Friday, May 22, 2020

Friday Night Links

  • "A business as successful a Doordash and worth billions of dollars would clearly not just give away money like this." But I pushed back that, given their recent obscene fundraise, they would weirdly enough be happy to lose that money. Some regional director would be able to show top-line revenue growth while some accounting line-item, somewhere, would not match up, but the company was already losing hundreds of millions of dollars. I imagined their systems might even be built to discourage catching these mistakes because it would detract, or at a minimum distract, from top-line revenue. [link]
  • His model imagines three kinds of people: naives, radicals, and moderates. At the start of a cycle, most people are naive, with a few radicals. Radicals gradually spread radicalism, either by converting their friends or provoking their enemies (eg a terrorist attack by one side convinces previously disengaged people to join the other side). This spreads like any other epidemic. But as violence gets worse, some people convert to "moderates", here meaning not "wishy-washy people who don't care" but something more like "people disenchanted with the cycle of violence, determined to get peace at any price". Moderates suppress radicals, but as they die off most people are naive and the cycle begins again. Using various parameters for his model Turchin claims this predicts the forty-to-sixty year cycle of violence observed in the data. So this is the basic thesis of Secular Cycles. Pre-industrial history operates on two cycles: first, a three-hundred year cycle of the rise-and-fall of civilizations. And second, a 40-60 year cycle of violent disorder that only becomes relevant during the lowest parts of the first cycle. [SSC]
  • Cap table errors are a natural side effect of a manually recorded ledger without counter-party verification. Think of a cap table as a blockchain of a company's liabilities. Every stock certificate, option grant, exercise, transfer, or debt issue is a transaction that updates the ledger. Every transaction should be verified by the counterparty and the network as a whole. And by network I mean all stakeholders in the cap table who are required to verify the aggregate correctness (fully diluted count) of the table. [link]
  • Jerome Powell has our backs. And he's cranking. Thank Mr. Powell. If this thing craters in the next few months — as bad economic news is revealed and half the pundits prove prescient — I'm not selling. I'll be buying. I've got cash. Don't bet against the American economy. [Technology Investor]
  • In the endless sort of struggle that neurobiologists have — in terms of free will, determinism — my feeling has always been that there's not a whole lot of free will out there, and if there is, it's in the least interesting places and getting more sparse all the time. But there's a whole new realm of neuroscience which I've been thinking about, which I'm starting to do research on, that throws in another element of things going on below the surface affecting our behavior. And it's got to do with this utterly bizarre world of parasites manipulating our behavior. It turns out that this is not all that surprising. There are all sorts of parasites out there that get into some organism, and what they need to do is parasitize the organism and increase the likelihood that they, the parasite, will be fruitful and multiply, and in some cases they can manipulate the behavior of the host. [Sapolsky]
  • It's becoming increasingly clear that a big (maybe the biggest) risk factor for coronavirus transmission is speaking. Singing is even worse. The louder you speak or sing, the worse it gets. Some confirmed early superspreader events were choirs. A lot of others were churches, where everyone gets together and sings hymns full-blast. This person's explanation for the surprisingly low rate of subway-mediated transmission in Japan is that nobody talks on a Japanese subway. All this makes sense. Coronavirus has mostly droplet transmission. There are three ways to get droplets: coughing, sneezing, or talking/singing. You do one of those about a thousand times more often than either of the others. [SSC]
  • When the number of COVID-19 deaths picked up steam in April, the skeptics changed tactics and began arguing that we couldn't trust the numbers. They were inflated. Grossly inflated. Old sick people were being knocked off a little early by a virus that wasn't really that lethal. You see, those elderly were already living on the edge of the abyss so their deaths shouldn't count. Why does it matter if a sick eighty-year-old dies this month or a couple of months later? The month of May brought a determined resignation among the skeptics. I began hearing the words "herd immunity" a lot more. It had always been background noise before, but it was now front and center of many discussions. Apparently it was only days away, too. More shockingly, I began hearing that lockdowns and social distancing were a waste of time. They had, quite literally, no impact on the spread of the virus. Dozens of literate people have now told me this. Some have even demanded I prove that social distancing and lockdowns help slow down the virus at all. I would be only a little more shocked if they skeptically demanded that I prove the concept of gravity. [Greg Cochran]
  • Good strategy has a basic underlying logic: coherent action backed up by an argument, an effective mixture of thought and action. I call this basic underlying structure the kernel. A good strategy may consist of more than the kernel, but if the kernel is absent or misshapen, then there is a serious problem. The kernel of a strategy contains three elements: (1) a diagnosis that defines or explains the nature of the challenge, (2) a guiding-policy for dealing with the challenge, and (3) a set of coherent-actions that are designed to carry out the guiding-policy. "Bad strategy" occurs when there is bad doctrine, when hard choices are avoided, and/or when leaders are unwilling or unable to define and explain the nature of the challenge. [Richard Rumelt]
