Thursday, July 28, 2022

Thursday Night Links

  • Once the market is convinced that we have found the bottom in oil, energy stocks should reap unproportionate benefits to the upside. Many of the investors are still pricing energy stocks as if they are trading at $65 to $70/bbl, so once investors realize that $90/bbl is likely the floor going forward, there is going to be some serious re-rating that takes place. In addition, with energy companies now releasing Q2 results, it is going to become evident to the market that these companies are generating a lot of free cash flow, which will, in turn, be returned to shareholders via a buyback or dividend.  As a result, we continue to remain very bullish on energy stocks as the fundamentals are simply too strong to ignore. So for energy investors, all we need now is for the market to figure out where demand starts to respond to the upside. Give it a few weeks for the data to keep trending that way, and that's where the lower band is. Once we find that, we think energy stocks are going back higher. [HFI Research
  • Pausing briefly to consider the signature grape of the northern Rhône, he volunteered, 'The southern Rhône is too warm for Syrah. Of course we don't want to reduce the alcohol by physical means. If you use reverse osmosis to reduce the alcohol, you sacrifice some of the aromas. When you physically concentrate the grape must, you concentrate everything – including less desirable aspects. So how about simply adding back the water lost by evaporation? If you harvest on the basis of the ripeness of tannins in Grenache you risk having wines at 15.5 or 16% alcohol at least. We experimented and found that adding water did actually result in better wines.' [Jancis Robinson]
  • If the well was drilled by an entity with a cost of capital of 50 percent, it would definitely be a losing proposition. That would be a sign that the entity did not make effective capital allocation decisions. The decisions could be rational if the entity had hidden motives; perhaps principal/agent conflicts like a desire to look busy and stay employed drilling wells. By the way, how could the agents of that entity hide this? They would want to focus attention on the highest point on the chart, namely the nearly-instantaneous rate of initial production, and avoid discussing the rate of production decline, the present value of revenue, the present value relative to cost, and the internal rate of return of the well relative to other opportunities (like buying back debt) or to doing nothing. What would be the end game for that strategy? An entity that will reinvest capital at negative rates of return will eventually deplete all of its capital and become worthless, unless the principals relieve the agents of control. [CBS]
  • The reason the Japanese liked [my former skateboard brand, ‘Homeless’] was because it had an L in it and a Japanese marketing firm wouldn’t come up with a brand name with an L in it. L is not in their vocabulary. It’s a tough pronunciation for them. So I thought, next time I have a company, I’ll make a name with three Ls and see if I can get three times the money. It’s kind of exotic for them. I was playing with Ls and I came up with Lululemon. It’s funny to watch them try to say it. [link]
  • Magellan continues to forecast annual DCF of $1.09 billion for 2022. The recent decline in commodity prices as well as the potential for slightly higher expenses during the second half of the year are currently projected to mostly offset our modest financial outperformance year to date. While management continues to monitor general economic conditions, including inflation and refined products demand, we do not expect a material impact to our annual guidance. [Magellan Midstream Partners, L.P.]
  • At a recent investor conference, management stated that they are not interested in further reducing leverage to achieve credit upgrades. The reasoning is that the incremental benefit from a higher credit rating will not offset the shareholder value created from higher leverage. For now, I agree with that sentiment considering the strong energy environment and most importantly, MMP’s leverage is by no means high. If the company needs to reduce leverage in the future, it will be doing so from a strong starting point relative to peers due to the low starting number. MMP has differentiated itself from peers in its surprising commitment to its unit repurchase program. [Seeking Alpha]
  • Adderall, especially in this new shortage, is the Domaine du Romanée-Conti of prescription medication. Not only do you have to shell out for whatever your insurance doesn’t cover, but you also have to pay for a session with a psychiatrist every three months to get a new prescription. And during COVID, those aren’t easy appointments to book. So Adderall has become a privilege of the L.A. elite. Because, remember: at the same time demand is up, there’s less out there. Like a Soviet ministry, the Drug Enforcement Administration decides how much can be sold for the entire country. And the DEA has dropped its allowed quotas. In 2016, it allowed 50,000 kilograms to be sold; but for 2022, it has lowered the amount to 41,200 kilograms. [LA Magazine]
