Monday, October 7, 2019

"Sears Wins Liquidation Plan Approval"

Today:

"Sears Holdings Corp. won court approval Monday of a chapter 11 liquidation plan requiring suppliers that kept its shelves stocked in bankruptcy to wait for their money or take a discounted payoff."
Our posts about the decline of Sears over the years: (1, 2, 3, 4, 5). Also,the post from last spring where we noticed the Sears capital structure mispricing. And our post last September about Eddie's last ditch attempt to keep Sears out of bankruptcy:
Here is something I do not understand about Eddie or Elon Musk. They each made a serious entrepreneurial mistake over a decade ago and have been dealing with the miserable consequences ever since. Why keep prolonging it?
Just finished a book called Dead Companies Walking by a short seller. He would say that Lampert and Musk are typical hyper-competitive types in business who do not know when to quit.

October 7th Links

  • One can fly to Japan from anywhere, but from Japan one can only fly to the Third World, and it hardly matters whether one lands in Kinshasa, London, New York or Zurich: they are all places where one must be constantly watchful and distrustful, where one cannot leave a suitcase unattended even for ten minutes, where women strolling home through town at 3 a.m. are deemed imprudent, where the universal business model is not to underpromise and overdeliver but if anything the other way round, where city streets are clogged at rush hour because municipal authorities mysteriously fail to provide ubiquitous, fast and comfortable public transport, where shops need watchful staff or cameras against thieving customers, and where one cannot even get beer and liquor from vending machines that require no protection from vandalism. Japan was the world’s only really different country when I first visited forty years ago, and it remains so now, despite many misguided attempts to internationalise its ways to join the rest of the world. [LRB]
  • To get some industry and competitive background, it pays to follow Arcosa's (ACA) - investor presentations. Their Inland Barge Division is a competitor to Conrad. Their two facilities are based along the Mississippi River system (hence the name "inland") -- one in Missouri and the other in Tennessee. I've attached some of snippets from their presentations in 2018 (when their parent Trinity Industries split off parts of its business including Inland Barge). [CoBF]
  • On foreign policy, too, Sailer has been a pervasive if subtle presence on the right. During the mid-2000s, he popularized the phrase "Invade the World, Invite the World" to parody the apparent bipartisan foreign policy consensus of the last two decades around large-scale military intervention abroad and large-scale immigration at home. It took some time, but by the summer of 2016, the mood of the country had caught up with Sailer. [NY Mag]
  • I can.t overstate the benefits of knowing the demand curve. In my friend.s case, the auction let them sell far above their initial price and revealed that the market was deep enough to justify a larger production run. In the context of an ongoing concern with multiple production runs, having email addresses associated with price-levels allows for very effective targeted email marketing: "Hey, we just did a larger run with lower unit-costs, so now we can afford to sell you a board for $X — you still in?" Given these benefits, why aren't such auctions more common in artisan manufacturing niches? [Kevin Lynagh]
  • After 12 years in Portland, Oregon USA, my girlfriend and I decided to evaluate other cities where we might want to live. In 2017 September, we each packed a duffel bag, put our stuff into storage, and skipped town. We're not vacation traveling — eating at fancy restaurants, sightseeing castles, skydiving, etc. — but rather just moving to a new city every few weeks/months. [Kevin Lynagh]
  • I needed an "optician kit" consisting of: Trial lenses: A large number of lenses with varying corrections. Trial frame: A pair of glasses without lenses into which you can insert the trial lenses. Turns out, you can order these kits online from very trustworthy Chinese resellers for around 190€. Fast-forward two weeks later. It's a long weekend, I'm standing in my flat, 10 lenses scattered across the desk in front of me. I'm wearing the trial frame with some lenses stuck into it. I squint out of the window, trying to read number plates of cars parked in the street. [Eidel]
  • What do you do if you're meeting someone in four hours and that person decides to change plans two hours before by sending you a message which you won't see due to DND? You might have to deactivate DND in those situations. The underlying problem however is that nowadays everyone assumes that plans can be changed frequently at no cost. [Eidel]
  • Don't bother with The Better Angels of Our Nature. I think you have to be very careful before buying anyone's ponderous 800 page tome. (I wasn't fooled into buying Piketty, but look how many copies of his are going to have to be pulped.) Unless the author is an utter genius crystallizing some subject for the rest of us, the result is going to be a muddled mess. Since Pinker uses "'six trends' interacting with 'five inner demons,' 'four better angels,' and 'five historical forces,'" to attempt to explain his hypothesized decline of violence, I think we can tell it fits squarely in the muddled mess category. (Twenty degrees of freedom in the model!) [CBS]
  • After your cliff, the valuation required for you to stay rises, but pretty slowly. In reality, you might want to be more aggressive with quitting than this. A company whose valuation has stagnated for 3 years seems bad enough to quit. If the model incorporated something like, say, variance going down over time, or fatter tails, then it might reproduce that effect. At 4 years, the model tells you always to quit, because your vesting is over, which means there's no point in sacrificing the higher earnings from the bigco job. Obviously in real life startups do things like refresher option grants etc. that make it more worthwhile to stay. [link]
  • In addition to being a function of price, demand for transactions is a function of the level of security provided. If equilibrium fees are not enough to provide adequate security, then demand will fall further and the price in the fee market will fall further, resulting in even less security. This is a potentially unraveling market, and I think it is what Satoshi meant when he said, "in 20 years there will either be very large transaction volume or no volume." The fee market is only stable when block sizes are sufficiently small and demand is sufficiently inelastic to sustain full blocks with high-enough fees to be secure. We know that given today's prices, volumes, and subsidies the market doesn't unravel and security is maintained. But we also know that the subsidy is going to zero in the long run and is halving next year. [link]