  • Four Major Hallmarks of Bad Strategy. Fluff: A strategy written in gibberish masking as strategic concepts is classic bad strategy. It uses abstruse and inflated words to create the illusion of high-level thinking. Failure to face the challenge: A strategy that does not define the challenge to overcome makes it impossible to evaluate, and impossible to improve. Mistaking goals for strategy: Many bad strategies are just statements of desire rather than plans for overcoming obstacles. Bad strategic objectives: A strategic objective is a means to overcoming an obstacle. Strategic objectives are "bad" when they fail to address critical issues or when they are impracticable. [Jeff Zych]
  • So the company does make money fairly consistently and it is clearly worth something. The exact number is not that important here, but it should be way more than the $0.8m (net of $5.6m of cash) that management is now effectively valuing the operating business for. Shareholders do have the opportunity to assert their dissenters rights under Pennsylvania Business Corporation Law. YCRG's management mentioned this explicitly in the letter and have even included the relevant section in the materials they sent to shareholders. I think any shareholder that holds a material investment in YCRG should vote against the reverse split and assert their dissenters rights. The question is how many shareholders can really afford to go through the time and trouble to do that? [VIB]
  • Value Investing Blog alludes to a problem that minority shareholders have in these situations: a high fixed cost of fighting what the management and/or controlling shareholders are trying to do. It can be a significant cost in terms of time and attention, and for someone to rationally pay that cost upfront he would have to anticipate a higher expected benefit. An appraisal action is likely going to require dissenting shareholders to have an expert report. That suggests something important for corporate governance theory. The ownership structure of a company matters, and can be very important for the ultimate returns of shareholders. At the limit, if a company were to be owned by a large group of shareholders each holding a single share of de minimis value, it might be possible for the management to convert all of the company's equity to their benefit and rational for the shareholders to acquiesce. (In theory, the shareholders could resist as a class, but in practice those efforts have to be initiated and organized by a shareholder with an economic incentive to do so.) [Oddball Stocks]
  • This matter comes to us under our jurisdiction over diversity of citizenship cases. 28 U.S.C. § 1332. Beginning with the First Judiciary Act of 1789, Congress authorized federal courts to hear suits "between a citizen of the State where the suit is brought, and a citizen of another State." The grant of diversity jurisdiction to federal courts was controversial at its inception and continues to be. A byproduct of that jurisdiction is the requirement that the federal court must apply the law declared by the supreme court of the relevant state. If there is no applicable decision of the highest court of the state, then federal courts must make a prediction as to the law that would be applied were the issue before it, an issue that has occupied many judges and courts. The issue, however, does arise in the present case and the Supreme Court has made clear that a federal court is not free to decline jurisdiction in a diversity case merely because the issue is a difficult one. Therefore, we must decide the important issue of Pennsylvania corporate law that the Supreme Court of Pennsylvania has not yet explicitly addressed. The issue is whether the Pennsylvania statute providing for appraisal of the value of the shares of minority shareholders who are "squeezed out" in a cash-out merger precludes all other remedies. In this case, a substantial minority shareholder of Irex Corp., that is, Mitchell Partners, L.P., which is participating in an appraisal proceeding in state court, also asserted a post-merger claim for damages in federal district court in Pennsylvania, alleging breach of fiduciary duties by the majority shareholders in connection with Irex's cash-out merger with North Lime Holdings. The District Court held that the appraisal remedy was exclusive and therefore dismissed Mitchell Partners' complaint in its entirety. Mitchell Partners filed this timely appeal. [Court of Appeals, 3rd Circuit]
  • One very interesting thing mentioned on the website was that "LICOA has made offers to settle litigation with some of the plaintiffs via buying them out. In March 2020, they offered some plaintiffs the equivalent of $25 per LINSA share." The LINSA shares are currently offered for $12.00 per share on the OTC... Obviously there is no way of knowing whether that deal is still on the table or not, or whether it would apply to all comers or not. But it is interesting. Presumably it was not taken because the shareholder plaintiffs thought it was a "lowball" offer. This reminds us of a dynamic we have seen in micro cap activism, which is that shareholders are rarely well-served by sitting passively on the sidelines while these things are going on. One thing that can happen is management will settle with unhappy shareholders by buying them out, and the remaining shareholders will be stuck in the company. At that point, they have fewer potential allies, and management will probably view them as oblivious or acquiescent. [Oddball Stocks]
  • Surging accounts receivable relative to total sales has often been an early indicator of companies reporting questionable sales just before a financial period ends. In 2018, Tesla's accounts receivable surged with little explanation. This puzzled analysts because auto dealers—and Tesla acts as its own dealer—are usually paid in cash for cars sold immediately by the customer or a car financing company. Hence, big auto dealers don't sport large accounts receivable relative to sales, yet suddenly Tesla did. Tesla, when repeatedly pressed, said it had to do with a calendar quarter ending on a weekend, yet the big receivables balances have not corrected themselves as expected. Tesla later offered up a confusing explanation that the jump in receivables was due to strong Model 3 European sales and slow payments from financing banks there. Again, this explanation didn't seem to line up, as the spike in receivables predated the Model 3 introduction in Europe. [Newsweek]

