Thursday, September 21, 2017

"Seadrill Bondholders Are Said to Hire Stroock in Debt Plan Fight" $SDRL

"A group of Seadrill Ltd. bondholders has hired Stroock & Stroock & Lavan LLP as legal counsel to fight a restructuring plan that they argue leaves them with an unfairly low share of the offshore drilling company... The group’s goal is to accumulate one-third of the $2.3 billion in unsecured bonds, which would allow the investors to disrupt the plan presented last week by Seadrill... The group is close to reaching that portion of the unsecured debt, one of the people said."

Wednesday, September 20, 2017

Best Reads - Summer 2017

  • "My expectation is that reform will come by other means. We aren’t going to sit down and rationally formulate a plan to solve all our festering troubles. Instead failure will overwhelm our current set of arrangements and involuntary change will result. New institutions will emerge that will work better – until they too become sclerotic and dysfunctional. That’s just the way the world has functioned for 5,000 years." [Granola]
  • "The first anonymous multibillionaire is being absolutely hardcore about demonstrating to the world that he is not ripping anybody off. He is not even using his privileged early-miner position for personal gain. Just stop and think about that for a minute, before you go on." [link]
  • "After the past 8 years, I look at investing and central banking less naively, through a political lens. One job of a central bank is to periodically pull the rug out from under would-be elites by tightening money when their me-too investments are coming online, so that the real elite can buy them at auction." [CBS]
  • "I think it’s time to go the route of what I’d planned to do if Hillary had won, and just decide the country is over and wash my hands of it" [Coulter]
  • "A strong association between lipid levels and heart disease risk has been found in the ratio of triglycerides to HDL cholesterol. In Fasting Triglycerides, High-Density Lipoprotein, and Risk of Myocardial Infarction, researchers found that those with the highest triglyceride to HDL ratio, in the top quartile, had 16 times the heart disease risk of those in the lowest quartile. The ratio in the lowest quartile in this study was about 1.3. Other studies have found similar results. These lipids are likely not causal of heart disease either, but are related to insulin resistance and are markers for it; diabetics, who have 2 to 4 times the heart disease risk of non-diabetics, typically have elevated triglyceride levels and low HDL levels." [Mangan]
  • "The startup and venture capital businesses are based on a general idea that you can and should invest heavily into your business in order to increase value creation, amplify it, and accelerate it. These investments mostly take the form of operating losses, driven by headcount, where the monthly expenses are larger, often much larger, than revenues." [AVC]
  •  "There are at least 35 well-defined tumor suppressor genes, and many others that are proposed, in our genome, to help keep cancer in check. We can case-harden these genes against mutations in various ways. A famous tumor suppressor gene is the p53 gene, so called guardian of the genome. What you see here is a map of the mutations that arise in cancer. What you can see first of all is that almost all of these mutations are in one part of the gene and they are extremely variable. There are some spots that are off-the-scale here, and these are the hot spots, and then there are others that are much less frequently mutated. The impact is huge in that p53 is mutated in 50% of human cancers and therefore by implication one could, if one never had mutations in p53, one would anticipate a major impact on the probability of cancer, and most of these mutations occur in these hot spots. Of those 9 hot spots, 7 fall in codons that contain the CPG... all of those codons could be recoded to other codons that didn't contain CPG, which could then specify the same amino acid, but then would lose their ability to be hot spots for the mutation. This is a somewhat specialized case because p53 is unusual in having many point mutations. Many suppressor genes are lost by deletion and other loss of function changes. The inspiration from nature is that some very long lived animals have extra copies of p53." [link]
  • "So if I absolutely had to dive, I'd be willing to risk another full month of hospital treatment, convalescence, and imprisonment in Australia. But who absolutely has to SCUBA dive? Most of the good coral reef sights are within 10 meters of the surface, oftentimes closer to 5 meters. And the shallower they are the more vibrant the colors from sunlight. You can see these sights just floating on the surface with a snorkel and see them well by getting good at free diving (the dive instructors on Spoilsport would regularly free dive down to 15 meters to secure lines and oftentimes to 30 meters or more for fun). I very happily snorkeled a full mile across a bay in Hawaii once and then snorkeled a mile back in the other direction. I saw eagle rays, sea turtles, and a school of dolphins. The beauty of the snorkel is that you can breathe while floating at your natural level. So you can just stop and rest at any time. Still, if you're lazy or out of shape SCUBA is a good crutch for getting below the surface but being out of shape is probably an increased risk for DCI." [Greenspun]
  • "The universe is a dark forest. Every civilization is an armed hunter stalking through the trees like a ghost, gently pushing aside branches that block the path and trying to tread without sound. Even breathing is done with care. The hunter has to be careful, because everywhere in the forest are stealthy hunters like him. If he finds another life — another hunter, angel, or a demon, a delicate infant to tottering old man, a fairy or demigod — there’s only one thing he can do: open fire and eliminate them." [link]
  • "I’ll never forget the day my wife and I were riding bikes and I noticed a realtor escorting buyers into a new luxury condo. Suddenly and unexpectedly, I yelled, 'Don’t do it, it’s a bubble!'" [Cinnamond]
