The Business Roundtable, a coalition of America’s leading corporate executives, created a firestorm with its August 19 announcement calling for corporations to create value for all stakeholders rather than simply maximizing value for their shareholders. A debate ensued over whether Milton Friedman was right or wrong in 1970 when he famously declared that the social responsibility of business is to increase its profits.
Some commentators accused the executives of abandoning shareholders; others decried that they were “green-washing” or “purpose-washing:” simply making themselves look good without authentic action.
In reality, large corporations have understood for a long time the importance of creating value for all stakeholders, including their employees, customers, suppliers and communities, as well as their investors, and the Business Roundtable statement just updated the executives’ outward-facing communications to confirm a direction that is both underway and unstoppable.
The statement shows a recognition of two facts:
1. The business case for creating stakeholder value has already been proved. Without creating value for a variety of stakeholders, and without mitigating the risks associated with subtracting value from stakeholders, a company can’t deliver profits to shareholders anyway, at least not over the medium to long term. Creating value for stakeholders, when managed strategically, doesn’t take away from enhancing profits for shareholders, it adds to it. It is part of good management. This is not a zero-sum tradeoff.
2. The U.S. economy is suffering from fallout from short-termism, that is, investors squeezing profits out of companies with a shorter and shorter time horizon. Companies pressured to deliver greater and greater profit margins to their financial owners in the space of a quarter, or less, might not be making the investments and strategic directional decisions that will allow them to thrive in the longer term.
The Business Roundtable statement begins: “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.”
For a long time the U.S. was known around the world as a “meritocracy.” U.S. policy aimed to provide citizens with equal opportunity, for example through public education or public libraries, and to reward those who worked hard and applied their talent. The “American Dream” refers to the aspiration of immigrants from around the world that they could come to America and within a generation, see the fruits of their labor rewarded through upward social mobility.
But Michael Young, the U.K. Labour Party strategist who coined the term “meritocracy,” knew that once the most talented workers rose through the capitalist system, over time this new elite would naturally consolidate its power, leaving behind those less equipped to succeed, and eventually stratifying society.
The fact that this has occurred in America is widely known, and most political campaigns on both sides of the spectrum claim to want to address the extreme levels of societal stratification now so evident.
The Business Roundtable has recognized that while corporations must be well-managed for the benefit of their owners, U.S. capitalism needs to find ways to ensure a longer-term vision than the one that has morphed out of the automation of stock trading, the rise of passive investing, and the power of activist shareholders wanting to squeeze value out of a company no matter the broader context.
The investor community itself has been alarmed, as evidenced by the rise of a movement subscribing to “Principles for Responsible Investment,” which promotes inclusion of environmental, social and governance (ESG) criteria in evaluating investments, and which now has more than 2300 signatories representing more than 80 trillion dollars in assets under management.
Tensie Whelan, director of the NYU Stern Center for Sustainable Business, notes the difference between value extraction from a company (through “maximizing short-term profits and boosting stock price, often at the expense of stakeholders other than shareholders”) and value creation for a company. NYU research into certain case studies shows a positive financial return on sustainability investments, with many long-term benefits.
Indeed, sustainability, or attention to ESG factors, is the way large corporations are creating value for the company, and therefore for all stakeholders including shareholders. A European Union directive now requires companies to provide non-financial (ESG) reporting to investors as well as financial reporting. Creating value for all stakeholders isn’t a foreign concept to European companies, whose cultural context has historically favored this idea.
Kudos to the Business Roundtable for bringing its statement on purpose into line with 21st century practices. The statement is a signpost that will most certainly make it easier for companies to implement purposeful strategies.
Help us learn more about your experience by completing this short survey: https://www.surveymonkey.com/r/RRKS8LZ Subscribe to Alanis Business Academy on YouTube for updates on the latest videos: https://www.youtube.com/alanisbusines… An outline of the two perspectives related to corporate social responsibility: the shareholder model and the stakeholder model. The discussion also includes support for each perspective, including that of famous Nobel prize winning economist Milton Friedman.
As toddlers, my sister and I used to play the famous board-game where depending on the spot where one lands, the individual either slides down a long chute, or climbs a ladder. I had intended to carry my long position in Best Buy (BBY – Get Report) into the holiday season as far back as September. This was one of the first names that I got rid of in early October at an average price of $70 and change.
The broad market selloff that stated there has now surpassed the threshold of what many consider to be the definition of a Correction (-10% from the highs) was just getting in gear at that time. The retailers were making a lot of noise regarding trade with China, and this name was one of the first deck chairs thrown overboard for me as my ship started taking on water. I could have made a better sale a day of two prior, but then again, these shares never looked back once I made that sale either.
The stock had been so badly beaten that recently I considered buying back what I had sold. As I usually do with the retailers, I visited my local Best Buy location before taking on some shares. I walked around the store, stopped over by the laptops pretending to need help. Nothing. Look around. Employees walk by. Maybe it’s just the department, so I walk over to household appliances. Same thing.
The employees did not seem interested in making a sale that day. I decided to walk out. I put my hands in my jacket pockets in a way that should have drawn interest from the security employee at the door. Again, nothing. Now it may just be my store, and it may have just been a bad day, but I decided not to buy any shares in the company that day. Lucky miss.
Will I Be Back?
To the store? Definitely. I have thought the employees energetic and helpful in the past. They’ll get another chance. The stock may have to prove itself, especially after Bank of America Merrill Lynch made their opinion known this morning. BAML cut it’s rating on BBY to “Underperform” from “Neutral”, so it’s not like they loved the chain to begin with. However, the firm dropped their price objective for BBY from $70 to $50.
