Jen Ross - Always Questioning the Narrative
The Business Brew is joined by Jen Ross this week. Jen was a professional short seller. Consequently, she has a unique perspective. It took Bill a while to understand the role of short selling in a portfolio but Jen’s comment about the need (or lack thereof) to hedge a quality equity portfolio really helped Bill understand what risks to think about hedging via short selling.
Her Bio very unique:
Jennifer L. Ross has more than 20 years of engineering and financial experience. She is a principal engineer in Launch and Enterprise Operations at The Aerospace Corporation.
Prior to joining Aerospace, Ross held management and executive positions in the areas of material science and manufacturing, process engineering, and financial analysis. Her focus is analyzing the space industrial base and helping space startups conduct business with the U.S. Space Force.
Ross transitioned from engineering to management consulting and finance in 2007. She spent five years as vice president of a public finance management and municipal bond firm. She later joined a hedge fund as an equity short seller/research analyst, analyzing corporate financials of publicly traded companies and predicting the probability of financial failure for those businesses. Ross joined Aerospace in 2015 when she saw the opportunity to combine her passions for both engineering and financial analysis.
Album art photo taken by Mike Ando.
Thank you to Mathew Passy for the podcast production. You can find Mathew at @MathewPassy on Twitter or at thepodcastconsultant.com
+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. We got a very special guest this week, Jen Ross, Rocket Jen Ross, if I may. Rocket science, short-seller extraordinaire, political commentator and everything in between. As a reminder, this is not investment advice. Do not follow anything that we're saying. We are two people hanging out late on a Friday night. I'm drinking wine. Jen's got something in her hand. Don't take any of this too seriously, but I hope you enjoy us along this ride. Nothing's investment advice. We're not your fiduciaries. You know the drill, do your own due diligence. Jen, how you doing?
Jen: Very good, Bill. I like your safe harbor statement because--
Bill: Yes, it's super vetted.
Jen: [laughs] Well, whoever would listen to a short seller is out of their mind anyway.
Bill: That's possible. I tend to like you guys. I think you have something weird in you that makes you short sell, but we can get into that.
Jen: Oh, I definitely do. Yeah.
Bill: Well, and not just you, I think I fell in love with short selling. I was at a Grants Conference, and Marc Cohodes walked up on stage with this Canadian jacket. He proceeded to just completely dismantle whatever entity, what was it? Home Capital Group?
Jen: Yeah.
Bill: I think it was Home Capital Group. Just the passion that I watched him deliver that speech and then started to follow him on Twitter. That dude has got a different gear. That is not the same game as being long and hoping that interest rates go down.
Jen: No. Short sellers read everything. We read the 10-Qs, the 10-Ks, every single footnote, every article. I remember, I don't know if it was RAM Capital, or one of those guys, but they said something like, “If TSLAQ only applied that skill set to any other stock, [chuckles] they would be millionaires.”
Bill: Yeah. If you did that amount of long research, by far do the most due diligence on the street, what is it about short sellers that are doing that level of-- it's almost a crusade.
Jen: We're very idealistic to a fault, I think. The last year or two has proved that-- it's funny, I fell into my own traps, where I would always say, “If your thesis requires a government agency to do their job, abandon it now.” But in the same sense, I'm like, “Well, the SEC is not going to let Robinhood run in front of trades. They're not going to let Tesla go ahead and fake a leveraged buyout.” But they did. I think our idealism sometimes gets in our way, which means you have to be very good about holding on to your risk rules, because you can just blow yourself up very quickly with unlimited risk. You have to have rules in place that are there to keep you from falling into your emotions or falling into your ego. But yeah, the short sellers that I know are extremely smart. They're idealistic. They're actually very optimistic because if you're a short seller and you're pessimistic, you're going to take on way too much risk because you're always going to think that the world is falling apart.
Most of the short sellers I know are super funny, quick-witted. They have a way of finding information and connecting dots that are second and third-order effects, where if you took information individually, it's just data points but when they weave it together, you get a whole holistic view that can really tip you off to the true nature of the business. Not every short is a fraud, but it's very helpful when you are shorting frauds to be able to do that kind of critical thinking.
Bill: Yeah, but then again, you told me that only crazy people short frauds?
Jen: Oh, yeah, I know, a lot of short sellers that won't touch frauds. Frauds are by far the most fun. The stories, like, people are coming out with [unintelligible [00:04:11] where the guys like photoshopping his face on fake material, or we've talked about with Tesla-- that's going to be a case study for generations someday. It's by far the most fun. Martin Shkreli to we've seen CEOs of frauds murdered their spouses. It's just stuff that if you saw a Hollywood movie, you would never think is real.
Bill: That's an easy thing to not be long. I don't know about shorting.
Jen: Yeah.
Bill: Why is it so hard to short frauds?
Jen: Well, Chanos says it best where he talks about this one book, I can't remember the author's name, but it's called The Seven Signs of Ethical Collapse. In these seven signs, one of them is, it's almost like a CEO with a cult-like following, and the sheep will suspend disbelief. Whether it be Enron, Ken Lay having his following to some of the companies that we see today. Also with fraud, you don't always see it in the income statement, balance sheet, and cash flow statement, you usually see it in the qualitative stuff first. Martin Shkreli was committing fraud at Retrophin, and that's why he's in prison, and a lot of the--
Bill: How so?
Jen: He blew up a hedge fund prior to founding Retrophin and taking it public. When you looked at his financials, you didn't really see anything quite off, but then you started to look at what products were they selling? Well, they're selling oxytocin and ketamine. It was like a weird variety of drugs. Then, you look to see, well, he IPO’d with Roth Capital. They're a bullshit bank compared to Goldman Sachs and others. He had a no-name auditor that was easily fleeced. Then you go on to social media, and it was like a total shit show where he's hitting on women, and just saying gross stuff. Then, he had all these fake Twitter accounts. You look at it, and you're like, “Alright, this doesn't make sense.” Then, you start to look through the 10-Q, and you see he's charging six Bloomberg terminals. You're like, “Why would a pharmaceutical company be charging Bloomberg terminals?” He was still trying to run a fund inside of Retrophin, and then he blew up his last fund. In order to pay back, those investors, he was having them, like sending invoices for consulting work that they were not doing. And then, he was funneling the money back to them.
Bill: If you are clever enough-- let's just say he's hypothetical, let's say all these facts are true. I'm not trying to get us in a ton of trouble.
Jen: Yeah. Well, he's in prison right now.
Bill: That's true.
Jen: So, I don’t know if he could do anything about it for this.
Bill: I just haven't done my own research, so I'm not trying to come at him. [chuckles] Is the thing about shorting a fraud, that that kind of person is so persuasive in selling the story that they're telling that it's hard to figure out when it cracks?
Jen: Yeah, because usually, the story is fantastical. You would say there's a lot of stocks right now on the market that have gone parabolic, and it's because of their story. Either, we're going to have hotels surrounding Mars, to we're all going to be eating vegetable-based protein to electric cars. There's always this fantastical story around these larger-than-life stories. Even things like Theranos, where she was saying, “Well, you can test in one drop of blood all these different diseases.” The physics didn't make sense. It's always innovation like no other, where you have the believers, so it almost becomes like a religion to the believers. So, you try to say, “Well, now there's science there that says that that's just not fundamentally possible.” The culture says, “Well, the great leader says it is.” You have people that will follow these stocks and follow these Silicon Valley-type companies religiously.
I don't know if you saw the video today. I think it was Bloomberg, posted a video of a kid who said he turned $10,000 into a million dollars trading Tesla.
Bill: Yeah, in Tesla. Yeah.
Jen: It's the math didn't make sense. He said that he didn't trade options, he only did it on the equity. I don't know how that math really worked, how you got from $10,000 to a million. He's a perfect symbol of somebody who's, like, “Screw fundamentals and screw the true nature of the company. I believe that this company is going to take over the world.”
Bill: I'll tell you what's pretty amazing about that, and I've had opinions over time, all of which have been wrong, according to the market, but $659 billion for that company, [crosstalk] the equity.
Jen: Oh, my God.
Bill: That's incredible.
Jen: That's the perfect point of idealism of short sellers. Pretty early on, I had said like, “It's not a tradable stock. It rips the faces off the longs and the shorts,” but the shorts had it completely right on the fundamentals. They warned, “Hey, we're going to have year over year revenue declines, that there only growth will be from opening up new markets, that the subsidies were going to run out and you were going to see in those countries that decline of adoption of Teslas. There's going to be new competition coming on.” All of those things came true. The company keeps incinerating cash in order to make the cash burn not look so bad. They don't spend as much on CAPEX, so they're--
Bill: No, it's gross spend, Jen, you don't understand gross spend. They're investing through the income statement than the cash flow statement.
Jen: Oh my god, don't even start with me on that. I'm like, “Show me on the income statement where this is.” But, still, the story goes on, and people will say to me, “But, Jen, you don't understand, it's taking over the world.” I'm like, “Well, it's only 1% of global auto revenue.” That's what every subsidy ever thrown at it. So, how are you telling me that this technology is taking over the world when the company was founded in the early 2000s and has only penetrated 1% of the global market, but yet you add the market cap up of its six nearest competitors, and it doesn't even equal Tesla's market cap?
Bill: I think you're not thinking long enough, Jen.
Jen: I know. I know. I have this argument every day. It's so frustrating. It's hard because I can write-fight all I want, but the stock price is making people millionaires. So, I look like the idiot, right?
Bill: Yeah, I mean, I don't know. I had a dude, and if that guy's listening, thank you for listening, I'm not trying to call you out. That's why I'm not saying your name, but this guy was-- he actually said that he found it offensive how I talk about some of these highly valued names. I am one of the first admit that I really don't know what the heck's going on in a lot of these SaaS names or even Tesla, I can't even construct a case that you could argue is worth-- what people think it's worth.
Jen: Well, saying, I don't know what's going on is different than saying I don't know what it's worth. There are obvious things that are going on. Those stocks are low float stocks. Last year, we started seeing that this habit of someone going in, buying a large amount of out of the money calls, and then the stock would just rip up. It was manipulation. We've seen it in the Shanghai market in 2015. You were seeing it last year. Some of it is like that delta gamma hedging style.
Bill: You buy this? This is a theory you buy?
Jen: Oh, no. I was one of the people who noticed it, who was very vocal about it.
Bill: No shit.
Jen: Yeah. Last year, back in October, there's tweets of me saying there's some out of the money calls here that don't make much sense. [crosstalk]
Bill: Are you talking specifically about Tesla? Are you talking about some of these low--? [crosstalk]
Jen: There's about seven of them, eight of them that are low float Silicon Valley dream stocks, and you can watch the manipulation happen. The question is, “Well, is it a nefarious foreign actor?” That was my first question looking back to Shanghai in 2015. Is this China messing around, manipulating our stock market? And then it was, well-- [crosstalk]
Bill: Let me ask you a quick question.
Jen: Yes, sure.
Bill: Why would that matter? Let's say China is manipulating the stock market, why does that like-- if I'm just a skeptic, why do I even care? Let's all go make money buy calls and whatever.
Jen: What do you think is going to happen when Tesla shits the bed?
Bill: Well, now that they're included in the S&P and they just have a Momo buyer, I'm not sure they ever will, but I don't disagree with you that there could be some negative consequences to rewarding companies like this.
Jen: Right.
Bill: To be fair, I have not done deep research, but I think that probably TSLAQ is more in tune with the fundamentals than the longs at this point. I'm sorry longs.
Jen: Yeah.
Bill: I just turned off like half the people that listen.
Jen: No, but I mean, the longs tell me every day-- I hear this from friends, coworkers, everyone is like, “You don't understand. They're revolutionizing the world. It's the greatest innovation ever.” They say the fundamentals now don't matter, but I'm like but you're using 2040 cash flows that are so obnoxious, these discounted cash flow models that don't make sense to get today's valuation. They don't care. It does not matter to them.
Bill: The wild thing is if you push people on that math, what do you think the discount rate is that they have to use to make sense of today's valuation?
Jen: You can't even. You'd have to sell cars to larger than the world population.
Bill: Well, that’s why they're going to Mars.
Jen: [laughs] Right. Bring your lithium-ion batteries to Mars, that'll be wonderful.
Bill: I'm going to try to remove that particular stock just because it's selling like hot bun, people's blood will probably boil. What do you do when you have a stock that is somewhat similar, and as a short seller, you have a view, but it seems to me like the whole world is incentivized, again, towards getting you to cave on that stock? How do you manage risk on a position like that? Then, how do you know when to put it on because a lot of smart guys have gotten their faces blown off in that thing?
