Thursday, March 3, 2022

Thursday Links

  • The world is underinvested in commodities, over-invested in technology, and the pattern of alternating decade-long cycles between the two is reasserting itself. In the 2010s, a popular tagline was that data is the new oil. Now we are beginning to hear about how “oil is the new data”. [FT]
  • Since the pre-Covid days (February '20), the non-currency portion of M2 has increased by about $6 trillion, or 43%. Since early-summer '20, that same measure of the money supply has increased at about a 13-14% annual rate, a bit more than twice it's long-term average growth rate. [Scott Grannis]
  • Faced with much-higher-than-expected inflation, the Fed is nevertheless taking great pains to assure markets that they will address the problem in a slow and gradual fashion, by taking 25 bps baby steps per month to raise the federal funds rate beginning next month. They seem to be aligning with a school of thought that says the economy these days is too weak to sustain a rapid increase in interest rates, so it's better to be slow and gradual than shock and awe. While this reinforces the point of my last post (i.e., the Fed poses no near-term threat to the economy), it will likely only make things worse in the long run. Why? Because by pre-announcing a gradualist approach they have given investors and the public a green light to take advantage of incredibly cheap financing costs, and that will only make inflation harder to control in the future. Why harder to control? Because increasing the incentive to borrow money to buy things (cars, houses, commodities, property, plant and equipment) is equivalent to decreasing the incentive to hold money.  Borrowing money means going short money: you win if the value of the dollar declines. Paying off debt means going long money: you win if the value of the dollar increases. With the supply of money (e.g., M2) obviously in over-supply, the Fed is incredibly trying to undermine the demand for holding that money. [Scott Grannis]
  • In 2021, ROFO paid $1.50 per share in dividends, $2.5 in 2020, $0.75 in 2019, and $1 in 2018. With 7.25 million shares outstanding, that was a total of $41.7 million ($5.75 per share) in four years. Interestingly, it was trading for years on end at a dividend yield north of 10%. Dividend yield can be a very good indicator. Rockford had high free cash flow conversion on its earnings, greater than 100% of net income in 2016-2018 for example, and allocated this cash flow well. They simply returned it to shareholders. [Oddball Stocks]
  • So how would an investor have done owning Dorchester units over the past fifteen years, starting at the beginning of 2007? One interesting calculation to make is to look at the outcome if an investor had reinvested the quarterly distributions in more units of the partnership. It turns out that the points in time where the dividend yield is high (when the prices of DMLP and/or oil are distressed) are very powerful in the compounding effect of distribution reinvestment. The reinvestment of the November 3, 2008 quarterly distribution grows your stake by 4.3%. The reinvestment on May 14, 2020 grows your stake by 4.7%. The result of the compounding is that one partnership unit purchased in January 2007 grows to 3.5 units with dividend reinvestment over the 15 year period. Those 3.5 shares are worth $83.34 now on a starting investment of $21.50. That is an IRR of 9.35%. This is particularly impressive since the valuation has fallen (the Dorchester distribution yield has increased) from 8.55% (annualized) at the start in 2007 to 10.8% (annualized) today. If the yield today matched what it was at the beginning of 2007, the price of a Dorchester unit would be $29.90 and the IRR would have been 11%. Note that the time periods when Dorchester is richly valued actually lower the IRR that an investor following the long-term distribution reinvestment strategy earns. As an example, the highest price that an investor would have paid during the fifteen year period for units was $34.16 in July 2014, which was only a 5.6% yield on that quarterly distribution (annualized). If the units had instead been trading at the same yield as today, the unit price would have been $18.15, and an investor would have been able to buy more units, and so the IRR would have increased slightly to 9.4%. [CBS]