  • "At the stroke of 5 p.m., a doorbell announced the arrival of Princess Noor Pahlavi, 24, a daughter of Iran’s exiled crown prince, Reza Pahlavi, and granddaughter of the late shah. She brought cheese. Mr. Milstein, who graduated from Yale in May, paired a green Fendi blazer with a Club Monaco top, Rag & Bone trousers and Gucci fur-lined leather slippers, personalized with tiger appliqu├ęs. A light coating of tinted foundation smoothed out his cheeks and forehead." [NY Times]
  • "Afghanistan is the sort of quagmire that ideally, you’d lure your greatest enemies to attempt to occupy. 'Oh no, stay out of Afghanistan! It’s the strategic center of Asia, controlling all of the mountain passes. It’s a veritable Gibralter or Constantinople of strategic world locations.'" [Sailer]
  • "Is it really a ponzi scheme? Sounds just like any other startup mentioned here where they burn a tonne of cash while working out how to be profitable." [Hacker News]
  • "Two months ago, it was P&G which fired the first shot across the 'adtech' bow when not long after it announced it was slashing its digital ad spending because it thought it was not getting the kind of return on investment it desired, it made a striking discovery: 'We didn’t see a reduction in the growth rate.' CFO Jon Moeller said 'What that tells me is that that spending that we cut was largely ineffective.'" [ZH]
  • "The way to fight the fascist state is to show that it is inherently morally corrupt, and that any attempt to make it slightly less corrupt is simply putting the monstrosity on life support. Let it go belly-up as soon as possible." [Gary North]
  • "I suspect most of the indexers who believe markets are efficient have never tried to liquidate a multi-million dollar small cap position in a market with few bids. I’ve seen it. It’s sloppy, illiquid, and very inefficient. I believe the great passive investing unwind could be one of next attractive buying opportunities for disciplined absolute return investors. I’m ready and looking forward to owning small cap stocks again." [Cinnamond]
  • "In recent months, Nike realized it was losing negotiating leverage to argue for better brand presentation or eliminate counterfeits as long as Amazon could make money off unsanctioned sales of its product, according to one of the people familiar with the deal. That triggered internal conversations among senior Nike executives about its relationship with Amazon, according to people familiar with the deal." [WSJ]
  • "'Inquiring minds want to know' originally came from E. F. Hutton (Stock Brokers) commercials on TV. Probably as early as the late 70's. They were funny, too. You'd see these two business types in the middle of a crowd and one of them would say, 'Well, my broker is E. F. Hutton, and he says...' and, in the next scene, you'd see the whole crowd stop in their tracks and look over at the guys, straining to hear what he'd say. Then, the commercial would end with 'Inquiring minds want to know' across the screen" [Quora]
  • "Right now, sitting in an office somewhere there is a fund manager you have never heard of who is going to be famous in the coming years.  This person will have absolutely spectacular performance during the next bear market." [Bason]
  • "As Lewis Cantley, the director of the Cancer Center at Weill Cornell Medicine, once put it, 'Metformin may have already saved more people from cancer deaths than any drug in history.' Nobel laureate James Watson (of DNA-structure fame), who takes metformin off-label for cancer prevention, once suggested that the drug appeared to be 'our only real clue into the business' of fighting the disease." [MR]
  • "It is often argued that our societies are old, with a graying population, and so we need immigrants. When these theories are challenged—by asking, for instance, why the next generation of Germany’s workforce might not come from unemployed Greece rather than Eritrea—we are told that we need low-skilled workers who do not speak our languages because it makes Europe more culturally interesting. It is as though some great hole lies at the heart of the culture of Dante, Bach and Wren." [WSJ]
  • "'Stocks with low expected returns based on the Valuation anomaly variable are also the stocks that are likely to provide the most investment banking business' - mostly likely to raise new capital. In other words, there was a conflict of interest." [AA]
  • "I've raised some fictional money to start a fictional cloud computing company, DeceptiCloud. My plan is simple: in the first year, the company will spend $1 billion building out its cloud data center, selling the same types of services sold by other cloud infrastructure providers like AWS. In each following year, the company will ramp its spending by 50% -- it is a fast-growing industry, after all." [MF]
  • "This has worked fine for companies so long as the economy has remained relatively strong and interest rates have remained low. However, should we enter another recession or a period of rising interest rates this may change. A economic slowdown or another pop in interest rates (or both, a phenomenon called 'stagflation') could precipitate a reversal in this trend towards 'de-equitization' in which companies are forced into debt-for-equity swaps in order to meet these new and growing fixed obligations." [Felder]
  • "The single biggest change in the American diet over the 20th century was the increase in seed oils, which increased 1000-fold" [link]
  • "I've watched Lampert sell off the crown jewels, and hey, maybe there *is* no future in retailing, but I'm absolutely sure there's no future if you don't have any products worth selling, and if your here-to-fore best brands are now available down the street or across the plaza for less. Craftsman Tools. Land's End. Kenmore. DieHard. What's left, the real estate? OK, but they don't even have that now, as Eddie's fist is in that pie, too" [MF/Roark]
  • "The degree to which the level of depression in a country correlates with the amount of fish eaten in that country is staggering" [SSC]
  • "the ability of participants to integrate disconfirmatory evidence showed a significant linear dopaminergic modulation pattern (highest with haloperidol, intermediate with placebo, lowest with L-dopa)" [link]

