Thursday, September 12, 2019

September 12th Links

  • Financial markets are good teachers of this sort of thing. Having spent decades around markets, I learned that once I had a pretty good idea why a few things happened, that coincided neatly with my discovery that I had no idea why those things happened. This has been true across debt markets, equity markets, macroeconomics, microeconomics, and so on. (I have had a similar experience in healthcare, where my main discovery as I go ever-deeper is how little we know, how often what we think we know is wrong, how often medical reversals happen, and how often better tests lead to more incidentaloma-induced unnecessary treatments, not better solutions.) [Kedrosky]
  • All 34 cases in New York State admitted using cannabis products. The suspected substance, Vitamin E acetate, was found in cannabis products but not in the nicotine-based products they tested. [health.ny.gov]
  • Airline safety has always been one of the more accurate ways of determining a country's level of socioeconomic development, since it captures the diffusion of both technology and human capital/IQ within a country, and is unaffected by random commodity bubbles or SJW talking points. Much better than GNP, etc. [Sailer]
  • Is there a framework to think about what kind of duopolies will compete with each other and what will co-exist? Or is it just led by management behaviour? A lot of it comes down to the unit economics of the business. Boeing and Airbus need to absorb a lot of fixed costs. Building an aircraft factory, investing and designing a new aircraft, requires a lot of very high fixed costs, and so they need to absorb that. And so, each incremental plane sold is very important to both companies. So they need to take market share from each other. Whereas for Visa and Mastercard, their fixed cost for the payment networks, those costs were sunk decades ago. Their network is there. It exists. So there's no incentive to compete on price, because they don't have the same economics of cost absorption. [Pat Dorsey]
  • It is hard, at this late date, to be moved by Scientists' threadbare theological squabbles and internecine court battles, by the minutiae of their predicaments. The church deserves to die, and it is dying. It just can't happen soon enough. [The Guardian]
  • During the 382 days of the fast, the patient's weight decreased from 456 to 180 lb. Five years after undertaking the fast, Mr A.B.'s weight remains around 196 lb. [...] The amount of weight lost by Mr A.B. was 276 lb, with an average rate of loss of 0.72 lb/day, comparing favourably with the rates of weight loss in other long-term fasts (> 200 days) which have ranged from 0.41 lb/day (Thomson, Runcie & Miller, 1966) to 0.67 lb/day (Runcie & Thomson, 1970). [NLM]
  • No luck for anti-natalists... the super-strong drug-like effects of having children will presumably continue to motivate most humans to reproduce no matter how strong the ethical case against doing so may be. Coming soon: a drug that makes you feel like "you just had 10,000 children". [Qualia]
  • The More Dakka story is common in medicine. You do an intervention; the disease doesn't get better, or gets only marginally better; the research literature concludes it doesn't work; nobody tries doing MORE of that intervention, but when somebody just raises the dose high enough, it does work. [Qualia]
  • Habits can only be thought of rationally when looked at from a perspective of years or decades. The benefit of a habit isn't the magnitude of each individual action you take, but the cumulative impact it will have on your life in the long term. It's through that lens that you must evaluate which habits to pick up, which to drop, and which are worth fighting for when the going gets tough. [Less Wrong]
  • Modern art is unique in that no other asset class allows something nearly worthless to arbitrarily become worth millions in a thinly traded market. A lot of the social pressure to accept this stuff as art is about keeping the scam going. [CBS]
  • I think that our single best psychopharmacological bet for tackling depression, anxiety, and above all chronic pain worldwide in the next decade is to: 1) Identify great, non-toxic, partial mu-opioid agonists with extremely high therapeutic index (e.g. tianepetine, 7-hydroxymitragynine, etc.), and 2) Prescribe them in conjunction with anti-tolerance drugs (such as proglumide, agmatine, black seed oil, small dose ibogaine, etc.). I think that whomever manages to patent a mixture of partial opioid agonist + anti-tolerance drug that works in the long term will be a multi-billionaire within a couple of years while actually reducing/preventing massive amounts of untold suffering. [Qualia]
  • Leftists often talk about "food deserts" in Western cities, where the poor supposedly lack options to buy affordable and nutritious food. If they want to see a real food desert, they should come to Havana. I went to a grocery store across the street from the exclusive Meliá Cohiba Hotel, where the lucky few with access to hard currency shop to supplement their meager state rations. The store was in what passes for a mall in Havana—a cluttered concrete box, shabby compared even with malls I've visited in Iraq. It carried rice, beans, frozen chicken, milk, bottled water, booze, a small bit of cheese, minuscule amounts of rancid-looking meat, some low-end cookies and chips from Brazil—and that's it. No produce, cereal, no cans of soup, no pasta. A 7–11 has a far better selection, and this is a place for Cuba's "rich" to shop. I heard, but cannot confirm, that potatoes would not be available anywhere in Cuba for another four months. [City Journal]
  • The Chinaman is a being of another kind, who is endowed with a remarkable aptitude for a high material civilization. He is seen to the least advantage in his own country, where a temporary dark age still prevails, which has not sapped the genius of the race, though it has stunted the developed the of each member of it, by the rigid enforcement of an effete system of classical education which treats originality as a social crime. All the bad parts of his character, as his lying and servility, spring from timidity due to an education that has cowed him, and no treatment is better calculated to remedy that evil than location in a free settlement. The natural capacity of the Chinaman shows itself by the success with which, notwithstanding his timidity, he competes with strangers, wherever he may reside. The Chinese emigrants possess an extraordinary instinct for political and social organization; they contrive to establish for themselves a police and internal government, and they give no trouble to their rulers so long as they are left to manage those matters by themselves. They are good-tempered, frugal, industrious, saving, commercially inclined, and extraordinarily prolific. They thrive in all countries, the natives of the Southern provinces being perfectly able to labor and multiply in the hottest climates. Of all known varieties or mankind there is none so appropriate as the Chinaman to become the future occupant of the enormous regions which lie between the tropics, whose extent is far more vast than it appears, from the cramped manner in which those latitudes are pictured in the ordinary maps of the world. [Galton]