  • Mesabi Trust’s unit price is irrationally high given the coming collapse in distributions and the much degraded situation with Cliffs. With Mesabi Trust’s ore now used exclusively for internal consumption and alternative sources now available (thanks to Cliff’s recent acquisitions), the leverage the Trust once had with Cliffs has been severely degraded - and I don’t see this fundamental problem getting fixed any time soon. [Nat Stewart]
  • I explored Bozeman and Big Sky, ultra-hot destinations (and now homes) for the woke bourgeoisie, and Three Forks, the polar opposite, a totally different world a razor thin distance away. I saw two groups of people, an overclass and an underclass, pressed up against each other, spoiling for a fight, just waiting for the littlest spark to set their fury ablaze. Over what? The soul of Montana of course. One-of-a-kind land. That’s nothing new. What’s new is the character of the warring factions. They aren’t who you see on TV. On one side you have global interests imputing their values, importing cheaper labor, hollowing out Montana’s attractions and selling them to an international bourgeoisie for maximum profits. On the other you have the new underclass. Not the friendly Christian country folk of times past. And not Cowboy Hat Republican Rancher Dad either. No, these are a new kind of country person. Angry, exasperated, poor, Trump-loving service-workers—the Oxy takers, the meth cookers, the eaters of Chick-Fil-A. This group is acutely aware of just who controls Bozeman and Big Sky, and believe that the same people are coming for their territory. And they’re right. If you listen, you can hear the two groups screaming at each other in silence, waiting for their very own Gavrilo Princip to spark this thing off. [Isaac Simpson]
  • Unfortunately, distracted by the gorges, lakes, movie houses, corridor dates, and other more local enchantments of Ithaca, I did not get around to reading any of Anna Karenina before Nabokov sprang a pop quiz. It consisted of an essay question: “Describe the train station in which Anna first met Vronsky.” Initially, I was stymied by this question because, having not yet read the book, I did not know how Tolstoy had portrayed the station. But I did recall the station shown in the 1948 movie starring Vivien Leigh. Having something of an eidetic memory, I was able to visualize a vulnerable-looking Leigh in her black dress wandering through the station, and, to fill the exam book, I described in great detail everything shown in the movie, from a bearded vendor hawking tea in a potbellied copper samovar to two white doves practically nesting overhead. Only after the exam did I learn that many of the details I described from the movie were not in the book. Evidently, the director Julien Duvivier had had ideas of his own. Consequently, when Nabokov asked “seat 121” to report to his office after class, I fully expected to be failed, or even thrown out of Dirty Lit. What I had not taken into account was Nabokov’s theory that great novelists create pictures in the minds of their readers that go far beyond what they describe in the words in their books. In any case, since I was presumably the only one taking the exam to confirm his theory by describing what was not in the book, and since he apparently had no idea of Duvivier’s film, he not only gave me the numerical equivalent of an A, but offered me a one-day-a-week job as an “auxiliary course assistant.” I was to be paid $10 a week. Oddly enough, it also involved movies. Every Wednesday, the movies changed at the four theaters in downtown Ithaca, called by Nabokov “the near near,” “the near far,” “the far near,” and “the far far.” My task, which used up most of my weekly payment, was to see all four new movies on Wednesday and Thursday, and then brief him on them on Friday morning. He said that since he had time to see only one movie, this briefing would help him decide which one of them, if any, to see. It was a perfect job for me: I got paid for seeing movies. [Edward Jay Epstein]
  • The publishing world is still dominated by a very specific type of rising star. She is online, progressive, and impeccably feminist. She has an elite background, got her BA at a northeastern liberal arts institution, before picking up a post-graduate qualification or two. Currently, she resides in a gentrified part of Brooklyn. Ironically, these beneficiaries of a push for inclusion have shaped a literary scene that is as lacking in diversity as their apartment blocks. They consider two types of books worthy of publication: the female-narrated, elite-world comedy of manners and the multicultural narrative of brown victimization and suffering. What they especially don’t consider worthy, which explains its disappearance from the publishing industry altogether, is the heterosexual male bildungsroman. Lads: it’s over. [Alex Perez]

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