Just How Crazy is Overstock's Patrick Byrne?

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Now that the credit crunch is beginning to spill into tech, it’s worth wondering just how ugly this is going to get. Two notable perspectives on the situation appeared in recent days, one from a battle-scarred regulator and another from a tech CEO.

The first came from former Fed Chairman Paul Volcker, who was asked four different ways by the Wall Street Journal how bad the fallout will be, and who found four different ways to say “We don’t know yet.”

The second came from Patrick Byrne, CEO of Overstock (OSTK). When writing about Byrne, it’s customary to use the understated adjective “controversial,” so let’s get that out of the way. Byrne was on Fox News, echoing an economic forecast that he had just made on CNBC — an appearance, by the way, that would send his stock spiraling downward (more on that later).

byrne.gifByrne was asked by Fox News’ Terry Keenan whether the mortgage turmoil was hurting Overstock’s sales of home items. After noting that furniture sales were going great guns, he suddenly shifted gears:

BYRNE: I do think that we are in — I have been saying for about two years we’re looking at a 1929 kind of event. I think that we are really in trouble in this country. And what you have seen in the last four months is just the beginning of it.

KEENAN: Wow.

BYRNE: The government has been keeping the economy afloat with flooding us with cheap money. And those days are over. The dollar is cracking. Eventually, they are either going to they have to defend it by raising interest rates or something. But we’re looking at a very bad economic situation.

Wow, indeed. Byrne is no Volcker, but I have a sinking feeling that behind all of Volcker’s anodyne we don’t know’s lurked a scenario as bleak, if not as dramatic, as the one Byrne laid out.

And this is why Patrick Byrne is one of my favorite CEOs. I don’t say that as a shareholder or as a business partner — I am neither — but as a journalist. In an era in which news has become just another form of entertainment, Byrne is as entertaining as they come. I wish there were more CEOs like him.

But for better or worse, there is only one. A story I once wrote once elicited from him an email that was signed “Patrick ‘Frothing at the Mouth’ Byrne,” which made me wonder if Byrne is as crazy as some have suggested. If you know you’re crazy, if you can even joke about it, how crazy are you, really?

Byrne reminds me of one of those maverick, intriguing characters like Anton Chigurh or Omar Little. Not, of course, because he’s some kind of serial killer, but because he stubbornly holds to a code of behavior that very few understand. He tirelessly champions causes that draw few followers: the “jihad” against naked short selling, the private-school voucher initiative in Utah, the deep-discounting at Overstock that leads to losses year after year.

So when Byrne appeared on CNBC on Monday and warned that gross margins would fall during the busiest quarter of the year — despite a 10 percent rise in gross bookings — the stock slid 21 percent. Six weeks ago, Overstock shares were trading for as much as $39.39, their highest level in nearly two years. But after Monday’s slide, the stock is now up only 19 percent this year. One more Byrne interview could wipe that out.
OSTK, last two years

Why would Overstock choose to deepen discounts and beef up promotions during a quarter when it had been otherwise assured of a tidy profit? CIBC, which had been forecasting a $4.2 million profit for the company this quarter, revised that downward on Monday, to a loss of $2 million. That red ink is so much blood in the water for short sellers.

A clue may lie in something else Byrne told Fox:

If anything, we are counter-cyclical. In good times, it is — we have — it’s toughest to get overstock. In bad times is when, suddenly, everybody is calling us to unload product.

In light of that, Byrne must be hoping to build market share. By slashing prices, Bezos-like, during a holiday season in which consumers are counting each penny, he’s doubling down — betting he’ll wind up with an even larger share. If so, maybe his recent TV appearances aren’t so crazy after all. Risky? Very. But crazy? We’ll see.

15 Comments

Peter Rad

Prestowitz wrote a book about this problem in 2005 called 3 Billion New Capitalists. The BBC and the European press headline our economic crisis in America all the time.

The fact that the Administration, Congress and Business Leaders do not acknowledge the pending crisis bothers me. Mainly, these groups of people are too busy grabbing as much gold as they can while at the same moment screwing over the American people even more.

Hendley

Just how crazy is mhelburn?