Monday, September 9, 2019

September 9th Links

  • This was such a great thread. Maybe when the bear market returns, the CBS commentariat will have the Animal Spirits for these types of discussions again. [CBS]
  • Are there debates happening today in Russian, German, Japanese, and so forth, that would shake the world if only the world could read them? Or are those conversations mostly internal reactions to intellectual trends pioneered in the Anglophone world (just as the intellectual conversation in China, c. 1911-1949 was mostly a reaction to ideas imported from Europe)? Has the engine of thought really left the Old World behind? [Scholars Stage]
  • It is incredible how much useful information from the business world is becoming lost to history. I can get detailed box scores from decades-ago college football games, but finding a 1975 annual report from a midsize company is surprisingly difficult. [New Yorker]
  • The thing people don't get in the electric vehicle discussion is that gasoline is almost a waste product in the refining industry. Our civilization runs on diesel and JP-8 and asphalt. The logistics, farming, and mining systems run on this stuff and electrification is utterly impossible, and you can't run the equiment on gasoline either: the torque curve requirements necessitate higher octane fuels. There will never be an electric or gasoline combine harvester or freight train or barge or surface mining vehicle. Refining profits are made from diesel/jet fuel and asphaltenes for industrial applications. The refineries make gasoline out of the remaining stuff that cannot be profitably re-fractionated into higher octane products. So it really makes almost no sense to power personal vehicles with electricity from uranium/coal/natgas when we are going to have the gasoline anyway whether we really need it or not, as it's basically a way to get rid of the leftover crap. I see many city electrified light rail and diesel/natgas powered bus systems that I am almost sure would operate at a fraction of the cost if replaced by fleets of large gasoline powered vans. Just give them reserved lanes and optimize traffic light timing for them. People would actually *use* public van transit that showed up very often (every eight minutes) and zipped past traffic. SWPLs really need to get over their superstitions (oooh, monorail) and think about these things systematically. [LoTB]
  • Pursuant to the Settlement Agreement, the Parties concurrently entered into a share repurchase agreement (the "Repurchase Agreement") providing for the purchase of the shares of common stock of the Company, par value $0.01 per share ("Common Stock"), beneficially owned by the Investor Parties as of the date of the Settlement Agreement, by the Company and Christopher Hughes, the Chairman of the Board of Directors of the Company (the "Board"), President and Chief Executive Officer of the Company, for an aggregate purchase price of $5,956,712.50 in cash or $6.25 per share, subject to the terms and conditions contained in the Repurchase Agreement (the "Repurchase"). In addition, the Company has agreed to make a payment of $1,543,287.50 to the Investor Parties for the settlement of the pending litigation (the "Settlement Payment"). [EDGAR]
  • Despite the billions of dollars cigarette companies invested in new technologies, it took a start-up to popularise e-cigarettes. Founded in 2015, Juul Labs has seized more than 70 per cent of the US vaping market, a market that is growing fast: the US now has 14m adult vapers alongside its 39m adult smokers, Wells Fargo estimates. The speed of these changes has forced cigarette makers to respond. Last year, Altria invested $13bn in Juul for a 35 per cent stake, pledging to use its sway with retailers to promote Juul's products. The tobacco group's efforts to diversify have also seen it spend $1.8bn on a 45 per cent stake in Cronos, a Canadian cannabis company, and $372m for a majority stake in Burger Söhne, the Swiss manufacturer of On, an oral nicotine brand. [FT]
  • They'd find old cars driving through town, and they'd give the drivers $50 to drive back and forth through a scene so that they'd have 1982 Cutlasses in the background of a shot. He bought a '73 pickup truck that they'd drive to the set every day in case of a problem — if you look in the background the truck "drives through the movie about 90,000 times". [NY Times]
  • Musk is an excellent promoter. He did not come up with the technological innovation in batteries that would have allowed battery electric vehicles to make economic sense. Nor did he come up with a technological innovation in photovoltaic solar panels, balance of solar system, or installation procedures that would allow them to make clear economic sense for residential installation. But he started companies in those two industries anyway. With his excellent promotion skills he was able to raise a lot of money for them and sell products to tech dorks, albeit at prices that result in the continual consumption of the capital he has raised. Because the capital has been consumed and continued operations would consume more he needs more - but the fundamentals of his businesses do not allow him to raise money if he gives a clear, straightforward presentation of the economics. That is why he depends on promotion and tantalizing sizzle - a promise that he can write now but that will not be cashed for "six months" or more. [CBS]
  • Sad, however, that its marketing uses the word "shark" to describe company owners who have decided to attempt to work with fellow owners to convince managements (their employees!) to take actions that they feel would be beneficial. Also, the term "takeover defense" is euphemistic and misleading. How about calling it "management entrenchment"? Or "principal-agent accountability disruption"? Good corporate governance is, to a large degree, the inverse of the "takeover defense" and anti-"activist" devices that have been created over the past decades to entrench management agents at the expense of their owner principals. [CBS]
  • So-called "takeover defense mechanisms" drive a wedge between ownership of the company by shareholders and the rightful exercise of that ownership through control of the company's operations. This makes way for a parasite class of non-owner management to usurp wealth. [CBS]
  • Go out in bad weather! Seriously, a friend of mine broke into the stock photography business by shooting at Boston Logan airport only on bad weather days when no one else was. He built up an impressive portfolio of powerful images that an agency was willing to take on. This was a side-business for him but soon after he wound up getting hired to shoot the final A6 Intruder cat-shot on a US Navy aircraft carrier! Brooding dark skies and dangerous clouds really add a lot of drama to otherwise repetitive blue-sky landing or take-off pictures. [link]