Tuesday, October 1, 2019

Opportunity in the Big Tobacco Duopoly?

Over the past couple of years (since short-term interest rates have been non-zero) we have watched for opportunities to buy short-term corporate bonds at yields meaningfully higher than treasuries of the same maturity.

"Yields meaningfully higher" has meant a spread of a fraction of a percent - say 0.25% higher. Enough to be worth the bother, while still being a loan on which it is hard to imagine losing the capital invested.

This has typically meant a bond from a disfavored company (maybe with a low "rating"), yet a low multiple of net debt to free cash flow, and a high multiple of equity market capitalization to net debt. Some examples of issuers:

  • Anheuser-Busch InBev (BUD) has a market capitalization of $190 billion, $130 billion of total liabilities less current assets (for a total EV of ~$300 billion), and operating income of $18 billion. Their EBITDA is $23 billion.
  • Becton Dickinson (BDX) has a market capitalization of $68 billion, debt of $20 billion (enterprise value of $88 billion), and operating income of $2.7 billion. Their EBITDA is $5 billion.
  • Fiserv (FISV) has a market capitalization of $70 billion, net debt of about $5 billion, and operating income of $1.5 billion. Their EBITDA is $2 billion.
  • Juniper Networks (JNPR) has a market capitalization of $8 billion, no net debt, operating income of ~$500 million, and EBITDA of ~$700 million.
  • Kraft Heinz (KHC) has a market capitalization of $33 billion, total liabilities less current assets of $42 billion, operating income of $6 billion, and EBITDA of $6.4 billion.
  • Altria (MO) has a market capitalization of $82 billion, total liabilities less current assets of $38 billion (enterprise value of $110 billion), operating income of $10 billion, and EBITDA of $10 billion.
  • Molson Coors (TAP) has a market capitalization of $12 billion, debt of $10 billion (enterprise value of $22 billion), and EBITDA of $2 billion. Net income is a bit under a billion. (The story here is that Molson Coors' core brands, which include Coors Light, Miller High Life and Blue Moon, have been losing market share.)
Some of these enterprise values seem very high relative to the cash flows, but that is coming from the equity market capitalization component of the enterprise value and not from the debt load. (Kraft Heinz used to be like this, but the air came out of that bubble and the stock is down 70% since February 2017.) You can see in this table how this shakes out:
  

P/E (ttm) EV/EBITDA
BUD 25 13.3
BDX 91 17.8
FISV 44 24.1
JNPR 17 10.2
KHC n/m 10.1
MO 13 10.6
TAP 14 9.8

The companies with higher EV/EBITDA valuations have higher P/Es - the overvaluation of the enterprise is coming from the equity side. Essentially, the investors in BUD, BDX, and FISV perceive these as ultra high "Quality" businesses and are willing to value their equity investment in them more like a bond.