Best Buy will report its Q4 results on February 19th. Industry consensus is for EPS of $2.57, which would be good for earnings growth of 6.2%. Revenue is expected to print somewhere around $14.7 billion, which will illustrate a contraction year over year for that line item.
The stock trades at just 9.8 times forward looking earnings, and given the general outlook for growth, is it possible that these earnings projections are just too high. If relations with China don’t come to an amicable resolution in the near future… perhaps. That’s the way BAML feels at least for the current quarter, but also makes a point of mentioning the full year.
The analyst behind the BAML opinion is not highly rated by TipRanks, at least not yet. The last highly rated, high profile analyst that I see that still has a buy rating on BBY, and a much higher price target ($81) is Piper Jaffray’s Peter Keith. My belief would be that if Keith throws in the towel, that the marketplace will notice. Perhaps at that point I will initiate an entry level long but not without another visit to my local store.
So, what can a trader do, other than sit on their hands, and wait to see if another shoe drops? Right now, a trader might be able to sell one BBY $47.50 February 15th put at an implied value of $1.29, instead of taking down an equity stake. Hopefully, this trader pockets $129, and takes his or her significant other out for a nice meal.
The risk is that the shares trade below $47.50 by expiration, and the trader is forced to eat these shares at a net basis of $46.21. Note that expiration is four days ahead of this Q4 earnings release. At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.
Warren Buffett has been and continues to be a role model for millions of investors across the globe. His rich investment history going back to as far as 11 years old when bought his first stock, his impressive story has been used in hundreds of speeches globally, with every investor, beginner or pro, being asked to emulate him. However, who is Warren Buffet? In this video, we are going to look into the life of the man known as the “Oracle of Omaha”, highlighting the investments and decisions he made to become one of the richest and most respected businessmen in the world. Audible 30 Day Free Trial: https://amzn.to/2mO6ow0#WarrenBuffett#WarrenWisdom Light Sting by Kevin MacLeod is licensed under a Creative Commons Attribution license (https://creativecommons.org/licenses/…) Source: http://incompetech.com/music/royalty-… Artist: http://incompetech.com/ Practical Wisdom – Producing High Quality Content For Your Enjoyment. Please Consider Subscribing, and enable notifications. Thanks in Advance.
On Thursday, Patrick Byrne, the founder and longtime CEO of former e-tailing giant Overstock.com, resigned, saying his involvement as a federal informant in the investigation of accused Russian spy Maria Butina made performing his duties impossible. That’s not the whole story. This is.
Its early May and Patrick Byrne has just gotten off the phone with hip-hop artist Akon and is roaming barefoot in the elegant three-room suite on the top floor of the Jefferson hotel, a stone’s throw from Embassy Row in Washington, D.C. He grabs a Diet Coke, a pack of gummy bears and some M&Ms from a minibar hidden in a tasteful armoire, settles on a plush cream-colored sofa and begins to boast about the circumstances around which the Senegalese-American celebrity sought him out.
“I hear he’s a musician. We share ambitions for Africa,” says Byrne, popping a gummy bear into his mouth.Byrne, who bought Overstock.com in 1999 and ran it for two decades, has always been a man of many ambitions. High on his list: transforming the African continent and its 1.3 billion people via blockchain technology.
Like an infomercial for the nascent decentralized, distributed ledger technology that underlies cryptocurrencies like bitcoin, he waxes poetic about a future in which corruption is wiped out, people are freed from poverty and developing nations can leapfrog ahead by putting government functions like voting, property records and central banking on the blockchain. Characteristically low on his priority list: The economic interests of the thousands of shareholders in his publicly traded former e-tailing giant.
For the last several years, Byrne, 56, spent no fewer than 220 days a year on the road spreading his blockchain gospel, despite the fact that Overstock was hemorrhaging cash. “Over the next five years, we can change the world for 5 billion people,” says Byrne. “Well, at least a billion. Maybe 5 billion.”
Byrne is vague about why he is in the nation’s capital this week and mentions a meeting with representatives from Africa about his blockchain projects. However, he later reveals that he had been meeting with the Department of Justice. Byrne claims he’s been serving as a government informant, feeding information since 2015 to the “Men In Black,” as he puts it, on Maria Butina, a vivacious Russian grad student with whom he struck up a romantic relationship. She is currently serving an 18-month prison sentence after pleading guilty to conspiring to act as a foreign agent, in connection with her efforts to infiltrate conservative political circles before and after the 2016 presidential election.
In his resignation letter, Byrne cited his involvement in “certain government matters” as complicating “all manner of business relationships from insurability to strategic discussions regarding our retail business.” Byrne says what he has done (exactly what that was remains unclear) “was necessary for the good of the country, for the good of the firm.” Byrne concludes his letter by stating cryptically:
“Coming forward publicly about my involvement in other matters was hardly my first choice. But for three years I have watched my country pull itself apart while I knew many answers, and I set my red line at seeing civil violence breaking out. My Rabbi made me see that ‘coming forward’ meant telling the public (not just the government) the truth. I now plan on leaving things to the esteemed Department of Justice (which I have doubtless already angered enough by going public) and disappearing for some time.”
In a call from his car minutes after delivering a farewell speech to his surprised employees, Byrne said he had his bags packed. “I will be sitting on a beach in South America shortly, and that is all I want to think about,” he says. “I want to focus on getting back into good shape, doing yoga and becoming a vegetarian.”
Welcome to Patrick Byrne’s bizarre world. The existential crisis Byrne is putting his Salt Lake City-based company through comes after an impressive career pioneering e-commerce. Nearly two decades ago, Byrne was lauded as “The Renaissance Man of E-Commerce.” The closeout store he took control of in 1999 for a mere $7 million was on its way to becoming an e-tailing phenom and eventually came to command a market capitalization of $2.2 billion. But in the hyper-competitive digital age, disruptive business models don’t last long, and today Overstock—once an innovator—is a has-been.
