Monthly Archives: July 2014

Server downtime

Cable Car experienced website and email server downtime yesterday due to a registrar transfer. If you tried to email me during the last 24 hours, I did not receive your message and you may not have gotten a bounce. Please try again!

I’m tempted to turn this into a long rant and quasi investment thesis on VRSN, NAME, or DADY (no positions), emphasizing the antiquated and monopolistic infrastructure of the Internet, but it’s better not to let emotions cloud investment analysis.

Q2 2014 Letter

Cable Car’s Q2 2014 letter has been published. For the quarter ended June 30, 2014, the Cable Car Composite returned +4.5%.

Performance statistics are preliminary and unaudited. Returns are presented net of all expenses and fees, including accrued but unpaid performance fees. The Cable Car Composite includes all accounts Cable Car manages on a fully discretionary basis. The performance of individual client accounts can vary significantly from the performance of the composite. The timing of cash flows, the size and type of account, the fee arrangement, and the availability of investment opportunities for each account may lead to divergence from composite returns. Past performance may not be predictive of future results.

Businessweek has the last word on CYNK

Disclosure: No position in CYNK.

I doubt they came across my post, but I enjoyed Zeke Faux and Dune Lawrence’s reference to the “sharper finance blogs” in their excellent investigative research into the absurd story of CYNK. CYNK was halted on July 11 but continues to fascinate financial journalists. If you’ve enjoyed following along, I highly recommend reading today’s piece.

Also, I note that my original estimate of there being fewer than 1 million shares “really” outstanding wasn’t too far from the truth. An earlier article quoted the company’s transfer agent as saying that only 500,000 shares were unrestricted. In other words, CYNK never really had a multi-billion dollar market cap in anything other than a purely notional sense. At the stock’s peak, the tradeable shares were collectively worth only about $10 million.

NetDragon write-up selected as runner-up in FactSet Top Idea Tournament 3

Disclosure: Long NetDragon (777 HK).

The buyside networking and idea-sharing website SumZero and FactSet are sponsoring an ongoing investment idea contest this year. It’s a great forcing mechanism for me to put pen to paper on some of my highest-conviction positions, and time permitting I hope it will lead to more material I can publish here.

I’m pleased to share that my report on NetDragon was selected as a runner-up from among 130 submissions in the first leg of the contest, which focused on non-US ideas.

I am sharing the investment thesis publicly in hopes of receiving feedback. If you find the time to read the report, please consider taking a moment to share your thoughts — especially dissenting views — via email or in the comments below.

Click here to download the write-up.

By accessing the report, you acknowledge that the information contained therein is for information purposes only and should not be considered a recommendation to take any action with respect to any security.

CYNK: Sometimes your prime broker is looking out for you 1

Disclosure: No position in CYNK. Thankfully. This post is intended to discuss my reaction to a topical market situation. It has been edited to remove the details of trading activity in CYNK in order to avoid reference to the performance of a past specific recommendation. 

Last spring, before the Bitcoin mania had peaked and prior to starting Cable Car, I discovered a way to short BTC using a very sketchy online exchange. I briefly shorted a single Bitcoin in a personal account, covered after a small gain that almost made up for the transaction costs, and happily withdrew my balance with the learning experience as my reward. A part of me wanted to do it just to be able to say I had one day. Reasonable people may disagree over whether crypto-currencies ultimately have any value (I am not a believer), but I found the notion of shorting something truly worthless to be irresistible. Financial assets that appear to have no intrinsic value at all — pump-and-dump schemes, penny stocks, frauds, some bankruptcies — draw a certain type of value-oriented short-seller like moths to a flame. And it can be playing with fire.

The latest such sign of the apocalypse making the rounds is Cynk Technology Corp (CYNK), which I’ve seen mentioned by no less than half a dozen investors I respect. CYNK is a Belize-based pink sheets pump-and-dump, presumably, with negative shareholders’ equity, no revenue, and a vague intent to develop a social media business. Despite all that, it is a startlingly successful stock promotion scheme, with what appears to be a $4.3 billion market cap on paper after today’s 150% gain, up from $23 million a month ago. The usual pattern of such things is that after the price reaches stratospheric levels, promoters sell their shares, the share price craters, and the hordes of day traders who had helped run up the share price move on. The underlying promotion activity can be illegal, but it is very difficult for the SEC to police. I have no insight into whether any laws were broken to get CYNK to where it is today, but the outcome is the height of absurdity. The intrinsic value of CYNK, to any reasonable observer, is zero. And yet here we are, watching a bubble in action.

This post is in fact a bit of a confessional. Last Tuesday, I shorted a very small position in CYNK that I closed not long afterwards. I am embarrassed to have participated at all. At the time, CYNK was already down over 40% intraday, and it appeared to be following the classic pattern of a “dump”. The fact that a significant amount of borrowable shares had become available from my prime brokerage suggested that the float might have increased due to promoters dumping their shares. Yet when I started to think about shorting it again on the way back up this week, no shares were available. I don’t actually think it’s a deliberate policy on the part of the brokerage to withhold shares in a situation like this (that confuses cause and effect — the lack of available borrow may have actually been the cause of a squeeze), but I was willing to short CYNK at $6/share this morning, had there been shares available. Since there weren’t, I have no position, and I avoided a more than 100% intraday loss. Usually I’m not pleased when I can’t borrow a stock I want to short, but this time I am!

CYNK closed today at $14.71. Were I still short, I could have tolerated the loss, but I’d be on some level just as much of a victim as whatever gullible shareholders are buying at these prices and will ultimately be left holding the bag.

I may still short CYNK, in very small size, if shares are available when it inevitably starts to decline. That’s what I feel the need to confess! It is ineluctable, this desire to have some (very carefully sized and curated) short exposure to what David Einhorn recently called “silly prices,” while hoping they don’t get any sillier.

But there is one caveat! One thing that may just hold me back is a notion I haven’t seen any of the myriad commentators discuss: does CYNK really have the number of shares outstanding it claims? Dishonest people have falsified many many things in unaudited financial statements. Why not share count? Couldn’t that line in its filings be just as fraudulent as the business itself? According to the limited filings it makes with the OTC bulletin board, CYNK had 291.45 million shares outstanding as of March 31, 2014. Even the OTC website itself is very lackadaisical about the figure. It has a typo that misstates shares outstanding as 191.45 million, throwing the market cap off by a whopping $1.47 billion! Even if the 291.45 million figure is correct, 210 million of these are held by the founder and sole employee of CYNK, and they supposedly bear a restrictive legend (how restrictive, I wonder?) preventing them from being sold. To some extent, only the float of 81.45 million shares represents real capitalization, but even that would be pretty absurd by now at well over a billion dollars.

Instead, I question whether there really are 81 million shares floating around. Cumulative volume traded in the past 30 days, since all this nonsense began, is only 1.5 million shares. Today, despite the massive price increase, only 124,000 shares changed hands. It is not uncommon for the targets of pump-and-dump schemes to trade several times their float in a single day. Why should CYNK be different? Either there is an impressively patient group of promoters waiting to sell their shares, or an extraordinarily bullish group of long-term penny stock investors (do such people exist?) withholding millions of shares from the current frenzy, or CYNK does not actually have anywhere near 81 million shares outstanding.

I hate to rain on the parade of everyone else as excited as I was about the insanely high notional market cap, but I don’t think CYNK really has the capitalization it appears to. Based on the low trading volume, I’d guess fewer than 1 million shares are held by people not connected to the company or promoters, if they even exist at all. At, say, a $14 million market cap, CYNK no longer looks quite so appetizing as a short candidate, even with an intrinsic value of zero.