October 14th Links

• We really do seem to be reaching the end of the standardized testing regime. There will be a dual movement — progressive politics will attain explicit hegemony as the criterion for inclusion within "elite" institutions, and those institutions will see their own hegemony erode. There will be a period in which parroting progressive dogma becomes the new Confucian classics, which will create openings for various skilled-based market-driven education alternatives. [Sailer]
• Masonry corners are labor intensive, which adds disproportionately to cost, so the Adams House is a classic, 4-sided box. That may sound like a concession, but it isn't. Think in terms of homes historically. More often than not, they also started out as a box, then grew over time via smaller boxes added on. We may have become indoctrinated by the idea that over-articulation is necessary but it's simply not the case. Scale, balance, and the manner in which a building;s variations catch light all contribute greatly to its dignity and presence. [link]
• The English novelist Anthony Trollope reported, during a trip to the United States in 1861, that Americans ate twice as much beef as did Englishmen. Charles Dickens, when he visited, wrote that "no breakfast was breakfast" without a T-bone steak. Apparently, starting a day on puffed wheat and low-fat milk—our "Breakfast of Champions!"—would not have been considered adequate even for a servant. [Atlantic]
• The SEC has proposed rules changes that would effectively shut down all trading in non-reporting OTC-traded companies. I am strongly opposed to these rule changes. As proposed, the new rules would eliminate the ability of holders of non-reporting OTC company shares to transact in the marketplace. Holders would only be able to sell their holdings by identifying a willing buyer without the benefit of market makers or electronic trading. The resulting prices and valuations for these trades would surely be punitive in the extreme. [OTC Adventures]
• I think this chart shows both the appeal and the risk of investing in the aircraft lessors: you are really levered to airplane prices. With AER, we have a ten year history of them selling planes for a 5-10% gain yet their stock trades for a ~5% discount to their plane value. That is not a large gap, but given the leverage here closing that gap just to the low end of the range (i.e. going from -5% of plane value to +5%) would result in a huge gain (>50% share price appreciation). At the same time, you're really levered on the downside. If we run into some type of crisis (whether that's a real financial crisis that cuts into the airline industry / plane values or some type of airline specific crisis that brings air traffic coming to a halt (pandemic, war, loss of faith in air travels due to more crashes or terrorism)), it doesn't take a lot for the shares to be worth materially less than today's share price. How many assets (even hard assets) are there out there that haven't had a 10% drop at some point? Airlines aren't exactly known as the paragon of financial health and stability; if air traffic dipped one year and a wave of airlines went bankrupt, why couldn't aircraft flood the market and AER be staring at 10-15% "mark to market" losses on the cost basis of their planes? Even from today's (I would argue depressed) share prices, moving from a 5% discount to a 15% discount would knock the stocks fair value down to ~$24/share, cutting it in ~half. I'm not saying that's likely or even probably, but obviously there is some significant tail risk here in any scenario where aircraft prices drop even slightly. [link]
• [Y]ou own only a claim against the offshore holding company ('holdco') that doesn't actually house any of the operating/tangible assets of Nio China – rather, you simply have a 'guarantee' that the onshore (ie, in China) profits, and assets backing those profits, protect your security interest in the bonds (there are no profits here clearly, but you get the concept!). Of course this applies to the ADR stock as well – but creditors are likely to have a much deeper understanding of the limits of that 'guarantee' than equity speculators... [Raper Capital]
• And so we get to the core of how dying companies can make you big money. Lack of interest creates low valuations and potentially value stocks (presuming legacy debt is not an issue) – historical studies have demonstrated that value stocks tend to outperform the market (and high multiple stocks) in the long-run. And even more importantly – because of the perceived obsolescence of a given industry, you don't have to deal with pesky competition (new players don't want to enter a dying market) and in fact weaker players may exit or leave the market. This leads to the creation of oligopolies which generally enhance profitability. [Raper Capital]
• That is, in fact, the entire point of this post: Don't outsource your thinking. Not to the government, not to the media, not to me. Confront the world skeptically, particularly in realms like supplements, where organizations we lean on for oversight may sometimes abdicate their responsibility. Educate yourself until alarm bells ring in your mind when you read observation masquerading as journalism. We are lucky to live in a time when we are all so empowered. [link]
• There's a management thought process I've seen many times that goes like this: "We own this asset that was a mistake to buy. No one would be interested in buying it now, at the bottom of the cycle. We will never admit that it's a sunk cost. So, we'll sell the remaining good assets we have and continue to develop this bad one." [CBS]