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Whitney Tilson’s Latest Lumber Liquidators articles; Flash crash; is Slack really worth $2.8B; retail traders wield social media for investing fame; Swiss, Mexican bond deals represent milestones for debt; AIG bailout lawsuit trial ends as it began; Meet the man who could own Aviva France.

Whitney Tilson on Lumber Liquidators

1) Another week, another two articles on Lumber Liquidators. (If you want to be on my LL email list for updates roughly once a day, let me know.) Believe it or not, I’m actually holding back, as rarely a day goes by without me learning more about how rotten to the core this company is. Mark my words: in due time, it will all come out…

1. More On Lumber Liquidators And Formaldehyde (4/15/15)

  • While everyone is exposed to small amounts of formaldehyde in the air, the amount emitted by Lumber Liquidators’ Chinese-made laminate, according to tests 60 Minutes and others have done, is far above typical indoor air levels.
  • Thus, Lumber Liquidators is vulnerable to lawsuits by customers suffering adverse health effects associated with exposure to excess levels of formaldehyde.
  • There is currently no national law setting a limit for formaldehyde in indoor air, but I think regulators are almost certain to set a standard in the 7-33 ppb range (probably much closer to the low end).
  • The three Lumber Liquidators samples 60 Minutes had tested came in far higher, at 57, 93 and 268 ppb.
  • Assuming the regulators’ tests show similar results, it’s unclear what actions they might take, but I suspect they’ll be very onerous for Lumber Liquidators – and its stock.

2. Lumber Liquidators’ Offer to Do Indoor Air Quality Testing Appears to Be a Sham (4/20/15)

  • Two lawsuits filed recently make it clear that Lumber Liquidators’ offer to do indoor air quality testing is a sham.
  • An expert testified that Lumber Liquidators’ testing program is “the cheapest possible way to test,” “cannot be considered valid” and “will likely provide some consumers with poor data that give them a false sense of security.”
  • The lab Lumber Liquidators hired has numerous conflicts of interest.
  • The methodology used to collect the air samples is highly unreliable and unscientific and is likely to significantly understate the true level of formaldehyde in the air.
  • Test results for four customers show troubling levels of formaldehyde, yet the lab told Lumber Liquidators’ customers not to worry, citing a guideline that only assumes “30-minute average concentration.”
  • Even when customers, at their own expense, hired independent, qualified technicians to measure the formaldehyde in their homes, Lumber Liquidators was dismissive of the findings.
  • Lumber Liquidators needs to immediately cease its current testing program and instead offer its customers a genuinely professional one that would give homeowners information they could rely upon.
  • Of course, there is no chance that Lumber Liquidators will do this voluntarily, but I’m optimistic that a judge or regulator will soon compel Lumber Liquidators to do the right thing, which will be bad news for the stock for a number of reasons.

2) I have a hard time believing that one random kid in London caused the flash crash – but doesn’t this underscore the absolute insanity of regulators allowing our stock exchanges to become casinos??? I’m not holding my breath, but maybe, just maybe, they’ll wake up and do something about it before we have a MAJOR problem…

One theory is that it wasn’t just Sarao, but a confluence of spoof traders or price manipulators who caused the market imbalance; Sarao is simply the only one—or perhaps just the first—to get caught. It just may take another flash crash for government regulators to find the others.

3) I respect this guy’s honesty – he knows there are bubble-like conditions across much of Silicon Valley and is wisely monetizing it:

It’s pretty straightforward. I’ve been in this industry for 20 years. This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians. It’s certainly the best time for late-stage start-ups to raise money from venture capitalists since this dynamic has been around.

And as a board member and a C.E.O., I have a responsibility to our employees, to our customers. And as a fiduciary, I think it would be almost imprudent for me not to accept $160 million bucks for 5-ish percent of the company when it’s offered on favorable terms.

We don’t have an immediate use for that money. But it increases the value of our stock and can allow potential employees to take our offers, and it reinforces the perception for our larger customers that we’ll be around for the long haul. All of that stuff.

4) What a sure sign of a bubble – so 1999…

Justin Pulitzer always wanted to be a professional trader. He just never imagined he could build a career powered by little more than his Twitter account.

The 36-year-old one-time club promoter is among a vanguard of retail investors who are diving into the stock market with social media as their primary tool for research and communication. Some aspire to become investing stars themselves.

Leaving behind the club scene four years ago to trade full-time, Mr. Pulitzer today has a personal portfolio hovering around $1 million and plans to launch a paid subscription service to build on his Twitter following. He says the transparency of social media helps separate the pundits from the posers.

“If you’re right, you’ll get a lot of accolades,” he said. “If you’re wrong, people will know it too.”

Fifteen years after the Nasdaq Composite first hit 5000, the index is near that level again—and once again retail investors are piling into stocks. Last year, the four biggest U.S. discount brokers recorded the highest combined trading volume on record, topping 1.4 million average daily client trades, according to investment firm Sandler O’ Neill + Partners.

Social media is feeding the frenzy. Unlike the dot-com boom, when like-minded obsessives congregated in obscure chat rooms or message boards to discuss their favorite stocks, the latest bull market is continually analyzed and broadcast to a mainstream audience on websites such as Twitter and Facebook. There are also a growing number of niche social-media sites that encourage rapid exchanges of information about stocks.

Increasingly, online brokers also are seeking to engage with customers more through social-media-like offerings because they say such activity encourages more trading. TradeKing, an online broker founded in 2005, noted that customers who consistently post on the company’s portal trade four times as often as those who don’t. Even so-called “voyeur” customers, who don’t post but still visit the online community, trade nearly twice as often.

5) Speaking of bubble-like conditions, I continue to be amazed by the ultra-low (even negative) interest rates around the world – and it’s not just stalwarts like Switzerland, it’s totally junky countries and companies! It’s simply unprecedented and anyone who says they know for sure how it’s going to end is blowing smoke (I suspect badly, but have little conviction when or how):

Switzerland recently sold 10 year bonds at a negative yield. Mexico sold 100-year bonds denominated in euros at 4.2%. Berkshire Hathaway recently completed a 3 billion euro bond deal that was priced to yield 0.8%, 1.2%, and 1.6% for eight, 12, and 20 year maturities, respectively.

6) I agree 100% with this comment about Greenberg’s lawsuit:

“Greenberg got lucky with a judge who decided he wanted to listen to a claim that should have been laughed out of court,” said Dennis M. Kelleher, a former partner at Skadden Arps who runs the financial advocacy group Better Markets. “There’s a reason an appeals court uses three judges and not one. Because one person can always decide whatever he wants.”

7) This is quite a story about perhaps the most insane insurance contract ever written:

When he was seven years old, Max-Hervé George was given a magic ticket by his father. It lets him turn back the clock, to invest with perfect hindsight week after week, steadily accumulating a fortune.

The ticket is a life insurance contract and Mr George, now 25, has fought for years in the French courts to preserve its magic. He could be a billionaire by the end of this decade and, by the end of the next, his contract would be worth more than the insurance company which stands behind it, Aviva France.

There is no mystery to the financial magic, however. Instead it is a story of grand stupidity, of how a French insurer wrote the worst contract in the world and sold it to thousands of clients.

Lumber Liquidators