Wednesday, May 23, 2018

Frontier Is Talking With Bondholders After Failed Asset Auction


Frontier Communications Corp. and its bondholders are back at the negotiating table after the debt-laden telephone service company’s asset auction failed to generate an acceptable price, people with knowledge of the matter said.

Monday, May 21, 2018

May 21st Links

  • If I wanted to enslave & subjugate a race, I would introduce agriculture. Weakens men: Less protein, less testosterone (grains, phytoestrogens, omega-6) Matures girls sooner: Phytoestrogens Result: Faster reproduction, shorter lifespans, less ability to resist (weaker/shorter). [Twitter]
  • Plants have physical and chemical mechanisms for defense from attack by animals. Phytochemical defenses that protect plants from attack by insects include antifeedants, insecticides, and insect growth regulators. Phytochemical options exist by which plants can modulate the fertility of the other major group of plant predators, vertebrate herbivores, and thereby reduce cumulative attacks by those herbivores. The success of such a defense depends upon phytochemical mimicry of vertebrate reproductive hormones. Phytoestrogens do mimic reproductive hormones and are proposed to be defensive substances produced by plants to modulate the fertility of herbivores. [NLM]
  • Do you think Trump's enjoying his job at all? No. I do not. I have never thought he is enjoying this job. I think he enjoys the title Mr. President. I think he enjoys Air Force One, Marine One, the big car, having a lot of Secret Service, his Diet Coke bell, all of that stuff. I don't think he particularly likes living in the White House. I certainly don't think he enjoys the job. [Slate]
  • After the academy, the two men roomed and raised a ruckus together at flights schools, Timberg wrote. At Corpus Christi, they reconfigured their set-up of adjoining rooms, he wrote. They moved their beds into one room and converted the other into a party room. [link]
  • During the summer of 1936, Indiana had 100 degree temperatures from June 15 to September 16, with a peak temperature of 114 degrees on July 14. If this happened now, climate scientists would be 100% certain it was due to man-made CO2 and demand immediate world communism. Over the past five years, Indiana has only recorded one (barely) 100 degree temperature. Afternoon temperatures have been plummeting in Indiana since the 19th century, and the frequency of hot days has also plummeted. [Goddard]
  • When we're in a bubble: (1) I tend to get emails asking about the price of stocks rather than any risks to the economy or fears of a permanently bleak future. (2)The emails I get tend to acknowledge that prices are high but then assert that there is no catalyst to cause them to come down. (3) People tend to talk about their expectation for permanently lower long-term rates of return rather than the risk of a near-term price drop. (4) People ask more about assets that are difficult to value. [Gannon]
  • The take home is that regular use of caffeine produces no benefit to alertness, energy, or function. Regular caffeine users are simply staving off caffeine withdrawal with every dose – using caffeine just to return them to their baseline. This makes caffeine a net negative for alertness, or neutral at best if use is regular enough to avoid any withdrawal. [link]
  • In our view, Illinois's best option is to impose a statewide residential property tax that expires when its unfunded pension liability is paid off. In our baseline scenario, we estimate that the tax rate required to pay off the pension debt over 30 years would be about 1%. This means that homeowners with homes worth $250,000 would pay an additional $2,500 per year in property taxes, those with homes worth $500,000 would pay an additional $5,000, and those with homes worth $1 million would pay an additional $10,000. [link]
  • The procedure continues to the VNY R152 to HIRVI, then direct to SMO, where a turn of more than 90 degrees is required to join the SMO R267 to Ventura (VTU). Total flying distance from the missed-approach point to the holding pattern is nearly 50 miles, so the fuel load must be planned accordingly. [Flying]
  • The Owens Valley is an 80-mile-long, stirringly dramatic gorge — one of the deepest in the country — hewn between the vertiginous wall of the Sierra Nevada to the west and the White and Inyo Mountains to the east. Many peaks on both sides rise above 14,000 feet. The valley floor averages 8 miles wide and is mostly flat at around 4,000 feet elevation, with one exception: Crater Mountain, a large dark-red cinder cone plopped in the middle of the valley 20 miles south of Bishop. [Flying]
  • The town was founded, in 1870, by immigrants from Holland looking for farmland, and until recently almost everyone who lived there was Dutch. Many of the stores on Central Avenue still bear Dutch names: Bomgaars farm-supply store, Van Maanen's Radio Shack, Van Rooyen Financial Group, DeJong Chiropractic and Acupuncture, Woudstra Meat Market. The town's police force consists of Jim Pottebaum, Duane Hulstein, Audley DeJong, Bruce Jacobsma, Chad Van Ravenswaay, Wes Van Voorst, and Bob Van Zee. When an Orange City teacher wants to divide her class in half, she will say, "A"s through "U"s to one side, "V"s through "Z"s to the other. Once, many years ago, an actual Dutch woman, from Rotterdam, moved to town with her American husband. She found the Dutchness of Orange City peculiar—the way that most people didn’t speak Dutch anymore but sprinkled their English with phrases that nobody had used in the Netherlands for a hundred years. [New Yorker]
  • Still, the present study identifies a significant difference between the ages of persons who die with tattoos compared with those without tattoos. The difference is 14 years and appears to be independent of sex, race, or manner of death. When manner of death is factored in, the survival difference is even more appreciable: 20 years for a tattoo with a nonnegative message and 32 years for a tattoo with a negative message. [link]
  • The arbitrageurs who founded hedge funds to bring appraisal actions are too smart to throw their money away on doomed litigation. For good or ill, I have a feeling the appraisal boom will be busted by the end of this year. [link]
  • The obvious approach of supplementing the primary antioxidant systems designed to suppress the initiation of oxidative stress has been tested in animal models and positive results were obtained. However, these findings have not been effectively translated to treating human patients, and clinical trials for antioxidant therapies using radical scavenging molecules such as α-tocopherol, ascorbate and coenzyme Q have met with limited success, highlighting several limitations to this approach. These could include: (1) radical scavenging antioxidants cannot reverse established damage to proteins and organelles; (2) radical scavenging antioxidants are oxidant specific, and can only be effective if the specific mechanism for neurodegeneration involves the reactive species to which they are targeted and (3) since reactive species play an important role in physiological signaling, suppression of endogenous oxidants maybe deleterious. Therefore, alternative approaches that can circumvent these limitations are needed. While not previously considered an antioxidant system we propose that the autophagy-lysosomal activities, may serve this essential function in neurodegenerative diseases by removing damaged or dysfunctional proteins and organelles. [NLM]

