Shoot-Out at Wall and Broad: A Wall Street Fable

By Michael Metz

Shoot-Out at Wall And Broad is a fable, but more fact than fiction, about a veteran activist money manger. An activist doesnt just take a position in a stock and passively wait until an anticipated scenario plays out and changes the value of his investment but instead writes the scenario and has a complete understanding of the realities of the business he is investing in.

He is initially triggered into action on the short side by the follies, greeted enthusiastically by the herd on Wall Street, of an entrenched hereditary and incompetent management and then switches strategy completely when the stock collapses. His focus is on changing the strategy of a chastened management and, most importantly, of the markets perception of the stock.

En route, he employs some old fashioned tape painting, option maneuvers, news management, perception manipulation, and ingenious financial engineering. There is always someone on the other side of the trade, and the protagonist matches wits with other money mangers, hedge funds, market manipulators and underwriters. A story not for those who believe in the tooth fairy but for the pragmatist who believes that investing is sometimes a zero sum game.

• Language: English
• Publisher: Xlibris US
• Release date: Jul 31, 2008
• ISBN: 9781469104157

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Copyright © 2008 by Michael Metz.

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

This is a work of fiction. Names, characters, places and incidents either are the product of the author’s imagination or are used fictitiously, and any resemblance to any actual persons, living or dead, events, or locales is entirely coincidental.

This book was printed in the United States of America.

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Contents

PROLOGUE

CHAPTER 1

CHAPTER 2

CHAPTER 3

CHAPTER 4

CHAPTER 5

CHAPTER 6

CHAPTER 7

CHAPTER 8

CHAPTER 9

CHAPTER 10

CHAPTER 11

CHAPTER 12

CHAPTER 13

CHAPTER 14

CHAPTER 15

CHAPTER 16

CHAPTER 17

CHAPTER 18

Dedicated to Steve Stern who made it happen and to Dan Rosenblatt without whose encouragement nothing would have happened; and for Janine, Hack, Rayanna, David , Sol and Gert, and for Norman Weinger, a source of enlightenment for years.

PROLOGUE

For some weeks I had been looking forward to putting the office, and the saga of ABP Products stock, out of my mind and immersing myself in the glories of the Grand Canyon. Some twenty years ago, I had made my initial rafting trip along the Colorado River, having hiked down the Bright Angel Trail on the South Rim to join a motorless group for a six day run of the rapids deep in the confines of the Canyon—completely isolated from all communication with the outside world. Unlike most of my colleagues on Wall Street, I was quite content—even delighted—to be completely out of contact for the period.

I had awakened at the lodge on the South Rim at around 4 A.M. to be on the Trail at daybreak so that most of the seven hour trek down to the river would take place before the blazing mid-day heat. Before embarking, I called my office just after 5 A. M, or 7 A. M. in New York. My secretary, Mrs. Clarke, had been alerted to arrive early in case of emergency. She answered on the first ring, an uncustomary note of urgency in her voice.

Mr. Brown (after decades we were still not on a first name basis) I’ve got some big news, a big surprise for you. At least I think it must be big but I have no idea what it all means.

Well, Mrs. Clarke, why not tell me and maybe we can figure it out?

Mr. Wooster called me at home about an hour ago. He said the New York Stock Exchange was going to delay the opening of trading in ABP Products shares for the dissemination of some major news development.

Indeed, this was a big surprise to me. I thought I was more knowledgeable on developments at the company than almost anyone, including management.

Did Mr. Wooster give you an idea of what it was about?

Not a clue. He was as astonished as anyone by this development. He said you could call him if you want but insisted he knew absolutely nothing, and was as surprised as he thought you would be.

I was shocked by the news. Wooster was a director of ABP and had been for years. But knowing the headstrong management at the company, it was not inconceivable that he would not be privy to a major development until after it had become an accomplished fact. I had no reservations about Wooster’s candor, but I was eager for any clue.

Did Mr. Wooster give any indication whether the news was good or bad, or what?

No, Mr. Brown, he stressed that he is completely in the dark and to tell you that frankly he is embarrassed at being left completely out of the loop. He also said he had called one of the other directors who is also uninformed about what is going on. He said to call him if you wish, but he knows nothing.

This indeed was a new twist. For the past two years or so my financial fate, and that of many clients, has been closely tied to that of ABP Products shares. We have lived through its fall and rise, and fall and rise again. I had thought I knew the company inside out.

From my knowledge of the company and its Chief Executive Officer, and my decades of experience on Wall Street, a host of possible scenarios came to mind. But I am running ahead of my story. What follows is the history of ABP and of my involvement with the company. It is a story, with variations, that is constantly playing on Wall Street.