Saturday, September 7, 2019

In Re Tesla Motors, Inc. Stockholder Litigation

This case (In Re Tesla Motors, Inc. Stockholder Litigation) is the Delaware shareholder litigation regarding Tesla's acquisition of Solar City. The case was filed in September 2016 (three years ago), depositions have been taking place this summer, and the parties just filed opening briefs in support of summary judgment motions.

Something interesting in the Plaintiffs' motion for partial SJ:

On October 21, 2015, following a “weekly cash meeting,” Bryan Ellis, SolarCity’s Senior Vice President, Finance and Analysis, advised the executive management team that his “updated forecast projects our December monthly average balance at ~$91 million, which is $24 million below our revolver covenant threshold of ~$115 million.”

To address its cash need, SolarCity contacted several investment banks and private equity investors about an equity or convertible bond offering—public or private. The banks told SolarCity that neither was a reasonable option for obtaining the amount of cash it needed. The private equity investors had no interest in equity or convertible bonds in the amount SolarCity needed and would only consider “very high coupon debt” that SolarCity management believed would be very difficult to execute given “tough covenants” with their existing debt.

[...] On February 11, 2016, Rive convened a “cash planning” meeting at his home with Musk and SolarCity management. Rive and Musk discussed measures SolarCity could take to conserve cash and stave off its liquidity crisis, including delaying payments to SolarCity’s vendors. [portion redacted]

On the morning of February 27, 2016, Musk called Tesla CFO Wheeler and ordered him to prepare a presentation pitching an acquisition of SolarCity, to be presented during an “emergency meeting” of the Tesla Board. Wheeler prepared the pitch in under “48 hours.” Musk summoned an “emergency meeting” of the Tesla Board on February 29 for the sole purpose of discussing an acquisition of SolarCity. During this meeting, Tesla’s remaining directors learned about Musk’s proposal for Tesla buying SolarCity for the first time.

Wheeler’s presentation made clear that buying SolarCity would be a financial disaster for Tesla. The transaction was projected to be highly dilutive to Tesla’s earnings per share under all contemplated scenarios and would impose a substantial cash drain on the Company—above and beyond Tesla’s own deeply negative cash flow. The Board did not reject Musk’s proposal, as represented in the Proxy. Instead, the Board “authorized management to gather additional details and to further explore and analyze” a SolarCity acquisition.

In the meantime, SolarCity management began to take drastic measures to preserve cash—including delaying payments to its vendors. In March 2016, SolarCity management developed a “stacked ranking” of payments it owed to vendors to help it decide which payments to prioritize and which to postpone. Management also developed “finance postpone guidelines” dictating whether SolarCity would complete or suspend specific solar system orders because of their cash impact.
So, this is the Musk playbook for financial distress. Try to raise money without letting on that there is a cash crunch. Slow pay vendors. When I asked why Tesla doesn't raise money, the pattern of behavior that I noticed there is like the pattern at Solar City when it was on the verge of failing.

Musk would love for Tesla to raise five billion dollars. Ten billion. One hundred billion. Give him five hundred billion and he could pretend to be running a for-profit Mars colonization company for decades to come. Since money is not coming into his hands in big quantities now, a reasonable inference is that no one is willing to give it to him. Not anymore, not at a valuation anyway that would leave him in control of Tesla. He was able to get $2.7 billion this spring, mostly debt, in conjunction with the "robotaxi" stock promotion campaign. (Utterly preposterous because Tesla autopilot cannot recognize a stopped firetruck in its lane.)

