David Einhorn's hedge fund Greenlight Capital submitted a notice of exempt solicitation today via the SEC where they urged Apple (AAPL) shareholders to vote against proposal 2 which eliminates the company's ability to issue preferred stock, at the company's annual meeting on February 27th.
The main reason for this? Einhorn wants to see Apple issue perpetual preferred securities, a concept we highlighted via that link.
In the statement, Einhorn says that,
"We believe Apple must examine all of its options to unlock the growing value of its balance sheet for all shareholders. Over the past several months, we have had an ongoing dialogue with Apple regarding one option to do so, namely the creation of a new security, a perpetual preferred stock that would be distributed at no cost to Apple’s existing shareholders, and would provide an attractive, sustainable dividend while preserving Apple’s financial resources to pursue its business strategy."
Greenlight sees this as a way to improve Apple's poor capital allocation policy. After all, the company has around $137 billion in cash (or $145 per share).
While Apple has started paying a dividend and initiated a 'nominal share repurchase program,' Einhorn still feels there's more room for improvement.
As such, Einhorn calls for AAPL shareholders to vote against proposal 2, which eliminates the option for the company to issue preferred stock. We'll have to wait and see if his call to action is successful.
In the late 1990s, an ad agency creative director I'll call Joe Smith to protect his privacy bought several hundred shares of Apple (AAPL) at $60 apiece. Last fall, at age 42, he found himself out of work and increasingly dependent on the value of those shares to make ends meet.
Following the lead of a 33-year-old investment advisor named Andy Zaky who had written that Apple was going to $750 by January and to $1,000 within a year, Smith converted most of his Apple common stock -- more than he should have -- into high-risk Apple call options. When those options expired in the third week of January with Apple trading below $500, they were worth exactly zero. Smith had lost roughly $400,000 and all his Apple shares.
A lot of people lost a lot of money when Apple went into the extended downward slide that just entered its sixth month. And there were plenty of other experts saying all along that the stock was undervalued and ready to bounce. But Smith's story -- and the story of hundreds of other investors who were following Andy Zaky's so-called Apple model portfolio last fall -- hold a special poignancy for me. Not only did these people get some spectacularly bad advice, but they got it from someone whom I helped make famous.
Zaky was working hard that spring. He had taken his free newsletter, Bullish Cross, behind a paywall in June 2011, charging subscribers $49 a month for his daily live market analysis, annotated charts and weekly summaries -- pieces that were sometimes 3,000 or 4,000 words long.
"There's a solid easy 500% gain to be had in Apple with an imbalanced low level of risk involved," he wrote, with typical bravado, at the launch of Bullish Cross Pro. "There is such a low risk profile in this trade, that I'm actually pretty shocked that not a whole lot has actually been written about it."
As Apple's share price climbed and Zaky's fame spread, investors clamored to get in. In June 2012 he opened his newsletter up to a flood of new subscribers, charging the members of this group $200 a month. At its peak, Bullish Cross Pro had 700 subscribers and a lively bulletin board where Zaky would often field more than 500 comments and questions a day.
Meanwhile, he was onto something even bigger. In late 2011 he'd launched Bullish Cross Capital L.P. -- basically an Apple-only hedge fund -- with a handful of subscribers. By the spring of 2012, the fund's investor rolls had grown six fold. In a Form D filed in November 2012, Zaky reported to the Securities and Exchange Commission that Bullish Cross Asset Management (BCRAM) had attracted 28 limited partners with an average investment of $378,000. The minimum investment, which started at $250,000, had grown to $500,000 by March 2012.
It was in the hedge fund that the first signs of trouble appeared. An investor who spoke off the record because he is bound by a nondisclosure agreement, describes how the fund missed both of Apple's big 2012 rallies -- in April when it hit $644 and in September when it hit $705. Zaky lost nearly nearly 50% of the fund's capital in one month (March) by buying bearish put spreads just before the stock rose 10%. The fund also managed to get crushed when the stock went down. In May, when the stock fell nearly 100 points, Zaky had bet heavily on bullish calls spreads.
When Apple fell to $505 in late November, he sent his investors what must have been one of the most painful letters of his life:
"Dear Limited Partner," it begins. "It is with extraordinary regret that I must inform you that during this very dramatic period, the fund has sustained very heavy and largely irreversible losses... At this point, it makes very little sense for anyone to make a redemption given that the fund's liabilities are greater than the fund's capital balance."
Zaky had taken under management more than $10.6 million of other people's money and lost it all.
But those lost millions -- suffered largely by well-to-do investors who knew the risks they were taking -- pale next to the damage done to the 700 subscribers at Bullish Cross Pro. Many of these investors have since fled the site and joined a Google group called bc-subs (for "Bullish Cross subscribers"), where they commiserate about their lost retirement funds, their ruined marriages, their thoughts of suicide. Many lost hundreds of thousands of dollars. Some lost millions.
"A significant number of the people who lost money following Zaky's trades were people who were not sophisticated enough to understand the instruments in which they were investing," says one member who asked not to be identified.
But things got out of hand in October, when Zaky became convinced that Apple was set to rally. "At some point he lost it. When he said hold on to our spreads, I was losing $25,000 a day. I froze. I couldn't sleep."
On Bullish Cross Pro, Zaky has moved away from covering Apple and concentrated on trading the SPY, which tracks the S&P 500 and requires less faith in fundamentals. For the few members that remain, he has recommended several recovery plans, some of which involved investing in January 2014 Apple options that have already lost most of their value.
What I can say now is that I've heard directly from 36 former Bullish Cross members who tell me that they lost anywhere from $15,000 to $50 million apiece.
Total losses for these 36 investors: $92.5 million
Average loss: $2.6 million
Given that at its peak, Bullish Cross had 700 members, it's quite likely that Andy Zaky's followers -- many of whom had put their savings and retirement accounts into Apple call spreads -- lost hundreds of millions of dollars. If the members I haven't heard from were large investors, total losses could reach into the billions.
En el cuadro que os adjuntamos podéis observar cuales son las compañías en las que los 50 mayores Hedge Funds tienen su mayor inversión. En el tercer trimestre del 2012, 23 de los 50 mayores hedges funds (los auténticos elefantes de los mercados) tenían a Apple como su mayor inversión en cartera. Un trimestre más tarde sólo eran 10 los Hedge Funds gigantes que mantenían a Apple en cartera.
El Hotel donde dejar aparcado su dinero es hoy en día Google, donde 16 de los 50 mayores Hedge Funds la tienen cómo su principal inversión.