Jen: Right. Before you even put it in the portfolio, you have to ask yourself-- the problem with Tesla is the short interest was way too high. So, it was an easy squeeze. You want to make sure the interest is not too high that you're not going to be too much of the volume in any day, so that you want to be able to get out of the position over a week, if you had to. So, you’ve got to look at the trading volume. I personally read all of the 10-Qs, the 10-Ks. I build historical models that go back a few years. Then I do projections for the future and I try to do best case, worst case projections and make sure that the future is going to be worse than the past. Then you assume, if you're assuming that the market is rational and is going to follow fundamentals, then if you can see the stock price is going to be down a certain percentage, if you believe it's going to be down more than 50% in the next couple of years, then it makes sense to add it into the portfolio from there.
Once you're in that position though, you don't want to have a full-size position off the bat, because this thing could go tearing, so you try to feed into it, and pyramid into it. Then, even if you have a ton of conviction, but it is getting above a certain percentage-- I think Chanos is one of the people he has about 5% is his max size, I think we were 4%. If it starts to get above that max size, you have to cut it back. That's painful because, for me, the most painful, painful short I ever had was Westport Innovations, because that stock just took off. I knew it was total bullshit, the physics did not work. From front end, it was like the dumbest company ever, but the rebate-
Bill: [laughs]
Jen: -was like 40%. How do you short a stock that's 40%? I remember my boss and me getting in this awful, awful argument over it because she wanted me to have conviction if we're going to hold on to it, but it mentally the stock just abused me that I caved a little bit on that stock.
Bill: Was that because of the borrow? Or was that because of the price action?
Jen: Yes.
Bill: That had gotten in your head? Both?
Jen: [laughs] Both. It was both. Again, it was one of those stocks, like, we're all going to go to natural gas engines. I'm like, “No, we're not.” Just think about it, the size of a gas tank for natural gas would take up the whole payload of this truck. And you're asking truckers who have to be careful with their costs and making sure that there's enough availability of their truck running, they're not going to take on this new technology. Natural gas also is great for a hub and spoke type situation. You're a garbage truck, and every night you're going back to the hub, but that's not cross-country 18-wheelers. You just couldn't get the energy density from natural gas. It was just stupid. It was an absolutely stupid company.
I remember go into their investor days, and there was just so many people that were like a religious cult over this stuff. The stock went from like $28 to $40. The rebate was like at 40%. I think that was by far the toughest short to ever hold on to.
Bill: Do you remember what the enterprise value peaked at?
Jen: I don't, because we got out of it. I'd have to look back. To be honest, I don't remember how big it-- [crosstalk]
Bill: That sucks. So, you were right and you guys got blown out of it, or girls?
Jen: Yeah, girls.
Bill: Gals? What's the right terminology? Gals, I think. I don’t know.
Jen: Ladies? I don’t know. [laughs]
Bill: Yeah, you professional women. When we talked, you mentioned that it was an all-woman hedge fund, right?
Jen: At the time, it was all female. Yeah, I think since then they've added men.
Bill: What was that like?
Jen: It was interesting. They stay very, very private. I'm not even going to say their name because they really respect their privacy, but I think it was interesting having an all-female dynamic. I think they are by far the smartest people I've ever worked with, and I've worked in rocket science and everything. Super geniuses. We had two women who were sniper instructors previously.
Bill: What?
Jen: Yes. They were like crazy tough. Me and other one, we were a little more emotional here and there. Whenever we got a little too emotional, like those two were like, “Lock it up.” [laughs]
Bill: They brought out the snipers?
Jen: Yes.
Bill: That's crazy.
Jen: Yeah, so it was interesting. I've never had a female boss before or since then, so that was a neat experience to work for another woman.
Bill: It's weird, this podcast, I get the data in and whatever, it's like 94% guys, and I wish that more women were listening, but then I think about how many women are on the street. It's just not that many that either I interact with or I know of or whatever, I don't know. One of the ways that we got connected was, I said, “I'd like to interview women,” I still want to. If somebody's listening to this and knows a cool woman to talk to, please reach out because I think it's important.
Jen: There's a cool group of FinTwit ladies. We all have our little estrogen chat group, and it's funny because it's from all different parts of, like, some are day traders. One is running, like a pension fund. I mean, so it's all over the place. There's some great venture cap female, venture capitalists on. I think with podcasts, it's hard. I think podcasts tend to in general, be more males listening. Banking and investing is still a male-dominated industry.
Bill: Yeah, I was at a bank, I fucking hated this one woman that I worked with, but then the other side of me is, she had to grow up in a time that-- she was probably the only woman in an investment bank. Her viewpoint was probably like, “Dude, make it or go home crying, I don't really care.”
Jen: Yeah. Even in rocket science, you have to be the best of the best to make it through. No slacker female is going to make it into these very male-dominated industries. At work, the females that I work with are just phenomenal, because we came up at a time where it just wasn't popular for women to be in the industry.
Bill: You had mentioned that you thought that women were slightly better at risk management.
Jen: Oh, absolutely.
Bill: Why do you think that is?
Jen: I think men are more emotionally tied to their traits than women are. I think that you guys take it a little bit personal when it doesn't work.
Bill: I'm very in touch with my feminine side. I'm very comfortable being wrong.
[laughter]
Jen: This is a generalization. It's not all men and all women.
Bill: Thank you.
Jen: Of course.
Bill: We’ll make me the exception to what we're talking about. I clearly have no flaws.
Jen: If a trade is working against me, and every time there's an earnings call, I asked myself, is the thesis still holding up? Was I wrong from the beginning, or did something fundamentally change? Maybe a new management team came in, or maybe they did another capital raise, so it changes the story. Then you have to adjust and not be so emotionally tied. You have to know when to call in your chips on it, where I think that some men will hold on to the bitter end, either because it's ego driven, or they just don't want to face the music that the trade is just not going to work.
Bill: Let's talk about Tesla again. I know it's going to make some people upset. When do you face the music? I would argue that the shorts still don't think that they're wrong, but--
Jen: When they traded out of it. Look at the short interest.
Bill: Yes. How does that thought process go through? At what point-- [crosstalk]
Jen: No one cares if you're right. No one gives a shit in life-- Number one fundamental rule, no one gives a shit if you're right. Think about every argument you've ever had where you're right, but if you're arguing like an asshole, nobody cares. Being right doesn't win you any favors, doesn't win you friends, and it doesn't win you money if these things are not trading on facts.
Bill: What is the stock like that if not that one trading on?
Jen: Religion. Low float religion. There's just so much stupid money out there right now. The Fed is just printing money like crazy. It has nowhere to go. There's been a rise of the zombie stocks. I was warning you guys last year. “Holy crap, look at the zombies.” The worse you are, the more you burn cash, and the closer you were to bankruptcy, the more your stock was going parabolic.
Bill: Was that a shale issue? Or, was that just like generally--? Was that SaaS? What was that that you saw overall?
Jen: I ran those screens across US equities, but I excluded things like shale, oil, gold, mining, pharmaceuticals that are very binary, and I was just looking at what remained. Most of the stocks-- so I compared the zombies to the rest of the names that came through the screen, and in January and February of this year, those zombies were up substantially more than the general market. I think it's because--
Bill: I'm trying to think of why that would be.
Jen: Why did Robinhood kids go into Hertz and JCPenney’s? They were literally bankrupt, and these kids were still trading this crap.
Bill: To be fair, though, that was after January and February. I'm not trying to argue with you. I'm just trying to figure it out.
Jen: But the pattern started back in October. What happened? I'm still thinking that Robinhood was offering zero fees. The big banks are like, “Crap, we want to capture the millennials.” Why? Because millennials have more money in their savings account than the average American, as much as they --
Bill: Really?
Jen: Oh, yeah. It was the CIO of Bank of America, Merrill Lynch, back in January had this dinner that I went to. He went through all the numbers, they want the millennials because of the ESG stuff, where they'll invest in companies based on these like-- I don't want to say religion, but in terms of like this--
Bill: No, ESG is fucking bullshit. I know somebody that runs an ESG fund that I have mad respect for. I don't want to come off like a promoter, so I'm not going to name him. That whole thing, if there is a perfect theme for Wall Street to package up and just sell to the masses and make fees on, it’s ESG, it’s perfect.
Jen: It's total bullshit, right?
Bill: Yes, 100%.
Jen: If you look at the companies in ESG, you're like, “Wait, these are lithium-ion batteries, raping the earth and cobalt mined by children.” You're plugging this into a coal-burning power plant, and it's $100,000 toy for people in Santa Monica, but, yeah, it's considered ESG.
Bill: Like I said, my one buddy does it right, at least I think he does. I haven't seen his whole book but I do think there's a couple people out there that believe in it. Man, that thing is perfect for just pillaging people and marketing wrapper.
Jen: Exactly. it is a beautiful marketing wrapper.
Bill: Oh, I care about the world.
Jen: Right. It heart hug a whole generation of people that have-- they have on average $10,000 in their savings account where the average American has $600 in their savings account. It's a really right market and these banks know how to market to these kids about experiences and saving the world. So, they'll package some of the stocks under that same vein. At the same time, they wanted to pull the kids away from Robinhood. What did they do? They started offering zero-fee trades. Then when you don't have to pay trading fees, you can trade in and out of this crap all day long. I think you saw the volatility start to go way up. Then, when you had the lockdown start, oh, forget it, these kids had nowhere else to go or what to do. There's no sports betting. What else you're going to do? You're going to trade it in and out of Beyond Me and Virgin Galactic all day long.
Bill: Yeah. One of the things that bothers me a lot about the zero-fee thing is when you look at how at least some of these firms are compensated-- When you get payment for order flow, I haven't done all the math myself, but just like optically on the back of the napkin, it seems like they get paid a lot more for option flow and then they're also incentivized for margin debt, it's like, okay, so if I just think about the incentives, it's basically to push people into the riskiest financial products possibly.
Jen: And ruin their lives.
Bill: Yeah, right.
Jen: Yeah, the last time you and we talked, we talked about this, where I said the only thing that's going to bring down Robinhood is that they're obviously front running trades, giving it to the high-frequency traders. I don't know exactly what their fiduciary duty is to their clients, but this seems morally, ethically wrong. I was saying like, “Hey, let's see how this turns out. I don't think it's going to be good for them. The SEC will shut it down.” Then instead, what does the SEC do? They slap them on the wrist with a fine, and that's about it. [crosstalk] A lot of this complacency--
Bill: [crosstalk] -beginning.
Jen: Yeah. After seeing what the SEC has looked away from for the last couple years, I go back to my if you expect a government agency to do their job, abandon your thesis.
Bill: Yeah, no doubt. I will say I had a discussion with somebody today that was talking about these three-time leveraged funds and how much money they make on the fees of-- when somebody holds it overnight, that's when you really get destroyed when you're holding those three-time leveraged funds, and they're actually day trading vehicles. His point was like, “I don't know that Robinhood is better or worse than that. But I also don't know where to draw the line.” I thought that that was actually a fairly compelling argument. I'm obviously emotionally biased against Robinhood, I think, for pretty freakin’ good reason.
Jen: Yeah. Which is the inevitable outcome when your business is like preying on people who don't know better and is designed to make the most money when you've got these kids overleveraged, that's the inevitable outcome. These are young kids that have no idea that they could turn this upside down really quickly.
Bill: Yeah. My biggest fear is the kids are turning to that platform because they don't trust Wall Street, and that platform has embedded some brain hacks. This is opinion. I don't have any facts to back this up. It's just my thought. They have embedded brain hacks that have incentivized trading. If we have a group of young people that will graduate with a ton of debt that inherently don't trust the system and they're turning to an alternative platform that ends up screwing them, I am really worried about the consequences of that.
Jen: That is the system. You can't say they don't trust Wall Street. Well, what the hell are they doing? They're trading options. That is Wall Street. To me, it's the gaming of it where even on social media, it's the dopamine, the serotonin, it's the same kind of release you get with dating apps, or how WeChat does the coin thing. There's a certain amount of human psychology and it becomes a game. Like I said, these kids are home now for how many months with nothing to do. You've got like 15-year-olds talking about trading in and out of stocks. To them, it's a game, it's Monopoly money that they don't even realize could get them upside down.
Bill: Well, when I've had this conversation with some people, and what they said to me is like, well, a lot of these kids understand that it's Monopoly money. If that's the case, I guess it's more okay than maybe I would be predisposed to say, but my beef with that particular platform from what I've understood is, it's super hard to find ETFs. If you're going to call yourself Robinhood and democratize investing and then make it really hard to find investment products, we’ve got to have a hard conversation before I buy your sales pitch.