At the current stage of the Delaware case there are two main issues to be adjudicated. First, whether the "entire fairness" standard (and not the far more relaxed business judgment rule) governs the court's review of the purchase of Solar City, which it arguably might because of board conflicts of interest. (Interestingly, Plaintiffs say that the Tesla defendants "did not even contest the issue of demand futility at the pleading stage given the Tesla Board’s conflicts.") And second, that shareholder ratification of the deal is not a defense because the Tesla defendants did not "disclose fully and fairly all material information within their control" about the acquisition.

Plaintiffs' discussion of the second issue sheds more light on how Musk behaves when his enterprises are in trouble:
In a June 22 conference call announcing the Acquisition, a transcript of which was filed by Tesla as a Rule 425 Prospectus, Musk represented that SolarCity was “headed to cash flow positive situation for the next three to six months at the outside” and would therefore be in “a very healthy place from a cash flow standpoint in short order.”

These statements were false. SolarCity internally projected that it would likely be in breach of the liquidity covenant for its revolver numerous times in 2016, which would trigger an event of default on its revolver and cross-defaults on other debt instruments, and SolarCity did not have enough cash to get through the year without raising additional funds.
I think that the pattern here is as follows: Musk is an excellent promoter. He did not come up with the technological innovation in batteries that would have allowed battery electric vehicles to make economic sense. Nor did he come up with a technological innovation in photovoltaic solar panels, balance of solar system, or installation procedures that would allow them to make clear economic sense for residential installation.

But he started companies in those two industries anyway. With his excellent promotion skills he was able to raise a lot of money for them and sell products to tech dorks, albeit at prices that result in the continual consumption of the capital he has raised. Because the capital has been consumed and continued operations would consume more he needs more - but the fundamentals of his businesses do not allow him to raise money if he gives a clear, straightforward presentation of the economics. That is why he depends on promotion and tantalizing sizzle - a promise that he can write now but that will not be cashed for "six months" or more.

It does not really matter whether this Solar City case succeeds or not. It might not - under our law, courts defer to managements to an absurd degree. There is little shareholder remedy for mismanagement (barring extreme cases) except to convince lazy index funds to vote the bums out. (See 1, 2.)

But the case has already had the effect of disclosing the degree to which Musk exhibits honesty and forthrightness when his businesses get in a pickle. 

Friday, September 6, 2019

Distressed Debt Watch - September 2019

See previously: the August Distressed Debt Watch.

