Monday, June 10, 2019

Update on Tesla

In the past, we had asked, "Why Doesn't Tesla Raise Capital?" There were such obvious signs of undercapitalization (see: layoffs, severely stretched payables to suppliers, closing stores), and the company was so richly valued compared to any competitors, yet they did not borrow money or sell equity.

Some people thought that Tesla and Musk were being prevented by regulators from raising capital. Others thought that Musk was careful raising equity because the overvaluation of the equity (which he needs to maintain) is caused by limiting the float and keeping the stock in the hands of diehard believers in him and his mission - and he was out of believers whom he could trust to not sell the shares.

Ultimately, at the beginning of May he at least settled the question of whether he is "allowed" to access the capital markets and raised $847.6 million from selling stock and $1.84 billion from selling convertible debt. (Maybe someday we will learn why he did not sell equity at far higher prices in 2017 and 2018.)

When the capital raise was announced, the most pessimistic Tesla bears were shocked and despondent. They even thought the SEC might block the deal at the 11th hour. Yet what ended up happening was that the deal closed but then stock began a precipitous decline.

The most bearish Tesla bears had been looking at the stressed balance sheet and concluding that bankruptcy was imminent - which it would have been if it was truly prevented from raising capital. Meanwhile, the bulls thought that bankruptcy was off the table because of the multi-billion dollar market capitalization. They thought that while Musk is "eccentric," the idea that the government would be intervening secretly to protect investors from him was a wild conspiracy theory. Both sides were focused on the bankruptcy argument; bears advancing it to the incredulity of bulls.

Maybe what both sides missed was that the stock was priced for growth and absolute perfection, but in 2019 the growth was reversing into volume and margin contraction, the management and business model are far from perfect, and if the valuation were simply to adjust to that of other automakers then there was (and still is) a very long way for the share price to fall. See the chart below of automakers' enterprise value to sales ratios versus their operating margins:




Tesla is in a league of its own - in a bad way. The other automakers are profitable right now, with an average operating margin of five percent. Recessions are tough in the auto business so you had better be making money when things are good. The other automakers have enterprise values (their market capitalizations plus debt minus cash) that are fractions (an average of 20%) of their annual sales revenues. Meanwhile, Tesla in the top left corner trades at an order of magnitude higher EV/sales multiple despite chronic unprofitability.

At the beginning of 2019, something happened to Tesla that a lot of analysts could not ignore: sales collapsed.




This chart (by @TeslaCharts) shows just the Model 3, but the other two models (S & X) are similarly troubled. (The Europeans in particular seem to be finished with those models.) And these volume declines are despite significant price cuts. Tesla was already unprofitable, and in a business with operating leverage like an automaker, price cuts will amplify the losses.

Without growing sales at constant profit margins (i.e. no price cuts), there is no path to profitability for Tesla, and that in turn implies insolvency. There has been a big change in tone the last few months as sell side analysts and journalists want to get in front of this story. Morgan Stanley's research analyst Adam Jonas was shockingly bearish on a call with investors on May 22nd:

  • And today Tesla is not really seen as a growth story by at least the feedback we were getting which was quite one sided. But we'll get the feedback in a minute. It's seen more as a distressed credit story and a restructuring story. So from a growth story to a distress credit and restructuring story. At the heart of this though is demand. What's changed? What's changed is demand. Right? And then from demand I could go on and say it's a cost problem but - or a debt problem which it also is - but it started with demand. That's the first domino and I won't get into too much details as there is so much public published around him. Most of our clients have vastly superior ways to look at demand than we do on a daily or weekly basis. But demand basically fell one third sequentially from 4Q to 1Q 19.
  • The gross debt as a percentage of market cap and even net debt as a percentage of market cap is really at all time highs right now on our numbers at least since at least since the it's been a public company. Gross debt - I'm giving you round numbers - is roughly 50% of revenues. When I say revenues I mean the 2019 revenue forecasts that are 350,000 unit number. 50% of revenues is debt, that compares to about 10% of revenues gross debt at Ford and GM and for Volkswagen and BMW it's somewhere between gross debt is about 2 to 5%. I mention that because on our $10 bear case you know the EV to sales is almost double Volkswagen. And again I know it's heresy to suggest that you can compare the valuation of Tesla with a genuinely class leading tech and brand positioning to Volkswagen, but you know if a company is not growing you invite yourself to those comparisons. Even at a zero dollar equity value the enterprise value to sales ratio of Tesla would be 50% or so higher than VW. It would be in the range of a BMW EV to sales at zero dollars. So the exercise of moving to 10 bucks was not so much saying "hey it's a it's a black zero or the so much a commentary on insolvency, but just to put in perspective the composition of enterprise value and how large debt is as a proportion of that enterprise value at those levels.
It appears as though insiders at Tesla have seen this coming for a long time. We have previously noted the executive departures, like David Morton, who joined as a new Chief Accounting Officer on August 6th, 2018 only to quit a month later. He had worked at his previous employer Seagate Technologies for 23 years.

The insiders who are still, for whatever reason, stuck at Tesla dump their stock instead. Jeffrey Straubel was part of the founding team and is the Chief Technical Officer of Tesla. On May 28th, he exercised his stock options to buy 15,000 shares at $31.49 and sold the stock in the high $180s to low $190s. These options were not due to expire until February 2022, so the early exercise threw away a lot of time value.