This isn’t any secret. By the time of his resignation, Byrne had all but given up trying to compete with the likes of Amazon and Wayfair, and he had spent the last two years unsuccessfully attempting to unload Overstock’s retail business. Just as e-commerce captivated Byrne at the turn of the millennium, blockchain was his shiny new obsession. So Byrne funneled Overstock’s dwindling resources into blockchain ventures—more than $200 million since 2014.
About 30% of that sum went into 18 early-stage companies that are building a suite of blockchain technology products he wanted to sell to governments. The rest has been seemingly squandered on a personal vendetta: Overstock is creating a blockchain version of Nasdaq, which Byrne believed could right some of the evils of Wall Street—particularly the naked short-selling that he claims plagued his company for much of the last 15 years. Byrne attracted an eclectic mix of allies to his corner doing what he calls “God’s work,” ranging from Akon and the World Bank to the infamous short-seller Marc Cohodes and the city of Denver.
But the walls closed in on Byrne’s quixotic adventure. Overstock’s heavily shorted stock plummeted from $87 in the beginning of 2018 to about $20 today as some $1.5 billion in market capitalization has evaporated. Once reliably profitable, Overstock lost $206 million last year and $110 million in 2017. In recent months, Byrne fired some 400 people.
Even worse were the cracks forming in Overstock’s new strategy. The company’s prized crypto offering, Tzero, is the subject of an SEC investigation, and a highly-anticipated private equity investment into the fledging exchange has withered away. Its blockchain investment arm, Medici Ventures, has yet to generate meaningful revenues and racked up losses of $61 million in 2018. With many big companies now embracing blockchain technology—including a bold new plan from Facebook—Byrne’s strategy shift to blockchain suddenly looks as challenging as Overstock’s online retailing business.
Eventually even Byrne’s most loyal shareholders—blockchain believers among them— were in open revolt. Fumed Byrne in May, after investors bombarded him with calls and emails when he sold 900,000 shares of stock, “Frankly, I had no idea that shareholders would demand explanations of why and how I might want to use my cash derived from my labor and my property to pursue my ends in life.”
Byrne is the son of the late John “Jack” Byrne, a University of Michigan-trained mathematician and renowned insurance executive credited with turning around Geico in the mid-1970s and persuading Warren Buffett to invest in the auto insurer. Geico would eventually become one of the biggest contributors to Berkshire Hathaway’s bottom line, and Buffett once described Byrne’s father as “the Babe Ruth of insurance.”
When Byrne was in middle school, he gravitated toward his father’s friends. Bethesda neighbor Gordon Macklin, the president of Nasdaq from 1975 to 1987 (and later the chairman of San Francisco investment bank Hambrecht & Quist), would drive Patrick to school regularly. Buffett was an occasional house guest, and Byrne’s parents would allow him to skip school to spend time with the investment maven.
Says Byrne, who now refers to the Omaha billionaire as his Rabbi, “My mom would get a case of Pepsi, and Buffett, who is a teetotaler, always carried a hip flask of cherry syrup like a drunk. We’d sit there and over an afternoon polish off 18 Pepsis.”
Byrne’s father later went on to turn around American Express’s Fireman’s Fund and eventually created his own insurance holding company, called White Mountains Insurance. His stake, worth hundreds of millions at his retirement in 2007, formed the basis of the family’s wealth.
Patrick was the youngest and most precocious of Jack’s three sons. In 1981, he headed to Dartmouth to study philosophy and Asian studies. Shortly after his graduation, he was diagnosed with testicular cancer. After treatment, he celebrated with a cross-country bicycle ride with his two older brothers. The cancer would come back two more times in quick succession and keep him in the hospital for much of his 20s. To keep his mind occupied while he was bedridden, he began pursuing a graduate degree in mathematical logic from Stanford. In 1988 he headed to Cambridge University as a Marshall Scholar and eventually received his philosophy doctorate from Stanford.
Byrne speaks Mandarin and several other languages and once translated Lao Tzu’s Tao Te Ching (The Way Of Virtue) into English. “I was one of those guys who actually studied philosophy because I was trying to figure out man’s place in the universe,” says Byrne, whose dissertation explored the virtues of limited government and drew from libertarian Robert Nozick’s Anarchy, State and Utopia.
Despite his years in academia, Byrne pivoted hard to the pursuit of wealth in the late 1980s. “I had grown up in a very business-oriented household … I never anticipated staying in a university setting,” he says. In 1987 he bought a bankrupt hotel with his older brother called the Inn at Jackson Hole for about a million dollars, which they sold several years later for $4 million. In 1989, they started buying distressed consumer debt at 5 cents on the dollar during the S&L crisis.
In the early 1990s, Byrne led a $1 million investment into the development of the Red Dolly Casino in Colorado, which was later sold for $5 million. He also invested in distressed strip malls, office space and apartment buildings across the country. His dad often loaned his sons money and in later years put up mezzanine capital, collecting a preferred, 15% return and half as much equity.
Nothing kept Byrne’s attention very long. In 1994, he led an investment into Centricut, a New Hampshire-based industrial torch-part manufacturer, and served briefly as CEO when the current management fell ill. In 1997, he left to run Berkshire Hathaway’s Fechheimer Brothers, which made uniforms for police, firemen and military. In 1999, seeing an opportunity to sell leftover inventory online, his investment holding company, High Plains Investments LLC, acquired a majority stake in D2-Discounts Direct for $7 million. He renamed it Overstock, and when 55 venture capitalists declined to fund the company’s growth, he turned to friends, family and his own checkbook.
