Sunday, May 08, 2005

For Mother's Day, Mr. Cuban Gives The Gift of Laughter

In these turbulent times, it's all too often that we see arrogant blowhards going on and on about topics that strain the limits of their cognitive carapaces - the equivalent of Sean Penn in Team America. Not so the subject of Sunday's Barron's interview, Mr. Mark Cuban, ladies and gentleman, please, a big hand for the man, yessssss.

Mark is possessed of a marvelous sense of whimsy and fun, a mirth-filled pithiness that is a refreshing breath of cool fresh air after all the "hard number crunching" and "in-depth research" that the rest of the publication is burdened with. In his latest frolic through the pages of Barron's, he brightens all of our days by introducing a stunningly low-key parody of some of the dimmer folk that can be seen lumbering through their "analysis". Take this section of his interview from Sunday:

"Q: You have a paired trade on NovaStar Financial, another controversial name.
A: I'm hedged, leaning short. They package and resell mortgages and sub-prime mortgages. The short story is, they are keeping the stock up by paying dividends, and they are paying for the dividends by raising money, rather than from operations. At some point, that runs out."

You have to love the timing, and the cadence. It's almost musical. Obviously here he is nudging anyone that doesn't realize that NovaStar, a REIT, securitizes pools of bonds backed by the mortgages they originate or buy (all of which are sub-prime). He then lets us in on the joke by pretending to not know that all REITS are legally obligated to pay a dividend equal to 90% of their taxable income (NFI pays 100%) by the time they file their tax return, and further, that their cashflow supports the dividend they pay. You can imagine him slyly observing his interviewer, sizing him up to see if he's caught the joke or is still buying it. He then trots out the old saw about NFI having to raise cash to pay the dividend, testing to see if the questioner will point out that all REITs have to fund their growth by doing secondaries and the like, as they have no capital left at year-end given that they've payed it all out in dividends. Now, Mark's crafty sense of fun might have one believe that he didn't understand this, or that it had never been explained to him (ad nauseum), or that NFI was a special situation in the REIT world, but I happen to know that it has been explained in depth, thus this is obviously a put on. Tim Conway, Steve Martin, Mark C. Funny stuff, very inside jokey, and the delivery is a gas. But that was just the warm-up. Try this howler:

"Q: The longs are pretty vocal on this one. So is the company.
A: When a company fights so hard to fight the shorts, that's always, to me, a great sign to short a company. But it's almost impossible to borrow, and you have to repay the dividends. But there's a preferred. So I'm long the common and short the preferred. I can use the fee from lending the common to pay the dividends on the short of the preferred and still have money left over."

Again, he comes at it straight faced, but it's a rib-tickler once you get the tongue in cheek thing. First, he knows that the company has never ever "fought hard" against the shorts, and in fact has never even said a word about them. So that's clearly his richly developed sense of irony at work, as he mocks with his condescending feigned credulity the questioner's declarative misstatement that the company has been vocal, when he knows they haven't. And then he toys with anyone dull enough to not get that shorting the preferred and going long the common is actually a bullish position. He waves his hands around here a bit, for theater, but at the end of the day, it's a bullish stance, and he has some fun with his interviewer to see if he'll get it. He doesn't, but nobody said they had the best or the brightest throwing the softballs at Barron's. But the next chunk is by far the best of the exchange - you can almost see the Bill Murray-like twinkle in his eyes as he deadpans it:

"Q: So this leads me to something that you've posted about on the blog a number of times in the past couple of months: naked short selling -- selling stocks short despite an inability to borrow them as you would in a more typical short sale.
A: Because I kept on getting all these e-mails from people saying naked shorting is bad, you have to come support this.But in most of the examples, the companies were like one-cent stocks, where a guy had bought all the float for $5,000.

Q: So, did they have a point?
A: It's almost like sitting in the bar and saying who was better: Wilt Chamberlain or Bill Russell? It's not the big thing people make it out to be, but it cracks me up to watch them go at it."