Meanwhile, the TAP, MO, KHC, and JNPR lack the bond-like "Quality" halo and the enterprises are priced accordingly. Both Kraft Heinz and Molson Coors have tired, overpriced brands in very competitive spaces (the grocery shelf and the beer aisle). Juniper is the odd company out of this list because it is so much smaller than the others - not a mega cap - but its sales are shrinking as it loses market share to Arista and Cisco.

What about Altria (MO)? People are smoking less, but this is an addictive product in an almost duopoly industry. Almost any cigarette you would care to smoke in the U.S. is sold by either Altria or British American Tobacco (which bought R.J. Reynolds). (Note that Philip Morris, ticker symbol PM, sells the same Marlboro & co brands that Altria does, but internationally. It's one company for U.S. sales and one for international.)

Altria spent $5.4 billion on dividends last year, 6.6% of the current market capitalization, and repurchased an additional $1.7 billion of stock. They returned an average of $6.8 billion a year to shareholders from 2016-2018, which is about an 8% shareholder yield. The stock is at a five year low, with the result that the dividend yield and P/E are very cheap relative to the levels of the past decade:



In addition to the cigarette business, Altria owns 35% of the currently leading vaping company Juul, 10% of AB InBev, and the Chateau Ste Michelle wine company in Washington state.

The other two tobacco companies to look at for comparison are Philip Morris (PM) and British American Tobacco. The combustible revenues of PM are holding up better than MO's - their biggest markets are Europe followed by east Asia, and smoking is still cool in those regions. Their dividend yield is 6.2% and they don't buy back stock. Over the past three years they have paid of 95% of earnings as dividend and the average amount paid would represent 5.9% on the current share price.

What is fascinating to me is that these tobacco stocks seem cheap at the same time that nicotine is making a huge comeback:



Nicotine is a drug that, like ethanol and caffeine, has stood the test of time. Does society crave it now after having cut back so sharply? Maybe people will resume consuming nicotine at very high rates, but in a different form See this astute comment about how big tobacco plans to control nicotine vaping:
Lots of people commenting who don't really understand the industry or its future. Forget cigarettes. Conventional cigarettes generate free cash flow (for now) but the volume decline is already built-in to both companies' strategies.

Both PM and MO are trying to shape the future regulatory environment around [Electronic Nicotine Delivery Systems]. This battle will be fought first and foremost in the U.S., which will influence the regulatory environment worldwide. The strategy is already taking shape:

1) Raise cigarette buying age to 21--this is window dressing to placate Congress and buy other concessions, like those below. This is exactly what both companies are lobbying on now.

2) Build a regulatory moat around [Electronic Nicotine Delivery Systems]:
- Push legislation which will require FDA submission and ingredient disclosure for e-liquid based [Electronic Nicotine Delivery Systems](consumer safety regulations, labeling, etc.).
- Regulate nicotine levels.
- Keep chasing MRTP for IQOS.
- The U.S. regulatory environment would then be the model for the rest of the world.

This would effectively cede the ENTIRE electronic cigarette space to the big players. Only the big players can afford to comply with a complex approvals/disclosure process--it would put all the small importers of various Chinese-made products out of business in the U.S. because they will not be able to afford this kind of testing/QC. The more burdensome/labyrinthine the regulatory process becomes, the better it is for PM/MO with their armies of lawyers and quality engineers.

This will be the same play in the cannabis space if and when the big players are ready: bury the small competition in regulatory bureaucracy. This is what worked in the cigarette space for decades. This is why there are now only a handful of giant companies selling a commodity product with in developed markets. No one else can afford to.

PM and MO, or future NewCo, are selling razor blades, not razor handles. The strategy is to have good enough technology, best-in-class distribution, but most importantly: giant regulatory barriers to prevent new entrants.
It is a concern that MO paid such a high valuation for its stake in Juul. On the other hand Facebook paid what seemed like high prices for two investments to defend its monopoly - and it worked.