Acting dumb as a rock in her post above. Mary Helburn is the lead Plantif against Gradiant/Rocker in Overstocks Law suit.

Aidan Henry

I love his attitude and honesty. It’s very rare to find a CEO like that nowadays, but it’s very refreshing. He kinda reminds me of Mark Cuban in some ways…

My only concern is how shareholders and board members react to his comments and actions. After all, he has a fiduciary duty to the company, and his words don’t seem to be helping the cause.

Cheers,
Aidan
http://www.MappingTheWeb.com

mhelburn

On Nov. 1, I contacted OSTK attorney and asked if they knew how many fails to deliver there were in OSTK. Fails are phantom or counterfeited shares. OSTK requested data from January thru May on August 23 and was received by the SEC on August 30. The response was dated Sept 19.

..”we are consulting with other commisssion staff regarding information that may be responsive to your request. We will advise you of our findings as well as the actual cost of review the records as soon as we receive a response.”

As of last week, they still had no 2007 data.

You can’t get current data on fails as the SEC has arbitrarily set a 60 day window of hiding the data so that it doesn’t reveal anyone’s trading strategy.. Mind you, failing to deliver as a trading strategy is illegal and the fail data is aggregate, not broken out. This policy certainly doesn’t protect the investor and is cumbersome, and this example typifies the responsiveness of the SEC. First they denied there was a problem with fails, they instituted Reg SHO and had to insert the grandfather provision to keep the illegal positions from having to be bought in and causing “volatility”.

After the Senate investigated the SEC, 4 of the top 7 officials at the SEC resigned.

I saw Patrick on TV and the part that I heard was that they were getting calls from suppliers to sell merchandise because other stores were not doing reorders. The markdowns this year started early and have continued. If OSTK is doing discounts, it is no different than every other retailer. The difference is that OSTK gets the merchandise at a discount and this year they are getting current merchandise that is still in other stores. There is a fear in retail that the consumer is cutting back and if OSTK is discounting and giving incentives, they are not alone. Profits for retailers will be down because of energy and health care prices.

I wrote Patrick several years ago. He had one of his associates contact me with a courtesy call to thank me for my letter. I’ve since listened to his presentations on the market and particularly enjoyed http://www.deepcapturethemovie.com and his recent NPR interview. He has put a lot of effort into his presentations and they are worth the time to listen.

Nobody likes the predictions of a market crash or recession, unless they have a short position. If you understand that we are positioned as we were before the crash of the last century, with the same entities in place, just with different names and our regulators are not protecting investors or the market, you can understand why Patrick is concerned about the economy. If people understood that their brokers are taking money and giving them counterfeit shares, selling them silver and charging storage for it without ever buying it for them, and that the regulators are pitifully under-manned and in come cases captured, the “house of cards” would collapse.

Here is an example of how we all get screwed with policies that create boondoggles for some and shortages (higher prices) for others. And the true economies are not addressed because it isn’t convenient.

Biofuels… big item in Iowa. A complete boondoggle as corn ethanol is expensive to produce, is corrosive to fuel lines, has an 85% efficiency, corn has to be rotated or it detroys the soil, and the increase in the production of corn for fuel has a direct impact on the production of other grains and the consumers around the world are already paying more for other grain products. Will any of the candidates address the trade-offs we have to make for corn ethanol… not until the Iowa primaries are over. We see special interests controling energy policy and gutless or ignorant leaders who play the game to get the vote. We aren’t hearing anything about this now.. but look at the market… Monsanto is hitting new highs today. Will we be forced to use corn ethanol? Will we have fuel line problems from corrosion? With 85% efficency, you get lower gas mileage, bread and pasta cost more because there will be a shortage… Think green… It is all promoted as environmental.. hardly when you add in all the other costs..and ethanol can’t be shipped in standard pipelines because of the corrosion, so it has to be trucked.

Policy, enforcement.. all controled by special interest and some of the decision makers are either bamboozled or bought to promote public policy that isn’t beneficial for the greatest good, but is profitable for the special interests who have the lobbyists, and the populace gets screwed. And it is almost sacrilege to talk against farmers because they are perceived as the ones who will benefit, but this is fallacy.. It is the huge farm corporations who are buying the politicians.

