Posts tagged ‘contract’

LeBron James’s Stock: Buy, Sell, or Hold? (Ticker: LBJ)

The world is watching. With the National Basketball Association (NBA) free agency period officially kicking off on July 1st, frothing-mouthed NBA owners have been released to attack LeBron “King” James in hopes of dragging him back to their home teams. Don’t be surprised to see extensive media footage of paparazzi chasing around a Cadillac Escalade with tinted windows or LeBron’s custom logo’d Ferrari – at least until James officially announces his new team of choice (or reasserts his loyalty to his hometown Cleveland Cavaliers). Stalking one of the greatest professional basketball players of all-time may be fascinating to many, but in the high stakes business of professional sports, LeBron is nothing more than a financial asset being shopped around everywhere from Los Angeles and New Jersey to Miami and New York. So, if LeBron James was a stock, would he be a buy, sell, or hold? And if so, at what price? By the way, his bud, and fellow biased posse member, Warren Buffett, is not eligible to answer these important questions.

Hot IPO Season

Although LeBron is the talk of the town these days, there is a flood of other new contract issuances coming to market. Unlike the stock market, the IPO (Initial Public Offering) and Secondary Offering markets for NBA players is flaming hot this year, with some fresher faces mixing it up with some steely veterans. Beyond LeBron James, you have an incredibly talented cast of characters chasing big bucks, including Dwyane Wade, Chris Bosh, Amar’e Stoudemire, Joe Johnson, Paul Pierce, Ray Allen, Dirk Nowitzki, Yao Ming, Carlos Boozer, Manu Ginobili, Richard Jefferson, and Michael Redd.


James is not an unknown commodity like a private start-up company with a limited track record, so valuing LeBron is much easier than sizing up a rookie. What is a 25 year old, two-time MVP phenom, who averages 27.8 points per game, 7.0 rebounds, and 7.0 assists worth?  

Well, what kind of coin are other illustrious players making…for example Kobe Bryant of the Los Angeles Lakers? Even with Bryant’s slightly less dazzling stats (25.3 points per game, 5.3 rebounds, and 4.7 assists), in April he signed a three-year contract extension worth almost $90 million that will keep him in Los Angeles through the 2013-14 season. The comparison isn’t exactly fair, since Bryant, a 12-time All-Star, has been in the league twice as long as James (14 years vs. 7 years) and Bryant also just secured his fifth golden championship ring (versus zero for James).

To get an even better feel on LBJ stock’s comparable analysis, let’s look at the green that other premier players in the league pulled in last season:

1. Tracy McGrady (Houston Rockets): $23.4 million

2. Kobe Bryant (LA Lakers): $23.2 million

3. Jermaine O’Neal (Miami Heat): $22.8 million

4. Tim Duncan (San Antonio Spurs): $22.2 million

5. Shaquille O’Neal (Cleveland Cavaliers): $20 million

6. Dirk Nowitzki (Dallas Mavericks) $19.8 million

    Paul Pierce (Boston Celtics): $19.8 million

8. Ray Allen (Boston Celtics): $19.75 million

9. Rashard Lewis (Orlando Magic): $18.9 million

10. Michael Redd (Milwaukee Bucks): $17 million

Big bucks all these players make, but so sad what they do with it (read Hidden Pro Athlete Train Wreck)

M & A Perspective

Another way of looking at the LBJ free agency circus is from a mergers and acquisition standpoint. Unfortunately, the vast majority of mergers fail (see CNET article). One major reason is the culture dynamics that need to align between the coach, LeBron, and the other supporting cast on the team. Golden state Warrior Latrell Sprewell’s choking of Coach P.J. Carlesimo in 1997 is proof positive of what can go wrong when cultures collide. Another aspect of deal-busters is the tendency for suitors to overpay for acquisition deals, and bake in too optimistic assumptions regarding the target’s capabilities to perform.

On the flip side, some obvious complementary skill-set synergies could mesh nicely if a multi-player deal could be constructed between Chris Bosh (Toronto Raptors), Dwyane Wade…cool name (Miami Heat), and resurrected Coach Pat Riley, also of the Heat.

The Buck Stops in ???

When all is said and done, LeBron’s choice is simple – join the team that offers the best hope of winning a championship. The dollars and cents component of the deal are pretty formulaic due to salary caps and league maximums mandated through the Collective Bargaining Agreement (CBA) between owners and players. As the Associated Press points out, the difference between staying in Cleveland and going elsewhere is around a measly $30 million (easy for me to say):

“James can get perhaps $125 million over six years by staying in Cleveland; $96 million over five years if he goes.”