CHAPTER 1

The Arena

 . . . there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that. I suppose I really manage to remember when and how it happened. The fact that I remember is the way I capitalize on experience.—Edwin Lefevre, Reminiscences of a Stock Operator

The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.—John Maynard Keynes

The sun’s come out at last, I said to my friend Ronald Wooster, when he telephoned and told me what he called the happy bad news you were waiting for.

It’s a good day for a stroll in a graveyard, I remarked.

Carleton, yes, it is. And a good day to make a little investment.

"The usual bench, in half an hour?’

I’ll be the one with the grin on my face, Wooster replied.

I sat back in my desk chair and looked down at the crowds milling at Wall and Broad, fifty-one stories below. The market had just closed. The Dow Jones, NASDAQ, and Standard & Poor’s averages had gone up or down somewhat—it didn’t really matter which, as it didn’t most days, for those of us who believe in a steady focus and the power of time. If an investor is familiar with the climate, he needn’t follow the vagaries of weather too closely.

That is a fact that the frantic weathervanes of Wall Street never understand; the men and women six hundred feet below me moved with the same alacrity with which they bought and sold. I didn’t operate the same way. They were brawlers, every one. However, like many Street fighters, they didn’t really know how to win the long bout. I am a brawler too—which was why I was going to see my friend Wooster—but I know how to be patient; I brawl for the long haul.

I occupy a small, discreetly furnished suite of offices on Broad Street, on the fifty-first floor, above the great throbbing brain of the Exchange. The simple black lettering on the frosted double doors of my office suite reads CARLETON BROWN: INVESTMENT COUNSELING. Inside, the rosewood paneling signals quiet opulence, as does my spectacular view of the harbor. My private office is small. I require little equipment for what I do; I’ve arrived at a level of success that doesn’t require props. On my desk are just three telephones and an electronic machine that provides a continuing real-time display of stock market activity during the day. The bookcases contain Moody’s and Standard & Poor’s references, Value Line, Who’s Who in Finance and Industry, the Wall Street Journal Index, and the Registry of Directors and Executives. I also have a computer that is programmed to provide me access to SEC filings by public companies for the past decade. I have a television but I seldom turn it on; I am uninterested in simple-minded cause and effect rationalizations by commentators and traders who explain the recent past and try to guess the outcome of the next five minutes, but not the next five months.

On my way out to meet Wooster, I walked past my secretary, who is pleasant, unobtrusively efficient, and not excessively attractive; she wears trim black suits and expensive scarves, and may have a private life about which I know nothing. Are you leaving for the day, Mr. Brown? she asked, her attitude toward me, as always, respectful but not groveling. Just for stroll, I told her. You have a nice evening, Mrs. Clarke. You too, Mr. Brown.

But I was going out for more than a stroll; I was, in fact, traveling for business. For the last several years, I had been casually following the market action and business performance of the American Building Products Company (ABP). My primary efforts—and capital—had been committed elsewhere, but I had kept abreast of ABP ever since it had been brought to my attention a few years earlier by an associate, Ronald Wooster, who had long shared my predilection for asset-rich, unglamorous companies. The name of the company was as unremarkable as its basic business: making plywood, finished lumber, and related products used in the construction of new homes and by the do-it-yourself home maintenance and improvement industry.

ABP was venerable in an unremarkable way, the wallflower type of company that Wall Street, in its rapture over the new and flashy, tended not to court. These days, ABP was tarting itself up in an effort to be glamorous, which would earn it Wall Street’s fickle attentions. That meant there was an opportunity to make money—not because of ABP’s prospective glamour, but in spite of it. When it comes to making money, glamour is my enemy—unless I can use it for my own ends.

Using Wall Street for my own ends makes me not a particularly nice guy. But I’m really not that bad. I have learned from occasionally costly experience that the innocent and virtuous don’t survive for long on Wall Street. The stock market is the most pragmatic and unsentimental of institutions; its function is to distribute and redistribute its spoils among participating brawlers. My occupation goes by titles of varying complexity and pomposity. I’m called account executive, registered representative, investment advisor, or portfolio manager. Take your pick. None of them really tells you what it is I do. Unlike most merchandisers, I don’t deal in tangibles. My inventory occupies no space on a display shelf; it is rarely if ever seen by the customer. Essentially, my success depends on the oldest commercial transaction in the world (save one, perhaps): I try to buy wholesale and to sell at retail. As a professional buyer and seller of stocks on Wall Street, my goal is to buy at distressed (read low) prices before a change in vogue or in the perceptions of the real world creates a more robust appetite for my merchandise.

