is now say $31.50 per share and he will make more money than originally - which means he is short at least 32 million shares (which produces the same result) and probably more than 40 million shares (which is what is required to make this a "much larger" position than originally.

My figuring is that Ackmans short plus put position adds up to something greater than 40 million shares. My guess is 42 million.

--

Now Ackman has many followers. There is Whitney Tilson (who is publicly short) and a host of Twitter gliterati who boast about being short. It is a fair guess that in aggregate they are short (say) 3 million shares.

This makes an aggregate short position of 45 million. This includes straight shorts plus puts.

--

The published short position is about 30 million.

As a conclusion we can guess that something like 15 million shares are not delta hedged.

Those puts are issued by someone who is going to take (or has taken) unhedged delivery of 15 million shares.

Given the number of puts exercised on Friday I suspect they have largely taken delivery.

--

Some of those shares are going to be delivered accidentally. The person sold puts in the hope they would not be delivered and when they are delivered they just sell the shares. This creates downward pressure on the stock. I think we saw that on Monday.

Some of those puts are sold by someone willing and able to take delivery. And most importantly wanting to take delivery.

Normally a new large shareholder has to disclose ownership at ten days (and that would be ten days after they take delivery).

And there must be some new fundamental long (or more than one) who sold those puts to Ackman. People sell a few million dollars of premium for speculation - but someone has taken delivery of hundreds of millions of dollars worth of shares - and in my experience they don't do that by accident.

We have had the first disclosure today - and it was a gentle one. UBS owns 6.4 percent.

I still think there will be another person. At least that is my count.


John

PS. There was a serious correction to the original version of this post regarding the ownership of the UBS stake.

Tuesday, January 20, 2015

Vale Saxo Bank

If this story in the Danish press is correct Saxo Bank is not long for this world.

Good riddance. Hope the gamblers (ahem: customers) get some money back.


John

http://www.business.dk/finans/saxo-bank-faar-kaempetab-paa-schweizerfranc

Sunday, January 18, 2015

Herbalife after the January option expiry: Part 1

I have deliberately refrained from writing about Herbalife until the 17 January 2015 option expiry.

We know from public disclosures that Pershing Square (PSQ) had a huge put option position on Herbalife.

There were also a vast number of put options that expired on 17 January.

Here are the outstanding in-the-money put contracts as at market close Friday.

issueopen interest
31.5HLF150117P000315001,174
31.5HLF150130P000315001
32HLF150117P00032000974
32HLF150123P0003200034
32HLF150130P0003200031
32.5HLF150117P000325005,318
32.5HLF150123P0003250059
32.5HLF150130P0003250026
33HLF150117P00033000677
33HLF150123P00033000116
33HLF150130P00033000137
33.5HLF150117P00033500125
33.5HLF150123P00033500276
33.5HLF150130P0003350012
34HLF150117P00034000206
34HLF150123P0003400023
34HLF150130P0003400013
34.5HLF150117P0003450020
34.5HLF150123P0003450078
34.5HLF150130P0003450063
35HLF150117P0003500013,729
35HLF150123P0003500079
35HLF150130P0003500039
35.5HLF150117P00035500168
35.5HLF150123P0003550035
36HLF150117P000360002,096
36HLF150123P000360002
36.5HLF150117P00036500190
36.5HLF150123P000365002
36.5HLF150130P0003650018
37HLF150117P00037000481
37HLF150123P00037000135
37.5HLF150117P000375007,446
37.5HLF150123P00037500248
37.5HLF150130P000375008
38HLF150117P00038000119
38HLF150123P000380007
38HLF150130P0003800047
38.5HLF150117P0003850017
38.5HLF150123P0003850041
38.5HLF150130P000385002
39HLF150117P0003900022
39HLF150130P000390007
39.5HLF150117P0003950025
39.5HLF150130P0003950010
40HLF150117P0004000020,202
40HLF150123P0004000016
40HLF150130P000400006
40.5HLF150123P000405004
41HLF150123P000410003
42.5HLF150117P000425007,563
43HLF150117P000430001
44HLF150117P0004400011
44HLF150123P0004400011
45HLF150117P0004500018,770
47HLF150117P0004700021
47HLF150123P000470001
47.5HLF150117P000475009,611
50HLF150117P0005000073,611
52HLF150123P000520002
52.5HLF150117P0005250027,058
55HLF150117P0005500016,754
55HLF150123P0005500011
57.5HLF150117P000575007,597
60HLF150117P0006000043,836
62.5HLF150117P000625003,173
65HLF150117P0006500027,343
67.5HLF150117P00067500957
70HLF150117P0007000013,127
72.5HLF150117P00072500638
75HLF150117P000750001,373
77.5HLF150117P00077500184
80HLF150117P000800009,981
82.5HLF150117P00082500892
85HLF150117P0008500043
87.5HLF150117P00087500109
90HLF150117P000900002,329
95HLF150117P00095000263
100HLF150117P001000005,276
105HLF150117P00105000172
110HLF150117P00110000115
115HLF150117P0011500051
120HLF150117P0012000069
325,520


They add up to 325 thousand contracts outstanding representing 32.5 million shares.

These options expired on Saturday morning and I presume that the stock has been delivered.

The delivery of these options may have a profound effect on the Herbalife share register. These effects will be part of this series. For reference there are less than 82 million basic shares outstanding and about 91 million diluted shares. However basic shares are the right comparable because delivery has to be effected through basic shares outstanding.

It was generally assumed that these options belonged to PSQ.

Bill Ackman however has issued a denial. To quote:
To set the record straight, 97% of the Herbalife put options owned by Pershing Square have been extended and have expiration dates up until 2016.  The January put options held by Pershing Square have a strike price of $US65 share. Pershing Square may choose to extend, sell or exercise the January put options depending upon market conditions and other factors.
Those in the know have understood that the options expiring on 17 January were not PSQ's options.

PSQ's option position in Herbalife is an off-market position.

I know the contract terms as do many others.

Some of the strikes are very unusual.

They include 44,362 call contracts [which I presume hedge a short position] expiring on 17 April with the very unusual strike price of $69.99. [The contracts represent 100 shares.]

They also include puts expiring 15 May, 11,550 contracts with a $44.50 strike and a further 19,500 contracts with a the unusual $49.99 strike.

There are a further 25 thousand contracts for calls with another $69.99 strike.

I could go on... and on. Ackman's position is well known amongst connected and sophisticated longs.

Moreover like many things that Bill Ackman says he is being cute-with-the-truth. Bill said his "puts" largely didn't expire on 17 January. He however owned a large number of calls that expired - and these calls hedge the oversized short position. For example PSQ carried 4,375 call contracts that expired this weekend with a strike price of $89.90. Presumably these hedged 437,500 short positions.

I wouldn't bother disclosing that I knew details of PSQs unlisted positions except that it is useful in future posts.




John

Post script: If you (like me) believe that Herbalife is a legitimate business and (like me) you believed that the end game was a private equity bid - then I have a puzzle for you.

How could you - knowing the detail of Bill Ackman's position - make a simply humungous amount of money at least partly at the expense of Pershing Square and their clients? Because I assure you some people want to play rope-a-dope with Mr Ackman. [If you think that Carl Icahn has really suddenly become Bill Ackman's bosom buddy then you don't know Carl...]

Secondly: I suspect that this post will cause Pershing Square's office to be quiet and unusually tense on Monday.

Can you say witch-hunt?

Sure, I knew you could.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.