A big proportion of MO consists of its investment in BUD (10% ownership) - $19 billion of the total enterprise value of $100 billion. BUD is not that exciting so it would be tempting to see it spun off. Or, you could spin it off yourself - isolate the bet on nicotine - by shorting it out proportionally.

October 1st Links

  • It is really difficult to make precise measurements. Everyone who has examined the way the best values of the fundamental physical constraints have varies with time has noted that there is usually a "fashionable" value that is often many standard deviations away from a later value more precisely known. This phenomenon, which I call intellectual phase lock, occurs partly because no one likes to stand alone. [Luis Alvarez]
  • Measure fasting insulin, fasting glucose (a lab test), then go to "Calculate HOMA-IR score" website, plug in fasting glucose, fasting insulin and site calculates HOMA-IR score. 0.5-1.4 is healthy; above 2 is early insulin resistance; above 3 is significant insulin resistance. Type 2 diabetes is a preventable disease. If you avoid insulin resistance you avoid type 2 diabetes and the increased risk for most age-related disease. Knowing your HOMA-IR score is very important as this is best indicator of good metabolic health. High HOMA-IR score causes increase in insulin, increase in TOR and accelerated aging. Dietary ways to reduce TOR are caloric restriction, intermittent fasting, and keto diet. Moderate alcohol reduces TOR. Metformin reduces TOR. Rapamycin is the most direct way and most effective way to reduce TOR. [Mangan]
  • I paid for my kids College by buying big tobacco when Obama passed the bill which caused the stock prices to drop sharply. I read the bill and saw that it entrenched the oligopoly so I purchased. Maybe this is another such opportunity for young parents. Watch for the bill. You have to be patient with big tobacco but you can't beat the effect of those massive cash flows have on compound growth rate of stock when the monies are used for dividends and share buy-backs. The trouble here is impatient management who took too long to get into vaping then panicked and failed to put sufficient trust in their friends in Congress. [CoBF]
  • Cities need a good location. This is a debate I had with Paul Romer when he was interested in charter cities. He had decided that he could create 50 charter cities around the world. And my reaction — maybe I'm wrong — but my reaction is that there are not 50 very good locations for cities around the world. There are not many left. Maybe with Belt and Road, maybe the opening of Central Asia. Maybe the opening of the ocean route on the northern, following the pole, will create the potential for new cities. But cities like Singapore, Malacca, Mumbai are there for a good reason. And I don't think there's that many very good locations. [MR]
  • I also know that Saddam poses no imminent and direct threat to the United States or to his neighbors, that the Iraqi economy is in shambles, that the Iraqi military a fraction of its former strength, and that in concert with the international community he can be contained until, in the way of all petty dictators, he falls away into the dustbin of history. I know that even a successful war against Iraq will require a U.S. occupation of undetermined length, at undetermined cost, with undetermined consequences. I know that an invasion of Iraq without a clear rationale and without strong international support will only fan the flames of the Middle East, and encourage the worst, rather than best, impulses of the Arab world, and strengthen the recruitment arm of al-Qaida. I am not opposed to all wars. I'm opposed to dumb wars. [NPR]
  • What goes unsaid eventually becomes inconceivable. If you are no longer allowed to mention in public that it's a good thing for the British that they possess a nice island with a Channel protecting them from invasion by the rest of the world, then, after awhile, the Labour Party platform declares that there should be no caps on how many get to inundate Britain. [Sailer]
  • Less well publicized, however, are the various ways in which Shaw has applied his fund's risk-averse, quantitative approach to nearly every aspect of his life. Employees tell stories about Shaw wanting Chinese food or a comfortable mattress, and Shaw staff exhaustively researching and testing the options in advance. It was company lore that before Shaw traveled, an assistant would take the exact same trip — same car service, same airport, same seat on the plane — to eliminate any inefficiencies. Shaw has been said to purchase tickets for several different flights on the same day in case his plans change. [Nymag]
  • I believe that we have seen a narrative in the late stage private markets that as software is eating the world (real estate, music, exercise, transportation), every company should be valued as a software company at 10x revenues or more. And that narrative is now falling apart. If the product is software and thus can produce software gross margins (75% or greater), then it should be valued as a software company. If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software. But we have not been doing it that way in the late-stage private markets for the last five years. I think we may start now that the public markets are showing us how. [A VC]
  • We bought a house in the Hill Country and they had an old F150 with 200,000 miles on it at the house. I asked to have it included in the purchase and they agreed. It is a real farm truck but man I love heading in to town with it to get stuff from the feed store or Home Depot. The truck shakes some and has a droopy headliner but it is a really nice feeling having it. I don't use it a lot. Kind of like you maybe twice a month but I don't plan on letting it go as long as it keeps starting. [Jalopnik]