Tesla is facing serious competition for the first time, and seems to be crumbling in the face of it. If you want a luxury EV, there are the Jaguar I-PACE, the Audi e-tron, and soon the Porsche Taycan. If you actually care about the environment, there are the Chevrolet Volt and Nissan LEAF. And if you are actually frugal, there is the Toyota hybrid lineup (including the Prius) and any number of highly fuel efficient diesels.

P.S. Does anyone remember actors and actresses showing up at the 2003 Academy Awards in the Prius?

June 10th Links

  • Most of us move through our daily lives merely "looking", that is, using our eyes simply for the practical task of completing our daily routines without too much drama. We rarely really take the time to SEE the many miracles and hidden universes that are constantly presented to us. In this sense, photography has been a gift of "sight" in that it has helped me to slow down and to engage my senses on a much deeper level than ever before. As Burke Uzzle said, "Photography is a love affair with life." And so it is with me. Living between Barcelona, Spain and Boulder, Colorado has led me to make pictures of two apparently very contrary subjects: wild scapes (nature) and human scapes (urban scenes, street, the human condition). [link]
  • A motivation for dropout comes from a theory of the role of sex in evolution. Sexual reproduction involves taking half the genes of one parent and half of the other, adding a very small amount of random mutation, and combining them to produce an offspring. The asexual alternative is to create an offspring with a slightly mutated copy of the parent's genes. It seems plausible that asexual reproduction should be a better way to optimize individual fitness because a good set of genes that have come to work well together can be passed on directly to the offspring. On the other hand, sexual reproduction is likely to break up these co-adapted sets of genes, especially if these sets are large and, intuitively, this should decrease the fitness of organisms that have already evolved complicated co-adaptations. However, sexual reproduction is the way most advanced organisms evolved. One possible explanation for the superiority of sexual reproduction is that, over the long term, the criterion for natural selection may not be individual fitness but rather mix-ability of genes. The ability of a set of genes to be able to work well with another random set of genes makes them more robust. Since a gene cannot rely on a large set of partners to be present at all times, it must learn to do something useful on its own or in collaboration with a small number of other genes. According to this theory, the role of sexual reproduction is not just to allow useful new genes to spread throughout the population, but also to facilitate this process by reducing complex co-adaptations that would reduce the chance of a new gene improving the fitness of an individual. Similarly, each hidden unit in a neural network trained with dropout must learn to work with a randomly chosen sample of other units. This should make each hidden unit more robust and drive it towards creating useful features on its own without relying on other hidden units to correct its mistakes. However, the hidden units within a layer will still learn to do different things from each other. One might imagine that the net would become robust against dropout by making many copies of each hidden unit, but this is a poor solution for exactly the same reason as replica codes are a poor way to deal with a noisy channel. [link]
  • I reject, as a matter of law, Facebook's implicit suggestion that I must adjudicate the merits of Plaintiffs' Caremark claim before allowing an otherwise proper demand for inspection to stand. This is not the time for a merits assessment of Plaintiffs' potential claims against Facebook's fiduciaries. The "credible basis" standard applicable in this Section 220 action imposes the lowest burden of proof known in our law and asks a fundamentally different question than would be asked at a trial on the merits: has the stockholder presented "some evidence" to support an inference of wrongdoing that would justify allowing the stockholder to inspect Facebook's books and records? While this court consistently reminds stockholders that a Caremark claim "is possibly the most difficult theory upon which a plaintiff might hope to win a judgment," that admonition does not license this court to alter the minimum burden of proof governing a stockholder's qualified right to inspect books and records. [Delaware Chancery]
  • As unbelievable as it sounds, a Chicago-based firm called Helferich Patent Licensing LLC owns that patent, which its founder Richard Helferich filed for in 1997. So far nearly 100 companies have settled with HPL for the $750,000 licensing fee, meaning a patent that you'd think would be ludicrous has earned its owner at least $75 million, if not more. [link]
  • A continuation is essentially a copy of the non-provisional application, that claims the benefit of the provisional and prior non-provisional applications. The continuation also contains new patent Claims. The continuation allows an inventor to continue to claim other inventions in the disclosure with the filing date of the original provisional application. For example, if an inventor files a provisional in 2019 and maintains continuity by always filing a continuation before the issuance of a patent application, in 2029 the inventor can file another patent application with the original 2019 filing date, and draft the claims of the application based on what your competitors are doing (so long as the information was disclosed in the original provisional / non-provisional application). This can be incredibly powerful—it's almost like having a time machine that enables you to write claims based on your specification after looking into the future to see how the patent will be infringed. [JDBIP]
  • TPL's almost "autopilot" policy of self-repurchasing has proven to be a great capital allocation strategy, avoiding the all-too-common resource producer patterns of buying overpriced land (often at cyclical commodity peaks) just to grow production, or boondoggles from straying afield (something that Pardee investors are currently grappling with). [Oddball Stocks]
  • The proxy statement is well worth reading. The negotiations with the eventual buyer lasted from March 2018 until April 2019. One thing that is a little ominous is that the buyer wanted the fruit business but not the plastics and especially not the real estate. Apparently the buyer was emphatic that they did not want "to be in the 'chain of ownership' for the Company's real estate property"! The way that this was resolved is that Paradise is doing an asset sale of just the fruit business; not a merger or sale of the whole company. [Oddball Stocks]
  • Suspension problems have plagued Tesla's cars for years. On the internet an incident like Mena's is known as the "whompy wheel," and it has become something like Tesla-lore. The National Highway Safety Transportation Association (NHTSA) website is littered with anonymous complaints about broken suspensions, and there are websites dedicated to spotting whompy wheels in the wild. For its part, Tesla has issued multiple technical service bulletins (TSBs) warning mechanics of suspension issues with its Model S and X cars. But Tesla has never issued a recall for this problem. [Business Insider]
  • Don't completely write off the idea of using a film camera. Film–and even instant Polaroid–seems to be making a comeback lately. You can pick up film cameras on eBay and Craig's List for a sweet song, even larger format cameras. If you go this route, you might eventually want to develop your own negatives and do your own printing. This will involve a darkroom and a whole huge new world of information, learning, and experimentation. As an alternative, many film enthusiasts (including me, when I shoot film), have a local shop develop the film and provide both the negatives and scanned digital files of those negatives. This allows you to shoot with film but do your post-processing at your computer, cookies and milk by your side. Maybe something to consider? [link]
  • All four long-term readers of BLDGBLOG will know that I am obsessed with the San Andreas Fault, teaching an entire class about it at Columbia and visiting it whenever possible as a hiking destination. The San Andreas is often a naturally stunning landscape—particularly in places like Wallace Creek, Tomales Bay, or even the area near Devil's Punchbowl—but the fault's symbolism, as the grinding edge of two vast tectonic plates, where worlds slide past one another toward an unimaginable planetary future, adds a somewhat mystical element to each visit. It's like hiking along a gap through which a new version of the world will emerge. [Geoff Manaugh]
  • Many biologists have sought specific external causes for the five biggest mass extinctions apparent in the fossil record. These events stand out to the eye just like the big avalanches in the rice pile; their sheer size makes them look different and exceptional. Yet a number of simple models of out of equilibrium ecosystems of interacting species have shown that random extinctions of single species—analogous to the dropping of a single rice grain—may trigger avalanches of species extinctions that would produce a distribution of extinctions by size fitting the fossil data9, 10. The big and small mass extinctions may just be identical avalanches of extinctions, only some have gone on much longer than others. [link]
  • Others in AV space had stuffed the cars with LIDARS, which although expensive, solve the majority of what Tesla tries to solve with AI (such as obstacle avoidance and traversability), full blown gaming GPUs offering way more compute power than even the latest Tesla hardware and yet according to the data we have it is clear that nobody is even close to full autonomy. [link]

