Tuesday, June 15, 2021

Tuesday Night Links

  • For years, Big Tech crushed the competition with relative impunity, squeezing every dollar from would-be rivals to reach unprecedented valuations. And while their anti-competitive practices may well continue, there are now five draft bills circulating in the House of Representatives that represent the biggest threat ever to their standard method of doing business. The draft bills, which Big Technology obtained in full, contain just about everything Big Tech’s detractors have hoped for on the antitrust front. They take direct aim at Amazon, Apple, Facebook, Google, and Microsoft’s self-dealing, outline new speed bumps for anti-competitive mergers, and empower feeble federal regulators to bulk up and throw some punches. [bigtechnology]
  • There’s a small cottage industry in central America in scamming gullible libertarians with colonialist inclinations. In the Honduras charter city scheme, a few libertarians thought they could come into a country, take over an area, and run it as an enclave with private laws. The rich got richer, the local poor were screwed over, the charter city scheme was eventually ruled unconstitutional, and the investors’ money went up in smoke. [link]
  • The main reason I went down the renewable rabbit hole is to try and punch holes in my oil, nat gas, and uranium theses. As if projections like Bloomberg’s New Energy Outlook are even half right the impact will be substantial. As you’ve probably guessed I’m not the least bit concerned. The uranium bull thesis works currently even if none of the planned or proposed reactors are ever built. The needs of the current fleet and size of supply deficit mean we will get a price reaction before the end of next year due to utility needing to start contracting. As for the oil/gas market, I actually think renewables are helping set the stage for a huge energy bull market. The reason being the longer renewable projections are deemed credible the less will be spent by fossil fuel on CAPEX which results in less supply and a higher incentive price required to correct the imbalance. [Trader Ferg]
  • Any institution with an ESG mandate can’t go near them regardless of the performance. This results in high barriers to entry since no competitors can get financed or get acceptably priced capital from the markets. Grant a permit for a new coal plant? Forget it. Even if you do get the permits you can easily get tied up in courts by a bunch of teenagers with public opinion behind them. So, incumbents simply tighten their belts cut CAPEX, and pay down debt. If coal prices continue to rise they will generate large free cash flow, yet institutions restricted by ESG mandates won’t jump in to bid them up. Meaning they will end up paying big dividends and buying back shares. A similar situation occurred with Tobacco stocks. The industry was thought to be in trouble with huge lawsuits, regulation on top of regulation, and a public understanding of the health impacts of smoking. [Trader Ferg]
  • The problem is the bearings. If we make the bearings bigger, the bearings last longer, but making the bearings larger increases friction, which kills turbine efficiency. But we can’t keep using the current bearings – replacing them is sending us broke. What we need is a quantum leap in bearing technology – bearing materials which are at least ten times tougher than current materials. [Watts Up With That?]
  • I would like to provide a little more color on our distribution restrictions. The indenture governing our bond restricts us from paying more than one half of the quarterly distribution on our preferred units in cash or to redeem any outstanding paid-in-kind preferred units if our consolidated leverage ratio exceeds 3.75x. And as of March 31, 2021, our consolidated leverage ratio was 4.5x. We expect our leverage ratio to continue to rise through the second quarter of this year and then begin a sustained long-term decline as we continue to pay down debt. In addition, under the terms of our partnership agreement, if our consolidated leverage ratio remains above 3.75x into 2022 and we are unable to redeem all outstanding paid-in-kind preferred units, we would be required to temporarily suspend distributions on our common units until the leverage ratio drops below 3.75x and the outstanding paid-in-kind preferred units are redeemed. [Natural Resource Partners]
  • In my opinion, the essence of genuine and effective contrarianism lies in a deeply-rooted belief/understanding that the world is not black and white, but instead shades of grey, and is filled with infinite nuance and complexity, and as a result, future outcomes will routinely surprise mainstream popular opinion informed by overly-simplistic generalisations and thinking in absolutes. We see the same sort of simplistic, binary thinking manifesting in the investment world all the time, and it is generally characterised by the excessive use of generalisations and absolutes. Examples include 'bricks and mortar retail is dead'; 'EVs are displacing ICEs'; 'ride hailing will put an end to private vehicle ownership'; 'Millennials don't buy stuff anymore, they buy experiences'; 'coal is dead'; 'Europe's banks are all insolvent'; 'banks are all black boxes and are hence uninvestable'; 'Greece is bankrupt'; 'China is nothing more than a giant leveraged bubble that will explode'; 'Russia is bad'; 'Africa is the hopeless continent'; 'Trump is stupid and everything he says is by definition wrong'; 'free trade is always best in all circumstances'; 'you're either for immigration or against immigration'; 'China is evil'; 'shopping mall REITs are all going broke', or 'malls in tier 1 cities will be immune from online threats; malls in tier 2 cities will go bankrupt', etc. What all of these types of claims have in common is that they are all absolute, black and white assertions, and are hence easy beliefs to not only hold and act upon, but also communicate/sell (which results in the memes spreading far and wide and self-replicating into consensus opinion - the water in which investors swim). But they are also all generalisations that lack any sort of nuance, or leave any room for complexity or uncertainty. As a contrarian, one should be instinctively skeptical of overly generalized claims such as these, because the world is almost never as simple and clear cut as these statements proclaim. Even if they are right in direction, they are seldom right to such an extreme degree, or with such a high degree of certitude about future outcomes (EVs might in fact eventually displace ICEs, but as I have discussed in past blog entries, people are likely too confident this is inevitable). [LT 3000]
  • The choice of federal over state court will always be an attractive one for close corporation shareholders seeking judicial dissolution, assuming they can establish subject matter jurisdiction based on diversity of citizenship or the inclusion of other claims arising under federal law. As things stand currently, a federal forum for dissolution petitioners is not available in the seven states within the Second and Sixth Circuits, is available in the three states within the Eleventh Circuit, and may or may not be available in the remaining forty states (and District of Columbia) in the nine other Circuits that have not yet addressed the issue of Burford abstention in dissolution cases. I discount heavily the likelihood that the U.S. Supreme Court, as the ultimate arbiter of conflicting rulings among the Circuit Courts, will decide the issue any time soon, if ever. It would have to be one hell of a case, with stakes the magnitude of which is not typical of dissolution cases involving closely held corporations and a timeline that avoids mootness, to justify a petition for certiorari to the Supreme Court. [New York Business Divorce
  • The Covid-19 virus infected people in five U.S. states in December 2019 and early 2020 before those states reported their first cases, according to a large new government study, providing new insights into the first, unseen weeks of the nation’s deadly epidemic. Scientists analyzing blood samples taken for a National Institutes of Health research program identified seven people in states from Mississippi to Wisconsin to Pennsylvania who were infected with the new virus days or weeks before the first cases were confirmed in their areas. At least a couple had mild symptoms. [WSJ]
  • If you are incompetent at manufacturing and have to scrap a lot of parts, you can prevent or delay any financial statement impact of this by keeping the parts on the books as inventory even if you have already thrown them away. It is very simple, comically so, and it makes your gross margin and profit figures look better. The only problem is it is a crime! So, if you were a Silicon Valley company doing this, you would need to provide illegal sex and drugs to accounting firm employees, SEC employees, and journalists. One good time to do this and get them on tape for blackmail would be an "anything goes" festival in the desert, where you could have "boom boom tents". It might also help to learn that trade from a master. [CBS]

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