Monday, May 14, 2018

May 14th Links

  • Block suggested an arbitrage strategy involving going long a short target's bonds and using the cash flows to buy long-dated, out-of-the-money put options. "In addition to providing a good hedge to a long book, in a year when the market rips, we'll get lucky on a few of these options," he said. "In a year when the market tanks, this positions us to have downside convexity to the market tanking." [II]
  • Pierre Andurand, one of oil’s most prominent hedge fund managers, said the current reluctance of energy companies to invest in new production meant $300 a barrel was "not impossible" within a few years. [Bloomberg]
  • How would you like your balance sheet to blow up by $18.2 billion? That's the amount of Verizon's minimum future rental payments under non-cancelable operating leases reported in their most recent Form 10-K. Delta Air Lines reported $12.8 billion and Starbucks Corporation reported $5.7 billion. According to the Effects Analysis issued by the IASB in January 2016, listed companies using either U.S. GAAP or IFRS disclose approximately $3 trillion in off- balance sheet lease commitments. These amounts are currently only disclosed. However, under the new lease accounting standard (ASC 842), the vast majority of these operating leases will now be reported on the balance sheet. The Wall Street Journal reported that corporate balance sheets could swell by as much as $2 trillion. [link]
  • When a "direct action" is removed from State court to federal court, it is not sufficient to analyze whether the plaintiff (the party who has been harmed) and the defendant (the insurance company) are "diverse" (i.e., citizens of different States). Even if the plaintiff and the insurer in a direct action are diverse, under the exception set forth in § 1332(c)(1), diversity still does not exist if the plaintiff and the person who cased the alleged harm, and who is insured under the insurance policy at issue, are citizens of the same State. As one might imagine, business disputes, commercial torts and other loss-causing incidents often involve citizens of the same State. Section 1332(c)(1) thus ensures that a large group of insurance cases, which would otherwise be removable to federal court, cannot be removed – and all aggressive insurance litigators should keep the § 1332(c)(1) arrow in their quiver. [link]
  • In early 2003, Larry met with a 71-year-old couple with financial assets of $3 million. Three years earlier, their portfolio had been worth $13 million. The only way they could have experienced that kind of loss was if they had held a portfolio almost all in equities and heavily concentrated in U.S. large-cap growth stocks, especially technology stocks. They confirmed this. They then told him they had been working with a financial advisor during this period—demonstrating that while good advice does not have to be expensive, bad advice almost always costs you dearly. Larry asked the couple whether any meaningful change in the quality of their lives would have occurred if, instead of their portfolio having fallen almost 80 percent, it had doubled to $26 million. The response was a definitive no. Larry then noted the experience watching $13 million shrink to $3 million must have been very painful, and that they probably had spent many sleepless nights. They agreed. [link]
  • The growth of bypass ratios during the 1960s gave jetliners fuel efficiency that could compete with that of piston-powered planes. Today, most jet engines have some bypass. Modern engines in slower aircraft, such as airliners, have bypass ratios up to 12:1; in higher-speed aircraft, such as fighters, bypass ratios are much lower, around 1.5; and craft designed for speeds up to Mach 2 and somewhat above have bypass ratios below 0.5. [Wiki]
  • So, while the "Great Recession" ironically benefitted Daily Journal, the Board knew that it needed to plan for the Company’s post-recession operations. To do that, the Company needed to (1) hedge a very difficult environment for newspapers generally, (2) provide for an asset base from which to pursue attractive acquisition opportunities, and (3) establish a minimum net worth that would enable it to bid on significant government software contracts that the Company had been too small to qualify for in the past. Accordingly, the Board decided to purchase three securities selected by Charles Munger, the Company's non-executive chairman, and J.P. Guerin, the Company's vice-chairman. Those investments were quite successful, and the Company now holds positions in six securities. As you know, the Act does not define what it means to be "primarily engaged" in the business of trading and investing in securities, but the Commission developed a five-factor test to determine a company's primary engagement in In re Tonopah Mining Co. That test was also recently interpreted in SEC v. National Presto Industries. The five factors are addressed below. [SEC]
  • Like most people, despite knowing better, I have always suspected that maybe somewhere out there is an activity at which I could be a genius. I've watched enough biopics to feel I possess some of the eccentricities—issues with shirt tags and sock seams and eye contact, repetitive food habits—that are the mark of singular achievers. But I am getting older, and lately have been aware I'm running out of time to be a wunderkind. [Vice]