Jen: Yeah, that's not about democratizing. Come on, give me a break. It's about gaming. It's about turning this into a game for people.
Bill: Yeah. Well, I tend to agree.
Jen: If you had 1000 lives, like you do, this is a Call of Duty where I could just like-
Bill: Yeah, that's right.
Jen: -re-up. This is holy crap, I'm $50,000 in debt now because I didn't realize that if I held on to this future, that I'd actually be responsible for it.
Bill: Yeah. When I started to trade options, I did not do it very well, but I learned on thinkorswim from this dude, Tom Sosnoff. I really like him. He led with education first. Well, I caused myself to over trade with his knowledge. Maybe I'll say it that way. I always felt like when I traded on their platform-- and even tastytrade that I see them do their thing now. They were always there. I could call them, I'd have somebody on the phone right away. I always felt approached it in the right way. Even though I was engaging in what I knew was risky behavior, I sort of understood the risk. Hopefully, that’s what’s going on.
Jen: But also, how old were you at that time?
Bill: Probably 24, which is about the worst time to take on risk as a male, because I think that's the dumbest animal on the planet.
Jen: Yeah, but it was your own money that you're earning through a paycheck.
Bill: Yeah.
Jen: These are 18-year-olds that nana give them birthday money and they're doing this stuff. I think it's about the context and understanding and the social psychology of the money. It's a lot easier to game money that you didn't put your blood, sweat, tears into.
Bill: Yeah. Look, my official on the record stances, I don't think that anybody should be precluded from a financial product, because they don't have the wealth. I do think that there are reasons that Wall Street has been precluded from selling to unsophisticated people. I don't know if regulation is the answer, that my bias is not to say regulation is, but if this shit continues to go on, something's got to fix it. I'm just trying to be loud before the regulators come because they're going to come. There's no way this ends well.
Jen: Well, I thought they’d come, but after I saw that SEC slap on the wrist, I'm like, “Well, no, I think the regulators are going to look the other way.”
Bill: Yeah, we will see. Look, my belief in conservative thought is, if you're going to be conservative, you’ve got to talk up when you see that bullshit happening, and I see it happening. So, I'm trying to be-
Jen: No, I'm right there with you.
Bill: -somewhat reasonable about how I'm talking about it.
Jen: My opinion is the SEC does not want to be considered the cause of any pullback or collapse. I think that's why they didn't go after Tesla with the fake leveraged buyout years ago.
Bill: That was bizarre to me.
Jen: Yeah. There's a couple things. First of all, the SEC wants easy cases to try. That's why they love insider trading, because if you're going to put this in front of a jury, are you really going to talk about a term sheet and what it's like to actually do a leveraged buyout? All of us could say, this was fake, all of the process was not done. They didn't hold the stock. There was no term sheet. There was nothing that went to the board first. Try explaining that to a jury. The jury is not going to understand, so you want to do something-- The way the SEC works is they wait till afterwards, there's something easy to show, and then they'll recreate it. But they're not proactive, like the short sellers are. Your short sellers are your real-time investigators. Some of them are very vocal. I was not vocal when I was shorting on a position. I was the type that after it collapsed, I would take my model, my research and put it in the mail and send it to the SEC, but I didn't want to be considered a manipulator. Chanos will go out there or Cohodes or even some of the people going after [unintelligible [00:34:06] right now, they're being demonized as slimy short sellers. It's a no-win situation.
Bill: Yeah. I love Cohodes.
Jen: Oh, he's freakin amazing. [unintelligible [00:34:16] both are just really brilliant people.
Bill: I may even know of Donut Shorts by face but I don't know who he is. The only reason that I love Cohodes is I just seeing that man pitch something and people shit on him or whatever, because they think he's a little bit-- I don't know if the word ‘promotional’ or whatever. I don't know what the answer is. When he stood up and he said, “I'm so concentrated, it would make a lot of you sick.” I knew what this guy. To be that concentrated-
Jen: [laughs] He's ballsy for sure.
Bill: [crosstalk] -short, that dude believes in what he's saying. He might be wrong.
Jen: Yeah. [crosstalk]
Bill: I think he would acknowledge, “I might be wrong,” but if you're going to say he's wrong, put your research out.
Jen: I never understood his Overstock trade and how he got into bed with Patrick. That was the only time that Cohodes lost me. Other than that, I think that he's incredible, and I'm a huge fan, but I just couldn't follow the whole Overstock, and then when they got into the IOC, and then what an unusual bedfellow. Patrick had gone off after the shorts forever. Now, all of a sudden, they're chummy. I couldn't quite follow that, and I still don't follow it to this day.
Bill: I don't know, and Marc, please don't come after the two of us because we're not trying to get into that. I will say though--
Jen: He doesn’t know me at all, so it's fine.
Bill: What he does say, at least my belief of what he says is that he felt the same way about that guy, and then they got on a personal level, and maybe that changed some stuff, but I don't really know.
Jen: Yeah, and then I think Patrick went off the deep end again, something happened like this whole story that he-- I can't remember what really went on, but something with the Russians-
Bill: Who knows?
Jen: -and Trump, and I was like, “What the hell?”
Bill: Yeah, that's right.
Jen: That was really one of Cohodes [unintelligible [00:36:09]. Like the MyMedic stuff was brilliant. I think he's involved with some of this [unintelligible [00:36:14] stuff that's going on, uncovering that, but yeah, the Overstock thing still to this day confuses me.
Bill: Let's say that you see something like Overstock going parabolic, and you don't get it. When as a short seller would you think about initiating? One thing that when I was talking to McMurtrie, what I thought that he had articulated really well was, you can tell the Tesla longs, this doesn't make sense, but they don't care.
Jen: Right, they don’t care.
Bill: They're talking about going to the moon. Did you use to think, okay, the story is going to crack and then we'll put on our position, or would you think more of my fundamentals are right, and I'll hold it through the borrow and whatever the pain comes, let's do it?
Jen: It depended on the stock. Our hedge fund had a rule, “Never bet against Elon.” We had never shorted. After I left the hedge fund, I was--
Bill: When was this? Do you mind talking about the year? You don’t have to.
Jen: I left there in 2015.
Bill: You already had that rule?
Jen: Oh, yeah. He was on our radar forever.
Bill: Really?
Jen: Oh, God.
Bill: From his PayPal days?
Jen: No, but from early days of Tesla and SolarCity. SolarCity was a shit show from top to bottom. I would put SolarCity absolutely in the fraud category of just funny things.
Bill: This is all opinion for those that are listening. I'm not trying to get either of us in trouble.
Jen: It is hard too because I've tried to stay off of Elon’s radar-
Bill: Yeah, hit list.
Jen: -I wanted-- because he could easily hurt me with work, but SolarCity was his cousin’s, so we can't blame Elon for this. This was the Rives. That company was near collapse, and yet they were out there saying like, “Oh, we're just printing money, and it's great, and everything is fine.” Yet they had certain debt instruments that were related party transactions, because they were so ugly that there was nobody that was actually going to give them the money to do this. I wanted to short SolarCity, but I couldn't get a borrow. I've chosen because of work reasons-- I'm legally allowed to trade Tesla, I just choose not to because I think it would look bad, where he could always say, “Hey, you've got somebody in the rocket business that's actively betting against my company.”
Bill: That said, I see you on Twitter cheering on SpaceX. You are not an Elon hater per se. [crosstalk] You're down for the cause when it matters.
Jen: [crosstalk] No human being is 100% good or 100% bad. That would be very myopic way. I think that there's a lot of incredible things the man has done. He has reinvigorated the space program out of its darkest hours during the Obama era and we shut down the space shuttle, and we could only launch our astronauts on Russian rockets, like that is shameful. That was disgustingly shameful.
Bill: Why did we do that, do you know?
Jen: Money. It was so freakin’ expensive to launch that shuttle. The reusability economics, but I won't go there. [laughs]
Bill: That's the hack he solved, right? That he could reuse the rockets? Is that what you're referring to, or no?
Jen: I would say his hack is the ability to raise venture capital.
Bill: Well, it's pretty important these days.
Jen: Right, exactly. If your business model does not close, you have the ability to stay alive by new injections of cash. Again, there's a few things that he's phenomenal at. He reinvigorated the space program. I would say he hires the smartest people I've ever worked with. His engineers are phenomenal, hardworking, super-smart people. They've done some great things. I mean, you saw the SN8 test the other day that was just like freakin’ phenomenal. That rocket goes on its belly and then comes back vertical again. They've done a lot of great concepts. But I think his main product is a function of today's day and age where we all put money into our 401(k)'s every month. That just keeps going, and we need more and more stocks to buy with that. So, he can constantly dilute, keep raising, dilute, keep raising, and it makes everyone rich. We need the stocks in our ETFs and our 401 (k)'s, the bankers need the deals. You look from top to bottom, everybody needs this. I think that he's discovered that his greatest gift probably is giving the masses what they need, and it's more shares even privately if you look at the number of series of capital raises he's done.
Bill: One of the things that I was doing some math on the other night was dilution just generally. I was like, all right, you're in this-- like a lot of these high EV to current cash flow names. It's like, “Alright, well, what do I have to believe to get to the EV today?” Then, I was looking at the share dilution over that time-
Jen: [laughs]
Bill: -like, all right, that can work for a year, but over 10 years, dilution is a real bitch.
Jen: It is, but again, people don't care, because the stock price has gone so parabolic that it outpaces the dilution.
Bill: Yeah, that's right. Well, even Zoom, I was looking at and I'm not trying to pick on them, and I don't know what the average share counts are. I'm talking a little bit out of school here, but for the period ended October 31st, I think the nine months ended, I think that the top-line revenue was like 400% growth. But if you do revenue per share, I think it was 300% growth. I know that they probably had some unique reason to issue whatever shares, but 400% to 300% is not nothing.
Jen: It's material enough. Yeah.
Bill: It's not average, I get that I have problems with how I'm calculating and it's just off the top of my head.
Jen: Oh, yeah, but it's in the realm of [crosstalk] numbers.
Bill: I'm just saying maybe look at that if you're going to be a long-term shareholder.
Jen: Yeah. It's the numerator versus the denominator. If the denominator grows, but the numerator outpaces the growth of the denominator, they don't seem to care. The numerator is only growing because of ultra-liquidity, the whole reflexivity bubble that Soros talks about?
Bill: You think that so?
Jen: Yes. Well, I mean, we have to look at the quality of earnings. The companies that seem to be outpacing the rest of the market, I would not say that they have strong quality of earnings.
Bill: Why do you say that?
Jen: You can look to see-- well, they have revenue growth, but where's that revenue growth coming? Is it coming from subsidies? Is it coming from same-store sales or, is it coming from just opening up new stores? Look at their operating margins and their net margins, and I don't think that they're very high-quality earnings.
Bill: If I'm playing devil's advocate with you. I tell you that they're investing through the income statement and underpricing to [unintelligible [00:43:00] expand. What do you say to that?
Jen: It depends. That's great if you're Salesforce, where you can take the same software, put it on the cloud, and just grow yourself out of expenses. But if you're a capital goods company, that means to build new factories and maintain those factories, well, I don't know if that scalability story really works. If you have to do a shit ton of R&D and you have to do a lot of CAPEX to grow, I don't see yourself necessarily scaling out that way.
Bill: I'll tell you the thing that might be the biggest blind spot, it might be costing me a lot of money, but to your point on R&D, I just see the R&D line item grow and grow and grow in a lot of these companies-- Jen: As a percent of revenues, or just in absolute dollars?
Bill: I would need to do a lot more work. What I can tell you is that it seems to me as though the incentive system right now is set up to reward top-line growth and because of that, the expense structure can get sort of, to my perception, a little bit wacky. I think that as long as the top line is growing in many companies these days, people forgive the expenses, because they say, “Well, they'll figure it out.” I guess that they--
Jen: Well, it's a beat and raise game, too, we're saying. You said, it's about the top-line growth, and then it's pretty much beating the estimates on the top and the bottom lines. Some of these companies you'll see right before earnings, they'll start socializing, lowering of those numbers, and then they lower it so much that comes earning report, they actually beat it or they announce on non-GAAP earnings and it confuses, I don't know if it confuses the algorithms or people just don't understand the difference. When you're telling me adjusted EBITDA, already EBITDA is a bullshit number and then you're adjusting it even more, and that's what you're running your press release on? To me, that's just like a beat and raise game that they're going to keep playing.
Bill: Yeah. My beef is on gross margin, I feel there's a lot of sale-- If you think about the traditional manufacturing company, let's say I were to build out a plant. I used to bank food, so let's call it chickens. As I process chickens through the manufacturing company, the depreciation runs through the gross profit. There are certain companies these days--
Jen: [crosstalk] -operating a little bit too, though.