  • At a very big picture: averaging down when you are right is very sweet, averaging down when you are wrong is a disaster. At the first pick the question then is "when are you wrong?", but this is a silly question. If you knew you were wrong you would never have bought the position in the first place. So the question becomes is not "are you wrong". That is not going to add anything analytically. Instead the question is "under what circumstances are you wrong" and "how would you tell"? When you put it that way it becomes obvious that you must not average down (much) on highly levered business models. And looking at Buffett he is very good at that. He bought half a billion dollars worth of Irish Banks as they collapsed. They went approximately to zero. But he did not double down. He liked them down 90 percent, he did not like them more down 95 percent. By contrast these are the stocks that Bill Miller blew up on: American International Group, Wachovia, Washington Mutual, Freddie Mac, Countrywide Financial and Citigroup. They were all levered business models. By contrast you can probably safely average down on Coca Cola: indeed Buffett did. It is really hard to work out a realistic circumstance in which Coca Cola is a zero. And if it is still growing there is going to be a price at which you are right - so averaging down is going to go some way to obtaining an average cost near or below that price. [John Hempton]
  • What “Seva” Mogilevich does, better than perhaps anyone who ever lived, is move around things that aren’t meant to be moved around: narcotics from Southeast Asia, arms to Iran, sex slaves from Eastern Europe, diamonds from Africa, nukes to God knows where—and money, vast sums of money, from Point A to Point B. Meyer Lansky may have written the book on money laundering, but it was Semion Mogilevich who turned it into a blockbuster motion picture. [Greg Olear]
  • Atlantic City is in South Jersey, closer to Philadelphia than New York, so to build “his” casino, Trump needed to play ball with the Philly mob. That meant dealing with Nicodemo “Little Nicky” Scarfo, head of the most powerful mob family in Philadelphia. Land that Trump needed for his casino was owned by Salvie Testa and Frank Narducci, Jr.—hit men for Scarfo, collectively known around town as the Young Executioners (the nickname was not ironic). To help negotiate the deal, Trump hired Patrick McGahn, a Philly-based attorney known to have truck with the Scarfo family. (The last name should sound familiar; Don McGahn, the former White House Counsel, is Patrick McGahn’s nephew. And Don McGahn is not the only Trump Administration hire with ties to the Philly mob. Among Little Nicky’s associates was one Jimmy “The Brute” DiNatale, whose daughter, Denise Fitzpatrick, is the mother of none other than Kellyanne Conway. [Greg Olear]
  • We get a stroke alert for a 76-year-old diabetic female who had a breast cancer lumpectomy one year ago. Her husband reports returning from grocery shopping to find that she was slurring words and unable to walk. He promptly called 911 so we’re probably seeing her about two hours after the onset. Her blood pressure is 215/100, too high for TPA, so she’s on a nicardipine drip in hopes of bringing it down. The neurologist calmly examines her with standard techniques (“follow my hand with your gaze”) and some of his own design (“close your eyes and tell me what you feel” as he hands her objects such as a key or lighter). She has a left facial droop, dysarthria (speech disorder due to muscle weakness), right gaze preference, and a left hemianopsia (blindness). Like most of our stroke admits, she gets a CT perfusion scan (five minutes and reimbursed at $12,000 by Medicare) to see if she is a candidate for endovascular intervention, i.e., clearing out a plumbing clog with a drain snake. Her scan is among the 10 percent that suggest endovascular intervention: proximal (closer to the heart) clot surrounded by potentially viable tissue. Her clog is in the middle cerebral artery (MCA, the main artery of the brain). She is carted off to the endovascular suite. I call Straight-Shooter Sally, who did not get to see an endovascular procedure on her week of stroke service. We meet up in the Interventional Radiology suite; endovascular procedures are split between interventional radiology and interventional neurology. We’re both excited, but the neurologist doesn’t say anything during the 45-minute procedure. [PhilG]
  • Singer Vehicle Design is an American company that modifies Porsche 911s. It was founded by Rob Dickinson, former frontman of the English rock band Catherine Wheel. The company is based in Los Angeles, California. The name Singer Vehicle Design pays homage to noted Porsche engineer Norbert Singer as well as acknowledging Dickinson's previous career as a vocalist. The company's motto is "everything is important", a reference to their design philosophy in which no aspect of the car is overlooked and even the smallest details are enhanced. The company's main product is a "re-imagined" 911, which is a heavily modified coupe or Targa Porsche 964. Much of the bodywork is replaced with carbon fiber body panels and the engine is reworked by engine manufacturers such as Cosworth, Ed Pink Racing Engines and Williams to produce significantly more power. The long hood of the Porsche 911 classic replaces the shorter hood of the Porsche 964. Relocated fuel filler and oil filler caps are a nod to historic Porsche race cars. The tachometer is colored in Singer Orange and displays values up to 11, a reference to the up to 11 meme (though engine redline is 7,900 RPM). [wiki]