Monday, June 3, 2019

June 3rd Links

  • "Menashe's hummus is magnificent, a ring of silky, airy purée surrounding a big spoonful of chunkier, denser stuff; a green rivulet of olive oil; smears of spicy, smoky harissa and green puréed herbs." [LA Times]
  • An inventor should always ask, "how can I implement the essence of my idea in different forms"? The answers to this question should be included in the materials that get filed in a provisional application. In addition, as many other features or planned features that have not been included in working prototypes but that are able to be sufficiently described in writing and through figures should also be included in the materials that are ultimately filed in the provisional application. [JDBIP]
  • Most public criticisms of Uber have focused on narrow behavioral and cultural issues, including deceptive advertising and pricing, algorithmic manipulation, driver exploitation, deep-seated misogyny among executives, and disregard of laws and business norms. Such criticisms are valid, but these problems are not fixable aberrations. They were the inevitable result of pursuing "growth at all costs" without having any ability to fund that growth out of positive cash flow. [link]
  • "The snowball property of growing companies means that if you are extracting cash fraudulently, you usually need to be growing the fake earnings at a higher rate. So people who are correctly identifying frauds can often look like they are jealously attacking success." [link]
  • This culture of superstars is a major obstacle frustrating any attempt to improve existing technology. It more or less works for commercial websites, where the startup capital requirements are low, profits per employee are vast, and employee turnover is such that corporate culture is impossible. People get extremely rich for doing something first, even if in their absence their competitors would've done the same six months later. Valve, a video game company that recognizes this, oriented its entire structure around having no formal management at all, but for the most part what this leads to is extremely rich people like Bill Gates and Mark Zuckerberg who get treated like superstars and think they can do anything. In infrastructure, this is not workable. Trains are 19th-century technology, as are cars and buses. Planes are from the 20th century. Companies can get extremely successful improving the technology somehow, but this works differently from the kind of entrepreneurship that's successful in the software and internet sectors. The most important airline invention since the jet engine is either the widebody (i.e. more capacity) or the suite of features that make for low-cost flights, such as quick turnarounds. What Southwest and its ultra low-cost successors have done is precious: they’ve figured how to trim every airline expense, from better crew utilization to incentives for lower-transaction cost booking methods. This requires perfect knowledge of preexisting practices and still takes decades to do. The growth rate of Microsoft, Google, and Facebook is not possible in such an environment, and so the individual superstar matters far less than a positive corporate culture that can transmit itself over multiple generations of managers. [link]
  • Mount Olympus, nearly 8,000 feet tall, is a mere 35 miles from the Pacific Ocean, one of the steepest reliefs globally and accounting for the high precipitation of the area, as much as 240 inches of snow and rain on Mount Olympus. [Wiki]
  • Something to keep in mind is that the NYT figured out a while ago that it could cheaply generate a lot of clickbait content without sending out expensive foreign correspondents to Rangoon or wherever. Instead, it could just pay its intersectional interns to generate cheap content in genres that they would obsess over for free anyway, like "The White Patriarchy Is Trying to Erase My Hair." [Sailer]
  • I don't either, but I think I understand. In the absence of a legally enforced class system, there's something deeply disturbing about having poor people of your same genetic stock around. They sort of remind you of where you come from, and where you might go back. When I see all those smart enterprising Chinese working their asses for 200 dollars a month, I feel uneasy, that they might some day replace me, or I'll end up like them. Prole co-ethnics are the personification of downward mobility. And downward mobility is the most pure source of fear in the world. It's fear itself. [Bloody Shovel]
  • And thus, in less than 20 years since the Communist takeover, the most ancient culture on earth was shattered, and replaced by a signalling spiral, all by sheer cognitive overload. [Bloody Shovel]
  • The following scenario is quite common: In merger negotiations, the target company and the buyer retain their own attorneys. At closing, the target company and all of its assets transfer to the buyer by way of the surviving company. That transfer involves the transfer of computer systems and email servers, which contain pre-merger communications between the target company's owners and representatives (i.e., the sellers) and the target company's counsel. Thus, in a postclosing dispute between the sellers and buyer, the buyer possesses the target company's privileged pre-merger attorney-client communications, including those concerning merger negotiations. This common scenario gives rise to the question currently before the Court: When may a buyer use the acquired company’s privileged pre-merger attorney-client communications in post-closing litigation against the sellers? [Delaware Chancery]

