Month: June 2018

Authored by Lance Roberts, Michael Lebowitz, CFA and John Coumarianos, M.S. of Real Investment Advice,

This article is Part I of a series discussing the fallacies of always owning stocks for the long run (aka “buy and hold” and passive strategies). Given the current bull market is not only long in the tooth compared to prior bull markets, but sitting at valuations that have always been met with more severe declines, we believe the points made in this series of articles are important for investors to understand.

This series of articles will cover the following key points:

• “Buy and Hold,” and other passive strategies are fine, just not all of the time
• Markets go through long periods where investors are losing money or simply getting back to even
• The sequence of returns is far more important than the average of returns
• “Time horizons” are vastly under-appreciated.
• Portfolio duration, investor duration, and risk tolerance should be aligned.
• The “value of compounding” only works when large losses are not incurred.
• There are periods when risk-free Treasury bonds offer expected returns on par, or better than equities with significantly less risk.
• Investor psychology plays an enormous role in investors’ returns
• Solving the puzzle: Solutions to achieving long-term returns and the achievement of financial goals.

Part I: Buy and Hold Can Be Hazardous To Your Wealth

One would think that following two major market corrections of over 50% within the last two decades, investors would have a better appreciation for how much time it takes to compound your way out of losses. While buy-and-hold investors who stayed true to their strategy over the last two decades are indeed ahead, they lost many years of valuable compounding time in a quest to “get back to even.”

Just recently, Michael Lebowitz tweeted a chart that highlighted the issue of the time required to “get back to even.”

The tweet, and graph, was a simple reminder that markets spend a good deal of time declining and retracing those declines. These are long periods when investors are not compounding their wealth. As he noted:

“This fact should be top of mind given ‘history, risk levels, and valuations.’”

Not surprisingly, his tweet quickly sparked rebuttal from some promoters of “buy and hold” investment strategies. Of note was a Tweet from Dan Egan.

Dan thinks that Michael’s message is “Fear Mongering.” If presenting factual data, and highlighting the certainty of market cycles, is fear mongering then maybe he is right. If so, he might also want to consider that investors should be fearful given current valuations and the economic underpinnings of corporate earnings. If fear is what it takes to help investors understand the next five years will likely not be similar to the last five, then it will have served a valuable purpose.

The reason, however, this message seems lost on many investment professionals and individuals is because:

• They have never been through a major market reversion
• They have only lived through one (2008) and assume another “financial crisis” cannot happen in our lifetimes.
• They find it easier to passively manage money and blame major drawdowns on the markets rather than commit to the efforts, rigorous analysis, and mental fortitude to go against the crowd. These are all important traits needed to manage an active investment strategy.

As David Rosenberg recently noted, since 2009 nearly 13.4 million individuals have taken on roles in the financial industry. What this suggests, is there are many professionals currently promoting a “buy-and-hold” strategy who have never actually been through a “bear market” cycle. Even Dan Egan who quickly dismissed the analysis did not start his career with Betterment until after the financial crisis.

“Experience” is the most valuable teacher of investing over time. Severe market draw downs have permanent negative effects on an individual’s financial goals, their lives, and their families. Dan would likely have a much different opinion if he had to sit across the table from someone who had just lost 50% of their retirement savings pleading with him about how they are ever going to get it back.

This is why all great money managers throughout history have all operated under one simple investment philosophy – “buy low, sell high.”

Even the great Warren Buffett once noted the two most important rules of investing.

1. Don’t Lose Money
2. Refer To Rule #1

Josh Brown also commented on Michael’s tweet and made a good suggestion. (We are going to cover the concept of dollar cost averaging later in this series.)

Per Josh’s request, the chart below shows the total real return (dividends included) of $1,000 invested in the S&P 500 with dollar cost averaging (DCA). While the periods of losing and recovering are shorter than the original graph, the point remains the same and vitally crucial to comprehend: there are long periods of time investors spend getting back to even, making it significantly harder to fully achieve their financial goals. (Note the graph is in log format and uses Dr. Robert Shiller’s data)

The feedback from Josh, Dan and others expose several very important fallacies about the way many professional money managers view investing.