His timing was perfect. The company began scooping up inventory from bankrupt dot-coms, whether it was consumer electronics, jewelry or sporting goods, then selling it on the cheap. In 2002, Overstock’s revenue hit $92 million and Byrne took the company public via a Dutch auction, which allows investors (not bankers) to set prices for the stock offering themselves. (Google went public the same way.)
By 2005, the company’s stock, which had skyrocketed post-IPO, began to slide as its losses widened. Byrne became convinced it was because of naked short-selling, an illegal practice in which investors sell shares in a company without actually borrowing the shares, typically using leverage. In a now-infamous August 2005 conference call, he ranted about how hedge funds, journalists and regulators were conspiring to push down the company’s stock price under the direction of some faceless menace he called the “Sith Lord.”
Overstock sued short-selling hedge fund Rocker Partners and research firm Gradient Analytics, which had been critical of the company. Then, in 2007, he filed a $3.5 billion lawsuit against 11 of the biggest banks on Wall Street (Goldman Sachs, Morgan Stanley and Credit Suisse among them), accusing them of participating in a “massive, illegal stock market manipulation scheme” that distorted the company’s stock price by facilitating naked short-selling.
The crusade cost him two directors, plus the confidence of his father, who threatened to step down from the board because he believed his son was distracted from Overstock’s core business. The litigation dragged on for over a decade and resulted in a handful of settlements, including a $20 million payment from Merrill Lynch in 2016. “I think he won the battle but lost the war when it came to naked short-selling,” says Tom Forte, long the lone analyst covering the stock.
In the years Byrne spent chasing short-sellers, Overstock’s stock sagged and revenue drifted slowly upward, hitting $830 million in 2008, $1.3 billion in 2013 and $1.8 billion in 2018. And while the company never racked up massive losses like Amazon or Wayfair, as Byrne likes to point out, its profitability has been modest. Overstock broke into the black in 2009, then eked out small profits for the next seven out of eight years.
In 2017 and 2018, as Byrne shifted his attention to expanding in crypto and blockchain, the company began bleeding red ink—a whopping $316 million over two years, which is more than twice the profits Overstock has ever delivered. Byrne chalked his market share declines up to competitors with seemingly endless piles of cash to blow through.
“The thing I never anticipated … was that I would be in an industry that tolerated people losing $500 million, $1 billion or $3 billion forever. We started drawing copycats who came in and seemed to have unlimited capital,” he says, not hiding his disdain for and jealousy of Wayfair.
However, former employees say Byrne was distracted by his short-selling crusade and failed to take competitors seriously. Internally Byrne’s ADD management style—enthusiastically starting up new projects but then losing interest—was jokingly referred to as the Overstock “ovolution.” In 2004, the company spent a couple of million to develop an online auction platform akin to eBay, but it struggled to turn a profit and was shut down in 2011.
(Byrne later said he wished he hadn’t abandoned it.) In 2014, Overstock invested $400,000 to facilitate pet adoptions by working with shelters, which it still runs but describes as a “public service.” The company started selling home, auto and small business insurance in 2014, too, which Byrne described as “a long-term play” before trashing it as not doing “particularly well” three months later.
“Patrick gets very focused on something, and then when he sees the financials didn’t work out, he basically forces layoffs,” says Chad Huff, a former software developer. “Initiatives would get started, then shelved. Or they’d be half done and not in a great state but rolled out anyway.”
Acouple of months before his resignation, as sheets of rain blanket Overstock’s new headquarters at the base of Utah’s Wasatch Mountains—a building designed to resemble a peace sign when viewed from above—Byrne has finished sitting through a scheduled business luncheon and gone missing.
Several minutes later, after his assistant tracks him down, he glides into his office, where posters of Bob Marley and Pulp Fiction give it a dorm-room feel. He sits down and begins ruminating on his two decades running Overstock. “It’s kind of imagination land,” says Byrne, dressed in a black long-sleeve T-shirt, jeans and tennis shoes.
Strangely, Byrne’s Overstock was long immune from activist shareholder campaigns and boardroom coups and what ultimately prompted his sudden departure is still murky. Investors like Marc Cohodes had called for Byrne to step aside as CEO and move into a chairman position. Despite recent stock sales, Byrne remains the company’s largest shareholder, with a 14% stake and says he wasn’t pushed out. “This is not about pressure from shareholders. The only pressure—or actual issue— was that the insurance companies were having conniptions,” he says.
Byrne began chasing crypto in late 2013 when he asked dozens of staffers to work over the holiday break to fast-track a bitcoin payment feature. The price of bitcoin had skyrocketed that year from about $13 to more than $1,000, and in January 2014, Overstock became the first major retailer to accept bitcoin as payment.
Before long, Byrne began tapping Overstock’s balance sheet to fund bigger and bigger blockchain initiatives. The crown jewel: a digital stock exchange called Tzero, which is seeking to allow investors to trade so-called security tokens that represent traditional securities, like stocks, bonds, real estate, private equity and art on the blockchain. Proponents say this will improve access and liquidity for certain investments, plus cut down settlement times for stocks and bonds from up to two days to mere seconds. A bonus: The system would make naked short-selling impossible because there is no longer a lag time between a buy and sell order.
On the plus side, Tzero has satisfied a set of fearsome regulatory requirements, most notably acquiring a company licensed as an alternative trading system. The problem is, with just two tokens—representing Overstock’s and Tzero’s own shares—available to trade on Tzero’s platform, almost no one uses it. The company says it is aiming for 5 to 10 tokens by the end of the year.
In May, it announced partnerships with Saudi real estate giant Emaar Properties, to list $2 billion in real estate, and Securitize, a startup that packages regular assets into digital tokens that can be traded on the blockchain. While it hopes to generate revenues from listing fees, trading commissions, interest on lending assets and more, it first needs to create liquidity by attracting quality issuers and investors to its platform.