  • Approach Resources (AREX, EDGAR) bond due June 2021 trading in the 20 cent range (small pieces), ytm's of  over 100%. Market capitalization at 18 cent share price of $17 million. Net debt of $400 million on about $2 million of EBITDA the most recent quarter. They keep rolling their forbearance agreement with their lenders, one week at a time, negotiating a restructuring. The January 2020 $1 put options are usually 80 cent bid and 85 cent offered.
  • Frontier Communications (FTR, EDGAR) bond due April 2020 trading at 63 cents, ytm of over 100%. Market capitalization at $0.81 share price of $87 million. Net debt of $17 billion on $1.5 billion of operating income. There are restructuring talks, with some creditors favoring a Chapter 11 (in-court) restructuring. Shareholder equity is $1.5 billion, but that includes $6.4 billion of goodwill and $1.4 billion of other intangibles. The January 2021 $2 put options are $1.35 bid and $1.55 offered. On the second quarter earnings conference call (where they didn't take questions), the CFO closed by saying, "I want to touch briefly on our capital structure. The Finance Committee of the Board of Directors is evaluating Frontier's capital structure. This includes considering, evaluating and negotiating capital markets and/or financing transactions and/or strategic alternatives. Frontier remains committed to reducing debt and improving its leverage profile." There is also a September 2020 8.875% bond trading at 55 cents, a ytm of 80%. Moody's downgraded in mid-August: "Frontier's decision to write down $5.45 billion of goodwill in the quarter reflected, in part, concerns regarding the long term sustainability of the company's capital structure and reduced expectations for the overall wireline industry. The company's potential to improve weak fundamentals in advance of sizable debt maturities beginning in 2022 remains difficult given a shortening runway to stabilize business trends. The potential for distressed debt exchanges in the next year or so is further elevated based on these operating results and other developments, including recent appointments of new Board members with restructuring and bankruptcy experience. Moody's continues to anticipate a heightened focus on potential capital structure optimization efforts given the mixed evidence of sustained progress from ongoing operational improvement initiatives." They just sold their "Northwest Operations" (Washington, Oregon, Idaho, and Montana) for $1.35 billion, which represented 7% of revenues, but chose not to disclose what proportion of operating profit these operations represent. Often when a distressed company is  selling assets, it is an adverse selection process where the best stuff can find a buyer (like real estate at a failing retailer) and what remains with the company becomes more and more concentrated sludge.
  • J.C. Penney (JCP, EDGAR) bond due November 2023 still in the 40 cent range, ytm of over 30%. Market capitalization at 77 cent share price is $241 million. From the second quarter results: "For the quarter ended Aug. 3, 2019, total net sales decreased 9.2 % to $2.51 billion compared to $2.76 billion for the quarter ended Aug. 4, 2018. Comparable sales decreased 9.0 % for the quarter." Book value has declined to $963 million, but I would subtract $657 million of "other assets" like capitalized software and intangibles, and further the $392 million of capital expenditures in 2018 for things like "investments in our store environment and store facility improvement," leaving an adjusted equity value that may be negative. The capital structure subject came up on the quarterly call: "First, our capital structure. Since my arrival to JCPenney, we have been very focused on reviewing the overall dynamics of our capital structure. We have outlined key tenets that we will abide by when evaluating our capital structure. First, we will continue to maintain more-than-adequate liquidity to fund the operations of our business. Second, we will proactively manage our existing outstanding debt maturities. And third, we will maintain flexibility in how we fund the business and options we have to ensure sustainable and profitable growth. With that, we are taking positive and proactive measures to improve our capital structure and the long-term health of our balance sheet." The January 2021 $1 put options are about 52 cent bid and 63 cent offered. 
  • Denbury Resources Inc. (DNR, EDGAR) bond due July 2023 trading at 35 for a 38% ytm. Market capitalization at $1.13 share price of $516 million. For the first half of 2019, they had $213 million of cash from operations less $158 million of capital expenditures, for a net of $55 million of free cash flow, which would be $110 million annualized. Against that, they currently have $2.5 billion of debt outstanding. The January 2021 $1 put options are 45 cents. 
  • California Resources Corporation (CRC, EDGAR) bond due Setember 2021 is trading at 58 for a 37% ytm. Market capitalization at $10 share price of $489 million. Total net debt outstanding at the end of the second quarter was $5.1 billion. For the first half of 2019, their operating income was $179 million. The DDAX was $239 million but capital expenditure was $170 million. This suggests that "cash flow" is something like ~$500 million annually, which is small compared to the $5.1 billion of debt. Interest expense is like $400 million annualized now. The January 2021 $10 put is ~$4.50.
  • Mallinckrodt plc (MNK, EDGAR) bond due April 2023 trading at 25 cents, ytm of 56%. "The company has been implicated as a major contributor to the prescription opioid scandal around the over-prescription of oxycodone in the United States." The January 2021 $3 put is $2.15 (with the stock at $1.87). Moody's just downgraded: "Mallinckrodt's liquidity will be weak over the next 12 months as it faces a large upcoming notes maturity of $700 million in April 2020. It also reflects Mallinckrodt's full draw on its $900 million revolver, using up all of its committed external liquidity. Mallinckrodt's liquidity benefits from substantial cash (exceeding $550 million at the beginning of September 2019, inclusive of proceeds from its full revolver draw) as well as good free cash flow. Moody's believes that Mallinckrodt would likely be able to meet the April 2020 maturity with available cash and cash flow. However, given the sizeable debt maturity, there is minimal cushion to absorb any litigation or other required payments. For example, there is risk that Mallinckrodt would have to make up to $600 million in retroactive payments to Medicaid related to Acthar. Even without this payment, Mallinckrodt faces considerable uncertainty around the timing and amount of possible opioid related cash outflows. In Moody's view, risks stemming from Mallinckrodt's exposure to opioid litigation are high, in both its branded and generics businesses, potentially posing a challenge to capital market access."
I would guess that common stocks of companies that mention "capital structure" on their conference calls underperform. I am pretty sure that common stocks of companies with debt yielding more than 30% underperform.

