Evil government wendigo spirits... Resurrecting dead money... The 'tell' of premium strike prices... Kodak knew what was coming... The rankest crony capitalism... I wish them swift and terrible justice... Stand up straight, with your shoulders back...
 This Kodak story has taken a whole new turn...
In last Friday's Stansberry Digest, I (Dan Ferris) suggested Eastman Kodak (KODK) was channeling Ursula K. Le Guin's sci-fi novel, The Lathe of Heaven.
Just like in the novel, we accused Kodak, in league with the U.S. government, of trying to rewrite Kodak's past to justify lending it $765 million to start a pharmaceutical company – a business it has spent a total of six (miserable) years in during its 131-year history.
With the ink still wet on last Friday's Digest, the story took a darker turn, more akin to the plot of the 2019 film remake of Pet Sematary [sic], based on Stephen King's 1983 novel.
In Pet Sematary, emergency room physician Louis Creed and his family leave the hectic pace of Boston for a peaceful house in the woods near the small town of Ludlow, Maine.
There, the family discovers a pet cemetery (identified by a misspelled sign, "Pet Sematary") on their property.
To keep from spoiling the film's plot too much, let me just say that beyond the "pet sematary" lies an old burial ground inhabited by a wendigo, a mythological evil spirit from Algonquin Indian folklore.
If you bury a dead person or animal on the old burial ground, the wendigo brings it back to life...
And, in the movie, this process corrupts the dead into a murderously evil "undead" version of their former self.
So, how is Eastman Kodak like the undead of Pet Sematary?
If you argue that Kodak wasn't dead before the government resurrected it, you're right. The business never quite died. (I'll let its 2012/2013 bankruptcy slide and call it a mere near-death experience.)
But the stock has been stone cold "dead money" for at least six years...
After emerging from bankruptcy in September 2013 with its share price around $19, Kodak shares peaked the following January at $37.40.
It was all downhill after that... The stock closed as low as $1.55 this March – during the COVID-19 bear market – a peak-to-trough drop of 96%.
It was dead money.
Go bury it out beyond the Pet Sematary...
... and cue the wendigo, who in this tale happens to be the President of the United States...
Donald Trump – whose motionless hair and orange skin also suggest a brush with something not of this world – decided at some point during the COVID-19 pandemic that the U.S. should bring some of its pharmaceutical production back from China and India to U.S. shores.
Via executive order on May 14, Trump invoked the Defense Production Act of 1950, which was passed 70 years ago to "facilitate the production of goods necessary for the national security."
The next plot point of this movie was for the U.S. International Development Finance Corporation ("DFC") to start calling on U.S.-based companies like Kodak.
The DFC was created in 2018 when Trump signed the Better Utilization of Investments Leading to Development ("BUILD") Act into law. It's a government lending institution, which tells you everything you need to know.
As we said last week, "government capital allocation" is a malodorous oxymoron.
I promise you every penny these wendigos lend will corrupt the recipients...
Let's get into the necessary details of this Kodak story...
On Tuesday, July 28, the DFC announced Kodak would receive a $765 million loan. As we reported last week, the stock took off. It reached a high of $11.80 that day, up from $2.62 the day before. The share price got as high as $60 on July 29.
Alright, movie fans, hit pause, take a potty break and get some fresh popcorn. Now comes the part when the DFC wendigo temps Kodak executives with immortality (or maybe just a super comfy retirement), corrupting their decrepit souls and damning them for all eternity...
On Monday, July 27 – the day before the announcement that sent the stock soaring – four members of Kodak's management team received stock option grants at strike prices of $3.03, $4.53, $6.03, and $12.
Remember, the stock closed at $2.62 that day. So three of the four strike prices were at large premiums to the stock price.
In a brilliant exposé of the Kodak/DFC option grant story in his newsletter, Mike (he doesn't have a last name, at least publicly) of Non-GAAP Thoughts calls the July 27 grants "spring-loaded options," because they were made with full knowledge of impending bullish news. He also commented on the premium strike prices...
When you see insiders suddenly accept options with premium strike prices, pay attention. That's not an arbitrary decision and is explicitly contemplated.
I can only speculate on why the changes occurred at Kodak, but based on past experience this is the kind of behavior you'd see from insiders extremely bullish on the prospects of the company.
The grants were made (by the board of directors) on July 27, the day before the $765 million loan announcement... but didn't have to be publicly reported until July 29... the day after the announcement.
This is suspicious enough, but it doesn't end here...
Kodak held its annual meeting on May 20 – six days after Trump invoked the Defense Production Act to fight COVID-19. On that day, Kodak directors were granted options at those same four exercise prices.
It's clear the July 27 option grants were made with full knowledge of the impending loan announcement.
Kodak CEO Jim Continenza also made it clear in an earlier on-the-record interview with a local media outlet that he started working with the DFC two months before the July 28 announcement.
It sure looks like Kodak knew a big chunk of money was coming their way when directors received option grants on May 20.
Another weird fact is that directors had received restricted stock grants back in January. It would be more normal for them to receive equity or option grants once a year, around the time of the annual meeting. Some companies also do quarterly grants in lieu of cash compensation for directors.