Monday, September 30, 2019

Books Read - Q3 2019

In Q3, eight books read - down from 9 in Q2. Previously: see the Q1 books list (16) and the 2018 list which was 113.

  • Tragedy & Challenge: An Inside View of UK Engineering's Decline (4/5) About the decline of manufacturing in the U.K. - see our full review post. The author Tom Brown says that clueless City of London investors with no understanding of technology were always thwarting his high ROI capital investments and his long term plans for building value in manufacturing businesses. Of course: all the managements that we ever see are the opposite. They refuse to explain their plans but they always try to grow their businesses at the cost of destroying value.
  • Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World (3/5) My theory is that Malaysian prime minister Najib put Jho Low in charge of looting a sovereign wealth fund, with the expectation that JL would make legitimate investments that would be politically helpful, give Najib and his wife kickbacks, and take a little for himself - but JL took far more than expected. In fact the fund borrowed multiples of its assets so he looted more than 100% of it. That may be a first. The biggest purchase was a $300 million yacht, followed by big ticket NY and CA real estate, but a lot of it was blown at nightclubs, gambling, and on jewelry and presents for women. When you see people making over the top purchases like these, you have to suspect that they are made with stolen money. The looting was pretty simple - there were no internal controls, so JL just wired the money where he wanted it to go. (See the Fraud Casebook from Q2 reviews.) The big four auditors and investment banks like Goldman did not ask many questions. (Theme from 2018 reviews - no one is looking out for you.) The whole thing was incredibly clumsy and low IQ. Najib could have steered the money towards investments of supporters in Malaysia and generated valuable favors for himself, probably perfectly legally. Jho Low could have done the same. However, they both exhibited total lack of future orientation. Najib's wife acquired "12,000 pieces of jewelry, 567 handbags, and 423 watches" so she is obviously some kind of bizarre hoarder and a liability that he should have cut loose. JL should have managed the fund legitimately - a big opportunity at such a young age. There is a description of a party at a nightclub in New York that sounds like something from Tom Wolfe, with JL being mentioned in the lyrics of a song called "Check My Steezo". (Life imitates Tom Wolfe.) I agree that in the eventual movie about this, Jaime Foxx should play himself. 
  • Lords of Finance: The Bankers Who Broke the World (1/5) This is a muddled book. It is a history of the period from the start of WWI through the beginning of WWII from the perspective of the big four central banks of England, France, Germany, and the U.S. It is also an argument that "mistakes" by these four central bank heads (the "lords of finance") caused the Great Depression. However, it is written by a globalist central bank functionary who lacks a coherent theory of macroeconomics, and so it is ultimately just anti-gold and pro-fiat propaganda. (The author is descended from Nizari Muslim Indians who moved to Kenya; he was educated in England.) When central planning fails, statists argue that we need even more central planning. Note that the WJB silver pro-inflation message lost because of South African gold discoveries (increasing supply and relieving gold deflation) - he was nominated for the Democrat presidential ticket three times but never won.
  • Fall; or, Dodge in Hell: A Novel (1/5) Neil Stephenson is the speculative science finction writer best known for early 2000s books Cryptonomicon and Snow Crash. When @dpinsen posted excerpts from Stephenson's latest, they looked good. But I ordered too early - dpinsen later said the ending was bad, and I should have seen all the one-star reviews on Amazon and Goodreads. Oh well - I think it is fine to have a bias towards ordering books and taking a look at them as long as you are able to cut losses and stop reading bad books partway through. I am getting better at that. Non-fiction writers can have careers where they churn out 4/5 and 5/5 books, like John McPhee. (He has a stellar batting average.) Fiction writers do not seem to have this ability. (This may have to do with the fact that fiction is autobiographical and people only have one biography, hence only one good story in them at most.) Stephenson lives in Seattle on Lake Washington. It turns out he is (or has become) a tiresome shitlib. He thinks if left to their own devices, rural Americans (in Iowa!) would spray gunfire like opium addled Afghans, and also literally crucify people for minor violations of the Old Testament. He calls it "Ameristan." He thinks the biggest problem with the internet is that it is not sufficiently censored; that people in "Ameristan" are allowed to use social media for "shared hallucinations".
  • The Man Who Planted Trees (5/5) An anti-war book: "In the foothills of the French Alps the narrator meets a shepherd who has quietly taken on the task of planting one hundred acorns a day in an effort to reforest his desolate region. Not even two world wars can keep the shepherd from continuing his solitary work. Gradually, this gentle, persistent man's work comes to fruition: the region is transformed; life and hope return; the world is renewed." George Bernard Shaw wrote in 1914 that "both armies should shoot their officers and go home to gather in their harvests".