Monday, May 27, 2019

Memorial Day Links

  • The dangling implication of this report is that it remains entirely possible that an older, asymptomatic patient may never require dilated fundus examination during the course of his or her life. Long-term prospective, population-based study is required to follow up on this intriguing hypothesis and to provide medical evidence to substantiate an old clinical practice. In the final analysis, patient symptomatology continues to be the single most important factor in discovering highly significant peripheral retinal findings. To answer the question posed by the title of this article then, clinicians must recognize that it is quite possibly "never." [NLM]
  • One of the most notable yet subtle costs of reuse is that the rocket manufacturer must now keep two separate supply lines open: one to service refurbishing of previously used rockets, and one to build new rockets and rocket components. Keeping both open is expensive, and running either one at reduced capacity (such as if few rockets are produced because many are reused) is a substantial expense. This leads to one of the most important rules in rocket reusability: it can only work at a consistent high flight rate (usually in the 30-40 launches per year range) because that is what is needed so that the fixed costs of running two supply lines does not dominate your expenses. Otherwise, more efficient production without reuse makes far more financial sense. [Reddit]
  • The people, members of a hunter-gatherer tribe called the Pirahã, responded to the sight of Everett—a solidly built man of fifty-five with a red beard and the booming voice of a former evangelical minister—with a greeting that sounded like a profusion of exotic songbirds, a melodic chattering scarcely discernible, to the uninitiated, as human speech. Unrelated to any other extant tongue, and based on just eight consonants and three vowels, Pirahã has one of the simplest sound systems known. Yet it possesses such a complex array of tones, stresses, and syllable lengths that its speakers can dispense with their vowels and consonants altogether and sing, hum, or whistle conversations. [New Yorker]
  • You can't have nationalism without race (minzu zhuyi). That's what we want to do: promote Han racial nationalism (Han minzu zhuyi). The multiracial nationalism we have now in China, with 56 races as part of a larger "Chinese race" (Zhongua minzu) is a big scam. It was imposed upon us by the Manchus, forcing us Han, the core of China from the beginning of time, into submission. All that this nationalism has done is to weaken China. You can't just destroy the distinction between civilization and barbarism (Hua yi zhi bian), incorporate a bunch of barbarians into our nation and then expect a strong nation. All this talk of "wealth and power" (fuqiang) is empty and meaningless without Han nationalism. [Asia Sentinel]
  • The "Substantive Consolidation Settlement" is another major change in the amended plan. Under this settlement "all Assets of the Debtors shall be consolidated and treated as Liquidating Trust Assets irrespective of which Debtors own such Assets". The problem was that some claim holders had a claim only against a specific Sears entity. If that entity had significant assets, the claim holders were asserting in objections that they should get a higher recovery. Now all entities are all consolidated together and assumed to be just one entity. In addition, all intercompany claims and intercompany interests (equity holdings between entities) are going to be cancelled. This settlement still has to be approved by the court. If it is not approved, there could be huge administrative problems because each Sears entity would need to have a "a separate chapter 11 plan of liquidation", which could "reduce recovery for other creditors". It would also drag the case on for a very long time. [Seeking Alpha]
  • In the US from the 1950s to the early '70s, if you wanted a truly small, economical car that was a bit on the rorty side and genuinely fun to drive, you probably bought a Fiat. The make sold very well in the US for a long time. However, Fiat lost its luster as the '70s wore on and people got tired of the rust and problems. That's where Honda stepped in. They offered the same basic qualities of the Fiats but with a difference of reliability and build quality. By 1982, Fiat was all but gone in the US and Honda took their place and then some. [TTAC]
  • Toxic signaling molecules. Increasing the energetic demands of signaling is not the only way to impose costs on parasites. An even more direct strategy would be to employ toxic molecules as chemical signals. In principle, this countermeasure achieves two goals at once: it turns the brain into an inhospitable environment for manipulative parasites, and forces them to synthesize dangerous substances that may hinder their survival and reproduction. If the fitness costs are sufficiently large, toxic signals can work as deterrents against direct hijacking. Among classic neurotransmitters, dopamine is the most likely candidate as a toxic signal. Dopamine molecules are unstable and tend to oxidate spontaneously, yielding highly reactive quinones that can damage proteins, DNA, and other macromolecules. In sum, synthesizing and storing dopamine is hazardous, but even breaking it down involves a potential risk of damage. Indeed, some species of green algae exploit the toxicity of dopamine to repel marine herbivores and avoid being eaten by them. [Research Gate]
  • If one asks, to take a trivial and theoretically uninteresting example, whether we might expect to find social class differences in a color-naming test, there immediately spring to mind numerous influences, ranging from (a) verbal intelligence leading to better verbal discriminations and retention of color names to (b) class differences in maternal teaching behavior (which one can readily observe by watching mothers explain things to their children at a zoo) to (c) more subtle—but still nonzero—influences, such as upper-class children being more likely Anglicans than Baptists, hence exposed to the changes in liturgical colors during the church year! Examples of such multiple possible influences are so easy to generate, I shall resist the temptation to go on. If somebody asks a psychologist or sociologist whether she might expect a nonzero correlation between dental caries and IQ, the best guess would be yes, small but statistically significant. A small negative correlation was in fact found during the 1920s, misleading some hygienists to hold that IQ was lowered by toxins from decayed teeth. (The received explanation today is that dental caries and IQ are both correlates of social class.) More than 75 years ago, Edward Lee Thorndike enunciated the famous dictum, "All good things tend to go together, as do all bad ones." [Meehl]
  • The ignition switch died, so to start the car, I had to pop the hood and jump the starter relay with a wire, every single time. It got to the point where I'd just keep the Jeep idling in the grocery store parking lot while I went shopping so I could avoid starting it back up. I did this for six months, and nobody ever tried to steal this green meachine. That's how sad this Jeep had become. [Jalopnik]