The most obvious is that investors do NOT have 118 years to invest. Given that most investors do not start seriously saving for retirement until the age of 35, or older, most investors have just one market cycle to reach their goals. If that cycle happens to include a 10-15 year period in which total returns are flat, the odds of achieving their savings goals are massively diminished. If an investor’s 30-year investment cycle happens to end with a major market crash, the result was devastating. Time, duration and ending dates are crucially important to expected investor outcomes.

Second and more importantly, “buy and hold” investors fail to consider risks, expected returns and alternative strategies. Consider that from 2000 through 2013, the S&P 500 Index, including dividends and inflation, delivered a zero rate of return. And from 2000 through 2017, it returned a scant 0.30% more than risk-free Treasury bonds (5.4% annualized for stocks versus 5.1% annualized for bonds). Further, to reach that return it required the expansion of valuation multiples to extreme and risky levels. Equity investors have endured two 50% draw downs, and over a decade of no returns, to achieve an 18-year, 30 basis point annualized pickup over bonds. In recent years that entailed holding equities that were well above long-term averages and presented a poor risk/return framework.

Given current valuations, it is possible, perhaps even likely, that we will wake up on New Year’s Day 2025 to a stock market that has lagged or only barely matched the return of bonds for a full quarter century. The chart below shows the annualized performance of 10-year equity returns versus 10-year U.S. Treasury notes based on over 100 years of history. Clearly equity investors will need to defy history to outperform risk-free bonds. Stocks vs. Bonds: What to own over the next decade.

Summary – Part I

As shown and described, markets go through cycles. During these cycles, there are often incredible opportunities to own stocks. However, these cycles also include periods when risk should be minimized and greed should be constrained. Active management, unlike the static, one-size-fits-all mindset of the popular “buy and hold” strategy, seeks to measure risk and expected returns and invest in a manner in which one is aggressive when valuations are cheap, and defensive when they are rich. The philosophy of this approach seeks first to avoid large losses which are the key to compounding wealth.

The bottom line, and the topic for Part II, is that corrections and crashes matter a lot. Avoiding losses weighs far more heavily in compounding wealth than does chasing returns. In the next article we will walk through the math of compounding and explain why investing in markets that are expensive may provide short-term satisfaction but more than likely will severely harm your ability to meet your retirement goals.

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Bill Clinton got feisty over his affair with former White House intern Monica Lewinsky – telling NBC’s Craig Melvin that while he has not apologized to her personally, he has done so on national television – and would not reveal whether he thinks he owes her an apology today. 

“This March, Monica Lewinsky penned an op-ed in “Vanity fair,” taking responsibility for her part in the scandal but also admitting that years later, she was diagnosed with PTSD from the unrelenting public scrutiny,” Melvin said to Clinton, reading aloud an excerpt from the op-ed. “Looking back, through the lens of #MeToo now, do you think differently or feel more responsibility?”

Clinton said he felt “terrible” and “came to grips with it,” before claiming that the investigation into his conduct was unfair and that he had to incur debt. 

“Through the lens of #MeToo now, do you think differently or feel more responsibility?… Did you ever apologize to her [Lewinsky]?” @craigmelvin to Bill Clinton pic.twitter.com/rXcixhDHER

— TODAY (@TODAYshow) June 4, 2018

Bill Clinton gets asked if he ever apologized to Lewinsky. He responds by saying Starr investigation was unfair https://t.co/C96l2tJBe4

— Maggie Haberman (@maggieNYT) June 4, 2018

Bill Clinton responds by attacking Melvin as presenting “one side”, and pivots to talking about how much debt he incurred, how many women he employed and how he had a sexual harassment policy in the 1980s. https://t.co/D04WBZS52L

— Jonathan Swan (@jonathanvswan) June 4, 2018

Clinton accused Melvin of giving a one-sided interview. “You typically have ignored gaping facts in describing this, and I bet you don’t even know them,” he continued.