Byrne was also developing a securities lending platform as part of Tzero, which would connect asset-rich institutional investors like pension funds (who make money by lending their stock) directly with short-sellers (who borrow stock to make trades). Both parties stand to benefit from lower fees, plus will receive a blockchain-enabled digital locate receipt that proves the shares have actually changed hands.
The service takes dead aim at banks like Goldman Sachs and Morgan Stanley, which currently sit in the middle of these transactions. It’s been tried before: A company called Quadriserv created a similar stock lending platform named AQS in 2006, but alleged in a recent lawsuit that banks conspired to “boycott AQS and starve it of liquidity.” In 2016, AQS was sold in a fire sale for $4 million.
“It’s the last great business on Wall Street,” says Byrne. “Pension funds are going to understand they have been deprived of tens of billions of earnings a year. That money is turning into Maybachs in the Hamptons.”
At the company’s annual shareholder meeting in May, Byrne fielded tough questions from investors. While the price of bitcoin had climbed some 60% in the last five months, Overstock’s shares continued to slide. And after months of delays, Overstock just dropped a bombshell: Tzero would receive a measly $5 million in the form of Chinese renminbi, U.S. dollars and other Hong Kong-traded securities from Asian investment firm GSR Capital, after the company originally touted a deal size of as much as $404 million.
Over time Byrne developed a dilettante’s reputation for overpromising and underdelivering. In 2016 Byrne boldly told investors that Overstock would be issuing the world’s first equity security using the blockchain. “The history of capital markets is entering a new era,” he said. Byrne personally ended up buying 50% of the $2 million preferred stock offering.
In 2017, Byrne announced a joint venture with Peruvian economist Hernando de Soto Polar that would “challenge global poverty and inequality” by creating a blockchain-based global land registry. But when the two couldn’t agree on terms, Byrne ended up contributing $7 million of his personal capital to take a 43% stake in the newly formed Medici Land Governance.
Overstock began exploring a sale of its retailing business in 2017, but to date no buyers have materialized. There was also Tzero’s troubled “initial coin offering,” which set out to raise $250 million but, ultimately as crypto prices were dropping, generated $105 million in August 2018 at an expense of $21.5 million to corporate parent Overstock. The offering is now being investigated by the SEC as part of a broader ICO crackdown.
Many investors grew tired of Byrne’s promises. “Basically, every initiative they put forward, they promised or signaled to the market that this is an incredible layup and they will get it done in three to six months,” says Kevin Mak, a lecturer at Stanford Business School who invested in the company in 2017 and sold his shares last fall. “I ultimately exited when I found that the information I was getting from management was no longer—I want to pick the right words—reliable.”
In the end, Byrne was forced to spend a considerable amount of time hunting for fresh funds to keep his dream alive. In November 2017, Overstock borrowed $40 million from his mother (trusts in her name own 5% of the company) and brother at an interest rate of 8%.
Over the next few months, during the height of crypto-mania, the company received $150 million from two investors, including George Soros, after they exercised warrants in exchange for stock (the investors have since dumped their shares). In August and September 2018, the company raised another $95 million by issuing new shares of common stock in an “at the market” offering.
The problem is, unlike most companies that buy back shares as prices decline, Overstock is selling, diluting the company’s equity. Shares outstanding have climbed to 35 million from 25 million in the last two years. In the first quarter of 2019 Overstock committed to another quick stock sale, raising $31 million to partially offset a $51 million cash burn.
Meanwhile, Overstock’s original business is running on fumes. “It was kind of a fight to run retail because it was never his priority,” says Stormy Simon, former president of the operation who left in 2016. Since then, there have been several rounds of layoffs in the retail business, leaving a raft of empty desks in Overstock’s new $100 million headquarters.
And yet, to his blockchain staffers, Byrne was like Daddy Warbucks. Tzero CEO Saum Noursalehi was paid $4.8 million last year, while his brother and Tzero vice president Nariman earned $1 million. Tzero chief technology officer Amit Goyal made $1.8 million—and his brother Sumit earned an additional $765,000.
In Overstock’s recent quarterly filings, it indicates that it should be able to fund its current obligations for another 12 months, but after that, additional capital may be needed “to be able to fully pursue some or all of our strategies.” The ominous disclosure seems to have had little effect on Overstock’s languishing shares, because by now many investors have given up on the company.
Byrne never showed much respect for Wall Street or small-minded shareholders—and maybe that’s what got him in the end. “We’re like a Russian icebreaker trolling across the Arctic ice field. It’s three or four yards at a time and enormously expensive,” says Byrne. “When you’re talking about the kinds of numbers we’re talking about and freeing up trillions of capital … I think there is going to be so much money in it it’s kind of silly to try and model it.”
I am a staff writer at Forbes covering retail. I’m particularly interested in entrepreneurs who are finding success in a tough and changing landscape. I have been at Forbes since 2013, first on the markets and investing team and most recently on the billionaires team. In the course of my reporting, I have interviewed the father of Indian gambling, the first female billionaire to enter the space race and the immigrant founder of one of the nation’s most secretive financial upstarts. My work has also appeared in Money Magazine and CNNMoney.com. Tips or story ideas? Email me at email@example.com.
The most reliable recession indicator in the world just flashed red—and it’s actually setting us up for 33%+ gains in the next two years.
A contradiction? Sure sounds like it.
But history tells us we can expect a fast return like this when the economy and stock market look exactly like they do right now.
I’ve got two ways for you to grab a piece of the action, one of which even hands us a growing 7% cash dividend.