Monday, September 2, 2019

September 2nd Links

  • They used the technology on hand in the 50s; vacuum tubes, telephone lines and CRTs. They didn't postulate any significant breakthroughs in order to get 'er done. They made do with what they knew was possible As such, the path to success was obvious. Engineering genius came along the way. If you don't have manageable pieces, you don't have a real project: you have a wish. What are the manageable pieces needed to make "nanotech" or controlled nuclear fusion a reality? What are the manageable pieces needed to make quantum computing or deriving all electrical power from the sun a reality? I don't know, and I don't know of anybody else who does: therefore, such things do not count as legitimate long term projects. [Scott Locklin]
  • In linguistics, a hapax legomenon is a word that only appears once in a given context. The term comes comes from a Greek phrase meaning something said only once. The term is often shortened to just hapax. [link]
  • Zoox is a five-year-old company worth over $3 billion, having raised $800 million from some of the best venture capitalists out there. One early backer, the firm Lux Capital, recently raised a $1 billion fund based on the company's success as a crown jewel in its portfolio. It's one of a number of companies — including Aurora, GM's Cruise, Alphabet's Waymo, and even Tesla — betting on the super-intelligent Mr. Magoo theory of self-driving cars. Like Mr. Magoo, their vehicles experience technical hitches due to near-sightedness and a stubborn refusal to admit the problem. Their hope is that if they jack up Mr. Magoo's brain to superintelligent power and have him circle the block a trillion times, his poor eyesight won't stop him, because the recognition algorithms running on his visual cortex will be able to identify the intentions of another driver from the faint blur of a mere handful of pixels, even at a 150 yard distance while traveling 60 miles an hour. [National Review]
  • Onstage, Kelton lamented, "There's so much pressure on candidates to pay for everything. I don't see anyone—I mean, I'll just be honest, I don't really see any Presidential candidates putting forward ambitious agendas and saying, 'We're not going to try to pay for any of this.'" [New Yorker]
  • There is a solution: be famous. You lose the ability to filter out who you want to talk to, but at least everyone starts the conversation with some context; you're outsourcing the extroversion to them. Fame is hard, and it has other costs. But there's a second alternative: be microfamous. Microfame is the best kind of fame, because it combines an easier task (be famous to fewer people) with a better outcome (be famous to the right people). [Medium]
  • I find it so useful to keep my thoughts on each subject together, because I can see my past thoughts and current thoughts in one place. I can see how my thoughts on this subject have evolved or keep repeating. Sometimes I think I have a new thought on a subject, so I open up the file and write it down, then afterwards I see I had that same thought a year ago and had forgotten about it. If you care about your thoughts, keep them. [Sivers]
  • Once you know your TRUE Hourly Wage (calculate it here), you need to change your mindset and begin to automate or delegate every task that can be executed at a lower hourly wage. It has taken me a long time, probably too long, to come to this realization. There was always something in me that resisted hiring out tasks that I could do myself. I have always been a more frugal penny-pincher so spending money on something I can do myself seemed like I was spending money that I could be saving. However, over the past several years, I have realized that in order for me to grow financially and personally, I need to zero in my highest-value work and hire out everything else. [THW]
  • There was a top literary agent in New York, Morton Janklow, who Ovitz identified as having a good story pipeline. Janklow initially did not want to talk to Ovitz, so Ovitz called him every week for a year until Janklow agreed to a deal! Introverts and northern Europeans can't imagine doing something like that. But another example of a connector with incredible telephonic persistence was a literary agent named Irving Paul Lazar. One funny thing that Lazar would do is call his circle of important connections every day. People would get a daily call! [CBS]

