Trader’s Narrative

If you were around the dot com bubble years, you remember that there were a few people who were “non-believers”. Those few who didn’t believe that “this time its different”. One of them was Robert Shiller, an economist who got his first 15 minutes of fame for renting to Allan Greenspan, the now infamous phrase, “irrational exuberance”.

Most economists would give their left (insert apendage here) to have this much insight. But Shiller goes one step beyond, he not only nails the predominant theme of the day, his timing is impeccable.

His first mainstream book, Irrational Exuberance, was published in early 2000, just as the Nasdaq reached its zenith and started to feel top heavy.

I remember watching many of his interviews back then. It was as if the market itself seemed to go out of its way to make the case on his behalf. He lucidly explained to millions of new taxi drivers turned traders and “get rick quick” investors why their dreams were melting faster than an ice sculpture in the Gobi desert.

He’s Back!
Shiller is back with another book, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It

I haven’t read it yet (but hope to as soon as possible) so I can’t give you my review but from everything that I’ve read online about it from other reviewers and from the interviews that Shiller has been doing, I think he has done the amazing feat of producing a hit sequel to his original.

It looks like it is the end of the line for RedEnvelope (REDE). The company is mired in losses, their credit lines have been terminated, and they have sent most of their employees packing. While their site is still up, there’s no telling what will happen.

Perhaps they will be wound down. Or maybe bought out by someone. Perhaps OverStock.com?

It is a shame since it is one of the companies that were birthed in the dot com mania of the late 1990’s and it has lasted so long. But no company can survive without profits. Since going public in 2003, their stock reached a peak of $17 and from there it has been downhill, reaching $0.28/share today. That makes their market cap just above $2.5 million.

Opportunity
The special situation here is that although the company has been bleeding red ink, they have a lot of cash on hand. As of December 31st, 2007 they had $12.3 million to be exact. And while they have no doubt dipped into that in the ensuing months, there should be more than enough there to double or triple their market cap.

At the risk of playing a fundamental analyst, here are the details from their latest quarterly results:

• total assets $33.1 million
• liquid assets (total cash + accts receivable) $15 million
• total liabilities $23.8 million
• value: $9.3 million

Now that is a very crude back of the envelope analysis and it is for the end of last year. But I really don’t think they’ve burned through it all. Which leaves a healthy margin.

Here is the graph of RedEnvelope (REDE) with their closing price and what they have on cash, if we assume the business isn’t a going concern and worth zero:

It may not show up as a significant difference on this chart because of the sheer loss of value of RedEnvelope shares, but it is more than three times the current share price.

In case REDE gets bought out, it will be for the name and the business as a going concern, which will make the offer higher than mere net cash value.

From a technical point of view, I wouldn’t touch REDE with a barge pole. It is too late to sell short and you would have to forget everything ever written about technical analysis to go long. But that isn’t how I’m approaching it.