Failing to Feed the Monster

Overstock held its conference call on Wednesday to discuss third quarter earnings.

You can see the transcript here.

I've also attached their one-year stock chart. As you can see, there was a strong upward move in the early spring of this year. At the vernal equinox, the price was under $15, through May it was repeatedly close to or above $24.

It lost all of that gain over the course of the spring and summer, and was back at $14 in August. Yesterday, November 4, it closed at $13.39.

The stock has also been underperforming the indexes markedly since August, when it reported a second quarter loss of $1.4 million.

On this week's call, OSTK officials discussed another loss, for the 3d quarter, this time of more than $3.3 million, or 15 cents per share.

I maintain some skepticism over the value of Overstock's numbers, a skepticism I explained in posts on my other (now-suspended) blog in February, and before that.

In my humble opinion (and in the opinion of observers who have looked into the matter quite keenly), Overstock created a cookie-jar reserve for itself in 2008. It inflated its 2009 results with the help of that reserve. The problem, though, is that once you start doing that, you'll find it tough to maintain. The cookie jar runs empty, and you have to get ever-more creative.

I suspect that Overstock's creativity has failed, and so it is now reporting the kinds of losses it would have been reporting for some time had it not engaged in trickery. Thus, the hit it has taken on its stock price.

I have no personal position, long or short, on OSTK, by the way. Furthermore, I am not giving financial advice, except to say that if you are going to invest in the stock market in any capacity, you would be an idiot to rely on anything you saw in a blog, including this one. Also, picking stocks for most people is a fool's errand anyway.

Still: there is an empty cookie jar from OSTK's kitchen and a rather bad odor wafting thence.

Boyd story and the fall-out

Roddy Boyd has a neat story about Overstock.com in The Big Money.

I'm rather late to the buzz about this piece, so I'll only make the observation that Boyd buried his lede. The story isn't really about Byrne's "nasty" streak, as the headline suggests. Nor does it use Overstock in any very helpful way as a microcosm of how and why the financial press fell down on the job of reporting the roots of our financial troubles before the big blow-up, despite the opening paragraph.

No ... what the story turns out to be about once it settles down is the fall-out from the Gradient/Rocker lawsuit. That lawsuit has been settled, and arguments over that settlement have occupied familiar positions.

Overstock: We were right, which is why they gave us money. We are vindicated!
Skeptics: They gave you money because you are a nuisance, trials are expensive, and they just wanted you to go away.

But Boyd's story tells us that the reason Overstock had for settling the lawsuit exceeded the money received. It may have settled because it was concerned about certain materials that would have come out had there been a trial. Did Boyd meet Mark Felt in a garage to get this stuff? I don't know. But ... Boyd does seem to be familiar with evidence that may well have accumulated during discovery proceedings.

One of the defendants in the lawsuit, Gradient, had issued a research note in May 2005 offering a detailed criticism of certain diamond/jewelry wheelings and dealings going on at the time. Gradient wondered whether the structuring of the deal was intended to allow the company to report top-line benefits without reporting losses.

But, Boyd now tells us, Gradient was over-analyzing. It wasn't accounting trickery. It was apparently a tax dodge, known within the company by the lovely name, "Operation Heist and Freeze."

Here, by the way, is Byrne's initial response to Boyd's questions. In response to a question about the avoidance of sales taxes, Byrne says he is giving the "same answer" as he had to the earlier questions (that the issue didn't require disclosure because it was immaterial): "plus tax is discussed in the due course of the
conduct of any business plus have you ever considered trying the fact-fact-logical-inference thing instead of the stuck-on-stupid-reporter thing?"

Notice the difference between Byrne's initial response, to which I've just linked you, and his later reconsidered response. With regard to the bit near the end that I just quoted, there is no difference. The difference you may want to notice, though, is at the start. Byrne decided to dial back the oral-sex-obsessed insult with which his initial riposte had begun. Good move, but on the internet, all is forever.

So even though the story doesn't turn out to be about Byrne's "nasty" streak especially, Byrne's responses surely reveal one.

"Extrapolated" Conclusions

Judd Bagley, the proprietor of the blog "AntiSocialMedia," maintains in his latest posting there that nobody has ever shown anything he's said to be wrong.

Then he adds a neat little parenthetical qualification, for which I will personally take credit. He writes, "Yet, with a single (quickly rectified) exception, every conclusion extrapolated here has proven accurate."

The exception that I presume he has in mind involves a reporter named Susan Antilla, of Bloomberg News, who has written critically of Mr. Bagley's favorite company, Overstock dot com. That's always a good way to draw Bagley's attention, which it seems to have done.

Antilla is also the ex-wife of Dennis Leibowitz. For the particulars of why that's important to Mr. Bagley see what I wrote in September.