Tuesday, September 19, 2017

Review of Investing in Life: Insurance in Antebellum America by Sharon Ann Murphy

I'm looking at a small insurance company as an investment, so I read a history of life insurance called Investing in Life: Insurance in Antebellum America. The first for-profit life insurance company was started in 1809, in Philadelphia.

Southerners had to pay more for life insurance. There were also travel restrictions for northerners, for example some policyholders were prohibited from going south of 34 degrees of latitude. There were also higher premiums charged for 49ers planning to travel California and work in the gold rush, for example one company at the beginning of 1949:

"We shall not insure parties going by Panama, but only those going round the Cape. We take no risk over $1000. The charge is double that shown by the tables at each age and $5 per $1000 for going and for returning.
That is the first actuarial estimate I have seen of the probability of dying on a round trip to California for the early gold rush: 1%. Even then, many of the insurance companies had bad loss experience with 49er policies.

Note that life insurance premiums in general were far higher in the mid 19th century than today. In the 1830s, the premium for a 30 year old man was 2-3%. By the 1850s this had dropped to the low 1% range per year. Today it is far lower. According to modern mortality tables, a man does not have a 1% annual chance of dying now until he's 60 years old.

Life insurance companies liked married men: "bachelorhood is more destructive to life than the most unwholesome trades, or than residence in an unhealthy house or district, where there has never been the most distant attempt at sanitary improvements of any kind."

Also, at the time they noticed in regard to married men that they "may, in one sense, be accounted as selected lives; for the weak, the delicate, those suffering from disease of any kind, the dissipated, the licentious, do not marry."