My bottom line is that LBJ’s stock is pricey right now, but well worth the BUY if he ends up in Miami with Wade and Bosh. Unfortunately, a restructuring or 1-time charge in Cleveland will not get the job done (Shaq proved that point), so in the Cavs’ hands James is a sell. On the speculative BUY side, let us please forget I am a biased California native, and not fully dismiss the possibility of the Los Angeles Clippers landing LeBron. Billy Crystal is no iconic Laker fan like Jack Nicholson, but nonetheless with LBJ dressed up in red, white, and blue, Billy would have no trouble recruiting some of his celeb pals to hang courtside with him.

Given all the suitors and scenarios, determining a precise Buy, Sell, or Hold rating can be quite challenging. Information in this epic story is changing by the hour, but based on the current data, I am selling LeBron short in Cleveland, and buying him long in Los Angeles. Kobe, don’t confirm your 6th celebration parade next June just quite yet.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper. 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in MSG, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

July 2, 2010 at 1:34 am 1 comment

Making Safer Asbestos: Einhorn on CDS


David Einhorn, founding hedge fund manager of Greenlight Capital, exploited Credit Default Swaps (CDS) derivative contracts to their fullest in the midst of the financial crisis and now he says any effort to keep them in existence is like making “safer asbestos.” Hypocritical?

As toxic debt devices that profit from credit default triggers, CDSs have created “large correlated and asymmetrical risks,” which have “scared authorities into spending hundreds of billions of taxpayer money to prevent speculators who made bad bets from having to pay,” according to Einhorn.

The abolishment of the CDS market would have no impact on me (I have never traded a CDS in my life), but in principle Einhorn has no leg to stand on. Just because these unregulated insurance contracts were not properly disclosed or collateralized by American International Group, Inc. (AIG) does not mean a transparent, properly collateralized, central clearing exchange could not be created to efficiently meet the needs of counterparties.

Derivatives Description

Conceptually, a CDS is no different than a derivatives option contract. Take for example a put contract. Like a CDS, a put contract can be purchased as insurance (hedging against price declines on a current holding) or it can be purchased for speculative purposes (profit from future potential price declines if there is no underlying ownership position). All derivatives are structured for hedging or speculation, whether you are talking about options, futures, swaps, or other exotic forms of derivatives (i.e., swaptions). CDSs are no different.

Einhorn is not the first person to disingenuously speak about derivatives. The “do as I say, not as I do” principle holds true for Warren Buffett too. Buffett blasted derivatives as “weapons of mass destruction,” yet he has made billions of dollars (read about Buffett on derivatives) in premiums from writing (selling) multi-year options on various indexes.

Derivatives History

Derivative trading goes as far back as Roman and Greek history when similar contracts were used for crop insurance and shipping purposes. After the Great Depression, the Investment Act of 1934 legitimized options under the watchful eye of the Securities and Exchange Commission (SEC). Subsequently, the Chicago Board Options Exchange (CBOE) began trading listed options in 1973. Since then, the investment banks and other financial players have created derivative products making up many different flavors.

The Solution

How does Einhorn feel about central clearing exchanges?

“The reform proposal to create a CDS clearing house does nothing more than maintain private profits and socialised risk by moving the counterparty risk from the private sector to a newly created too big to fail entity.”


Oh really? If the utility of hedging contracts has been documented for hundreds of years, then why wouldn’t we create a standardized, transparent, adequately capitalized central clearing house for these tools? Whether Einhorn is asking for the eradication of all derivatives, I cannot be sure.  If his extermination comments apply equally to all derivatives, then I guess we’ll just have to shutter entities like the CBOE, which handled 1.19 billion options contracts last year alone. If eliminating speculation was the focal point of Einhorn’s argument, then perhaps regulators could simply raise the reserve requirements for those merely gambling on price declines or default triggers.

In the end, if what Einhorn recommended came to fruition, he would only be throwing the baby out with the bathwater. CDSs, and other derivatives, serve a healthy and useful purpose towards the aim of creating more efficient financial markets. I agree that the AIG flavor of CDSs were like lethal asbestos, so let’s see if we can now replace it with some safer insulation protection.

Read Financial Times Editorial on David Einhorn

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 


DISCLOSURE: Sidoxia Capital Management (SCM) or its clients owns certain exchange traded funds, but currently has no direct position in AIG, or BRKA/BRKB. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

November 16, 2009 at 2:00 am 3 comments

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