Anyway, after Bagley went out on a limb on an IV bulletin board and referred to the present-tense Antilla-Leibowitz marriage, he was immediately informed of the divorce. He chose not to believe it, and to write up his disbelief in Antisocial. He even suggested Antilla's divorce lawyer may have failed to file the appropriate papers, so she may still be married without knowing it.

Now, this is a matter on which there can't be a lot of room for confusion. I happen to be a member of the bar of the state of Connecticut (that is itself a matter of public record, as easily verified as is marital status!) and I know that a divorce can be verified with ease.

Anyway, after this was explained sufficiently to Bagley, he eventually deleted the babbling from his website. Since he's been called on it before, I do believe that's the "one exception" to his accurate "extrapolations" he now acknowledges so fleetingly.

We shouldn't let him off the hook too easily here, especially given the odd word "extrapolation" itself. He made a false statement of fact on an easily verified matter. What was supposedly extrapolated?

I'm not inclined to accept his implicit factual claim (in that parentheses) that this was his only factual error. He hasn't hired me as a fact checker, after all. But I'm pretty confident that is the factual error that inspired the parenthesis, because of an exchange he and I had on the subject in September of last year.

At that time, Bagley e-mailed me to note that I had referred to "demonstrably false assertions" of his. He asked which assertions were those. I replied, referencing Susan Antilla. He responded to that, claiming that he hadn't made the marital claim about Susan Antilla in his blog, only on IV. That was a demonstrably false assertion itself, as I pointed out to him in his reply. Deleting something from a blog doesn't mean it was never there. Deletion isn't a memory hole.

He replied telling me, "Forget Susan Antilla," [I'm sure he would like me to] and asking me for other examples of his falsehood, on the theory that learning of them would help him develop as a writer. At this point I was getting tired of the game, and I didn't reply.

As I had expected, he soon thereafter posted a very long blog entry in which my name plays a very small part. He puts me on a list of his blog's "harshest critics" and complains in general that none of us have replied to his e-mail. "My e-mail must be broken" he says, in what I suppose is meant to be irony or sarcasm or something stylish.

Just in case anybody who read that has now found your way here. Mr. Bagley's e-mail isn't broken. I did reply to his initial request about whether he had said anything demonstrably false, and I pointed out to him that he had. He told me to "Forget Susan Antilla." I did so, and accordingly did not respond subsequently. Now I see that all of this rates a parentheses from him.

Ah, so I have not lived and breathed entirely in vain.

Why am I taking note of it only now, five months later? Well, because Bagley doesn't occupy many of my neurons for very long and I've let time slip by occupied with other matters.

But I come back to it because I do feel a certain non-emotive indignation at being listed, as I now have been, as among Mr. Bagley's blog's "harshest critics." That's language that just makes you say: huh? If I'm among that blog's harshest critics, it leads a charmed life indeed. I've written of it rarely, and if any "harshness" has crept into my writing on the subject, I'm unaware of it. Correcting the Antilla error isn't harshness. It's fact finding. Positing the absense of any need for an article about Mr. Bagley on wikipedia may be as "harsh" as I've gotten. But, hey, there's no article on wikipedia about me, either, and that's honky-dory at this end.

Wikipedia

There's a brief article on a fellow called Judd Bagley in wikipedia, and there's an "Articles for Deletion" page on Bagley as well.

I find myself in an odd position here, because something I wrote has apparently been cited as one of the reasons why Judd is notable enough to warrant an encyclopedia article of his own.

Editor Phil Sandifer wrote, "Bagley is involved in a financial scandal with coverage in the New York Post, New York Times, Bloomberg, and the HedgeWorld Daily."

Well, I wrote the last of those. In fact, Bagley is mentioned exactly three times in the pages of HedgeWorld, and each of those three times the byline is mine. Here's one of them.

But I don't think he warrants a wikipedia entry of his own. He's worth the sporadic mention he gets because of his position as "director of social media" at Overstock, a company I've mentioned more than one here I think.

I might as well mention, though, that Susan Antilla, a finance journalist, wrote a column for Bloomberg in February of this year on what she called the "bizaare battle against naked shorts" being waged by Overstock CEO Patrick Byrne and Mr. Bagley. The gist of the column was that although Mr. Byrne is "pro at creating havoc [he] isn't so good at creating profits," as indicated by Overstock's history.

This Antilla column generated an odd response from Mr. Bagley on the InvestorVillage message board. He referred to Dennis H. Leibowitz, founder of the New York hedge fund firm Act II Capital LLC, as Ms. Antilla's husband. He also said that this provides "a wee bit of context" on her column -- he left, and I think he meant to leave, the implication that the Leibowitz/Antilla marriage is itself a microcosm of a broader hedge fund/financial media conspiracy.