Monday, May 20, 2019

May 20th Links

  • Now with the UBER IPO, the Ponzi Sector may finally be peaking. On Friday, May 9, we saw conclusive proof that there simply isn't enough dumb money left to fund endless operating losses, while simultaneously absorbing all the VC shares that are desperately seeking exits before their various Ponzi Schemes detonate. Remember, a Ponzi Scheme dies when more money goes out than comes in. This is especially true of schemes that rely on greater fool theories where most purchasers feel that they are "in on the scheme," and will sell out to someone stupider than them in the future. When it becomes obvious that there are no more "bag-holders," look out below. [AiC]
  • Nate Silver correctly predicted one presidential election where the losing candidate took a dive and another where the losing candidate correctly predicted that he would lose because there was a winning majority already on the payroll of the incumbent. [CBS]
  • He notices simple things that some might call innuendo, but any gay man will instantly recognize, like the fabulous interiors of the gay cardinals' palaces, always with their "assistants" or young "relative" on hand. Or he simply describes Burke's appearance: "The 70-year-old cardinal [is] sitting on an asparagus-green throne twice as large as he is, surrounded by silvery drapery. He wears a fluorescent yellow mitre in the shape of a tall Tower of Pisa, and long turquoise gloves that look like iron hands; his mozzetta is cabbage-green, embroidered with yellow, lined with a leek-green hood revealing a bow of crimson and pomegranate lace." [NY Mag]
  • Below is a compare and contrast photo to help illustrate what I mean by nice homes being replaced by extravagant ones. It's difficult to explain the size and length of this home under construction. To get a better understanding, I included an average sized beach house in the picture (to the right). I've labeled these monster residences "Quantitative Easing Beach Homes," as many were built after the Federal Reserve implemented its asset purchase programs and expanded its balance sheet. While I need to do further research, I suspect the average size of a new beach house has grown commensurately with the Federal Reserve's balance sheet. [Cinnamond]
  • PLEASE TAKE NOTICE that the hearing to consider approval of the Disclosure Statement for Joint Chapter 11 Plan of Sears Holdings Corporation and Its Affiliated Debtors scheduled for May 16, 2019 at 10:00 a.m. has been rescheduled to May 29, 2019 at 1:30 p.m.. The Disclosure Statement Hearing will be held before the Honorable Robert D. Drain, United States Bankruptcy Judge, at the United States Bankruptcy Court for the Southern District of New York, Courtroom 118, 300 Quarropas Street, White Plains, New York, 10601-4140. [Prime Clerk]
  • Oklahoma City was born in an event called, with extreme dramatic understatement, the Land Run. The Land Run should be called something like "Chaos Explosion Apocalypse Town" or "Reckoning of the DoomSettlers: Clusterfuck on the Prairie." It should be one of the major events in American history — dramatizations of it should be projected onto IMAX screens with 3-D explosions, in endless loops, forever. Because the Land Run was, even by the standards of America, absurd. It was a very bad idea, executed very badly. It would be hard to think of a worse way to start a city. Harper's Weekly, which had a reporter on the ground, called it "one of the most bizarre and chaotic episodes of town founding in world history." [NY Mag]
  • The Art Institute's famous western entrance on Michigan Avenue is guarded by two bronze lionstatues created by Edward Kemeys. The lions were unveiled on May 10, 1894, each weighing more than two tons. The sculptor gave them unofficial names: the south lion is "stands in an attitude of defiance," and the north lion is "on the prowl." When a Chicago sports team plays in the championships of their respective league (i.e. the Super Bowl or Stanley Cup Finals, not the entire playoffs), the lions are frequently dressed in that team's uniform. Evergreen wreaths are placed around their necks during the Christmas season. [Wiki]
  • I was shocked at how over-hyped this museum was in relation to the awful curating and presentation of what is without a question a world class collection of impressionist masters, along with other genres. Famous works of art stacked on top of each other, some hung above doorways near the ceiling of small badly lit rooms so that it was impossible to even see, much less appreciate those works. As other reviewers have observed, there are many rules that the staff take a special delight in enforcing like Nazi guards. My friend was not allowed to bring her small handbag, though while waiting for the elevator, we saw one women with a handbag large engough to carry her laundry. The walls are covered with a hideous burlap material, with many paintings missing and in their place are left ugly nails and other items. There is no space in between paintings so that the visual experience is cluttered. [Trip Advisor]
  • American gave all its boarding groups numbers, even the premium ones, and "Group 1" became "Group 5." Citibank had to send an email to American co-brand cardholders telling them they'd now be boarding in "Group 5," but that this wasn't a demotion because they'd really been in the fifth group all along. Actually, "Group 5" is the sixth group — American still allows its most elite Concierge Key fliers to board before "Group 1," as a sort of Group 0 — but who's counting? (Just kidding: These people are definitely counting.) [NY Mag]
  • High in the Andes, La Rinconada has an alpine / tundra climate, with no month having average temperatures even close to the 10°C threshold that would permit tree growth and a subtropical highland classification for the city. Far above the tree line, La Rinconada is unique in its high elevation and population, with the highest city of comparable population (Cerro de Pasco) being over 700 m (2,300 ft; 0.43 mi) closer to sea level. Owing to the extreme elevation of the town, climatic conditions more closely resemble that of the west coast of Greenland than somewhere only 14° from the equator. The town has rainy summers and dry winters with a large diurnal variation seeing cool to cold days and freezing night time temperatures throughout the year, with common snowfalls. [Wiki]
  • The couple spent hours soaking in natural hot springs in Oregon's Owyhee Canyonlands and swimming in the Burgdorf Hot Springs in central Idaho. In Washington, Kathy said, the Goldmyer Hot Springs, near Snoqualmie Pass on the Pacific Crest Trail, were magical. "You actually step into a narrow cave in the top pool," she says. "You feel like you're in a womb." They lodged with hunters near the Wilderness Gateway Campground in Idaho, staying in cozy canvas tents with wood stoves. A detour took them on a 55-mile walk along an abandoned railroad. [Outside]
  • The third-generation edition of the Buick Roadmaster line, made from 1994 to 1996, is especially coveted. That one packs the same 5.7-liter LT1 V8 engine that GM also put into its Corvette. At 260 horsepower and with a top speed limited to 108 miles per hour, the wagon's engine had been detuned to produce less power than the 300-horsepower Corvette, but that didn't hamper enthusiasm for it then nor has it now. [Bloomberg]
  • I'm not debating the political merits of Cash for Clunkers. I was just saying that these qualified for the program right about the same time as 1) they hit the bottom of the depreciation curve and 2) a lot of people needed money. Thus, many otherwise good vehicles were scrapped, making them more scarce now than they would have been. [Bring a Trailer]

Friday, May 17, 2019

Modern Art is a Giant Tax Scam

Our correspondent from Louisiana:

Maybe you saw this news story and thought, "what idiots," to pay $91 million for a balloon animal any clown could make. Actually, the joke's on you, the American taxpayer.

The entire modern art industry, except for the rubes who get conned into thinking it's real art, is a giant tax scam. Being from Louisiana, I have a superpower in that when I see things involving large amounts of money that make no sense, I know someone's running a scam (people from other states, except NY/NJ, very gullible and trusting in my observations). I figured this out years ago reading about aggressive tax strategies, but this one felt too dishonest to pursue. Here's how it works:

To run a great tax scam, you need something that is cheap to produce, has no inherent value, but can plausibly be marked up to ungodly prices for no reason whatsoever. Modern art checks all those boxes. It's legal monopoly money.

