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]


eah said...

I certainly admire the intellectual energy you put into compiling these lists.

CP said...