And when I say “growing,” I mean it: this already-huge cash stream has grown 96% in the last 15 years, and it’s backed by the strongest stocks in America (I’m talking about the 30 names on the Dow Jones Industrial Average), so there’s plenty more to come.
More on this cash-rich fund shortly. First, we need to talk about the “recession signal” everyone’s panicking about.
Recession Alert: Red
That would be the yield curve, which just “inverted” for the first time since 2007. This means the 2-year Treasury was briefly yielding more than the 10-year Treasury.
That shift grabbed a lot of headlines because every time the 2-year has yielded more than the 10-year, a recession has followed (though there’s typically a long time lag).
However, there’s a hugely important detail the mainstream crowd is forgetting—and that’s where the 33% gain I mentioned off the top comes in. I’m talking about what happened in 1998, when, like today, the yield curve briefly inverted, then “uninverted.”
What happened then?
Stocks exploded 33% post-inversion before a recession did eventually arrive.
Why the big jump? Because 1998 was unlike most periods of an inverted yield curve: shortly after the yields flipped, the Federal Reserve started cutting interest rates—and that’s exactly the situation we’re in today.
This is the opposite of what happened when the yield curve inverted in 1989, 2000 and again in 2006. During those periods, the Fed kept raising rates, and economists say those hikes made recessions worse—or even started them in the first place.
Only in 1998 did the Fed respond to the inverted yield curve by starting to cut rates—and then, when the central bank went back to raising rates two years later, the recession followed in about a year.
Funny thing is, no one is talking about this right now, and it’s critical, because it tells us that the chances of a recession in the near term largely depend on what the Fed does. And with the Fed now cutting rates, a recession could be delayed for over two years. And that means letting fear get the better of you and moving to the sidelines now could cause you to miss out on a double-digit gain.
Here’s something else that tells us a recession is nowhere near: earnings blew out expectations in the second quarter, and analysts now expect profits to grow in the third quarter of 2019. Sales are still up about 4% across the board for S&P 500 companies, and US GDP growth is slated to come in above 2% this year.
This is where the two funds I want to show you today come in—they position you to profit if it’s 1998 all over again, but, just in case things do take a sudden downward turn, they build in a bit of protection, too.
The first (but not my favorite) fund is a plain-vanilla ETF, the Dow Jones Industrial Average ETF (DIA), which, as the name says, holds the 30 companies in the Dow Jones Industrial Average. Because of its large-cap focus, the Dow largely tends to track the SPDR S&P 500 ETF (SPY) when stocks rise, and it falls less in a declining market.
However, you’re missing a far more important piece of downside protection when you go with DIA: a strong income stream (DIA yields just 2.1% as I write this). And a serious dividend is critical when the next downturn hits, especially if you’re counting on your portfolio to fund your lifestyle. That’ s because a strong dividend reduces the need to sell your holdings in a crash—at fire-sale prices—to access cash.
This is where a closed-end fund (CEF) like the Nuveen Dow 30 Dynamic Overwrite Fund (DIAX) really shines. DIAX also holds the “Dow 30”: household names like Home Depot (HD), McDonald’s (MCD) and Apple (AAPL), but with a big difference from DIA: a 7% dividend yield—over three times bigger than DIA’s payout.
Plus, it offers something few high-yield stocks and funds do: a dividend that’s growing.
Holding DIAX will get you exposure to stocks, no matter what happens, and an income stream you can depend on. That’s a lot better than letting yield-curve fears force you to the sidelines—where you’ll miss out on solid returns.
I have worked as an equity analyst for a decade, focusing on fundamental analysis of businesses and portfolio allocation strategies. My reports are widely read by analysts and portfolio managers at some of the largest hedge funds and investment banks in the world, with trillions of dollars in assets under management. Michael has been traveling the world since 1999 and has no plans to stop. So far, he’s lived in NYC, Hong Kong, London, Los Angeles, Seoul, Bangkok, Tokyo, and Kuala Lumpur. He received his Ph.D. in 2008 and continues to offer consulting services to institutional investors and ultra high net worth individuals.
General Electric (GE – Get Report) rose Friday after CEO Larry Culp purchased $2 million worth of shares in the company following reports that its accounting tactics were targeted by the whistleblower who helped bring down Bernie Madoff’s Ponzi scheme.
Securities and Exchange Commission filings from late Thursday indicate Culp purchased 252,000 GE shares at $7.93 each Thursday as the stock plunged following a Wall Street Journal report that outlined allegations from Harry Markopolos, an accounting expert who flagged issues surrounding Bernie Madoff’s investment fraud.
Markopolos called GE a “bankruptcy waiting to happen” and said he found that its insurance unit would need an $18.5 billion boost to its reserves. He also told that paper that other accounting issues, including in its oil and gas business, would amount to around $38 billion.
Markopolos is working with an undisclosed hedge fund that has an ongoing short position in GE shares, meaning they’re betting against them in the near and long term.
“GE will always take any allegation of financial misconduct seriously. But this is market manipulation — pure and simple,” Culp said in a statement Thursday. “Mr. Markopolos’s report contains false statements of fact and these claims could have been corrected if he had checked them with GE before publishing the report.”
GE shares rose 9.7% on Friday to close at $8.79 following Thursday’s 11.3% plunge (the biggest in more than 11 years).
GE’s power division raised concerns last year when the company said a $22 billion charge related to acquisitions that it booked over the three months ending in October 2018 was being probed by both the Securities and Exchange Commission and the U.S. Department of Justice.
“GE stands behind its financials. We operate to the highest-level of integrity in our financial reporting and we have clearly laid out our financial obligations in great detail,” the company said in a statement to TheStreet. “We remain focused on running our business every day and following the strategic path we have laid out.”
