Tuesday, Kinder Morgan, Inc. common stock (KMI) hit a low of 15.72, down from its 44.57 April peak. The bloodletting into 15.72 took out a tad under 9 points in 9 consecutive down days from November 24 to December 8. That part smacks of collusion. Back in the day, Wall Street Crime Families scared retail clients out of their investments by engineering precipitous drops like that, following up with the inevitable phone calls by bullying brokers. Dons loved to do income investors this way. Got folks living off portfolio dividends and interest to hand their holdings over to the Crime Families at absurd prices by pulling out the Family rug over this curious hole the mob would dig by totally thrashing prices going into the bottom.
Nowadays, with the Fed shutting down the T-bond market a while back, Washington has yanked away the primary source of safe investment income for all market participants, adding to the sense of urgency in preserving capital at dire times like this. From what we've read, more than one guru believes that the Fed played a huge role in setting up what may well turn out to be a Kinder Morgan con.
Friday, Kinder Morgan, known to us as a great big pipeline outfit and to themselves as the largest energy infrastructure company in North America, filed a Form 8-K informing the Securities and Excuses Commission that one of its directors had left their board. Turns out the man's partnership, an investment fund management firm, whose sizable KMI holdings had given them the right to nominate a director in the past, had reduced that position below the threshold (2.5% of total outstanding shares), and, no longer having said right, the partnership's nominee resigned.
Those circumstances recalled a method of short-selling used by the crime families back in the day. Market makers had to maintain a position in each stock they assumed responsibility for. In upswings, that would be long, in downswings, they'd reduce the size of that long position or actually go short. Both downswing moves were called "shorting against the box" because the trading desk would eventually restore the original long position at lower price levels.
It sounds kind of silly to tag this simple practice with a name, only it opened the door for Family traders to run some interesting cons, like "front running" client sell orders - in effect, getting clients to kind of momentarily hold the Family long position for the trading desk - a practice so sophisticated it's against the law, or would be if securities laws came with an actual law enforcement agency actually enforcing actual securities laws.
Moreover, this Kinder Morgan bloodbath comes with two longstanding non-issues being bandied about as if they were all of a sudden hot-button topics today: 1) to decide how much it should pay in dividends, the company uses Distributable Cash Flow (DCF) instead of net income calculated under Generally Accepted Accounting Principles (GAAP), 2) in determining the certainty of Kinder Morgan's income, hence the quality of its bonds, ratings agencies don't give anywhere near enough weight to the basic need people have to keep warm in the winter.
Thing is, these non-issues have been around since at least the 1950's, and probably way further back than that since the 50's are when MacDougal started studying this stuff. We decided to touch base with Emmett Lathrop "Doc" Brown, Ph.D., inventor of the DeLorean Time Machine, to see if MacDougal could go back to those rock 'n' roll days for his valued subscribers. Maybe talk to some of his old finance professors or something.
Doc wasn't available and sidekick Marty McFly was off somewhen with him, so MacDougal had to tap into his own Gordon's London Dry Time Machine, and speak with whoever showed up.
WHOEVER (SHOWING UP): Whattaya want from me?
MACDOUGAL: Who are you?
WHOEVER: Does it matter?
MACDOUGAL: I Suppose not. Look, about this Kinder Morgan thing ...
WHOEVER (AGITATED): "Thing"? "Thing"? Grand larceny is more like it. Widows, orphans, seniors getting fleeced. This nosedive is no "thing", Mac. It's grand larceny - widows, orphans, and senior retirees.
MACDOUGAL: Okay, okay. Point taken. Look, I brought you here to ask about the 50's.
WHOEVER (STEELY EYED. HEROICALLY FOR THE REST OF THE CUT): Yeah, the non-issues and shorting against the box. I remember those days well. And you, you were just a pup then.
MACDOUGAL (FROWNING AT THAT LAST PART, KIND OF STUNG): How about the non-issues? Not using GAAP to come up with a dividend payout ratio, and lousy math behind the barely-investment-grade bond ratings.
WHOEVER: GAAP isn't even GAAP. That's why we need security analysts. Kinder Morgan management says they can calculate depreciation precisely, and they can, and GAAP there is basically a joke based on nonsensical numbers, both historical and projected. As for the ratings, 1) the agencies have never given enough weight to the need you and I have to keep our homes and offices heated, and 2) low interest rates have rendered some of their standards completely irrelevant for a while.
Management is right on both points. And security analysts have been looking at them Kinder Morgan's way for more than half a century now. Why all the fuss over the general public getting let in on these things is a mystery to me.
WHOEVER: Not as fondly as you do.
MACDOUGAL: You think the ex-director's investment management operation is going to buy back the shares they sold?
WHOEVER: I think those shares added to the selling pressure. Who knows about the rest?
MACDOUGAL: How about collusion?
WHOEVER: Wall Street Crime Families reducing their positions from 44.57 on down, only to restore every share from 15.72 on up?
MACDOUGAL: Together.
WHOEVER: Got me. Maybe, is the best I can do there.
MACDOUGAL: B#st#rds.
WHOEVER: Maybe, on that one too. Look, MacDougal, KMI stock's worth 30 something. Someone'll make a bundle riding it back there. History says the Families will be in on that lock, stock, and barrel.
MACDOUGAL: How'd you get 30's?
WHOEVER: Allocate half of Kinder's Distributable Cash Flow to dividends and apply a 3% yield. Industry norm for these times. And KMI is selling at book value now. That's your standard bargain basement level.
MACDOUGAL: So dividend investors have nothing to worry about?
WHOEVER: Dividend investors always have something to worry about. Invest in companies, not dividends, MacDougal. You know that.
MACDOUGAL: Yeah, right. So what happens from here?
WHOEVER: How would I know? I use a Gordon's London Dry Time Machine, not a Delorean.
SPECIAL EFFECTS AS THE TIME TRAVELLER DISAPPEARS IN A PUFF OF SPARKLY SMOKE. FADE TO SPACY MYSTERIOUS TIME-WARP MUSIC