“This was litigated 20 years ago. Two-thirds of the American people sided with me,” Clinton said. “They were not insensitive that I had a sexual harassment policy when I was governor in the ’80s. I had two women chiefs of staff when I was governor. Women were over-represented in the attorney general’s office in the ’70s for their percentage of the bar.”

The former President continued, “I’ve had nothing but women leaders in my office since I left. You are giving one side and omitting facts.”

Melvin defended himself, saying that he was “not trying to present a side.” 

Clinton shot back – “I don’t think — you think President Kennedy should have resigned? Do you believe President Johnson should have resigned?”

“Someone should ask you these questions because of the way you formulate the questions. I dealt with it 20 years ago, plus, and the American people, two-thirds of them, sided with me, and I’ve tried to do a good job since then with my life and with my work. That’s all I have to say.”

Meanwhile Juanita Broaddrick, who claims that Bill Clinton raped her on April 25, 1978 in an Arkansas hotel room, biting her upper lip so badly it was nearly severed, asks “WHY Doesn’t any reporter have the guts to ask about Bill Clinton about the sexual assaults and rape???” adding “Monica was Consensual!!!” 

WHY Doesn’t any reporter have the guts to ask about Bill Clinton about the sexual assaults and rape???….Monica was Consensual!!! https://t.co/CkuSMCAXAe

— Juanita Broaddrick (@atensnut) June 4, 2018

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With Italy’s new government once again – if coyly for the time being – bringing up the thorny issue of currency redenomination within the Eurozone, and by implication the failure of the euro and its reversion back to its constituent currencies, we thought it would be a good idea to remind readers why the euro exists in the first place. The briefest possible answer: to make sure the Deutsche Mark does not.

As presented in the chart below – which shows the performance for each of the EU12 countries against the German DEM in every decade from the 1950s to the start of the Euro in 1999 – apart from a small revaluation of core countries in the 1990s, every country devalued to Germany in every decade between the 1950s and the start of the Euro. Said otherwise, the Deutsche Mark appreciated in value against all of its European peers for 5 consecutive decades, a condition which if left unchanged, would have led to an economic and trade crisis.

And as a bonus chart, here is same data (with the US and UK added) from the end of the Bretton Woods system in 1971 to the start of the Euro (Lira -82% devaluation to German DM) and during the 1990s (-24% devaluation) – the decade immediately leading up to the Euro start. As can be seen Italy is amongs the weakest performers relative to the German DM over these periods and showed the momentum that existed in the period leading up to the start of the Euro.

And while the fixed exchange of the Euro for European nations allowed the German export industry to go into overdrive, the lack of the possibility for an external, i.e. currencly, devaluation, meant that Italy has been forced to do it all by engaging in internal devaluation, i.e., lower wages, and higher unemployment, which however Italy’s deteriorating demographics also make virtually impossible. This is what DB’s Jim Reid said of Italy’s potential future:

Looking forward, Italy will not find it easy to grow out of its problems as its facing one of the worst set of demographics of the G20 countries. It’s population size has peaked (according to the UN) and is expected to decline out to 2050. Its working age population (15-64 year olds as a proxy) is set to fall -24% over the same period and is  again one of the worst placed in the G20.

One can almost see why Italy is rather angry at the Euro: As Reid summarizes, Italy is stuck in a “fixed exchange rate with one of the most competitive countries in the world in recent times. The debt levels, high levels of youth unemployment, and demographics show the difficulties that will lie ahead too”

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Authored by Jon Miltimore via IntellectualTakeout.org,

There are various reasons for surging education costs, but the primary one is the expansion of university administration in recent decades.

Year after year, media note, and sometimes bemoan, the ballooning cost of higher education.

There is no doubt that the human costs of this rise are severe: Some 44 million Americans currently carry nearly $1.5 trillion in student loan debt, and the delinquency rate is 11 percent.