“We will not be distracted by this type of meritless, misguided and self-serving speculation and neither should anyone in the investor community,” the statement added.
Shares of General Electric fell in the pre-market Thursday after Madoff whistleblower Harry Markopolos released a report alleging that GE has masked the depths of its financial problems, resulting in inaccurate and what he’s calling fraudulent financial filings with regulators. GE responded by saying it hasn’t been contacted by Markopolos and the group’s report was produced to help short sellers profit by creating volatility in GE’s shares. CNBC’s “Squawk on the Street” discuss.
Deere (DE – Get Report) posted weaker-than-expected third-quarter earnings Friday and lowered its full-year sales and profit forecast as trade uncertainty surrounding the agricultural sector continues to hurt the farm equipment maker’s bottom line.
Deere said earnings for the three months ended on July 28, the company’s fiscal third quarter, came in at $2.71 a share, up 4.6% from the same period last year but 13 cents shy of the Wall Street consensus forecast. Group revenue, Deere said, fell 3% from last year to $10.03 billion and topped analysts’ forecasts of a $9.38 billion tally.
Looking into 2019, Deere said it sees full-year equipment sales rising by 4%, down from a prior forecast of around 5%, while net income is forecast to come in at $3.2 billion, down from the company’s earlier guidance of $3.3 billion.
“John Deere’s third-quarter results reflected the high degree of uncertainty that continues to overshadow the agricultural sector,” said CEO Sam Allen. “Concerns about export-market access, near-term demand for commodities such as soybeans, and overall crop conditions, have caused many farmers to postpone major equipment purchases.”
“At the same time, general economic conditions remain positive and are contributing to strong results for Deere’s construction and forestry business,” he added.
Deere shares were up 3.17% to $148.26 in trading Friday.
“In spite of present challenges, the long-term outlook for our businesses remains healthy and points to a promising future,” Allen said. “We continue to expand our global customer base and are encouraged by response to our lineup of advanced products and services.”
“Furthermore, we are fully committed to the successful execution of our strategic plan focused on achieving sustainable profitable growth,” he said. “In support of the strategy, we are conducting a thorough assessment of our cost structure and initiating a series of actions to make the organization more structurally efficient and profitable.”
The bank holding company has launched an internal investigation into the matter to determine its exposure, which it currently estimates at $90 million. The Cleveland, Ohio-based bank said there could be an additional impact on its third-quarter earnings. Executives are working with law enforcement to determine additional details.
Shares of KeyCorp were down 1.14% at $17.38 in early trading Tuesday. The shares are down approximately 17% year-to-date.
U.S. banks began rolling out their quarterly earnings numbers this week, starting with Citigroup (C – Get Report) , which Monday said that second-quarter profit rose 6.6% to $4.8 billion. JPMorgan (JPM – Get Report) and Goldman Sachs (GS – Get Report) both posted better-than-expected results on Tuesday before the market open.
Wall Street analysts have warned that U.S. banks could face a squeeze on their lending profits as the Federal Reserve moves toward a likely interest-rate cut later in July.
For the first quarter, Cisco said it anticipates adjusted earnings per share between 80 cents and 82 cents. The company said it expects flat to 2% revenue growth. Those figures are below analyst projections for earnings of 83 cents per share and revenue growth of 2.5%, according to Refinitiv consensus estimates.
Cisco CEO Chuck Robbins said the company’s business in China dropped 25% amid the U.S.-China trade war and early signs of macro shifts that didn’t occur in the previous quarter.
Shares of NetApp jumped nearly 4% after the data services and management company reported promising first-quarter earnings. The company reported adjusted earnings per share of 65 cents on revenue of $1.24 billion. Analysts had expected earnings per share of 58 cents on revenue of $1.23 billion, according to Refinitiv. NetApp CEO George Kurian said gross margin and cost structure improvements will help the company “navigate the ongoing macroeconomic headwinds”
Vipshop soared 8% after announcing higher-than-expected earnings for the second quarter. The Guangzhou, China-based company reported adjusted second-quarter earnings per share of $1.58 yuan on revenue of $22.74 billion yuan. Analysts had expected earnings per share of $1.01 yuan on revenue of $21.52 billion yuan, according to Refinitiv. Eric Shen, chairman and chief executive officer of Vipshop, cited the company’s growing numbers of active users and acquisition of Shanshan Outlets.
Ralph Lauren Corp. (RL) is under selling pressure today. Earnings are expected tomorrow, Tuesday, but traders are not waiting for the numbers to sell. Selling has been going on for most of the month and further declines are anticipated. Let’s check the fit of the charts and indicators.
In this daily bar chart of RL, below, we can see a weak situation. The rally from the December low in the $95 area stalled/stopped in the $130-$135 area, or the middle of prior resistance from $125 to $145 from last May to early October.
A rally that stops in the middle of prior resistance is weak in my book. Add in closes below the 50-day and the 200-day moving average lines and you get another reason to sell.
The daily On-Balance-Volume (OBV) line shows a peak in early November and the subsequent decline even while prices rallied tells me that sellers of RL have been more aggressive and prices can decline further.
The Moving Average Convergence Divergence (MACD) oscillator is right on the zero line and could soon cross below the line for an outright sell signal.
In this weekly bar chart of RL, below, we can a potential topping pattern from early 2018. RL is testing the declining 40-week moving average line from above but it could close below it this week.
The weekly OBV line has been unable to trend to new highs for several months and the weekly MACD oscillator is poised to cross to the downside for a take profits sell signal.
In this Point and Figure chart of RL, below, we can see a downside price target around $104 being projected.
Bottom line strategy: The charts and indicators on RL look weak ahead of tomorrow’s earnings report. I would not look to be a buyer.
