Thursday Morning Links

• In some cases, a large book value discount at an insurance company might indicate an asset quality problem, suggesting the company's assets were not worth their carrying values. However, LICOA's assets then and now consisted primarily of a rather “vanilla” corporate bond portfolio managed by outside advisers. The distress that the market price of the non-voting shares was (and is now) implying is managerial in nature. As discussed herein, it would ultimately be revealed that a group of relatives took legal control of LICOA by owning a majority of shares and have used and continue to use this control inequitably to the detriment of minority shareholders. Interestingly, during the pendency of this litigation, that discount seems to have widened and narrowed based on the market perception of Plaintiffs' likelihood of success in the litigation, indicating that it is indeed the inequitable conduct causing the distressed trading price of the non-voting shares. The economic purpose of an insurance company, from a shareholder perspective, is to raise funds from policyholders and invest them at a profitable spread. Using borrowed money (“Float”) from the insurance customers as leverage and investing it in a bond portfolio ought to offer shareholders a higher return on their capital. But because the controlling shareholders of LICOA overpay themselves and otherwise waste money, the return on equity that minority shareholders receive is lower than the underlying yield on the bond portfolio. The minority shareholders bear all the risk of an insurance company's financial leverage (where the total assets are approximately three times the shareholder capital) but without the benefit of any increased return. [Oddball Stocks]
  
• Judge Drain further found that Charter was liable for four separate categories of damages: "(1) lost profits from customers who switched to Charter as a result of the campaign, (2) the cost of corrective advertising to maintain customers, (3) the cost of a promotional campaign to recover market share..., and (4) the fees and expenses of outside counsel and [Windstream's] expert witness..." Windstream's expert witness testified that the company lost some 1,400 customers and as much as $5.1 million in profits because of Charter's false advertising. In addition, Windstream expended nearly $900,000 in corrective advertising, as well as more than $4 million in promotional costs to try to redress the harm to Windstream's goodwill caused by the false advertising. The Court also awarded Windstream its attorneys' fees and litigation costs relating to prosecution of the litigation. In total, the Court awarded sanctions of $19,184,658.30, which we understand to be the largest compensatory sanction ever awarded by a bankruptcy court for violation of the automatic stay." [Katten Muchin Rosenman LLP]
• I just interviewed for a sawmill job, things are hot in that sector again. BUT the prices never stay up for long - I bailed on a good sawmill equipment manufacturer job twice because the market dried up and layoffs were coming (2004, 2006). When the housing market crashed in 2008, basically all the mills in British Columbia were down from 3 shifts to just one - making "J grade" for China. The larger operators, like CanFor (they own some southeast US mills as well) are infamous for stocking up and market dumping, in fact there's NAFTA grievances about it. Building a house can certainly be a matter of timing. A friend of mine has a scheme that I may get in on, but also, could be of interest to a prospective home buyer - a small-scale portable sawmill. His is 1950s vintage so it'll take some work to get running. But they are generally not expensive when compared to the lumber costs for a house. There's free wood all over the place, especially with the pine-beetle epidemic. The wood has a green tint to it but if you can harvest before it rots / dries out / catches fire, it's good. Get a portable mill, find a place ravaged by the pine beetle, and pick your own damn cotton. There is no shortage of trees on this continent, and I've helped out just taking them from private property so they don't fall on houses (used for firewood). I know people prefer spruce for some things (floor joists), but pine will serve for your basic wall framing and accounts for most of a house - which is why the pine-beetle epidemic is such a fire hazard in the first place. In the 60s they only re-planted pine trees instead of the natural mix, so now entire mountainsides are full of dead and rotting firebait red trees. Find five other home builders in your area and get together on a portable mill, and strike deals with private landowners - you may even have a side business when all is said and done. [Vox Day]
• Right off the bat, let me say this: the 2020 presidential election was stolen, fair and square. No use complaining. If you read anything about American politics, and not just the sanitized versions, you’ll learn that democracy is messy. John Calhoun’s father obtained state legislative representation for his large and growing district by marching to his state Capitol at the turn of the 19th century with an armed posse, and they got it! Add to that Tammany Hall, the Daley machine in Chicago, or the caudillo border politics leading to the infamous (and confessed!) fraud relating to “Box 13” in LBJ’s statewide race there (The Duke of Duval is pictured above). When I lived in Miami I recall the grizzled Cubans all chuckling about their red phone where they could call a bus full of abuelas in the middle of the day and get fifty or a hundred votes delivered where needed. This is America! Democracy is when the one guy steals 1000 votes, you steal 800, and you win by 50. Love it or leave it, I always say. Over time, this machine politics stabilizes the system, because it takes years to build a machine. If you have the ability to steal, it means you’ve put in the work to build that capability, with bribes, favors, and control of municipal offices over time. It’s the democracy of the dead. In a sense, there is nothing more conservative. And there’s nothing less conservative than ceding the entire field, bitching, and then filing lawsuits and complaining about the courts. Counting on the courts is what you do when you are lazy, or a rube. [Andrew Kloster]
• The Atlanta Fed's sticky-price consumer price index (CPI)—a weighted basket of items that change price relatively slowly—increased 3.5 percent (on an annualized basis) in March, following a 2.3 percent increase in February. On a year-over-year basis, the series is up 1.8 percent. On a core basis (excluding food and energy), the sticky-price index increased 3.7 percent (annualized) in March and its 12-month percent change was 1.7 percent. The flexible cut of the CPI—a weighted basket of items that change price relatively frequently—increased 21.8 percent (annualized) in March and is up 6.3 percent on a year-over-year basis. [Atlanta Fed]
• I'm a believer in the taking advantage of the net issuance anomaly (i.e. companies retiring debt and repurchasing shares outperform those raising capital). Where does the anomaly show up today? Industries with companies that are returning capital to investors are banks, tobacco, energy, miners, pipelines. Industries that are raising capital are electric vehicles and many types of growth and tech - especially considering stock based compensation. (Although some tech is negative issuance, e.g. Apple.) The net issuance anomaly is related to our Sector Rotation Value Strategy. One logical mechanism which would cause the net issuers to under-perform is that they are in the "over-investment" part of their industry cycle. They take the proceeds of their equity and debt issuances, and they expand capacity, driving each other's economic rents down. [CBS]
• “The eugenicists have got hold of the levers of power and this is a really artful way of getting you to line-up and receive some unspecified thing that will damage you. I have no idea what it will actually be, but it won’t be a vaccine because you don’t need one. And it won’t kill you on the end of the needle because you would spot that. “It could be something that will produce normal pathology, it will be at various times between vaccination and the event, it will be plausibly deniable because there will be something else going on in the world at that time, in the context of which your demise, or that of your children will look normal. “That’s what I would do if I wanted to get rid of 90 or 95% of the world’s population. And I think that’s what they’re doing.” [link]