This is no different than the rules that screw the ordinary investor to benefit Wall Street. Take from the many to benefit the few.

rtway1

I am just curious to know how many stories you have written about Jim Cramer and his T.V. appearance where he explains how to game the market using RIMM as an example and how he uses the media to spread stories. Or how many stories about two senators on the senate floor appealing to m Mr. Cox to clean up all the FTD’s that are two years old. Or how many stories about those who are in jail who admitted to naked short selling. Or could you explain why Mr. Cox the head of the SEC agrees with Patrick Byrne that naked short selling does exist saily as well as his pedecessors. Why not tell the stories of the failed pensions and the risk if Mr. Byrne and many others are right. Be a journalist and give all the stories not your chosen ones.

lenofus

On Dec 5, 2006, Gary Aguirre appeared before the Senate Judiciary committee. Arlen Specter accussed senior SEC officials of perjury. Wonder why it’s so hard to trace? Do some research. It’s all over the place. Try ‘Deepcapturethemovie.com”.

Secondly. why should companies jump through hoops to survive?

Third. REGSHO.COM. How many days has OSTK had FTD’s? 660 or so. NO conspiracy. Yeah, this just fell though the cracks.

Counterparties? I have emails from at least five firms concerning one stock, where there were, at each of these firms, at least 500,000 of this particular entity. This was four or five years ago. Question? Where is the money? Customers paid for the goods. Where did the money go???? Wake up. I was on Wall St. for a long, long time. Wake up, before your ass is in the street. And when it’s there, don’t expect anybody to care, except Patrick Bryne.

sc

lenofus:

Wall St. is not a single entity – it is many individuals/institutions – each looking for their own best interests. So if one group was indulging in speculative naked short-selling, other individuals/institutions who know better would be the counter-party in the transaction.

Also, there are many things that the company can do – like announcing buybacks through debt financing – that is, if the cash flows can support it. Your conspiracy theory doesn’t hold much water.

Besides, CDO’s and SIV’s are rather irrelevant to this conversation.

Devildog

So his company benefits from a bad economy,

“In bad times is when, suddenly, everybody is calling us to unload product.”

and he’s a hero because he’s claiming the economy is in trouble? No, he’s doing what any other cut-throat CEO does, say and do whatever it takes to make money.

Say something often enough and it becomes true. Repetition is the key. Get enough people to repeat things, whether or not they’re true and other pick up on it and so on and so on. It’s an old trick and they’re hoping it will work for selfish reasons.

lenofus

I’ve known Patrick for a couple of years. He joined my party, I did not join him. He’s right. I’ve watched naked shorting right to the point of having Exchange Specialists tell me about floor traders killing them, and having the exchange cover it up. He’s not crazy. He’s honest – and to a fault. We finally have a leader, someone selfless who is willing to take the underdog side when it would be so easy to sit back and peel a grape, and we want to kill him. Wake up. Is there anybody out there that thinks Wall St. is on our side. They believe they can continue to take the system to the brink and the Government (us) will continually bail them out. Many Wall Str’s laugh. they say “We’re too big to fail”.

Where are the leaders?I have to turn on the tv and see what Warren Buffett had for breakfast. He knows about this. Why is he quiet? Could it be all that money he has in GS??? Come on. Wake up. Help the man, before we’re all in the Street (sic).

Here’s my challenge. Point to anything about SIV’s, CDO’s, Subprime…..who did it, and what are the consequences? I can tell you exactly what happened. Wall Street packaged this crap and loaded it up with “credits”. That’s what bond guys call commissions – “credits”. The managers got special incentives, and layed on the sales forces. This stuff is in every pension fund, state pool, throughout the entire country. BAC had to shut a 14bb money market. And the worst hasn’t even begun. Now, we’re going om make them cover the billions and billions in stocks they sold us, but never gave us the stock. so you tell me. How crazy is he????

John

Doubling down?

They barely carry any inventory anymore. I’m not sure what doubling down would consist of.

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