Step One: Find a chain smoking degenerate who thinks he or she is an "artist." Whatever random trash they've put together as their art doesn't matter. The main thing is that the artist will play ball, and is charismatic and can convince others that he or she is a genius through clever and elaborate verbal descriptions of their art. You need a number of true believers as your useful idiots to keep the scam going.

Step Two: You and your friends in on the scheme buy up most of the artist's work directly from the artist. Because you're on the board at a museum, preferably one in NY, you pull strings to get your artist featured with an exhibition. Maybe you use your influence on the board to have the museum buy a few pieces at a significant markup to your cost. Now, boom, by social proof, random starving artist is now a BIG DEAL.

Step Three: You send a piece or two from your collection to auction. Your buddies bid it up and let's say they sell for $1 million each. You probably don't directly reimburse your buddies for their sham purchase - that would be my first thought if I were running this, but Louisiana people get in trouble because they're too honest when pursuing a scheme - there's just an "understanding" among collectors that you help each other paint the tape at auction.

Step Four: You say you have 10 pieces in your collection from this newly minted million-dollar artist. You only paid $5,000 each for them (cost basis $50,000), but through the beauty of the tax law that doesn't matter. They are now worth $1 million each, and even better, you can get an appraisal that they're worth $1 million each - because a similar piece just sold for the same amount thanks to your friends! With your appraisal in hand, you now own art worth $10 million. Amazingly, the law allows you to write this off at the appraised value, not the cost basis. Friends of yours in some flyover modern art museum influence their board to accept all 10 pieces as a donation. The rubes at this museum are very impressed with their new collection of work from the hot new artist in NYC. High school students with marginal talent come see the exhibit and seeing the art requires no technical skill, convince themselves they could become an artist too. The cycle begins anew.

Do the math: if you're from New York, you have an effective marginal tax rate of 55%. A $10 million tax deduction is worth $5.5 million to you, all on an investment of $50,000, 100x return. You can write off up to 30% of your income each and every year this way under the tax law.

Modern art is unique in that no other asset class allows something nearly worthless to arbitrarily become worth millions in a thinly traded market. A lot of the social pressure to accept this stuff as art is about keeping the scam going.
Previously on CBS, The $12 Million Stuffed Shark. Now that you've read this post, no reason to read the book.