Monday, August 26, 2019

August 26th Links

  • "Musk has a habit of overstating Tesla's operational capabilities and its prospects for profitability, especially when the company is preparing to raise capital, collect customer deposits, or secure regulatory benefits," says Brian Horey of Aurelian Partners, an investment firm. [Vanity Fair]
  • After the Minsky moment, whatever is used to settle debts (i.e. cash) becomes extremely scarce. This is why the panics are worth waiting for. Note that most of these bargains are not being sold "voluntarily". Owners of insolvent enterprises always want to extend and pretend. They talk about the "option value" of their far, far out of the money equity claims. The forced selling happens via lender foreclosure, but also via open-ended investment vehicles like mutual funds, where redemptions force the managers to sell the investments indiscriminately. The scarcity of cash results in lots and lots of political conflict over the value of money, which is part of a broader political conflict between creditors and debtors. [CBS]
  • My friend in college had a very pretty blue one in 2010, that was the top trim level. I noticed him topping off oil one day and after he revved it a few times there were massive clouds of blue smoke. I asked him if that was normal and he said the car burned about 1L of oil per 1500 miles. It sounded crazy to me, but he went to the dealer that week and they said "that's normal for a rotary." [Jalopnik]
  • There's a lot of stupid things that go wrong with BMW's that shouldn't. For example: o-rings (or anything rubber), radiators, AC evaporators, Alternators, rod bearings. Things that won't happen on any japanese car before 200k miles will fail before 50k miles. A lot of it comes down to material failure. Vanos bolts that are too soft and sheer off, plastic parts cracking or breaking. Materials that everyone else has figured out already, and shouldn't fail. Why is Honda radiator plastic so superior to BMW's? Why do their valve cover gaskets last 4 times as long? After a 100 years they should have something as simple as rod bearings figured out. That's one item that shouldn't be recalled, ever IMO. Want to change their makeup and alloy content? Fine but test the hell out of it before putting into production. [Opposite Lock]
  • Small banks are trading at ridiculous premiums (~1.2-1.5x) to book value. If I started a hedge fund that was going to short T-bills and buy 10 year bonds with max leverage, would you be willing to invest a dollar and only have 66 cents of your capital working for you? That's what you're doing if you're buying (at >1x BV) one of the crappy small banks. [CBS]
  • I asked him how he had come to settle in Mozambique. "I went to an African trade fair in Fujian province and there were lots of Chinese businesspeople there," he said. "I got excited by all the talk of business opportunities in Africa. Later I figured my English is no good, though, so I got the idea that if I went to an English-speaking country, English being a popular language, Chinese people would be everywhere. I'll be damned if I understood Portuguese, but damn it, I figured, neither do most Chinese people in general, so what the fuck? There must be great undiscovered opportunities there, and I won't have to be constantly looking over my shoulder for other Chinese coming to compete with me, cheat me out of my money, or steal my ideas." [Harpers]
  • Oddly enough 15 years ago I used to represent a rural ILEC when I was an M&A attorney, so I know a tiny bit about the economics of these strange beasts. (my info may be outdated, so take with a bit of salt). It's very uneconomical to string wires long distances (even outdoors with a government right of way) so the government subsidizes a big chunk of the costs of service. If you've ever looked at your phone bill and wondered why 20% of the taxes are for a "Universal Service Fee" it's so that people like Ted Turner can get subsidized landline service on their ranches. That's how a lot of these rural ILECs stick around. It's not profitable to run huge amounts of wire for few customers if you're competing on price. So you've got the previously spent capex which you can continue to milk and get the subsidy too. It's a legal monopoly, but not a great one because your rates are set by the state public utilities commission. You are required to let competitors hang their lines on your poles for a fee (there is literally a federal pole attachment act and the rate is determined by formula based on their costs in the FERC form 1, if i recall). So that helps with your cost if there is a cable provider in the area that wants to use your poles because they don't have government granted right of ways. Rural customers in many cases can't easily switch to wireless or cable and use the copper phone lines for internet access with DSL (this may be dated info). It's slower than the other options, but it's the only option in some places. Internet and other add on fees are not regulated by state PUCs (if I recall) so this can be a nice money maker for them (regulated monopoly pays for the cake and you get to sell the frosting for whatever the market will bear). I invested in a ILEC once (when Embarq landlines was spun off from Sprint and it was too cheap to ignore) but I haven't invested in one since. Companies that rely on subsidies that can go away at any time are scary. [CoBF]
  • Amazing that baby boomers in safe enclave neighborhoods think that real estate appreciation has made them rich. I've had a chance to see firsthand how the gears in their brains jam when they realize that their children (with their grandchildren) can't afford to live nearby. Those paper real estate profits look nice on the net worth spreadsheet, until you realize that a Chinese embezzler is literally occupying the niche space that your children should be in. [CBS]
  • Estimating a resource (e.g. oil, gas, minerals, etc.) is inherently subjective. Because of this, there is room to be overly optimistic. Many management teams in the resource sector have figured out that they can pressure their reserve estimators into delivering inflated estimates. The interesting thing about this is that management can blame the engineer if there are problems with the estimate. Management can basically get these engineers to lie for them without having to take any responsibility for those lies. [Glenn Chan]
  • I have read much of the IPCC reports and have skimmed the rest, and I can say with certainty that these reports contain no theory about how increasing the concentration of atmospheric CO2 from 0.03% to 0.04% causes warming of 2C or more focused in hotspots as small as a 50 mile radius. There is absolutely no theory, and I would argue no way, that a general global warming trend of 1-1.5C per century is causing warming 2-3 times that rate narrowly over San Jose, California or Phoenix, AZ. The fact that many of these hotspots are focused over urban areas is a good indicator that this temperature data set is corrupted with urban heat island biases. [Coyote Blog]
  • Unlike the Kahneman and Tversky experiment in which subjects were overreacting to measures of sense of humor when predicting GPA, we were not specifying what investors were overreacting to. We were just assuming that by driving the price of some stock up or down enough to make it one of the biggest winners or losers over a period of several years, investors were likely to be overreacting to something. The results strongly supported our hypothesis. We tested for overreaction in various ways, but as long as the period we looked back at to create the portfolios was long enough, say three years, then the Loser portfolio did better than the Winner portfolio. Much better. For example, in one test we used five years of performance to form the Winner and Loser portfolios and then calculated the returns of each portfolio over the following five years, compared to the overall market. Over the five-year period after we formed our portfolios, the Losers outperformed the market by about 30% while the Winners did worse than the market by about 10%. [Misbehaving]