Why the double-dip equity grants? The COVID-19 pandemic hadn't really hit U.S. shores in January. But it was certainly in full swing by May 20. Mike at Non-GAAP Thoughts concludes the obvious...
I don't think it's a stretch to believe the Board was willing to push the governance envelope to double dip on equity grants and maximize their financial upside.
He also points out that Kodak's 2020 first quarter 10-Q report contains the following interesting disclosure...
On May 12, 2020, a Chinese subsidiary of Kodak transferred approximately $70 million to a U.S. subsidiary of Kodak in anticipation of an inter-company transaction.
I believe starting up a new pharmaceutical business qualifies as an inter-company transaction.
Again, this two-month 'diligence period' was established publicly...
... before the announcement, supporting the increasingly suspicious timeline...
Kodak is based in Rochester, New York. In an interview with RochesterFirst.com, published the day the loan was announced, Continenza said the company had been working with the DFC every day for two months.
His comments also seem to suggest the federal government is run by a bunch of bureaucratic bulls in a China shop, shoving money around willy-nilly. (I mean... what idiot says, "We need to make drugs in the U.S. Call Kodak!"?)
Here's an excerpt from the interview...
[Assistant to the President and Director of the Office of Trade and Manufacturing Policy at the White House Dr. Peter] Navarro does not take enough credit for what he did. He's the one who was like, 'can you do this, get to the point, get it done, bye.'
This was literally two months ago that's how fast this has been moving, but it was every day. Once you're in, you're in. I was joking, we were given five days by Dr. Navarro, he calls it Trump Time, and I learned what that is to get this done and we did it in four because I said Trump Time is five, we're going to do better, we have to do better and my team did and it was amazing.
Taken at face value, Continenza's comments suggest the government – perhaps to get itself a job-creation, "made-in-the-USA" win – shoved hundreds of millions of dollars at Kodak, telling them to "get it done" on some stupidly short timetable.
This is how the worst management people operate...
They call up their stressed-out underlings, bark orders, and never accept responsibility when it becomes clear the project either should never have been done in the first place, or needed much more time to be done right.
Trump is the typical "get-it-done" guy... and the DFC strikes me as a vehicle for shoving money at politically palatable targets like Kodak.
(On a related note, don't bother writing in about me criticizing Trump. There's no meaningful difference between Biden, Trump, Obama, Bush, Clinton or any of the rest of them. No one who can get elected will perform well in office. No one who would perform well in office can get elected.)
The interview makes clear that folks at Kodak knew the DFC was interested in making some type of investment at least two months prior to the announcement date.
Putting it all together...
Here's the timeline...
- May 12: Kodak moves $70 million from a Chinese subsidiary to a U.S subsidiary "in anticipation of an inter-company transaction."
- May 14: Trump issues executive order invoking (among others) the Defense Production Act.
- May 20: Kodak makes director option grants at premium prices.
- Approximately May 28 (according to Continenza's RochesterFirst interview): Kodak and the DFC start talking about its new drug business.
- July 27: More option grants.
- July 28: DFC announces a $765 million loan to Kodak, causing its share price to rise roughly four-fold.
- July 29: Kodak's stock price hits $60 in trading volume roughly 167 times the prior days (which was roughly 22 times July 27 volume).
- July 30: Non-GAAP Thoughts article citing suspicious option grant dates and strike prices.
- July 31: Wall Street Journal publishes article citing potential $95 million windfall for Continenza.
- August 4: Wall Street Journal publishes article citing new SEC investigation into the DFC loan.
It sure looks to me like Kodak knew what was coming...
And they knew it very soon after Trump's May 14 executive order invoking the Defense Production Act.
It looks like they got aggressive with option grants on May 20 to take advantage of the windfall – essentially conspiring to make the largest possible transfer of taxpayer-funded loan money to Kodak management brokerage accounts.
And now – late to the party as usual – the SEC has taken note and has begun an investigation.
Meanwhile, Non-GAAP Thoughts completed its investigation and published the results on July 30 – even before the Wall Street Journal started getting wise.
If this doesn't scream at you as the rankest crony capitalism, maybe you need a quick course on the term...
As it happens, I recently interviewed Nick Sorrentino of the Against Crony Capitalism website (AC2news.com) for an upcoming episode of the Stansberry Investor Hour podcast. Here's an excerpt from the website's "About" page, in answer to the question, "What is Crony Capitalism?"...
Crony capitalism is the marriage of the state and private special interests. Some people have called it corporatism, mercantilism, fascism, or even Communism.
We will call it crony capitalism.
By whatever name, it is phony capitalism.
Over the years the public has been taught that many of the problems it faces on a day to day basis such as the lack of jobs, rising prices, corruption in Congress, and so on are a result of capitalism.
If so, it is a perverted capitalism.
These unsavory realities are largely the result of government/private "partnerships." Whether in banking, agriculture, housing, energy, transportation, manufacturing, or nearly any other facet of the economy, the "unsavory" parts are often the result of public/private collusion.