On March 14, on his AntiSocialMedia web site (which Mr. Bagley appears to maintain of his own initiative, outside the scope of his employment at Overstock), Mr. Bagley acknowledged that he had read on another web site or blog that Ms. Antilla and Mr. Leibowitz are divorced. He responded, "I went on to spend about 10,000 moments online searching for evidence of that divorce, yet found no record of the dissolution of the Antilla-Leibowitz union. In fact, I'm on the verge of advising Ms. Antilla to ask her divorce lawyer for her money back."

The divorce lawyer in question can keep his fee, though. The records of the Family Division of the Superior Court for the State of Connecticut in Stamford clearly show that Ms. Antilla filed for divorce on Feb. 2, 2005. The marriage was formally dissolved Oct. 31, 2006, months in advance of the Bloomberg column that drew Mr. Bagley's effort at that "wee bit" of contextualizing.

The nature of social media is such that Mr. Bagley was soon directed to this document, and backed down from an impossible position, acknowledging the divorce.

People outside Mr. Bagley's own limited social circle seem to mention him chiefly in conexts like that -- contexts in which he made demonstrably false assertions. Hardly a sufficient reason to give him a wikipedia entry of his own, IMHO.

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P.S. Subsequent to my composition of the above, the Bagley article was in fact deleted from wikipedia, pursuant to its Afd procedure.

http://en.wikipedia.org/wiki/Wikipedia:Articles_for_deletion/Judd_Bagley_%282nd_nomination%29

Overstock: Pathetic

An amusing site called hedgefunnies ran a photo of a "naked short seller" recently.

http://hedgefunnies.com/2007/07/30/patrick-byrne-unveils-irrefutable-proof-of-naked-short-selling/

This is amusing, at any rate, to those of us who have followed the controversy over "naked short selling" and the central role of Overstock boss, Patrick Byrne, therein.

http://cfaille.blogspot.com/2007/06/overstock-what-about-losses.html

But Mr. Byrne and his fans, including one Judd Bagley, Overstock's Director of Communications, have been rather nasty about this. Either they don't have much of a sense of humor or they really have no business plan OTHER than to silence any critics. So they've gone after the proprietor of the hedgefunnies site in a big way.

He's a 19 year young man, so this means, say, critiquing his high school via wikipedia. Yes, High School. Does that sound petty? Yes, I think so too.

I'll save myself some typing. Here's more.

http://www.sequence-inc.com/fraudfiles/2007/08/05/more-on-overstockcom-stalking-teenage-blogger/

More on Overstock.com

In Saturday's entry I discussed certain controversies concerning the internet retailer Overstock, and gave my view that the company's problems aren't the result of a short-seller's conspiracy, but of a flawed business plan.

As some of the evidence of the company's troubles, recall that three members of the board of directors have quit in the last year. The first to go was the CEO's father, John Byrne, last July.

This February, John A. Fisher left the board. He was explicit about why. The company had just filed a lawsuit against several brokerage firms (separate from the lawsuit I discussed yesterday involving short sellers and an independent research firm -- although brought on a related conspiratorial theory). The "prime brokers" supposedly enabled the naked short-selling of their clients. And they have deep pockets. Fisher said that his disagreement with the pursuit of this lawsuit had precipitated his own exit. What could he mean by that, though? The most reasonable interpretation is that he believes the company has deeper problems, and that the pursuit of such crusades distracts attention therefrom. If that's what he thinks, he's probably right.

Last month, Ray Groves left the board too. Again, he said the prime broker lawsuit was his reason. But, if so, why didn't he leave soon after the suit was filed? Why didn't he leave when Fisher left?

Well ... sometimes when the water is getting hot slowly, one isn't sure just when to jump out of the tub. Groves was apparently harder to boil than Fisher.

Here's another bit of evidence of Overstock's troubles to consider:

http://www.alexa.com/data/details/traffic_details?url=overstock.com

Obviously,internet traffic, the number of eyeballs the company's website gets, is a crucial metric for an internet retailer. There was a sharp drop off in early December, as you can see from the chart. The company gained some ground back with a late-month spike, perhaps representing last-minute Christmas shoppers. Then it resumed the downward move.

I don't give investment advice on this blog. And you shouldn't look to blogs for investment advice anyway, on general principle! So, speaking only for myself: I won't be investing in Overstock.

Overstock: What About the Losses?

The big news for Overstock in the final days of May this year was victory in an appellate court of the state of California regarding its "Sith Lord" lawsuit.

(I haven't written about this matter since I moved over from blog-city, so if you know Pragmatism Refreshed only in its blogspot variant you may not know about the Overstock imbroglio. I'll remedy that today.)