Bill: That’s right.
Jen: [crosstalk] depending if you're vertically integrated.
Bill: Yeah, no doubt.
Jen: Which is why I don't look at gross margin, I only look at operating margin.
Bill: Yeah, well, so some of these companies today, the SG&A is basically your plant. People are like, “Oh, look at the gross margins.” And it's like, “Well, I don’t know [crosstalk] it's really apples to apples.”
Jen: That's one of the biggest arguments I have with the US government when we're talking about financials. They always want to talk about gross margins of a company. I'm like, “Who gives a shit about the gross margins? They're a vertically integrated company.”
Bill: Why does the government care about gross margins?
Jen: I think that's the way they've always done it with their contracts. There's the Federal Acquisition Regulations. A lot of it's like, well, contractor can't make more than 12% over cost.
Bill: Yes. That’s what TransDigm got in trouble for.
Jen: Yes, exactly. Right. They're looking at the wrong line sometimes, in my opinion, because you're now dealing with vendors that are vertically integrated. To me, I always look at the operating margin, because it's your operating profit that makes your debt payments. I'm constantly asked, “Okay, is this industrial base partner going to go bankrupt?” Well, what that means to me is, can they service their debt and can they pay their vendors? And I use the operating margin line to look for that.
Bill: Yeah. Well, that's fully baked. How much are you allowed to talk about your rocket science job?
Jen: I can talk a little bit, I didn't go through corp comm on this, so I don't want to talk too much. I left the hedge fund in 2015, and I switched over to federally funded think tank. Right now, it's the US Space Force, it was the US Air Force and the National Reconnaissance Office Space Programs. I was hired originally into a group of engineers with MBAs doing this kind of analysis of the markets or industrial base. Then, after a couple years, I switched over and decided to do flight operations for national security space launch. I sit console on launches. I have a team of engineers that I reach back to, to make sure something we call like, is the telemetry going to come off the rocket? Or, the ground--[crosstalk]
Bill: All right. Explain this to a two-year-old. Is it telemetry going to come off-- [crosstalk]
Jen: There's a bunch of data that comes off the rocket. We're constantly reading all points of data that we want to get from the rocket as it's circling the earth. That data has to beam down to ground stations all around the earth receive it. I have to make sure that those ground stations are going to come online and can receive that data, especially during critical parts of the rocket launch.
Bill: Are they in the ocean? That might be stupid-- [crosstalk]
Jen: They're on islands of the ocean. Yeah, there's definitely some on islands all over the world. You can watch it during a rocket launch just all over the world.
Bill: Yeah, I'm very stupid when we're talking about this, so I didn't-- [crosstalk]
Jen: No, not at all.
Bill: [crosstalk] -in on the mainland, they were collecting it all, or if it's all throughout the world.
Jen: No, they're some in Guam, Hawaii, they're all over because this rocket is circling the earth, so you need to have stations all over. We double-check to make sure that during critical events, that there's a ground station that's going to be able to receive this data. Another thing that fell under flight operations is the second stage that was pushing the satellite or the payload into orbit, that eventually separates from the payload and typically comes back down to earth and lands in the ocean. Sometimes, it's left in space, but we made sure that it was going to land in a part of the ocean where there's no population, we're on the phone with the FAA to make sure that ships and planes do not enter that area.
Bill: How the hell do you land in this job? What goes on in Jen's life that she's like, “I'm done with short selling, I'm going to rocket launching?”
Jen: [laughs] How could you not be done with short selling in this market?
Bill: I get it, I understand why you quit one, I don't understand how you ended up in the other.
Jen: I think part of it was, I was doing a lot of financial analysis for our rocket group. Some of it was so that I could keep doing financial analysis. There's a number of rocket vendors, small launches mostly privately funded through angel investors and venture capital. A lot of people don't know how to analyze venture class companies, so I was able to work on that. Then even with our larger primes, you have some that are private companies like Blue Origin and SpaceX and then you have some that are joint ventures of larger parents, like United Launch Alliance is a JV of Boeing and Lockheed. And then there was Northrop Grumman. So, you have to span the ability to analyze a publicly traded company that gives you quarterly financials to a private company that gives you no information and how do you--
Bill: Because why, you're worried about like credit risk or the ability to execute, you don't want to commit to something with a company that's not going to be there? Is that what’s going on?
Jen: Yeah, it's partly due diligence. Our job at this think tank is to do mission assurance. We look and identify risks to the system. We have a tendency to concentrate on the hardware risks, but the risks to some of these systems are not the hardware, it's the ability to raise capital, the money for the business. It's just part of that situational awareness to understand what's going on in our industrial base.
Bill: Do you ever get conflicted that the amount of liquidity almost enables some of your job, but it's also what you hate as a short seller?
Jen: Yes. I mean, it's really funny. It's very true.
Bill: It's an internal conflict.
Jen: Yes, absolutely. I know that there's 140 small launch companies mainly because there's so much liquidity right now.
Bill: What do you think about that? Do you think that there's a legitimacy to the argument that the amount of liquidity and low rates create sort of technology of the future, do you think it's a lot of malinvestment?
Jen: There's that valley of death. If this liquidity helps great technologies get through that valley of death, out to the other side, well, okay, then you could say it was worth it. If it's just to be a misallocation of capital and create bubbles for crop that like pets.com, that's going to go under, and no one ever actually gave a shit about it. Well, that was definitely a waste of investor money. It's hard to say until you're on the other side of it. Even there's 140 companies, there'll be a few that make it out. Those could be game-changing, whether it be for our warfighters, or even for the commercial market to have these new capabilities, but there'll be 137 that just die.
Bill: As a noob citizen, what am I trying to look for in the space sector? Am I looking for really fast flights to Japan? Or, is America going to--? What's not classified that you can tell me about what we're doing up there?
Jen: This will be hard for me to answer because I--
Bill: You don't have to. It’s fine.
Jen: [crosstalk] -talk to work about it.
Bill: We can also just cancel this. I can edit all this out.
Jen: Well, what I would say is there's people who would be great guests to talk about this exact topic. I would say Ethan Batraski at Venrock and Josh Wolfe at Lux Capital.
Bill: Okay, we're going to go back on the record right now. I'm going to ask you officially what is Space Force?
Jen: Space Force started out, there was a portion of the Air Force that was dedicated to space out in Colorado Springs, it was headquarters Air Force Space Command. There are a few issues that were happening. One, the Air Force is mostly air breathers. It was very difficult to make a career in space. Predominantly, the budget went to the air-breathing part of the Space Force.
Bill: What do you mean by air-breathing?
Jen: Like the planes, fighter pilots. You're going to be a general, you're going to be a fighter pilot, where it was very hard, I think, to make a career in space, especially if you wanted to move up to a general-type position. Earlier on, we were the belles of the ball up in space, but in the last few years, our near-peer opponents have become more aggressive. Their technologies have grown in capability. So, it is becoming congested and contested up there, and it was becoming clear that we needed to be able to protect and fight into and through space as a domain. There's a warfighting component of it. We want to be able to protect our assets up there, the assets of our allies. Then also, there's a cyber component to the Space Force.
Bill: What’s the cyber component?
Jen: We have a lot of people inside the Space Force that work on preventing cyber hacks and preventing cyber warfare. A lot of that falls under the Space Force. It's hard, because cyber goes cross-domain. Every part of the command needs cyber, but a large component of it does fall into the Space Force.
Bill: It's weird, because I see like a lot-- I don't know what-- I have no idea what space does as a company or whatever. I'm like, “Why are so many people so interested in space?” On the other hand, I guess there's good reason. I don't know. It seems like a lot of capital is flowing into that industry. Or at least the stocks are moving quick.
Jen: Adam Jonas, recently, I think it was last December at his space conference said, “How important is space to your portfolio? Raise your hand if space is important.” I think 1 out of 10 people raised their hand. Then, he reminded them of the statistic that's very true. GPS, Global Positioning System, is really giving us position navigation and timing and that timing component is extremely important for all parts of our infrastructure and communications networking. It runs our ATM machines, it runs part of the smart grids, it runs the dams, in an insane amount of our infrastructure. If PNT went down, if GPS went down, it would cost the US economy between $1 and $1.5 billion per day, but it's so ubiquitous, you have no idea.
Bill: Yeah, you just assume it's going to work.
Jen: So, much of the capabilities we get from our satellites are just part of an integrated system that you don't realize that it's a node that if that was to go down, and if there wasn't another satellite to pick up that slack, that we would have some serious problems in our own economy and vulnerabilities.
Bill: Do you buy the argument of internet through space?
Jen: I think that any business that wants to be from space, the moat has to be space. Meaning, if you can do it, terrestrially, it's usually cheaper to do it terrestrially, and it's easier to do tech refresh terrestrially. They're going to be competing against the 5G here on Earth, and then they're not going to have the same issues with speed and latency. We talk about wanting to use your cell phone anywhere and wanting to use internet anywhere. Well, that's great if you're hiking the mountains, and you can connect to a satellite, but you really want to be able to use your cell phone internet from a parking garage. That's not going to work with a satellite system. I think that the marketing for some of these systems for internet doesn't really match the reality where-- we're talking about using internet anywhere, well, you're not out in an oil rig most of the time, but you are in a parking garage. Is it really internet anywhere? Sometimes, you're providing capabilities that aren't a huge customer base. So, then it's going to come down to can you get the economics to close so that those who are underserved, the people in remote areas, the people who don't have fiber running, that they could use these capabilities? Usually, space is expensive, so you're going to have to find other ways to close the business model.
Bill: That’s what it seems to me because it seems to me as though you're competing against people that already have a dense network that works. You can try to introduce a different technology, as long as you’ve got the patience to get through the burn, but I don't know that you can get the critical mass. That seems hard to me.
Jen: Yeah. I don't think they're going to be commercial businesses. I think that they'll have a large defense component. Defense tends to be high ARPU, the Pentagon's willing to pay a higher revenue than a commercial customer would. Once you get a defense customer, it's stickier. I would think that most of those commercial constellations will be either subsidized through the FCC and then have government customers that can help subsidize some of these commercial costs.
Bill: Putting your short seller hat on, how do you think through a nascent technology like this, that people are saying, “Okay, the internet's going to come through from space,” how do you think through like, when might I short, something like this? Is it worth it short? What's your process start and then how do you narrow it down to the decision process? Does that question make sense?
Jen: Yes, but I want to use it very generic because this could be-- this is a little bit of a conflict with my job.
Bill: Okay, that's fair. [crosstalk] I'm just thinking of a new technology.
Jen: [crosstalk] -a nascent technology. So, then you look at-- you've got the total addressable market bros out there, they're going to tell you, this is the TAM. What I try to do with-- [crosstalk]
Bill: TAM bros are the best bros, EV to TAM.
Jen: Exactly.
Bill: I love the TAM bros. Shoutout to you all.
Jen: [chuckles] Shoutout to the West Coast there. What I usually try to look at is who is doing something similar now if there is something similar? You've got Viasat out there, and you've got Inmarsat and Intelsat.
Bill: Is Iridium still relevant?
Jen: Yeah. I mean, Iridium is still launching. I think SpaceX just finished off launching their constellation, their refresh. You start to look to see, “Okay, what was the art of the possible for them? And you look to see what were their max commercial revenues?” Well, some of them were about max $500 million. They penetrated the airlines, they penetrated the oil rigs, and the remote areas. When they were up and running full constellation, they got around $500 million. Then I started to compare that to what the total addressable market bros are saying, and I'm like, “Okay, what does it take to close that business model to be cashflow positive, or at least cash flow breakeven?” If it's a couple billion dollars of revenues, and I know at most, they can only make a few 100 million, then I say, where does the differential come from? Can they penetrate defense markets or global governments to make up that difference? Then, I look for certain things that they can do to bring down their costs that maybe will close the business model so that you can get cashflow positive.
I look for those critical paths. What's the most expensive part? Is it going to be the lifecycle of the satellite? Is it going to be the terminal cost? How cheap does a terminal have to be because you have to give those out to your customers? In order for this business model to close, can it be a $3,000 terminal? Probably not. Can it be a $500 terminal? Well, yeah, maybe customers will start to pay that fee. Well, what do I need to do to get it from $3000 to $500? Is that possible? Well, it could be possible through certain technologies, or it could be possible through capturing certain subsidies. Those are the ways that I try to see if you can close the business model.