Why can't you get any kind of return on your money in a CD, the traditional vehicle for retirees? Crony capitalism.
Kodak executives and directors, unable to get a decent return on the business they're running into the ground, decided instead to take the crony route to riches.
I said last week I wish them well. I'd like to rescind that. I wish them swift and terrible justice...
No matter what happens to the folks running Kodak, I doubt anyone will ever speak up for the victim in all of this...
That's The Forgotten Man of William Graham Sumner's 1883 essay of the same name, who works, votes, sometimes "prays – but he always pays – yes, above all he pays."
In the cronyistic Kodak affair, the Forgotten Man is both the taxpayer and the long-suffering Kodak shareholder. Both groups work, vote, sometimes pray and above all, they always pay.
What ever shall I tell them?
Well, the market has already spoken with Kodak's surge to $60 sucking in all-too-human, greedy innocents... with the crash back to roughly $15 today turning their Kodak bet to a sizeable loss.
To make the most of a bad situation, I can offer two practical lessons to all investors, one financial and one spiritual...
First comes the practical financial advice...
Here's an idea of how one might profit, or at least not lose from similar situations, from Mike at Non-GAAP Thoughts (to whom my hat is off)...
Overall, you didn't have to wait for an inadvertent leak to capitalize on Kodak's stock pop. You could have deducted something material was on the table 2 months ago when directors decided to double dip on equity grants and shifted to options over RSUs.
Corporate governance "dark arts" can surprisingly be good source of ex-ante signals so always pay attention to sudden changes in grant timing, grant type, and price hurdles.
You'll be surprised how often the same story plays out.
Having put another arrow in our trading and investing quiver, let's now attend to the spiritual lesson attending such unpleasantness...
What can I possibly tell the taxpayers and Kodak shareholders to help them move forward from the current debacle?
Here's the spiritual advice...
Stand up straight with your shoulders back, like every victorious lobster...
That's right, a lobster.
If you've read Jordan B. Peterson's brilliant book, 12 Rules For Life: An Antidote to Chaos, you'll recognize the advice as Peterson's Rule 1, which makes ample use of the lobster reference.
Peterson, a professor of psychology at the University of Toronto, goes into great detail about what happens in lobsters' nervous systems during their territorial squabbles, which separate winner lobsters from loser lobsters.
He writes that chemicals like serotonin and dopamine play similar roles in both humans and lobsters and quips, "In one of the more staggering demonstrations of the evolutionary continuity of life on Earth, Prozac even cheers up lobsters."
Peterson even provides an investment tie-in when contemplating how female lobsters choose mates:
Females outsource the problem to the machine-like calculations of the dominance hierarchy. They let the males fight it out and peel their paramours from the top. This is very much what happens with stock-market pricing, where the value of any particular enterprise is determined the competition of all.
Like lobsters searching for mates, male and female investors alike let the marketplace fight it out, showing them which companies deserve their capital.
The government tried to fake them out by giving Kodak a loan it otherwise never could have gotten.
Many investors were faked out, bought into this frenzy and have already lost money. They should take heart...
Standing up straight with your shoulders back works in reverse, too...
In other words, a loser can set himself on the pathway to a winning life by assuming a winner's posture. Besides signaling to others, standing up straight with your shoulders back also signals to your own nervous system that you're a winner.
Peterson writes that your nervous system responds with real chemical changes that help you grow in confidence and effectiveness, as soon as you start merely acting like a victorious lobster. As Peterson puts it...
Standing up straight with your shoulders back is not something that is only physical, because you're not only a body. You're a spirit, so to speak – a psyche – as well. Standing up physically also implies and invokes and demands standing up metaphysically. Standing up means voluntarily accepting the burden of Being. Your nervous system responds in an entirely different manner when you face the demand of life voluntarily. You respond to a challenge, instead of bracing for a catastrophe. You see the gold the dragon hoards, instead of shrinking in terror from the all-too-real fact of the dragon...
So attend carefully to your posture. Quit drooping and hunching around... Walk tall and gaze forthrightly ahead. Dare to be dangerous. Encourage the serotonin to flow plentifully through the neural pathways desperate for its calming influence.
Attending carefully to their posture won't get Kodak shareholders their money back. But I believe it'll leave them far, far less likely to put their capital in with another bunch of losers.
Standing up straight with their shoulders back will make them more likely to wind up investing in a world class management team next time...
As for the rest of us taxpayers...
Seeing the Kodak management team for what it is – a bunch of defeated lobsters trying to cheat the taxpayer so they can retire rich – helps us learn to avoid others like them in the future.
In any case, the market has spoken...
Now it's up to the Forgotten Men of this episode to stand up straight with their shoulders back, heed the market's lesson, cut losses, and move forward in the light of their new knowledge.
If you stand up straight with your shoulders back, Peterson ultimately concludes...
Then you may be able to accept the terrible burden of the World, and find joy. Look for your inspiration to the victorious lobster, with its 350 million years of practical wisdom.
This just may be the best antidote to the wendigo spirits. | 
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