On Aug. 11, 2005, Overstock.com, a web-based discount retailer, (known for the sultry woman who says "it's all about the O" on television) and one of its investors, Mary Helburn, filed a lawsuit in Marin County (Calif.) alleging that David Rocker and various associates and vehicles under his control had conspired to drive down Overstock's stock price in order to profit from short sales.

It alleged in particular that (1) Overstock was in cahoots with a purportedly independent stock analyst firm called Gradient Analytics, (2) Gradient allowed Rocker to write reports blasting Overstock, which Gradient then distributed as its own, (3) the fact that they were coming from an 'independent' source gave the charges credibility and did lower the price, enriching Rocker at the expense of such "long side" investors as Ms Helburn. And of course at the expense of the company itself, since (4) a lower stock price creates capital-raising difficulties going forward.

Rocker and Gradient have denied the charges.

On August 17, Mr. Byrne appeared on the program "Street Signs" on CNBC, with Ron Insana. Byrne gave a jaw-dropper of a performance. He spoke of a conspiracy among journalists, hedge funds, research firms, all headed by a mysterious "Sith Lord" whom Mr. Byrne refused to name.

The Sith Lord, in the terms original significance, is the evil mastermind of the recent Star Wars movie, who seduced Anakin Skywalker, turning him into the Darth Vader we all knew and feared in the 1980s when we watched the good Star Wars movies. Byrne seems to be casting himself as Yoda, the implacable enemy of the Sith Lord.

This would be just an amusing cat fight between Messrs Rocker and Byrne, were it not for the fact that it has tapped into broader animosities about (a) short selling as a practice and (b) "naked shorting" as an abuse of that practice.

Very briefly: most short selling involves borrowing stock certificates. Suppose I borrow a certificate of Overstock from a broker, and then "short sell," i.e. promise delivery of the stock to someone who believes in the company's prospects, (let's call her Mary) in 60 days, at today's price. Between now and then, I have to buy it outright from the folks I had borrowed it from, and then make the delivery. So my profit requires that the price of the stock fall after I make the deal. I buy it at the lower price, sell it to Mary at the higher earlier price, and use some of that profit to cover the cost of borrowing the share in the first place.

The significance of borrowing the share is enormous. (Or, as Yoda would say, "significant, this is.") It ensures that the share exists -- I'm not trading on imaginary stock. The fact that I've borrowed and am in possession of a share of the stock protects Mary against a fail-to-deliver. It also limits the amount of shorting that would net a profit, because I'm not just betting on a fall, but on enough of a fall to cover the securities-borrowing cost.

The controversy over shorting, and over the spreading of rumors or biased analyses for which shorters are always blamed, gets intertwined then with another controversy, over how much "naked shorting" takes place -- i.e. how many shorts don't borrow the stock before selling it. Resolution of those issues apparently will have to wait for the various lawsuits to wind their way through the courts. In the interim, pitched battles involving complex conspiracy theories, name-calling and the occasional rational argument are being fought online.

As for the independent research firm that was allegedly bribed to badmouth Overstock, it of course denies the accusation. Fortunately for those of us who've been trying to cover the story, although the short sellers themselves have been very closed-mouthed about the lawsuit, the researchers, as alleged co-conspirators, have been quite vocal. A typical press release from there side put it thus: "Gradient researches, draws conclusions and issues reports based on work conducted by highly-trained analysts who report to Gradient and Gradient alone. We will continue to do so, despite efforts like these to discredit the valuable and insightful analysis we provide to investors and shareholders.”

Anyway, in late May 2007, one year and three quarters after the lawsuit was filed, Overstock won a victory in a state appellate court that may end Gradient's and Rocker's hopes of bringing an early end to the lawsuit on procedural motions. This may have to go through the process of "discovery" and to a finding on the facts.

Still, I have to ask: what about the fact that Overstock keeps losing money? Doesn't that make it a bad idea for an investment, alleged conspiracies notwithstanding???

In the first quarter of this year, Overstock lost more than $17 million. That might be tolerable if Overstock were moving in the right direction, "you have to lose money to make money" and that sort of thing. But its moving the other way. Its first quarter losses for 2007 are $3.5 million greater than its first-quarter losses for 2006. "You have to lose money in order to lose larger amounts later," seems the implicit motto here.

There may, for all I know, be problems and abuses among short sellers. It would be surprising if there were none, since they're made of the same fallible human flesh as the rest of us. But that isn't the problem with the Overstock stock price. Its problem is that it has a business model that works like a yard sale. Overstock's only real reason for existing at this point is as a vehicle for its lawsuits. Its remaining investors might reasonably hope for a decent "go away" settlement down the line -- if not from the Rocker/Gradient defendants, perhaps from those in another of its lawsuits, notably one against most of the brokerage firms on Wall Street.