When investors encounter tough days in the stock market, they need a game plan for how to respond, Jim Cramer told his Mad Money viewers Friday. That means knowing what type of selloff you’re dealing with and how best to navigate it. Fortunately, history can be your guide in identifying those inevitable moments of weakness and keep you from panicking.
Stocks finished down Friday, as Donald Trump’s recent threat to levy 10% tariffs on an additional $300 billion of Chinese imports overshadowed the latest U.S. jobs data.
The Dow Jones Industrial Average, which hit a session low of 334 points, finished down 98 points, or 0.37%, to 26,485. The S&P 500, which saw its worst week of the year, fell 0.73% and the Nasdaq dropped 1.32%. The Dow had its second worst week of the year as it fell 2.6%.
Cramer told his viewers that the U.S. stock markets have only seen two truly horrendous selloffs since he began trading in 1979. Those were the Black Monday crash in October 1987 and the rolling crash of the financial crisis from 2007 through 2009. But while both of these declines saw huge losses, they were in fact very different.
Many investors don’t remember Black Monday, where the Dow Jones Industrial Average lost 22% in a single day. Even fewer remember that the market lost 10% during the week prior, and continued its losses on the Tuesday after. While it wasn’t known at the time, this crash was mechanical in nature, caused by a futures market that overwhelmed the ability to process the flood of transactions. In the confusion, buyers stepped aside and prices plunged.
The carnage wasn’t stemmed until the Federal Reserve stepped in with promises of extra liquidity. But in the end, the economy was strong. There was nothing wrong with the underlying companies, the market just stopped working. That’s why it only took 16 months to recover to their pre-crash levels.
Investors witnessed similar mechanical meltdowns in the so-called “flash crash” of 2010 and its twin in 2015. On May 6, 2010 at precisely 2:32 p.m. Eastern, the futures markets again overwhelmed the markets, only this time machines were doing most of the trading. The crash lasted for a total of 36 minutes, during which time the Dow plunged 1,000 points from near the 10,000 level.
In August of 2015, another flash crash occurred at the open, with the Dow again falling 1,000 points in the blink of an eye. In the confusion, traders couldn’t tell which prices were real and which ones were pure fantasy. Only those with strong stomachs risked trading at the heart of the decline, but those traders were rewarded handsomely.
In all of these cases, Cramer said, the machinery of the markets was broken. Even the circuit breakers put in place after 1987 were not able to stem the declines and in fact, did very little to even slow them down. But for those investors who were able to recognize what was actually happening, these declines were a once- (well, twice-) in-a-lifetime gift.
The Great Recession was a totally different animal. The market began falling in October 2007, but didn’t bottom until March 2009, almost two years later. Afterwards, it took until March of 2013, four years later, for the markets to get back to even. Cramer said this kind of decline is the most dangerous, but fortunately, it’s truly a once-in-a-lifetime event, only occurring every 80 years or so.
The Great Recession was caused by the Fed raising interest rates 17 times in lock step, trying to cool an already cooling economy. The recession could have been avoided had the Fed done their homework and actually talked to CEOs, as Cramer did at the time.
Cramer recalled talking to the CEOs of banks, all of whom told him that defaults on mortgages were on the rise in a fashion none of them had seen before. Cramer’s famous “They know nothing” rant on CNBC stemmed from those conversations, as the Fed did nothing until the first banks began to collapse. The market fell 40% before finally finding its footing.
How can investors identify this type of devastating decline? Cramer said investors can ask whether the economy is on a solid footing. Is business declining? Is employment falling? Are interest rates still rising even as cracks are appearing? If big companies are unable to pay their bills, the problem could be a lot deeper than you think.
Today’s market is not like 2007, however, Cramer said. Business is stronger, our banking system is stronger and there’s still time for the Fed to take their foot off the brakes and wait for more data before proceeding.
So you’ve just spotted a mechanical breakdown in the market, what should you buy? Cramer said he’s always been a fan of accidental high-yielders, companies whose dividend yield is spiking because their share prices are falling with the broader averages.
He said that these stocks are always among the first to rebound, as their dividends help protect them. He advised always buying in wide scales as the market declines. That way, if the rebound is swift, you’ll still make a little money, but if it’s a larger, multiday sell off, you’ll make even more.
Cramer reminded viewers that when the Fed is cutting interest rates, almost every market dip is a buying opportunity. But when it’s raising rates, things get tricky. Not every rate hike causes a crash, however, only ones that push rates high enough to break the economy.
During these times, it’s important to remember that stocks aren’t the only investment class out there. You can also invest in gold, bonds or real estate to stay diversified.
It’s Not Just the Fed
The Fed isn’t the only reason why the market declines, and Cramer ended the show with a list of the other common culprits.
The first sell-off culprit are margin calls. Too often, money managers borrow more money than they can afford and when their bets turn south, they are forced to sell positions to raise money. We saw this happen in early 2018 when traders were betting against market volatility by shorting the VIX. When volatility returned, these traders lost a fortune and the whole market suffered.
There are also international reasons for the market to sell off, including crises in Greece, Cyprus, Turkey and Mexico, among others. Cramer said in these cases, it’s important to ask whether your portfolio will actually be impacted by these events. Usually, the answer is no.
Then there’s the IPO market. Stocks play by the laws of supply and demand after all, so when tons of new IPOs are hitting the markets, money managers often have to sell something in order to buy them. Declines can also stem form multiple earnings shortfalls as well as, yes, political rhetoric coming from Washington.
Cramer said many of these declines happen over multiple days. The key is to watch if the selling ends by 2:45 p.m. Eastern. If so, it may be safe to buy. But if not, there will likely be more selling the following day and it will pay to be patient.