Bill: What do you do when the TAM bros heap a huge EV on a concept that you think doesn't have this huge--? You look at something, let's just say for the sake of argument that it has this huge enterprise value, but you think that the actual economics are pretty crappy-- I know that I've asked this question a couple different ways, but how do you decide when to put on that short? The thing that's so tough for me to understand about you short sellers, is the guys that are long or the girls that are long have time on their side, and like y'all have to pay borrow, and there's so many institutional biases, for lack of a better term, that are like you're swimming upstream, so how do you figure out how to put on a position?
Jen: Yeah, you still [crosstalk] against the ocean. For us, I want to be sure, I would have convinced myself, truly convinced myself through data-driven analysis that the stock will be down 50% within the next one to two years.
Bill: How do you know if the TAM bros control the flow?
Jen: Well, it's been worse in the last few years, obviously, because of the liquidity issue. But some of the shorts have still worked, and some of them were frauds, and some of them weren't. You’ve got to also look what type of short it is. Is it a buggy whip company? Is it a yellow pages in electronic world?
Bill: Movie theater right now.
Jen: Yeah, right. Then, does it have any possibility of pivoting or coming back. For me, the number one indicator is the management team. If there's a really great short, that I love as a short, but they bring in a new management team that has the ability to turn it around, then I might exit the short just on that. There's times though, where like JCPenney’s was a perfect example where-- [crosstalk]
Bill: Did you short Ackman?
Jen: Oh, yes.
Bill: Oh, how dare you short the Ack attack?
Jen: Yes. Only time I met Ackman was at JCPenney’s headquarters, and I will never forget this day, this was one of my favorite days ever.
Bill: He's so good looking, and he was in retail and you shorted him.
Jen: I shorted him-
Bill: That is dangerous.
Jen: -and it was so tasty, the short because it was the one time where I looked around and I'm not one of those like, “Oh my God, you have to have a 50:50 mix of female executives on your board,” kind of thing. But it was one of those moments where I looked all around and go, “Holy shit.” Not one single woman walked through the store with these guys.
Bill: [unintelligible [01:03:09] retail.
Jen: It was so bad. They got Ron Johnson from Apple. He thought he was just going to replicate an Apple Store. His big idea was this whole mall within a mall. Imagine malls were dying, so why would you want this mall within a mall concept, but you walk in and it was polished white crap everywhere, in a store that sells polyester. He decided without any research to get rid of coupons.
Bill: Yeah, that's the part that I didn't like.
Jen: There was no research done behind that. They just decided. They wanted to go after a more selective customer, but the selective customers are brand snobs. They won't pivot immediately to JCPenney’s. We went into the store. They did this whole dog and pony show where you met at the headquarters and then they put us on these buses to one of the stores, polished white everywhere. The store within a store concept was, there was dry cleaners in the store, and this is when I was standing next to Ackman at this point, and I go, “I just want to let you guys know, I don't even schlep across the street to drop off my dry cleaning. I sure as hell am not driving to the mall to drop off to JCPenney’s, a store that doesn't sell dry-cleaned clothes.” Nothing you buy at JCPenney’s needs to be dry cleaned, first of all.
Bill: Were they going to do it for free or was it just like a thing? Oh, they were going to charge?
Jen: Yeah. It was a mall within a mall.
Bill: Oh, that’s very stupid.
Jen: But this is crap that I don't want to go to the mall for to begin with. There's a reason why it's not at the mall.
Bill: Oh, Bill Ackman, if you listen, come on, bro. What did you do?
Jen: Yeah. So, then, we're walking around more and he's like, “Well, we got rid of registers,” and all I could think of is like-- say you've got a bunch of kids and you got heavy back-to-school jackets in your arms and you're running around the store trying to find somebody with an iPad to scan this shit, I was like, “That is not going to work.” Then, they had next to the children's section, a gelato store. Now mind you, this is a polished white store, and all I could imagine is tiny little chocolate fingerprints all over the merchandise. Every part of this thing just made no sense to me. It was one of those times where I couldn't bite my tongue. I even as a short seller, I looked over and I was like this [unintelligible [01:05:29] from top to bottom. This is a horrible idea. As a female shopper, there is no way I would go to the store for this stuff. They just rolled their eyes like, “Who the hell are you?” And this was the time when the share was about $40 a share. I remember calling back to the fund halfway through this pitch day, like, “Make this our biggest position.” I'm like, “This is a shit show.”
Then I remember, one of the guys who's now one of my best friends I met that day, because I remember sitting on the bus next to him and I was like, “Can you believe this crap?” You saw the color drained from his face. He was like, “What are you talking about?” “Oh, my God, this is so bad. Not only is their balance sheet a shit show, but the management team is driving into the ground.” Then, I remember the woman who from Goldman Sachs, who gave him a loan was at our table, she could like hear us talking, and I could tell she was having heart palpitations. But, yeah, that was the only time I met Bill Ackman. I tried to give him a piece of advice and got blown off. [chuckles] I think it was a big position for us.
Bill: I'm on the record as a Bill Ackman liker, a lot of people don't like that.
Jen: He did great this year.
Bill: He did do well, but JCPenney did not.
Jen: Or Herbalife or half the other stuff, but it's amazing how concentrated he can make his positions. [laughs]
Bill: That’s how the right tail works so you can mess up on half if you're right on the big winners. It doesn’t really matter so much.
Jen: Yeah, and he's really right on the big winners. He's got a lot of smart friends that I really respect, like, [unintelligible [01:06:56], I think, is just an awesome guy. They say that I'm a little harsh about that moment, but it's just a really funny memory of-- again, arrogance, not letting you realize that like, “Hey, maybe you're making a bad choice here with this redesign of the store. Maybe, I don't know, bring some of your female execs with you next time, and they can tell you that how bad of an idea this is.”
Bill: I didn't ever see this store, but what I thought that they really messed up on was when I heard that they weren't going to discount anymore, that made me super nervous, because then you have a situation where your core customer, you're invalidating your proposition to them.
Jen: Well, their website was one of the most top 10 e-commerce websites at the time. They killed it by getting rid of coupons. The shining gem of JCPenney’s, they killed in one fell swoop.
Bill: That's what people hate on Bed Bath & Beyond for but that's also what their customers expect. They can't go away from couponing. That's who they are.
Jen: You've already conditioned the customer for it. There's no unconditioning them at this point. It's not like Bed Bath & Beyond sells the stuff super cheap. I feel sometimes when I go in there with my coupon, it's equivalent to what I would have paid elsewhere.
Bill: Yeah, but you think you're getting a deal.
Jen: Yeah. Well, it's that human psychology. It's the gaming, the thinking that I'm losing money not buying this.
Bill: Yeah. The CEO change has been interesting. I haven't been in there in a while, mostly because COVID hit, but I do think it's--
Jen: Where are you getting your Yankee candles from if you're not going into Bed, Bath & Beyond?
Bill: Oh, you know what? I don't have enough Yankee candles around here. That's my problem. I'm buying my wine on the internet, though.
Jen: [laughs] Your [crosstalk] cups. Nice.
Bill: I should be getting them on QVC given how loud I've been about that position.
Jen: Yeah. [chuckles] Exactly. Ackman was Chipotle [laughs] from COVID.
Bill: That’s right. Yeah, I should be taking pictures. I was taking pictures of QVC for a minute, but I should continue that. So, I will. My highlight, my strength is transitions. Information flow. You and I had talked about how you read the news. I had shared a story about how when I was at a table once upon a time, the smartest guy there wasn't focused at all on the story, and he was focused on who leaked the story and why. How you view the news and how has short selling sort of skewed your perception of corporate puffery for lack of a better term?
Jen: Well, all information is biased. It's biased from the person who's giving the information and even we are biased receiving it through our lens. I'm a believer of put all information out there, don't hide information from me, but I want to calibrate for it. That's why it is important when I get a research report or I read a news article, “Who wrote it? What are their biases? How are they paid?” Even if it's like a CEO, and I want to find fraud, “How are they paid? That's where I'm going to go find it.” Then I try to caveat when I'm reading this. If it's a super glowing review of a company where I'm like, “Alright, what are they trying to do, a secondary with this company?” Or, “Are there other reasons why they might be a little more optimistic on it?” I'm not calling them a liar. I just think that they have some biases there that just need to be calibrated.
Every piece of information, I ask myself like, “Okay, where did this come from? What is that person's motivation? Is it true? Do I agree with this? If I don't agree with this, could I be wrong? Are there other things that I should take a look at? Even if it's true, does it matter?” Especially when you're dealing with frauds, a lot of times when you're interviewing a CEO, or CFO, that's lying to you, they won't outright lie. Instead, they use this technique of answering your question with a correct true statement, completely irrelevant to the question you asked. It's almost like a mental platitude where they'll say it, and it sounds right, and you rest on it, and you're like, it is what it is kind of thing. Then, you move on to the next topic because there's this, again, this psychology where it's like they say something that's correct, even if it wasn't the answer to the right question, maybe I don't fully understand, so I'll move on to the next thing. I see that a lot with fraudulent executives where they'll answer, they don't lie, it's just what they're saying is totally irrelevant to what's being asked.
Bill: Hmm. It's been on my head lately is there's the CEOs that write nice letters. There was this-- not a narrative. It was supported by data, but that for a while, clear corporate communication resulted in higher stockholder returns. But then, I have sort of like dug into a couple companies that have written this letter that you might think like, “Oh, this is the best letter ever.” Then, you look at what the stock has done, or what the business has done, it’s really corporate marketing, for lack of a better term.
Jen: Correct. That's an indication where you want to go through the letter and ask yourself, “Well, why are they saying this? Is it true? It doesn't matter.” That's a perfect example when you want to try to apply that reasoning to the information.
Bill: What do you think of Buffett?
Jen: I'm not a value investor.
Bill: I'm just asking you what you think of how he communicates to the shareholder base.
Jen: Oh, yeah. His 80-page letters? I think it's interesting. Again, there's a cult around that, we all get excited.
Bill: I'm part of it. I am a cult member, so that’s why I'm asking.
Jen: I read his letters. I enjoy them. I learned something from them. Do I always agree with them? No, but they're still enjoyable and they're still an interesting perspective. I think he's a unique one with his letters that you get really excited to go read them.
Bill: As a skeptic, do you buy the grandpa sales pitch? Or, do you read it with the highly skeptical eye?
Jen: He has a track record. He's been able to find good companies, and hold them for a long time, and they're cash flowing companies. It's not that I don't buy him. I just don't want to have conflicting methodologies. You can have a diversified portfolio, but I'm not going to try to run a hedge fund that's like Buffett-style long and then short tech bros, because those would be somewhat inconsistent. I would run a short fund maybe that does distress debt or something that would be a good match.
Bill: You would pair up a Buffett-style long strategy with just a dumpster fire short strategy?
Jen: Yeah. What do you mean by a dumpster fire short strategy?
Bill: I don't know. You said you wouldn't short the tech bros.
Jen: Well, I don't think I would pair him with any kind of-- again, it's like what you're trying to do as an individual investor in your portfolio? Why would you in that type of portfolio take on such risk as short selling? It's a hedge. Do you need to hedge a-- I want to invest in blue chips and See's Candy like dividend-paying cash flow super stable companies, well, I don't think that a concentrated short position actually hedges that properly.
Bill: Do you run your PA with shorts?
Jen: My personal fund? No. I have no reason to. I'm not wealthy enough to need that kind of hedge. I got divorced. [laughs] There's no wealth after divorce.
Bill: [laughs] That's fair. The lawyers may need the-- [crosstalk]
Jen: Yeah. I don't have enough in my personal account to really justify needing that type of hedge. I want to keep my skills sharp, so do I still run screens and read 10-Qs and 10-Ks and just do it for the academic fun of it? Hell yeah. And that's why I tweet some of this stuff. I helped a friend co-write an article on Benefitfocus last year on Seeking Alpha just because I find it intriguing and I never want to lose that skill set or lose that ability because I can apply it to other areas of my job now. But no, I'm like an ETF bro. I'm your typical long term, 401(k) type, and then personal account-- [crosstalk]
Bill: Well, you own Tesla now if you're long the S&P ETF.
Jen: For the S&P. I cannot trade aerospace and defense stock individually. I personally choose to not trade related party companies. I don't trade Amazon because of Blue Origin. I don't trade Tesla because of SpaceX.
Bill: But if you're in an ETF, you just incorporated--
Jen: ETFs are different because that's passive.
Bill: Oh, I'm aware. I'm just telling you, you own some.
Jen: I know. Well, that's interesting right now, like, what's going to happen to Tesla shares now that you can't do these out of the money calls that-- because it's no longer going to be a low float stock? People are going to have to start buying up Tesla shares right now to balance the ETFs. But after that, how are you going to do these parabolic pumps if you can't do these out of the money calls?