Thursday, August 22, 2019

August 22nd Links

  • Jeff Roe, Ted Cruz's former campaign manager, called Trump's son-in-law, Jared Kushner, and reminded him of Trump's fury at Pompeo's Kansas caucus speech. As Tim Alberta recounts in his book, "American Carnage," Kushner put the call on speaker, so that Trump could hear. "No! That was him? We've got to take it back," the President-elect roared. "This is what I get for letting Pence pick everyone." [New Yorker]
  • Pay the market no attention. Enjoy the beach, the pool, the tennis court or the mountains. President Trump will not let us fall into recession. He has tools. His latest idea is cutting payroll taxes. And he can always tie up a "deal" with the Chinese. Just announce a deal and drop some irksome tariffs. He has tools to get re-elected. [Technology Investor]
  • Much of AMZN's current FCF is due to its negative working capital. That means as it grows sales, payables rise faster than receivables & working capital, generating cash. However, this is NOT sustainable FCF, because another name for payables is short term, non-interest-bearing debt. As soon as they stop growing, this cash flow will disappear, and if sales ever fall, this source of cash flow will quickly turn into a huge FCF drain. [LT 3000]
  • Dopamine is mildly toxic. The body is usually pretty good at protecting itself, but the mechanism fails under stress; this is why too much methamphetamine rots your brain. Why would you use a toxic chemical as a neurotransmitter? For the same reason you would use antiparasitic drugs – because you want to kill anything smaller than you that tries to synthesize it. [SSC]
  • It remains to be seen how long the music will keep playing. However, as the amount of aggregate upstart losses grows (which must happen if all this VC funding is to be absorbed), at some point the equilibrium point will be reached where the pace of fund-raising falls short of these aggregate losses. This could occur, for e.g., if Softbank is less successful with its Vision Fund 2 fund raising than it hopes, and/or more high-profile IPO failures such as Lyft/Uber sour the market's appetite for Unicorn IPOs to the point where meaningful negative marks need to be taken by VC funds when they monetise their investments via IPO (notable also is that the listing of Uber et al will now expose a growing share of the Vision Fund's investments to potentially significant mark-to-market losses, impairing its ability to manufacturing paper gains by funding - sometimes as the sole bidder - up-rounds in its investees). At this point, capital will become scarce and Unicorn valuations will start to fall, as loss-making enterprises compete for scarce funding to keep the lights on. This will result in negative valuation marks being taken by VC funds/the Vision Fund, which will then in turn sharply dampen the appetite for investors to tip more more money to these funds (high apparent returns and 'low volatility' have been their chief attractions, particularly as pension funds, insurance companies, etc, try to replace lost income from falling bond yields with the illusory high returns/low volatility provided by private equity/VC vehicles - another disaster in the funded status of these investors' long-tailed obligations that is waiting to happen). The whole ecosystem will then start to quickly unravel, and an epic bust likely awaits the sector (my prediction is that investors in the Vision Fund(s) will ultimately lose the majority of their investment, and Masayoshi Son will no longer be seen as a visionary, but instead as a poster-child for this cycle's utterly irrational excesses). [LT 3000]
  • I'd calculate how much management is benefitting from its ownership (could be done by taking HNSFA's NI % vs. a "normal" NI % (4% maybe?)and assuming mgmt is getting the "missing" income). Compare that to the passive income mgmt could make on their proceeds of the sale of the company. That could give you some idea of the likelihood of a sale. [CBS]
  • Regulars are a different breed. Often, they haven't settled down, or don't have kids, or have come through the crucible of child-rearing with an impulse to be out again. Some have drinking problems. Many others enjoy a drink but are not afflicted. Some nurse pain, but others are simply looking for human connection. For decades, sociologists have agreed that three conditions are essential to making friends: proximity; repeated, unplanned interactions; and a setting that encourages people to let their guard down and confide in others. College presents these conditions, but as people get older, pair off, change jobs, move, and race through days, it can be difficult to maintain a life in which all three conditions are present. The interactions regulars have—unpredictable in date and duration, but not in place, and with a splash to ease away their guard—allow for connections to bloom. [link]
  • Former Federal prosecutor and Labor Secretary R. Alexander Acosta said he was told to lay off Epstein, as he "belongs to intelligence" -- why no media followup on this? (Still don't believe in a Deep State?) Clinton said he only flew on Epstein's plane 4 times (but 26 is also commonly reported) and never visited the island (despite many eyewitness claims to the contrary). No investigative reporting on this by mainstream media? Epstein's partner Ghislaine Maxwell is the daughter of Robert Maxwell, a billionaire with possible Mossad connections. What were Epstein's links to Israeli intelligence and national interests? (Robert Maxwell's death is at least as mysterious as Epstein's ...) Why did it take the FBI so long to get to Epstein's island? What have they found in Epstein's house and on his island? How much blackmail material is there and who is implicated? Were it not for the possibility that the Epstein scandal might be damaging to Trump, would there be anything close to this level of mainstream media interest? Why was there almost zero interest in Epstein in the previous 15-20 years? Someone was protecting Epstein (someone with influence on the DOJ, FBI, perhaps US intelligence) long before Donald Trump had political power of any kind. Why? What other obvious scandals are hidden in plain sight? Iraq WMD? Spygate? Compromised politicians and national leaders? Blackmail by national intelligence services? Ideology-driven Social Media and Search filtering of information? Ivy League discrimination against Asian Americans? [Steve Hsu]
  • I tried to go phoneless, and replace my phone with an Apple Watch, but unfortunately I still wanted to use some utility apps like Uber and Venmo. The solution I've settled on is that I've turned my phone to greyscale (to reduce its addictiveness; go to Color Filters in Settings), deleted email, Slack, and all entertainment apps (YouTube, Twitch, Instagram, and even the browser), deleted the app store (locking it with a passcode that I don't have access to). My phone is now only useful for reading, music, texting; I find myself using it much, much less, at basically no cost to my quality of life. [Justin Kan]