  • Just Enough: Lessons in Living Green From Traditional Japan (3/5) A picture of agrarian life (80% of population agricultural workers) on a densely populated, very mountainous island. People in Edo period Japan "lived simply" - they had to; they were poor by modern standards. Most of the world was very poor until very recently, that is why poverty does not explain crime and especially does not explain senseless violence. You can tell that the Edo Japanese were very short on space, especially arable land, and very short on nitrogen. What makes our world different from theirs? Fossil fuels and synthetic nitrogen have to be at the top of the list. (Liebeg described agriculture's principle objective as "the production of digestible nitrogen".) The Japanese practice of scrubbing intensely prior to entering a shared, hot bath comes from a need to conserve energy intensive hot water. The author Azby Brown is a Japanophile and his book The Genius of Japanese Carpentry looks cool. But he's a hippie who wants us to stop eating beef - he nods approvingly at the sad lack of livestock in Edo Japan. He also mentions their practice of mabiki for population control. Rather than primogeniture to maintain a farm size that could feed one family, farmers killed sons born after the first one!
  • Selfish Reasons to Have More Kids (3/5) This is by GMU economist Bryan Caplan, who you may be surprised to learn is staunchly pro-natalist. Like a typical modern economist he denies that there is any Malthusian limit on population - he believes that the quantity of niche spaces for humans increases with the population, unlike any other known life form. The Edo Japanese farmers in the previous book practicing infanticide just needed a Bryan Caplan lecture! (Notice that Gregory Clark sides with Malthusians and physicists on this.) Anyway, Caplan's argument that the reader (who is presumably an educated professional) should have more children is that today's American middle and upper class parents artificially inflate the cost of having children, which of course leads to a suboptimal quantity being demanded. By making some parenting changes the cost can fall and lead to an increased quantity demanded. (He also makes the point that many of the benefits of children come later in life, while at the beginning they have "high start-up costs.") He focuses on behavior that I would call "overparenting," i.e. the way that "moms and dads tag along with their kids as supervisors, or servants." He also makes the point that "families earning six figures have plenty of fat to cut. If you have two kids, a part-time nanny will probably do more for your quality of life than a new car." (Since he's a lolbertarian economist, he also says "a nanny doesn't need fluent English or a driver's license to provide loving care for your children.") A big chunk of the book is a summary of nature over nurture arguments, with the purpose of convincing blank-slatist SWPLs that they can helicopter parent less because their children are genetically destined to strongly resemble them. (He says, "Behavioral genetics offers parents a deal: Show more modesty and get more happiness. You can have a better life and a bigger family if you admit that your kids' future is not in your hands." He even says, "trust not in your parenting but in your genes... pick a spouse who has the traits you want your kids to have"!) Ultimately, I do think that Caplan is right but for the wrong reason. I think that the biggest factor that drives down family sizes is not overparenting but the cost, or apprehension about the cost, of the American education scams: not only overpriced colleges but also secondary schools. Once you have the key insight that "selective" private collages (full of potheads) are a scam, you can save a tremendous amount of money. And as an added bonus, the "selective" college scam has also been driving the excessive extracurricular activity burden.
  • Ludicrous: The Unvarnished Story of Tesla Motors (3/5) Bought this to support @Tweetermeyer and because it looked like a quick read. It reads like a bit of a rush job but it does job telling the Musk story to people who have not been following as closely as we have. (See 1, 2, 3, 4, 5, 6.) Basically Musk is a liar and a crook, and that strategy has worked for him for his whole career, but it is beginning to catch up with him. The early parts of the book are a reminder of how many times he has gone all-in and won: "extraordinary bluffing streak paid off". "This pattern would become a defining characteristic of Tesla's culture: The company would be stuck having to hype ever-bigger new ambitions to raise the money needed to deliver on earlier endeavors that had bogged down in execution." The ever bigger ambitions have become impossible: fully autonomous vehicles (a million robotaxis) or settling Mars. In addition to being dishonest, Musk's ratio of confidence to capability is off the charts. He is the ultimate entrepreneur as miscalibrated optimist. Big problem with the Model 3: "the lower the price of a car, the more the owner is likely to rely on it and thus the more important quality is." The idea that Musk is a physics or engineering genius is wrong - he does things that do not pencil out even on the back of the envelope. For example in 2015, he promised that the "Supercharger" charging stations would be converted to solar power. That just does not work - that amount of energy needs to come from grid power. Why Tesla has to take huge risks releasing self-driving features that aren't ready: "If Tesla were to completely eliminate the risks that killed Josh Brown, Autopilot would be almost impossible to distinguish from any other ADAS system, and Tesla's supposed advantage in autonomous-drive technology (and the billions in market valuation that it brings) would disappear." Also a good point: "The most brilliant design in the world is worth very little if it can't be made efficiently, profitably, and at competitive quality. These 'compromises' [made by other automakers] aren't the products of generic corporate mediocrity, but of survival of the fittest - the car companies that didn't embrace them have all gone out of business." Remember that Musk's plan for the Model 3 factory (the "unstoppable alien dreadnought") made no sense from the beginning. He was bizarrely obsessed with the line speed and volumetric density of the factory and proposed "a factory populated completely by densely packed robots moving so fast that no human could keep up with them." Because he did not actually have what should have been the premise of an electric car company - better battery chemistry - he decided to try to challenge companies like Toyota and Honda at what they have perfected.