Bill: Who's doing the parabolic pump? That's the question.
Jen: Well, that was the question for a while there, I thought maybe it was overseas nefarious actors. Now, I'm just thinking it was the-- I think it was like the Robinhood traders a little bit and then the bankers caught on themselves and started doing it with larger amounts of money. Because I was working for the Robinhood bros, think about if you could actually put some real money behind it. I don't know, like SoftBank? I have really no idea. I'm curious to know if we'll ever find out who are doing those out of the money calls.
Bill: Now that it's in the ETF, you can do a similar strategy? Pardon my ignorance. I just don't think about this stuff often.
Jen: I think there's just going to be too many shares. If it's not a low flow, I don't think that the trick will work anymore.
Bill: Why is that? Do they have to issue shares to get in the ETF? I'm sorry though, I sound like an idiot.
Jen: He just did a $5 billion raise when he thought it was against the ETF last time. I thought he's doing another $5 billion right now on capital raise for Tesla.
Bill: It's pretty smart of him.
Jen: Yeah, it's brilliant. Like I said, I'm not an Elon hater. I think that his product is different than EVs. I think it's more shares for ETFs, but he capitalized on something that others didn't.
Bill: It's weird for me to see a car company with that valuation and then also believe in efficient markets.
Jen: I don't believe in efficient markets anymore. I don't think this is capitalism.
Bill: What do you think's going on?
Jen: I think that we've had a period of a decade of ultra-low interest rates creating asset bubbles, especially in real estate and equity market that cannot handle the least bit of bad news because look back at 2018. All of a sudden, we had our Secretary of the Treasury go, right before Christmas, call all the big banks. They told me there was no liquidity issue. All of a sudden, it was like, “What the hell are you talking about? No one thought there was a liquidity issue. Where that hell did that come from?”
Bill: That was a really weird statement of him.
Jen: Correct. I think he was talking about the repo market, because shortly after that, the Fed which has no mandate to bail out hedge funds said, “You know what, instead of the repo market, we're going to try to lend directly to the hedge funds.” It was like, “Why would you need to do that? You have no mandate to be doing that.” The repo market was totally screwed up. And why did the liquidity dry up? I'm not sure. There's people smarter than me. China has a lot to deal with liquidity market of the repo, were they trying to retaliate for trade reasons? I have no idea, or were they running into their own economic issues? But I still believe they made those comments because of the repo market, because at the time, nobody else was seeing a liquidity issue.
Bill: Yeah. I was sitting at home and I read that statement, I said, “That's not even on my radar,” which-- I'm not the most brilliant person in the world. I pay some attention to stuff, and I was like, “This is a bizarre statement.”
Jen: Right. Then the market started to pull back, and what did we do? We started like printing again. We've gotten to a point where we will not let the market correct. I assume it's because they're worried that if they let it correct, then it's just going to come crashing down at once. Because if it's not trading on fundamentals, what is going to hold it from crashing down further? What is the safety net there? What does it spark? What is the Black Swan going to be? For so long, I thought the Black Swan was going to be all the debt in the Permian Basin. We become an oil nation. Shale economics doesn't close. You need oil to be above $40 a barrel just to break even. Those companies down there are very, very indebted and it’s junk debt for a lot of them, $2 trillion worth of it. I always was like, “Hey, if our market starts collapsing, the government better start issuing like 0% government-backed paper to keep this Permian Basin from collapsing.”
Bill: My boy that work down there, he says that the thing that Wall Street misses is that a lot of the game down there is not even about cash flow. It's about flipping to Chevron and Occidental and whatnot. Do you think there's any merit and that some people are looking at shale companies that are uneconomic but not understanding that they're just playing like a proven sell game, or do you think that fundamentally, the wells don't work, even at scale?
Jen: I think even at scale, fundamentally, the economics doesn't work. Yeah, flipping it to Chevron. Okay, so you're talking about trading futures, and then on the 22nd of the month sending the oil over to Chevron-
Bill: No, he was talking about, what they would do is they would find where Chevron is buying acreage and then they would say, okay, if we go by 50 acres, or whatever, in front of them, and then we can prove that we have good acreage and then sell it to them and then they're a scale producer, so they can come in and prove it out or actually produce it, they have the scale on a per-barrel basis where like, if you were looking at our financials, it may look closer to this growth, cash flow negative company, but we're not really on economics.
Jen: Yeah, but you’ve got to still service this debt. Okay, great.
Bill: You just roll it, Jen, come on. Who needs the services?
Jen: That’s exactly the Black Swan. It's to the point where you can't keep rolling it. That's my exact point where if you're not cash flowing business, the moment liquidity stops for your business for some reason, you're totally effed, because you still have to make those debt payments. It's $2 trillion worth of debt down there. That to me is a huge worry, and you saw it. Come on. Look back in March. When the market started to pull back really hard, that was not COVID because COVID had yet not truly shut us down. We did not see any earnings statement yet. That was because Putin and Saudi Arabia came to the table. I think Putin was trying to destabilize the Saudi royal family and said, “FU, I am not cutting back production.” They both said FU to each other. Then, the price of oil just came shattering down. That's what brought down the market. It was what, March 7th, 8th around there? That was the Saudi-Russian oil pricing war that put us in the middle because we're the world's largest oil exporter with all this debt down in the Permian Basin. We keep calling it COVID--
Bill: There was quite an overlap, though, Jen.
Jen: What's that?
Bill: There was quite an overlap.
Jen: On March 8th?
Bill: Yeah.
Jen: Yeah, there was panic, but to drop the market that much? I would say, no, because look at the price of crude, and how the market comes back--
Bill: No, crude got crazy.
Jen: Crude got crazy, the market got worse, and then they start to come back together. I would not say this market right now is trading on COVID. It's trading on crude being back above $40 a barrel.
Bill: You think that's true? You just said it, so I assume you think it's true. It's not how I thought about it.
Jen: It's true because I haven't seen my office desk in eight months. There's suppliers all over the country saying my mom and pop shop is about to go under. Yet, our market’s at all-time highs, but yet the market pulled back in March. The only difference in March was oil shit the bed. And yet, right now, we have businesses being cut. We have a transfer of wealth from one part of the economy to the big box stores or to those few companies. Everybody else is suffering. The local economies are suffering, small business, restaurants. We've been shut down but yet our stock market’s at all-time high right now. The only difference between now and March, well, COVID got worse, but yet our stock market got better, but also crude got better. I still think it's more to do with oil than it even does with COVID.
Bill: I'm going to push back on you on that, only in that I don't have the data in front of me and people that I've talked to about you say that you know your shit. So, I might be the idiot here.
Jen: Well, no, these are all opinions because they'll say, well, since then also, the Fed has done a bond-buying program. Until they didn’t--
Bill: Rates are lower.
Jen: Rates are lower, bonds. I also think the Fed was buying equities because there's about nine stocks that just were not allowed to drop, whether it be Amazon.
Bill: Shout out to QTR, I hope Chris Irons listens to this.
Jen: [Chuckles] Yeah, he's awesome. Look, like Nvidia to Tesla to Amazon to Adobe, we're just not allowed to drop. So, yes, there's a certain component of it that is definitely the Fed just injecting liquidity and supporting winners and losers. But I also think that, for me, the biggest sign to get back into the market was the oil price.
Bill: I think that on the Adobe thing at least, and Microsoft, I think it was March 7th or March 8th, I was long banks in airlines.
Jen: Oh good. [laughs]
Bill: So, coming into that was real fun.
Jen: That was a good day. [laughs]
Bill: Yeah. Great stuff. By the 12th, I was out of both.
Jen: Did you get cruise ships too? [laughs]
Bill: No, I didn't have the trifecta, but I did sell out of a lot of those. I bought Microsoft and Visa and one other. My theory was, I just want to buy something that can survive. I think I was a little early on that trade because they started to rip not that long after I did that. I sort of think it was one of these flight to safety type trades.
Jen: Yeah, maybe but--
Bill: I don't know that I buy that the Fed came in, that seems farfetched. I'm not trying to argue with you. I'm just trying to tell you what I think.
Jen: People have put graphs up on Twitter and elsewhere showing different banks holdings of these like nine stocks, and every quarter, they were just like unloading these stocks, unloading these stocks. Then all of a sudden, they started to go big time. I can understand Microsoft because--
Bill: Really?
Jen: Oh, yeah, I can send you some stuff that others have sent me showing me the--
Bill: We're going to go down the conspiracy rabbit hole, I love this.
Jen: [crosstalk] -get Alex Jones, get him on the phone.
Bill: [chuckles] Well, I need a fact-checker if I'm having him. I'm not trying to get deplatformed.
Jen: There's stocks that you can tell were supported in the NASDAQ because the NASDAQ was falling harder than the other indices back in March. I think that people were spooked and I think it got support. It definitely got support from these banks. Now, was it the Fed telling them to support this? Was it Fed injecting money? I don't know, but it does not seem-- okay, Microsoft, I can understand some of the trade. It's a stable company. On top of it, it came out with Microsoft Teams very heavily that was a COVID play, you could say. Some of the others like Tesla, again, I hate to go back to that company, but these are toys for people who have the extra income to have a second toy car, and you're going to trade that up in this market?
Bill: They bottomed on the 20th. I'll tell you what I missed. I missed when the Fed announced and the government announced that they were going to do, I should have bought the shit out of everything that was super levered.
Jen: I should have bought. I know. I missed it, too. I got out early. I got out before early March. Thank God, I did, but I didn't get back in on time.
Bill: Were you short going into that?
Jen: No, I didn’t short, but I was long and then I decided-- I think I've shown you some of my emails, back in February, I was like, the zombies have so disconnected from the market, that it just does not smell right. There's something very obviously wrong here.
Bill: There is something that I feel is messed up. I don't know how to articulate it, other than I think that if you look at-- and I know that this is like-- people are going to roast me for saying this, but if you look at these graphs of some of these companies and how parabolic they've gone, this idea that this is rational, it's just so hard for me to buy.
Jen: No, it's not irrational. Listen, the fanboys of these companies that have gone parabolic tell me, “I just don't understand, it's all about the future.” I'm like, “All right. Well, walk me through this. Tell me in the future how many tickets did they have to sell to that tourism ride?” Or, “How many cars they need to sell to get to that valuation?” Then, the theory starts to break down.
Bill: Or licenses-- [crosstalk]
Jen: Whatever it is, SaaS licenses or whatever. It doesn't work, but those won't work in this ultra-liquid 0% interest rate environment because zombies stay alive through new injections of capital. When debt is so cheap, and it's so easy, you can SPAC anything. You could SPAC your grandmother at this point, and it will get a ridiculous valuation. Nana's chocolate chip cookies. [laughs]
Bill: I don't know what people would value at. I value her very highly. I love you, if you’re listening.
Jen: Come on. Most of the companies SPACing are one month away from bankruptcy in a sense. This is horseshit. But they live another day. It all comes down to liquidity. What would cause liquidity to tighten? There was an issue with the repo market and the funds couldn't get overnight loans essentially? Well, that was a problem, but the Fed said, “Well, we'll step in. We have no mandate to support hedge funds, but we'll still do it.” In this environment, it's killing the bears because the government will step in whenever they need to.
Bill: Yeah. I was actually having this conversation with my buddy today, who said, “What do you think the optimal leverage is to have on a company?” Obviously, that's super hard. It depends on the quality, the cash flow, but I said I would push it as hard as humanly possible because in my mind, we are all playing this debt roll game. We've been shown that there's no scenario-- that I can fathom other than the system breaking, in which case too much debt is not your biggest worry. Even if it is the cause--
Jen: Yeah, at that point, you've got social unrest. But we've thought the same thing in 2007. We fed ourselves a bunch of bullshit where we said, “Okay, people are not going to default on their mortgage because it’s their home they're going to live in.” Robinhood bros of those days were the house flippers and they just overleveraged, overleveraged because debt-
Bill: Yeah, it's reasonable.
Jen: -it was easy to-- At that time, we considered it cheap debt. It was 4% interest, but it was still cheap mortgages compared to our parents that had back in the 70s, double-digit percent interest rates on their mortgage, and they overleveraged, overleveraged. Then finally, there was a snap in the system, just came crumbling down. Is this that same thing? Is this 2007, but instead of it being homes, is it more just these parabolic equities? I think it was Chanos who said on Hidden Forces or one of those or Hedgeye, he said, “Tesla is the bellwether stock of the market.” He's absolutely right. Barring any kind of insanity, any outlier one-off from the management team or the company, there's no reason for the stock to collapse unless the market as a whole collapses. Then, I think it's going to be a negative feedback loop because it is such a big part now in terms of market cap of the S&P 500, but I don't see any massive event taking it down.