To acquire stocks cheaply, I must be willing to bid for them when the competition is feeble. Wall Street is simply a public auction. When a stock is in strong demand, the bidding is competitive and prices can move up with startling speed. When a particular type of stock is in vogue (and much of my story has to do with how demand is created, controlled, and manipulated), those of us who bought early and cheaply, and then waited patiently, can sell at considerably higher retail prices.

It was once thought that you, the public, were the sucker who bought our merchandise at peak prices, and it was true that, until the last quarter of the twentieth century, the individual investor was indeed the major player on Wall Street. He was usually fairly affluent and often in the business world himself. His agent was the customer’s man, or stockbroker or registered representative whose qualifications were often no more than a familiarity with the language of Wall Street and a broad circle of affluent friends. The cast of characters is no longer the same. In the elevator with me now, wearing their sleek suits and a grim, exhausted, calculating expression, were several of today’s frequent top-tick payers, the so-called professionals: the mutual fund or pension fund portfolio managers, who now act as an intermediary for the public. Paradoxically, the public, when acting for itself and not caught up in some mania encouraged by Wall Street, is often sophisticated and shrewd, while those managers it has voluntarily (as in mutual funds or bank trust departments) or involuntarily (as in pension funds) chosen to act for it have a singularly undistinguished record in their timing and selection.

I exited my building arid walked down Broad Street toward the intersection with Wall Street. My appearance hardly distinguished me from hundreds of other men striding through the skyscraper-darkened canyons of lower Manhattan. Our suits are invariably dark, usually tailored with great care to look unfitted. Our ties, however, are reassuring, quietly sumptuous. Our hair is sometimes scarce in quantity and always cut with restraint and without obvious styling. Our offices are to be found in those towering, marble-lobbied buildings that give the foot of the island its dramatically futuristic look. Once inside these massive structures, one has the feeling of solidity, prosperity, and sobriety. What actually goes on in our thickly carpeted sanctums is something else again.

Seeing some of the hungry-eyed, lean younger players, I was reminded of my own early days on the Street, now thankfully over, when, like the Ancient Mariner, I plucked at every passing sleeve, eager to acquire customers, whether they had $50 or $50,000 to invest. Then I had no record of accomplishment; every decision I made was a critical one, since clients were quick to switch allegiance from a counselor who was not performing at least as well as the market.

Today my clientele is small in number but large in bank accounts; they are select and powerful. I deal with just a few accounts and no longer seek (and rarely accept) new clients. My affluent customers are professional business managers, successful lawyers or doctors, or heirs of wealth shrewd enough to realize their own limitations when operating in the investment field. They know, whether they are in law, architecture, medicine, or finance, the motto is not do-it-yourself’ but rather hire the best." The test for investing is performance; unlike in most professions, it can be gauged with accuracy—the bottom line results—and can be compared with an objective criterion, like the Dow Jones Average. My clients have to believe that I know my business well enough to be allowed total freedom to make decisions and select investments.

I feel a professional yet tender affection for them. Some have no taste for the world of commerce. Others come from a business background and understand the concept of valuing a public company the same way they do a private enterprise they might buy.They look at a stock for what it is, a share of a company, and ask themselves if they would buy the entire company at this specific market price. It honors me they ask so few detailed questions about the portfolio I manage for them. My clients know I invest side by side with them in amounts often larger than their own commitments. They also know that while the fees they pay me are sizable, they pale in comparison with what I stand to win (or lose) through my own capital exposure.

My customers do not share the popular belief that, while knowing nothing of the investment world, amateurs can casually enter the most merciless and sophisticated commercial arena in the world—Wall Street—and compete successfully with professionals who have devoted often limited talents but probably unlimited energy, avarice, and effort to mastering their field. This popular fantasy has been encouraged by massive advertising campaigns of firms offering cheap and fast trade executions (which are properly named, since they often mean a death sentence to one’s capital) and easy do-it-yourself software. The dumbing down of America reaches its zenith when it comes to investing. It is as if the typical American amateur investor, rather than seeking a board-certified surgeon, would be willing to perform a liver transplant on himself after reading Prevention magazine and catching a week’s programs on the Health Network.

Before me stood the Exchange, protected by a phalanx of security officers and a maze of movable metal barriers, a huge American flag spread across its columns. Across from it on the steps of Federal Hall, the site of George Washington’s inauguration, lounged several of the young, fierce floor traders, wearing the smocks that advertise the firms for whom they toil on the floor of the exchange. These are the water boys in our Wall Street brawls. Many of them sucking on cigarettes, all looked grim, exhausted, as if they were coming down from a drug high—which, after a day of trading, was exactly the case. I myself do very little trading in the conventional Wall Street sense. As a member of the Exchange, I do have trading privileges that allow me to go down to the floor and try to scalp fractions from active, volatile stocks while competing against a public that, unlike members of the Exchange, is burdened with commission costs and a delay,