Here you get to see the master at work, and it is a thing of beauty. First, he allows the interviewer to sidestep the fact that naked short selling is illegal for all but a few rare MM instances. That's to suck him in, play him, softly softly catchee monkey, and so on. Then he delivers the pile driver - he tricks the poor fool by abruptly changing the subject from naked short selling to company valuations (which clearly have as much in common as fish and bicycles), wryly allows the interviewer to ask another fumbled non-question, and then pretends to have said something coherent while tossing out some folksy aphorism involving athletes. No doubt he was ready to pee his pants by then, as it's hard to imagine an interviewer not catching on to the joke by the point this jibber jabber non-answer/retort was delivered. "Mark, is it true that naked short selling is illegal or not?" "Well, it's like when you are huffing paint fumes and arguing over whether Bruce Lee could kick Spiderman's ass, you know? I mean, they're just different, but I still think it's like really funny." "Uh huh. I see"

Anyone doubting that Mark is a man of imponderable depth of humor and shockingly keen reasoning capability need only look to this section for a rare sneak peek at the real man behind the mask. He delights in toying with the admittedly not so quick questioner, and does so with the fluidity and grace of an Olympic gymnast. It's watching a master, a virtuoso performance, a Sensei of rhetoric and a guru of reason at the top of his game.

Bravo, I say.


Blogger EdwardB_3 said...

Re: . . . and further, that their cashflow supports the dividend they pay.

True, but that's not the problem, which is that the company has failed to explain how it's going to pay the TI not covered by cash flow ($3.84/sh last year, $1.03 last quarter). Talking vaguely about the possibility of a special doesn't get the job done. Note that the implied shortfall this year is $4.12.

The failure to explain clearly and consistently the cash flow vs TI problem is, IMO, what allows the manipulators to make the (false, but never challenged by the company) claim that dividends exceed cash flow.

7:44 AM  
Blogger bob obrien said...

Uh, the company will pay the TI not covered by the cashflow last year with this year's cashflow, and this year's spillover with next year's, until the cashflow gradually rises to meet the TI.

But what you are saying is not what Cuban said. He said that they borrow money to pay the dividend. Not TI. The actual dividend they pay.

There is no cash flow vs. TI problem.

And no manipulator has ever claimed that the dividend exceeds cash flow. Find where Cuban said that. He didn't. He said that they borrow money to pay the dividend, just like Cramer said, and just like Herb said. None of them have ever said how they know that, or how they calculated cashflow to arrive at that conclusion - they simply delare it as thought the very vibration caused by air rustling their vocal chords makes it true.

It doesn't.

11:37 AM  
Blogger EdwardB_3 said...

Oops! What I thought I cut and pasted from your commentary was: "The short story is, they are keeping the stock up by paying dividends, and they are paying for the dividends by raising money, rather than from operations. At some point, that runs out."

That is a clear statement that the dividends are not being paid from cash flow and is, as we know, false. My point was, and is, that this deliberate misrepresentation is made possible by the fact that TI exceeds cash flow. The point that the naysayers fudge, is that NFI only pays as much dividend as is supported by cash flow, something that the company does not appear to thinks needs saying, loudly and clearly.

IMO, the fact that TI is significantly greater than cash flow is a problem. As you know, if the dividend is maintained at $1.40 is will take the first three quarterly dividends this year to pay last year's spillover, leaving all but $0.32 of this year's TI for the fourth quarter, special and spillover. I hate to think what the Rockettes will do with, say, $10 TI and $1.40 of cash from operations!

12:36 PM  
Blogger bob obrien said...

I'm not sure that the disconnect between TI and cashflow is a "problem". Again, cashflow will rise to meet TI, so as long as they can float ahead 3 quarters as they are this year by pushing forward the carry forward, there's no "problem." The alternative is to have moribund growth in the portfolio, in which case cashflow will catch up with TI very quickly - but then we have a very low growth play, which is not particularly attractive.

The fact is that there are other REITs whose dividend is larger than their GAAP and less than their TI, and the shorts don't mention those. The only reason it's an issue on NFI is because someone is heavily short and is looking to create problems. If it weren't this, it would be something else. It's kind of like complaining that a company is growing so fast that it has to keep raising money to expand.

Boo hoo. We should all have such problems..

2:21 PM  

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