Wednesday, September 25, 2019

September 25th Links

  • You'll also note that 'insulin resistance' while carbohydrate dominated, can also be activated through, for example, too much fat (triglycerides). Any macronutrient may produce ATP, which will overload the system and cause glucose to back up. Proteins and fats, however, are more difficult to overeat, because they naturally activate satiety hormones that prevent this exact situation. The logical solution? Fasting. Boom. [link]
  • Ukrainians love their lard. Lard is the country's most consumed meat product—and the national food. The first time I visited the daily farmers market, I was overwhelmed by the amount of pork belly for sale. Lard is everywhere and is prepared in many different ways. The man in the business suit who ate a plate of lard all by himself ate it with three different seasonings. It is very popular to eat lard raw by adding it to a sandwich or just eating it as a small snack. It is also a component of soups and dumplings, and Ukrainians add extra chunks of lard to their cured and fermented meats. Many parents have their babies suck on pieces of lard instead of a pacifier! [WAP]
  • I'm excited about another upcoming announcement that involves a 22-foot conference table that has been the center of my office for 15 years. It is where we have hosted dozens of business and political leaders as well as elite athletes. It's also where we've made...and, sadly lost...billions of dollars. We auctioned that table a few weeks ago and the tale of where it will land is incredible. [T Boone Pickens]
  • While we will always honour our commitments to our customers, our decision on sourcing our committed supply will always be value based, not volume based. We have cut production well below our committed sales and are purchasing material to fulfill our commitments, backed up by a strong balance sheet that ensures we can self-manage risk while executing this approach. This is what separates commercial suppliers from non-commercial suppliers. Production curtailment decisions are among the most difficult decisions I have ever had to make. And, unfortunately, I have had to make a number of them. But without direct or indirect statebacking, we must make these decisions along with marketing and financial decisions that insulate us from contributing to today's near-term oversupply and that prevent us from having to chase this market down. Also, we preserve the value of one of the world's very best mining assets for the future giving our customers the confidence in our long-term, tier one supply base. [Cameco]
  • To many on the left, Donald Trump is an order of magnitude more disastrous a commander in chief than was George W. Bush, whose reputation now stands thoroughly rehabilitated in the popular culture. Bush is no longer the incurious man who launched an unnecessary war that killed hundreds of thousands in Iraq; today, he's the goofy old fella who paints portraits of the troops, pals around with Michelle Obama and seems to be in on the joke of our times. [NYT]
  • The best pilots do not sit in cockpits so much as strap them on. The United States Navy manages to instill a sense of this in its fledgling fighter pilots by ramming them through rigorous classroom instruction and then requiring them to fly at bank angles without limits, including upside down. The same cannot be expected of airline pilots who never fly solo and whose entire experience consists of catering to passengers who flinch in mild turbulence, refer to "air pockets" in cocktail conversation and think they are near death if bank angles exceed 30 degrees. The problem exists for many American and European pilots, too. Unless they make extraordinary efforts — for instance, going out to fly aerobatics, fly sailplanes or wander among the airstrips of backcountry Idaho — they may never develop true airmanship no matter the length of their careers. [Langewiesche]