There are various reasons for surging costs, but the primary one is the remarkable expansion of university administration in recent decades. As Paul Campos, a law professor at the University of Colorado, wrote in the New York Times a few years ago:

“According to the Department of Education data, administrative positions at colleges and universities grew by 60 percent between 1993 and 2009, which Bloomberg reported was 10 times the rate of growth of tenured faculty positions.

Even more strikingly, an analysis by a professor at California Polytechnic University, Pomona, found that, while the total number of full-time faculty members in the C.S.U. system grew from 11,614 to 12,019 between 1975 and 2008, the total number of administrators grew from 3,800 to 12,183 — a 221 percent increase.”

Universities are large and require administrators to function, of course. The problem is there seems to be no end to the expansion. This point was recently illustrated by Mark Perry, an economics professor at the University of Michigan-Flint.

Perry, who also is a scholar at the American Enterprise Institute, used the University of Michigan as an example to highlight the rise of “diversicrats” (diversity bureaucrats) on today’s campuses. The numbers are astonishing.

1. The University of Michigan currently employs a diversity staff of nearly 100 (93) full-time diversity administrators, officers, directors, vice-provosts, deans, consultants, specialists, investigators, managers, executive assistants, administrative assistants, analysts, and coordinators.

2. More than one-quarter (26) of these “diversicrats” earn annual salaries of more than $100,000, and the total payroll for this small army is $8.4 million. When you add to cash salaries an estimated 32.45% for UM’s very generous fringe benefit package for the average employee in this group (retirement, health care, dental insurance, life insurance, long-term disability, paid leave, paid vacation, social security, unemployment insurance, Medicare, etc.) the total employee compensation for this group tops $11 million per year. And of course that doesn’t count the cost of office space, telephones, computers and printers, printing, postage, programs, training, or travel expenses.

If you fell out of your chair upon realizing that the University of Michigan has a full-time diversity staff of nearly one hundred employees, one of whom earns more than the president of the United States, you can be forgiven. I nearly did too.

We’ve previously noted that the diversity movement is taking on certain aspects of religious faith. It appears, however, that we missed a similarity: Like the priests of ancient Egypt who amassed huge fortunes for themselves and the medieval popes who sold forgiveness and indulgences, the diversity faithful have found profit in their beliefs.

In many ways the modern American university resembles the medieval cathedral – something that began as beautiful but became a monstrosity when its true purpose was lost.

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After another unexpectedly weak first quarter for US GDP (the 4th in a row), the US economy appears to have suddenly hit the nitrous as the unexpectedly strong Friday payrolls report showed, and from one forecast such as the Atlanta Fed which now sees GDP growing at 4.8%…

… to consensus Q2 GDP, which has surged by 50% over the past year, and is now at 3.1%…

… analysts and economists see another period of above-trend growth for the US economy, in large part thanks to the boost from the Trump fiscal stimulus which is slowly finding its way into the broader economy. Not even Goldman could hide its surprise at the strength of recent economic data, writing that the “Friday’s jobs and ISM numbers capped several weeks of firm US numbers that have taken our Q2 GDP tracking estimate to 3.7%… so the economy is back to a very rapid growth rate of roughly twice our 1¾% estimate of the underlying trend.“

However, also according to Goldman, the streak of good news fo the economy is about to end as David Kostin explains below:

The current pace is probably as good as it gets because we expect the impulse from financial conditions to turn gradually more negative, based on the modest tightening in our index that has already occurred and the further likely FCI impact of our above-market funds rate forecast. 

Even so, Kostin believes that growth should remain well above trend as the fiscal impulse boosts both personal consumption and business fixed investment.  We therefore expect the jobless rate to fall to 3¼% by the end of 2019, 1¼pp below the FOMC’s current estimate of the longer-term sustainable rate. Goldman also notes that the biggest missing variable from the so-called expansion – wage growth – may finally be making a comerback:

our single favorite US wage measure—the employment cost index for private-sector wages and salaries excluding incentive-paid occupations—printed a sturdy 0.9% in Q1 on a seasonally adjusted basis.  When translated into annualized terms, both numbers are well above our estimate of the sustainable wage growth rate of 3-3¼%, though these high-frequency signals admittedly await broader confirmation.