  • One thing you didn’t predict, understandably, is the “Twitterization” of the conflict. Suppose that you set out in 2019 to predict how governments would respond to the next pandemic. How would you do this? Presumably you’d look at their responses to past pandemics, estimate the probable severity of a virus, follow the latest public health discussions and the latest vaccine technology, etc. Would that exercise lead you to predict what happened over the last two years? No, not even close. What happened was that people in early 2020 scrolled and tweeted their way into a frenzy. This deeply affected those in leadership roles, partly because they were responding to their constituents and partly because they themselves spend a lot of time scrolling and tweeting. As a result, the pandemic response was far more extreme and far different than someone in 2019 would have predicted. Just as COVID-19 is the first pandemic in the Age of Twitter, so the Ukraine invasion is, in some sense, the first war in the Age of Twitter. As it unfolds, we are seeing many disturbing parallels to the events of early 2020. People are rapidly normalizing once-fringe ideas like a NATO-enforced no-fly zone, direct US conflict with Russia, regime change in Moscow, and even, incredibly, the use of nuclear weapons. Just as with COVID, we’re seeing the rapid abandonment of longstanding Western policies. The overnight flips on German defense spending and SWIFT are like the overturning of conventional public health policies on masking, lockdowns, and so on. The emotionalism and recklessness we see in the Western professional class right now are producing an extremely dangerous situation. Let’s hope that it can be de-escalated before we get into a world war. And in making future predictions, we should acknowledge that the hyperconnected world brings with it new tail risks produced by rapid online escalation. [Richard Hanania]
  • The implied market capitalization of LICOA at a $26 LINSA share price is $21 million, or 30x the reported net income of $690k for 2021. The net income was a paltry 2.1% return on statutory equity. However, the adjusted book value per share grew by much more than the paltry ROE suggests, because of the accretive repurchase as well as the investment portfolio gains that do not flow through the income statement. It is noteworthy that LICOA is profitable, overcapitalized, bought back 20% of its outstanding shares last year, is being sued by minority shareholders, but the nonvoting shares last traded for only 42% of adjusted book value per share. [Oddball Stocks
  • I read the Strauss and Howe book Generations when if first came out in 1992. If I recall correctly, they thought Generation X (which they called the “Thirteenth Generation”) was going to have to fall on a grenade to restrain the Boomers so that the Millennials could inherit the earth. I’m no fan of their generational theory, but that does seem to be what awaits Generation X. Perhaps best and most extremely illustrated in the case of Julian Assange, now rotting in jail in England, Generation X critics are likely to pay a price, sometimes a steep one for defying the Boomers. Look at the pressure being brought to bear against Joe Rogan, for example, for his daring to entertain guests with ideas contrary to the party line. [Aaron Renn]
  • Marathon Oil (MRO) caught the market a bit off guard today when it disclosed that it had bought back $724mm of its stock in 4Q21. Halfway through February, it further disclosed that the buyback is still running hot with ~$375mm repurchased year to date. Measured as a % of market cap, MRO’s repurchase activity is heads above the rest of energy, beating CNX who took advantage of 4Q price strength to step up its buybacks, and MPC who is in the midst of a laborious return of capital after selling its Speedway business for $21B last year. Even on an absolute basis, MRO’s 4Q activity stands out, falling behind only COP (7x market cap) and MPC (3x market cap, distributing asset sale proceeds). We learned a while ago to follow the capital, not the narrative. [viscosityredux]

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