2 comments:

Stagflationary Mark said...

These link posts, to me, are like being a kid on Christmas morning, waking up, and running to see what Santa left. Ha! :)

There are all sorts of parasites out there that get into some organism, and what they need to do is parasitize the organism and increase the likelihood that they, the parasite, will be fruitful and multiply, and in some cases they can manipulate the behavior of the host.

Looking forward to the day when Amazon puts a stop to price gougers. As a customer, I feel like my behavior is being manipulated even more than the host. I see Costco’s Kirkland products sold at hefty prices on Amazon when they can be purchased much, much cheaper on Costco’s own website. Well, when Costco isn’t out of stock anyway. Say, during a pandemic. And on that note, just scored 250 pills of Acid Controller for just $12.49 at Costco.com. Finally. Sellers on Amazon currently want between $49 and $82 for the exact same thing. #$&*ing parasites, pardon my language.

More shockingly, I began hearing that lockdowns and social distancing were a waste of time. They had, quite literally, no impact on the spread of the virus. Dozens of literate people have now told me this. Some have even demanded I prove that social distancing and lockdowns help slow down the virus at all. I would be only a little more shocked if they skeptically demanded that I prove the concept of gravity.

That really is a head scratcher. Do we really need proof that social distancing works? If I stay completely away from other people, then how can other people make me sick? What if I embrace the opposite of social distancing? Does anyone really think it would be a good idea to stand outside of a hospital right now and be an uninvited greeter who tries to help direct sick people where they need to go?

I ask because I recently finished a book of fiction about a pandemic where a terrorist became an uninvited greeter at the front of a hospital. He hoped to get sick. He succeeded and proceeded to practice his intentional lack of social distancing skills to great effect. It’s a work of fiction of course, but yet somehow quite believable.

"Bad strategy" occurs when there is bad doctrine, when hard choices are avoided, and/or when leaders are unwilling or unable to define and explain the nature of the challenge.

That gave me a flashback to college and The Game of Risk. It also reminds me that bulls make money, bears make money, but pigs get slaughtered. The pig’s strategy is rarely a good one. It leads to buying stocks on margin heading into a pandemic, being forced to sell at a less than opportune time, and then watching the bulls make money during a recovery. Meanwhile, the bears have a good year taking profits on their Treasury holdings. Not saying that happened this year, of course. As a bear, not saying it didn’t either though. *cringe*

CP said...

Glad you like them!

"Now with more Civil Procedure content."