February 3rd Links

• A straight line in a marketplace is something that will be noticed and gamed by people who find a way to make use of its predictability, and thereby creates activity of a different sort. Our steady, artificially low interest rate regime, coupled with the mechanism of passive investing funds has resulted in a very stable, linear flow of funds into certain kinds of securities. "The availability is limited and prices are rising." People will do more and more of it and – here's the thing – they will not stop of their own accord. They simply don't. It is something external, an exogenous event, that ultimately changes the game for them. So back to that question, which is very important, "What if it keeps going?" The answer is that it can't. It's true that it can go on for a long time. But when it stops, the damage is likely to be even more severe. [Horizon Kinetics]
• Basically what I'm doing is not insisting on only buying companies that are 10s (out of 10), for 8, which is what most value investors are trying to do these days. I am happy to own an 8 and 5, or a 5 and 2. or even a 3 at 1. I don't care that the business is not a 10. I care that it's undervalued. And generally, the only time you get a chance to buy a 10 at 5, is when the 5s are priced at 1 (i.e. a recession), and so even then, they are often not the best investments on offer. And what you learn over time is that there is a tonne of money to be made owning 7s, 5s, and even 3s, as long as you can buy them cheap enough. [LT3000]
• Dishonest, Badly-Incentivized, or Inadequate Management – There is almost no discount large enough to account for the liability that bad or oblivious management represents. A company hamstrung by entrenched bad actors likely deserves every cent of that discount, no matter how alluring the figures on the financial statements may appear. The market has seen fit to remind us of this fact more than once. [Alluvial]
• If you can buy and have delivered a mattress from a third-party manufacturer for say $200, and sell it online for $400, it makes sense not just to pay FB and GOOG $20 to acquire a customer, but also $50, $100, $150, and ultimately $200. Indeed, it even makes sense to pay $250 if you are being valued on revenue growth rather than profitability, as most VC-backed Unicorns are. Growth at all costs is their mantra. [LT3000]
• The most important psychological outcome of this experience has been that any decision to sell/reduce such stocks over the past decade - due to the exercise of 'price discipline'/'value consciousness' - has proven - ex post - to have been the wrong one. Consequently, the lesson the newsletter has drawn from this experience is that it is a mistake to sell good businesses, regardless of price. You should buy good businesses and never sell. Why? Because the past decade of market experience proves it. [LT3000]
• Equitable remedies, like remedies in general, are meant to redress the injuries sustained by a particular plaintiff in a particular lawsuit. When a district court orders the government not to enforce a rule against the plaintiffs in the case before it, the court redresses the injury that gives rise to its jurisdiction in the first place. But when a court goes further than that, ordering the government to take (or not take) some action with respect to those who are strangers to the suit, it is hard to see how the court could still be acting in the judicial role of resolving cases and controversies. Injunctions like these thus raise serious questions about the scope of courts’ equitable powers under Article III. It has become increasingly apparent that this Court must, at some point, confront these important objections to this increasingly widespread practice. As the brief and furious history of the regulation before us illustrates, the routine issuance of universal injunctions is patently unworkable, sowing chaos for litigants, the government, courts, and all those affected by these conflicting decisions. Rather than spending their time methodically developing arguments and evidence in cases limited to the parties at hand, both sides have been forced to rush from one preliminary injunction hearing to another, leaping from one emergency stay application to the next, each with potentially nationwide stakes, and all based on expedited briefing and little opportunity for the adversarial testing of evidence. [SCOTUS]
• Of the 33 lbs of eggs consumed per person per year in the USA, around ten pounds is from egg products in processed foods. That leaves around 90 billion shell eggs to be scrambled, omeletted, boiled, fried, or mixed into foods. Iowa is the major producer, with 52 million egg-laying chickens, followed by Ohio, Pennsylvania, and Indiana. Major egg producers have farms with long sheds, containing thousands of birds, and cold storage sheds for holding the eggs. Rose Acre Farms is one of the largest egg producers in the nation, with 24 million birds, at several large farms. Its facility in Guthrie Center, Iowa may be the largest egg farm in the nation. Cal-Maine foods, Moark, and Spartoe farms are also major national egg companies. [CLUI]