  • On March 1st we were assigned our cover animal which Kris and I named Andy O'Connor the Andean Condor. We were pretty excited to see the cover for the first time even if the subtitle went through multiple revisions. We didn't get to pick the animal or the picture. We were told up front we wouldn't get to pick the animal so we knew what to expect. We were also told that Tyrannosaurus Rex and unicorns are not allowed. [link]
  • Many diverse properties of cities from patent production and personal income to electrical cable length are shown to be power law functions of population size with scaling exponents that fall into distinct universality classes. Quantities reflecting wealth creation and innovation have exponents greater than 1 (increasing returns), whereas those accounting for infrastructure display exponents less than 1 (economies of scale). [PNAS]
  • My experience was that I enjoyed Spanish Class in second and third grade, but then I didn't take Spanish again until 9th and 10th grade, by which point I'd forgotten what little Spanish I'd learned as a child and had somehow developed a hopelessly extreme americano accent: I sounded like W.C. Fields trying to speak Spanish. [Sailer]
  • "Now let me ask one thing," interjected our fast-talking client manager. Short and self-assured, with a penchant for carbon-fiber road bikes and closetful of custom European-style blazers... [Vice]
  • The Caa1 CFR reflects BevMo's weakened liquidity profile, including Moody's expectations for constrained revolver availability and roughly breakeven free cash flow despite significant CapEx reduction. The rating also incorporates the company's high leverage, weak interest coverage, small size and concentrated geographic footprint. Rising competition from grocery stores, online retailers and club stores such as Costco has resulted in revenue and EBITDA underperformance relative to both budget and Moody's expectations in the second half of 2017. In addition, revolver borrowings in 3Q and 4Q 2017 were higher than expected due to use of cash for working capital. As a result of these factors, Moody's-adjusted debt/EBITDA was 6.3 times at the end of 2017 (7.8 times based on funded debt and management-adjusted EBITDA), and EBITA/interest expense was only 0.8 times. At the same time, BevMo's credit profile benefits from the recession-resistant nature of off-premise alcohol demand, low risk of product obsolescence or changing consumer preferences, and the company's established position in its core California market. Additionally, the company's rollout of a self-distribution model has the potential to significantly benefit gross profit, as cost savings from bulk purchases are realized. However, Moody's expects these savings to be largely offset by margin pressure from heightened competition and the company's adoption of a hybrid everyday low price model in order to regain market share. [Moody's]
  • Hovey and his fellow divers spent that six-week assignment working at the relatively shallow (but still quite deadly) depth of 250 feet, and living in a shipboard capsule pressurized to the same level. Pressure can be measured in atmospheres (atm) or pounds per square inch (psi). Pressure at sea level is 1 atm, or 14.7 psi. Inside a bicycle tire is about 65 psi. Hovey was living at over 110 psi. An ocean-and-a-half away, diver Steve Tweedle was making his way through a 28-day job in "storage," as they call it, for work at a depth of 426 feet (190 psi) in the North Sea. [Atlas Obscura]
  • Legacy fallback language will likely generate winners and losers. Litigation regarding the interpretation and enforceability of legacy fallback cannot be ruled out. Counterparties may try to argue that the language was drafted to address the temporary unavailability of LIBOR, not its permanent unavailability, and that some other approach to calculating the interest rate should be adopted outside what is provided for in the contract (e.g., due to contract interpretation doctrines such as "frustration of purpose"). The potential merits of such claims will be highly fact specific and depend on, among other things, the governing law of the contract. However, as a matter of New York law, for example, to the extent that the contract does provide a clear and complete framework governing how to determine the interest rate if LIBOR is unavailable, such claims may bedifficult to sustain. [Davis Polk]
  • A capital lease is an entirely lawful and above-board product offered by leasing firms which exists for only two purposes: To move goods that you couldn't otherwise move. This includes subsidized unattractive goods and lending to buyers who couldn't otherwise afford the goods. To allow the lessee legally to modify the appearance of their books. In Amazon's case, there is no economic reason for using capital leases except that it had the (surprise, surprise) magical side effect of making the cost of all that equipment escape the (silly) metric that Mr Bezos recommends you use to measure his firm's progress. Pick a quirky metric, then manipulate that metric. What could be simpler? And, if I'm not mistaken, it also had the effect of moving a whole lot of debt off the balance sheet until a recent accounting rule change put a stop to that wheeze. Paying people in stock purely so it doesn't show up as a compensation expense (and some tax dodging) is still allowed too, so they still do that, over a billion a year. They take every opportunity to arrange their operations to reflect their desired bookkeeping rather than the other way around. Which is of course perfectly legal. [MF]