However, aside from extrapolating trends, a bigger question in light of ongoing political developments, is how much growth will be impacted by the ongoing trade war. Here is Goldman’s take:

The Trump administration’s recent trade-related announcements have taken us back to the environment of March/April, before Treasury Secretary Mnuchin declared the trade war “on hold.”  We wouldn’t take the latest announcements entirely at face value and regard them, in part, as an attempt to carve out a favorable negotiating position.  However, the administration is likely to implement at least some of them, as the threats otherwise risk losing credibility.  The measures could boost core PCE inflation by between 0.03pp and 0.15pp—depending on the extent to which the administration follows through on its threats of tariffs on China and auto imports— and subtract a similar amount from real GDP growth, assuming US trading partners retaliate as we expect.

But before the ongoing trade war impacts the economy negatively, another potential risk is how the Fed will respond to what now appears to be an economy firing on all cylinders, if only for the time being:

What looms larger in the run-up to the June 12-13 FOMC meeting is how the 0.3pp drop in the unemployment rate since the March meeting will affect the committee’s economic and monetary policy projections.  We think the unemployment forecasts of 3.8% for end-2018 and 3.6% for end-2019 will need to come down by at least 0.2pp, despite the understandable reluctance to show labor market overshooting to a degree that has always set the stage for a recession in the past.  And, in our view, such a forecast change not only seals the case for another 25bp hike in the funds rate target range (coupled with a 20bp hike in the interest rate on excess reserves) but it also makes an increase in the median number of hikes in 2018 from 3 to 4 quite likely.

Where things get more interesting is Goldman’s forecast of a total of 8 rate hikes in 2017 and 2018 (or another 7), which would send the fed funds rate to 3.5% by the end of 2019, and all else equal, sharply inverting the curve:

we remain comfortable with our baseline forecast of a total of 4 hikes in both 2018 and 2019, and in fact think the risks to our 2019 forecast are skewed to the upside.  In the world of projections, the gap between the real funds rate and r* is the key metric by which most FOMC participants judge the stance of monetary policy.  But in the world of actual rate decisions, the key issue is the observable behavior of the economy and financial conditions.  And we expect that behavior to support rate hikes for longer than many FOMC participants now believe, partly because our estimate of r* is somewhat above the committee’s 0.75-1% estimate and partly because we are more skeptical that there is a mechanical or even close relationship between the funds rate gap and the strength of the economy.

And here is Kostin’s top argument why the Fed will continue to aggressively hike to the point where growth itself will finally stumble:

As a matter of causation, it is the conditions that have historically driven the FOMC to deliver curve-inverting hikes—i.e., economic overheating—that raise recession risk, not the committee’s decision to act on those conditions. In fact the opposite is likely true; if the FOMC decides not to hike when the economy is overheating for fear of inverting the curve, the overheating will tend to get more extreme and recession further down the road will become all the more likely.

Meanwhile, as Bloomberg macro commentator Andrew Cinko wrote this morning, “on the other hand, some  prognosticators were caught off guard as this unusual cycle unfolds. It probably pays to be flexible in one’s  forecasting rather than getting too comfortable with the idea that the next year will rhyme with some prior period.”

Indeed: as we reported over the weekend, not one but two banks have now called the expansion phase of the global economic cycle, with first Bank of America saying that “The Global Wave Has Just Peaked For Only The Tenth Time In 25 Years…”

But Morgan Stanley went so far as to lay out when the two key asset classes, stocks and bonds will peak (September and December, respectively).

Ultimately, however, it will all depend on the central banks, because while on one hand the habitual gamblers are once again dumping vol as if the February volocaust never happened…

… the biggest risk remains the central banks, whose net liquidity injections will turn into this decade’s first liquidity drain, some time in the 3rd quarter of 2018.

What they do, and how they respond after the market and economy finally in response to this most critical of all inflection points, is the only thing that matters.