After the for-profit insurance companies came the mutual insurance companies. They figured out how to market life insurance as an investment in addition to an assurance for families.

Northern life insurance companies having southern policyholders, from whom they could not legally (or practically) receive premium payments during the civil war, led to litigation after the war. From an 1876 Supreme Court case:
"If a failure to pay the annual premium be caused by the intervention of war between the territories in which the insurance company and the assured respectively reside, which makes it unlawful for them to hold intercourse, the policy is nevertheless forfeited if the company insist on the condition; but in such case the assured is entitled to the equitable value of the policy arising from the premiums actually paid."
I had never thought about post-CW litigation before.

Oddly, this book did not discuss the investment portfolios or strategies of the insurers at all; only the liability (insurance) sides of their business. 3/5.

Friday, September 15, 2017

Have a Donut

Maturity YTM CY Mcap
XCO 2018 167% 23% $29
CIE 2019 85% 10% $50
REXX 2020 41% 20% $22
BONT 2021 38% 20% $11
HOS 2021 32% 12% $115

Tuesday, September 12, 2017

Review of The Art of Profitability by Adrian Slywotzky (Chapter 2)

See our reviews of Chapters One and Four of The Art of Profitability. The model in Chapter Two is "Pyramid Profit":

"Here's how it works at Mattel. You sell a Barbie doll for twenty to thirty dollars. But imitators can come in below you. So you build a firewall. You develop a ten-dollar Batbie to seal off that space. It's barely profitable, but it prevents other companies from establishing a connection with your customers. [...] But in order to achieve a real breakthrough, Mattel had to look in the other direction. Looking hard, they saw the opportunity for a $100 or $200 Barbie. [...] Suddenly, Barbie wasn't a product any longer, but a system... a firewall of defensive product at the bottom of the pyramid and powerful profit-generators at the top."
A company sells a set of products with escalating prices and margins but narrowing audiences; hence the pyramid. The firewall item brings customers into the system, some of which flow through the sales funnel over time and buy the much more profitable products at the top of the pyramid.

The best historical example of this strategy is when Alfred Sloan ran General Motors and segmented the car market into five brands: Chevrolet, Pontiac, Buick, Oldsmobile, and Cadillac. This was called the "ladder of success". It's been copied successfully throughout the car industry - all of the Japanese auto manufacturers have a pyramid model.

At first it seems like pyramid profit is a business to consumer model, where the profit is coming from aspirational, high margin, status symbol goods at the tops of pyramids. Certainly there are many more such examples: Tiffany's sells cheap lockets and such for teenage girls, clothing makers like Ralph Lauren sell clothes under several different labels with different levels of exclusivity.

Can a business to business product be sold under a pyramid profit model? Here is one venture capitalist who thinks so.
"Many SaaS businesses follow this profit model: there's a free/cheap tier, a medium priced tier that is appropriate to most customers, and an enterprise tier for customers with deep pockets who want the most features and services."
Pyramid profit models seem much more common than switchboard profit models, that's for sure. However if you are selling enterprise SaaS software to customers with deep pockets, odds are you are probably doing a little customization and therefore customer solution profit as well.

Seadrill Announces Comprehensive Restructuring Plan

Interesting, their opening proposal is to violate absolute priority and throw equity a little bone.

Seadrill Limited ("Seadrill" or the "Company") has entered into a restructuring agreement with more than 97 percent of its secured bank lenders, approximately 40 percent of its bondholders and a consortium of investors led by its largest shareholder, Hemen Holding Ltd.