Bill: Isn't it-- it’s close to its Facebook's market cap?
Jen: Hmm.
Bill: That's stupid.
Jen: Yeah, but it doesn't matter anymore. It doesn't matter until one day there's going to be some reverberation of this, something's going to snap it and then we're all going to look back and go, “Well, yeah, that was dumb of us, wasn't it?” Just like we did with the subprime mortgages. It was stupid of us to get people who had horrible credit ratings, and probably not enough income these high-interest mortgages and then let other people lever up to flip homes. It looks really stupid. Then you had the credit default swaps. Looking back, we looked like freakin’ morons. But when we're in and we're all making money, nobody gives a shit. That's today. We're in this reflexivity bubble. We have 0% interest rates. Nobody cares, we're all getting rich.
Bill: Value investors aren't getting rich, to be fair.
Jen: No, but they've become SPAC bros, the value investors now are the biggest SPAC bros out there.
Bill: Some of the real OGs are not, they're just sitting there, sucking their thumbs crying.
Jen: No, but look, Ackman, Tilson.
Bill: I'm friends with a lot of them.
Jen: Yeah. Those guys have pivoted.
Bill: Ah, Whitney, come on, man, stop your newsletter. Anyway, I digress.
Jen: [laughs] I was going to [crosstalk] newsletter before but then I remembered you're a value guy. [laughs]
Bill: That just hurts me. I used to like what he did. I still do like what he did. I just don't like what he's become. But whatever, he can come on this podcast, I'll debate him.
Jen: That's the idealism. We might not like what they do and we don't agree with it on a fundamental level with the market, but they're the ones making money. When do we say, “We are the religious cult.”? At what point, do I say me reading a 10-Q is a religious cult?
Bill: Look, my beef is, if you're going to go down, this is probably my-- this is who I am to a detriment. I would rather go down being honest than make a bunch of money selling out.
Jen: You sound like a short seller. Welcome to the club.
Bill: Yeah, well, I might be. [chuckles]
Jen: Any one of us who looks at some of these stocks, and it's like, well, math is on my side. The math is on my side with these shorts, and even the qualitative evidence is on my side, but it doesn't matter because as long as they have access to capital, they survive.
Bill: I sometimes wonder what the stocks that go parabolic, I do-- I've read a lot. Well, I haven't read a lot of Soros, but I've read some, and I do think that there's this element of reflexivity. If I put myself in the CEO seat and everybody is rewarding me for growth, and they really don't care about my expenses, I’d do the same thing.
Jen: Well, look at the proxy statements. Again, we said it earlier, people do what you measure, not what you expect. If you're going to pay a CEO based on market cap and adjusted EBITDA, well, they're going to run their business to maximize market cap and adjusted EBITDA.
Bill: Or sales growth or whatever it is.
Jen: Whatever that is. You can go to the proxy and you can see how the CEOs paid, and then you can figure out how they're going to run the business. That's what they're being-- We're literally telling them as shareholders, that's how we're going to incentivize you.
Bill: Yeah, it's a weird world. I don't know. And then, when you get these things that are valued so far out in the future-- I don't know. It's something I've struggled with for a while. I'm just the idiot in the room. I'm the guy that waits for QVC to get cheap, so what do I know?
Jen: Well, I'm the idiot. I'm very public about some of the stuff. You've seen my Twitter, I'm public with it out in the open about this doesn't make sense, this doesn't smell right and this is going to come collapsing down. But at some point, you sound like Chicken Little because I've been saying this since what, 2015? It's now 2020, and I got my ass handed to me.
Bill: The thing that bothers me is the argument, “Well, the stocks worked.” Okay, well, I don't really give a shit. I get it.
Jen: But you’ve got to remember these people have never touched a 10-Q in their life. I hear like, “Oh, you sound like a TSLAQ, bro. Look how stupid you guys are.” I'm like, “No, we were completely right on the fundamentals, completely right. We predicted everything except for the stock price.”
Bill: Well, and the capital raise.
Jen: Oh, I predicted that capital raise.
Bill: Did you?
Jen: That was the difference between me and TSLAQ. I could still remember-- [crosstalk]
Bill: Even that value?
Jen: Oh, yeah.
Bill: That was a good move of his.
Jen: Yeah. He pulls it out. He admits it. If you listen to Musk, he said, “I was days away from bankruptcy during that Model 3 push. I remember Ross Gerber invited me. I lived in Venice. He said, “Come over to Santa Monica, I'm going to give you a ride in my Tesla. And let's talk.” I said, “Ross, the fundamentals of this company are just terrible. What are you doing?” And he's like, “Oh, they can raise capital, they can raise capital.” I sat down, I was like, “You know what? He's actually right. They can raise capital right now.” Baillie Gifford will give it to them. Morgan Stanley will give it to them. I think he was with-- the company was within 24 hours of bankruptcy. When you look back at that one pivoting capital raise, it was weird. He hates short sellers, but yeah, he raises all this convertible debt that does nothing but create short sellers, because that's the hedge, that convertible debt.
Bill: Can you explain that to those that are less sophisticated, such as myself?
Jen: The way convertible debt works is, you're essentially loaning money to the company. They can either pay that back in cash, or it's almost like an option where they could say, “Okay, in this date in two years from now, if the share price is at $380 a share, instead of paying you back in the dollars, we could pay you back shares.” You always run the risk that the stock-- they can't pay back the cash and on top of it, the stock won't be valued that much. You can start to hedge it through shorting the shares so that in case, they try to negotiate and hand you cheap shares to pay you back to say like, “I have no money, I can't pay you back the shares.” Then you can close your short position with the shitty shares that they gave you. In a way-- because your short position, the way that it works is you're not-- [crosstalk]
Bill: But how many shares that they're going to give you? They're going to settle up with that equivalent amount of shares?
Jen: Probably.
Bill: Depending on the agreement, right?
Jen: Depending on the agreement. There was a point where it looked like Tesla was going to be in that situation because right before they did the 420, I'm going to take it private. That happened because the stock was in the 200s at the time, it was nowhere near the $380 strike price. They had a pump it up to the strike price. It was complicated because there was a rule in there that said it had to be above $380 for the last 30 trading days or something in order to qualify to give back the shares. A lot of short sellers speculated that the 420 tweak happened because of a convertible debt that was coming due and it was the only way--
Bill: Yeah. That I did see [crosstalk] theory.
Jen: Yeah. There's one way, if you're holding a convertible debt, you can hedge it through shorting the equity, just in case you don't get the debt paid up.
Bill: The convertibles, I was following Restoration Hardware, I got scared out of that. I had read it wrong and I thought that they could settle in shares, and then a smart man, I think it was PFH Capital, pointed out where I was wrong. Shit, I wish I’d just held on to those because anything that had liquidity concerns has ripped.
Jen: Yeah, because there are no liquidity concerns in this environment. When Musk raised that pivotal capital, it was very bizarre. It was game over. It was definitely game over for TSLAQ, because they at that point had too much cash on the balance sheet to be considered a bankruptcy risk. It was evaluation short at that point because it wasn't a bankruptcy risk anymore.
Bill: If you had your short seller hat on, it was bankruptcy--
Jen: Oh, I would have gone down in that moment.
Bill: Yeah. Then once it becomes a valuation short, you're done.
Jen: Yeah, because I don't short valuation.
Bill: Yeah, especially on a cult.
Jen: Yeah. How do you do that, right? It had way too much cash on the balance sheet and it was getting to the point where shortly after that, it wouldn't even show up on my screens anymore because it had enough operating margin. Now, whether you believe it or not is different because they can capitalize some stuff and put it on the balance sheet, but they had enough operating margin to make their debt payments. It wouldn't have shown up on the type of screens that I run for shorts.
Bill: When you're talking about I want something to be down 50%, you're looking at solvency risk.
Jen: Correct. I'm looking, can they pay their vendors? Can they pay their debt servicing? I look at the cap stack, what does it do? Are they going to be able to recapitalize this? Are revenues growing or declining, are margins compressing? Are they burning cash? If they're burning cash, when are they going to be out of cash? You have to look to say, how dire is a situation going to be and what can they do about it? What are their options at that point?
Bill: You know what someone--, I would think tough for short sellers is, there's no covenants left anymore in these debt packages.
Jen: Well, even if there's covenants-- so say you're a bank, and you've got debt covenants, but your company is breaking them, well, you're immediately going to send them into bankruptcy if you exercise that. A lot of banks will negotiate on the debt companies because they don't want to be the ones to send the company to bankruptcy. I look at covenants, and I'm like, “Alright,” because a lot of times our EBITDA based or whatever, but I don't hold a lot of stock in it, because the bank is still going to negotiate that. They don't want to be the ones--
Bill: Liquidity is what you're more interested in?
Jen: Yeah.
Bill: Yeah. That's what we always used to look at, at the bank. There's your inside answer. [laughs]
Jen: Yeah. At this point, what doesn’t have access to capital? Because if you don't have access to capital, what do you do? You SPAC. I'm a very defeatist short seller in this moment, but that makes me feel like if I am this down and depressed about short selling, it's always darkest before the dawn. Does that mean--
Bill: I asked some value investors, there's been no dawn. It's been going on a long time.
Jen: That’s the thing, ever since 2012, it's just been on a tear. I don't know. When you've got value investors and short sellers-- again, Chanos said the other day, I think it was Bloomberg that asked him, if you met Musk, what would you say? He said, “Job well done, you got through this.” He even cut back his position. At that point, there's no shorting. There's just unended amounts of liquidity available.
Bill: No, it'll stop when it stops, I think this is the bitcoin bull thesis right here.
Jen: I mean, that's the thing I think about constantly is, what is going to make it stop?
Bill: I don't know.
Jen: Because the money printers can keep going. Is it going to be political based where someone else comes in and says, “Well, this is not the kind of monetary policy I want to have.”? Is it something with China, like, they have an onshore and offshore currency, and something goes wrong-- Because it wasn't a global virus that put end into it. You would think like, okay, a one-off event, I don't know, a global pandemic, well, that didn't shoot shit to the market to pull it back, maybe for March. Again, I still relate that to oil. Where's the liquidity going to stop?
Bill: I don't know. I'm going to have to put some data together on this oil theory. I don't disagree with you that it was definitely a contributing factor, and you seem to be smarter than me--
Jen: No, not at all.
Bill: So. I'm going to have to think about this.
Jen: Oh, I'm sure 90% of your listeners are not going to agree with me.
Bill: Yeah, that's fine. I don't care what people think.
Jen: Oh, I don't care either. I mean, that's why I wouldn't say it if I cared.
Bill: The people that I reached out to about you, they all have mad respect for you. A lot of the listeners have mad respect for them. What they said is like, “She's very data driven and scientific.” That was pretty much my research, is confirming you with three different people, and they all had high things to say about you.
Jen: Thank you, I appreciate that.
Bill: I couldn't really care less if you're a super contrarian, but I just--
Jen: Well, let's talk about data for a second, because one of the things that I struggle with at work is I work in a very quantitative environment. If you can't show it in an Excel spreadsheet, no one will listen to you. You have to be able to show it in Excel spreadsheet. What I remind people with a lot of the frauds and the shorts is, I see the qualitative stuff way before I see it in that quantitative, so we have to do a better job of building more holistic models that incorporate qualitative information. Like I said earlier, why would I get out of a short right away? The management team. I've seen ugly balance sheets and a really good management team turned it around.
Bill: Yeah. Well, this is McMurtrie said, great management team running into a dumpster fire is a great signal to him, and I think he's right.
Jen: I 100% think he's right. Absolutely. Enough of a signal for me to get out of a short.
Bill: How much would you do personal research on the management team when you were a full-blown short-seller? You guys hire personal detectives and stuff?
Jen: No, we didn't do anything creepy, but I would meet with the management team. I used to first call investor relations and be friendly and talk to them, but try to ask them a question that stumped them hard enough that they had to go to the CFO for the answer. I would be like, “Well, since it's complicated, can I talk to the CFO?” Then I would get on the phone with the CFO and ask them questions and say, “Hey, I'm going to be in your area in a few weeks. Can I stop by?” They would usually let me. I would bring a second person with me typically, sometimes it wasn't even from our own fund. It would be one of us watching body language and other person asking questions. I would almost always try to meet with the management team when possible because sometimes they might have a good answer and it would convince me to not short the company. But usually, it confirmed my thesis because they had a shitty answer and weird-ass body language. They're smoking cigarettes in the middle of the interview, or whatever.