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Via Columbia Threadneedle Investments blog,

The first half of the year reintroduced investors to market volatility. Six key events in the remainder of 2018 could add to the uncertainty…

Geopolitical tensions were a key factor in market gyrations throughout the first six months of 2018, which began with rising fears of a nuclear showdown between the United States and North Korea and ended with the possibility of the latter nation’s nuclear disarmament. Rising interest rates continued to have a dampening effect in the U.S., the European Union and the United Kingdom.

Growing tensions about a potential trade war between the U.S. and other nations, particularly China, loom larger in the second half of the year. Given a fluid situation and ongoing policy discussions, predicting the most likely outcome is sometimes difficult. As these stories unwind, investors and advisors should keep their ears attuned to the potential risks and opportunities of six upcoming events.

June 8: G-7 Summit

Leaders of the world’s seven most powerful economies will gather in Charlevoix to discuss ways to strengthen the middle class, battle climate change and promote peace in Ukraine, Syria and Israel/Palestine, among other issues. Discussions also are likely to involve the recent decision by the U.S. to pull out of the Iran nuclear accord and the continuing importance of the World Trade Organization (WTO), given President Trump’s insistence that WTO rules are being interpreted by WTO judges in a way that disadvantages the U.S.

June 12: U.S. Federal Reserve meeting

The Fed held interest rates steady at its previous meeting in May because of inflation fears, but is widely expected to increase rates at its June 12-13 meeting. Whether or not the Fed will increase rates at its September 25-26 meeting depends on the economic outlook.

July 1: Mexican national election

With President Enrique Peña Nieto not standing for reelection, the country may swing further to the left. Candidate Andrés Manuel López Obrador and his populist MORENA party have pledged to battle President Trump’s policies towards Mexico and address the country’s longstanding poverty, political corruption, crime and other social problems. If López Obrador wins the election, large U.S. multinational companies that have invested heavily in Mexico over the past two decades could be affected.

October 18: Brexit withdrawal treaty

As the U.K. transitions out of the European Union, several key meetings remain. On October 18-19, several legal loose ends are expected to be addressed, including finalizing an agreement about how to handle the Irish border and free trade between the U.K. and EU. Both sides appear closer to solving these issues, although neither issue is yet resolved. As such, Brexit remains a moving target, rattling nerves over possible tariffs and other trade consequences.

November 6: U.S. midterm elections

The partisan balance in the U.S. Congress may shift in November, with all 435 House seats and 33 Senate seats (as well as 36 governorships) up for grabs. The midterm elections will likely serve as a referendum on President Trump’s policies. Midterm elections typically do not favor the sitting party in the White House. Democrats could regain a majority in both the House and Senate (assuming a gain of 24 seats and 2 seats, respectively), potentially disrupting Trump’s trade agenda.

Update: U.S.-North Korea Summit

Following a historic summit between the leaders of North and South Korea in April, expectations were that President Trump and North Korea’s leader Kim Jong-un would meet within the next month in Singapore to discuss the denuclearization of North Korea and an official end to the decades-old war between North and South Korea. At one point in May, it appeared the meeting was suspended, cancelled and then possibly back on. The possibility of reaching an agreement remains up in the air.

Bottom line

The fast pace and unpredictability of geopolitical and macroeconomic events make it difficult to forecast their potential effect with a high degree of confidence. But being informed about the what-ifs and the range of possible outcomes will at least help advisors and investors better prepare for the unexpected.

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The wild and often unpredictable persona of Athenahealth CEO Jonathan Bush shouldn’t really come as a surprise to anybody who has been following the company over the last decade. What should come as a surprise, however, are continued allegations of domestic abuse and sexual harassment which have been ongoing for years but were updated, supplemented and amplified in a Bloomberg article out over the weekend.