  • As rich and powerful as the Godfather becomes, he never loses sight of the reciprocal strands of respect, obligation, honor, and loyalty due family, friends, fellow Sicilians, and the Catholic church. These are not ties that bind. They are bonds, sources of strength, foundational stones of his life and empire. Such bonds have bolstered the human race for most of its history. That they are now under sustained assault would strike Don Corleone as foolishness. Their proposed replacement would strike him as madness. [Lew Rockwell]
  • Hello from the tail end of Japan Swelter Summer. The humidity broke a few days ago and everything is crisp and glorious and markedly less soggy. I am obsessed with humidity — my home is filled with hygrometers. I have a dry case for camera equipment and my one pair of fancy leather shoes. My friends send me the latest in dehumidifier news. Few people fully understand the implications of runaway humidity. What an odd thing to care about, you may think. But spend a summer in certain corners of Japan and you will suddenly care very much. A comfortable life is contingent on very narrow bands of humidity:temperature ratios. 60% humidity and 22 degrees Celsius is excellent. [Craig Mod]
  • Some SoftBank executives are balking at taking on large personal loans to buy into the Japanese group's portfolio of technology companies, an investment scheme described internally as a test of loyalty to founder Masayoshi Son. The scheme encourages participants to take a huge personal bet on SoftBank's $97bn Vision Fund — the vehicle which has come under intense scrutiny after the collapse in value of WeWork, the shared office provider that is one of its bigger investments. SoftBank offers the loans on a sliding scale depending on salary and length of tenure. Some executives have been encouraged to borrow more than 10 times their base salary, according to people familiar with the situation. [FT]
  • The legal wrangling over Universe is knotty. Although the sculpture was effectively integrated into the tower's lobby from the start, ownership of the work was governed by a separate "option agreement" created during a 1994 financing deal involving the tower. The option agreement granted Sears the right to purchase the Calder from any subsequent owner of the building for a set fee of $3.625 million, plus interest, during the first six months of 2010. [Artnet]

Tuesday, September 24, 2019

Sears Holdings Bankruptcy Update

To address the timing mismatch of the Debtors’ assets and administrative claims, the Debtors intend to proceed with confirmation now and prosecute litigation with the oversight of the Litigation Designees who will be appointed effectively immediately upon entry of the Confirmation Order (and, on the Effective Date, will become the initial members of the Liquidating Trust Board), but intend to go effective once the Debtors either reconcile or settle with certain Administrative Expense Claimants. But the Debtors believe and will prove at the Confirmation Hearing that they have been and remain administratively solvent. The Debtors have met with certain Administrative Expense Claim creditors and proposed a settlement to such creditors in exchange for accepting a reduced but accelerated recovery on their Administrative Expense Claims. A construct for Administrative Claim settlements is attached hereto as Exhibit B (the “Administrative Expense Claims Settlement Proposal”). Negotiations among the Debtors and a group of ad hoc administrative creditors holding certain asserted Administrative Expense Claims are ongoing. In the Debtors’ view, and as the evidence demonstrates, such a settlement is “nice to have”—not a “must have.”