Monday, May 7, 2018

May 7th Links

  • Everything in your life is your fault, whether you want to admit it or not. Every problem you have has been overcome by a man with the same circumstances as you, yet his attitude was positive, and one of growth and strength. Having an internal locus of control is essential for achieving goals. It’s an absolute baseline requirement. And can you guess what is 100% within your control? Can you throw a wild stab in the dark as to what nobody can take from you? It is, of course, your health and fitness. It is the ONE thing that only relies on your actions, nobody else’s. Nobody can force you to be fat. Nobody can stop you from going to the gym in your free time. Nobody can prevent you from gaining muscle. With money, business and women, you need other people to act a certain way at least some of the time. With fitness, it is 100% down to you, and nobody else. [Western Mastery]
  • After decades of obsessively documenting the subway system, Coppola is finally getting his due. [link]
  • George Hopkins, executive director of the Arkansas Teacher Retirement System, said he met with Mr. Kaluzny and committed $25 million to Sycamore's new fund. "I was ashamed when I walked out of that room about how little I knew about the retail space," he said. "I always know when I'm outmatched." [WSJ]
  • Subject to the terms and conditions set forth in this Agreement, Seller hereby agrees to sell, transfer, and deliver to Buyer, and Buyer agrees to purchase, one used Gulfstream IV aircraft, Serial Number 1140, Registration N77WL, together with all parts, items of equipment, instruments, components, and accessories installed therein or thereon, including the Rolls Royce Tay MK 611-8 engines having manufacturer's serial numbers 16388 and 16387, as defined by Exhibit "A" attached hereto (collectively the "Aircraft"). Purchase Price; Terms of Payment. The purchase price of the Aircraft shall be Eight Million Two Hundred Fifty Thousand U.S. Dollars (US$8,250,000.00) which shall be paid as follows at the Closing. [EDGAR]
  • Your time is valuable. You want to make sure you are spending your time around the right people. Don't hang around blue-pilled men without a damn good reason. Either spend your free time hanging around winners that will help you achieve your goals, or spend time around nobody at all while you aim to constantly improve and take yourself to the next level. Only add people to your life that provide value to you. [Western Mastery]
  • I last talked about Vulcan International in September 2015, since then a lot more information has come spilling out about this secretive company. For the uninitiated, this is a company that is extremely secretive and refuses to release financials to shareholders without a signed NDA. When this happens it's usually the case that management is either stealing outright from shareholders, or trying to hide an enormous amount of value. [Oddball Stocks]
  • The role of industry in a company's position is so substantial that you'd rather be an average company in a great industry than a great company in an average industry. The median pharmaceutical company (India-based Sun Pharmaceuticals), the median software company (Adobe Systems), and the median semiconductor company (Marvell Technology Group) all would be in the top quintile of chemicals companies and the top 10% of food products companies. [McKinsey]
  • Nothing about climate science reeks more of confirmation bias, than the changes scientists make to their own data sets over time. They all show exactly the same pattern of monotonically cooling the past and warming the present, regardless of the instrumentation. [Goddard]
  • On March 29, 1986 almost the entire country was over 70 degrees, with temperatures above 100 degrees in California. CO2 was below 350 PPM. The only other years with similar warmth on March 29 were 1910, 1946 and 1968. [Goddard]
  • The more America is opened up to immigration by the other seven billion people on Earth, the more the billionaires of America will prosper and the less the American people will enjoy high wages and low rents. Bernie Sanders had the right instincts in 2015 when he derided Open Borders as a way for the Koch Brothers get even richer. But by 2016, he shut up about that because he realized that the political hopes of the Democrats are so tied to a strategy of importing millions of ringers from abroad to demographically crush the GOP. [Sailer]
  • Sometimes I feel like the only person excited about higher short-term rates. I attended a social event last weekend and no one, I mean no one, was talking about the sharp run-up in short-term yields. They should be. Just look at the 2-year yield chart — it’s beginning to look more impressive than most FANG stocks! [Cinnamond]