Monday, May 13, 2019

May 13th Links

  • One shareholder asked if Steak n Shake would introduce "vegan hamburgers." Another questioner asked for applause for the company's management, a request which was greeted with awkward silence. One shareholder was displaying a copy of John Carreyrou's Theranos book "Bad Blood" and was asking if people thought Biglari Holdings' board was like Theranos' board and if Sardar Biglari was like Elizabeth Holmes (and another shareholder then referenced this in a question). My perception of Sardar Biglari's attitude towards Biglari Holdings shareholders reminded me of John Updike's great line about Ted Williams refusing to respond with a hat-tip to the pleading ovation of Red Sox fans after Williams' home run in the last at-bat of his career: "Gods don't answer letters." [Seeking Alpha]
  • You attain the Tao by avoiding all grains. You will never again have to follow the rhythm of the moon and plant or harvest. Now, the people of mysterious antiquity, they reached old age because they remained in leisure and never ate any grains. As the Dayou zhang (Verse of Great Existence) says: "The five grains are chisels cutting life away, making the five organs stink and shorten our spans. Once entered into our stomach, there's no more chance to live quite long." [Wiki]
  • In the San Fernando Valley, for instance, you can tell the neighborhoods where the ex-Soviet Armenian newcomers are pushing out the old Chicanos because the Armenians disdain the Mexicans' glass shards and instead invest in elaborate iron fences with lethal finials to impale intruders. [Sailer]
  • They are firm believers in walls and fences! It was controversial when some razor wire was rolled out on the US border, but I have never seen so much razor wire as down there in my life. Houses and apartment buildings in the best neighborhoods will have 10 foot tall fences topped with spikes and the spikes will be crowned with razor wire. Sometimes above the razor wire there are four or five strands of electric fencing too. Schools and government buildings are fortified with fences like this, and sometimes sandbags in front, the way military bases in Afghanistan and Iraq are set up. Everywhere the buildings present a totally armored face to the street. [CBS]
  • "Grand Canyon is remarkable not for its bigness but for its smallness. The Grand Wash trough just below the GC is much bigger in terms of sheer volume removed by erosion, but it is nowhere near as impressive to look at because it's too big. And for real size, consider what the Mississippi River has done. It has eroded a volume of material that would fill the GC many times over. Yet no one stands in Denver and looks out to the east thinking what an amazing erosional feat has been performed between the Rockies and the Appalachians. [...] Canyons, as opposed to valleys or larger landforms, are created by a tension between erosion and the lack of erosion. They are features of arid regions, where a river or stream works at the bottom, but there isn't enough erosion to widen the sides. This is best illustrated by slot canyons, where walls actually overhang and in places block one's view of the sky." [CBS]
  • You might also be wondering which non-alien phenomena might be accounting for these strange observations. Wouldn’t it be interesting, for instance, if a foreign power were tracking our military missions with a new secret weapon? Or if the eyewitness reports of our service members were so unreliable and in such systematic ways? [Cowen]
  • People hate paying for shipping. They despise it. It may sound banal, even self-evident, but understanding that was, I'm convinced, so critical to much of how we unlocked growth at Amazon over the years. People don't just hate paying for shipping, they hate it to literally an irrational degree. We know this because our first attempt to address this was to show, in the shopping cart and checkout process, that even after paying shipping, customers were saving money over driving to their local bookstore to buy a book because, at the time, most Amazon customers did not have to pay sales tax. That wasn't even factoring in the cost of getting to the store, the depreciation costs on the car, and the value of their time. People didn't care about this rational math. People, in general, are terrible at valuing their time, perhaps because for most people monetary compensation for one's time is so detached from the event of spending one's time. [Less Wrong]
  • It sure looks like the Industrial Revolution was a big deal. But Paul Christiano argues your eyes may be deceiving you. That graph is a hyperbola, ie corresponds to a single simple equation. There is no break in the pattern at any point. If you transformed it to a log doubling time graph, you'd just get the graph above that looks like a straight line until 1960. On this view, the Industiral Revolution didn't change historical GDP trends. It just shifted the world from a Malthusian regime where economic growth increased the population to a modern regime where economic growth increased per capita income. For the entire history of the world until 1000, GDP per capita was the same for everyone everywhere during all historical eras. An Israelite shepherd would have had about as much stuff as a Roman farmer or a medieval serf. [SSC]