The agreement delivers $1.06 billion of new capital comprised of $860 million of secured notes and $200 million of equity. The Company's secured lending banks have agreed to defer maturities of all secured credit facilities, totaling $5.7 billion, by approximately five years with no amortization payments until 2020 and significant covenant relief. Additionally, assuming unsecured creditors support the plan, the Company's $2.3 billion of unsecured bonds and other unsecured claims will be converted into approximately 15% of the post-restructured equity with participation rights in both the new secured notes and equity, and holders of Seadrill common stock will receive approximately 2% of the post-restructured equity. The agreed plan comprehensively addresses Seadrill's liabilities, including funded debt and other obligations. For additional information please refer to the Company's Form 6K filed along with this announcement.
The unsecured debt appears to be trading at ~30 cents on the dollar. So that values $2.3 billion of unsecured debt at $690 million. (Which seems unrealistically high; I'm not sure that people really think there be a 30 cent recovery.) If that is going to become 15% of the reorg equity, then the reorg equity is worth $4.6 billion. (Seems crazy.) If that's true, and the current equity is getting 2% of reorg equity, then the current equity is worth $92 million.

Current market cap is $115 million.

Monday, September 11, 2017

Review of The Art of Profitability by Adrian Slywotzky (Chapter Four) and Power to Burn: Michael Ovitz and the New Business of Show Business by Stephen Singular

Two years ago we reviewed chapter one of The Art of Profitability by Adrian Slywotzky, and the reviews of further chapters have been long overdue.

You may recall that the first chapter and profit model is called "Customer Solution Profit". Skipping ahead a little in the book, the fourth profit model is called Switchboard Profit.

The example of switchboard profit is the Creative Artists Agency as Michael Ovitz moved it into putting together movie deals in the late 1980s. CAA represented so many of the best writers, actors, and directors (who they would package together into deals) that negotiating leverage shifted from the movie studios to the talent. This drove pay (and moviemaking costs) significantly higher, which resulted in much more profit for the talent agency as well since it got a percentage of what the talent was paid. A positive feedback spiral also developed because talent risked missing good opportunities for work if they weren't represented by CAA.

One of the keys to getting this virtuous cycle started was for Ovitz to lock up a good source of stories to make into movies. 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, profiled in this New Yorker article:

In the late forties, after the war, Lazar decided to move to L.A. permanently, and he quickly established himself as the connection between New York and Hollywood. Not a reader himself (he is notorious for not bothering to read the books he is selling), he cultivated writers, publishers, and playwrights, and brought the studio heads projects they could never have found by themselves, for prices they would never have dreamed of paying to anyone else. In New York, Lazar became known as the man who could get you bagfuls of money from Hollywood; in Hollywood, he was known as the man who could bring you the hottest properties before anybody else on the Coast had heard of them. In the days when a transcontinental telephone call was a big deal, Lazar was in touch constantly, perfecting his peculiar blend of gossip, news, and sales pitch, and a lot of people didn’t know whether Lazar was speaking to them from his poolside in Beverly Hills or from around the corner on Fifth Avenue. [...]

Early on, Lazar hit upon three rules that have stood him in good stead for over fifty years. The first was that he could always reach anyone, anywhere, any time. His secret weapon is the world’s largest address book, full of the private, unlisted numbers of people whom nobody else can reach. Who else can pick up the phone and call Mrs. Norton Simon, Jack Nicholson, Barry Diller, Larry McMurtry, Arthur Schlesinger, Richard Nixon, Cher, Gregory Peck, or Henry Kissinger, and get through immediately? The second rule was always to go directly to the top. Lazar doesn’t deal with underlings. The last rule was to insist on a quick answer. Even now, if I tell Irving that I want to think something over or discuss it with someone else he will snap, “Never mind, I can see you’re not interested, I’ll talk to Phyllis Grann.”
One funny thing that Lazar would do is call his circle of important connections every day. People would get a daily call!

The Art of Profitability source for the Ovitz information was a book called Power to Burn, which he recommends that students of profitability read. I give it a solid 3/5; I think the summary in AoP is sufficient.

Also, I can't really think of switchboard models beside this one. And it is also puzzling that, for all the monopoly power that CAA had in the film market, his young lieutenants were willing to consider leaving the firm if they weren't promoted and given equity.

But could you consider Google a switchboard? They obviously have some powerful profit model. Read about being A Serf on Google's Farm.

Speaking of making money by connecting people, I have had two books on this topic by Ronald Burt on my list to read: Structural Holes, and Brokerage and Closure.