  • Some $4.3 BILLION worth of infant formula was sold in the United States last year, a vast majority of it in powdered form. Between factory and baby aisle, its cheap ingredients (dehydrated milk and vitamins) become steeply, even mysteriously expensive. Basic types run about $15 for a 12.5-ounce can, amounting to perhaps $150 a month for a fully formula-fed infant. Specialty recipes like EleCare can cost two or three times as much. Strict Food and Drug Administration regulations govern formula production, and three companies dominate. Abbott Laboratories, which makes Similac, and Mead Johnson, which makes Enfamil, each control about 40 percent of the market. The Nestlé-owned brand Gerber holds a roughly 15-percent share. [NY Times]
  • To take one example, one of the dynamics I've talked about before that's driving higher and higher list prices, is the system of rebates between payers and manufacturers. And so what if we took on this system directly, by having the federal government reexamine the current safe harbor for drug rebates under the Anti-Kickback Statute? Such a step could help restore some semblance of reality to the relationship between list and negotiated prices, and thereby boost affordability and competition. But beyond discounting, a web of rules and restrictions – some implemented as a result of industry lobbying – prevent truly market-based pricing and competition. [FDA]
  • Like a stray piece of driftwood, a James Perse outpost has washed up on a well-trafficked corner of SoHo, facing the Gourmet Garage, formerly the very apex of Manhattan discount gastronomy, with its shrink-wrapped Camembert. [NY Times]
  • Back in the kitchen, chefs prepared two foie gras parfaits, two steak frites—two of everything Sietsema's table ordered. The nicer-looking plate was sent out, while at least four senior staff sampled the duplicate to reassure themselves that nothing tasted amiss. A manager and the executive chef also photographed each dish, then texted the images to corporate honchos in Philadelphia. [link]
  • Rountree makes the very powerful point that the skin-protective effect of the sulforaphane in broccoli cannot be explained by its inherent chemical antioxidant properties. He cites a Johns Hopkins study in which broccoli extract applied to the skin of nude mice prevented oxidative damage from UV light for a period of several days, even after it was washed off the skin. The absorbed sulforaphane could only act as an antioxidant for 30-60 minutes, at best a short-term effect. However, the induced upregulation of antioxidants in the skin protected the skin from UV for two days! To put it in chemistry terms: antioxidants are stoichiometric and used up quickly, whereas the endogenous antioxidant enzyme system is catalytic and long-lasting. [Getting Stronger]
  • Dr. Naiman suggested that "the sweet spot for intermittent fasting" occurs between 18 and 24 hours of fasting, since this is the time period that sees the greatest drop in insulin and increase in lipolysis – the breakdown of fat. Eyeballing the graph and comparing it to the one above from Volek shows that at an insulin level of about 40 pmol/L, lipolysis should be proceeding briskly. [Mangan]
  • Any competent nuclear physicist would have come out with very similar answers to ours if he had been asked: "What is the likely fission cross-section of pure U235? What critical size for separated U235 follows from this? What will be the explosive power of such a mass? How much industrial effort would be needed to do the separation? And would the military value be worthwhile?" The only unusual thing that Frisch and I did at this point was ask those questions. [Wiki]
  • Buried in stacks of periodicals and manuscripts, he found what he was looking for—an academic paper titled "Searching for Positive Returns at the Track: A Multinomial Logit Model for Handicapping Horse Races." Benter sat down to read it, and when he was done he read it again. The paper argued that a horse's success or failure was the result of factors that could be quantified probabilistically. Take variables—straight-line speed, size, winning record, the skill of the jockey—weight them, and presto! Out comes a prediction of the horse's chances. More variables, better variables, and finer weightings improve the predictions. [Bloomberg]
  • An Excess Male is an interesting novel by Maggie Shen King. She posits a Chinese society in which "plural marriage" is the adaptation to the fact that there are more men than women. Except this is not plural marriage quite as Brigham Young might have envisioned. The book opens with a meeting arranged by a matchmaker. At the table are a 22-year-old woman’s two current husbands, the candidate third husband, and the candidate's two fathers. [Phil G]
  • The kind of social insecurity this exhibits is characteristic of Massachusetts, going back almost 400 years. What makes your liberal friends slightly worse off than their Puritan 10-greats grandparents (also applies if their ancestors were in shtetls) is their lack of awareness of the nature of their belief system; when there is an official book of rules one is not quite as terrified of breaking them inadvertently and being shunned by the tribe. [Phil G]
  • So the analysis that you need to do (some have, most haven't) is this: If consumer cohort A can afford X price level, what is the probability they can afford X+10k? X+20k? X+50k? I'll give you the punchline. A 50k EV is in trouble. [MUGATU]