• Furthermore, if those problems weren't significant enough, the cost of installations had started to level off, and even tick up slightly. What had happened to the 'Moore's Law' decline curve in solar prices the solar bulls had enthusiastically preached of? The issue was 'balance of system costs'. Wafer prices have declined a lot, but the cost of glass, concrete, and installation labour, it turns out, have not, and these had become the largest costs involved in installing a system. All-in system costs looked to have bottomed out, and at levels no where near low enough for solar to be competitive with on-grid wholesale pricing. Worse, clear evidence was emerging that utility-scale solar was much cheaper and more efficient than rooftop solar, as there were much greater economies of scale with installation costs; greater locational flexibility; and the ability to install panels in a manner able to dynamically adjust their angle to the sun throughout the day, increasing insolation. All of these factors, viewed together, suggested that the rooftop solar business case was well and truly busted. I was surprised Musk was seemingly unaware of these structural flaws in the business model, and for the first time, I began to doubt Musk's judgement. He seemed to have been so blinded by his sci-fi vision for what the world could be, that he had overlooked economic realities. [LT3000]
• While the supply of bitcoins might be finite, the aggregate supply of digital currency as a whole, including Ethereum, Litecoin, and all the other variants, is potentially infinite. We have already seen the emergence not just of Ethereum, but a seemingly limitless number of new Bitcoin immitation currencies alongside a proliferation of so-called 'initial coin offerings'. It is therefore a clear fallacy that one is buying into a finite supply of the world's next global currency to be. And why should we not have expected supply to mushroom in this way? Ethereum was created by a 21yo college dropout in his basemen at zero cost. If you can code a currency in your basement that subsequently ends up trading at an aggregate value of $40bn, then why on earth would you not do so? But this sort of alchemy can't last. One of the best measures of something's value is its replacement cost, and if a 21 year old can create a digital currency in his basement, it can't be all that hard. It is therefore reasonable to expect thousands and thousands of new coin offerings to emerge until the supply overwhelms demand and the prices of all of them crash. [LT3000]
• These pro-cyclical adjustments simply prolong existing momentum, as managers holding cheap stocks are forced to sell them to fund redemptions, while growthy in-vogue sectors receive the inflows which further drive up valuations when invested. This acts to perpetuate recent performance disparities that trigger yet further portfolio reallocations, and so forth. This can go on a long time - for periods of years that can exceed the patience of the typical investor/asset allocator. This is likely why Greenblatt notes that a significant portion of the best performing funds over the course of a decade usually spend at least three years in the bottom quartile of performance, and why Grantham notes that while GMO's funds typically make it through a full cycle with above-average returns at below-average risk, they do so 'not necessarily with the same clients we started with'. [LT3000]
• Practically all rubber products where tensile and abrasion wear properties are important use carbon black, so they are black in color. Where physical properties are important but colors other than black are desired, such as white tennis shoes, precipitated or fumed silica has been substituted for carbon black. Silica-based fillers are also gaining market share in automotive tires because they provide better trade-off for fuel efficiency and wet handling due to a lower rolling loss. Traditionally silica fillers had worse abrasion wear properties, but the technology has gradually improved to a point where they can match carbon black abrasion performance. [Wiki]
• The Yukon River, which flows east to west, is a major aquatic artery for the interior of Alaska, and divides the state half. The half-mile-long bridge built for the pipeline and its haul road is the only road crossing of the river. The Arctic Ocean is 350 miles away, and the state north of the Yukon is virtually roadless, except for the Haul Road. The Yukon Bridge is the largest of the thirteen bridges on the pipeline. The pipeline makes more than 800 river and stream crossings, and it is buried under most of them, held down in a trench below the stream bed by large concrete anchors that straddle the pipe. [CLUI]
• The main point here is that the quantity of highly processed carbohydrate and sugar in a standard Western Diet is not just harmful to your cardiovascular and endocrine systems, but likely to your connective tissues as well. [link]