Tuesday, April 25, 2017

Michael Porter Not Worth Reading?

Very interesting Forbes piece:

Hype, spin, impenetrable prose and abstruse mathematics, along with talk of “rigorous analysis”, “tough-minded decisions” and “hard choices” all combined to hide the fact that there was no evidence that sustainable competitive advantage could be created in advance by studying the structure of an industry.

Although Porter’s conceptual framework could "help explain excess profits in retrospect, it was almost useless in predicting them in prospect." As Stewart points out, “The strategists’ theories are 100 percent accurate in hindsight. Yet, when casting their theories into the future, the strategists as a group perform abysmally. Although Porter himself wisely avoids forecasting, those who wish to avail themselves of his framework do not have the luxury of doing so. The point is not that the strategists lack clairvoyance; it’s that their theories aren’t really theories— they are ‘just-so’ stories whose only real contribution is to make sense of the past, not to predict the future.”
Everybody raves about his book Competitive Strategy (90% 4 and 5 star reviews) but is it actually useful for an entrepreneur or an investor??

Monday, April 24, 2017

The Coming Bond Bear Market: Will "Inflating our troubles away?" Work?

At The Grumpy Economist:

I think our most immediate danger is a rise in interest rates. If the real rates r charged to our government rise, say, to 5%, then the service on a 100% debt/GDP ratio rises to 5% of GDP, or $1 Trillion dollars. Now, debt service really does matter, and our outstanding stock of debt really does pose a surplus problem.

There are two mechanisms that might raise interest rates. "Not so bad" interest rate rises come as a natural consequence of growth. Higher per capita growth times the intertemporal substitution elasticity equals higher interest rate. If the elasticity is one, the interest rate rise "just" offsets the benefits of higher growth.

Conversely, low real interest rates can buffer the impact of lower growth. γ above one and r thus falling more than g may be a reason why our current slow growth comes with rising values of government debt.

"Really bad" interest rate rises come without growth, from a rising credit spread -- the Greek scenario. If markets decide that the entitlements are not going to be reformed, cannot be taxed away or grown out of, they will start to charge higher rates. Higher rates explode debt service, make market more nervous, and so forth until the inevitable inflation or default hits. In present value terms, higher r can quickly make the present values on the right implode. This sort of roll-over risk, interest rate risk, or run has been the subject of at least half the papers in this conference.

Here, I find the most important implication of this paper's calculations. The paper shows that the US has a very short maturity structure, so higher interest rates turn into higher debt service quickly. The paper shows that a large slow inflation results in a small change in the present value of surpluses. It follows, inexorably, that if a small change in the in the present value of surpluses has to be met by inflationary devaluation, that inflation must be large, and sharp. If x is small, 1/x is large.

We live on the edge of a run on sovereign debt. The US has a shorter maturity structure than most other countries, and a greater problem of unresolved entitlements. Despite our "reserve currency" status, we may actually be more vulnerable than the rest of the high-debt, large entitlement western world. That, I think, is the big takeaway from this paper -- and this conference.

Wednesday, April 5, 2017

Irving Kahn on Safety

There were two key questions I asked Irving [Kahn] via his grandson. One was, “If you could share a single piece of financial advice that you’ve learned over your life that is absolutely invaluable, what would it be?” [Irving] came back via his grandson. He did an extraordinary job, interviewed him over days about these things. Came back and said, “Safety.” He said, “The #1 thing is paying attention to the downside.” He said, “There are all these people. It’s like they’re on a horse and they can gallop very fast, but do they know what direction they’re going in?” It was kind of this fascinating insight that sounds really banal and prosaic in some ways, but this is coming from a guy of 108 who managed to survive the crash of 1929, World War II, Vietnam, any number of crises and crashes. When I started to think about that, this is one of those ideas that if you truly internalize it, it actually has an enormous impact on you.

He said, for example, “You’ll find that if you make reasonable gains and avoid disastrous losses, you’ll outperform all of your gambler friends.”
Qtd in The Manual of Ideas, March 2017.

Tuesday, April 4, 2017

"Seadrill says shares to have little value after restructuring" $SDRL

The current shareholders of Seadrill should expect to lose almost all value of their stock as the company prepares for potential bankruptcy proceedings to restructure debt and liabilities of $14 billion, the rig firm said on Tuesday.

It also said that its banks and other lenders had agreed to extend ongoing restructuring talks by three months to July 31.

"We currently believe that a comprehensive restructuring plan will require a substantial impairment or conversion of our bonds, as well as impairment, losses or substantial dilution for other stakeholders," Seadrill said in a statement.

"As a result, the company currently expects that shareholders are likely to receive minimal recovery for their existing shares ... We expect the implementation of a comprehensive restructuring plan will likely involve schemes of arrangement or chapter 11 proceedings, and we are preparing accordingly," it added.
Previously in 2014.

Company has a note due September 2017 that was offered at 41 cents today, which is a yield to maturity of >300%. The September 2020 note also trades at about 40, so the yield curve is totally inverted (i.e. the bonds are trading at an estimated recovery value not on a yield basis).

Peabody Energy Options Contract Adjustment

On March 17, 2017, the United States Bankruptcy Court for the Eastern District of Missouri Eastern Division confirmed the Second Amended Joint Chapter 11 Plan of Reorganization (“Plan”) for Peabody Energy Corporation (BTUUQ). The Plan became effective on April 3, 2017, and BTUUQ shares were canceled.

Effective April 3, 2017, existing BTUUQ options are adjusted to no longer call for the delivery of Peabody Energy Corporation shares upon exercise.

Friday, March 17, 2017

"Judge Announces Intention To Confirm Peabody Energy Plan Of Reorganization, Paving Way For Emergence" $BTUUQ

Peabody Energy announced today that the judge presiding over the company's Chapter 11 process in United States Bankruptcy Court for the Eastern District of Missouri has ruled that he intends to confirm the company's amended plan of reorganization after finalization of language regarding a settlement with the U.S. Department of Justice.

The plan, which received overwhelming support from creditors with an overall approval rate of 93 percent and unanimous acceptance by all 20 voting classes, articulates Peabody's strategy to emerge from the Chapter 11 process with a strong balance sheet, well positioned to build a successful future for the company's stakeholders. Peabody expects to emerge from Chapter 11 in early April 2017, less than one year after commencing the Chapter 11 process.
Naturally, there is still a bid of $1.78 for the stock.