Monday, April 30, 2018

End of April Links

  • You never need to find an outside investor to say, "oh hey this nonexistent social network looks like a great buy at $600 million." Instead you just need a few people to say, "wait this nonexistent social network seems terribly overvalued at $600 million and I am going to bet against it." That's... that's what they're supposed to do, right? Short sellers are supposed to try to root out scams and bet against them. That's good for price efficiency (it keeps down the valuation of scams) and it's good for exposing scams (short sellers have every incentive to expose frauds to the government to drive down the price of the frauds and make money for themselves). [Bloomberg]
  • From a cultural perspective, the city is still hot. One of my friends says that his East Coast friends who age out of that high cost environment heavily favor places like Nashville and Austin. Apparently recruiting people to come to Nashville is super-easy. In fact, I heard one person talk about how they have to be careful to filter for people who actually want the job in question, not just a vehicle to get them to Nashville. [link]
  • Islay, known as the "Queen of the Hebrides," is the southernmost island of the Inner Hebrides, accessible by ferry and plane. It remains unique among the Scottish regions in that its whiskies are characterized by smoky, peaty flavors and aromas. Many consider it an acquired taste, but for those who have acquired it, like myself, Islay is pilgrimage-worthy, much like Bordeaux is for oenophiles, and like those wine-producing regions where vineyards dominate the landscape, the local drink is more than just a drink on Islay. [NY Times]
  • Of course, the literary world is a small one — as are the fields represented by many of the books the Review covers. "In certain areas, everyone knows everyone," Ms. Paul said, citing politics, science and even British literature. ("It's an island nation," she added.) [NY Times]
  • New York City cannot compete with Los Angeles's patchwork quilt of cuisines, Northern California's sainted ingredients, New Orleans's discerning and passionate diners. What sets New York's restaurant culture apart is that it never quite shakes the past and has never fully severed its ties to Europe. This is why New York can seem to be stuck in the last century, but it also explains its unusual receptivity to news from across the Atlantic. [NY Times]
  • What became clear is that, while having its moments, being single is work, a lot of work. The prepping, pruning, preening, planning, Tindering, texting, courting, rejecting, Coachella-ing, gaming, being rejected is exhausting. Being good at being single either means you're one of the 1% who don't live in the real world, and everything just sort of comes to you (note: I know a few of these people and hate them), or — like any job — you have to work at it. [link]
  • The research company Ceresana estimates that pigments are a $30 billion industry, headlined by major chemical companies such as Lanxess, BASF, Venator (a spinoff from Huntsman), and Chemours (a spinoff from DuPont). [Bloomberg]
  • Our kitchen is stocked with "provisions" of organic beef jerky, coconut water, craft beers, chips, and two restaurant-class espresso machines. We have two ping pong tables and buckets of 3-star ping pong balls. (A new office manager bought "1-stars" once and some of the guys protested by crushing them.) [Outside]
  • The United States cannot be a colonizing nation for a long time yet. We have only twenty-three persons to the square mile in the United States without Alaska. The country can multiply its population by thirteen; that is, the population could rise above a billion before the whole country would be as densely populated as Rhode Island is now. There is, therefore, no pressure of population, which is the first condition of rational expansion, unless we could buy another territory like the Mississippi Valley with no civilized population in it. If we could do that it would postpone the day of over-population still further, and make easier conditions for our people in the next generations. [Sumner]
  • In one of the best documentaries about present-day Spain's intractable history wars, two Swedish filmmakers visit the Valley of the Fallen, the mausoleum Franco had built outside Madrid to commemorate his victory in the Civil War.​ They are accompanied by 86-year-old Andrés Iniesta, who became a political prisoner in 1939 when he was 17, spent nearly twenty years in prison and was one of the 20,000 forced labourers who built the mausoleum. The filmmakers wanted him to meet the abbot, chosen by Franco in 1958 and still in post in 2007. But staff at the ticket kiosk asked him to pay – the mausoleum's upkeep is partly dependent on public funds – and he was furious. 'You can't charge me! I built it! This is my place! How dare you try to charge me!' (In the end one of the filmmakers paid for his ticket.) [LRB]
