Monday, August 26, 2019

August 26th Links

  • "Musk has a habit of overstating Tesla's operational capabilities and its prospects for profitability, especially when the company is preparing to raise capital, collect customer deposits, or secure regulatory benefits," says Brian Horey of Aurelian Partners, an investment firm. [Vanity Fair]
  • After the Minsky moment, whatever is used to settle debts (i.e. cash) becomes extremely scarce. This is why the panics are worth waiting for. Note that most of these bargains are not being sold "voluntarily". Owners of insolvent enterprises always want to extend and pretend. They talk about the "option value" of their far, far out of the money equity claims. The forced selling happens via lender foreclosure, but also via open-ended investment vehicles like mutual funds, where redemptions force the managers to sell the investments indiscriminately. The scarcity of cash results in lots and lots of political conflict over the value of money, which is part of a broader political conflict between creditors and debtors. [CBS]
  • My friend in college had a very pretty blue one in 2010, that was the top trim level. I noticed him topping off oil one day and after he revved it a few times there were massive clouds of blue smoke. I asked him if that was normal and he said the car burned about 1L of oil per 1500 miles. It sounded crazy to me, but he went to the dealer that week and they said "that's normal for a rotary." [Jalopnik]
  • There's a lot of stupid things that go wrong with BMW's that shouldn't. For example: o-rings (or anything rubber), radiators, AC evaporators, Alternators, rod bearings. Things that won't happen on any japanese car before 200k miles will fail before 50k miles. A lot of it comes down to material failure. Vanos bolts that are too soft and sheer off, plastic parts cracking or breaking. Materials that everyone else has figured out already, and shouldn't fail. Why is Honda radiator plastic so superior to BMW's? Why do their valve cover gaskets last 4 times as long? After a 100 years they should have something as simple as rod bearings figured out. That's one item that shouldn't be recalled, ever IMO. Want to change their makeup and alloy content? Fine but test the hell out of it before putting into production. [Opposite Lock]
  • Small banks are trading at ridiculous premiums (~1.2-1.5x) to book value. If I started a hedge fund that was going to short T-bills and buy 10 year bonds with max leverage, would you be willing to invest a dollar and only have 66 cents of your capital working for you? That's what you're doing if you're buying (at >1x BV) one of the crappy small banks. [CBS]
  • I asked him how he had come to settle in Mozambique. "I went to an African trade fair in Fujian province and there were lots of Chinese businesspeople there," he said. "I got excited by all the talk of business opportunities in Africa. Later I figured my English is no good, though, so I got the idea that if I went to an English-speaking country, English being a popular language, Chinese people would be everywhere. I'll be damned if I understood Portuguese, but damn it, I figured, neither do most Chinese people in general, so what the fuck? There must be great undiscovered opportunities there, and I won't have to be constantly looking over my shoulder for other Chinese coming to compete with me, cheat me out of my money, or steal my ideas." [Harpers]
  • Oddly enough 15 years ago I used to represent a rural ILEC when I was an M&A attorney, so I know a tiny bit about the economics of these strange beasts. (my info may be outdated, so take with a bit of salt). It's very uneconomical to string wires long distances (even outdoors with a government right of way) so the government subsidizes a big chunk of the costs of service. If you've ever looked at your phone bill and wondered why 20% of the taxes are for a "Universal Service Fee" it's so that people like Ted Turner can get subsidized landline service on their ranches. That's how a lot of these rural ILECs stick around. It's not profitable to run huge amounts of wire for few customers if you're competing on price. So you've got the previously spent capex which you can continue to milk and get the subsidy too. It's a legal monopoly, but not a great one because your rates are set by the state public utilities commission. You are required to let competitors hang their lines on your poles for a fee (there is literally a federal pole attachment act and the rate is determined by formula based on their costs in the FERC form 1, if i recall). So that helps with your cost if there is a cable provider in the area that wants to use your poles because they don't have government granted right of ways. Rural customers in many cases can't easily switch to wireless or cable and use the copper phone lines for internet access with DSL (this may be dated info). It's slower than the other options, but it's the only option in some places. Internet and other add on fees are not regulated by state PUCs (if I recall) so this can be a nice money maker for them (regulated monopoly pays for the cake and you get to sell the frosting for whatever the market will bear). I invested in a ILEC once (when Embarq landlines was spun off from Sprint and it was too cheap to ignore) but I haven't invested in one since. Companies that rely on subsidies that can go away at any time are scary. [CoBF]
  • Amazing that baby boomers in safe enclave neighborhoods think that real estate appreciation has made them rich. I've had a chance to see firsthand how the gears in their brains jam when they realize that their children (with their grandchildren) can't afford to live nearby. Those paper real estate profits look nice on the net worth spreadsheet, until you realize that a Chinese embezzler is literally occupying the niche space that your children should be in. [CBS]
  • Estimating a resource (e.g. oil, gas, minerals, etc.) is inherently subjective. Because of this, there is room to be overly optimistic. Many management teams in the resource sector have figured out that they can pressure their reserve estimators into delivering inflated estimates. The interesting thing about this is that management can blame the engineer if there are problems with the estimate. Management can basically get these engineers to lie for them without having to take any responsibility for those lies. [Glenn Chan]
  • I have read much of the IPCC reports and have skimmed the rest, and I can say with certainty that these reports contain no theory about how increasing the concentration of atmospheric CO2 from 0.03% to 0.04% causes warming of 2C or more focused in hotspots as small as a 50 mile radius. There is absolutely no theory, and I would argue no way, that a general global warming trend of 1-1.5C per century is causing warming 2-3 times that rate narrowly over San Jose, California or Phoenix, AZ. The fact that many of these hotspots are focused over urban areas is a good indicator that this temperature data set is corrupted with urban heat island biases. [Coyote Blog]
  • Unlike the Kahneman and Tversky experiment in which subjects were overreacting to measures of sense of humor when predicting GPA, we were not specifying what investors were overreacting to. We were just assuming that by driving the price of some stock up or down enough to make it one of the biggest winners or losers over a period of several years, investors were likely to be overreacting to something. The results strongly supported our hypothesis. We tested for overreaction in various ways, but as long as the period we looked back at to create the portfolios was long enough, say three years, then the Loser portfolio did better than the Winner portfolio. Much better. For example, in one test we used five years of performance to form the Winner and Loser portfolios and then calculated the returns of each portfolio over the following five years, compared to the overall market. Over the five-year period after we formed our portfolios, the Losers outperformed the market by about 30% while the Winners did worse than the market by about 10%. [Misbehaving]

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