  • My memories of Zaragoza, Spain, remain very strong. It's the 5th largest city in Spain (650K people according to Wikipedia) but so compact you can easily walk from the city centre to the edge of town. And when you reach the edge of town it just stops. Literally one side of the road is seven storey apartment buildings and the other side is just countryside. Who needs suburbia when you can have that? [Marginal Revolution]
  • Caro himself says he was influenced by the 'small is beautiful' movement in city planning when he wrote the book, and upon later reflection was a bit unfair to Moses. [Marginal Revolution]
  • Robert Caro's biography of Moses, The Power Broker, gives only passing mention to this event, despite Jacobs's strong influence on Caro. In 2017, Caro told an interviewer about the difficulty in cutting more than 300,000 words from his initial manuscript: "The section that I wrote on Jane Jacobs disappeared. To this day, when someone says: "There's hardly a mention of Jane Jacobs," I think, "but I wrote a lot about her." Every time I'm asked about that, I have this sick feeling." [Wiki]
  • We look at an international universe of stocks beginning with the first month of 1990 until December 2011; we compute the volatility of total return for each company in each country over the previous 24 months. Stocks in each country are ranked by volatility and formed into deciles. In the total universe and in each individual country low risk stocks outperform, the relationship with respect to Sharpe ratios is even more impressive. We believe this anomaly is caused primarily by agency issues, namely the compensation structures and internal stock selection processes at asset management firms which lead institutional investors on average to hold more volatile stocks. The article also addresses the implications for how corporate finance managers make capital investment decision in light of this evidence. The evidence presented here dethrones both CAPM and the Efficient Market Hypothesis. [SSRN]
  • I've been fascinated recently by the longevity of men with high-status, intellectually stimulating jobs. Charles Munger (still doing Q&A in public at 91), Judge Robert Patterson (who died last week, at 91). I'm sure it didn't hurt Armen Alchian that he lived in LA and had a flexible schedule for golfing. [CBS]
  • BIG's proposal for protecting New York is really a proposal to protect the most valuable real estate in lower Manhattan. The rest of the city that's vulnerable to floods is evidently out of luck. That includes half of Brooklyn, Queens, Staten Island, the Bronx, and big chunks of New Jersey. If the Dry Line actually gets built does the entire region chip in to pay to save the wealthiest inhabitants of the city? Does the city create a special parcel tax for just the properties served by the Dry Line? Or does the city build the cappuccino versions in some places and plain concrete walls and sand bags in others? Anyone want to guess how things turn out in the South Bronx? [Granola Shotgun]
  • DJT’s fortune has always been highly leveraged long commercial real estate, like a stubborn ass. Characters in the biz like Sam Zell repeatedly got in and out of the same trades over the relevant time period to better profit. [Phil G]
  • Testosterone treatment was initiated in 398 men during routine clinical care. The mortality in testosterone-treated men was 10.3% compared with 20.7% in untreated men with a mortality rate of 3.4 deaths per 100 person-years for testosterone-treated men and 5.7 deaths per 100 person-years in men not treated with testosterone. After multivariable adjustment including age, body mass index, testosterone level, medical morbidity, diabetes, and coronary heart disease, testosterone treatment was associated with decreased risk of death (hazard ratio 0.61; 95% confidence interval 0.42–0.88; P = 0.008). [JCEM]
  • Although several population studies have reported an association of increased mortality with low testosterone, the effect of TRT has not been studied. When we reviewed those patients who received TRT for 1 year or longer, we found a beneficial effect improving survival in men with hypogonadism. The data showed that the survival curve followed a similar course to that of the normal testosterone group, whereas the untreated group had a worse prognosis. It is important to note that all patients treated with testosterone had careful adjustment of testosterone to achieve levels within the mid to upper normal range for healthy men. This is the first time any study on men with type 2 diabetes has shown that TRT may improve long-term survival outcome. [EJE]