  • Everyone who has made two visits, at intervals of months, to Barcelona during the war has remarked upon the extraordinary changes that took place in it. And curiously enough, whether they went there first in August and again in January, or, like myself, first in December and again in April, the thing they said was always the same: that the revolutionary atmosphere had vanished. No doubt to anyone who had been there in August, when the blood was scarcely dry in the streets and militia were quartered in the smart hotels, Barcelona in December would have seemed bourgeois; to me, fresh from England, it was liker to a workers' city than anything I had conceived possible. [LRB]
  • What private individuals want is free access, under order and security, to any part of the earth's surface, in order that they may avail themselves of its natural resources for their use, either by investment or commerce. If, therefore, we could have free trade with Hawaii while somebody else had the jurisdiction, we should gain all the advantages and escape all the burdens. [Sumner]
  • One potential risk insurance policyholders face is that their insurer will become insolvent. This risk may be higher when the insurer is selling long-time-horizon products with little historical data on the performance of the products. For many insurers that wrote LTC insurance, initial assumptions about investment returns, mortality, morbidity, and policyholder behavior that turned out to be incorrect wound up hurting their profitability, and for some, their viability. Consumers should consider both price and capital strength when purchasing such products. Finally, policyholders should be aware that guaranty funds may not always make them whole should an insurer fail. [link]
  • Using the complete history of regular quarterly and annual filings by U.S. corporations from 1995-2014, we show that when firms make an active change in their reporting practices, this conveys an important signal about future firm operations. Changes to the language and construction of financial reports also have strong implications for firms' future returns: a portfolio that shorts "changers" and buys "non-changers" earns up to 188 basis points in monthly alphas (over 22% per year) in the future. Changes in language referring to the executive (CEO and CFO) team, regarding litigation, or in the risk factor section of the documents are especially informative for future returns. We show that changes to the 10-Ks predict future earnings, profitability, future news announcements, and even future firm-level bankruptcies. Unlike typical underreaction patterns in asset prices, we find no announcement effect associated with these changes--with returns only accruing when the information is later revealed through news, events, or earnings--suggesting that investors appear to be ignoring these simple changes across the universe of public firms. [SSRN]
  • Ms. Kirchhoff designs Disco Cubes, frozen objets d'art that keep cocktails cold while also evoking the botanical paperweights of the glass artist Paul Stankard. When she isn't suspending herbs, vegetables and logos inside orbs of ice, Ms. Kirchhoff is a D.J. (she recently played at the Louis Vuitton store opening in Chicago) and a portrait and fashion photographer (her images have been published by, the Coveteur and Kinfolk). [NY Times]
  • It's the Craft Beverage Modernization and Tax Reform Act, an amendment that quietly found its way into the omnibus tax bill that President Trump signed into law in December. The measure lowers the federal excise tax that producers pay to $2.70 per proof gallon (a gallon of spirits that is 50 percent alcohol), from $13.50, for the first 100,000 gallons of distilled spirits produced or imported annually. [NY Times]
  • Still, people use weed for a reason. Concentrates known as dabs — a waxy substance that can be flash vaporized in a glass pipe — offer a more powerful high than any flower could, and are becoming popular among classic stoner types. One California grower I spoke to said that even if younger clientele are looking to get nice and stoned, loose-leaf pot is no longer the coolest way to do that. [link]
  • The Duke of Westminster owns (via some kind of ingenious tax free trust) 0.22% of the UK, including big chunks of Mayfair and Belgravia. He has an economic incentive to favor more immigration so he can raise rents. At the other end of the spectrum, renters have incentives to dislike immigration because it drives up their rents. On the other hand, people like the Duke of Westminster tend to have more influence over the conventional wisdom than do renters, so it's not at all clear if renters understand the economics as well as the Duke does. The BBC, for example, does not go out of its way to explain to renters how immigration costs them. You might think that this would be a rich subject for a Foucaultian analysis of how power drives worldviews, but, for some reason, that never seems to come up. [Sailer]