I would try to understand the products, like ViSalus used to sell this bullshit diet shake powder crap. I would go to their like little white parties and go to their marketing pitches, and really try to understand their products and their pyramid scheme itself and how it was working. I would walk JCPenney stores all over the country to try to get a feel of what's going on inside the stores and the traffic. I didn't hire personal detectives, I always felt that was a little sleazy. Plus, it doesn't help me with my own-- I want my own research. I want to know what's going on, but I would definitely try to do as much in person as I possibly could. I would go to social media because there's a lot of red flags. Like I said, with Martin Shkreli, who was doing some weird shit on social media, that was a red flag for me.
Bill: Dude likes attention.
Jen: Yeah. There's other CEOs out there that do some weird stuff on Twitter.
Bill: Yeah, [crosstalk] a yellow flag.
Jen: [chuckles] Yeah.
Bill: No doubt.
Jen: There's qualitative indicators out there. There's companies that we would visit. There was one that was pretending to do home remodeling after Hurricane Katrina, but you went there, and there was people pretending to paint but there was no pain on their nails, and no paint on their smocks. The Home Depot price tag was still on the paintbrush. You see stuff like that. Or, you walk into a headquarters and there's like, over the top expensive art all over the place, and water features, or just flamboyantly, over the top dressed CEO. Their name would be on a stadium, a ballpark stadium, is usually a red flag.
The biggest red flag for me of all things when I'm shorting and I get giddy when I see it in a statement is related party transactions. They overwhelmingly have been an indicator for me of nefarious problems. There's different types. It could be Newman putting his wife on the board or an executive, to the CEO owning all of the real estate and the company’s paying him the fees for headquarters. I overwhelmingly find companies with those types of related party transactions committing fraud.
Bill: If you were researching a long, would that be a hard stop for you?
Jen: Ah, yeah, probably.
Bill: Really?
Jen: Unless there's a really good reason for that related party transaction, it would be a hard stop for me.
Bill: That’s interesting.
Jen: Only because so many times I've seen it. If your listeners are out there, and they are long a company that they believe is properly using related party transactions, I would like to learn about them because it would be contrarian to my thesis on related party transactions.
Bill: I can't think of any off the top of my head. I will tell you that if John Malone did anything, I'd probably give him the benefit of the doubt. That's probably to my detriment, but it's honest.
Jen: Yeah, there's trustworthy people out there, but then you start to ask, “Well, why do you need to name your family member to the board of trustees?” Or, “Why do you need to make your family member the CFO and you're the CEO?” Or, “Why do you need to sell your own assets to a publicly traded company?”
Bill: John Malone does have a son on the board of something. Don’t come at Liberty. Don’t do it.
Jen: [laughs] Again, it's the lack of checks and balances, where you're more likely to cover for your spouse that you would just an unrelated party.
Bill: I don't know. I need to think about this, because this is interesting to me. I think about my portfolio, a lot of it is with Buffett and Malone. It's very possible that I have this glaring blind spot. I put a lot in their track record and I've seen them a couple times, a couple being five or six, and I think I can read them but what do you actually know? I don't know.
Jen: Yeah, but when you're talking about Buffett maybe putting a family member on a board, that's a board seat for oversight any other fund would have on there. I'm talking more about you're the CEO of a company and you have your cousin as the chairman of the board.
Bill: Yeah, that's fair.
Jen: That's the lack of checks and balances that I'm talking about. Not so much like, “I'm an investor and I have--”
Bill: I named my kid after Buffett, so I'm like a super fanboy.
Jen: Yeah, but Buffett is different. He's an investor overseeing. He's putting somebody in there that would be no different than, “Hey, I'm investing in this company, and I get two board seats.” I'm talking more about the lack of fiduciary duty when you have two C-suite members that are related. There's no checks and balances. Or, you have board members related to the CEO. To me, that should not be allowed at all. I don't understand why that's allowed, but we do allow it. I can think of companies that actually have that situation.
Bill: Well, Burford had that, and they went from a compounder company to short real quick.
Jen: Yeah. Maybe I'll run some screens, I think in Cap IQ, I can look for-- I can run screens on who has related party transactions. Then let's say, let's go through those and see if there's anything interesting there.
Bill: I would enjoy this project. We should do that.
Jen: Yeah, because to me, I get giddy. When I say giddy, I get giddy when I see related party transactions.
Bill: Huh. That’s interesting. [crosstalk] Have you ever looked at National Beverage?
Jen: No. I know what you're talking about, but no, I haven't researched them in depth.
Bill: I've made a fair amount of money fading short reports, but I also am always super nervous. I will tell you when I've done it, I've done a lot more research than I otherwise would. I have mad respect for short sellers. That's why when we met, and you're like, “I’ve got to tell you I'm a bad short seller” or whatever.
Jen: I'm a slimy short seller.
Bill: Yeah, I like short sellers. I like them. I think it's important for the market. I just think it's sort of sad that a lot of them throwing in the towel.
Jen: Yeah. Short sellers play a very important role. We keep the market honest.
Bill: Calling out bullshit is necessary.
Jen: Absolutely.
Bill: That is fundamental to capitalism in the United States.
Jen: Absolutely. That's the rational part of the market. A lot of short sellers do a shit ton of work and they just share it for free. Look at the stuff Carson Block has put out there about Luckin Coffee, and Chanos had with Wirecard. And others, like you're seeing now with Cohodes and PEN and MyMedics. They didn't get paid from people reading that. They just openly shared it. Now, I really respect some short sellers. Some short reports I've read where I think that they're not being nefarious, but they're a little overzealous in their analysis. There's some that I take with a grain of salt, and then there's a couple where I'm just like, oh, I don't even bother reading their bullshit.
Bill: I'd almost like to know how long the average short seller holds the position. Because if you're like a three-month short seller, then I would really discount your work. Somebody did a short report on Ubiquiti with Robert Pera.
Jen: Years ago, wasn’t it?
Bill: Yeah.
Jen: Yeah, I remember that short report.
Bill: That's when I made a lot of money off of. I know why people didn't like him, but when he responded, the shorts were like, “You can't attack the shorts. You can't attack the shorts.” When you really listen to what he said, he was like, “I’ve got to go to work, and I don't have time for this stuff.” I really felt like--
Jen: Attacking the shorts is a red flag, though. It depends how you attack the shorts.
Bill: That's what I'm saying. I think he has an interpersonal issue that people don't vibe with. I don't think his personality is one that the market accepts. I think his version of saying, like, “I'm going to work,” did not jive with what people wanted him to say, and they interpreted as he's attacking the shorts, and I don't think that's what he's doing.
Jen: Yeah, I have to go back and see what he wrote. That was a good short back then. I think this was like 2013, you're talking about, 2014?
Bill: Yeah, maybe ‘15 or so.
Jen: Yeah.
Bill: It worked until it didn't. He destroyed people on that thing.
Jen: Right. If he treated it right, he did okay.
Bill: Yeah, he's a monster.
Jen: Yeah. There's times that somebody could just be misinterpreted, but then there's other times where-- Apple’s one of the most shorted stocks at times because it could be a valuation short and I never hear Timmy Apple talking about the short sellers. He just shows up and goes to work, but then you've got Patrick from Overstock.
Bill: What you just said, if any short sellers listening to this and give two craps about what I'm going to say, I sometimes think that people are so hungry for the bait of their attacking the short sellers, that they're not actually listening to what the guy is saying. I think that happened with Ubiquiti.
Jen: Yeah, and it might have in that case. I'm not saying every time a CEO [crosstalk] something.
Bill: Yeah, I know.
Jen: But there’s saying something professionally here and there is one thing, but sending short shorts or suing short sellers, that gets a little nutty.
Bill: Yeah, no doubt.
Jen: I have a presentation I can send you on red flags that I look for. It's got the quotes in there from Al Dunlap.
Bill: Chainsaw Al?
Jen: Yeah. He attacked people in his comments, and you’ve got Ken Lay calling somebody on an earnings call an asshole. Earnings call behavior is a massive red flag when it goes to--[crosstalk] It's usually an indication that the person is under a lot of stress.
Bill: Or on discipline maybe.
Jen: Or on discipline, they're circling the drain. I call it the Caged Rat Syndrome, where they know they're in trouble, their back’s against the wall, and then you have a short seller going, “Excuse me, your accounts receivables is outgrowing your revenue growth. You're not collecting money on these and it's really weird because you're selling grills in December? What's going on here, Al?” He's like, “Holy shit,” they're exposing--
Bill: Was that what happened to him?
Jen: Oh, yeah, what he did was Sunbeam called up Home Depot in those companies and said, “Hey, it's accrual accounting. So, you can sell a grill to somebody and put it on your revenue line, but never collect the cash.” And it just goes on your accounts receivable.
Bill: Yeah, [crosstalk] channel stuff.
Jen: What did you say towards the beginning of this? It's all about beating on the revenue line. With him, he even got to the point where he said, “You don't even have to take delivery. We'll just ship it to a warehouse and let it sit there. But if you buy it in November and December, we're going to be able to put it on our revenue line, and you're not out any cash. You just have a commitment to buy this thing at this price and receive delivery in the spring.” One of the analysts, I can't remember who it was, was like, “Hey Al, how the hell are you selling grills in December in Wisconsin?”
Bill: [laughs] They're all in Florida.
Jen: [laughs] Yeah. “Why is your accounts receivables so high all of a sudden?”
Bill: Well, I hope that some of the listeners that are longs take some lessons out of this because I think that due diligence that short sellers do is really impressive. I don't know how y'all live. I think it's fucking crazy to be perfectly honest. There's so much market structure and timing stuff that I think it's a very nerve-wracking pursuit. I don't know if it's worth the payoff, but I have mad respect for all you.
Jen: It's a passion. We're idealistic people. A lot of us are. I would put on the spectrum slightly because we can sit there and read through every freakin’ filing and read every news report. We don't mind everybody hating us.
Bill: Yeah, it's an interesting personality type that can take that kind of pain. Public people just shaming you and the CEO comes after you and people want to believe that the CEO is right because there's so much money on the long side. Because on a lot of these things, it's billions of dollars on the line, and you're saying, this is bogus.
Jen: Yeah, but we believe in [crosstalk] truth. And you can see what people say to me sometimes on Twitter. Some of the longs of some of these tech bro stocks, they're nasty. They can be really nasty. There was times where I read just going through the fundamentals of the company, not even being mean to these people, and they'll call me a hard C word or attack me on my physical appearance or whatever kind of bullshit they can think of.
Bill: I did see that recently and I felt that was super weak.
Jen: Oh, yeah. I'm sure that guy's a Tesla long, who said that.
Bill: I was not going to bring that up, but if you're listening, go fuck yourself.
Jen: Go fuck yourself, dude.
Bill: [laughs]
Jen: He's also wearing a banana hammock in his profile.
Bill: [crosstalk] I was going to come at that guy, and then I was like, “Whatever, you're not worth the time,” but that was weak.
Jen: Yeah. What you see a lot from the bots and especially from the fanboys of certain companies, where I'm like, “Dude, I'm talking about metrics of a company and you're out here calling me the C word.” That to me is a red flag. If you get mad over accounting, you got some issues going.
Bill: Yeah, well, I’ll drop a Marc Cohodes thing. “It's not what they call you, it's what you respond to.” That's what his kid says. When people get offended, if you don't like their stock, I think they got to look inside themselves and figure out what they're mad at.
Jen: Yeah. Well, Chanos said one time--
Bill: Because if you're up big and you're pissed off that I'm saying something about your stock, you should just be drinking champagne somewhere.
Jen: Exactly.
Bill: Who cares what I say? I'm just an idiot.
Jen: Yeah. I’m one person, I could be totally wrong, and it's a stock, guy.
Bill: You're up and I'm not, so go have fun.
Jen: Well, my favorite quote is when Chanos goes, “I've been called worse from better.” [laughs]
Bill: Yeah, there you go. That’s right.
Jen: I try to remind myself when people make personal attacks on me.
Bill: I do like that. Well, I know you’ve got a flight to catch.
Jen: Thank you.
Bill: I really appreciate you joining us. I hope that people liked hearing from a short seller, and I was super happy to have you on the pod. So, thank you.
Jen: Thank you. I was excited to be on this, and I look forward to people proving me wrong on related party transactions and oil price effect on the 2020 stock market.
Bill: Yeah, that's right. All the conspiracy people, don't come at me. It's all Jen Ross.
Jen: It is. I'm sure people are heavily going to disagree with me on that, but I look forward to it.
Bill: All right, Jen.
Jen: All right, my friend.
Bill: Well, take care of yourself.
Jen: Thank you. You too.