The article details new alleged inappropriate behavior by the company’s chief executive officer. Bloomberg claims to have seen a video of Bush, in 2017, at a healthcare industry event where, dressed up as a character, he states he wants to “jump down on” one of his female employees and “do inappropriate things” to her:

A 2017 video clip seen by Bloomberg of Bush at a health-care industry event features the CEO dressed up as a race car driver, pretending to be the title character from the 2006 comedy “Talladega Nights: The Ballad of Ricky Bobby,” and at times reading from a cue card.

Midway through the skit, he says he wants to “jump down on’’ one of his female employees “and do inappropriate things.” He then briefly pauses. “Uh, but obviously that’s totally inappropriate and would never happen or be said on a microphone.” The exact context of the remarks isn’t clear.

This comes just a week after the CEO has apologized for assaulting his ex-wife and after new public records came out regarding a female employee who described working for Bush as a “sexually hostile environment”, according to Bloomberg.

These allegations follow a string of allegations and questionable actions by CEO Bush, dating back years, who is the nephew of President George W Bush. Previously, there were other incidents in 2006, 2007, and 2009.

In 2006, there were allegations of domestic violence:

Bush has also faced allegations of physical abuse of his former spouse.

In court records from a 2006 custody battle in Massachusetts, his ex-wife Sarah Seldon alleged that Bush punched her in the sternum, and pushed her on other occasions more than a decade ago.

The assault occurred at their home “while she was holding their one-year-old son in her arms,” according to the court documents.

In 2007 there were allegations of inappropriate workplace behavior:

Bloomberg also obtained a 2007 complaint filed by a female Athenahealth employee with the Massachusetts Commission Against Discrimination, a state body that investigates discrimination complaints.

The woman, who according to the complaint worked as a manager for Athenahealth, alleged that she was wrongly terminated and was told she was “destructive to the team,” despite being given positive performance reviews. In the complaint, she said Bush “engaged in highly inappropriate conduct regarding a female employee at an awards banquet in or around early 2005.”

As was the case in 2009:

Bush also faced a complaint in 2009, by another woman who said she was mistreated and left the company in part because of the “sexually hostile environment which I was forced to work in.”

The former employee alleged in a complaint to the Massachusetts commission that Bush had stared at her breasts, made sexual remarks and talked openly about his sex life in a way that made her uncomfortable. The complaint was first reported by the New York Post.

This behavior was supposedly one of the reasons that Elliot Management made an offer to buy the company – an offer that the company has so far ignored. Elliot seems to believe that the company is poorly managed in that more value can be driven out of its otherwise stagnant shares with a more effective management team. The article continued:

The company is facing a takeover attempt by the hedge fund Elliott Management Corp., which has cited Athenahealth’s poor management as one reason for its underperformance. The company, which makes an online platform doctors use to manage their practices, so far hasn’t bowed to Elliott’s proposal to buy it for $160 a share.

…

Even so, Jesse Cohn, a partner and senior portfolio manager at Elliott, said in the May 7 letter that “it is clear to us and becoming clear to many others that Athenahealth’s potential will never be realized without the kind of operational change that the company seems unable to deliver.”

But again, this isn’t the first time that Bush’s behavior has been front and center in an argument against the company being mismanaged. David Einhorn was famously short the stock back in 2014, and one of the centerpieces of his ongoing short campaign against the company was the unpredictability and the volatility of Mr. Bush as the company CEO. Mr. Einhorn thought the stock was in bubble territory back in 2014, as we reported  then:

At the same time, there are a number of tech stocks that are caught up in a smaller version of the 1999-2000 internet bubble, and as we mentioned, we created a bubble basket to short them. At this year’s Sohn Investment Conference in May, David presented athenahealth (ATHN), a healthcare IT company, as an example of a bubble basket stock. In response to our assertion that the shares are absurdly overvalued, CEO Jonathan Bush summed things up perfectly a few days after the conference when he told Bloomberg TV, “And those who buy our stock should not be sort of bottom [line] watching value investors. They should be people who dream of a health care cloud.” At Greenlight, dreams do not form the basis of investment theses.

We will know more about whether or not the company will accept its go private offer at $160 a share after the company’s annual general shareholder meeting, which is scheduled to take place on Wednesday of this week.

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