Thursday, April 26, 2018

Small Bank Annual Report Season

We get a lot of small bank annual reports in the mail at Credit Bubble Stocks. Two came in today so let's just do a kind of deeper read of the annual reports and think about their businesses and valuations.

First up is Dacotah Banks, Inc. (DBIN) which came in today.

  • At $32 per share the market capitalization is $358 million, which is 1.3x the book value of $274 million.  
  • Bank earned $17.5 million for a P/E of 20 times. Return on equity was 6.5% in 2017 and 9.1% in 2016.
  • Only $233 million of debt securities. Of these, only $25.3 million have more than five years to maturity. This is much more conservative than we have seen at a lot of other banks. Also, of the $1.9 billion of loans only $230 million has a maturity or next repricing of greater than five years.
  • Loans for agricultural purposes comprised approximately 46% of total loans. A similar amount are commercial and commercial real estate loans. Not much consumer or residential lending. 
  • They have $47 million of premises and equipment. But, they have 32 locations across the Dakotas and rural western Minnesota. So the total book value per store is only $1.5 million.
  • They have $1.9 billion of loans and $2.1 billion of deposits. So, another way to look at the locations is that each one is responsible for about $60 million worth of loan and deposit business.
  • Interest expense in 2017 was $10.4 million on $2.1 billion of liabilities. That's a funding cost of only 50 basis points! Interest received on loans was $94 million, which is a 4.9% coupon. The result is a net interest margin that's been steady around 4% the past four years.
  • They have some impressive non-interest income as well. For example, $4.8 million of insurance commissions.
  • They paid $735,000 to the FDIC in 2017 on the $2.1 billion of deposits. Andy Redleaf says that "mispriced deposit insurance" is one of the main reasons why a man should own a bank.
  • From their proxy statement, their bylaws provide for cumulative voting, which is cool. They also included the minutes of the previous year's annual meeting, which you never see. However, no disclosure in the proxy of who the largest shareholders are or how much management/directors own.
Next up is WC Bancorp (WFCB).
  • At $9.85 per share the market capitalization is $25 million, which is 0.89x the book value of $28.4 million. Notice that this one is a tenth the size of Dacotah.
  • Bank lost $116,000 in 2017 vs making $109,000 in 2016. So no net income over previous two years.
  • This is a mutual conversion: "WCF Bancorp, is a Iowa-chartered corporation organized in 2016 to be the successor to Webster City Federal Bancorp (the Old Bancorp), a federal corporation, upon completion of the secondstep conversion of WCF Financial, M.H.C. (the MHC) from a mutual holding company to a stock holding company form of organization. The MHC was the former mutual holding company for the Old Bancorp prior to the completion of the second-step conversion. Upon consummation of the second-step conversion, the MHC and the Old Bancorp ceased to exist. The second-step conversion was completed on July 13, 2016 at which time the Company sold 2,139,231 shares of its common stock (including 171,138 shares purchased by WCF Financial Bank's (the Bank) employee stock ownership plan) at $8.00 per share for gross proceeds of $17.1 million. Expenses related to the stock offering totaled $1.7 million and were netted against proceeds. As a part of the second-step conversion, each of the outstanding shares of common stock of Old Bancorp held by persons other than the MHC converted into 0.8115 shares of Company common stock with cash paid in lieu of fractional shares. As a result, a total of 2,561,542 shares were issued in the second-step conversion."
  • A fund called Firefly Value Partners in New York owns 8%. The ESOP owns 6.7%. Directors and management own less than 1%!
  • Interest expense on $88 million of deposits was 68 basis points.
  • The loan portfolio is 81% 1-4 family residential.
  • The securities portfolio is $43 million, which is 1.5 times their equity. Of this, about $17 million is more than five year maturity.
Neither one seems attractively priced. However, Dacotah is a better business and better positioned for rising interest rates.

Wednesday, April 25, 2018

High Plateau Drifter: The Lloyd Blankfein Interview

(See transcript also.)

The meteoric rise in the popular stock indexes after Trump's election victory in 2016 greatly surprised me. I assumed that money managers and those generally employed in - and generally controlling - the financial industry to react in shock and tank the markets. Instead, we got a rip snorting rally. Clearly, the titans of finance were pleased with the result.

I rationalized that perhaps the euphoria in the markets was a result of their impression that nothing would get done or change. But then how does one explain this market response in the face of the outright anti-Trump hostility from the main stream media. Do the titans of finance inhabit an alternate universe from the rest of the liberal society that surrounds them?

After much thought I figured that as long as they are free to make money, they do not care about the political strife surrounding and beneath them.

The Lloyd Blankfein Interview makes that clear. Without mentioning Trump's name, he approved his policies. The main stream media is clueless. 

But more important as a signal is his calm reassurance that the markets are just fine. Indeed there was no other possible purpose for him peeking around from behind the curtain than to reassure investors.

And that means it is time for caution. Indeed the six month T-bill yield tells a different story.

Money managers can now go to t-bills while collecting their 2% without reducing client cash balances. With treasury debt growing at record levels, interest rates are going to keep rising until something breaks, and breaks badly. The government has two choices. Issue more debt and drive rates higher, or flood the markets with new cash as the Federal Reserve purchases the new debt, thereby driving inflation much higher - albeit with a lag.

My bet is that the Federal Reserve wants to drive the stock market down for a spell to cool the animal spirits. My second bet is that they underestimate the fragility of this debt driven economy, and that the rising rates will cause a crash. Beware the Fall of 2018.